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McMILLAN v. INTERCARGO CORP.
768 A.2d 492 (2000)
Scott McMILLAN, John Norberg, James M. Wilson Trust, Peggy Wilson Trustee, Castillian Ventures, Inc., individually, and on behalf of all others similarly situated, Plaintiffs,
v.
INTERCARGO CORPORATION, a Delaware Corporation, and Arthur J. Fritz, Jr., Kenneth A. Bodenstein, Arthur L. Litman, Albert J. Gallegos, Robert B. Sanborn, Michael L. Sklar, George J. Weise and Stanley A. Galanski, Defendants.
Civil Action No. 16963.
Court of Chancery of Delaware, New Castle County.
Submitted: March 3, 2000.
Decided: April 20, 2000.
Ronald A. Brown, Jr., Esquire, Bruce E. Jameson, Esquire, and Sheldon K. Rennie, Esquire, of Prickett, Jones & Elliott, Wilmington, Delaware; and R. Bruce McNew, Esquire, of Taylor Gruver & McNew, Greenville, Delaware, Attorneys for Plaintiffs.
David C. McBride, Esquire, Danielle Gibbs, Esquire, of Young, Conaway, Stargatt & Taylor, Wilmington, Delaware; of Counsel: David L. Schiavone, Esquire, Christopher Q. King, Esquire, Elena B. Gobeyn, Esquire, and Jason L. Rubin, Esquire, of Sonnenschein Nath & Rosenthal, Chicago, Illinois, Attorneys for Defendants.
OPINIONSTRINE, Vice Chancellor. Several stockholders of Intercargo Corporation have sued the (now former) directors of Intercargo (the "defendant directors") for breach of fiduciary duty in connection with the acquisition of Intercargo by XL America, Inc. for $12.00 a share (the "XL merger"). Earlier in this litigation, the plaintiffs sought a preliminary injunction against the consummation of the XL merger. That request was denied by Vice Chancellor Jacobs,1 and the XL merger was approved by a vote of the Intercargo stockholders on April 29, 1999. Thereafter, the XL merger was consummated on May 7, 1999. In their amended complaint,2 the plaintiffs allege that the defendant directors breached their fiduciary duties of loyalty and care in two distinct ways. First, the plaintiffs allege that in connection with the XL merger, which was a change of control transaction,3 the defendant directors failed to ensure that the Intercargo stockholders received the highest value reasonably attainable and thus did not live up to their so-called Revlon4 duties (the plaintiffs' "Revlon claim"). Second, the plaintiffs allege that the defendant directors failed to disclose material information to the Intercargo stockholders that bore on the stockholders' decision whether to approve the XL merger (the plaintiffs' "disclosure claims"). The defendant directors have moved for judgment on the pleadings. In this opinion, I grant the defendant directors' motion for the following reasons. The XL merger has been consummated and rescission is not a practicable remedy. Therefore, the plaintiffs are left with a claim for damages against the defendant directors. Because Intercargo's certificate of incorporation contained an exculpatory provision immunizing its directors from liability for due care violations, the plaintiffs may survive this motion only if the complaint contains well-pleaded allegations that the defendant directors breached their duty of loyalty by engaging in intentional, bad faith, or self-interested conduct that is not immunized by the exculpatory charter provision. After according the plaintiffs the favorable inferences owed to them in this procedural posture, I conclude that the complaint fails to allege such a breach of the duty of loyalty. The plaintiffs concede that a majority of Intercargo's board was disinterested and independent, and the plaintiffs have failed to allege facts that, if true, support a reasonable inference that the loyalties of two of the other three directors were conflicted. And even if one or more of those three directors were interested in the merger, the plaintiffs have failed to allege that those directors dominated or controlled, or otherwise influenced in any improper way, the concededly disinterested board majority.
1. See McMillan v. Intercargo Corp. ("Intercargo I"), Del. Ch., C.A. No. 16963, 1999 WL 288128, mem. op., 1999 Del. Ch. LEXIS 95, Jacobs, V.C. (May 3, 1999). 2. Which I refer to for brevity's sake as the complaint. 3. See generally Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 42-48 (1993). 4. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). 5. Compl. ¶ 49. 6. Id. ¶ 47. 7. Id. 8. See § II, infra. 9. For a less constrained rendition of the facts, the interested reader is directed to Vice Chancellor Jacobs' preliminary injunction opinion. Intercargo I, mem. op., 1999 WL 288128, 1999 Del. Ch. LEXIS 95. 10. Compl. ¶ 25. 11. Id. 12. Id. 13. Id. ¶ 26. 14. According to the proxy statement, this price represented an 18.5% premium over the preannouncement trading price of Intercargo's stock. Proxy Statement, at 5. 15. Id. ¶ 46. 16. Id. ¶ 29. 17. Id. 18. Id. 19. Id. ¶ 32. 20. Id. ¶ 31. 21. Id. ¶ 32. 22. Id. ¶ 24. 23. E.g., id. ¶¶ 1, 24, 25, 26, 31, 32, 33, 37. 24. Id. ¶ 30. 25. E.g., id. ¶¶ 31, 32, 33, 34, 40. 26. Id. ¶ 26. 27. Id. ¶ 39. 28. Id. ¶ 47. 29. Intercargo I, mem. op., at 12-26, 1999 WL at *5-*9, 1999 Del. Ch. LEXIS 95, at *15-*35. 30. Id. 31. Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., Del.Supr., 624 A.2d 1199, 1205 (1993). 32. Id.; Weiss v. Samsonite Corp., Del. Ch., 741 A.2d 366, at 371, mem. op. at 9, 1999 Del. Ch. LEXIS 127, at *11, Jacobs, V.C. (June 14, 1999), aff'd, Del.Supr., 746 A.2d 277 (1999); see also Grobow v. Perot, Del.Supr., 539 A.2d 180, 187 n. 6 (1988) (same standard under Rule 12(b)(6)). 33. Kahn v. Roberts, Del. Ch., C.A. No. 12324, mem. op., at 6, 1994 WL 70118, at *5, 1994 Del. Ch. LEXIS 33, at *5, Hartnett, V.C. (Feb. 28, 1994). 34. In re Lukens Inc. Shareholders Litig., Del. Ch., 757 A.2d 720, 727 (1999) (quoting Grobow, 539 A.2d at 187 & n. 6.). 35. In re Santa Fe Pacific Corp. Shareholder Litig., Del.Supr., 669 A.2d 59, 69-70 (1995). 36. Id. 37. Id. 38. Gimbel v. Signal Cos., Inc., Del. Ch., 316 A.2d 599, 603 (1974), aff'd, Del.Supr., 316 A.2d 619 (1974); In re Lukens, 757 A.2d at 728; Goodwin v. Live Entertainment, Inc., Del. Ch., C.A. No. 15765, mem. op. at 3, 1999 WL 64265, at *6 n. 3, 1999 Del. Ch. LEXIS 5, at *16 n. 3, Strine, V.C. (Jan. 22, 1999), aff'd, 741 A.2d 16 (1999). 39. See Unitrin, Inc. v. American General Corp., Del.Supr., 651 A.2d 1361, 1374 (1995) (discussing the difference between the standard that a court uses to determine whether to enjoin a transaction and the one it uses to determine whether to hold directors liable for damages). 40. Defs. Ex. A. The court may take judicial notice of an exculpatory charter provision in resolving a motion addressed to the pleadings. E.g., In re Wheelabrator Technologies, Inc. Shareholders Litig., Del. Ch., Cons.C.A. No. 11495, mem. op. at 21-22, 1992 WL 212595, at *11, 1992 Del. Ch. LEXIS 196, at *38, Jacobs, V.C. (Sept. 1, 1992). 41. Most of the statute's exceptions simply iterate particular examples of breaches of the duty of loyalty. For example, the statute provides exceptions for conduct not in good faith, intentional misconduct, and knowing violations of the law — quintessential examples of disloyal, i.e., faithless, conduct. See In re ML/EQ Real Estate Partnership Litig., Cons. C.A. No. 15741, mem. op. at 9, 1999 WL 1271885, at *4 n. 20, 1999 Del. Ch. LEXIS 238, at *16 n. 20, Strine, V.C. (Dec. 20, 1999) (explaining that bad faith conduct is, by definition, disloyal conduct), rearg. denied, Del. Ch., mem. op., 2000 WL 364188, 2000 Del. Ch. LEXIS 47, Strine, V.C. (Mar. 22, 2000); In re Gaylord Container Corp. Shareholders Litig., Del.Ch., 753 A.2d 462, 475 n. 41, Strine, V.C. (Jan. 26, 2000) (same). 42. In re General Motors Class H Shareholders Litig., Del. Ch., 734 A.2d 611, 619 n. 7 (1999); In re Lukens, 757 A.2d at 733; In re Frederick's of Hollywood, Inc. Shareholders Litig., Del. Ch., Cons.C.A. No. 15944, mem. op. at 16, 2000 WL 130630, at *6, 2000 Del. Ch. LEXIS 19, at *20, Jacobs, V.C. (Jan. 31, 2000). 43. By showing that the certificate of incorporation bars duty of care claims and by further demonstrating that the well-pled allegations of the complaint fail to support a claim that the defendant directors engaged in non-immunized conduct, the defendant directors meet their affirmative duty to justify dismissal of the entire complaint under Emerald Partners v. Berlin, Del.Supr., 726 A.2d 1215, 1224 (1999). In re General Motors Class H. Litig., 734 A.2d at 619 n. 7; see also In re Frederick's of Hollywood, mem. op. at 16, 2000 WL 130630, at *6, 2000 Del. Ch. LEXIS 19, at *20; In re Lukens, 757 A.2d at 733 n. 33. 44. In re Lukens, 757 A.2d at 734. 45. Goodwin v. Live Entertainment, mem. op. at 50 n. 17, 1999 WL 64265, *24 n. 17, 1999 Del. Ch. LEXIS 5, at *76 n. 17. 46. The plaintiffs have not argued that any other exception under § 102(b)(7) is applicable. 47. QVC, 637 A.2d at 44; Revlon, 506 A.2d at 182. 48. Goodwin, mem. op. at 41-42, 1999 WL 64265, *21, 1999 Del. Ch. LEXIS 5, at *63 (quoting Barkan v. Amsted Industries, Inc., Del.Supr., 567 A.2d 1279, 1286 (1989)). 49. Goodwin, mem. op. at 10, 41-42, 1999 WL 64265, at *5, *20, 1999 Del. Ch. LEXIS 5, at *15, *63; In re Lukens, 757 A.2d at 730-732, mem. op. at 19-23, 1999 Del. Ch. LEXIS 233, at *26-*33; In re Frederick's of Hollywood, mem. op. at 13-14, 2000 WL 130630, at *5-*6, 2000 Del. Ch. LEXIS 19, at *16-*17; see also Cooke v. Oolie, Del. Ch., C.A. No. 11134, mem. op. at 34, 1997 WL 367034, at *12, 1997 Del. Ch. LEXIS 92, at *46, Chandler, V.C. (June 23, 1997) (claim that defendants breached their duty of care by failing to pursue the transaction offering the best value was barred by exculpatory charter provision). 50. Goodwin, mem. op. at 10, 41-42, 1999 WL 64265, at *5, *20, 1999 Del. Ch. LEXIS 5, at *15, *63; In re Lukens, 757 A.2d at 729-732, mem. op. at 19-23, 1999 Del. Ch. LEXIS 233, at *23-*33; In re Frederick's of Hollywood, mem. op. at 13-14, 2000 WL 130630, at *5-*6, 2000 Del. Ch. LEXIS 19, at *16-*17. 51. Although not cognizable on this motion, fairness to Galanski dictates noting that the reason for the lack of such allegations may be that the proxy statement indicates that Galanski's 1997 and 1998 base salaries from Intercargo were $260,000 and $265,000 per year on an annualized basis and that he agreed to stay on with XL for a base salary of $275,000 a year — a rather modest increase of approximately 4%. Proxy Statement at 13 & E-49 (Defs.Ex. B). 52. Compare Cinerama, Inc. v. Technicolor, Inc., Del.Supr., 663 A.2d 1156, 1170 (1995) (director's "hope" for better employment is not material under standard applicable for analyzing whether a director's non-§ 144 "interest" is sufficient to compromise the director's disinterestedness) with Goodwin, mem. op. at 52-53, 1999 WL 64265, at *25-*26, 1999 Del. Ch. LEXIS 5, at *79-*80 (where there was admissible evidence that two directors were bargaining with the acquiror for employment on enhanced terms after the merger, the court held that there was a triable issue whether their "expectations constituted a material interest in the merger not shared by the stockholders"). 53. Goodwin, mem. op. at 47, 1999 WL 64265, at *23, 1999 Del. Ch. LEXIS 5, at *71-*72, (citing Cinerama, 663 A.2d at 1143; Yanow v. Scientific Leasing, Inc., Del. Ch., C.A. Nos. 9536, 9561, 1988 WL 8772, at *5, Jacobs, V.C. (Feb. 5, 1988, rev. Feb 8, 1988)). 54. In a case involving a merger with a genuine third-party acquiror:
the plaintiff must show that [the] materially self-interested members [of the board] either: a) constituted a majority of the board; b) controlled and dominated the board as a whole; or c) i) failed to disclose their interests in the transaction to the board; ii) and a reasonable board member would have regarded the existence of their material interests as a significant fact in the evaluation of the proposed transaction. Cinerama, Del.Supr. 663 A.2d at 1168 (citing Cinerama, Inc. v. Technicolor, Inc., Del. Ch., 663 A.2d at 1134, 1153 (1994) (subsequent history omitted)). Absent such a showing, the mere presence of a conflicted director or an act of disloyalty by a director, does not deprive the board of the business judgment rule's presumption of loyalty. [Cede & Co. v. Technicolor ("Cede II"), Del.Supr.], 634 A.2d [345,] 363 [(1993)]. Goodwin, mem. op. at 51, 1999 WL 64265, at *25, 1999 Del. Ch. LEXIS 5, at *77; see also In re Lukens, 757 A.2d at 730 (where CEO was to receive a $20 million golden parachute payment as a result of a sales transaction but there was no allegation that he dominated or controlled the board, there was "no basis to say that the board as a whole lacked independence"); In re Frederick's of Hollywood, mem. op. at 17, 2000 WL 130630, at *7, 2000 Del. Ch. LEXIS 19, at *22 (where only one director was interested, where board majority that approved merger was disinterested, and where there was no allegation that the sole interested director dominated or controlled the board, "the duty of loyalty claim fails for lack of a valid premise"). 55. The board's reliance upon an investment banker (whose independence and qualifications are not challenged in the complaint) is another factor weighing against the plaintiffs' ability to state an actionable claim that the defendant directors breached their fiduciary duties by failing to secure the highest value reasonably attainable. Goodwin, mem. op. at 45, 1999 WL 64265, at *22, 1999 Del. Ch. LEXIS, at *68; In re Vitalink, mem. op. at 25-26, 1991 WL 238816, at *11-*12, 1991 Del. Ch. LEXIS 195, at *34-*35, Chandler, V.C. (Nov. 8, 1992), aff'd without op. sub nom., Grimes v. McCarthy Profit Sharing Plan, Del. Supr., 610 A.2d 725 (1992); 8 Del. C. § 141(e). 56. In the absence of the exculpatory charter provision, the plaintiffs would still have been required to plead facts supporting an inference of gross negligence in order to state a damages claim. Second-guessing about whether a board's strategy was "reasonable" or "appropriate" may be sufficient in a front-end injunction action under the Revlon standard, but it does little to assist a plaintiff in meeting its obligation to set forth facts from which one could infer that the defendants' lack of care was so egregious as to meet Delaware's onerous gross negligence standard. See Kahn v. Roberts, Del. Ch., C.A. No. 12324, mem. op. at 11, 1995 WL 745056, at *3, 1995 Del. Ch. LEXIS 151, at *11, Steele, V.C. (Dec. 6, 1995) (quoting Tomczak v. Morton Thiokol, Inc., Del. Ch., C.A. No. 7861, mem. op. at 31-32, 1990 WL 42607, at *12, 1990 Del. Ch. LEXIS 47, at *35, Hartnett, V.C. (Apr. 5, 1990)), aff'd, Del.Supr., 679 A.2d 460 (1996). 57. QVC, 637 A.2d at 45 ("[A] court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise.... [C]ourts ... will determine if the directors' decision was, on balance, within a range of reasonableness."). 58. For an excellent discussion of several important issues raised by the "deal protection" measures typically incorporated in merger agreements, see former Chancellor William T. Allen's article, Understanding Fiduciary Outs: The What and the Why of an Anomalous Concept, 55 BUS. LAW. 653 (2000). 59. Matador Capital Management Corp. v. BRC Holdings, Inc., Del. Ch., 729 A.2d 280, 292 n. 15 (1998); Goodwin, mem. op. at 46, 1999 WL 64265, at *23, 1999 Del. Ch. LEXIS 5, at *69. 60. Theoretically, the fee could be payable if the stockholders rejected the XL deal and a less favorable sales transaction was thereafter concluded. The probability of this occurring seems relatively small. 61. Unitrin, 651 A.2d at 1383 n. 34 (discussing origins of the word and its association with "barbarous severity" and "cruelty"). Of course, an allegation that the 3.5% termination fee was slightly outside the range of reasonableness would, absent well-pled allegations of disloyalty, raise at most a very weak due care claim and, more probably, no viable claim at all under the relevant gross negligence standard. 62. Under a "duck" approach to the law, "deal protection" terms self-evidently designed to deter and make more expensive alternative transactions would be considered defensive and reviewed under the Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985) standard. The word "protect" bears a close relationship to the word "from." Provisions of this obviously defensive nature (e.g., no-shops, no-talks, termination fees triggered by the consummation of an alternative transaction, and stock options with the primary purpose of destroying pooling treatment for other bidders) primarily "protect" the deal and the parties thereto from the possibility that a rival transaction will displace the deal. Such deal protection provisions accomplish this purpose by making it more difficult and more expensive to consummate a competing transaction and by providing compensation to the odd company out if such an alternative deal nonetheless occurs. Of course, the mere fact that the court calls a "duck" a "duck" does not mean that such defensive provisions will not be upheld so long as they are not draconian. 63. Matador, 729 A.2d at 291 ("Contrary to plaintiffs' suggestion, these measures [in particular, a no-shop provision] do not foreclose other offers, but operate merely to afford some protection to prevent disruption of the Agreement by proposals from third parties that are neither bona fide nor likely to result in a higher transaction."); Ace Ltd. v. Capital Re Corp., Del. Ch., 747 A.2d 95, 106 (1999) (a no-shop prohibiting a board of directors from "play[ing] footsie with other potential bidders or ... stir[ring] up an auction ... is perfectly understandable, if not necessary, if good faith business transactions are to be encouraged"); In re Lukens, 757 A.2d at 725 (dismissing Revlon claim in case where the merger agreement contained a "`no solicitation clause' ... preventing the ... board from soliciting a competing takeover offer" where that clause "was connected to the customary `fiduciary out,' allowing the board to adequately inform itself and take action on any unsolicited `superior proposal' from a third party"). 64. Again, solely for the sake of fairness to the defendant directors, I note that the proxy statement indicates that the Intercargo board in fact followed up on an expression of interest by another potential buyer in October 1998 who initially bandied about a price of $13.25 a share and then, after receiving due diligence information, talked about a $12.75 a share offer. Proxy Statement, at 10. Alas, this expression of interest never resulted in a fully financed, binding offer. 65. E.g., Barkan, 567 A.2d at 1287 ("when it is widely known that some change of control is in the offing and no rival bids are forthcoming over an extended period of time, that fact is supportive of the board's decision to proceed"); Goodwin, mem. op. at 43-44, 1999 WL 64265, at *22, 1999 Del. Ch. LEXIS 5, at *66 (when superior bid did not emerge after a lengthy period during which the company's willingness to engage in a strategic transaction was known, this factor weighed against finding a Revlon breach); In re Vitalink, mem. op. 22-23, 1991 WL 238816, at *10, 1991 Del. Ch. LEXIS 195, at *31 (where 45 days passed between the announcement of a tender offer and closing without an inquiry from an interested bidder, this fact was supportive of a finding that the board had adequate information to determine that a deal was the best available).
In their brief, the plaintiffs admit that the defendant directors were "unaware" of the alleged interest of Swiss Re and Houston Casualty. Pls. Br. at 12. Thus any failure of the defendant directors not to talk to them could hardly have been intentional. Furthermore, the complaint fails to allege any connection between their failure to make an offer and the terms of the XL merger agreement. Nor does our law require merger agreements to contain only such "deal protection" measures as will not deter the timid or those potential acquirors unwilling to bear the costs that may result from the law's acknowledgment that parties to executory merger contracts have legitimate, although constrained, contract rights. As long as no-shop and termination fee provisions are non-preclusive, non-coercive, and otherwise within the boundaries of reason, Delaware law generally recognizes them as valid. 66. The complaint does not even come close to alleging disclosure omissions or any other conduct "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith." In re J.P. Stevens & Co., Inc. Shareholders Litig., Del. Ch., 542 A.2d 770, 780-81 (1988), appeal refused, Del.Supr., 540 A.2d 1088 (1988). 67. Arnold v. Society for Savings Bancorp., Del. Supr., 650 A.2d 1270, 1286-87 (1994) (to the extent that inadequate disclosures can be attributed to no more than breaches of the duty of care and an exculpatory charter provision is in place, damage claims premised on those disclosures are not cognizable); Frank v. Arnelle, Del. Ch., C.A. No. 15642, mem. op. at 27-30, 1998 WL 668649, at *8-*9, 1998 Del. Ch. LEXIS 176, at *37-*41, Chandler, C. (Sept. 16, 1998) (same), aff'd, 725 A.2d 441 (1999); Goodwin, mem. op. at 10-11 & 11 n. 3, 1999 WL 64265, at *5-*6 & *6 n. 3, 1999 Del. Ch. LEXIS 5, at *15-*17 & *16 n. 3 (same).
In this respect, I also note that Vice Chancellor Jacobs' well-reasoned preliminary injunction opinion ruling on plaintiffs' disclosure claims — which was decided on a record identical to that I am permitted to consider in ruling on plaintiffs' disclosure claims — supports dismissal of the those claims on the merits. In view of my approach to this case and Vice Chancellor Jacobs' thorough analysis and rejection of those claims, I need not revisit his examination of the merits other than to indicate my agreement with his conclusion that the alleged omissions were not material. See In re Wheelabrator, mem. op. at 10, 1992 WL 212595, at *4, 1992 Del. Ch. LEXIS 196, at *17 (where record had not changed since the court decided that a disclosure claim was without merit on a motion for preliminary injunction, court relied on its prior analysis in dismissing the same claim on a 12(b)(6) motion); Intercargo I, mem. op. at 12-26, 1999 WL 288128, at *5-*10, 1999 Del. Ch. LEXIS 16963, at *15-*36 (examining plaintiffs' disclosure claims and concluding that none of the omitted information was material). 68. The complaint is also dismissed as against Intercargo itself. NRG Barriers, Inc. v. Jelin, Del. Ch., C.A. No. 15013, let. op. at 12-13, 1996 WL 451319, at *6, 1996 Del. Ch. LEXIS 99, at *17-*18, Steele, V.C. (Aug. 6, 1996). 69. The plaintiffs have not suggested that they would like to further amend their amended complaint and therefore I deem a "with prejudice" dismissal to be appropriate.
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