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Court of Chancery Finds Genuine Issue of Material Fact Regarding Disinterestedness of Board of Acquisition Target

Posted In Fiduciary Duty
IN RE FREEPORT-MCMORAN SULPHUR, INC. SHAREHOLDER LITIGATION., C.A. No. 16729, 2005 WL 1653923 (Del.Ch. June 30, 2005) In a shareholder class action, the plaintiffs sought relief alleging an unfair exchange ratio in a stock-for-stock merger of two public companies. The defendants moved for summary judgment. The Court of Chancery denied Defendant's Motion. In this shareholder class action, the plaintiffs contested the exchange ratio of a stock-for-stock merger of two widely held public companies. Plaintiffs alleged that the ratio favored one company at the expense of the other and that, consequently, they received an unfair price for their shares. The plaintiffs alleged fiduciary breaches by the directors of the defendant company by approving the merger, and alleged that the directors were influenced by the shared corporate heritage of the two companies,which includes having common directors. The defendants argue that the common directors were excluded from the Special Committee that recommended the transaction and that a majority of the board, comprising disinterested and independent directors, approved the merger. In denying Defendants' motion for summary judgment, the Chancery Court found the following. First, the Court found that the directors who sat on the board of both companies were "clearly interested in the merger," because several of the directors held more stock in the acquirer than in the target. The court found that
"A director is deemed interested whenever divided loyalties are present, or a director has received, or is entitled to receive, a personal benefit from the challenged transaction which is not equally shared by the stockholders."
The Court further found the independence of the directors was impaired by virtue of service on the board of both acquirer and target. The Court found that,
"[E]ven if their economic interests were immaterial, the Common Directors were still not able to act independently in the transaction because they sat on both boards and owed the same duty of loyalty to both companies. Their conflicting loyalties created a structural problem that precluded them from acting independently as directors of Sulphur, any more than they could act independently as directors of MOXY, in this transaction."
The court also found that the plaintiffs' arguments raise genuine issues of material fact about director independence from the three Common Directors, one or more of whom apparently suggested the merger at issue. The court found that that director's employment by FM Services indicated that he had some form of relationship with the acquiror, "even if it was only an indirect relationship." In sum, the Court denied the Defendants' motion for summary judgment, finding a triable question of fact as to whether a majority of the board of could act independently when voting on the merger with MOXY. The Court affirmatively found that the three directors who sat on both boards, were "obviously conflicted by their dual roles." The court also found genuine issues of fact with respect to whether the target's inside directors were able to function independently and in a disinterested fashion. Distinguishing this case from Lynch v. Kahn, where the application of entire fairness was based on the finding that the defendant was a controlling stockholder, in this case the Common Directors and Inside Directors, as a group, did not own a controlling, or even substantial, interest in the acquisition target: they held only 3% of the outstanding stock.Additionally, they held only 9%, of the outstanding acquiror's stock. The Court found that neither of those stakes was large enough to give rise to a concern about controlling the voting power of either company. Accordingly, the Court denied Defendants' motion for summary judgment. To be sent a PDF copy of this opionion, please click here. Authored by: Liza Haley Sherman 302.888.6940 Share


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