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District Court Dismisses Class Action Alleging Federal Securities Laws Violations and State Breach of Fiduciary Duty Claim

Hartman v. Pathmark Stores, Inc., C.A. No. 05-403-JJF, 2006 U.S. Dist. LEXIS 9349 (D. Del. Mar. 8, 2006). Plaintiff filed a class action complaint against defendants, alleging violations of Section 14(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and breach of the fiduciary duty of loyalty by the directors of Pathmark Stores, Inc. ("Pathmark") in connection with a transaction between Pathmark and The Yucaipa Companies, LLC ("Yucaipa"). Plaintiff also moved for appointment as lead plaintiff, with his counsel as lead counsel. Defendants moved to dismiss the complaint.

Pathmark issued a proxy statement to its stockholders of record on May 6, 2005, in which it sought approval of a proposed transaction in which Yucaipa was to invest $150 million in cash in Pathmark in exchange for 20 million Pathmark shares, plus warrants to purchase additional shares. About two weeks later, an undisclosed bidder offered to purchase all of Pathmark's outstanding shares, subject to due diligence. Pathmark amended its proxy statement to disclose the new offer and its rejection by Pathmark's board of directors. On June 1, 2005, the undisclosed bidder renewed its offer but removed the due diligence requirement. Pathmark amended its proxy statement on June 2 and on June 3, but did not disclose the June 1 offer. On June 7, Pathmark again amended its proxy statement, in which it notified its stockholders of the June 1 offer and Pathmark's board's decision to continue to recommend the Yucaipa transaction. Pathmark's stockholders approved the transaction with Yucaipa. Plaintiff filed suit, alleging that the defendants violated Section 14(a) of the Exchange Act and Rule 14a-9 by failing to disclose the June 1 offer earlier, and that the director defendants breached their fiduciary duty of loyalty by continuing to recommend the Yucaipa transaction in light of the allegedly superior June 1 offer. The court dismissed all of the plaintiff's claims. The Court concluded that the plaintiff had failed adequately to allege an injury under Section 14(a), noting that the closing market price of Pathmark's stock on the date of the stockholders' meeting was higher than the price offered by the undisclosed bidder. Assessing the sufficiency of the duty of loyalty claim under the enhanced scrutiny required by Revlon, Inc. v. McAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986), the court held that the plaintiff failed to allege any facts from which the court could conclude that the director defendants were conflicted or acted in bad faith, or that their decision making process was inadequate, and dismissed the duty of loyalty claim. The court consequently denied plaintiff's motion for appointment as lead plaintiff as moot.