Document: Gantler v. Stephens, C.A. No. 132, 2008, Steele, C.J. (Del. Jan. 27, 2009)
The Delaware Supreme Court reversed the Chancery Court’s dismissal of claims based on the business judgment rule. Plaintiff shareholders claimed breaches of fiduciary duty in connection with First Niles Financial, Inc.’s decision to reject an opportunity to sell its operations in favor of reclassifying its shares. First, in reversing dismal of Plaintiffs’ Count I, the Delaware Supreme Court found sufficient facts to overcome the business judgment rule presumption, as Plaintiffs sufficiently established the disloyalty of a majority of the First Niles directors. The Court recognized that all directors suffered from a conflict of interest for being in a position to structure the reclassification in a way that benefitted their personal interests differently from those of unaffiliated shareholders. Further, at least three directors were specifically conflicted, as CEO Stephens allegedly sabotaged the due diligence process involved with the bidding process to maintain his interest in continued employment while directors Kramer and Zuzolo had personal business dealings with First Niles that would be jeopardized if the company were sold. With the business judgment rule rebutted, the Court applied the entire fairness standard and reversed dismissal of the Plaintiffs’ claims. In addition, the Court explicitly held that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty. Applying this tenet, the Court found a reasonable inference that two defendants, as officers, colluded to sabotage the bidding process. As to Count II, the Court held that the Complaint sufficiently alleged that the proxy disclosures which represented the degree of deliberation over offers received were materially misleading. As to Count III, the Court held that ratification cannot apply to a transaction where shareholder approval is statutorily required. As a vote was required to amend the certificate of incorporation to effect the reclassification, the approving vote could not also operate to ratify the challenged conduct of the interested directors. In addition, as the reclassification proxy allegedly contained a material misrepresentation, the shareholder vote could not be fully informed as a matter of law.