First Niles was a holding
company that owned a bank in Ohio (but was a Delaware corporation). Their
founder was about to retire, and the bank wasn't doing great, so they put
out some feelers to see if another corporation wanted to buy them.
Three companies had interest
in buying First Niles, but First Niles' directors became spooked that they
would be replaced after the merger. They turned down one offer, and
didn't follow through on the negotiations with the other two companies.
The directors never gave
careful consideration to the offer, it was rejected with a minimum amount
of deliberation.
One of the directors,
Gantler, resigned in protest.
As a backup plan, the
remaining directors, led by Stephens, came up with a plan to change the
voting rights of some of First Niles' shareholders. This would allow the
corporation to become "private" and avoid some SEC compliance
costs. The directors disseminated a proxy solicitation, asking the shareholders to vote to reclassify
the company as "private."
The proxy solicitation did disclose that the directors had a conflict
of interests with the reclassification plan (since they all owned First
Niles stock), and that they had "carefully deliberated" and
rejected the acquisition offers from the other companies.
The shareholders just barely
voted in favor of the reclassification plan. Gantler sued.
Gantler argued that the
directors violated their fiduciary duty to the corporation by rejecting
the acquisition offer, and alternatively asking for a reclassification
that they would personally benefit from.
The Trial Court found for
Stephens and allowed the reclassification plan. Gantler appealed.
The Trial Court found that
the directors' misleading disclosures were not material because they did not alter the "total
mix" of information available to shareholders.
The Appellate Court reversed.
The Appellate Court found
that the disclosures in the proxy solicitation regarding the directors' deliberations with
regards to the acquisition offer were materially misleading.
The Court noted that the
term materially should be defined
as "a substantial likelihood that the disclosure of the omitted
fact would have been viewed by the reasonable investor as having
significantly altered the 'total mix' of information made
available."
The Court found that the
directors did not "carefully deliberate" the acquisition offer.
By saying that they had, it misled shareholders into thinking that there
were good financial reasons for the rejection.
The Court found that the
directors had breached their duty of loyalty by recommending the reclassification plan for
purely self-interested reasons.
The directors argued that
since the shareholders had ratified the plan with their vote, they
couldn't have been a breach of the duty of loyalty. However, the Court found that shareholder
ratification rebuts an accusation of breach of duty of loyalty when there was a material misrepresentation
in the proxy solicitation.
Basically, since the
shareholders were not fully informed of the consequences of their vote,
and of the directors' self interests, the fact that they voted to
approve the plan doesn't mean that the directors' didn't breach the duty
of loyalty.
