Gantler v. Stephens
965 A.2d 695 (Del.Supr. 2009)

  • 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.