Stephen Warren is a Partner in our Miami office
On January 31, 2013, the Delaware Chancery Court dismissed a shareholder class action in which the plaintiffs alleged that the directors of a warehouse club retailer had breached their fiduciary duties by agreeing to a buyout of the company by two private equity firms, notwithstanding that the shareholders received a 38 percent premium to the company's stock price. The plaintiffs argued that the directors had acted in bad faith when they shunned two higher bids, and that the board had accepted the lower bid because two of the board members were motivated by financial incentives and the board had relied on blatantly incorrect financial analyses.
In its opinion granting the defendants' motion to dismiss, the Chancery Court acknowledged that, as a general rule, a board of directors is required to maximize the sale price if it decides to engage in a change-in-control transaction (the so-called Revlon duty). The court found, however, that the plaintiffs had not adequately alleged that a majority of the directors had consciously disregarded their Revlon duties. The court noted that the board had met regularly to discuss strategic alternatives and had formed a special committee, which retained its own financial and legal advisers and met with each party that made a serious offer. As for the two higher offers, the court explained that those were preliminary expressions of interest that never materialized into formal offers. The court also found that the board's decision not to share confidential information with one of the suitors after receiving its preliminary offer — a decision that presumably prevented the suitor from making a formal offer — was not evidence of bad faith because the suitor was a direct competitor, and the board could have been reasonably concerned about sharing confidential information with a competitor, especially where the company's financial adviser had expressed doubt about the seriousness of the competitor's offer. The Chancery Court also noted that the board had expressed concerns about whether the proposed acquisition by the competitor would receive regulatory approval.
In summing up its decision to dismiss the case, the Chancery Court wrote:
Adequately pleading a duty of loyalty claim is especially difficult where, as here, the Board consisted of a majority of disinterested and independent directors, and it actively solicited interest from other bidders, the Special Committee — in good faith — relied upon financial and legal advisors, no other topping bids emerged after a lengthy public sales process, the Board drove the price up, and the shareholders received a 38% premium to the Company's unaffected stock price.
The opinion is In re BJ's Wholesale Club, Inc. Shareholders Litigation, No. 6623-VCN (Jan. 31, 2013), and is available at http://courts.delaware.gov/opinions/download.aspx?ID=184310..
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