Opinion
C.A. No. 16493.
Submitted: August 11, 1999.
Decided: December 1, 1999.
Joseph A. Rosenthal of Rosenthal, Monhait, Gross Goddess. OF COUNSEL: Stanley D. Bernstein and Abraham I. Katsman of Bernstein Liebhard Lifshitz, Attorneys for Plaintiff.
Jesse A. Finkelstein, Robert J. Stearn, Jr., and Srinivas M. Raju of Richards, Layton Finger. OF COUNSEL: John Sullivan of Fried, Frank, Harris, Shriver Jacobson, Attorneys for Individual Defendants.
A. Gilchrist Sparks, III, Alan J. Stone, and Jessica Zeldin of Morris, Nichols, Arsht Tunnell. Attorneys for Defendant Atlantic Richfield Company.
MEMORANDUM OPINION
This action arises from the acquisition of all of the outstanding stock of ARCO Chemical Company by a wholly-owned subsidiary of Lyondell Petrochemicals Company for $57.75 per share (the "Transaction").
Lyondell, and its acquisition subsidiary, Lyondell Corporation, were originally named as defendants in this action. Plaintiff, however, has since agreed to dismiss them. Remaining defendants are ARCO and ARCO Chemical's directors ("defendant directors" or "individual defendants").
In her Amended Complaint, shareholder Mary McMullen alleges that Arco Chemical's 82.3% shareholder, Atlantic Richfield Company ("ARCO") insisted on liquidating its controlling stake in ARCO Chemical for a cash price worth less than the maximum value that could have been obtained through differently structured transactions. Plaintiff also claims that the directors of ARCO Chemical willingly abdicated their fiduciary responsibilities and delegated them to ARCO.
Lastly, plaintiff alleges that ARCO Chemical's directors breached their duty of disclosure, a subset of the duty of loyalty, by failing to disclose material information in ARCO Chemical's 14D-9 regarding the Transaction. Defendants seek dismissal of all claims.
I have considered the parties' positions and examined the Complaint. I am convinced that:
(a) the plaintiff fails to state a claim that defendant directors breached their fiduciary duties; and,
(b) Delaware law does not mandate an auction or shopping of ARCO Chemical.
Therefore, the complaint should be and therefore is dismissed.
I. LEGAL STANDARD
In evaluating Defendants' Motion to Dismiss, I assume the truthfulness of all well-pleaded, non-conclusory allegations found in the Complaint and extend the benefit of all reasonable inferences that can be drawn from the pleading to the non-movant, plaintiff. To dismiss a claim, I must find plaintiff has either utterly failed to plead facts supporting an element of the claim or that under no reasonable interpretation of the facts alleged in the Complaint (including reasonable inferences) could plaintiff state a claim for which relief might be granted. Notwithstanding Delaware's permissive pleading standard, I am free to disregard mere conclusory allegations made without specific allegations of fact to support them. With that standard in mind, I examine the parties' contentions.
Loudon v. Archer-Daniels-Midland Co., Del. Supr., 700 A.2d 135, 140 (1997).
Delaware State Troopers Lodge v. O'Rourke, Del. Ch., 403 A.2d 1109, 1110 (1979) ("A complaint should not be dismissed upon such a motion unless it appears to a certainty that under no set of facts which could be proved to support the claim would the plaintiff be entitled to relief.")
Wolf v. Assaf, Del. Ch., C.A. No. 15339, mem. op., 1998 WL 326662, at *1, Steele, V.C. (June 16, 1998).
II. BACKGROUND
A. Facts
ARCO Chemical was a subsidiary of ARCO. As one might expect, several of ARCO Chemical's officers and directors were current or former officers or directors of ARCO. Lyondell itself was a wholly-owned subsidiary of ARCO until 1989. Unsurprisingly, there were numerous business relationships between and among the three entities.
ARCO desired to liquidate its 82.3% stake in ARCO Chemical for cash. ARCO's motivation for desiring cash is largely irrelevant here, but the decision to seek cash was presumably a product of the business judgment of ARCO's directors and officers.
Plaintiff alleges that certain companies expressed interest in acquiring ARCO Chemical. Plaintiff claims that ARCO Chemical's Board delegated management of the sale of ARCO Chemical to ARCO. This alleged delegation, plaintiff argues, constituted an abdication of non-delegable fiduciary duties.
In January of 1998, ARCO Chemical allegedly established a special committee of independent directors designed to negotiate with ARCO regarding the envisioned "Secondary Offering/Repurchase Transaction."
On June 4, 1998, the Financial Times quoted an ARCO representative as stating that "other companies had shown an interest in buying all or part of [ARCO's] chemical assets, but none had been prepared to pay what it considered a high enough price, and its strong preference for cash had excluded potential bidders wanting to offer only stock." The Houston Chronicle ran an article, presumably at approximately the same time, stating that "Atlantic Richfield officials said companies were interested in buying all or part of its ARCO Chemical stake, but no one made an offer that was both high enough and all in cash, as the Los Angeles-based oil company preferred."
On June 18, 1998, ARCO Chemical and Lyondell announced that they had entered into a merger agreement whereby Lyondell would acquire ARCO Chemical for $57.75 per share in cash. Lyondell was to pay a total of approximately $ 1.15 billion. The parties would affect the transaction through a cash tender offer followed by a merger. ARCO agreed to tender all of its shares in the first-step. ARCO did not demand a control premium.
ARCO and its financial advisor, Salomon Smith Barney, made a presentation to ARCO Chemical's Board on June 18, 1998, regarding the terms of Lyondell's proposal and the sale process conducted by ARCO. At the same meeting, Merrill Lynch, ARCO Chemical's financial advisor, opined that the proposed price per share was fair.
Plaintiff claims that Lyondell had originally offered a combination of cash and stock valued at $5 per share more than the all-cash deal eventually agreed to, but ARCO "forced" Lyondell to submit an all-cash bid as a condition of further negotiations.
On June 24, 1998, Lyondell commenced the first-step tender offer. As required, defendants distributed a Solicitation Recommendation Statement on Schedule 14D-9 and an Offer to Purchase on Schedule 14D-1 to the ARCO Chemical shareholders. Shortly thereafter, Lyondell completed the second-step. Presumably, as plaintiff does not claim otherwise, any unhappy ARCO Chemical shareholders could have opted for appraisal instead of tendering their shares. From the information before me, it appears that the plaintiff did, in fact, tender her shares for $57.75 per share.
I did not, however, consider whether plaintiff tendered her shares relevant issue in reaching my decision in this case.
Plaintiff also alleges that the Board never permitted the Special Committee to be involved in the negotiations. Therefore, the shareholders were not adequately protected, plaintiff argues.
B. Generally
I will consider plaintiff's claims with the following well established principles in mind.
• Delaware courts make a rebuttal presumption that directors are informed and act in good faith. To overcome the presumptions of the business judgment rule, the burden is on the plaintiff to show the defendant directors failed to act (1) in good faith, (2) in the honest belief that the action taken was in the best interest of the company or (3) on an informed basis. In the present case, I find plaintiff has failed to demonstrate any reason why the protection of the business judgment rule should not be afforded the defendant directors. Plaintiffs have not specifically alleged that the defendant directors acted out of self-interest. The only allegation made by plaintiff which I can interpret as an attempt to overcome the presumption of the business judgment rule is her claim that ARCO Chemical's directors did not take a sufficiently active role in the sale of the ARCO Chemical and therefore wrongfully delegated their fiduciary duties. I will discuss plaintiffs delegation argument below and explain why the business judgment rule applies nonetheless.
• Majority shareholders, like ARCO in ARCO Chemical, owe a fiduciary duty to minority shareholders. Therefore, a majority shareholder can not exploit its majority shareholder position in a manner that adversely affects the interests of the minority.
• In order to state a claim for breach by omission of the duty of disclosure, plaintiff must plead facts identifying (1) material (2) reasonably available (3) information that (4) was omitted from proxy materials. Failure to plead facts showing any one of the above elements would make plaintiffs complaint susceptible to a motion to dismiss.
Aronson v. Lewis, Del. Supr., 473 A.2d 805, 812 (1984).
Id.
Weinberger v. UOP, 457 A.2d 701, 710 (1983); Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 937 (1985).
Wolf, supra, Del. Ch., C.A. No. 15339, mem. op., Steele, V.C. (June 16, 1998), 1998 Del. Ch. LEXIS 101, at *4-5.
Cincinnati Bell Cellular Systems Co. v. Ameritech Mobil Phone Service of Cincinnati, Inc., Del. Ch., C.A. No. 13389, mem. op., Chandler, V.C. (Sept. 3, 1996), 1996 Del. Ch. LEXIS 116, at *27-28.
III. ANALYSIS
A. Was an auction required?Plaintiff alleges that ARCO Chemical placed ARCO's need for cash ahead of ARCO Chemical's fiduciary duties to its public shareholders. In the complaint, plaintiff does not identify whether the defendants breached the duty of care or the duty of loyalty. Instead, plaintiff avers generally that "defendants violated their fiduciary duties" by failing to maximize shareholder value. Instead of seeking an all-cash deal that would meet ARCO's needs, plaintiff argues that the ARCO Chemical Board should have conducted an auction to maximize shareholder value.
Amend. Compl., para. 28.
Implicit in this argument is plaintiff's assumption that the higher "price per share" is always better than a differently structured lower "price per share." This is not always the case, and the decision of what form of offer to accept is a product of business judgment. See In re RJR Nabisco, Inc. Shareholders Litig., Del. Ch., C.A. No. 10389, 1989 WL 7036 (Del.Ch.), 14 Del. J. Corp. L. 1132, Allen C. (Jan 31, 1989).
Delaware law requires that once a change of control of a company is inevitable the board must assume the role of an auctioneer in order to maximize shareholder value. There is a "change of control" if shareholders lose a further opportunity to participate in a change of control premium.
Revlon, Inc. v. MacAndrews Forbes Holdings, Inc., Del. Supr., 506 A.2d 173, 182 (1986); Paramount Comm., Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 44 (1994).
Equity-Linked Investors, LP v. Adams, Del. Ch., 705 A.2d 1040, 1054 (1997).
This duty, however, does not apply to situations where control of the company rests with a single controlling shareholder instead of the public. It is not appropriate to extend the so-called Revlon duties to that circumstance because public shareholders have no control premium and no opportunity to lose.
See Mendel v. Carroll, Del. Ch., 651 A.2d 297, 306 (1994) (holding that presence of controlling block changes duty to maximize the current value of minority shares).
In this case, ARCO originally owned over 80% of ARCO Chemical. ARCO had the ability to control the affairs of ARCO Chemical. The remaining shareholders of ARCO Chemical were well aware of ARCO's dominance of ARCO Chemical when they decided to buy shares in ARCO Chemical. Yet, for their own economic reasons, they decided to invest in ARCO Chemical.
Lyondell now owns and controls ARCO Chemical. Plaintiff alleges the Transaction constituted a change of control requiring the ARCO Chemical Board to auction or "shop" ARCO Chemical. Perhaps, a layman would label the Transaction a change of control, but the Transaction did not constitute the "change of control" intended by the Revlon court.
The minority shareholders, of which plaintiff was a member, were not deprived of a control premium. They never had a right to a control premium; therefore, there could not be a change of control costing them the opportunity to participate in a change of control premium. For its part, ARCO did not attempt to exact a control premium, even though it arguably had a right to do so. It is undisputed that ARCO and the minority shareholders received the same consideration for their shares.
Cf. QVC, 637 A.2d at 45 (Revlon requires an auction because "an asset belonging to public stockholders (a control premium) is being sold and may never be available again").
Thorpe v. CERBCO, Inc., Del. Supr., 676 A.2d 436, 441-44 (1996) (controlling stockholder had right as a shareholder to sell its shares and receive control premium so long as it did not obtain that premium by using its control of the corporate board to divert opportunity for such premium from corporation to itself).
Furthermore, an auction in this situation would have been nonsensical. Prior to the sale, ARCO rightfully remained firmly in control of the future of ARCO Chemical. ARCO owned over 80% of ARCO Chemical, and the defendant directors could not have compelled ARCO to accept any proposal. Accordingly, equity does not require an auction.
See Bershad v. Curtiss-Wright Corp., Del. Supr., 535 A.2d 840, 845 (1987) ("Stockholders in Delaware corporations have a right to control and vote their own shares in their own interest. . . . It is not objectionable that their motives may be for personal profit or determined by whim or caprice, so long as they violate no duty owed other shareholders"); Emerson Radio Corp. v. Int'l Jensen Inc., Del. Ch., C.A. No. 15130, slip op. at 35, Jacobs, V.C. (Aug 20, 1996), appeal refused, Del. Supr., 683 A.2d 58 (1996) ("even a majority stockholder is entitled to vote its shares as it chooses, including to further its own financial interest").
For the reasons articulated, I find that plaintiff has not stated a claim that defendants' approval of the process and terms of the Transaction breached their fiduciary duties.
B. Does plaintiff state an improper delegation claim against the individual defendants?
Plaintiff claims the ARCO Chemical directors effectively ceded their decision-making authority to ARCO and thereby abdicated their fiduciary duties. In sum, plaintiff makes conclusory allegations implying that the ARCO Chemical Board did not take a sufficiently active role in the sale of ARCO Chemical.
It would have been fruitless for ARCO Chemical to try to arrange transactions in which ARCO had no interest. ARCO could vote its majority share as it pleased, and ARCO Chemical's directors had to recognize that reality. In fact, without ARCO taking the lead, the entire process would likely have been much less efficient and may have unnecessarily exhausted corporate assets. Accordingly, the ARCO Chemical Board had no duty to take a more active role in the sale.
Bershad, 535 A.2d at 845.
See Van de Walle v. Unimation, Inc., Del. Ch., C.A. No. 7046, slip op. at 29, 1991 WL 29303, Jacobs, V.C. (Mar. 6, 1991) (stating directors "breached no fiduciary duty, whether of due care or of loyalty, by allowing [controlling shareholder's] representatives to speak for the minority in the negotiations.")
The plaintiff pleads no facts showing that ARCO Chemical's Board acted out of self-interest or with gross negligence. Therefore, the protection of the Business Judgment Rule applies to the actions of the director defendants.
C. Did defendants fully and fairly disclose all material information in the 14D-9?
Aronson, 473 A.2d at 812; see also Benerofe v. Cha, Del. Ch., C.A. No. 14614, mem. op. at 17, 1998 WL 83081, Chandler, V.C. (Sept. 21, 1996) (holding that to establish that a director does not maintain discretion to independently approve a transaction, plaintiffs must demonstrate that the directors are "beholden" to the controlling shareholder because of personal or other relationships).
Furthermore, Delaware law recognizes the appropriateness of directors relying on the advice of experts when specialized judgment is required as part of a business judgment. Accordingly, ARCO Chemical's directors acted appropriately when they relied on the assessment of Merrill Lynch. See 8 Del. C. § 141(e).
Plaintiff states that the 14D-9 contained material omissions. Specifically, plaintiff alleges that the individual defendants breached their duty of disclosure by omitting from the 14D-9 information: (1) indications of interest from other potential acquirors, (2) the handling of these potential offers, (3) the restrictions and constraints supposedly imposed by ARCO on any potential sale of ARCO Chemical, (4) the information provided to Merrill Lynch, and (5) the valuation methodologies used by Merrill Lynch.
Corporate fiduciaries, including corporate directors, majority stockholders, and presumably minority controlling stockholders, have a duty to disclose all material facts when seeking stockholder action. Material facts are those facts for which "there is a substantial likelihood that a reasonable person would consider them important in deciding how to vote." Materiality is to be evaluated from the viewpoint of the "reasonable" shareholder, not from the subjective viewpoint of the directors.
Malone v. Brincat, Del. Supr., 722 A.2d 5, 11 n. 21 (1998).
Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 944 (1985).
Zirn v. VLI, Corp., Del. Supr., 621 A.2d 773, 779 (1993).
Corporate fiduciaries can breach their duty of disclosure in several ways — by making a materially false statement, by omitting a material fact, or by making a materially misleading partial disclosure. Delaware law does not, however, require disclosure of unreliable or speculative information that would confuse shareholders or inundate them with an overload of information. Moreover, preliminary discussions held in order to arrange mergers are immaterial.
In re the Walt Disney Co. Derivative Litig., Del. Ch., 731 A.2d 342, 376 (1998).
Arnold v. Society for Savings Bancorp, Inc., Del. Supr. 650 A.2d 1270, 1280 (1994).
Bershad, 535 A.2d at 847 (stating "[e]fforts by public corporations to arrange mergers are immaterial under the Rosenblatt v. Getty standard, as a matter of law, until the firms have agreed on the price and structure of the transaction.")
Accordingly, plaintiffs first two alleged omissions (indications of interest from other potential buyers, and the handling of these inquiries) need not be disclosed as they concern preliminary discussions to arrange a merger. I find plaintiffs claim that ARCO's restrictions on the structure of the deal should have been disclosed to be vague and confusing. Through various avenues, ARCO fully disclosed its interest in cash. This interest was never hidden from the shareholders of ARCO Chemical. I can not imagine what more plaintiff would suggest ARCO or ARCO Chemical should have disclosed in this regard.
As for the documents provided to Merrill Lynch and the specifics of Merrill Lynch's methodologies, I find that the directors adequately disclosed all relevant material information. In its opinion letter, which the materials disclosed to ARCO Chemical shareholders, Merrill Lynch detailed that it had relied on both a comparable companies approach and a comparable transactions approach in concluding the Transaction price to be fair to ARCO Chemical's shareholders. Moreover, there is no allegation that any non-public earnings results were provided to Merrill Lynch by ARCO Chemical. Presumably, plaintiff then had access to everything on which Merrill Lynch relied. Even if additional documents were provided to Merrill Lynch that were not publicly available, these documents would not have become material simply because they were "furnished to the corporation's valuation advisors."
Nebel v. Southwest Bancorp, Inc., Del. Ch., C.A. No. 13618, slip op. at 10, 1995 WL 405750, Jacobs, V.C. (July 5, 1995); see also In re Dataproducts Corp. Shareholders Litig., Del. Ch., C.A. No. 11164, slip op. at 16-17, Jacobs, V.C. (Aug. 22, 1991) (stating "[o]ur law rejects the proposition that disclosure of the detailed facts and specific analyses underlying a financial advisor's valuation methodology is automatically mandated in all circumstances"); Goodwin v. Live Entertainment, Inc., Del. Ch., C.A. No. 15765, slip op. at 22, 1999 WL 64265, Strine, V.C. (Jan. 22, 1999), aff'd, Del. Supr., No. 72, 1999 (July 23, 1999) ("disclosure of the underlying analysis supporting a fairness opinion "is not ordinarily required,'" quoting Matador Capital Management Corp., Del. Ch., C.A. No. 16758, 1998 WL 842286, at *14, Lamb, V.C. (Nov. 25, 1998)).
Importantly, this is not a case where a plaintiff alleges partial or incomplete disclosure of material information. Had plaintiff made such an allegation by pointing to specific material information only partially disclosed that could mislead the shareholders, my decision on this issue might differ. But here, plaintiff only makes conclusory allegations that defendants omitted certain material facts. In the preceding paragraphs, I have explained why those facts are not material.
See Arnold, 650 A.2d at 1281 (describing how a partial or incomplete disclosure could be a material omission).
The pleadings raise no viable contention that the plaintiff did not have all relevant and material information before she was asked to act on the offer. Therefore, I find plaintiff fails to state a claim that the defendant directors breached their duty of disclosure.
D. Does the provision in ARCO Chemical's charter excusing liability of the directors for breaches of the duty of care mandate dismissal of the individual defendants?
As I have already found that plaintiff fails to state a claim, I need not address the issue of whether a provision in ARCO Chemical's Charter exculpates the director defendants.
IV. CONCLUSION
For the reasons stated above, I find that plaintiffs complaint fails to state claims upon which relief might be granted and grant defendants' motion to dismiss .
IT IS SO ORDERED.
________________ Vice Chancellor