Shareholder Challenge to Merger Transaction is Defeated

Scheidt v. DRS Technologies, Inc.., 424 N.J. Super. 188 (App. Div. 2012).  Plaintiff, a shareholder in defendant DRS Technologies, Inc. (“DRS”), sued the company, its Board of Directors and its General Counsel for self-dealing and breach of fiduciary duty in connection with an agreement and plan of merger with an Italian company, Finmeccanica.  After the merger transaction was consummated, the Chancery Division granted defendants’ motion to dismiss the Complaint.  Plaintiff appealed, but the Appellate Division, applying the de novo standard of review, affirmed, in an opinion by Judge Payne.  Because Delaware law was applicable, the panel relied on decisions from Delaware in reaching its conclusions.

At its core, the Complaint alleged that defendants had pursued a deal with Finmeccanica to the exclusion of another potential merger partner (“Company X”), and that defendants had done that in order to preserve their own positions after a merger, rather than in the interest of shareholders.  Under Delaware law, defendants need only have made a “reasonable decision, not a perfect decision” (emphasis in original), and if the merger with Finmeccanica was “one of several reasonable alternatives,” the courts would not second-guess the business judgment of defendants.

Judge Payne first concluded that plaintiff’s claim for a breach of defendants’ duty of due care failed as a matter of law.  Delaware law permits a company’s certificate of incorporation to include a provision that exculpates directors from monetary damages for breaches of due care.  DRS’s certificate of incorporation had such a clause.

Plaintiff’s claims for breach of the fiduciary duty of loyalty and good faith, because defendants acted to protect their own positions post-merger, fared no better.  Under Delaware law, plaintiff was obligated to show that defendants’ actions “were motivated primarily or solely for the purpose of achieving that [improper] effect” (emphasis in original).   This plaintiff had not done.  Instead, his allegations were purely conclusory. 

“Further, under Delaware law, the retention by directors of their positions on a board does not, without more, provide evidence of a disqualifying interest that could support a claim of the directors’ breach of their duty of loyalty.”  And, even if the CEO, who was to receive an employment contract with the new entity, and another director, who was of counsel to the law firm that was advising DRS regarding the merger, were conflicted, the majority of the Board “remained disinterested and independent.”

Nor did defendants breach any duty by allegedly failing to obtain the best price for DRS shares.  Defendants retained a major law firm to provide legal advice, and hired Bear Sterns and Merrill Lynch to provide financial advice and fairness opinions.  Those advisors evaluated the offer by Company X and found it wanting.  Nonetheless, defendants successfully used the Company X offer to induce Finmeccanica to increase its purchase offer.  As a result of all this, there was no breach of duty.

Finally, Judge Payne rejected plaintiff’s allegations that defendants had not made adequate disclosures to shareholders in the proxy statement.  A review of the disclosures showed that they were in fact sufficient.  The panel found that “[i]n essence, what plaintiff alleges under the guise of failure to disclose is that DRS did not adedquately pursue alternatives to Finmeccanica when determining to enter into the merger agreement with it.”  That claim, of course, had already been found insufficient as a matter of law.