Very recently, in the case of: In Re: J.P. Morgan Chase & Co. Shareholder Litigation, Vice Chancellor Lamb granted a motion to dismiss in a 34-page decision, based on the complaint in which stockholders of the acquirer sued its directors alleging breaches of fiduciary duty with regard to the acquisition of the bank. Their claims are based on an allegation that the directors paid too much for the acquired bank and in light of the CEO of the target proposing a no-premium merger if he were immediately promoted to CEO of the resulting entity. The CEO of the acquirer allegedly refused that offer, choosing instead to pay the premium for the target’s stock and retain his title. The defendants moved to dismiss the complaint on the basis that the claims are derivative, not direct, and that demand was not excused. A similar federal class action complaint was filed in the U.S. District Court for the District of Delaware in March of 2005 and that court refused to stay the instant Chancery Court litigation which was filed in January of 2005.
The Chancery Court relied on the recent decision by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin and Jenrett, Inc., 845 A.2d 1031, 1033 (Del. 2004) in determining whether the claims were either direct or derivative and relying on the answer to the following two questions: (1) Who suffered the alleged harm (the corporation or the suing stockholders individually); and, (2) Who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). The court viewed as the essence of the claim that J.P. Morgan Chase overpaid for Bank One. Regardless of whether the payment was in cash or in exchange of stock, the harm, if any, was suffered by J.P. Morgan Chase. The court cited other cases in which dilution claims that diminished voting power of a stockholder were characterized as direct claims. Other Delaware cases have found that when a board of directors issues stock for grossly inadequate consideration that the corporation is directly injured and shareholders are injured derivatively, and that mere claims of dilution cannot convert a derivative claim into a direct one. The court noted that any remedy from the harm would accrue to the corporation and not the stockholders. The Chancery Court also noted that a Section 220 demand for books and records was not made despite the frequent admonitions of the Delaware Supreme Court and the Court of Chancery to pursue that remedy prior to filing a complaint.
Next the court reviewed the two-part disjunctive test for demand futility recited in Aronson v. Lewis, 473 A.2d 805, 814 (Del. 1984). The court found that under the first prong of Aronson, the majority of the board was independent. The court also found that the plaintiffs failed under the second prong.
Regarding the proxy disclosure arguments, the court noted that the disclosure claim, if proven, may have supported a request for equitable relief, but the plaintiffs did not seek an injunction or seek to stop the merger before it was closed, and at this point the eggs cannot be unscrambled. Thus, plaintiffs present their disclosure claim as seeking money damages, but their request for compensatory damages arising from a violation of the duty of disclosure, in order to survive a motion to dismiss, must set forth well-pleaded allegations to support those damages. For the reasons that are discussed in the opinion, the Court concluded that the injury alleged is an injury to the corporation, not to the stockholder class, and therefore the damages, if any, flowing from the alleged breach of fiduciary duty belong to the corporation, not to the class, in that the directors could not be liable to pay compensatory damages to both the corporation and the class for the same injury. Although a disclosure claim might have given rise to an entitlement to equitable relief that could have been pursued by stockholders individually or as a class, the disclosure claim did not give rise to a claim for substantial, compensatory damages in the current factual situation.
The court also made clear that under current Delaware law, it is no longer true that nominal damages will always be awarded when there is a breach of disclosure duties in a corporate transaction.
The court also noted the recent U.S. Supreme Court decision of Dura Pharmaceuticals, Inc. v. Broudo, 175 S.Ct. 1627, 1629 (2005) which held that a private plaintiff who claims securities fraud must also prove that the defendant’s fraud caused an economic loss.