Schwartz v. Blum, (U.S. Ct. of App., 4th Cir., Jan. 29, 2009), read opinion here.

We are fortunate to have a review of this case from Kevin Brady, a partner in the Business Law Group at the Wilmington, Delaware, office of Connolly Bove.

In this opinion, the Fourth Circuit addressed on appeal, issues raised by a businessman challenging the fairness of the merger consideration in connection with the merger of Rent-A-Wreck of America, Inc. (“RAWA”) and MBFG, Inc.

Plaintiff Schwartz was the founder and majority shareholder of RAWA. Kenneth Blum (“Blum”) was the CEO and his son, Kenneth Blum II (“Blum II”) served as President. Schwartz alleged that from approximately 1994 through the early 2000s, the Blums mismanaged RAWA and engaged in self-dealing with the acquiescence of William Richter, a Board member and owner of a controlling interest in RAWA’s preferred stock. Schwartz also claimed that because the Blums eventually were concerned that their improper activities might subject them to potential liability under the Sarbanes-Oxley Act “(SOX”), the Blums caused RAWA to delist its shares from the NASDAQ exchange, resulting in a significant drop in the value of RAWA’s common stock. That led to the resignation of Blum II as President.

Schwartz alleged that in an attempt to “extract themselves from the problems [they] created,” Richter and Blum caused RAWA to enter into a merger agreement with MBFG, wherein MBFG agreed to “a waiver and release of all claims arising from the facts contained in the Audit Report.” Richter and Blum rejected a more favorable offer for RAWA because the higher bidder did not provide the same waiver and release. Eventually, Schwartz accepted the merger consideration and redeemed his 400,000 shares of RAWA stock. Schwartz then filed suit alleging breach of fiduciary duty against Richter, Blum and Blum II claiming that RAWA shareholders did not receive a fair price.

In a unique procedural setting, the defendants moved to dismiss the complaint on the grounds that Schwartz was barred from challenging the fairness of the merger consideration since he tendered his shares. Moreover, while the motion to dismiss was pending, the defendants filed a motion for summary judgment arguing that to the extent Schwartz was claiming that the defendants engaged in self-dealing or other wrongdoing as directors, such a claim was barred by Maryland’s three-year statute of limitation. The District Court granted both motions.

In analyzing the issues, the District Court agreed with the defendants and citing Bershad v. Curtiss-Wright Corp., 515 A. 2d 840 (Del. 1987), found that Schwartz had no standing to challenge the fairness of the merger consideration because he had already tendered his shares and accepted the benefits of the merger. The District Court then granted the defendants’ motion for summary judgment on the basis of the three-year statute of limitations. Schwartz appealed both rulings.

The Court of Appeals following Delaware law (the parties agreed that Delaware law applied), agreed with the Delaware Supreme Court’s decision in Bershad, finding that an informed stockholder (Schwartz conceded that he was fully informed) who has tendered his shares and accepted the merger consideration has “acquiesced in the transaction and cannot (subsequently) attack it.” As a result, the Court of Appeals affirmed the district court’s dismissal of the complaint and vacated as moot the order granting summary judgment.