Wheelabrator Technologies, Inc. Shareholders Litigation

Delaware Court of Chancery · Corporations

CorporationsFiduciary dutiesDisclosureShareholder ratificationDuty of careDuty of loyaltyMergersmaterial disclosure

Facts

Waste already owned 22% of WTI and was entitled to nominate four of WTI's eleven directors. In March 1990, WTI and Waste negotiated a stock-for-stock merger under which Waste would increase its ownership to 55%, with the transaction conditioned on approval by a majority of WTI shareholders other than Waste; the final exchange ratio and ancillary agreements were negotiated over the week and WTI's disinterested directors approved the deal after a board meeting with banker and counsel presentations. A joint proxy statement was later sent to shareholders, and the merger was approved by a majority of WTI shareholders other than Waste. Plaintiffs claimed the proxy was misleading and that the directors breached duties of care and loyalty in negotiating and approving the merger.

Issue

Whether plaintiffs produced sufficient evidence to survive summary judgment on their disclosure claim, and what effect a fully informed shareholder vote approving the merger had on plaintiffs' duty of care and duty of loyalty claims. In particular, the court had to decide whether ratification extinguished the loyalty claim or merely changed the standard of review and burden of proof.

Rule

Directors must disclose fully and fairly all material facts within their control that would significantly affect a stockholder vote. A fully informed shareholder vote extinguishes a claim that directors failed to exercise due care in approving a transaction, but it does not automatically extinguish a duty of loyalty claim. Where the challenged transaction does not involve a controlling stockholder, a fully informed ratifying vote invokes business judgment review and places the burden on plaintiffs; where a controlling stockholder is involved, ratification shifts the burden within entire fairness review rather than eliminating judicial review.

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Summit Grid Holdings, a Delaware corporation based in Denver, negotiated a stock-for-stock merger with North Basin Services, which owned 18% of Summit. The joint proxy told Summit stockholders that negotiations continued for eight days and that the final exchange ratio and several side agreements were reached near the end of that period; plaintiffs offered only a complaint allegation that the deal was really 'done on day one,' without depositions or documents supporting that assertion.

If defendants move for summary judgment on the disclosure claim, how should the court most likely rule?

Explanation. Directors must disclose fully and fairly all material facts within their control that would significantly affect the stockholder vote. But at summary judgment, once movants put record facts in evidence that would entitle them to judgment if undenied, plaintiffs must produce specific facts showing a genuine issue. Here, if the proxy’s description is supported by evidence that key terms such as the exchange ratio and side agreements were negotiated later, plaintiffs cannot survive with only unsupported allegations that the deal was settled immediately. Entire fairness is not the test for the disclosure claim. (Derived from Wheelabrator Technologies, Inc. Shareholders Litigation (n.d.).)