Alan Kahn v. Michael D. Stern
CA 12498-VCG
Del. Ch.Aug 28, 2017Background
- Kreisler Manufacturing, a small, thinly traded Delaware company largely family‑held, was sold to Arlington; the merger was approved by written consent without a stockholder vote and an Information Statement was sent to shareholders.
- Michael and Edward Stern (co‑presidents/executives) negotiated and received various post‑closing benefits (employment, rollover equity, sale bonuses) — the “Side Deals.”
- A Special Committee (Poling and Bacher) used the Company’s advisor (Robinson Humphrey); Daly was not on the Special Committee and owned ~19.1% of shares.
- Plaintiff Kahn (a beneficial owner who did not seek appraisal) alleges the Side Deals depressed the merger price and that the Information Statement omitted/misstated material facts, seeking damages/quasi‑appraisal.
- The Company’s charter contained an 8 Del. C. §102(b)(7) exculpation clause; no controlling stockholder was alleged.
- Chancellor (Vice Chancellor) granted defendants’ Rule 12(b)(6) motion, dismissing the breach‑of‑fiduciary‑duty claim for failure to plead that a majority of the board was interested or acted in bad faith.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a majority of the board was "interested" (disabling conflict) | Daly was effectively non‑independent (large illiquid block, aligned with activist AB Value, excluded from Special Committee) | Daly had same incentives as other public holders; no unique personal benefit alleged | Dismiss — plaintiff failed to plead Daly was interested or lacked independence |
| Whether the Side Deals caused bad faith by the board (tainted process) | Side Deals diverted merger consideration to insiders (reduction from $18.75 to $18.00; bonuses ~$0.11/share), making approval inexplicable absent bad faith | Side Deals (employment, rollover, conditional bonuses) can be explained by legitimate business purposes and were disclosed; no pleaded facts showing independent directors acted in bad faith | Dismiss — allegations insufficient to show board action was "so far beyond" reasonable judgment to infer bad faith |
| Whether disclosure omissions/misstatements support post‑close damages/quasi‑appraisal | Information Statement misrepresented access to Merger Agreement, omitted valuation details, projections, and negotiation "why" for Side Deals, thereby preventing informed appraisal decision | Disclosures were detailed on the Side Deals; omissions (if any) could be negligence but do not show knowing, intentional withholding by disinterested directors | Dismiss — post‑close damages claim requires pleading non‑exculpated duty‑of‑loyalty breach (bad faith); mere nondisclosure or negligence insufficient |
| Pleading standard given exculpation clause | Plaintiff contends disclosure + process allegations suffice to survive dismissal | Defendants emphasize exculpation bars duty‑of‑care claims and majority disinterested board presumption; plaintiff must plead majority interested or bad faith | Dismiss — because of exculpation and presumptive independence, plaintiff had to plead facts making bad faith or majority interest reasonably conceivable and failed to do so |
Key Cases Cited
- Parnes v. Bally Entertainment Corp., 722 A.2d 1243 (Del. 1999) (independent directors may be deemed to have approved a transaction in bad faith where insider imposed egregious side‑deals that taint the process)
- Crescent/Mach I P'rs, L.P. v. Turner, 846 A.2d 963 (Del. Ch. 2000) (series of favorable insider side‑deals can so taint a process that independent directors are implicated)
- Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) (bad faith occurs where fiduciary consciously disregards a known duty to act)
- In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006) (discusses bad faith and the standard for director liability for intentional dereliction of duty)
- Beam v. Stewart, 845 A.2d 1040 (Del. 2004) (addresses independence and burden to plead facts overcoming presumption of director faithfulness)