Sutton v. FedFirst Financial Corp.
126 A.3d 765
Md. Ct. Spec. App.2015Background
- FedFirst and CB Financial agreed to merge: FedFirst shareholders could elect $23 cash or 1.1590 CB shares per FedFirst share (65% of FedFirst shares to be exchanged for CB stock; 35% cash). Directors and officers received special payments and accelerated vesting/other benefits disclosed in the S-4.
- CB filed an amended S-4; it detailed negotiations, fairness opinion, risks, and "interests of certain persons" disclosures. Sutton alleged material omissions and conflicts favoring directors.
- Sutton filed a class/derivative suit seeking to enjoin the shareholder vote, rescission (or constructive trust/rescissory damages), and alleging directors breached fiduciary duties and CB aided-and-abetted; he later dropped the derivative claim and sought a preliminary injunction.
- The circuit court dismissed Sutton's direct claims with prejudice; the merger closed without a stay. Sutton appealed; appellees moved to dismiss the appeal as moot.
- The Court of Special Appeals held the appeal was not moot because rescissory damages might remain available, but affirmed the dismissal on the merits: Shenker/Revlon duties did not apply (no change of control), so no direct claim; aiding-and-abetting claim failed; declaratory relief was moot.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether a shareholder may bring a direct fiduciary-duty claim against the board for an alleged undervalued sale | Sutton: directors owed direct duties of candor and to maximize value once they put the company up for sale; he suffered a distinct injury | FedFirst: duties are to the corporation; plaintiff's remedy is derivative; business judgment rule applies | Held: No direct claim — Shenker/Revlon duties not triggered because transaction was a stock/mixed deal leaving shareholders a continuing interest (no change of control); derivative route required |
| Whether Shenker (recognizing direct claims when sale is a foregone conclusion) applies to non–cash-out / stock-for-stock or mixed mergers | Sutton: Shenker is not limited to pure cash-outs and applies when directors negotiate sale consideration | Defendants: Shenker limited to cash-out or change-of-control situations; here shareholders retain voting/ownership interest in the combined public market | Held: Shenker limited to change-of-control/cash-out contexts; Revlon duties do not apply where control remains in a large, fluid public market |
| Aiding-and-abetting liability of the acquirer (CB Financial) | Sutton: CB knowingly assisted directors' breaches (deal protections, termination fee, matching/messaging) | CB: No underlying breach by directors; even if there were, Sutton alleged no facts of knowing, substantial assistance | Held: Dismissed — no underlying fiduciary breach and no adequate factual allegation of knowing substantial assistance |
| Mootness and available relief after the merger closed | Sutton: Case not moot because court can award rescissory damages or impose constructive trust; monetary relief preserves controversy | Defendants: Merger consummated, consideration distributed, FedFirst ceased to exist — no effective relief so appeal is moot | Held: Appeal not moot — rescissory damages are a viable post‑closing remedy; court therefore reached and decided the merits |
Key Cases Cited
- Shenker v. Laureate Educ., Inc., 411 Md. 317 (2009) (Maryland Court of Appeals recognizing that common‑law fiduciary duties to maximize value and of candor can arise when sale is a foregone conclusion)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (when sale is inevitable, directors' duty shifts to maximizing shareholder value)
- Paramount Commc’ns v. Time Inc., 571 A.2d 1140 (Del. 1989) (Revlon duties do not arise merely because a company is "in play"; no change of control where ownership remains a fluid public market)
- QVC Network Inc. v. Paramount Commc’ns, 637 A.2d 34 (Del. 1993) (explaining why stock‑for‑stock mergers often do not trigger change‑of‑control duties when ownership remains widely dispersed)
- Werbowsky v. Collomb, 362 Md. 581 (2001) (directors manage the corporation and fiduciary duties are generally owed to the corporation rather than directly to shareholders)
- In re Orchard Enterprises, Inc. Stockholder Litig., 88 A.3d 1 (Del. Ch. 2014) (rescissory damages are the monetary equivalent of rescission and may be awarded when rescission is impractical)