Arnold v. Society for Sav. Bancorp, Inc.

• Decision Date: 21 October 1994
• Docket Number: 1993,No. 473,473
• Citation: 650 A.2d 1270
• Parties: , Fed. Sec. L. Rep. P 98,492 Robert H. ARNOLD, Plaintiff Below, Appellant, v. SOCIETY FOR SAVINGS BANCORP, INC., a Delaware Corporation, David T. Chase, Sanford Cloud, Jr., Lawrence Connell, Robert E. Green, Jerome H. Grossman, Betsy Henley-Cohn, Ronald D. Jarvis, Edward W. Large, Edward J. Okay, John F. Shea, Jr., Florian A. Stang, Jerry F. Stone, Jr., Bank of Boston Corporation, and BBC Connecticut Holding Corporation, Defendants Below, Appellees. . Submitted:
• Court: United States State Supreme Court of Delaware

Page 1270

650 A.2d 1270

63 USLW 2475, Fed. Sec. L. Rep. P 98,492

Robert H. ARNOLD, Plaintiff Below, Appellant, v. SOCIETY FOR SAVINGS BANCORP, INC., a Delaware Corporation David T. Chase, Sanford Cloud, Jr., Lawrence Connell, Robert E. Green, Jerome H. Grossman, Betsy Henley-Cohn, Ronald D Jarvis, Edward W. Large, Edward J. Okay, John F. Shea, Jr. Florian A. Stang, Jerry F. Stone, Jr., Bank of Boston Corporation, and BBC Connecticut Holding Corporation Defendants Below, Appellees.

No. 473, 1993.

Supreme Court of Delaware.

Submitted: Oct. 21, 1994.

Decided: Dec. 28, 1994.

Upon appeal from the Court of Chancery. AFFIRMED IN PART, REVERSED AND REMANDED IN PART.

William Prickett, Michael Hanrahan, and Ronald A. Brown, Jr. (argued), Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, for appellant.

A. Gilchrist Sparks, III (argued), and Seth D. Rigrodsky, Morris, Nichols, Arsht & Tunnell, Wilmington (Bingham, Dana & Gould, Boston, MA, of counsel), for appellees Bank of Boston Corp. and BBC Connecticut Holding Corp.

Jesse A. Finkelstein, Richards, Layton & Finger, Wilmington (Richard F. Ziegler (argued), Cleary, Gottleib, Stein & Hamilton, New York City, of counsel), for individual appellees.

Before VEASEY, C.J., and WALSH, HOLLAND, HARTNETT and BERGER, JJ., constituting the Court en Banc.

VEASEY, Chief Justice:

In this appeal from a judgment of the Court of Chancery in favor of defendants we consider the contention of plaintiff below-appellant Robert H. Arnold ("plaintiff") that the trial court erred in granting defendants' summary judgment motion and denying his own. This suit arose out of a merger (the "Merger") of BBC Connecticut Holding Corporation ("BBC"), a wholly-owned Connecticut subsidiary of Bank of Boston Corporation ("BoB"), a Massachusetts corporation, into Society for Savings ("Society"), a wholly-owned Connecticut subsidiary of Society for Savings Bancorp, Incorporated ("Bancorp"), a Delaware corporation. In accordance with the Merger, Bancorp ultimately merged with BoB. Plaintiff was at all relevant times a Bancorp stockholder. Plaintiff named as defendants Bancorp, BoB, BBC, and twelve of fourteen members of Bancorp's board of directors (collectively "defendants"). ¹

Plaintiff's central claim is that the trial court erred in holding that certain alleged omissions and misrepresentations in the Merger proxy statement were immaterial and need not have been disclosed. Plaintiff also claims that the Court of Chancery erroneously held that the duties enunciated in Revlon ² and its progeny were not implicated. Also at issue on this appeal is whether or not the individual defendants can be held liable if a disclosure violation is found in view of the exemption from liability provision in Bancorp's certificate of incorporation, adopted pursuant to 8 Del.C. § 102(b)(7) ("Section 102(b)(7)"). For the reasons set forth below, we hold that the Court of Chancery erred in failing to find that plaintiff's claim that the partial disclosures in the Merger proxy statement made it materially misleading with respect to one particular fact. In all other respects we find that the trial court committed no reversible error.

We further hold that, in all events, the limitation provision in Bancorp's certificate of incorporation shields the individual defendants from personal liability for the disclosure violation found to exist in this case. Finally, we hold that plaintiff's claim that Revlon was implicated under the circumstances of this case is without merit. Therefore, we REVERSE in part and AFFIRM in part the judgment of the Court of Chancery, and REMAND the case to the Court of Chancery for proceedings consistent with this opinion.

I. NATURE AND STAGE OF PROCEEDINGS

On March 3, 1993, plaintiff sought a preliminary injunction to enjoin consummation of the Merger, scheduled to occur on July 9, 1993. Under the terms of the Merger, Bancorp stockholders would receive 0.80 shares of BoB in exchange for each Bancorp share based on the trading price of BoB shares at closing (subject to an adjustable $20 per share cap). Plaintiff alleged that defendants breached their fiduciary duties of care and candor in the proxy statement dated February 1, 1993 (the "proxy statement") which was sent to stockholders seeking approval of the Merger. ³

The Court of Chancery denied plaintiff's motion for preliminary injunction, concluding that plaintiff had failed to show a reasonable probability of success on the merits. ⁴ The trial court did not find any need for corrective disclosures in Arnold I. Defendants had filed motions to dismiss and for summary judgment before the ruling on the preliminary injunction. The trial court deferred ruling on these motions at that time. The Merger was effected on July 9, 1993. On that date, plaintiff filed a cross-motion for partial summary judgment. In an opinion and order dated December 15, 1993 (the "Opinion"), the Court of Chancery granted defendants' motion for summary judgment and denied plaintiff's cross motion, holding that defendants did not violate their duty of disclosure. ⁵ The Court found that the alleged omissions and misrepresentations were immaterial as a matter of law. The Court also rejected plaintiff's "Revlon claim." The judgment of dismissal based on the Opinion is the subject of this appeal.

II. FACTS

The following operative facts govern this litigation. In 1991 Bancorp was suffering from severe financial distress, including an imminent threat of regulatory takeover, due mostly to Society's poor performance. In fact, Bancorp was being kept afloat mainly by the high profitability of Fidelity Acceptance Corporation ("FAC"), a Society subsidiary. Early that year, Bancorp began investigating whether it could "unlock" FAC's value from Bancorp's other poorly-performing assets.

On April 30, 1991, Bancorp publicly announced that it had retained Goldman, Sachs & Company ("Goldman") to identify transactions that would enhance stockholder value. After having canvassed the market for potential acquirors, Goldman informed the Bancorp board of directors (the "board") that there was a paucity of interest in Bancorp. Bancorp then considered selling itself in four parts--Society's deposits, Society's investment and loan assets, FAC, and a "stub" entity. ⁶ Under this scenario, the sale of each part was contingent upon sale of the others. As part of this effort, Goldman solicited bids for FAC and for Society's deposits, informing bidders in late 1991 and early 1992 that Bancorp was still available for sale in its entirety. Offers for Bancorp were not forthcoming.

Although FAC was not offered for sale separately, Goldman received nine bids solely for FAC. Eventually, Norwest Corporation ("Norwest") emerged as the highest bidder, with a bid for FAC forecasted to be approximately $275 million as of December 31, 1992. ⁷

Norwest's bid for FAC also was conditioned on the securing of all requisite regulatory approvals, among other provisos. Regulatory approval, however, turned out to be problematic. The board engaged several financial advisors to evaluate potential profit-maximizing alternatives, including Goldman, Salomon Brothers Incorporated ("Salomon"), and Merrill, Lynch, Fenner, Smith & Pierce, Incorporated ("Merrill Lynch"), all of whom confirmed the unlikelihood of FAC's sale being effected without selling simultaneously the remaining components of Bancorp.

On May 28, 1992, Goldman presented the following mutually-dependent proposal (the "May Proposal") to the board: BoB would purchase Society's deposits; Norwest would purchase FAC; Goldman itself would purchase much of Society's loan portfolio; and Society's unsalable assets would be relegated to the stub. Goldman advised the board that no such transaction had ever been executed successfully. Also, all three potential purchasers insisted that their purchases be secured by the stub and that sufficient cash be reserved to indemnify them against any asset losses. Given that Society's liabilities exceeded its assets, the reserve cash would have been transferred to the stub from FAC's sale proceeds.

Goldman estimated that stockholders could receive a net value of $15.94 per share, subject to market fluctuations. That value could be increased should a positive value of $3.32 per share for the stub assets materialize. In that scenario, Goldman estimated a total value of $229.4 million or $19.26 per share. The stub value was very uncertain, however. In fact, Director David T. Chase ("Chase") opined to the board that the stub more likely had a negative value of $3 per share. If that were the case the net value receivable by Bancorp stockholders would amount to approximately $13 per share. ⁸

Lawrence Connell ("Connell"), Bancorp's recently-hired Chief Executive Officer, President and board member, recommended that the board pursue the May Proposal, notwithstanding potential associated risks. After deliberations, however, the board rejected the May Proposal, five in favor and eight opposed (5-8), ⁹ as too risky and speculative. The board thereafter terminated Goldman and issued a press release indicating that Bancorp intended to focus on strengthening itself as an independent entity. Connell was to concentrate on managing Bancorp. ¹⁰

Shortly thereafter, representatives of BoB and Connell discussed a possible acquisition of Bancorp, examining the possibility throughout the summer of 1992. Connell enlisted Goldman's assistance as well as help from Bancorp senior personnel in the negotiations. In June or July, 1992, Connell casually mentioned BoB's interest to the Chairman. Connell did not formally disclose these developments to any board members until BoB sent a written expression of interest on August 24, 1992, which Connell relayed in substance to some board members.

On August 27, 1992, Connell informed the entire board that BoB had conducted due diligence in July and August and was interested in merging with Bancorp. The...