Sutton v. Fedfirst Fin. Corp.

• Decision Date: 29 October 2015
• Docket Number: No. 1751, Sept. Term, 2014.,1751, Sept. Term, 2014.
• Citation: 226 Md.App. 46,126 A.3d 765
• Parties: Larry SUTTON v. FEDFIRST FINANCIAL CORPORATION, et al.
• Court: Court of Special Appeals of Maryland

226 Md.App. 46

126 A.3d 765

Larry SUTTON

v.FEDFIRST FINANCIAL CORPORATION, et al.

No. 1751, Sept. Term, 2014.

Court of Special Appeals of Maryland.

Oct. 29, 2015.

Reconsideration Denied Dec. 24, 2015.

Charles J. Piven (Yelena Trepetin, Brower, Piven, Stevenson, MD, Evan J. Smith, Marc L. Ackerman, Brodsky & Smith, LLC, Bala Cynwyd, PA), all on the brief, for Appellant.

Leslie P. Machado (LeClair, Ryan Corp., Alexandria, VA, Stephen M. Faraci, Sr., LeClair, Ryan Corp., Richmond, VA) James T. Heidelbach (Gregory L. Arbogast, Gebhardt & Smith, LLP, Baltimore, MD, Stephen E. Hudson, Kilpatrick, Townsend & Stockton, LLP, Atlanta, GA), all on the briefs, for Appellee.

Panel: GRAEFF, REED and JAMES R. EYLER (Retired, Specially Assigned), JJ.

GRAEFF, J.

This appeal arises from a merger between FedFirst Financial Corporation ("FedFirst") and CB Financial Services, Inc. ("CB Financial"). After the merger agreement was announced, Larry Sutton, appellant, a former shareholder of FedFirst, filed a lawsuit against the two companies. He sought to enjoin the merger, alleging that: (1) FedFirst's directors breached fiduciary duties owed to FedFirst's shareholders; and (2) CB Financial aided and abetted the "breaches of fiduciary duty in connection with the Proposed Acquisition." On September 19, 2014, the circuit court dismissed Mr. Sutton's direct claims with prejudice.

On appeal, Mr. Sutton presents one multi-part question for our review,¹ which we have reorganized and reworded, as follows:

1. Did the circuit court err in granting the motion to dismiss the claims against the directors of FedFirst?

2. Did the circuit court err in granting the motion to dismiss the claims against CB Financial?

CB Financial and FedFirst present an additional question for our review, which we have reworded and rephrased slightly, as follows:

Should this Court dismiss this appeal as moot because the merger between FedFirst and CB Financial, which has now been consummated, cannot be undone, leaving Mr. Sutton with no relief that the Court can order?

For the reasons set forth below, we conclude that the appeal is not moot, and we shall affirm the judgment of the circuit court.

FACTUAL AND PROCEDURAL BACKGROUND

The Merger Agreement

On April 15, 2014, FedFirst and CB Financial announced that the two corporations had executed a merger agreement that, if approved by the stockholders of a majority of the outstanding shares of stock, would result in the merger of FedFirst and CB Financial.² The merger agreement provided that FedFirst shareholders would receive either $23.00 in cash or 1.1590 shares of CB Financial common stock in exchange for each FedFirst share. The FedFirst shareholders could elect to receive cash or stock, or a combination thereof, subject to the requirement in the agreement that 65% of the total shares of FedFirst would be exchanged for CB Financial stock and 35% would be exchanged for cash.³ Mr. Sutton's complaint estimated that the value of the merger was approximately $54.5 million dollars.

Pursuant to the merger agreement, FedFirst President and Chief Executive Officer Patrick G. O'Brien would become the Executive Vice President and Chief Operating Officer of Community Bank, a wholly owned subsidiary of CB Financial through which CB Financial conducted its operations. FedFirst directors John J. LaCarte, John M. Swiatek, Richard B. Boyer, and Mr. O'Brien would join the board of directors of CB Financial. The stockholders were advised that some of FedFirst's officers and directors obtained interests in the merger that were not shared by stockholders generally. For example, all outstanding stock options would be terminated and the holders of the stock options would receive a cash payment equal to the number of shares multiplied by the amount by which $23.00 exceeded the "exercise price" of the stock option. Cash payments for directors included the following: Patrick G. O'Brien (President and CEO) $446,314; Richard B. Boyer (Vice President) $193,958; Jamie L. Prah (Senior Vice President and Chief Financial Officer) $199,996; Henry B. Brown III (Senior Vice President and Chief Lending Officer) $161,862. Cash payments to all non-employee directors (5 persons) totaled $538,708.

Moreover, the agreement accelerated the vesting of FedFirst restricted stock awards, resulting in restricted stock awards becoming "fully vested upon the occurrence of a change in control and each share of restricted stock will be converted into 1.1590 shares of CB common stock."⁴

Finally, with respect to Exchange Underwriters, Inc., an insurance agency in which FedFirst owned 80% equity interest and Mr. Boyer owned 20% interest, FedFirst would buy out Mr. Boyer's 20% interest prior to the closing of the merger, and Mr. Boyer would continue to be employed as Chief Executive Officer of the company following the merger.

The Merger Agreement also included covenants that protected CB Financial's interests and encouraged the completion of the merger. Initially, FedFirst agreed that it would not initiate, solicit, or knowingly encourage any other acquisition proposals (e.g., a merger or tender offer). The agreement, however, did not preclude FedFirst from considering unsolicited offers, as long as they were "superior proposals." Moreover, FedFirst agreed to promptly

notify CB of such inquiries, proposals or offers received by, any such information requested from, or any such discussions or negotiations sought to be initiated or continued with FedFirst or any of its representatives indicating, in connection with such notice, the name of such Person and the material terms and conditions of any inquiries, proposals or offers.^{[5 ]}

Finally, "in order to induce CB to enter into this Agreement, and to reimburse CB for incurring the costs and expenses related to entering into this Agreement and consummating the transactions contemplated," the agreement included a termination fee of $2,750,000, which FedFirst agreed to pay in the event that it terminated the agreement.

The S–4 Registration Statement

On June 13, 2014, CB Financial filed a Registration Statement (Form S–4) with the United States Securities and Exchange Commission ("SEC"). On July 28, 2014, CB Financial filed an amended S–4 with the SEC (hereinafter "the S–4"), which was more than 300 pages long and included a plethora of information about the companies and the proposed merger. It included, inter alia, the following:

• A letter to stockholders of FedFirst explaining the proposed transaction and advising that the approval of the merger agreement required the affirmative vote of the holders of a majority of the outstanding shares of FedFirst common stock.

• A summary providing a description of the two companies and the highlights of the merger.

• A detailed discussion of the risks associated with the merger (e.g., the price of CB Financial stock may decrease after the merger, and/or "FedFirst stockholders will have reduced ownership and voting interest after the merger") and risks related to CB Financial (e.g., "Changes in interest rates may reduce CB's profits and impair asset values").

• Selected historical financial information for both companies.

• A description of the special meeting of the stockholders during which the stockholders would vote on the merger.

The S–4 also included a detailed chronological account of the negotiation of the merger. It explained that, in January 2013, Patrick G. O'Brien, President and Chief Executive Officer, of FedFirst, met with Barron P. McCune, Jr., President and Chief Executive Officer of CB, at Mr. McCune's invitation, to discuss a possible business combination of their two institutions. No price or other terms were discussed at this meeting. In February 2013, Mr. O'Brien and Mr. LaCarte met with FedFirst's financial advisor, Mufson Howe Hunter, "to examine the current [Mergers & Acquisitions ("M & A") ] market in the bank and thrift industry and review the financial characteristics of a possible business combination between CB and FedFirst." In March, the FedFirst board of directors discussed the issue and "observed that there were many compelling strategic business reasons for a combination with CB, including their complementary market areas and similar corporate cultures." FedFirst did not, however, pursue a transaction with CB or any other company at that time.

In August, the following occurred:

[T]he FedFirst board of directors met to discuss its strategic alternatives. Representatives of Mufson Howe Hunter were present at the meeting, as was a representative of Kilpatrick Townsend & Stockton LLP, outside legal counsel to FedFirst. Representatives of Mufson Howe Hunter reviewed with the directors bank and thrift stock market trends; compared key balance sheet and profitability metricsof FedFirst to those of comparable companies in Pennsylvania; examined FedFirst's historical and projected financial performance; provided an update on the M & A market in the bank and thrift industry; reviewed with the directors the financial characteristics of a possible business combination between CB and FedFirst; and identified potential acquirers of FedFirst, evaluated their likely interest, and analyzed their capacity to pay based on certain transaction assumptions. Legal counsel reviewed with the directors their fiduciary duties in the context of a business combination with another company.

In September, the FedFirst board of directors "authorized Mufson Howe Hunter to contact three selected parties regarding their interest in a possible business combination with FedFirst." It "determined that the business risks resulting from awareness in the local banking community of FedFirst's interest in a business combination outweighed the benefit of contacting additional companies that were unlikely to have the interest or ability to complete a transaction with FedFirst."

By October, FedFirst had received responses from each of the three companies. The first company (Bank A) initially indicated that it had an interest in...