Wheelabrator Technologies, Inc. Shareholders Litigation, In re

• Decision Date: 03 March 1995
• Docket Number: No. 11495,11495
• Citation: 663 A.2d 1194
• Parties: Fed. Sec. L. Rep. P 98,805 In re WHEELABRATOR TECHNOLOGIES, INC. SHAREHOLDERS LITIGATION. Civ. A. . Submitted:
• Court: Court of Chancery of Delaware

Page 1194

663 A.2d 1194

Fed. Sec. L. Rep. P 98,805

In re WHEELABRATOR TECHNOLOGIES, INC. SHAREHOLDERS LITIGATION.

Civ. A. No. 11495.

Court of Chancery of Delaware New Castle County.

Submitted: March 3, 1995.

Decided: May 16, 1995.

Revised: May 18, 1995.

Joseph A. Rosenthal, of Rosenthal, Monhait, Gross & Goddess, Wilmington; Pamela S. Tikellis and Carolyn D. Mack, of Chimicles, Jacobsen & Tikellis, Wilmington; Steven G. Schulman, of Milberg, Weiss, Bershad, Hynes & Lerach; Abbey & Ellis, New York City, for plaintiffs.

Henry E. Gallagher, Jr. and John C. Kairis, of Connolly, Bove, Lodge, & Hutz, Wilmington, for defendant Waste Management, Inc.

David C. McBride, of Young, Conaway, Stargatt & Taylor, Wilmington, for defendants Wheelabrator Technologies, Inc. and the individual defendants.

OPINION

JACOBS, Vice Chancellor.

This shareholder class action challenges the September 7, 1990 merger (the "merger") of Wheelabrator Technologies, Inc. ("WTI") into a wholly-owned subsidiary of Waste Management, Inc. ("Waste"). The plaintiffs are shareholders of WTI. The named defendants are WTI and the eleven members of WTI's board of directors at the time the merger was negotiated and approved. ¹

The plaintiffs claim that WTI and the director defendants breached their fiduciary obligation to disclose to the class material information concerning the merger. The plaintiffs also claim that in negotiating and approving the merger, the director defendants breached their fiduciary duties of loyalty and care. The defendants deny that they breached any duty of disclosure. They further contend that because the merger was approved by a fully informed shareholder vote, that vote operates as a complete defense to, and extinguishes, the plaintiffs' fiduciary claims.

This is the Opinion of the Court on the defendants' motion for summary judgment. For the reasons elaborated below, the Court concludes that: (1) the plaintiffs have failed to adduce evidence sufficient to defeat summary judgment on their duty of disclosure claim, and that (2) the fully informed shareholder vote approving the merger operated to extinguish the plaintiffs' duty of care claims, but not their duty of loyalty claim. Accordingly, the defendants' summary judgment motion is granted in part and denied in part.

I. PROCEDURAL BACKGROUND

On April 5, 1990, the plaintiffs commenced these class actions (which were later consolidated) challenging the then-proposed merger with Waste. After expedited discovery, the plaintiffs moved for a preliminary injunction. That motion was denied, In re Wheelabrator Technologies, Inc. Shareholders Litig., Del.Ch., Cons.C.A. No. 11495, Jacobs, V.C., 1990 WL 131351 (Sept. 6, 1990) ("Wheelabrator I "), and the merger was approved by WTI's shareholders, specifically, by a majority of WTI's shareholders other than Waste.

On July 22, 1991, the plaintiffs filed a Second Amended Consolidated Class Action Complaint, which the defendants moved to dismiss pursuant to Chancery Court Rule 12(b)(6). That motion was denied in part and granted in part. In re Wheelabrator Technologies, Inc. Shareholders Litig., Del.Ch., Cons.C.A. No. 11495, Jacobs, V.C., 1992 WL 212595 (Sept. 1, 1992). As a result of that ruling, all but three claims alleged in the complaint were dismissed.

The first remaining claim is Count I of the complaint, which alleges that the defendants violated their duty to disclose all material facts related to the merger in the proxy statement issued in connection with the transaction. More specifically, plaintiffs allege that (i) the proxy statement falsely represented that the merger negotiations lasted one week, whereas in fact agreement on all essential merger terms had been reached on the first day; (ii) the proxy statement disclosed that WTI's negotiators had successfully extracted concessions from Waste, whereas in fact Waste had dictated the merger terms to WTI; and (iii) the proxy statement disclosed that WTI's board had carefully considered the merger agreement before approving and recommending it to shareholders, whereas in fact the board did not consider the matter carefully before it acted.

Count III alleges that the defendants breached their duty of care by failing adequately to investigate alternative transactions, neglecting to consider certain nonpublic information regarding certain of Waste's potential legal liabilities, failing to appoint a committee of independent directors to negotiate the merger, and failing adequately to consider the merger terms.

Count IV alleges that the defendants breached their duty of loyalty, in that a majority of WTI's eleven directors had a conflict of interest that caused them not to seek or obtain the best possible value for the company's shareholders in the merger.

On December 30, 1992, the defendants filed the pending summary judgment motion seeking dismissal of these claims. Following discovery and briefing, that motion was argued on March 3, 1995.

II. RELEVANT FACTS

WTI, a publicly held Delaware corporation headquartered in New Hampshire, is engaged in the business of developing and providing refuse-to-energy services. Waste, a Delaware corporation with principal offices in Illinois, provides waste management services to national and international commercial, industrial, and municipal customers.

In August 1988, Waste and WTI entered into a transaction (the "1988 transaction") to take advantage of their complementary business operations. In the 1988 transaction, Waste acquired a 22% equity interest in WTI in exchange for certain assets that Waste sold to WTI. The two companies also entered into other agreements that concerned WTI's rights to ash disposal, the purchase of real estate for future refuse-to-energy facilities, and other business development opportunities. As a result of the 1988 transaction, Waste became WTI's largest (22%) stockholder and was entitled to nominate four of WTI's eleven directors.

Over the next two years, Waste and WTI periodically discussed other ways to reduce perceived inefficiencies by coordinating their operations. Those discussions intensified in December 1989, when Waste acquired a refuse-to-energy facility in West Germany. That acquisition raised concerns that the four Waste designees to WTI's board of directors might have future conflicts of interest if WTI later decided to enter the West German market.

Prompted by these and other concerns, Waste began, in December 1989, to consider either acquiring a majority equity interest in WTI or, alternatively, divesting all of its WTI stock. After several discussions, both companies agreed that Waste would increase its equity position in WTI. On March 22, 1990, Waste proposed a stock-for-stock, market-to-market (i.e. no premium) exchange in which Waste would become WTI's majority stockholder. WTI declined that proposal, and insisted on a transaction in which its shareholders would receive a premium above the current market price of their shares.

The following day, March 23, 1990, representatives of WTI and Waste met in New York City. Accompanying WTI's representatives were members of WTI's investment banking firm, Lazard Freres. At that meeting, Waste's representatives expressed Waste's interest in acquiring an additional 33% of WTI, thereby making Waste the owner of 55% of WTI's outstanding shares. The parties ultimately agreed on that concept. They also agreed to structure the transaction as a stock-for-stock merger that would be conditioned upon the approval of a majority of WTI's disinterested stockholders, i.e., a majority of WTI's stockholders other than Waste. Waste agreed to pay a 10% premium for the additional shares required to reach the 55% equity ownership level. Finally, it was agreed that the merger would involve no "lockup," breakup fees, or other arrangements that would impede WTI from considering alternative transactions.

During the following week, additional face-to-face meetings and telephone conversations took place between the two companies' representatives. Those negotiations resulted in five "ancillary agreements" that gave WTI certain funding and business opportunity options, as well as licenses to use certain Waste-owned intellectual property. ²

On March 30, 1990, agreement on the final merger exchange ratio was reached. The parties agreed that WTI shareholders would receive 0.574 shares of WTI stock plus 0.469 shares of Waste stock for each of their pre-merger WTI shares.

That same day, March 30, 1990, WTI's board of directors held a special meeting to consider the merger agreement. All board members attended except the four Waste designees, who had recused themselves. Also present were WTI's "in-house" and outside counsel, and representatives of Lazard Freres and Solomon Brothers. The WTI board members reviewed copies of the draft merger agreement and materials furnished by the investment bankers concerning the financial aspects of the transaction. The directors also heard presentations from the investment bankers and from legal counsel, who opined that the transaction was fair. A question and answer session followed.

The seven board members present then voted unanimously to approve the merger and to recommend its approval by WTI's shareholders. After that vote, the four Waste-designated board members joined the meeting, and the full board then voted unanimously to approve and recommend the merger.

On July 30, 1990, WTI and Waste disseminated a joint proxy statement to WTI shareholders, disclosing the recommendation of both boards of directors that their shareholders approve the transaction. At a special shareholders meeting held on September 7, 1990, the merger was approved by a majority of WTI shareholders other than Waste.

III. THE PARTIES' CONTENTIONS

The defendants seek the dismissal of plaintiffs' remaining disclosure claim on the ground that it has no evidentiary support. The defendants further contend that the effect of the fully informed...