(CN) – Likening himself to the Lady of Shalott character confined to a castle tower in an 1830s poem, Delaware Vice Chancellor Samuel Glasscock dismissed a shareholder class action over aerospace company Kreisler Manufacturing’s merger, notwithstanding his constrained view of the facts around the deal.
Glasscock found plaintiff Alan Kahn had failed to show that the company’s directors acted in bad faith when negotiating the company’s merger with private equity group Arlington Capital Partners.
He noted that even at the pleading stage, when discovery had not yet been completed and a plaintiff’s well-pleaded allegations are assumed to be true, Kahn did not state a viable claim, leading him to grant the company’s motion to dismiss.
In his work “Lady of Shalott,” British poet Alfred Tennyson provided the “ideal metaphor for the task of a bench judge addressing such a motion to dismiss,” Glasscock wrote.
“The eponymous Lady, of course, exists in a tower on a river island, with the charge of weaving a web representing the passing scene along the bank. She may not survey this scene directly, lest she suffer the consequences of a mysterious curse; her view is limited to the reflections in a mirror,” the judge wrote of the poem.
“So it is with this Motion to Dismiss. I am charged with evaluating the Plaintiff’s claim. The true facts from which that claim arises are, at this stage, forbidden to me; I am limited to the facts as reflected from the point of view of the Plaintiff in his complaint,” Glasscock said.
Kahn alleged that Arlington lowed its $18.75-a-share bid for Kreisler in response to expenses associated with “side deals” that, among other things, ensured post-merger employment and certain equity-transfer benefits for Kreisler CEO Michael Stern, great-grandson of the company’s founder. The board favored these “side deals” over maximizing shareholder value, Kahn claimed.
But Glassock ruled that Kahn did not pinpoint the impact the side deals had on the final merger price, “and hence … materiality is never pled.”
More importantly, Glasscock wrote, Kahn did not present arguments that would disprove the good faith of the independent directors in approving the merger and allowing the side deals.
Glassock rejected Kahn’s tally of which board members stood to gain disproportionate benefits from the merger as compared to common shareholders. The company charter’s exculpatory provision and the majority of the board being “independent and disinterested,” Kahn had a high legal standard to meet in moving forward with the litigation. Kahn needed to clearly show bad faith on the part of the directors, not just negligence or a breach of duty of care.
Beyond the allegations of improper favoring of the CEO’s “side deals,” Kahn claimed the company withheld details of the financial analysis about the merger from shareholders.
He further alleged that Kreisler unfairly required shareholders who wanted to view the merger contract to travel to Philadelphia, where the company’s law firm held the document. Even after Kahn expressed his desire to make the trek, the company denied him the chance to view the document, since he held his shares in his “street name” and was not a formal shareholder of record.
Glasscock ruled, however, that Kahn’s allegations in that vein again did not suggest bad faith.
“A director’s decision to limit access to the merger agreement and valuation metrics could have a valid business purpose. An omission of material disclosures could be the result of director negligence, or even gross negligence. Such mis-disclosures are not actionable here,” the judge wrote.
Glasscock noted that rather than seeking damages outright, Kahn could have filed for injunctive relief to halt the merger’s closing or force the company to grant shareholders better access to the merger details. If Kahn had done so, the court would have applied enhanced scrutiny and considered equitable relief with regard to shareholders’ statutory voting or appraisal rights, Glasscock wrote.
Under the final terms of the deal, Arlington acquired Kreisler, which makes components for aircraft engines and industrial turbines, for $18-a-share, at a nearly 60-percent premium to the company’s closing share price on the over-the-counter market prior to the deal’s announcement. The market capitalization of Kreisler at $18-a-share was estimated to be roughly $34 million.