Flake v. Hoskins
55 F. Supp. 2d 1196, 1999 WL 447128, 1999 U.S. Dist. LEXIS 10035 (1999)
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Rule of Law:
A corporate board's defensive measures against a perceived takeover threat are subject to the enhanced judicial scrutiny of the Unocal test, which places the burden on the board to prove its actions were reasonable in relation to the threat posed, making dismissal at the pleading stage unlikely.
Facts:
- J.C. Nichols Company (JCN) was a Missouri corporation whose board was controlled by the Nichols family, who held stock with a very low tax basis.
- In late 1996 and through 1997, several entities made escalating unsolicited cash offers to purchase JCN stock, particularly the large block of shares held by the company's Employee Stock Ownership Plan (ESOP).
- In response to these offers and a perceived threat to its control, the JCN board adopted a "poison pill" shareholder rights plan, a defensive measure designed to make a hostile takeover prohibitively expensive.
- The board rejected or thwarted multiple cash offers, including an offer from Bosfield LLC for $70 per share for the ESOP stock, by refusing to lift the poison pill or provide necessary information to bidders.
- The board negotiated and ultimately entered into a merger agreement with Highwoods Properties, Inc. (Highwoods) in a transaction structured primarily as a stock-for-stock exchange, which was more favorable to the Nichols family's tax concerns, valuing JCN stock at approximately $65 per share.
- In soliciting shareholder approval, the JCN board disseminated a proxy statement and sent letters to shareholders, particularly ESOP participants, that allegedly contained material misrepresentations and omitted information about higher competing offers.
- The Highwoods merger was approved by a shareholder vote and was consummated in July 1998.
Procedural Posture:
- A shareholder, on behalf of a class of J.C. Nichols Company (JCN) shareholders, filed a complaint in the United States District Court for the District of Kansas.
- The plaintiff sued JCN, Highwoods Properties, Inc., and former JCN directors, alleging six counts including breach of fiduciary duty under state law and ERISA, and violations of federal securities laws.
- Defendants filed a Motion to Dismiss all six claims pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6) for failure to state a claim.
- The court previously denied a request by the defendants to consider evidence outside of the complaint.
- Defendants filed a Motion for Reconsideration of that prior order.
- The District Court heard oral argument on the pending motions.
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Issue:
Do a corporation's defensive measures, such as adopting a poison pill and rejecting cash offers in favor of a stock-for-stock merger, survive a motion to dismiss when a plaintiff alleges the board acted to entrench itself and benefit insiders, rather than in response to a reasonably perceived threat to the corporation?
Opinions:
Majority - Vratil, District Judge
Yes. A plaintiff's claim that a corporate board's defensive measures were unreasonable will survive a motion to dismiss because the board, not the plaintiff, bears the burden of justifying its actions under the enhanced scrutiny of Unocal. The court dismissed the plaintiff's claim under Revlon, finding no 'change of control' occurred in the stock-for-stock merger that would trigger a duty to maximize immediate shareholder value. However, the court found the board's adoption of a poison pill was a defensive measure subject to Unocal's two-part test, which requires the board to prove its actions were a reasonable response to a perceived threat. Because this is a fact-intensive inquiry and the burden is on the defendants, the claim cannot be resolved on a motion to dismiss. Similarly, claims of material misrepresentations in the proxy statement and breaches of ERISA fiduciary duties related to plan administration were sufficiently pleaded to proceed.
Analysis:
This decision highlights the difficulty for corporate directors in dismissing breach of fiduciary duty claims at the pleading stage when defensive measures are challenged. It reinforces the distinction between Revlon duties, which are triggered by specific events like a change of control, and the more easily invoked Unocal standard, which applies whenever a board acts defensively. The ruling underscores that under Unocal, the burden of proving reasonableness rests on the directors, making summary dismissal rare. It also provides a useful distinction for ERISA claims, separating general corporate actions that indirectly affect an ESOP from direct communications with plan participants, which can trigger fiduciary duties of administration.
