McMullin v. Beran
2000 Del. LEXIS 481, 765 A.2d 910, 2000 WL 1741717 (2000)
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Rule of Law:
When a majority shareholder proposes the sale of the entire corporation to a third party, the subsidiary's board of directors has a non-delegable fiduciary duty to conduct an independent and informed analysis of the transaction to determine if it maximizes value for all shareholders.
Facts:
- Atlantic Richfield Company (ARCO) was the 80.1% majority shareholder of ARCO Chemical Company (Chemical).
- A majority of Chemical's twelve-member board of directors were current or former executives of ARCO or its subsidiaries.
- In February 1998, Lyondell Petrochemical Company (Lyondell) expressed an unsolicited interest in acquiring Chemical.
- Chemical's board authorized ARCO to explore the sale of the entire company, and ARCO exclusively handled the negotiations with Lyondell.
- ARCO rejected several offers from Lyondell before accepting a final, all-cash offer of $57.75 per share.
- The proposed transaction was a tender offer for all shares, including ARCO's, followed by a cash-out merger for any remaining shares at the same price.
- On June 18, 1998, the Chemical board met for the first and only time to consider the deal, heard presentations from ARCO's and its own financial advisors, and unanimously approved it.
- The plaintiff alleged ARCO's negotiations were driven by its own immediate need for cash for another acquisition, leading it to favor an all-cash deal over a potentially more valuable alternative.
Procedural Posture:
- Mary E. McMullin filed a putative class action lawsuit in the Delaware Court of Chancery against ARCO Chemical Company, its directors, its parent ARCO, and the acquirer Lyondell.
- McMullin voluntarily dismissed the claims against Chemical, Lyondell, and its subsidiary.
- The remaining defendants, the Chemical Directors and ARCO, filed motions to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Court of Chancery Rule 12(b)(6).
- The Court of Chancery granted the defendants' motions to dismiss.
- McMullin, as plaintiff-appellant, appealed the dismissal to the Supreme Court of Delaware.
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Issue:
Does the board of directors of a subsidiary breach its fiduciary duties to minority shareholders when it delegates the negotiation of a third-party merger to the majority shareholder and approves the transaction without independently determining whether the deal maximizes value for all shareholders?
Opinions:
Majority - Holland, Justice.
Yes. The board of directors breaches its fiduciary duties to minority shareholders under these circumstances. Even when a majority shareholder's vote makes a merger's approval a foregone conclusion, the subsidiary's board cannot abdicate its statutory and fiduciary responsibilities. The directors have an ultimate duty to make an informed and deliberate judgment, in good faith, about whether the transaction proposed by the majority shareholder will result in a maximization of value for all shareholders, including the powerless minority. The complaint sufficiently alleged breaches of the duties of care and loyalty, thereby rebutting the presumption of the business judgment rule. The duty of care was implicated by allegations that the board was uninformed, passive, and rushed by the majority shareholder's needs. The duty of loyalty was implicated by allegations that a majority of the board was conflicted due to their ties to ARCO and subordinated the minority's interests to ARCO's need for an immediate, all-cash deal. Therefore, the complaint should not have been dismissed.
Analysis:
This decision clarifies the scope of fiduciary duties for directors of a controlled subsidiary in the context of a sale of the entire company. It establishes that the board's role is not merely ministerial, even when the majority shareholder's voting power makes the outcome inevitable. The board serves as a critical procedural safeguard for minority shareholders, whose only recourse may be an appraisal action. By requiring the board to independently assess value maximization and provide full disclosure, the court ensures that minority shareholders have the information necessary to make an informed decision about whether to accept the merger consideration or seek appraisal. This precedent strengthens protections for minority shareholders in parent-subsidiary transactions.
