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Solomon v. Pathe Communications Corporation

Supreme Court of Delaware
672 A.2d 35 (1996)
ELI5:

Rule of Law:

In a voluntary tender offer, the adequacy of the price is not an issue for judicial review, provided there is no coercion of shareholders or materially false or misleading disclosures made in connection with the offer.


Facts:

  • Credit Lyonnais Banque Nederland N.V. (CLBN) loaned approximately one billion dollars to Pathe Communications Corporation (Pathe) to fund Pathe's acquisition of MGM.
  • As collateral for the loans, CLBN obtained a perfected security interest in the vast majority of Pathe's and MGM's stock, along with the right to vote those shares under voting trust agreements.
  • CLBN later exercised its voting rights to remove Pathe's CEO, Giancarlo Parretti, and three other directors from the boards of both Pathe and MGM.
  • Due to alleged defaults and a conflicting Italian court order obtained by Parretti, CLBN decided to foreclose on the stock collateral it held.
  • To ensure Pathe would not delay the foreclosure process, CLBN offered to make a tender offer for some of Pathe's publicly held shares.
  • Pathe's board formed a special committee to review the proposal.
  • Pathe and CLBN entered into an agreement whereby Pathe agreed not to interfere with the foreclosure, and in exchange, CLBN agreed to make a public tender offer of $1.50 per share for up to 5.8 million of Pathe's publicly held shares.
  • CLBN initiated the foreclosure via a public auction and simultaneously made the promised tender offer to the public shareholders.

Procedural Posture:

  • Robert Solomon, a shareholder, filed a putative class action suit in the Delaware Court of Chancery against CLBN, Pathe, and its directors.
  • Solomon filed an amended complaint asserting that CLBN's tender offer was coercive, unfairly priced, and amounted to a breach of the duty of loyalty.
  • Defendant CLBN moved to dismiss the complaint for failure to state a claim (Rule 12(b)(6)), lack of personal jurisdiction (Rule 12(b)(2)), and insufficient service of process.
  • The other defendants moved to dismiss only on the grounds of failure to state a claim upon which relief can be granted (Rule 12(b)(6)).
  • The Court of Chancery granted the defendants' motions to dismiss for failure to state a claim under Rule 12(b)(6) and dismissed the case with prejudice, without ruling on CLBN's jurisdictional motions.
  • Solomon, as plaintiff-appellant, appealed the dismissal to the Delaware Supreme Court.

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Issue:

Does a tender offer price that is allegedly inadequate constitute a breach of the duty of fair dealing where the plaintiff fails to plead specific facts showing coercion or disclosure violations?


Opinions:

Majority - Hartnett, Justice.

No. An allegedly inadequate price in a tender offer does not constitute a breach of the duty of fair dealing without specific, well-pleaded allegations of fact showing either coercion or material disclosure violations. The court distinguishes voluntary tender offers from cash-out mergers, noting that for tender offers, the determinative factor is voluntariness. A transaction is not voluntary if there is coercion or materially false or misleading disclosures. Here, Solomon's complaint offered only conclusory allegations that the price was 'coercive' without pleading any specific facts to support this claim. Conclusory statements are insufficient to survive a motion to dismiss. In the absence of coercion or disclosure violations, the adequacy of the price in a voluntary tender offer is not a matter for the courts to decide.



Analysis:

This decision reinforces the significant legal distinction between tender offers and mergers under Delaware law, providing substantial protection to bidders in voluntary tender offers. It clarifies that mere price inadequacy is not a valid cause of action for breach of fiduciary duty in this context. The case sets a clear pleading standard for plaintiffs, requiring them to allege specific facts demonstrating either coercion or disclosure violations, rather than relying on conclusory statements, to challenge a tender offer's fairness. Furthermore, it carves out a narrow judicial economy exception to the general rule that jurisdictional challenges must be decided before substantive motions to dismiss.

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