## Facts

- First Niles Financial, Inc., a Delaware thrift holding company, began exploring a sale in 2004 and retained advisers while receiving interest and bids from multiple potential acquirers.
- Some bidders conditioned proposals on replacing incumbent directors; others did not address director retention.
- Stockholders alleged management, led by CEO William Stephens, favored a “going private” strategy that would preserve control and positions.
- Stockholders alleged Stephens impeded bidders’ due diligence by not forwarding information requests, contributing to a bidder’s withdrawal and another bidder’s reduced price.
- Stockholders alleged certain directors had personal financial ties to the company (e.g., vendor and professional-service relationships) that could be lost in a sale.
- The board terminated the sale process, rejected a merger offer, and pursued a stock reclassification/privatization transaction that required a charter amendment and stockholder approval.
- The board issued a proxy statement to solicit the reclassification vote; stockholders alleged the proxy contained material misstatements or omissions about the sale process and the reasons for abandoning it.
- The Court of Chancery dismissed the complaint under Rule 12(b)(6), applied the business-judgment rule, and treated the stockholder vote as ratification of the directors’ conduct.

## Issues

1. Whether the complaint pled facts sufficient to rebut the business-judgment presumption and require entire fairness review of the board’s decision to abandon the sale process and reject a bid.
2. Whether Delaware corporate officers owe fiduciary duties equivalent to directors, and whether the pleaded conduct stated officer-level breaches.
3. Whether stockholder ratification applied to cleanse alleged breaches arising from a reclassification that legally required stockholder approval and was solicited by a challenged proxy.
4. Whether the proxy-disclosure allegations stated a claim for materially misleading disclosures in connection with soliciting stockholder action.

## Decision

- The Delaware Supreme Court reviewed the dismissal de novo and reversed in part.
- It held the complaint adequately pled disloyal, self-interested conduct by a board majority sufficient at the pleading stage to overcome business judgment and require entire fairness review of the decision to end the sale process and reject a merger offer.
- It held, for the first time expressly, that Delaware corporate officers owe fiduciary duties of care and loyalty that are the same as directors’ duties.
- It held the stockholder vote on the reclassification did not constitute ratification that would cleanse alleged fiduciary breaches because the vote was legally required to amend the charter.
- It reinstated claims challenging the reclassification based on alleged self-interest and materially misleading proxy disclosures.

## Legal Principles

- The business-judgment presumption can be rebutted at the pleading stage by particularized facts supporting a reasonable inference that a majority of directors was materially self-interested or acted disloyally; if rebutted, entire fairness applies.
- Entire fairness review places the burden on fiduciaries to show fair dealing and fair price for the challenged decision.
- Corporate officers owe fiduciary duties of care and loyalty to the corporation and its stockholders that are concomitant with directors’ duties.
- Stockholder ratification that cleanses fiduciary misconduct is limited to fully informed, uncoerced approval of board action that did not legally require stockholder approval; a vote mandated by statute or charter does not operate as cleansing ratification.
- When fiduciaries solicit stockholder action, they must disclose fully and fairly all material information; a materially misleading proxy can support a claim for breach of fiduciary duty.

## Conclusion

The court permitted loyalty and disclosure claims to proceed by holding that pleaded self-interest and process manipulation can trigger entire fairness review, that officers owe the same fiduciary duties as directors, and that a legally required stockholder vote on a charter amendment does not cleanse alleged misconduct through ratification.


Gantler v. Stephens, 965 A.2d 695 (Del. 2009)