## Facts

- Pathe Communications Corporation financed its acquisition of MGM/UA Communications Corporation largely through loans from Credit Lyonnais Bank Nederland N.V. (CLBN) totaling about $1 billion.
- As part of the financing, CLBN obtained a perfected security interest in approximately 89% of Pathe’s stock and 98% of MGM’s stock, and voting rights over most shares through voting trust agreements.
- Using those voting rights, CLBN removed Pathe’s CEO and several directors from the Pathe and MGM boards; a Delaware proceeding upheld CLBN’s removals.
- CLBN later proceeded toward foreclosure on the pledged stock and, in that context, made a tender offer to purchase 5.9 million shares of Pathe’s publicly held common stock.
- Pathe’s board formed a special committee of independent directors to evaluate the tender offer; the committee retained independent legal and financial advisors and recommended that shareholders tender.
- A minority shareholder filed a putative class action challenging the tender offer as unfair and coercive and alleging that Pathe’s directors breached fiduciary duties by recommending and supporting the offer and by providing inadequate disclosures.

## Issues

1. Whether the complaint stated direct (class) claims, or instead alleged injuries that were derivative and therefore subject to derivative pleading requirements.
2. Whether the complaint pleaded nonconclusory, particularized facts sufficient to state fiduciary-duty claims regarding the board’s recommendation of the tender offer.
3. Whether the complaint pleaded a viable disclosure claim by identifying specific material misstatements or omissions in the information provided to shareholders.

## Decision

- The Delaware Supreme Court affirmed the Court of Chancery’s Rule 12(b)(6) dismissal for failure to state a claim.
- Allegations amounting to corporate mismanagement or diminution in corporate value were derivative and were not properly pleaded as derivative claims.
- The remaining purported direct claims were inadequately pleaded because they relied on conclusory assertions (including price inadequacy and coercion) without supporting factual detail.
- The board’s use of an independent special committee and independent advisors, as described in the complaint, supported application of the business judgment rule absent well-pleaded facts of conflict, lack of independence, or uninformed decision-making.
- The disclosure allegations were dismissed because the complaint did not identify specific material omissions or misstatements or explain their materiality to a reasonable shareholder.

## Legal Principles

- A claim alleging corporate mismanagement resulting in a decline in stock value is generally derivative, not direct.
- On a motion to dismiss, courts accept well-pleaded facts and reasonable inferences for the plaintiff, but conclusory allegations unsupported by specific facts do not state a claim.
- Alleging that a tender offer price is inadequate, without additional well-pleaded facts indicating a fiduciary breach, is insufficient to state a claim.
- Absent well-pleaded facts showing director self-interest, lack of independence, or an uninformed process, a board’s transactional recommendation is protected by the business judgment rule.
- When directors seek shareholder action, they must disclose fully and fairly all material information within the board’s control; a disclosure claim requires identification of specific material omissions or misstatements and a showing of materiality under the “total mix” standard.

## Conclusion

The court affirmed dismissal because the plaintiff primarily alleged derivative harms and, as to any direct claims, failed to plead specific facts showing that the independent board process, tender-offer recommendation, or shareholder disclosures constituted a breach of fiduciary duty.


Solomon v. Pathe Commc'ns Corp., 672 A.2d 35 (Del. 1996)