Chris Lazarini Examines Standards for Proving Breach of Fiduciary Duty

November 11, 2019
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini examined a case in which a group of shareholders alleged the company and two individual defendants breached their fiduciary duties to shareholders, and an investment bank aided and abetted the alleged breach, in connection with the merger of two companies. The court rejected the shareholders’ argument that the merger was tainted finding that, under Michigan law, a transaction in which a director or officer has an interest shall not be set aside, or give rise to damages, in a shareholder proceeding if the interested person establishes any of the following:

  • The transaction was fair to the corporation.
  • The material facts of the transaction, including the director’s or officer’s interest, were known to, and approved by, the board.
  • The materials facts of the transaction, including the director’s or officer’s interest, were known to, and approved by, shareholders entitled to vote on the transaction.

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Nicholl vs. Torgow, Nos. 344000 & 344009 (Mich. App., 10/17/19)

Under Michigan law, a transaction in which a director or officer has an interest shall not be set aside, or give rise to damages, in a shareholder proceeding if the interested person establishes any of the following: (a) the transaction was fair to the corporation; (b) the material facts of the transaction, including the director’s or officer’s interest, are known to, and approved by, the board; or (c) the materials facts of the transaction, including the director’s or officer’s interest, are known to, and approved by, shareholders entitled to vote on the transaction.

In these consolidated appeals, Plaintiffs are shareholders of Defendant Talmer Bancorp, Inc. (“Talmer”), who filed separate cases against Talmer, two members of its Board of Directors, and Keefe Broyette & Woods, Inc. (“KBW”), an investment bank and advisor engaged by Talmer to assist in merger negotiations with Chemical Financial Corp. (“Chemical”). The proposed merger with Chemical was approved by Talmer’s Board and 99% of its shareholders. After the merger closed, five of Talmer’s former directors, including the individual defendants, were named to Chemical’s Board. Plaintiffs alleged Talmer and the individual defendants breached their fiduciary duties to shareholders, and KBW aided and abetted the alleged breach. In both actions, the trial court granted Defendants’ motions for summary judgment.

Plaintiffs’ appeals were consolidated, and the Court affirms. On Talmer and the individual defendants, the Court finds Plaintiffs’ claims were precluded under Michigan law, because the merger was fair to Talmer when it was entered into and the material facts about the Talmer directors obtaining seats on Chemical’s Board were disclosed to, and approved by, the entire Talmer Board, including all disinterested directors, and by 99% of its shareholders. The Court rejects Plaintiffs’ argument that the merger was tainted, because Talmer disregarded KBW’s alleged conflict of interest (a prior relationship with Chemical). The Court notes a Board committee had conducted a conflict of interest analysis during a meeting with KBW’s managing director and finds the Board was aware of KBW’s relationship with Chemical when it approved the merger.

The Court also rejects Plaintiffs’ argument that the merger was tainted because the Board and shareholders relied on financial forecasts allegedly contrived to undervalue Talmer’s stock by omitting financial models previously submitted to the FDIC regarding Talmer’s acquisition strategy. The Court finds KBW’s financial forecasts, which assumed no future acquisitions, were reasonable based on the evidence presented and notes that such forecasts are inherently uncertain predictions of future events. The Court concludes there was no material omission because the Board and shareholders received information regarding what factors were and were not included in KBW’s projections.

On KBW, the Court finds the absence of an independent wrong means the aiding and abetting claim cannot stand. Finally, the Court rejects Plaintiffs’ argument that the trial court erred in denying them the opportunity to take full discovery. The Court finds the documentary evidence provided to Plaintiffs addressed whether material facts about the merger were provided to the Board and shareholders prior to their affirmative votes. Additional deposition testimony, the Court concludes, will not supplant the documents.