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No Damages for Merger Approved in Bad Faith

The Delaware Supreme Court has ruled that even though a company's board of directors may have approved a merger in bad faith, if the price paid for the acquisition was fair, the shareholders have suffered no damages. Emerald Partners v. Berlin, No. 295, 2003 (Dec. 23, 2003).

A corporation purchased 13 companies from its chairman and chief executive officer. The shareholders objected, filing suit to challenge the merger. They claimed that both the price and the process of the merger were unfair. The court of chancery found that the price paid was “entirely fair,” and dismissed the action.

The Supreme Court affirmed. The Court stated that while the chancery court found several deficiencies in the merger negotiations, it agreed with the lower court's analysis on the issue of price. The Supreme Court further agreed with the chancery court that “process laxity” cannot be condoned, and that the “many process flaws in this case raise serious questions as to the independent directors' good faith. However, the Court also stated that “the Court of Chancery found that the price was fair and this court accords a 'high level of deference' to Court of Chancery findings based upon the evaluation of expert financial testimony,” and agreed here with the chancery court's analysis of the price paid for the acquisition. The Court did not reach the issue of bad faith, noting that: “even if the directors would not be protected by the exculpation provision in their company's certificate of incorporation, they are not liable for any monetary damages.”

New York's De Facto Merger Doctrine Requires Continuity of Ownership

The Second Circuit has ruled that continuity of ownership is a critical element of New York's de facto merger doctrine, which is a common law exception to the rule that an asset purchaser is not liable for the debts of the seller. A de facto merger is a transaction, which is not in form a merger, but is in substance “a consolidation or merger of seller and purchaser.” Cargo Partner AG v. Albatrans Inc., No. 02-9322 (Dec. 9).

Here, the plaintiff concedes that it did not have any evidence to support a continuity of ownership argument. Under New York law, “to find that a de facto merger has occurred there must be a continuity of the selling corporation, evidenced by the same management, personnel, assets and physical location; a continuity of stockholders, accomplished by paying for the acquired corporation with shares of stock; a dissolution of the selling corporation and the assumption of liabilities by the purchaser.” The plaintiff argued, however, that recent New York case law supported its position that a de facto merger may be found without fulfilling the continuity of ownership requirement. (Fitzgerald v. Fahnestock & Co., 286 A.D.2d 573 (1st Dep't 2001). The Second Circuit rejected this argument stating that continuity of ownership is essential. Continuity of ownership, the court remarked, “might not alone establish a de facto merger, but, as the magistrate judge correctly observed, it 'is the substance of a merger'…. Because there is no continuity of ownership here, the asset purchase was not 'a merger … called something else.'”

Firing Worker Who Displayed Anti-Gay Scripture Not Discriminatory

The Ninth Circuit has ruled that an employer did not violate Title VII of the 1964 Civil Right Act or fail to accommodate the religious beliefs of an employee who was fired for refusing to remove from his workspace biblical passages that condemned homosexuality. Peterson v. Hewlett-Packard Co., 01-35795 (Jan. 6, 2004).

In response to his employer's diversity initiative, the plaintiff prominently posted biblical scriptures in his workspace that condemned homosexuality. His supervisor removed the messages, citing a violation of the employer's anti-harassment policy. The employee admitted that the postings were intended to condemn “gay behavior.” Upon returning to work after some paid time off, the plaintiff did not relent and was terminated for insubordination. He then sued under Title VII and the district court dismissed the claim.

Affirming, the Ninth Circuit held that there was no evidence the employer's diversity initiative was a pretext for discrimination. The employer was not attempting to change the plaintiff's religious beliefs, but rather to enforce compliance with the policy against harassment in the workplace. The court further rejected the argument that the employer failed to accommodate the plaintiff's religious beliefs by refusing to take down its diversity posters of gay employees. This would have forced the company to exclude sexual orientation form its diversity program and would have inhibited its efforts to attract and retain a qualified diverse workforce, the court stated.

No Damages for Merger Approved in Bad Faith

The Delaware Supreme Court has ruled that even though a company's board of directors may have approved a merger in bad faith, if the price paid for the acquisition was fair, the shareholders have suffered no damages. Emerald Partners v. Berlin, No. 295, 2003 (Dec. 23, 2003).

A corporation purchased 13 companies from its chairman and chief executive officer. The shareholders objected, filing suit to challenge the merger. They claimed that both the price and the process of the merger were unfair. The court of chancery found that the price paid was “entirely fair,” and dismissed the action.

The Supreme Court affirmed. The Court stated that while the chancery court found several deficiencies in the merger negotiations, it agreed with the lower court's analysis on the issue of price. The Supreme Court further agreed with the chancery court that “process laxity” cannot be condoned, and that the “many process flaws in this case raise serious questions as to the independent directors' good faith. However, the Court also stated that “the Court of Chancery found that the price was fair and this court accords a 'high level of deference' to Court of Chancery findings based upon the evaluation of expert financial testimony,” and agreed here with the chancery court's analysis of the price paid for the acquisition. The Court did not reach the issue of bad faith, noting that: “even if the directors would not be protected by the exculpation provision in their company's certificate of incorporation, they are not liable for any monetary damages.”

New York's De Facto Merger Doctrine Requires Continuity of Ownership

The Second Circuit has ruled that continuity of ownership is a critical element of New York's de facto merger doctrine, which is a common law exception to the rule that an asset purchaser is not liable for the debts of the seller. A de facto merger is a transaction, which is not in form a merger, but is in substance “a consolidation or merger of seller and purchaser.” Cargo Partner AG v. Albatrans Inc., No. 02-9322 (Dec. 9).

Here, the plaintiff concedes that it did not have any evidence to support a continuity of ownership argument. Under New York law, “to find that a de facto merger has occurred there must be a continuity of the selling corporation, evidenced by the same management, personnel, assets and physical location; a continuity of stockholders, accomplished by paying for the acquired corporation with shares of stock; a dissolution of the selling corporation and the assumption of liabilities by the purchaser.” The plaintiff argued, however, that recent New York case law supported its position that a de facto merger may be found without fulfilling the continuity of ownership requirement. ( Fitzgerald v. Fahnestock & Co. , 286 A.D.2d 573 (1st Dep't 2001). The Second Circuit rejected this argument stating that continuity of ownership is essential. Continuity of ownership, the court remarked, “might not alone establish a de facto merger, but, as the magistrate judge correctly observed, it 'is the substance of a merger'…. Because there is no continuity of ownership here, the asset purchase was not 'a merger … called something else.'”

Firing Worker Who Displayed Anti-Gay Scripture Not Discriminatory

The Ninth Circuit has ruled that an employer did not violate Title VII of the 1964 Civil Right Act or fail to accommodate the religious beliefs of an employee who was fired for refusing to remove from his workspace biblical passages that condemned homosexuality. Peterson v. Hewlett-Packard Co., 01-35795 (Jan. 6, 2004).

In response to his employer's diversity initiative, the plaintiff prominently posted biblical scriptures in his workspace that condemned homosexuality. His supervisor removed the messages, citing a violation of the employer's anti-harassment policy. The employee admitted that the postings were intended to condemn “gay behavior.” Upon returning to work after some paid time off, the plaintiff did not relent and was terminated for insubordination. He then sued under Title VII and the district court dismissed the claim.

Affirming, the Ninth Circuit held that there was no evidence the employer's diversity initiative was a pretext for discrimination. The employer was not attempting to change the plaintiff's religious beliefs, but rather to enforce compliance with the policy against harassment in the workplace. The court further rejected the argument that the employer failed to accommodate the plaintiff's religious beliefs by refusing to take down its diversity posters of gay employees. This would have forced the company to exclude sexual orientation form its diversity program and would have inhibited its efforts to attract and retain a qualified diverse workforce, the court stated.