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Delaware Chancery Court Allows Board to Abandon Sales Process

BY Robert S. Reder
October 29, 2008

Earlier this year, the Delaware Chancery Court dismissed a claim by shareholders of First Niles Financial, Inc., alleging that the directors breached their fiduciary duty by abandoning a sales process, despite receiving offers that its financial adviser found to be “within a range supported by its financial models.” The court's decision in Gantler v. Stephens, 2008 WL 401124 (Dec. Ch. Feb. 14, 2008), is important in two respects. First, the court affirmed a Delaware board's right to abandon a sales process and, in effect, “just say no” to a merger proposal. Second, the court applied the deferential business judgment rule, rather than a more intrusive standard, in reviewing the Board's actions.

First Niles Sales Process

In August 2004, the Board of Directors of First Niles authorized a process to sell the company, and retained financial and legal advisers to assist with this process. The Board's financial adviser, Keefe, Bruyette & Woods, a well-known financial services sector investment banking firm, contacted six prospective bidders, three of whom submitted bids. One bidder, Farmers National Banc Corp., stated it had “no plans to retain the current First Niles board.” A second bidder, Cortland Bancorp, offered a mix of cash and stock representing a 3.4% premium over First Niles' share price. A third bidder, First Place Financial Corp., offered a stock-for-stock transaction with an exchange ratio representing a 3.4% to 6.3% premium. At the next regularly scheduled Board meeting, Keefe, Bruyette & Woods reported that “all three bids were within a range supported by its financial models, and the stock-based offers would be better than retaining First Niles shares.” The Board directed management and its financial adviser to continue the process with Cortland and First Place (but not with Farmers).

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