Question

The CEO of First Bank, without prior notice to the board, announced a

merger proposal during a two-hour meeting of the directors. Under the

proposal, the bank was to be sold to an acquirer at $55 per share. (At the

time, the stock traded at $38 per share.) After the CEO discussed the

proposal for twenty minutes, with no documentation to support the

adequacy of the price, the board voted in favor of the proposal.

Although senior management strongly opposed the proposal, it was

eventually approved by the stockholders, with 70 percent in favor and 7

percent opposed. A group of stockholders later filed a class action,

claiming that the directors were personally liable for the amount by

which the fair value of the shares exceeded $55—an amount allegedly in

excess of $100 million. Are the directors personally liable? Why or why

not?

Answer 1

Yes, The directors of the company are personally liable because a director has a duty, along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. and in the merger context , a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. Only an agreement of merger satisfying these requirements may be submitted to the shareholders . It is against these standard that the conduct of the directors of fisrt bank must be tested, as a matter of law and as a matter of fact, regarding thier exercise of an informed bussiness judgment in voting to approve the CEO merger approval.

The issue of whether the directors reached an informed decision to sell the company in that board meeting must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the CEO merger proposal.

conclusion

• The directors did not adequately inform themselves as to CEO's role in forcing the sale of the company and in establishing the per share purchase price.
• They were uninformed as to the intrinsic value of the company.
• In these circumstances, at a mimimum they were grossly negligent in approving upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency.

Without any documents before them concerning the proposed transaction, the members of the board were required to rely entirely upon CEO's 20- minute oral presentation of the proposal . NO written summary of the terms of the merger was presented; the directors were given no documentaion to support the adequacy of $ 55 price per share for sale of the company and the board had before it nothing more than CEO's statement of his understanding of the substance of an agreement that he admittedly had never read, or that any member of the board had ever seen.

Thus. the record compels the conclusion that the board lacked valuation information to reach an informed business judgment as to the fairness of $55 per share for sale of the company, The first banks board was grossly negligent in that .

hence, there should be a proper valuation of the shares of the first bank and if it is more than $55 than the difference shall be awarded to the plaintiffs as damages.