Cottle v. Storer Communication, Inc.

Summary

The United States Court of Appeals for the Eleventh Circuit affirmed summary judgment for the defendants in a shareholder derivative action arising from Storer Communications' merger with Kohlberg, Kravis, Roberts & Co. The court held that the business judgment rule protected the directors' decisions concerning asset lock-ups, selection of the winning bid, reliance on financial advisors, and termination fees. The plaintiff failed to identify specific facts showing fraud, bad faith, or an abuse of discretion.

Holdings

1. The business judgment rule protected the Storer directors because Cottle failed to produce specific evidence creating a genuine issue of material fact concerning fraud, bad faith, or abuse of discretion.
2. The asset lock-up was not shown to constitute an abuse of discretion and therefore did not defeat application of the business judgment rule.
3. The board's decision to accept KKR's offer without resuming negotiations with Comcast did not constitute an abuse of discretion because the alleged price inadequacy was not gross.
4. The board's failure to obtain an independent financial review or retain an independent financial adviser did not, without more, establish an abuse of discretion or defeat the business judgment rule.
5. The $18 million termination fee and related fee did not overcome the business judgment rule because the record showed that the fees were reasonable in relation to a transaction worth nearly $2.5 billion.
6. The challenged omissions did not constitute a section 14(a) violation because the underlying board conduct did not amount to a state-law breach of fiduciary duty.

Questions Presented

1. Whether the directors' grant of an asset lock-up to KKR constituted fraud, bad faith, or an abuse of discretion sufficient to overcome the business judgment rule.
2. Whether the directors abused their discretion by accepting KKR's bid without resuming negotiations with Comcast despite an assertedly higher overall valuation of Comcast's proposal.
3. Whether the directors' failure to obtain an independent financial review or retain an independent financial adviser demonstrated a breach of fiduciary duty or abuse of discretion.
4. Whether the $18 million termination fee and related investment-banker fee were impermissible and sufficient to overcome the business judgment rule.
5. Whether the proxy statement violated section 14(a) of the Securities Exchange Act by failing to disclose facts concerning the board's acceptance of KKR's offer and its relationship with Dillon Read.

Disposition

affirmed