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Employer Teamsters Local Nos. 175 & 505 Pension Trust Fund v. Caspersen

A-3956-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

CORPORATIONS; DIRECTORS—A board of directors, when investigating a merger offer, does not have a duty to conduct a due diligence investigation of non-public information.

After investigating publicly available information, a corporation’s Board of Directors voted to merge the corporation into another corporation. The Board issued its opinion to the shareholders, and the shareholders voted to approve the merger. Four years later, the management of the acquiring company admitted it had falsely reported its earnings for at least four years prior to the merger. Former shareholders of the merged corporation sued, alleging that the board had breached its fiduciary duty of care and loyalty; breached its duty of candor and full disclosure; had conflicts of interests; and acted with gross negligence. They claimed a collective loss of over $4.85 billion resulting from the over-inflated stock price of the acquiring corporation, and the drop in stock price following the announcement of the false earnings reports. The former shareholders also claimed that the Board members breached their duties by not investigating the non-public financial information of the acquiring corporation. The Board members moved to dismiss the complaint claiming Delaware law (which controlled in this case) did not recognize a shareholder cause of action against directors for failing to investigate the private financial information of an acquiring corporation. The lower court dismissed the complaint as to the duty of the Board of Directors to investigate non-public financial information. It also dismissed, without prejudice, the complaint alleging conflict of interest. The shareholders appealed as to the dismissal of their complaint alleging the Board of Directors had a duty to investigate non-public financial information.

Although the Appellate Division recognized that Delaware law imposes on a board of directors the obligation to be reasonably informed prior to recommending a sale or other exchange in control, the Court held that this obligation does not include a duty to conduct due diligence investigations of non-public information. Further, it held that if such a duty to investigate non-public information were to be applicable in such cases, the courts and legislature of Delaware were in a better position to create such a law.


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