Title: Krasner et al. v. Moffett et al.

State: delaware

Issuer: Delaware Supreme Court

Document:

IN THE SUPREME COURT OF THE STATE OF DELAWARE 
 
DANIEL W. KRASNER,         
§ 
No. 569, 2002 
GREGORY J. SHEFFIELD, and 
§ 
MOISE KATZ, 
 
§ 
  
 
§ 
     
Plaintiffs Below, 
§ 
Appellants, and 
§ 
Cross-Appellees, 
§ 
Court Below: Court of Chancery of  
§ 
the State of Delaware in and for 
              v. 
 
§ 
New Castle County 
§ 
JAMES R. MOFFETT, RENE L.  
§ 
C.A. No: 16729-NC 
LATIOLAIS, TERRELL J.  
§ 
BROWN, THOMAS D. CLARK, 
§ 
JR., B.M. RANKIN, JR.,  
§ 
 
RICHARD C. ADKERSON,  
§ 
ROBERT M. WOHLEBER, 
§ 
FREEPORT-McMORAN  
§ 
SULPHUR, INC., and McMORAN 
§ 
OIL & GAS CO., § 
§ 
Defendants Below, § 
 
 
 
Appellees, and 
§ 
Cross-Appellants. 
§ 
 
Submitted: April 8, 2003 
Decided:   June 18, 2003 
 
 Before VEASEY, Chief Justice, HOLLAND and BERGER, Justices. 
 
Upon appeal from the Court of Chancery.  REVERSED IN PART, AFFIRMED 
IN PART AND REMANDED. 
 
 
 
 
 
Pamela S. Tikellis, Esquire (argued), and Robert J. Kriner, Jr., Esquire, of  
Chimicles & Tikellis LLP, Wilmington, Delaware; Norman M. Monhait, Esquire, of 
Rosenthal, Monhait, Gross & Goddess, Wilmington, Delaware; Of Counsel:  Goodkind, 
Labaton, Rudoff & Sucharow LLP, for Appellants. 
  
Alan J. Stone, Esquire, of Morris Nichols Arsht & Tunnell, Wilmington, Delaware; 
Of Counsel:  Dennis E. Glazer, Esquire, John J. Clarke, Jr., Esquire (argued), and 
Florence A. Crisp, Esquire, of Davis Polk & Wardwell, New York, New York, for 
Appellees Richard C. Adkerson, Rene L. Latiolais, James R. Moffett, B.M. Rankin, Jr., 
Robert M. Wohleber, and Freeport-McMoRan Sulphur, Inc.   
 
Allen M. Terrell, Jr., Esquire, of Richards, Layton & Finger, P.A., Wilmington, 
Delaware; Of Counsel:  Terence M. Murphy, Esquire, Michael L. Rice, Esquire, and 
James P. Karen, Esquire, of Jones Day Reavis & Pogue, Dallas, Texas, for Appellees 
Terrell J. Brown and Thomas D. Clark, Jr. 
 
Lewis H. Lazarus, Esquire, of Morris James Hitchens & Williams LLP, 
Wilmington, Delaware; Of Counsel:  Robert B. Bieck, Jr., Esquire, David G. Radlauer, 
Esquire, and Amy L. Glovinsky, Esquire, of Jones, Walker, Waechter, Poitevent, 
Carrere, & Denegre, LLP, New Orleans, Louisiana, for Appellee McMoRan Oil & Gas 
Co.   
 
 
 
 
 
 
 
 
 
 
 
VEASEY, Chief Justice: 
In this appeal, we address the question whether a stockholder class action can be 
dismissed under Chancery Rule 12(b)(6) where the complaint adequately alleges that a 
majority of the directors recommending a merger to the stockholders had disabling 
conflicts of interest.  The Court of Chancery determined that the complaint alleges facts 
sufficient to infer that five of the seven directors on the board were interested in the 
merger.  The merger had been negotiated and recommended by a special committee of 
the two arguably independent directors who voted with the full board to approve the 
merger agreement and submit it to a vote of stockholders.  
The Court of Chancery determined, at the pleading stage, that, notwithstanding the 
allegations that five of the seven directors were interested, the board’s merger 
recommendation was entitled to the presumption of the business judgment rule.  The 
Court rested its decision on the fact that the special committee of the two independent 
directors recommended the merger to the full board that included the five allegedly 
conflicted directors and the two independent directors.  We hold that it was reversible 
error to dismiss the complaint under Rule 12(b)(6).  A factual record must be developed 
to determine what standard of review ultimately applies.   
 
In their cross-appeal, the defendants challenge the ruling of the Court of Chancery 
that the plaintiffs have adequately alleged a disclosure violation in the proxy material 
submitted to t
he stockholders.  We agree with that ruling and deny the cross-appeal.  
Thus, the directors cannot rely at the pleading stage on the stockholder approval of the 
merger to ratify their actions.   
 
 
-3- 
Facts1 
This case involves the 1998 merger of Freeport-McMoRan Sulphur, Inc. (FSC) 
and McMoRan Oil & Gas Co. (MOXY) into McMoRan Exploration Co. (MEC), a 
holding company created to execute the transaction.   The MEC merger represented the 
reunion of two sister companies.  FSC, a leading company involved in mining, terminaling 
and transporting sulphur, was formed as an independent corporation through a 1997 
spinoff from Freeport-McMoran, Inc. (FTX).  MOXY, a company involved in oil and gas 
exploration, was also formed through a similar spinoff from FTX in 1994.   
                                                 
1The facts relied upon for purposes of this opinion are taken from the plaintiffs’ complaint as well as from 
portions of documents incorporated into the complaint that are not disputed by the parties.   
By 1998, the managers and directors of FSC and MOXY believed the corporate 
entities could benefit from recombining the two companies as part of one enterprise. FSC 
had excess capital but could not find value-enhancing investments in sulphur operations.  
MOXY, by contrast, did not have sufficient funds to pursue fully its potential investment 
opportunities in oil and gas.  The two companies began negotiating a merger transaction to 
combine FSC’s capital with MOXY’s investment prospects.   
 
 
-4- 
On June 3, 1998, the FSC and MOXY boards of directors met independently and 
appointed special committees to negotiate a possible merger.  The seven directors sitting 
on the FSC board2 appointed Directors Terrell Brown and Thomas Clark, Jr. to constitute 
the FSC special committee to negotiate a possible merger.  The five-director MOXY 
board also appointed two directors to form a special committee. According to the joint 
proxy statement, both special committees retained legal counsel and investment bankers 
who were independent of MOXY and FSC.  As required by statutory law,3 the full 
boards of directors of MOXY and FSC retained the authority to approve any merger 
agreement.     
                                                 
2The former FSC directors were James R. Moffett, Richard C. Adkerson, B.M. Rankin, Jr., Rene L. Latiolais, 
Richard M. Wohleber, Thomas D. Clark, Jr., and Terrell J. Brown.   
3See DEL. CODE ANN. tit. 8, § 251(b) (2001) (board of directors must adopt a resolution approving an agreement 
of merger and declaring its advisability); see also DEL. CODE ANN. tit. 8, § 141(c) (2001) (committee of the board may be 
granted power and authority of the board except the power and authority to approve, adopt, or recommend to the 
stockholders “any action or matter expressly required . . . to be submitted to stockholders for approval,” such as an 
agreement of merger under Section 251). 
On July 14, 1998, the MOXY special committee proposed a merger in which 
MOXY stockholders would receive consideration amounting to 62.5% of the stock in 
MEC and FSC stockholders would receive the remaining 37.5%.  The FSC special 
committee reviewed the MOXY offer and made a counteroffer on July 22, 1998, 
 
 
-5- 
proposing MOXY stockholders receive consideration representing only 56% of the MEC 
stock, with a combined 44% for FSC stockholders.  The MOXY special committee 
responded with a proposed exchange ratio of 58.5% to 41.5% in favor of MOXY 
stockholders.  The MOXY special committee also proposed placing a “fiduciary out” 
provision in the merger agreement for both the MOXY and the FSC board, as well as a 
termination fee.   
The MOXY special committee approved these terms on July 30, 1998.  The full 
MOXY board approved the transaction the next day.   
On July 31, 1998, the FSC special committee held a meeting with its advisers.  The 
investment banker opined that the transaction was fair to the FSC stockholders from a 
financial standpoint.  The FSC special committee unanimously determined that the merger 
agreement was fair to FSC stockholders, and recommended the merger to the entire FSC 
board.  After the special committee recommendation, the full seven-member FSC board 
met to consider the merger agreement.  Following presentations by the investment banker 
and the special committee, all seven directors unanimously voted to recommend the 
merger agreement to the stockholders, including the five allegedly conflicted directors and 
the two arguably independent directors.   
To solicit stockholder approval, MOXY and FSC distributed a joint proxy 
statement to MOXY and FSC stockholders.  Among the portions of the statement 
relevant to this litigation, the FSC board disclosed the initiation of a stock repurchase 
 
 
-6- 
program in December of 1997 to purchase up to 1 million shares of FSC common stock.  
The repurchase program was expanded in May of 1998 to set a target to buy back an 
additional 600,000 shares.   
The FSC and MOXY stockholders approved the merger agreement on November 
17, 1998.  This action followed.   
Proceedings in the Court of Chancery 
A group of former FSC stockholders filed a class action suit against the former 
FSC directors, FSC, and MOXY, alleging that the former FSC directors breached 
fiduciary duties owed to FSC stockholders by approving the MEC transaction and that 
MOXY aided and abetted those breaches of duty.  In their complaint, plaintiffs allege that 
five of the seven directors serving on the FSC board had disabling conflicts of interest in 
the MEC merger and those conflicts motivated the directors to permit MOXY to receive a 
disproportionate share of MEC.  The plaintiffs also allege that the FSC directors failed to 
disclose their reasons for pursuing a merger based partly on the market capitalization of 
FSC when only months before the merger the board initiated a stock repurchase program. 
 According to the plaintiffs, the stock buyback program was designed to acquire FSC 
stock because the directors believed the stock was undervalued in the market.  If true, the 
complaint adequately alleges that this belief would be material information that the FSC 
stockholders would want to know in considering the MEC merger.  
 
 
-7- 
The Court of Chancery evaluated the plaintiffs’ claims on two occasions.  In its 
opinion of January 11, 2001, the Court dismissed the original complaint and granted leave 
to amend.4  The Court found that the complaint properly alleged that three directors 
(Moffett, Adkerson, and Rankin), who were directors of both FSC and MOXY, stood on 
both sides of the transaction and thus could not be considered independent and 
disinterested.5  The Court concluded that the plaintiffs had not alleged facts sufficient to 
challenge the disinterestedness and independence of the remaining two directors, 
Wohleber and Latiolais.6  The Court also decided that the complaint failed to allege that 
directors Brown and Clark, who constituted the special committee, were interested or 
lacked independence.7   
                                                 
4In re Freeport-McMoRan Sulphur, Inc. S’holders Litig., Del. Ch. C.A. No. 16729-NC (Jan. 5, 2001) (“2001 Mem. 
Op.”). 
5Id. at 10.   
6See id. at 11-14. 
7Id. at 10-11. 
 
 
-8- 
In granting leave to file an amended complaint, the Court stated that in an amended 
complaint, the plaintiffs had to “add nonconclusory factual allegations that would establish 
that the Merger is not governed by the business judgment standard, either because (a) the 
FSC independent committee process did not merit business judgment rule protection, or 
(b) a majority of the FSC directors who approved the Merger were interested and were 
not independent.”8   
The plaintiffs amended their complaint to plead with greater particularity facts to 
impugn the disinterestedness and independence of directors Latiolais and Wohleber.  The 
Court of Chancery held that these new allegations were sufficient to survive the motion to 
dismiss.  Even with the newly pleaded allegations, however, the Court determined that the 
amended complaint did not survive a Rule 12(b)(6) motion to dismiss.  In a bench ruling 
dated September 10, 2002,9 implemented by Order dated September 13, 2002,10 the 
Court dismissed the amended complaint with prejudice.  It is this judgment of dismissal 
from which this appeal is taken.  
                                                 
8Id. at 15. 
9In re Freeport-McMoRan Sulphur, Inc. S’holders Litig., Del. Ch.  C.A. No. 16729-NC (Sep. 10, 2002) (“2002 
Bench Ruling”).   
10In re Freeport-McMoRan Sulphur, Inc. S’holders Litig., Del. Ch. C.A. No. 16729-NC (Sep. 13, 2002).  
 
 
-9- 
Although the Court of Chancery found that the amended complaint contained facts 
sufficient to infer that a majority of the FSC board was not free of self-interest in the 
transaction,11 the Court concluded that the amended “complaint does not allege facts 
sufficient to [impugn] the disinterest, independence or processes of the special committee 
.... [to which] the negotiation of the transaction was specifically entrusted.”12 The Court 
held that “despite the presence of interested directors, nothing in the complaint justifies 
the Court [to] allow the case to proceed to the next stage, because there are no facts from 
which one can infer that the interested directors interfered with the committee’s 
deliberations or negotiations.”13  Accordingly, the Court reasoned that the complaint 
“would be evaluated under the business judgment standard of review, despite the fact that 
the complaint satisfactorily alleges that a majority of the board of directors had a 
conflicting interest in the transaction.”14  
Issues on Appeal 
                                                 
112002 Bench Ruling at 40. 
12Id. at 40-41.   
13Id. at 41.   
14Id.   
 
 
-10- 
In the first issue raised on appeal, the plaintiffs contend that the Court of Chancery 
erred as a matter of law in dismissing the complaint under the business judgment rule.  
They argue that the allegations of the complaint implicate ab initio the entire fairness 
standard, under which the defendants affirmatively bear the burden of showing fair price 
and fair dealing.  The plaintiffs conclude that a merger recommendation by a special 
committee to an interested board for a vote by the board does not invoke the business 
judgment standard.  Moreover, according to the plaintiffs, the Court of Chancery could 
not reach that determination on this record because the defendants could not establish the 
independence of the special committee based solely on the facts from the pleadings.   
The defendants argue that the Court of Chancery properly rejected the entire 
fairness standard because the interested transaction was not initiated by a controlling 
stockholder.  The defendants further argue that the plaintiffs have conceded the 
independence of the special committee through the documents incorporated into the 
complaint.  
The defendants raise a second set of issues on appeal by arguing that the dismissal 
should be affirmed on the independent ground that the FSC stockholders ratified the 
interested transaction.  Because the Court of Chancery recognized that the plaintiffs 
pleaded a cognizable disclosure claim15 that would preclude a favorable determination that 
                                                 
15The trial judge declined to rule on this ground but stated that “the plaintiffs have satisfied me . . . that there is 
an issue as to whether there should have been disclosure of the reasons for the termination of the buyback program.  
That omission may well have been material.”  2002 Bench Ruling at 42.  The trial court also declined to rule on the aiding 
 
 
-11- 
a fully-informed stockholder vote ratified the merger, the defendants cross-appeal the trial 
court’s determination that a disclosure violation occurred. 
  Plaintiffs Have Pleaded Facts Sufficient to State Breach of  
Fiduciary Duty Claims  
 
We begin by examining the initial conclusion of the Court of Chancery that the 
plaintiffs alleged facts sufficient to permit an inference that five of the seven FSC 
directors were interested because of conflicts of interest in the MEC transaction.  This 
Court reviews de novo the decision of the Court of Chancery on a motion to dismiss.16  
Like the Court of Chancery, we assume for purposes of the motion the truth of all well-
pleaded allegations, according the plaintiffs “the benefit of all reasonable inferences that 
can be drawn” from the complaint.17  
                                                                                                                                                             
and abetting issue.  
16Solomon v. Pathe Communications Corp., 672 A.2d 35, 38 (Del. 1996); see also Brehm v. Eisner, 746 A.2d 244, 
254 (Del. 2000). 
17Grimes v. Donald, 673 A.2d 1207, 1214 (Del. 1996).   
 
 
-12- 
The Court of Chancery correctly held that the plaintiffs have pleaded facts 
sufficient to infer that three of the FSC directors, Moffett, Adkerson, and Rankin, were 
interested in the MEC transaction because they served on the boards of the directors of 
both MOXY and FSC.18  We also agree that the facts set forth in the complaint allege that 
two additional directors, Wohleber a
nd Latiolais, had disabling conflicts of interest.    
Latiolais and Wohleber allegedly received substantial income from other entities within the 
interlocking directorates of Freeport-McMoRan companies and arguably had an interest in 
appeasing the MOXY and FSC insiders who also served with Latiolais and Wohleber on 
the boards of other Freeport companies.19  Although the allegations regarding their lack of 
independence may ultimately not be factually sustainable, the plaintiffs are entitled at the 
pleading stage to the inference that Wohleber’s and Latiolais’ positions would affect the 
                                                 
18See Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (noting that to be disinterested, the director cannot “appear 
on both sides of a transaction”). 
19In addition to serving as a co-chairman of FSC with Moffett, Latiolais was a Vice Chairman of Freeport-
McMoRan Copper & Gold, Inc. (Freeport Copper), a manager and former President and CEO of FTX, and a consultant to 
the Services Company, an entity then jointly owned by FSC and Freeport Copper.  The plaintiffs allege that Latiolais 
received greater income from services provided to entities other than FSC, and that Latiolais expected to benefit from 
increased consulting fees provided to the Services Company as a result of the MEC merger.  Wohleber was similarly 
situated as he served as President and CEO of FSC, and at various times was employed as a Vice President of Freeport 
Copper, and CFO and Vice President of FTX.   
 
The second-amended complaint alleges that Latiolais and Wohleber received income almost exclusively from the 
various Freeport-McMoran companies that were allegedly controlled by Moffett.  Although Moffett did not hold a 
controlling interest in any of the Freeport companies, in the recent past Moffett has served as either chairman or co-
chairman of FSC, MOXY, FTX, and Freeport Copper, and, according to the plaintiffs, “is the single most powerful member 
of management of the related group of companies and largely directs their fortunes and the prospects and compensation 
of upper level management of all of the related companies.”  Second-Amended Compl. at ¶ 4.  
 
 
-13- 
vote of a reasonable person in the same position because these insiders proposed the 
MEC transaction.20    
                                                 
20See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1168 (Del. 1995). 
 
 
-14- 
The trial court also correctly concluded that the plaintiffs are entitled to the 
inference that they may have a cognizable disclosure claim relating to the stock 
repurchase program.  Plaintiffs allege that the FSC directors initiated the buyback plan 
because the directors believed the market undervalued the FSC stock.  Only months later, 
the directors recommended the consideration offered in the MEC merger, which 
consideration was based partly on the market capitalization of FSC.21  The defendants 
point out that the joint proxy statement incorporated into the complaint discloses the 
repurchase program, including the fact that the stock buyback would not terminate until 
after completion of the MEC transaction.  As the trial court noted, however, an FSC 
stockholder would find material not only the existence of the repurchase program, but 
                                                 
21During arguments before the Court of Chancery, the trial judge summarized the possible tension between the 
buyback program and the merger:  
 
[T]he implicit premise . . . [of the buyback program] was that the market price of the stock did not reflect 
its true value and, therefore, the company was buying back the stock in an effort to raise the price to 
the true value level.  Then, in connection with the merger, the exchange ratio was determined in such a 
way as to reflect an implicit valuation of FSC based on the current market price, thereby suggesting 
that management believed, at least at that point, that market price did not reflect true value. 
 
2002 Bench Ruling at 37. 
 
 
-15- 
also the directors’ possible conflicting views on the market value of FSC stock 
represented by the stock buyback and the merger.22  
                                                 
22See Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1983) (stating that an omitted fact is material when its 
omission “would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of 
information made available”) (quoting TSC Indus. v. Northway, Inc., 426 U.S. 438, 449 (1976)). 
 
 
-16- 
Defendants maintain that the stock repurchase program was not motivated by a 
belief that the market undervalued FSC stock but rather was a capital budgeting decision 
to plow excess cash back into the company. The plaintiffs and the defendants have 
advanced arguments that require the court to infer the reasons behind implementing the 
buyback program.  Discovery may flesh out these facts, but the plaintiffs are entitled to 
the benefit of all reasonable inferences from the complaint.23 We agree with the trial court 
that the disclosure claim survives the Chancery Rule 12(b)(6) motion to dismiss.   
The Presumption of the Independence and the Effect of the Action  
of the FSC Special Committee are Not Conclusively Established  
 
Because the plaintiffs have sufficiently alleged facts to suggest that the MEC 
transaction was “not approved by a majority consisting of disinterested directors,” the 
plaintiffs are entitled at the pleading stage to the inferences that may lead to the 
conclusion that the business judgment rule would not apply to the FSC board’s decision 
to approve the MEC merger and to recommend it to the FSC stockholders.24  The 
defendants argue that by using the special committee process the directors have cleansed 
the conflicts of interest in the transaction and are entitled to the presumptions of the 
business judgment rule at the pleading stage.   
                                                 
23See Grimes, 673 A.2d at 1214. 
24Aronson, 473 A.2d at 812; accord McMullin v. Beran, 765 A.2d 910 (Del. 2000).   
 
 
-17- 
We do not, however, reach that issue because the FSC directors, not the plaintiffs, 
bear the burden of proving that the MEC merger was approved by a committee of 
disinterested directors, acting independently, with real bargaining power to negotiate the 
terms of the merger.25  The defendants cannot satisfy this burden at the pleading stage of 
this action.26   
When considering a motion to dismiss under Chancery Rule 12(b)(6), the trial 
court may not rely on documents outside the pleadings without converting the motion to 
one for summary judgment, thereby implicating some discovery.27  In the present case, 
the defendants attempt to establish the independence of the committee by relying only on 
                                                 
25See, e.g., Emerald Partners v. Berlin, 726 A.2d 1215, 1222-23 (Del. 1999).   
26See Paramount Communications Inc. v. QVC Network Inc., 637 A.2d 34, 42 n.9 (Del. 1993) (“Where actual self-
interest is present and affects a majority of the directors approving a transaction, a court will apply . . . exacting scrutiny 
to determine whether the transaction is entirely fair to the stockholders.”). 
27See, e.g., In re Santa Fe Pacific Corp. S’holders Litig., 669 A.2d 59, 68 (Del. 1995) (“Generally, matters outside 
the pleadings should not be considered in ruling on a motion to dismiss. . . .”); see also Malpiede v. Townson, 780 A.2d 
1075, 1090 (Del. 2001) (“Under Rule 56 . . . there may be an opportunity for either side to submit affidavits or engage in 
discovery to explore the ‘matter outside the pleadings [that has been] . . . presented to and not excluded by the Court.’”) 
(citing Chancery R. 56(c) and quoting Chancery R. 12(b)).   
 
 
-18- 
portions of the joint proxy statement incorporated into the complaint.28   Those allegations 
and incorporated references must effectively negate the plaintiffs’ claim as a matter of 
law.29    
                                                 
28See Chancery R. 10(c); see also Santa Fe, 669 A.2d at 69.   
29Malpiede, 780 A.2d at 1083 (citations omitted).   
 
 
-19- 
The description of the special committee provided in the joint proxy statement does 
not negate plaintiffs’ fiduciary duty claims as a matter of law.  Although several facts 
incorporated by reference into the complaint support characterizing the special committee 
as having acted independently,30 the complaint also highlights questions left unanswered 
by the joint proxy statement.  The plaintiffs note that the special committee merely 
recommended the merger to the full board, which voted unanimously to approve the 
merger.  None of the five allegedly conflicted directors  abstained from the 
decisionmaking process.31  We need not decide at this point in the litigation whether or 
not abstention was appropriate or necessary.   
Although the two disinterested directors who comprised the special committee also 
voted with the full board, the plaintiffs also contend that the proxy statement incorporated 
into the complaint does not permit the defendants to claim at the pleading stage that the 
special committee operated independently from the conflicted  
                                                 
30The plaintiffs acknowledge that the only facts that raise a question concerning the independence of special 
committee directors Brown and Clark are their subsequent seats on the MEC board.  The proxy statement also details the 
rounds of negotiations initiated by the FSC special committee that resulted in better terms for FSC stockholders.   
31Compare Citron v. E.I. du Pont de Nemours & Co., 584 A.2d 490, 504 (Del. Ch. 1990) (finding the defendants 
satisfied their duty of fair dealing partly because the “Merger Committee’s deliberations were not influenced by [the 
controlling stockholder] . . . or . . . management representatives, and throughout the process the Committee acted 
independently. . . .”).   
 
 
-20- 
directors.32   We need not assess the strength of the plaintiffs’ claims to point out that the 
joint proxy statement does not “directly portray a complete picture” of the special 
committee process.33  Defendants claim that plaintiffs conceded the independence of the 
committee, but plaintiffs dispute that they so conceded this fact.  We need not resolve 
that issue at this point. 
                                                 
32Courts typically do not find the facts alleged in a complaint fatal to the action unless the pleading documents 
present readily ascertainable facts precluding recovery, such as when the face of the complaint reveals a statutory 
defense barring recovery, or when the plaintiff relies on a legally operative document that unambiguously negates the 
plaintiff’s claim.  See, e.g., Jablon v. Dean Witter & Co., 614 F.2d 677, 682 (9th Cir. 1980) (dismissing complaint because the 
running of the statute of limitations was evidenced on the face of the complaint); Hoopla Sports and Entertainment v. 
Nike, Inc., 947 F.Supp. 347, 356 n. 5 (N.D. Ill. 1996) (noting that complaint should be dismissed because the pleaded facts 
revealed the statute of frauds barred the claim); McWane, Inc. v. Crow Chicago Indus., 224 F.3d 582, 584 (7th Cir. 2000) 
(upholding dismissal of claim because the contract upon which the plaintiff relied unambiguously denied plaintiff the 
rights asserted in the complaint).   
33See In re New Valley Corp. Derivative Litig., 2001 WL 50212, at *5 (Del. Ch.). 
 
 
-21- 
A complaint must survive a motion to dismiss under Rule 12(b)(6) if the plaintiff 
could ultimately prevail on the merits of their claims based on any reasonable set of facts 
alleged in the complaint.34  The independence of the special committee involves a fact-
intensive inquiry that varies from case to case.35  Thus, we cannot assume at the pleading 
stage that the defendants will carry the burden of establishing independence.36  Beyond 
that, it is premature to determine the legal effect—and the resulting standard of review—
that would apply if a special committee that operated independently recommended a 
merger to the full board.  Moreover, we need not decide the legal effect of the affirmative 
vote of the members of the independent committee, who constituted less than a quorum, 
when voting with the full board to approve the merger.37 
                                                 
34See McMullin, 765 A.2d at 917.   
35See Kahn v. Lynch Communication Sys., 638 A.2d 1110 (Del. 1994); see also Kahn v. Tremont, 694 A.2d  422 
(Del. 1997).   
36Cf. Kahn v. Tremont Corp., 1992 WL 205637, at *3 (Del. Ch. Aug. 21, 1992))  rev’d on other grounds 694 A.2d 
422 (Del. 1997).  In Tremont, the Chancellor denied the defendants’ motion to stay discovery, noting that a factual inquiry 
into the independence of the special committee was necessary even though the defendants alleged that the interested 
majority of the board merely followed the recommendation of the independent special committee.  We agree with the 
Chancellor’s conclusion in the Tremont decision that “the independence or not of the members of a special committee is a 
question of fact that turns not simply upon formality but upon the reality of the interests and incentives affecting the 
independent directors.”  We further endorse the assertion in the Tremont decision that  
 
When a plaintiff alleges that an interested transaction has been authorized and alleges a factual basis 
to conclude that the board of the Company is comprised predominantly of persons whose judgment 
would be affected by conflicting interest, plaintiff plainly should have the right to discover into the 
answering facts, relating to the alleged effectiveness of action of any independent committee of 
directors who are relied upon to protect the proponents of that transaction from justifying the fairness 
of its terms.   
 
Id. (citing Zapata Corp. v. Maldonado, 430 A.2d 779, 788 (Del. 1981)). 
37Under Title 8, Section 141(c) of the Delaware Code, a committee is not authorized to recommend a merger to 
stockholders, but the entire board must take that action under the merger statutes (e.g. Section 251(b)).  DEL. CODE ANN. 
 
 
-22- 
The Defendants Have Not Established at this Stage of the Case that the MEC 
Transaction Was Ratified by the FSC Stockholders 
 
                                                                                                                                                             
tit. 8, § 141(c).  Under Section 144(a)(1), a statute not cited by either side in this case, if the board in good faith approves 
an interested director transaction, the transaction is not void or voidable “even though the disinterested directors be less 
than a quorum.”  DEL. CODE ANN. tit. 8, § 144 (2001).  The application and effect of these provisions must be assessed 
upon a full record, not at the pleading stage of this action.   
 
 
-23- 
The defendants argue alternatively that the complaint should be dismissed because 
the MEC transaction was approved by a majority of fully informed FSC stockholders.  
The FSC directors, however, bear the burden of proving stockholder ratification.38  The 
complaint alleges that the directors omitted from the joint proxy statement a shift in their 
views concerning the market value of FSC.  The plaintiffs claim that it is reasonable to 
infer from the implementation of the repurchase program that the board bought back 
stock because the market undervalued FSC stock.  If true, it is reasonable to infer that the 
FSC stockholders would have found this information material in considering the MEC 
transaction because the merger consideration was based partly on the market 
capitalization of FSC.  Absent discovery on the directors’ reasons for implementing the 
stock repurchase program, the directors cannot prove that the MEC transaction was 
approved by a majority of fully-informed stockholders. 
Issues on Remand 
                                                 
38See Yiannatsis v. Stephanis, 653 A.2d 275, 280 (Del. 1995) (citations omitted). 
We agree with the plaintiffs that it was error for the Court of Chancery to dismiss 
the complaint with prejudice under Rule 12(b)(6).  Such a motion should be granted only 
if plaintiffs cannot prevail as a matter of law given all the reasonable inferences that could 
be drawn from the complaint.  It is premature for this Court to use the inferences from 
these allegations as a basis to decide whether this case must ultimately be reviewed on an 
 
 
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entire fairness basis—as distinct from a business judgment standard—and which side has 
the burden of proof. 
The rubric that plaintiff invokes is correct as a general matter—namely that when 
the majority of a board of directors is the ultimate decisionmaker and a majority of the 
board is interested in the transaction the presumption of the business judgment rule is 
rebutted.39  As a further general proposition, when the presumption of the business 
judgment rule has been rebutted, the entire fairness rule is implicated and defendants bear 
the burden of proof.40  Also, our jurisprudence with respect to the requirement that 
defendants prove entire fairness or prove a valid independent committee process to shift 
that burden in controlling stockholder transactions41 may or may not be applicable to this 
case.  Whether or not and to what extent these propositions are applicable in this case will 
                                                 
39See e.g., Aronson, 473  A.2d at 812 (noting that if “the transaction is not approved by a majority consisting of 
the disinterested directors, then the business judgment rule has no application whatever in demand futility”) (quoting 
DEL. CODE ANN. tit. 8, § 144(a)(1)); see also Kahn v. Lynch, 638 A.2d at 1117. 
40QVC, 637 A.2d at 42 n.9 (noting that “where actual self-interest is present and affects a majority of the directors 
approving a transaction, a court will apply . . . exacting scrutiny to determine whether the transaction is entirely fair to the 
stockholders”); accord Emerald Partners v. Berlin, 787 A.2d 85 (Del. 2001); Malpiede v. Townson, 780 A.2d 1075 (Del. 
2001). 
41See Kahn v. Lynch, 638 A.2d at 1117. 
 
 
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have to be determined on a more complete record and not at the pleading stage.  There 
are possibly several issues that lie ahead after further proceedings in the Court of 
Chancery. 
First, there is the question whether the facts will ultimately show that either 
Wohleber or Latiolais is interested or not independent as alleged in the complaint.  If the 
Court of Chancery, on a fuller record after remand, concludes that plaintiff’s proof fails 
to rebut the presumption that they are disinterested and independent, the Court of 
Chancery may conclude that the majority of FSC directors who approved the merger 
was, in fact, disinterested.  The trial court may then be called on to decide whether or not 
the presumption of the business judgment rule has been rebutted.  If the record shows, 
however, that either of these directors is interested or not independent, the Court of 
Chancery may decide that the presumption has been rebutted.  In that case, the trial court 
may have to decide the standard of review issues implicated by use of the special 
committee. 
Second, if the facts show that the special independent committee consisting of 
Brown and Clark in good faith negotiated the merger agreement and recommended it to 
the entire board for the necessary board vote under Section 251,42 there are further legal 
issues.  For example, the Court of Chancery may have to determine in the first instance 
                                                 
42The full board must act to approve a merger agreement and recommend it to the stockholders for approval.  A 
committee may not, under Section 141(c), be empowered to perform that necessary board function.  See DEL. CODE ANN. 
tit. 8, § 141(c) (2001); DEL. CODE ANN. tit. 8, § 251(b) (2001). 
 
 
-26- 
the import of the special committee’s negotiation and recommendation here where the 
independent directors, though less than a quorum, voted with the full board to approve 
the merger agreement.  If the facts show that four or five of the seven directors were 
 
 
-27- 
conflicted, but Brown and Clark were and remained independent, does their vote as board 
 
 
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members constitute valid board action, even though they were less than a quorum?43  
 
 
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Third, as to stockholder approval or ratification, the Court of Chancery on a fuller 
record may have to decide whether or not there was actually a material disclosure 
violation as alleged.  If so, the Court of Chancery may have to determine the effect of 
that violation on the issue of stockholder approval or ratification. 
 
Conclusion 
The amended complaint should not have been dismissed as a pleading matter under 
Rule 12(b)(6).  The case must be remanded for further proceedings designed to develop a 
fuller record.  As a consequence, some or all of the foregoing factual and legal issues, and 
perhaps others, may need to be decided by the Court of Chancery in the first instance 
before they are ripe, if ever, for review by this Court. 
The judgment of the Court of Chancery dismissing the complaint under Chancery 
Rule 12(b)(6) is reversed, and the matter is remanded for proceedings consistent with this 
opinion.  The cross-appeal is denied, and the decision of the Court of Chancery on the 
disclosure violation is affirmed.