Opinion ID: 2370284
Heading Depth: 1
Heading Rank: 5

Heading: The Reclassification Proxy and the Shareholder Vote

Text: On June 29, 2006, the Board submitted a preliminary proxy to the United States Securities and Exchange Commission (SEC). An amended version of the preliminary proxy was filed on August 10. Plaintiffs initiated this lawsuit after the amended filing, claiming that the preliminary proxy was materially false and misleading in various respects. On November 16, 2006, the Board, after correcting some of the alleged deficiencies, disseminated a definitive proxy statement (Reclassification Proxy or Proxy) to the First Niles shareholders. On November 20, the plaintiffs filed an amended complaint, alleging (inter alia) that the Reclassification Proxy contained material misstatements and omissions. In the Reclassification Proxy, the Board represented that the proposed Reclassification would allow First Niles to save significant legal, accounting and administrative expenses relating to public disclosure and reporting requirements under the Exchange Act. [4] The Proxy also disclosed the benefits of deregistration as including annual savings of $142,500 by reducing the number of common shareholders, $81,000 by avoiding Sarbanes-Oxley related compliance costs, and $174,000 by avoiding a one-time consulting fee to design a system to improve the Company's internal control structure. The negative features and estimated costs of the transaction included $75,000 in Reclassification-related expenses, reduced liquidity for both the to-be-reclassified preferred and common shares, and the loss of certain investor protections under the federal securities laws. The Reclassification Proxy also disclosed alternative transactions that the Board had considered, including a cash-out merger, a reverse stock-split, an issue tender offer, expense reduction and a business combination. The Proxy stated that each of the directors and officers of First Niles had a conflict of interest with respect to [the Reclassification] because he or she is in a position to structure it in such a way that benefits his or her interests differently from the interests of unaffiliated shareholders. The Proxy further disclosed that the Company had received one firm merger offer, and that [a]fter careful deliberations, the board determined in its business judgment the proposal was not in the best interests of the Company or our shareholders and rejected the proposal. The Company's shareholders approved the Reclassification on December 14, 2006. Taking judicial notice of the Company's Rule 13e-3 Transaction Statement, [5] the trial court concluded that of the 1,384,533 shares outstanding and eligible to vote, 793,092 shares (or 57.3%) were voted in favor and 11,060 shares abstained. Of the unaffiliated shares, however, the proposal passed by a bare 50.28% majority vote