Opinion ID: 1984316
Heading Depth: 1
Heading Rank: 4

Heading: the claims seeking enhanced judicial scrutiny

Text: The Court of Chancery dismissed on the merits the plaintiffs' claims under Revlon and Unocal. Since we have determined that a fully-informed stockholder vote on the merger did not extinguish claimed breaches of the duties imposed by Revlon and Unocal, we now review the Court of Chancery's dismissal of those claims. Before reaching the claims, we first must address a question regarding the proper approach to a motion to dismiss under Chancery Rule 12(b)(6).
Plaintiffs argue on appeal that the Court of Chancery improperly considered documents outside the pleadings in ruling on defendants' motion to dismiss. Generally, matters outside the pleadings should not be considered in ruling on a motion to dismiss. Chancery Rule 12(b) provides: If, on a motion asserting the defense numbered (6) to dismiss for failure of the pleading to state a claim upon which relief can be granted, matters outside the pleading are presented to and not excluded by the Court, the motion shall be treated as one for summary judgment and disposed of as provided in Rule 56, and all parties shall be given reasonable opportunity to present all material made pertinent to such a motion by Rule 56. Thus, if a party presents documents in support of its Rule 12(b)(6) motion and the court considers the documents, it generally must treat the motion as one for summary judgment. In re Tri-Star Pictures, Inc., Del. Supr., 634 A.2d 319, 326 (1993). Before a motion for summary judgment is ripe for decision, the non-movant normally should have an opportunity for some discovery. See Chancery Rule 56(e); Mann v. Oppenheimer & Co., Del.Supr., 517 A.2d 1056, 1060 (1986). The Court of Chancery, in ruling on the motion to dismiss, here, considered the Joint Proxy in its decision on all allegations of the complaint. The Court relied on the Joint Proxy and took the following as pleaded facts: What the complaint does allege is that the Santa Fe board (which except for defendant Krebs, is not claimed to have been other than disinterested and independent) negotiated a merger with [Burlington] based on its assessment of the strategic desirability of that combination. (Joint Proxy Statement at 24, 30, 41-42, incorporated by reference into the complaint). The [Burlington] transaction was believed to offer significant benefits in terms of geographic coverage, improved efficiency for customers through the provision of single-line service, a diversified traffic base, operating efficiencies, and financial strength. ( Id. at 41-42). The Santa Fe board concluded that Union Pacific's initial offer was a threat, not only because it was economically and strategically inferior to the initial [Burlington] merger, but also because that offer posed a high risk of ICC disapproval. These conclusions were based on the business judgment of the Santa Fe directors, who relied on the expert advice of Santa Fe's independent investment bankers and regulatory analysts. ( Id. at 28-29). No facts are alleged from which one could conclude that that perception was not reasonable. In re Santa Fe Pac. Corp. Shareholder Litig., Del.Ch., C.A. No. 13587, slip op. at 19-20, 1995 WL 334258 (May 31, 1995). It was certainly proper to consult the Joint Proxy to analyze the disclosure claim because the operative facts relating to such a claim perforce depend upon the language of the Joint Proxy. Thus, the document is used not to establish the truth of the statements therein, but to examine only what is disclosed. The Court of Chancery has considered documents referred to in complaints when ruling on motions to dismiss. [6] In particular instances and for carefully limited purposes, this may be an appropriate practice on a motion to dismiss. Abbey v. E.W. Scripps Co., Del.Ch., C.A. No. 13397, Allen, C., mem. op. at 4 n. 1, 1995 WL 478957 (August 9, 1995) (In deciding a motion to dismiss under Rule 12(b)(6), the court may judiciously rely on proxy statements not to resolve disputed facts but at least to establish what was disclosed to shareholders.). The practice appears to have originated with the federal courts in securities law complaints. Patents Mgmt. Corp. v. O'Connor, Del.Ch., C.A. No. 7110, Walsh, V.C., letter op. at 2, 1985 WL 11576 (June 10, 1985) ([T]he federal courts, in ruling upon motions to dismiss under the Federal Rule of Civil Procedure 12(b)(6), have taken into account documents, such as proxy statements, where the complaint relies on such documents.). The practice, however, has been viewed and justified by the federal courts as a necessary, but limited, exception to the standard Rule 12(b)(6) procedure. The exception has been used in cases in which the document is integral to a plaintiff's claim and incorporated in the complaint, such as a securities claim. Cortec Indus., Inc. v. Sum Holding, L.P., 2d Cir., 949 F.2d 42, 47 (1991); see also Pension Benefit Guar. Corp. v. White Consol. Indus. Inc., 3d Cir., 998 F.2d 1192, 1196 (1993) (purchase agreement); Goodwin v. Elkins & Co., 3d Cir., 730 F.2d 99, 113-14 (1984) (Becker, J. concurring) (partnership agreement); I. Meyer Pincus & Assocs. v. Oppenheimer & Co., Inc., 2d Cir., 936 F.2d 759, 762 (1991) (prospectus). Federal courts consider documents outside the pleadings when the documents are the very documents that are alleged to contain the various misrepresentations or omissions and are relevant not to prove the truth of their contents but only to determine what the documents stated. Kramer v. Time Warner, Inc., 2d Cir., 937 F.2d 767, 774 (1991) (emphasis added). Courts have also considered the relevant publication in libel cases [7] , and the contract in breach of contract cases [8] . Without the ability to consider the document at issue, complaints that quoted only selected and misleading portions of such documents could not be dismissed under Rule 12(b)(6) even though they would be doomed to failure. Kramer, 937 F.2d at 774. Cases in which claims arising out of a document are paired with substantive claims arising out of the events described in the disclosure documents present a situation which may be unique to corporation law. Considering this instance, using the Joint Proxy to consider all of the claims reaches well beyond the justification for the exception and leads to anomalous results. The Court of Chancery has considered a document, the Joint Proxy, which may not be admissible for all purposes at trial with respect to the Revlon and Unocal claims. If the Joint Proxy were relied upon for the truth of the matters contained therein, it would be hearsay with respect to claims other than the disclosure claims. See Hal Roach Studios, Inc. v. Richard Feiner & Co., Inc., 9th Cir., 896 F.2d 1542, 1552-53 (1990) (holding that S-1 Registration Statement is hearsay when used to prove the truth of the matters contained therein but admitting the S-1 under the catch-all exception to hearsay rule); White Indus., Inc. v. Cessna Aircraft Co., W.D.Mo., 611 F.Supp. 1049, 1068-69 (1985) (holding that Form 10-K and prospectus are hearsay with respect to the truth of matters asserted therein). At trial or on a motion for summary judgment, testimony of board members, or perhaps board minutes, may be admissible to show what the Board perceived as the threat and the justification for the defensive measures. [9] When a proxy statement is merely appended to the complaint and relied upon for the disclosure claims, but is not put forth by plaintiffs as an admission of the truth of the facts referred to therein, the defendants may not use it at the pleading stage for purposes other than disclosure issues or perhaps to establish formal, uncontested matters. The Joint Proxy may not be considered with respect to the Revlon and Unocal claims simply because the plaintiffs also happened to allege disclosure violations in the same complaint. The mere fortuity of the presence of a disclosure claim in the same complaint with substantive claims should not open the door to wholesale use of the Joint Proxy. The Court of Chancery should not have considered the assertions in the Joint Proxy in support of defendants' motion to dismiss the Revlon and Unocal claims. We now review the motion to dismiss de novo looking only to the face of the complaint.
Plaintiffs appear to rest their claim of a duty to seek the best value reasonably available on allegations that the Board initiated an active bidding process. Plaintiffs do not consider, however, that this method of invoking the duty requires that the Board also seek to sell control of the company or take other actions which would result in a break-up of the company. While the Board properly encouraged Union Pacific to improve its offer and may have used the results as leverage against Burlington, the Plaintiffs do not allege that the Board at any point decided to pursue a transaction which would result in a sale of control of Santa Fe to Burlington. Rather, the complaint portrays the Board as firmly committed to a stock-for-stock merger with Burlington. Conspicuously absent from the complaint is a description of the stock ownership structure of Burlington. Absent this factual averment, plaintiffs have failed to allege that control of Burlington and Santa Fe after the merger would not remain in a large, fluid, changeable and changing market. Arnold v. Soc'y for Sav. Bancorp., Inc., Del.Supr., 650 A.2d 1270, 1290 (1994) (quoting Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 47 (1993)). Plaintiffs have failed to state a claim that the Board had a duty to seek the transaction offering the best value reasonably available to the stockholders. Paramount v. QVC, 637 A.2d at 43. This duty arises: (1) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company, Paramount Communications, Inc. v. Time Inc., Del.Supr., 571 A.2d 1140, 1150 (1990) [ Time-Warner ]; (2) where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company, id. ; or (3) when approval of a transaction results in a sale or change of control, QVC, 637 A.2d at 42-43, 47. In the latter situation, there is no sale or change in control when `[c]ontrol of both [companies] remain[s] in a large, fluid, changeable and changing market.' Id. at 47 (citation and emphasis omitted). Arnold, 650 A.2d at 1290 (footnote omitted).
Looking only to the face of the complaint, Plaintiffs have stated a claim under Unocal. Enhanced judicial scrutiny under Unocal applies whenever the record reflects that a board of directors took defensive measures in response to a `perceived threat to corporate policy and effectiveness which touches upon issues of control.' Unitrin, 651 A.2d at 1372 n. 9 (quoting Stroud v. Grace, Del.Supr., 606 A.2d 75, 82 (1992), and Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1144 (1990)). Once the plaintiff establishes that defensive measures have been employed in the context of a contest for control, the Board has the burden of showing (1) that it had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, and (2) that [its] defensive response was reasonable in relation to the threat posed. Unitrin, 651 A.2d at 1373 (citing Unocal, 493 A.2d at 955). Once the Board has established the reasonableness of its perception of a threat and the proportionality of the response, it receives the protection of the business judgment rule. Id. at 1374. This case differs from cases where the presumption of the business judgment rule attaches ab initio and to survive a Rule 12(b)(6) motion, a plaintiff must allege well-pleaded facts to overcome the presumption. See, e.g., Levine v. Smith, Del.Supr., 591 A.2d 194 (1991); Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988). In the case sub judice, plaintiffs have pleaded defensive measures which the Santa Fe Board undertook in the context of a battle for corporate control. The complaint states: The Individual Defendants breached their fiduciary duties of loyalty and care by proceeding with and completing the Joint Offer, which placed approximately 16% ownership in the hands of BNI, adopting the Poison Pill and applying it in a discriminatory manner by exempting its application as to one bidder but maintaining it as to all other interested parties, amending the Poison Pill to allow Allegheny to increase its ownership of Santa Fe to 14.9%, and authorizing the Repurchase Program. The complaint does not admit that the Board had proper grounds for its decision. Nor does the Board enjoy a presumption to that effect. The complaint does not adopt as true the facts set forth in the Proxy Statement. Thus, without benefit of the Joint Proxy, the Board cannot rely on any allegations of the complaint to meet its burden under Unocal and Unitrin to come forward with evidence supporting the reasonableness of its perception of the threat posed by Union Pacific and the proportionality of the response thereto. See Rule 56(e). Accordingly, when the court used the Joint Proxy for this purpose, [10] it was error. This case may very well illustrate the difficulty of expeditiously dispensing with claims seeking enhanced judicial scrutiny at the pleading stage where the complaint is not completely conclusory. It is appropriate and consistent with the just, speedy and inexpensive determination of every proceeding, Chancery Rule 1, that conclusory complaints without well-pleaded facts be dismissed early under Chancery Rule 12. But that is not this case. Here, there are well-pleaded allegations on the Unocal claim. As the terminology of enhanced judicial scrutiny implies, boards can expect to be required to justify their decisionmaking, within a range of reasonableness, when they adopt defensive measures with implications for corporate control. This scrutiny will usually not be satisfied by resting on a defense motion merely attacking the pleadings. Accordingly, we conclude that the trial court erred in dismissing the Unocal claim under Chancery Rule 12(b)(6).