In a January 13, 2014 decision by Justice Marcy Friedman, the Court considered a motion to dismiss a class action against former directors and officers of Vertro, Inc. (“Vertro”) arising out of claims by former shareholders for breaches of fiduciary duty by the individuals for failing to maximize shareholder value, acting in their own self-interest, and failing to disclose material information in connection with Vertro’s merger with Inuvo, Inc. In addition, the complaint claims that the corporate entity defendants aided and abetted those breaches. The complaint sought rescission of the merger of the two companies, or, damages in the alternative. All defendants moved to dismiss the Second Amended Complaint for failure to state a claim.
Previously, a proceeding was brought in the Delaware Chancery Court based upon nearly identical allegations. The Chancery Court ordered an expedited hearing, and ultimately denied a preliminary injunction, allowing the merger to go forward. In the meantime, defendants in the New York proceeding requested a stay of the action pending resolution of the Delaware action, which was granted by Justice Fried. Plaintiffs in the Delaware proceeding then voluntarily withdrew their complaint there.
Defendants then moved to dismiss the New York action for failure to state a claim on various grounds.
The Court first considered the Revlon duties, concluding that the board’s initiation of an active bidding process did not implicate a Revlon duty, unless the board also tried to sell control of the company or take other action likely to result in a break-up of the company. The Court also rejected the application of Revlon based on the “change-in-control” provisions contained in contracts of the officers and directors. The Court concluded ultimately that the business judgment rule applied to review the acts of the board of directors in approving the merger.
The Court next applied the business judgment rule to analyze the claims that the members suffered from conflicts of interest; that the sales process and the merger consideration were inadequate; and that the proxy statement omits material information. None of those claims were pleaded sufficiently in the Court’s view to overcome the presumption of the business judgment rule. Accordingly, the Court granted the motion to dismiss the Second Amended Complaint in its entirety.
Badowski v Carrao, Sup Ct, NY County, January 13, 2014, Friedman, J., Index No. 652986/2011.