Cases and Deals

Blank Rome Secures Early Dismissal for Kreisler Manufacturing Corporation in Delaware Court of Chancery

Blank Rome successfully represented the former board of directors of Kreisler Manufacturing Corporation in obtaining a dismissal with prejudice of a putative shareholder class action suit brought against them in Delaware’s Court of Chancery relating to their sale/merger transaction.

After the sale of Kreisler closed, Plaintiff Alan Kahn initiated the putative class action and asserted allegations that Kreisler’s directors were self-interested and failed to properly disclose information regarding the sale process to the company stockholders. After briefing and oral argument on the former directors’ motion to dismiss, the court issued a 44-page opinion dismissing all of the plaintiff’s claims with prejudice. 

In the opinion, the court noted that, in the circumstances of such a dispute, a plaintiff’s complaint must properly “plead that a majority of the Board acted in bad faith” particularly since the company’s charter contained a Section 102(b)(7) exculpation provision, shielding the directors’ from liability for duty of care violations under Delaware law. Despite noting that “scattered within the Complaint are conclusory statements,” the court gave Kahn the benefit of construing his allegations as “attempt[s] to plead both process and disclosure claims” related to the transaction. While the complaint asserted the “conclusion that [one of the directors] lacked independence,” the court did not “consider this bare allegation well-pled in light of the Plaintiff’s failure to point to any specific facts supporting it.” Thus, siding with Blank Rome’s argument that a majority of the board was independent and disinterested, the plaintiff could not pursue post-closing damages for breach of fiduciary duty unless his complaint pleaded facts making it reasonably conceivable that the majority of the board acted in bad faith. Despite the plaintiff’s conclusory allegations of wrongdoing, the court found the “Complaint still does not plead facts creating a reasonable inference of bad faith” and “pleadings to negate the good faith of the independent directors approving the Merger in light of the side deals are absent.” 

Finally, in dismissing the plaintiff’s disclosure claims, the court noted that to state a non-exculpated claim, plaintiffs cannot “simply point to erroneous judgment in the failure to make a disclosure, implicating the duty of care, but rather must point to facts in the Complaint supporting an inference that the Board acted in bad faith in issuing the disclosure, implicating the duty of loyalty.” Importantly, the court clarified the different standards by which merger-related disclosure claims would be judged—pre-close claims for injunctive relief versus post-close claims for damages (often being pursued by the plaintiffs’ bar as quasi-appraisal class actions—claims that do not have as many of the risks or limitations of a statutory appraisal claim). As a result, the court granted Blank Rome’s motion to dismiss under Court of Chancery Rule 12(b)(6). 

Please click here to read the court’s opinion.