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It is improper for those in a fiduciary position to utilize a corporate merger process solely to promote the interests of one class of shareholders to the detriment, and at the expense, of the members of a minority class of shareholders.
Plaintiff shareholders of American Investment Company (AIC) brought suit against the board of directors of the company, alleging that the latter breached the fiduciary duty owed by them to the plaintiffs during the course of a merger whereby AIC was merged into Leucadia American Corp., a wholly-owned subsidiary of Leucadia, Inc. ("Leucadia"). In that merger, the common shareholders of AIC were eliminated from their equity position in the corporation at a price of $13 per share. However, the preferred shareholders of AIC were not cashed out, but were left as preferred shareholders of the corporation surviving the merger. Plaintiffs contended that AIC's board looked only to the interests of the common shareholders in seeking a merger partner for AIC and, by so doing, unfairly froze the preferred shareholders into the post-merger AIC as completely controlled by Leucadia. Moreover, the plaintiffs contended that they should have been entitled to vote as a class on the merger proposal because it constituted a change which adversely affected their existing preference rights.
Under the circumstances, did the board of directors of the company breach their fiduciary duty to the plaintiffs, thereby making defendants liable to the plaintiffs?
The court entered judgment in favor of the board of directors of the company, finding that the merger offer was proposed by persons from the corporation which desired to merge with the company and that the corporation had its own economic reasons for not cashing out the company's preferred shareholders. Thus, the merger was not brought about as a result of any breach of fiduciary duty on the part of the board. Second, the court held that the original requirement that any redemption of less than all shares of the preferred stock be accomplished by lot was not changed by the merger. The shareholders were therefore not deprived of any rights they possessed before the merger and failed to prove their claim.