breach of a fiduciary duty

In 1975 and 1976 Vincent Chiarella worked as a markup man in the New York composing room of Pandick Press, a financial printer. Among the documents he handled were five announcements of corporate takeover bids. The identities of the acquiring and target corporations were concealed by blank spaces or false names. The true names were sent to the printer on the night of the final printing. Chiarella deduced the names of the target companies from other information contained in the documents. Without disclosing his knowledge, Chiarella purchased stock in the target companies. He sold the shares immediately after the takeover attempts were made public. By this method he realized a gain of slightly more than $30,000 in the course of fourteen months. The Securities and Exchange Commission subsequently began an investigation of his trading activities. In May 1977 Chiarella entered into a consent decree with the Commission in which he agreed to return his profits to the sellers of the shares. On the same day he was discharged by Pandick Press. In January 1978 he was indicted on seventeen counts of violating § 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5. After he unsuccessfully moved to dismiss the indictment, he was tried and convicted on all counts in the District Court. The Court of Appeals for the Second Circuit affirmed the conviction. The Supreme Court granted certiorari.

In June 1985, Ronald O. Perelman of Pantry Pride met with Michel C. Bergerac of Revlon to discuss a friendly acquisition at prices between forty and fifty dollars per share. Bergerac rejected the overture as below the company's intrinsic value. On August 14, Pantry Pride's board authorized Perelman to acquire Revlon either by negotiation in the forty two to forty three dollar range or by hostile tender offer at forty five dollars per share. All further discussions were rebuffed when Bergerac conditioned talks on execution of a standstill agreement. On August 19, the Revlon board met specially to consider the impending threat of a hostile bid by Pantry Pride. Lazard Freres advised the directors that forty five dollars per share was a grossly inadequate price for the company. Martin Lipton recommended that the company repurchase up to five million of its nearly thirty million outstanding shares and adopt a Note Purchase Rights Plan. Under this plan, each Revlon shareholder would receive as a dividend one Note Purchase Right for each share of common stock. The Rights entitled the holder to exchange one common share for a sixty five dollar principal Revlon note at twelve percent interest with a one-year maturity. Felix Rohatyn and William Loomis of Lazard Freres explained to the board that Pantry Pride's financial strategy for acquiring Revlon would be through junk bond financing followed by a break-up of Revlon and the disposition of its assets. With proper timing, such transactions could produce a return to Pantry Pride of sixty to seventy dollars per share while a sale of the company as a whole would be in the mid fifty dollar range. Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all shares of Revlon at forty seven dollars and fifty cents per common share and twenty six dollars and sixty seven cents per preferred share. The offer was subject to obtaining financing and the Rights being redeemed. On August 29, Revlon commenced its own offer for up to ten million shares. It exchanged for each share of common stock tendered one Senior Subordinated Note of forty seven dollars and fifty cents principal at eleven point seven five percent interest due in nineteen ninety five and one-tenth of a share of nine dollar Cumulative Convertible Exchangeable Preferred Stock valued at one hundred dollars per share. Revlon stockholders tendered eighty seven percent of the outstanding shares and the company accepted the full ten million shares on a pro rata basis. Pantry Pride announced a new tender offer at forty two dollars per share on September 16 conditioned upon receiving at least ninety percent of the outstanding stock. The Revlon board held a regularly scheduled meeting on September 24 and rejected the latest Pantry Pride offer. Pantry Pride remained determined in its efforts and continued to make cash bids for the company. It offered fifty dollars per share on September 27 and raised its bid to fifty three dollars on October 1 and then to fifty six dollars and twenty five cents on October 7. On October 3, the Revlon board met to consider Pantry Pride's fifty three dollar bid and to examine possible alternatives. Both Forstmann and Adler & Shaykin made proposals. As a result, the directors unanimously agreed to a leveraged buyout by Forstmann. The terms of this accord were as follows: each stockholder would get fifty six dollars cash per share; Forstmann would assume Revlon's four hundred seventy five million dollar debt incurred by the issuance of the Notes; and Revlon would redeem the Rights and waive the Notes covenants for Forstmann or in connection with any other offer superior to Forstmann's. Part of Forstmann's plan was to sell Revlon's Norcliff Thayer and Reheis divisions to American Home Products for three hundred thirty five million dollars. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler & Shaykin for nine hundred five million dollars. On October 12, Forstmann made a new fifty seven dollars and twenty five cents per share offer based on several conditions. The principal demand was a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for five hundred twenty five million dollars if another acquiror got forty percent of Revlon's shares. Revlon also was required to accept a no-shop provision. There would be a twenty five million dollar cancellation fee to be placed in escrow and released to Forstmann if the new agreement terminated or if another acquiror got more than nineteen point nine percent of Revlon's stock. The board unanimously approved Forstmann's proposal because it was for a higher price than the Pantry Pride bid, it protected the noteholders, and Forstmann's financing was firmly in place. The board further agreed to redeem the rights and waive the covenants on the preferred stock in response to any offer above fifty seven dollars cash per share. Pantry Pride, which had initially sought injunctive relief from the Rights plan on August 22, filed an amended complaint on October 14 challenging the lock-up, the cancellation fee, and the exercise of the Rights and the Notes covenants. Moreover, on October 22, Pantry Pride again raised its bid with a cash offer of fifty eight dollars per share conditioned upon nullification of the Rights, waiver of the covenants, and an injunction of the Forstmann lock-up. On October 15, the Court of Chancery prohibited the further transfer of assets and eight days later enjoined the lock-up, no-shop, and cancellation fee provisions of the agreement. The trial court concluded that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann out of concern for their liability to the noteholders rather than maximizing the sale price of the company for the stockholders' benefit. The Supreme Court of Delaware granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control.

In December 1986, First American Bankshares, Inc. (FABI), a bank holding company, began a freeze-out merger in which the First American Bank of Virginia (Bank) eventually merged into Virginia Bankshares, Inc. (VBI), a wholly owned subsidiary of FABI. VBI owned 85 percent of the Bank's shares, with the remaining 15 percent held by approximately 2,000 minority shareholders. FABI hired the investment banking firm of Keefe, Bruyette & Woods (KBW) to opine on the appropriate price for the minority shares. Based on market quotations and unverified information from FABI, KBW advised the Bank's executive committee that $42 per share would be a fair price. The executive committee approved the merger proposal at that price, and the full board followed suit. Although Virginia law required only that the merger proposal be submitted to a vote at a shareholders' meeting preceded by circulation of a statement of information, the directors solicited proxies for voting on the proposal at the annual meeting set for April 21, 1987. In the solicitation, the directors urged adoption of the proposal and stated they had approved the plan because it provided an opportunity for the minority shareholders to achieve a high value for their shares, which they elsewhere described as a fair price. Respondent Sandberg, a minority shareholder who did not provide the requested proxy, filed suit in the United States District Court for the Eastern District of Virginia against VBI, FABI, and the Bank's directors. She alleged violations of section 14(a) and Rule 14a-9. She also alleged breaches of fiduciary duties under state law. Sandberg claimed the directors did not believe the $42 price was high or the merger terms fair but recommended the merger only to retain their board seats. At trial, the jury returned verdicts for Sandberg on both counts and awarded her $18 per share after finding she would have received $60 if the stock had been valued adequately. While Sandberg's case was pending, other minority shareholders including respondent Weinstein filed a similar action in the United States District Court for the District of Columbia. That case was transferred to the Eastern District of Virginia. After Sandberg's trial, the Weinstein respondents obtained summary judgment on liability through collateral estoppel. On appeal, the United States Court of Appeals for the Fourth Circuit affirmed the judgments, holding that certain statements in the proxy solicitation were materially misleading and that the respondents could maintain their action even though their votes had not been needed to effectuate the merger. The Supreme Court granted certiorari.

MAI is in the business of financing computer installations through sale and lease back arrangements with commercial and industrial users. Under its lease provisions, MAI was required to maintain and repair the computers but, at the time of this suit, it lacked the capacity to perform this function itself and was forced to engage the manufacturer of the computers, International Business Machines (IBM), to service the machines. As a result of a sharp increase by IBM of its charges for such service, MAI's expenses for August of 1966 rose considerably and its net earnings declined from $262,253 in July to $66,233 in August, a decrease of about 75%. This information, although earlier known to the defendants, was not made public until October of 1966. Prior to the release of the information, however, Oreamuno and Gonzalez sold off a total of 56,500 shares of their MAI stock at the then current market price of $28 a share. After the information concerning the drop in earnings was made available to the public, the value of a share of MAI stock immediately fell from the $28 realized by the defendants to $11. Thus, the plaintiff alleges, by taking advantage of their privileged position and their access to confidential information, Oreamuno and Gonzalez were able to realize $800,000 more for their securities than they would have had this inside information not been available to them. The complaint was filed by a shareholder of Management Assistance, Inc. (MAI). It asserts a derivative action against its officers and directors to compel an accounting for profits allegedly acquired as a result of a breach of fiduciary duty. It charges that two of the defendants — Oreamuno, chairman of the board of directors, and Gonzalez, its president — had used inside information, acquired by them solely by virtue of their positions, to reap large personal profits from the sale of MAI shares and that these profits rightfully belong to the corporation. Other officers and directors were joined as defendants on the ground that they acquiesced in or ratified the assertedly wrongful transactions. A motion by the defendants to dismiss the complaint — pursuant to CPLR 3211 (subd. [a], par. 7) — for failure to state a cause of action was granted by the court at Special Term. The Appellate Division, with one dissent, modified Special Term's order by reinstating the complaint as to the defendants Oreamuno and Gonzalez. The appeal is before us on a certified question.