The opinion of the court was delivered by: Herman Cahn, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the printed Official Reports.
These consolidated shareholder class actions arise from the precipitous collapse of the Bear Stearns Companies, Inc. ("Bear Stearns" and "the company") and the consequent, federally-assisted merger with JPMorgan Chase & Co. ("JPMorgan") in a stock-for-stock deal with an implied value of $10 per share. Challenging the consideration as inadequate, plaintiffs seek damages from Bear Stearns' directors for claimed violation of their fiduciary duties, and from JPMorgan for its allegedly tortious conduct in effecting the merger.*fn1
Defendants Bear Stearns and JPMorgan now move for summary judgment (CPLR 3212) dismissing the actions.
For the reasons discussed below, the actions are dismissed. The Court concludes that Bear Stearns board of directors' approval of the merger does not subject them to liability because the decisions are protected by the business judgment rule and the officers and directors are shielded by the exculpatory provisions of Bear Stearns' certificate of incorporation. The board's efforts to preserve some shareholder value while averting the uncertainty of a bankruptcy - an event with potentially cataclysmic consequences for the broader economy as well as for the shareholders - would survive scrutiny even if some enhanced standard of review under Delaware law did apply. For related reasons, JPMorgan's participation in negotiating the merger also does not give rise to penitential liability.
The following facts are taken from the parties' statements pursuant Rule 19-a of the Rules of the Justices of the Commercial Division, and the pleadings, affidavits, deposition transcripts and documentary evidence submitted with the motion papers.
Defendant Bear Stearns, a Delaware corporation, was a holding company that, through various broker-dealer and international bank subsidiaries,*fn2 was a leading investment banking, securities and derivatives trading, clearance and brokerage firm. It served corporations, governments, institutional and individual investors worldwide. As of February 20, 2008, Bear Stearns had 145,633,335 common shares and 1,757,397 shares of preferred stock outstanding. Bear Stearns also had more than $70 billion in outstanding unsecured debt.
During the relevant period, Bear Stearns' directors were defendants Henry S. Bienen, Carl D. Glickman, Michael Goldstein, Donald J. Harrington, Frank T. Nickell, Paul A. Novelly, Frederic V. Salerno, Vincent Tese, Wesley S. Williams, Jr., James E. Cayne, Alan D. Schwartz and Alan C. Greenberg (the "Director Defendants"). Three of the Director Defendants, Schwartz, Cayne and Greenberg, were also members of Bear Stearns' management, with Schwartz serving as its president and Chief Executive Officer. Nine of the directors were "outside directors" with broad business and life experience.*fn3
Defendant JPMorgan, a Delaware corporation, is a global financial services firm with assets of $1.6 trillion and operations in more than 60 countries. JPMorgan's chairman and CEO is James Dimon ("Dimon"). Dimon is also one of nine directors of the New York Federal Reserve ("NY Fed").
Plaintiffs are Bear Stearns shareholders,*fn4 allegedly injured by the company's merger with JPMorgan, suing individually and as representatives of similarly situated shareholders.
Bear Stearns' Liquidity Crisis
On Monday March 10, 2008, Moody's Investors Services downgraded certain series of mortgage-backed debt issued by an affiliate of Bear Stearns, and questions regarding Bear Stearns' liquidity began circulating in the market. Bear Stearns issued a press release denying the market rumors. Moody's issued a statement noting that it had not taken any adverse rating action regarding Bear Stearns' corporate debt and that Bear Stearns' rating outlook was stable. Nevertheless, by late Wednesday, March 12, an increased number of customers expressed a desire to withdraw funds from Bear Stearns, and certain counterparties expressed concern over maintaining their ordinary course exposure to Bear Stearns.
Concerned that the company's liquidity could be compromised, Bear Stearns' senior management met with its financial advisor, Lazard Freres & Co., LLC ("Lazard") on the evening of March 12, 2008 to discuss the issues raised by the market speculation. On Thursday, March 13, 2008, the Wall Street Journal reported that, due to the market perception of Bear Stearns' liquidity problems, trading counterparties were becoming cautious about their dealings with, and exposure to, the company. Over the course of the day, and particularly at an increasing rate in the afternoon, an unusual number of customers withdrew funds from Bear Stearns. In addition, a significant number of counterparties appeared unwilling to provide the short-term, fully secured funding customary in the investment banking business which were necessary for the company's operations. By the end of the day, Bear Stearns found that its liquidity had deteriorated sharply and that there was a reasonable chance that it would not have enough cash to meet its needs the next day.
The Federal Loan Facility
During the evening of March 13, Bear Stearns' senior management met with the company's legal and financial advisors to discuss the liquidity problem and explore potential options. Senior management had been in contact with the NY Fed, the Securities and Exchange Commission ("SEC") and representatives of the United States Treasury Department to inform them of Bear Stearns' condition. In addition, Schwartz contacted JPMorgan Chairman Dimon to seek funding assistance or some other solution to Bear Stearns' liquidity problem, including a possible business combination.
At 10:30 p.m. that evening, Bear Stearns' board held a special meeting at which its senior management and legal and financial advisors discussed the liquidity problem, and the possibility that the company would not be able to meet its operational needs the next day, absent the identification of sufficient funding sources. The board was informed that customers were withdrawing billions of dollars, counterparties were refusing to roll over their repurchase agreement or do business with Bear Stearns, and the company was receiving and meeting margin calls. Following that meeting, representatives of JPMorgan and officials of the Treasury Department, the NY Fed and the Federal Reserve Board held discussions throughout the night. They ultimately agreed to a temporary NY Fed-backed loan facility (the "Loan Facility"). Pursuant to that arrangement, for a period of up to 28 days, JPMorgan would fund Bear Stearns on a fully-secured basis, supported by a back-to-back loan facility which permitted JPMorgan to borrow similar funds from the NY Fed through its discount window on a non-recourse basis.
At a reconvened meeting at 8:00 a.m. Friday, March 14, 2008, Schwartz updated the board on the Loan Facility. At the conclusion of the meeting, the board authorized Bear Stearns to enter into the arrangement. Prior to the opening of the markets that day, Bear Stearns issued a press release announcing the Loan Facility and disclosing its discussion of alternatives with JPMorgan. Around noon, Bear Stearns' senior management held a public investor conference to discuss the Loan Facility and disclose its retention of Lazard to explore other options.
Lazard spoke to over a dozen potential merger partners over the next few days, ultimately reporting to the board that only JPMorgan and J.C. Flowers, a private equity firm, had expressed meaningful interest.
Bear Stearns' Continued Financial Instability
Despite Bear Stearns' announcement of the Loan Facility and discussions with JPMorgan, customers and counterparties continued to abandon the company. On March 14 its common stock price closed down 47% from the previous day. Additionally, that afternoon three major rating agencies, Standard and Poor's, Moody's and Fitch Ratings, downgraded Bear Stearns' long-term and short-term credit ratings two to four notches from the day before and stated that they would continue to review the company's ratings with consideration of possible further downgrades. On the evening of March 14, the NY Fed informed Bear Stearns that the Loan Facility would no longer be available as of the upcoming Monday morning, March 17, 2008. Treasury Secretary Henry Paulson also advised Schwartz that Bear Stearns needed to complete a stabilizing transaction by the end of the weekend.
The Initial Merger Negotiations
Bear Stearns determined that it would not be able to open for business Monday in the absence of an alternative source of funding. Its management estimated the funding requirements for that day to be in the range of $60 billion to $100 billion. The company determined that its only options were to complete a "stabilizing" transaction over the weekend or file for bankruptcy Monday morning (Def Bear Stearns Rule 19-A Statement, ¶ 24).
Accordingly, on Saturday, March 15, 2008 representatives of Bear Stearns and JPMorgan met to discuss a potential deal. Lazard also contacted various potential buyers and parties capable of providing alternative funding, and provided "due diligence" material to JPMorgan and J.C. Flowers, which were the only parties that expressed an interest in completing a stabilizing transaction, such as a merger, on an expedited basis. A separate Bear Stearns team considered the consequences of bankruptcy and prepared for the possibility of filing for bankruptcy if a stabilizing transaction were not consummated by late Sunday.
On Saturday afternoon, J.C. Flowers presented a proposal to contribute $3 billion to Bear Stearns in exchange for a 90% equity interest. The proposal required a $20 billion credit facility from a yet-to-be-assembled consortium of banks. J.C. Flowers was given permission to contact financial institutions to seek their participation, but later that evening indicated that it was having difficulty finding suitable candidates.
On Saturday evening, JPMorgan indicated that it was considering a stock-for-stock transaction in which Bear Stearns stockholders would receive JPMorgan stock with an implied value of between $8 and $12 per Bear Stearns share (Def Bear Stearns Rule 19-A, ¶ 31). Bear Stearns expressed interest at that price level. It insisted that any offer would have to be firm and could not be subject to any material conditions precedent such as the accuracy of representations and warranties. With the encouragement of the NY Fed and the Treasury, both JPMorgan and J.C. Flowers continued to conduct due diligence and hold discussions with Bear Stearns until early in the morning of Sunday, March 16.
Later that Sunday morning, JPMorgan advised Lazard that due to the risks of a merger it could not proceed without some level of financial and other support from the NY Fed. JPMorgan continued to work with Bear Stearns toward a transaction, and also pursued discussions with the NY Fed. The NY Fed ultimately agreed to provide $30 billion of non-recourse funding secured by a pool of Bear Stearns collateral consisting primarily of mortgage related securities and other mortgage related assets and hedges. According to officials of the Federal Reserve, the governmental intervention was premised on a concern that a sudden and disorderly failure of Bear Stearns would have "unpredictable but likely severe consequences for market functioning and the broader economy" (Markel Aff, Ex. DD at 3). It would also likely pose "the risk of systemic damage to the financial system" (id., Ex. K at 5).
Late on the afternoon of Sunday, March 16, JPMorgan indicated that it was interested in a stock-for-stock merger with Bear Stearns at an implied value of $4 per share for Bear Stearns stock, a figure shortly thereafter reduced to $2 per share. Bear Stearns objected to the price and suggested a term requiring JPMorgan to pay additional consideration if certain Bear Stearns assets were sold for more than JPMorgan valued them. JPMorgan declined to increase the price, a position which Bear Stearns' management understood to be, in part, a consequence of the Treasury's insistence.
In discussions of the transaction, the board was informed that without a deal, Bear Stearns would have to file for bankruptcy immediately, in which case its stockholders would likely receive nothing and the holders of Bear Stearns' unsecured $70 billion debt might suffer significant loss. Lazard issued an opinion that the "Exchange Ratio is fair, from a financial point of view, to the holders of the Company Common Stock" (Markel Aff, Ex. P at 4). The fairness opinion was executed by Larry W. Parr, Lazard's Deputy Chairman.
Bear Stearns' board approved an initial merger agreement (the "Initial Merger Agreement") on Sunday, March 16, 2008. The agreement provided for a share-for-share merger at an implied price of $2 per share, which was a fixed exchange ratio of 0.05473 shares of JPMorgan common stock for each share of Bear Stearns common stock. JPMorgan provided an immediate guaranty (the "Initial Guaranty") of various Bear Stearns' obligations, with the NY Fed providing supplemental funding of up to $30 billion.
Under the Initial Merger Agreement, JPMorgan received an option to purchase 19.9% of Bear Stearns' stock at $2 per share, and to purchase Bear Stearns' headquarters building at Madison Avenue, New York, New York, for $1.1 billion (the "Building Purchase Option").
The agreement also contained a "No Solicitation" clause which prohibited Bear Stearns from actively soliciting alternative proposals (Def Br, Ex. I § 6.9). However, the provision allowed the company to consider and participate in discussions and negotiations and provide information with respect to a bona fide Alternative Proposal received by Company, if and only to the extent that and so long as the Board of Directors of Company reasonably determines in good faith (after consultation with outside legal counsel) that failure to do so would cause it to violate its fiduciary duties to Company stockholders under applicable law (id.).The board was permitted to accept another proposal if it was a "Superior Proposal," defined as an offer for 100% of Bear Stearns' common stock and assets which was more financially favorable than the JPMorgan merger and reasonably capable of being completed by a third party qualified to obtain the necessary financing.
Bear Stearns resumed business on Monday, March 17, 2008. During the week, the NY Fed directly loaned the Company approximately $30 billion each day and JPMorgan lent it approximately another $13.4 billion. However, Bear Stearns' customers continued to withdraw funds and counterparties remained unwilling to provide secured financing on customary terms.
The Merger Renegotiations
Due to concerns over its continuing obligation to guaranty Bear Stearns' obligations, on Tuesday, March 18, 2008, JPMorgan contacted Bear Stearns' legal advisors to discuss revisions to the merger agreement. JPMorgan advised Bear Stearns that it was skeptical of its ability to continue to extend credit or guarantee the loans in the face of market fears over Bear Stearns' viability and the perceived risk that the merger might not be completed. On Friday, March 21, 2008, JPMorgan proposed that Bear Stearns issue a sufficient number of additional shares to give JPMorgan a two-thirds common stock interest and, thus, increase the certainty that the merger would close. Bear Stearns rejected the stock proposal and indicated that it would require a significant increase in the merger consideration for any revision of the Initial Merger Agreement.
On Saturday, March 22, 2008, Bear Stearns CEO, Schwartz, informed the board that uncertainty over of the terms of JPMorgan's guarantee was causing the market to eschew trading with Bear Stearns. He indicated that JPMorgan was concerned about its liability under the Initial Guarantee if the shareholders voted down the merger, and that JPMorgan sought to enable either party to have the right to terminate the agreement under such an outcome. Schwartz also apprised the board of the continuing efforts of counsel to prepare for a potential bankruptcy, which he stated was Bear Stearns' only option if the NY Fed and JPMorgan were unwilling to continue funding on Monday, March 24, 2008. Bear Stearns' board was advised that if the company filed for bankruptcy, its bankruptcy estate could potentially pursue litigation against JPMorgan for refusing to fund its operations.
The Amended Merger Agreement
Negotiations over revisions to the merger agreement continued throughout the weekend, with the participation of the NY Fed. In addition to Lazard, Bear Stearns retained four law firms as advisors, Skadden Arps, Sullivan & Cromwell, Cadwalader, Wickersham & Taft and Richards, Layton & Finger. The parties reached an agreement on early Monday morning, March 24. Most relevant, under the amended merger agreement (the "Amended Merger Agreement") the merger consideration was increased to an implied value of approximately $10 per share. JPMorgan was required to guarantee Bear Stearns' current and future borrowings from the NY Fed. JPMorgan's obligation to guarantee Bear Stearns' trading obligations, in the event of a negative vote on the merger, was reduced from one year to 120 days. Furthermore, JPMorgan was permitted to purchase 95 million shares of Bear Stearns' common stock, at $10 per share (the "Share Exchange Agreement"), for a 39.5% interest. As part of the renegotiation, JPMorgan and the NY Fed separately agreed to modify the $30 billion special funding facility, that would go into effect upon consummation of the merger. This was so that JPMorgan would assume up to the first $1 billion of any losses on the collateral provided to the NY Fed. The Amended Merger Agreement also required all of the Director Defendants to resign at the effective time of the merger.
The Shareholder Approval of the Merger
Between April 11 and April 28, 2008, JPMorgan filed various forms with the SEC disclosing the terms of the transaction, the history of the negotiations and the perceived risks of the transaction. On May 29, 2008, a majority of Bear Stearns' stockholders voted to approve the merger transaction. Stockholders representing 84.55% of the 240,739,293 outstanding eligible shares, including JPMorgan, participated in the vote. With abstentions and unvoted shares counting against the merger, the transaction passed with 71% of the vote. Had the 39.5% block of shares issued to JPMorgan been excluded, the merger would still have passed with 52% of the vote. However, if all of JPMorgan's shares had been excluded, including the 10% of the outstanding shares purchased on the open market, the measure would have failed with a 42.7% vote.
The merger closed on May ...