In Murphy v. Inman, No. 161454 (April 5, 2022), directors of Covisint Corporation approved a cash-out merger with OpenText Corporation at a price of $2.45 per share and, the day after shareholder approval, Covisint merged with an OpenText subsidiary, a so-called reverse triangular merger that eliminated Murphy’s share holdings.
Murphy sued Covisint’s directors alleging that they sold at a price that was too low, failed to consider other bidders and higher offers, obtained personal financial benefits, and omitted key information in the proxy statement sent to Covisint shareholders. The defendant directors argued that this was a derivative claim and that Murphy failed to meet the requirements for a derivative lawsuit.
The Michigan Supreme Court overruled the two lower courts and held that in a cash-out merger, the directors of the target corporation (1) must disclose all material facts regarding the merger, (2) must discharge their fiduciary duties to maximize shareholder value by securing the highest value share price reasonably available, and (3) owe this duty to the shareholders directly rather than to the corporation derivatively.
One of the defense arguments was that the Michigan Business Corporation Act recognized a director’s fiduciary duty to the corporation and therefore replaced or superseded common law fiduciary duties, but the court rejected this argument because the statute’s text did not state whether directors owed fiduciary duties to the shareholders. In the absence of provisions showing an intent to replace or eliminate common law fiduciary duties, the court held that they still existed.
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