In In re J.P. Morgan Chase & Co. Shareholder Litigation, 906 A.2d 766 (Del. 2006), plaintiffs, stockholders of J.P. Morgan Chase & Co. (“JPMC”), commenced a purported class action for money damages in the Delaware Court of Chancery challenging a merger in which JPMC acquired Bank One Corporation (“Bank One”) in July 2004 – a merger that the JPMC stockholders overwhelmingly approved with over 99 percent of the votes cast in favor of the merger. In their complaint, plaintiffs alleged that the JPMC directors breached their fiduciary duties by (i) approving a merger exchange ratio that paid an unnecessary and excessive 14 percent premium – approximately $7 billon – to Bank One stockholders, and (ii) inducing JPMC stockholders to approve a merger with a proxy statement that contained materially inaccurate or incomplete information.
Plaintiffs’ allegations in this action were based upon a single newspaper article that described the negotiations between JPMC and Bank One. Specifically, The New York Times reported that, only days before the merger closed, the Chief Executive Officer of Bank One, James Dimon, purportedly offered to sell Bank One to JPMC at no premium if he, rather than the Chief Executive Officer of JPMC, William B. Harrison, Jr., was appointed the Chief Executive Officer of the surviving entity immediately after the merger closed. The critical sentence in the article stated: “Mr. Dimon, always the tough deal maker, offered to do the deal for no premium if he could become the chief executive immediately, according to two people close to the deal.” Based upon this single sentence, plaintiffs alleged that:
JPMC could have purchased Bank One for no premium if JPMC agreed to appoint Dimon CEO. By allowing Harrison to keep his title of CEO for more than two years (the plaintiffs alleged), the board of JPMC caused JPMC to overpay for Bank One to the extent of the 14% exchange ratio premium. The plaintiffs claimed that the shareholder class was entitled to recover money damages equal to the dollar value of the premium – approximately $7 billion. The plaintiffs’ position was that by approving the premium and obtaining shareholder approval through a materially misleading proxy statement (that is, by not disclosing the information about Dimon’s alleged offer to Harrison), the JPMC directors breached their fiduciary duties, including their duty of disclosure, owed to the shareholders of JPMC.
The Delaware Court of Chancery held that the Delaware Supreme Court Revisits Its Decisions In Tri-Star And Loudon And The Concept Of Per Se Damages “overpayment” claim was a derivative claim and dismissed such claim under Delaware Court of Chancery Rule 23.1 because plaintiffs did not make a pre-suit demand upon the Board of Directors of JPMC and had not pleaded particularized facts in the complaint which reflected that such pre-suit demand was excused. In re J.P. Morgan Chase & Co. S’holder Litig., 906 A.2d 808, 818 (Del. Ch. 2005). The Court of Chancery also held that the “disclosure” claim did not state a cognizable claim for money damages (which was the only remedy being sought by plaintiffs) and dismissed such claim under Court of Chancery Rule 12(b)(6) because (although the “disclosure” claim could have supported a claim for injunctive or other equitable relief ) the “disclosure” claim did not allege any compensable harm to the class:
[T]he damages allegedly flowing from the disclosure violation are exactly the same as those suffered by JPMC in the underlying [“overpayment”] claim[,] . . . injury alleged in the complaint is properly regarded as injury to the corporation, not to the class. . . . [Accordingly,] the claim for actual damages, if there is one, belongs to the corporation, directly or derivatively.
Plaintiffs appealed from the judgment of dismissal, but only as to the “disclosure” claim and argued to the Delaware Supreme Court that a violation of the duty of disclosure, without more, automatically entitles the affected stockholders to a damages recovery because, “assuming the truth of plaintiffs’ well-pled disclosurerelated allegations, the plaintiffs were entitled to recover compensatory damages, as a matter of law,” under the rationale adopted by the Delaware Supreme Court in In re Tri-Star Pictures, Inc., 634 A.2d 319 (Del. 1993).
The Delaware Supreme Court upheld the decision of the Court of Chancery and rejected plaintiffs’ argument. Specifically, the Supreme Court held that plaintiffs’ argument that “there is a per se rule of damages for breach of the fiduciary duty of disclosure” is not “an accurate statement of Delaware law,” and referred to its decision in Loudon v. Archer-Daniels-Midland Co., 700 A.2d 135 (Del. 1997), which reflects current Delaware law:
We hold that under Delaware law there is no per se rule that would allow damages for all director breaches of the fiduciary duty of disclosure. The dictum in Tri-Star is confined to the facts of that case. Damages will be available only in circumstances where disclosure violations are concomitant with deprivation to stockholders’ economic interests or impairment of their voting rights.
In so holding, the Delaware Supreme Court emphasized that the “narrow scope” of Tri-Star applies only where there is a diluting transaction and the person or the entity benefiting from the diluting transaction is an existing significant or controlling stockholder(s). Based upon this Delaware law, the Court concluded:
In this case, the merger between JPMC and Bank One was not a transaction between a corporation and its controlling (or even a significant) stockholder. Rather, the merger was a transaction between two independent entities. Because the entity allegedly benefiting from the dilution (Bank One) was not a significant or controlling stockholder of JPMC, Tri-Star has no application to the facts alleged here.