EMPLOYER TEAMSTERS LOCAL NOS. 175 & 505 PENSION TRUST FUND, individually et al. v. FINN M. CASPERSEN, et al.

 

NOT FOR PUBLICATION WITHOUT THE

APPROVAL OF THE APPELLATE DIVISION

SUPERIOR COURT OF NEW JERSEY

APPELLATE DIVISION

DOCKET NO. A-3956-04T13956-04T1

EMPLOYER TEAMSTERS LOCAL NOS.

175 & 505 PENSION TRUST FUND,

individually and on behalf of

all others similarly situated,

Plaintiff-Appellant,

v.

FINN M. CASPERSEN, DAVID J. FARRIS,

ANDREW C. HALVORSEN, ROBERT J. CALLANDER,

ROBERT C. CLARK, LEONARD S. COLEMAN, JR.,

ROLAND A. HERNANDEZ, J. ROBERT

HILLIER, GERALD L. HOLM, THOMAS

H. KEAN, STEVEN MULLER, SUSAN JULIA

ROSS, ROBERT A. TUCKER, and SUSAN M.

WACHTER,

Defendants-Respondents.

_______________________________________

 

Argued January 10, 2006 - Decided February 24, 2006

Before Judges Axelrad, Payne and Sabatino.

On appeal from the Superior Court of New Jersey, Law Division, Somerset County,

L-0947-04.

Sandford Svetcov (Lerach, Coughlin, Stoia, Geller, Rudman & Robbins) of the California bar, admitted pro hac vice, argued the cause for appellants (Cohn, Lifland, Pearlman, Herrmann & Knopf, and Mr. Svetcov, attorneys; Peter S. Pearlman and Mr. Svetcov, Susan K. Alexander, Azra Z. Mehdi, and Elizabeth A. Acevedo (Lerach, Coughlin, Stoia, Geller, Rudman & Robbins) of the California bar, admitted pro hac vice, on the brief).

Christopher M. Murphy (McDermott, Will & Emery) of the Illinois bar, admitted pro hac vice, argued the cause for respondents (Riker, Danzig, Scherer, Hyland & Perretti and Mr. Murphy, attorneys; Sigrid S. Franzblau, Shawn L. Kelly, Mr. Murphy and Benson Friedman (McDermott, Will & Emery) of the Illinois bar, admitted pro hac vice, on the brief).

PER CURIAM

Plaintiff, a union pension fund and former institutional investor in Beneficial Corporation ("Beneficial"), a Delaware corporation, appeals the Law Division's dismissal of its shareholder class action against fourteen former Beneficial directors and officers. Plaintiff alleges that defendants breached their fiduciary duties and acted negligently in approving Beneficial's acquisition in 1998 by Household International, Inc. ("Household") through a stock-for-stock transaction. Eventually Household's stock plummeted after the discovery of fraud within the company, allegedly causing its shareholders collectively, including plaintiff, to lose billions of dollars.

Plaintiff's central theory is that the Beneficial directors and officers had a duty under Delaware law to undertake due diligence and review Household's non-public financial records before recommending the 1998 acquisition. The court granted defendants' motion to dismiss, finding that no established case law in Delaware supports such a cause of action. We affirm, as we likewise conclude that plaintiff's legal theory has yet to be recognized in the courts of Delaware, and that principles of interstate comity warrant our forbearance in so expansively interpreting the corporations law of a sister state.

I.

We begin with an overview of the facts, which we shall present in a light most favorable to plaintiff because its complaint was dismissed on the face of the pleadings. See R. 4:6-2(e); Printing Mart v. Sharp Electronics, 116 N.J. 739, 746 (1989).

Plaintiff, Employer-Teamsters Local Nos. 175 & 505 Pension Trust Fund ("Employer-Teamsters"), manages retirement accounts for more than 5,000 current and former union members. On behalf of those members, plaintiff invested in Beneficial, a Delaware corporation that was principally located in Somerset County, New Jersey. Beneficial was a publicly-held company, whose subsidiaries principally engaged in the business of consumer finance and credit-related insurance. At the time relevant to this litigation, Beneficial's board of directors had sixteen members, several of whom were also officers of the company. The defendants consist of fourteen of those sixteen directors.

Plaintiff alleges that in late January 1998, as a result of a ten-percent decline in the price of Beneficial's shares, the management of Beneficial began to consider selling the corporation. On February 16, 1998, the Board of Directors created an ad hoc committee to oversee an assessment of Beneficial's available options. After receiving initial expressions of interest from twenty-nine potential suitors, the committee opted to continue discussions with five of them, including Household. Household was a publicly-held corporation, whose subsidiaries were principally engaged in the business of providing loans to subprime consumers in the United States, the United Kingdom and Canada.

On April 6, 1998, the boards of directors of both Beneficial and Household met to discuss a proposed merger. The next day, the Beneficial board unanimously voted to recommend the transaction to Beneficial's shareholders. The transaction would involve the exchange of Beneficial stock for Household stock.

The Beneficial directors hired the investment firms of Goldman, Sachs & Co. ("Goldman Sachs") and Merrill Lynch, Pierce Fenner & Smith, Inc. ("Merrill Lynch") to examine Household's proposal and to make determinations regarding the fairness of the "exchange ratio" of the respective stock being exchanged in the merger. As part of their review, the investment bankers evaluated certain publicly-available filings and other financial records of Beneficial and Household, and conducted interviews with senior management of both companies.

With the consent of Beneficial's directors, the investment bankers assumed, as reflected in Goldman Sachs' opinion letter, that Household's financial forecasts "have been reasonably prepared on a basis reflecting the best currently available judgments and estimates of Household." Comparable qualifying language appeared in Merrill Lynch's opinion letter. The bankers also deferred to Beneficial's own industry expertise in the evaluation of loan portfolios, and did not review Household's individual credit files or conduct physical inspections of any properties. Subject to these caveats, Goldman Sachs and Merrill Lynch both opined that the stock-for-stock exchange ratio proposed in the transaction was "fair from a financial point of view" to Beneficial's shareholders.

On June 2, 1998, Beneficial transmitted a letter to its stockholders informing them of the proposed merger with Household. The letter enclosed various materials explaining the background of the transaction and the basis for the board of directors' recommendation for its approval. These items included a Form S-4 Registration Statement dated June 1, 1998, filed with the Securities and Exchange Commission (SEC), an Agreement and Plan of Merger, and a Joint Proxy Statement-Prospectus. The Joint Proxy Statement specifically recited that the proposed merger with Household "is fair to, and in the best interests of, Beneficial and its stock holders."

On June 30, 1998, Beneficial conducted a vote of its stockholders on the proposed sale. The sale would result in Beneficial shareholders receiving 3.06666 shares of Household stock, valued at $150.00, for each share of Beneficial stock they owned at the time of the merger. These terms were expected to produce a substantial premium for the Beneficial shareholders, given Beneficial's pre-merger value of $82.25 per share. The stockholders approved the transaction. The following day, July 1, 1998, Beneficial announced completion of the sale.

Plaintiff alleges that before the 1998 sale, Household had been engaged in unacceptable accounting practices, illegal predatory lending practices, and improper "reaging" and "restructuring" of delinquent loans to make those loans appear current. As a result, Household had allegedly overstated its income and concealed the risks involved in an investment in the company.

These improprieties came to light in 2002, some four years after the Beneficial merger. On August 14, 2002, Household's management publicly admitted that the company had falsely reported its earnings for at least four years prior to the July 1998 merger. This revelation led Household to take a $600 million charge against its income and to restate its previously-reported earnings for every fiscal period from the first quarter of 1994 through the second quarter of 2002. Household also entered into a settlement with the attorneys general of all fifty states for predatory lending, resulting in a $525 million charge against Household's past earnings. Plaintiff asserts that, as a result of these wrongful practices, Household's stock was grossly inflated at the time of the July 1998 sale, causing Beneficial shareholders to lose over $4.85 billion.

On June 20, 2004, plaintiff filed a class action complaint for damages against the defendants in the Law Division. The complaint alleged that defendants (1) breached their fiduciary duty of care and loyalty, (2) breached their duty of candor and full disclosure, and (3) acted with gross negligence. The complaint principally focused upon defendants' failure to conduct a due-diligence investigation into the accuracy of Household's reported financial condition before the 1998 sale was consummated. Plaintiff further alleged that the directors breached their fiduciary duties in failing to disclose their lack of due diligence to the stockholders.

Plaintiff also claimed that eight of the defendant directors had personal conflicts of interest, causing them to violate their fiduciary duties of loyalty when they voted to approve the Household transaction. Under Delaware law, the duty of loyalty is breached when a majority of directors, or a dominating voice among the directors, has a conflict of interest in recommending a merger. See Malpiede v. Townson, 780 A.2d 1075, 1084-85 (Del. 2001). Plaintiff specifically alleged that four of the defendant directors received millions of dollars through the merger agreement, and that four other defendant directors received lifetime post-merger annuities ranging from $17,000 to $34,000 annually. Plaintiff further alleged that all fourteen of the defendant directors received an accelerated vesting of certain stock options in Beneficial as a result of the Household transaction.

Defendants moved to dismiss the complaint pursuant to R. 4:6-2(e), contending that it failed to state claims cognizable under Delaware law, which indisputably controls this dispute. In particular, defendants argued that Delaware law has not recognized a shareholder cause of action against directors of a corporation for failing to conduct due diligence into the non-public finances of a company acquiring the stock of that corporation. Defendants also contended that they were protected from liability by an exculpatory provision in Beneficial's certificate of incorporation, pursuant to 8 Del. C. 102(b)(7). Defendants further asserted that plaintiff's conflict of interest allegations were not, as pleaded, supported by a legally-adequate number of board members who would receive substantial personal gain from the merger.

Following extensive oral argument, Judge Ashrafi issued, on February 10, 2005, a twenty-page letter opinion dismissing plaintiff's complaint as a matter of law. The opinion primarily focused upon plaintiff's due-diligence allegations.

In evaluating plaintiff's due-diligence theory, Judge Ashrafi acknowledged that Delaware cases describing the responsibilities of corporate directors in the context of a proposed merger require that such directors be "especially diligent" and "adequately informed." However, he further noted that no published Delaware case had recognized a specific duty of directors to conduct a due-diligence investigation of the accounting and business practices of the acquiring company. As Judge Ashrafi observed:

Household's illegal or improper practices were not discovered until four years after the merger. Only then did the value of Household stock go down. Nowhere under Delaware law, however, can be found a statute or case that says that directors have a duty to conduct a due diligence investigation of the practices and business methods of the corporation that is acquiring theirs to foreclose the possibility of future revelations of bad conduct.

[Emphasis added.]

Absent Delaware precedent establishing such a duty, Judge Ashrafi concluded that a New Jersey court should not impose one here.

Judge Ashrafi also recognized that the primary duty of directors in a merger, as established by Delaware case law, is to obtain for the stockholders the best price reasonably available in exchange for the selling company's shares. Judge Ashrafi found that duty to maximize the stock price had been fulfilled here, given that the Beneficial directors had secured a value of $150 per share of Beneficial, almost double its pre-merger market price of $82.25 per share. In that regard, Judge Ashrafi noted that plaintiff has "not alleged inadequacy of the acquisition price."

Further, Judge Ashrafi found no violation of a legal duty of disclosure by the defendant directors. He determined that the merger materials contained no misleading statements that would cause Beneficial's shareholders to believe that the directors or the investment bankers had, in fact, performed an investigation into the non-public financial records of Household and were relying on information gleaned from such an investigation. Moreover, Judge Ashrafi reasoned that the duty of disclosure posited by plaintiff could not exist independent of an alleged duty to conduct a due-diligence investigation. Because the latter duty had yet to be recognized under Delaware law, Judge Ashrafi concluded that the complaint's due-diligence allegations failed to state a claim upon which relief could be granted. That conclusion also extended to plaintiff's gross negligence claims, which were also predicated on the directors' alleged failure to investigate Household's financial condition adequately.

Apart from these substantive aspects, Judge Ashrafi also identified concerns of interstate comity and jurisprudential expertise in support of his analysis:

It appears, therefore, that plaintiff Pension Fund seeks from this court a ruling of first impression as to the duty of directors under Delaware law. Plaintiff has not revealed why it seeks such a ground-breaking ruling in an out-of-state jurisdiction. In my view, the courts of New Jersey would be foolish to accept plaintiff's invitation and to delve into these intricacies of the law of corporations in Delaware. The courts of that state are much more experienced and better equipped to consider whether due diligence investigation should be a duty of corporate directors.

A ruling by this court that the Directors had such a duty might reach substantially farther than this case. If a court holds that such a duty exists, every Board of Directors may feel bound to conduct a due diligence investigation of several potential bidders to avoid the risk that the directors might be held personally liable. Imposing such a duty might create a uniform prerequisite to recommending a merger, and it may conflict with the Delaware Supreme Court's statement in Paramount, 637 A.2d at 44, Barkan v. Amsted Indus., Inc., 567 A.2d at 1286-87, and other cases that there is "no single blueprint" that directors must follow in fulfilling their duty of care. This court declines to impose such a duty when no published opinion of a court in Delaware has previously found it.

[Emphasis added.]

With regard to plaintiff's conflict-of-interest theory, Judge Ashrafi held that the complaint was deficient in failing to allege facts showing that a majority of the sixteen Beneficial directors had such conflicts when they recommended the Household merger. The complaint only identified eight, not a majority of nine, directors who stood to reap substantial personal gains from the transaction, aside from the yearly annuity that merely replaced the same compensation the directors would have received on the Beneficial board. To cure this shortcoming, the trial court granted plaintiff leave to amend its complaint to add facts showing that a ninth director had likewise gained substantial amounts from the merger.

Based upon these findings, Judge Ashafi dismissed plaintiff's lawsuit in its entirety, but stipulated that "[t]he dismissal is without prejudice so long as any new Complaint does not allege failure to conduct a due-diligence investigation of Household." That disposition made it unnecessary for Judge Ashrafi to reach the directors' separate defense under the so-called "exculpatory provision" of the certificate of incorporation.

Plaintiff moved for reconsideration, which the trial court denied after further briefing and oral argument. Plaintiff also sought leave to amend its complaint in various respects. In denying the reconsideration motion, Judge Ashrafi again emphasized the absence of Delaware case law involving similar facts holding directors to a duty to conduct a due-diligence investigation of the accounting and business practices of an acquiring corporation. The judge reiterated that the presence or absence of such a duty under Delaware law was an issue of first impression, and thus a question of law suitable for resolution on a motion to dismiss. Without Delaware precedent articulating the elements of such a legal duty, Judge Ashrafi found that he lacked a proper basis on which to charge a jury, had the matter gone to trial. He explained:

[A]nd I say Paramount [Paramount v. Commc'ns v. QVC Network, Inc. 637 A.2d 34 (Del. 1994), the leading Delaware case on director responsibility in a merger context] just says very generally that there is a duty to learn material information, and it doesn't say that the duty includes investigating the books and records and business practices of the acquiring corporation. And that's why I can't rely on that case to tell the jury . . . [there is a duty], and since I can't rely on that case, I have to conclude that right now Delaware has not found such a duty in law, and therefore your complaint as you propose it doesn't state a claim.

[Emphasis added.]

Following the denial of its reconsideration motion, plaintiff appealed.

II.

Plaintiff contends that the motion judge misconstrued Delaware law in concluding that the theory underlying its cause of action had yet to be recognized by the courts of that state. The centerpiece of plaintiff's legal argument is the Delaware Supreme Court's seminal opinion in Paramount Commc'ns v. QVC Network Inc., 637 A.2d 34 (Del. 1994). Plaintiff asserts that the general principles of fiduciary responsibility, espoused in Paramount and in various other Delaware cases, supply an ample foundation for the claims it pleaded in this case.

Paramount involved the sale of control of Paramount Communications, Inc. ("Paramount"), a Delaware corporation. The litigation arose out of the proposed acquisition of Paramount by Viacom, Inc. ("Viacom"), through a tender offer and a subsequent merger. At the same time that the Viacom transaction was being considered by Paramount's board of directors, QVC Network, Inc. ("QVC") made an unsolicited competing tender offer for the company.

The Paramount directors favored the Viacom proposal over QVC's proposal, even though the purchase price in QVC's final offer was higher than Viacom's bid. The directors began to pursue steps to facilitate the Viacom deal. Those steps included various agreements that would make it more difficult for a competing tender offer, such as the one advanced by QVC, to succeed. Paramount, supra, 637 A.2d at 38-41.

QVC and several stockholders of Paramount filed an action in the Delaware Chancery Court to enjoin the sale to Viacom, arguing that the Paramount directors had violated their fiduciary duties to the stockholders by attempting to thwart QVC's bid for the company. Id. at 36. The Chancery Court issued an injunction, which the Delaware Supreme Court sustained on appeal. Id. at 45-53.

In upholding the injunction in Paramount, the Delaware Supreme Court construed its state's General Corporation Law, 8 Del. C. 141(a), to require directors, in the specific context of the potential sale of corporate control, "to take the maximum advantage of the current opportunity to realize for the stockholders the best value reasonably available." Id. at 43. The Court described this goal of maximizing the value obtained for the corporation's stock as the directors' "one primary objective," stressing that the directors "must exercise their fiduciary duties to further that end." Id. at 44.

As a corollary to the directors' overall duty to obtain the reasonably available best value for the company's stock, the Delaware Supreme Court also recognized the directors' duty to act reasonably in obtaining information relevant to the proposed sale. In that vein, the Court made the following observations:

In pursuing this objective, the directors must be especially diligent. See Citron v. Fairchild Camera and Instrument Corp., Del.Supr., 569 A.2d 53, 66 (1989) (discussing "a board's active and direct role in the sale process"). In particular, this Court has stressed the importance of the board being adequately informed in negotiating a sale of control: "The need for adequate information is central to the enlightened evaluation of a transaction that a board must make." Barkun, 567 A.2d at 1287. This requirement is consistent with the general principle that "directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them." Aronson, 473 A.2d at 812. See also Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872 (1985).

[Paramount, supra, 637 A.2d at 44.]

The Delaware Supreme Court in Paramount further explained the means by which directors may satisfy these duties:

Barkan teaches some of the methods by which a board can fulfill its obligation to seek the best value reasonably available to the stockholders. 567 A.2d at 1286-87. These methods are designed to determine the existence and viability of possible alternatives. They include conducting an auction, canvassing the market, etc. Delaware law recognizes that there is "no single blueprint" that directors must follow. Id. at 1286-87; Citron[,] 569 A.2d at 68; Macmillan, 559 A.2d at 1287.

In determining which alternative provides the best value for the stockholders, a board of directors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance. See Macmillan, 559 A.2d at 1282 n.29. Instead, the directors should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other non-cash consideration is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternatives.

[Ibid. (emphasis added).]

The Court went on to illustrate various "practical considerations" that may be considered by the Board members including:

[an offer's] feasibility; the proposed or actual financing for the offer, and the consequences of that financing: questions of illegality; . . . the risk of non-consummation; . . . the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests.

Macmillan, 559 A.2d at 1282 n.29. These considerations are important because the selection of one alternative may permanently foreclose other opportunities. While the assessment of these factors may be complex, the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.

[Id. at 44-5 (emphasis added).]

In a related footnote, Paramount suggested that directors obtain expert input on such valuation issues:

When assessing the value of non-cash consideration, a board should focus on its value as of the date it will be received by the stockholders. Normally, such value will be determined with the assistance of experts using generally accepted methods of valuation. See In re RJR Nabisco, Inc. Shareholders Litig., Del. Ch., C.A. No. 10389, 1 989 WL 7036, Allen, C. (Jan. 31, 1989), reprinted at 14 Del. J. Corp. L. 1132, 1161.

[Id. at 44 n.14 (emphasis added).]

Applying these principles, the Delaware Supreme Court held that the Paramount directors breached their duties by pursuing a strategic alliance with Viacom that "dominated their decision-making process," and which caused them to bypass the "opportunity for significantly greater value . . . and enhanced negotiating leverage" presented by QVC's competing bid. Id. at 56-57. "Rather than seizing those opportunities, the Paramount directors chose to wall themselves off from material information which was reasonably available and to hide behind the defensive measures as a rationalization for refusing to negotiate with QVC or seeking other alternatives." Id. at 57. The Chancery Court's injunction was therefore sustained. Id.

Plaintiff highlights these passages from Paramount, as well as comparable general language from other Delaware cases, to support its theory that the Beneficial directors had a legal duty to undertake due diligence and probe more deeply into the financial condition of Household before approving the stock-for-stock acquisition. Plaintiff conceives that a duty to conduct such an investigation into the finances of the acquiring firm is naturally implied by, and within the scope of, Paramount's imposition upon directors of a general duty to become "reasonably informed."

We disagree. We share Judge Ashrafi's conclusion that no published opinion in Delaware has extended the duties of directors to become reasonably informed about the terms of a proposed merger and maximize the value obtained for their shareholders, so far as to require such directors to delve into the non-public books and records of the acquiring company and assess the integrity of that company's financial condition as represented by its own accountants and officers. Plaintiff identifies no published decision in the Delaware courts embracing that proposition. For that matter, plaintiff does not cite, and our own research has not identified, a published opinion from any jurisdiction that has recognized such a specific duty of due diligence.

We have fully considered the reported decisions from Delaware relied upon by plaintiff. None of those cases involves a stock-for-stock acquisition in which directors were held liable for failing to perform a due-diligence investigation of the acquiring company.

For example, in Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985), the Delaware Supreme Court proclaimed, as it later reaffirmed in Paramount, that directors in the context of a merger have a duty, under 8 Del. C. 251(b), "to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders." Id. at 873. Smith, however, is distinguishable from the present case because the defendant directors there failed to investigate adequately the value of their own company and the fairness of the cash purchase price. Id. at 874-75. Smith also did not involve, as here, a stock-for-stock exchange. Id. at 868.

Plaintiff also relies on Barkan v. Amsted Indus. Inc., 567 A.2d 1279 (Del. 1989), in which the Delaware Supreme Court likewise expressed the directors' duty to become reasonably informed about a proposed sale of the corporation and to seek the best value for its shareholders. Id. at 1287. In Barkan, the Court ruled that the directors had acted properly in approving a leveraged buyout of the company without actively seeking other bidders, given that they relied on investment bankers who had vouched for the fairness of the transaction terms. Id. at 1287-88. The buyers were a group of managers inside the company and an employee stock ownership plan. The case did not involve any alleged failure to investigate the financial condition of an outside purchaser.

Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261 (Del. 1989), cited in the briefs of both parties, is also not squarely on point. Mills recognizes, as does Paramount, the directors' "active and direct duty of oversight in a matter as significant as the sale of corporate control." Id. at 1280. Mills further holds that the ultimate oversight role cannot be totally delegated to investment bankers. Id. at 1281. However, Mills involved the manipulation of an auction for the sale of corporate control, not a failure to delve into the financial integrity of the bidders. Id. at 1265-84. Also, unlike the case before us, Mills involved a proposed sale of stock principally for cash, not a stock-for-stock exchange. Id. at 1270.

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), a corporate acquisition case discussed in Judge Ashrafi's opinion, also does not impose on directors a duty under Delaware law to investigate the financial health or business practices of an acquiring company. Revlon, like Mills, also concerned irregularities in a corporate auction, where the defendant directors had made concessions to a bidder that were against the shareholders' best interests in maximizing the corporation's sale price. Id. at 176-79. Revlon did not address any obligation of directors to investigate the bidders' non-public financial records.

Finally, we note that Paramount, as the most recent Delaware Supreme Court opinion cited by the parties on these substantive matters, did not involve a situation where the directors were faulted for not adequately investigating the financial condition of the competing bidders for Paramount, i.e. QVC and Viacom. The alleged failures of the directors in Paramount hinged upon the directors' improper hindrance of fair consideration of QVC's competing bid. Paramount thus offers no illustrative guidance here on its facts.

We do not believe a specific duty to probe into the non-public books and records of a potential merger partner automatically derives from the directors' generic duty to become reasonably informed about the proposed transaction. Nor are we persuaded that the Beneficial directors had a duty to investigate the books and records of Household simply because the pre-merger documents afforded Beneficial with the right of access to those materials. A right does not inexorably carry with it a corresponding duty. Although plaintiff stresses that defendants permitted the investment bankers to opine on valuation without delving into Household's non-public financials, that observation begs the question. Such acquiescence does not create liability for the directors unless a recognized duty under Delaware law was breached.

We share Judge Ashrafi's concern that our imposition of such a duty under Delaware law may well have far-ranging consequences. We conceive that there are numerous competing policy and practical considerations that weigh in favor of, and in opposition to, such a rule. On the one hand, a duty of due diligence might prove useful in confirming that the acquiring company's stock has not been inflated in value through fraudulent practices or false representations and is not doomed to decline in value. On the other hand, the fulfillment of such a duty could prove to be onerous, tying up matters while the internal accounting and business records of potential suitors are pored over, and possibly allowing transactions advantageous to the selling company to slip away with the passage of time. The merits of adopting or rejecting such a rule of law are best committed to the courts and legislature of Delaware, which are entrusted with oversight of the corporate governance of firms incorporated within that state.

Our reluctance to impose a far-reaching gloss on another state's corporations law is fortified by Justice Francis's opinion in O'Brien v. Virginia-Carolina Chem. Corp., 44 N.J. 25 (1965), cert. denied sub nom., O'Brien v. Socony Mobil Oil Co., 389 U.S. 825, 88 S. Ct. 65, 19 L. Ed. 2d 80 (1967), a case relied upon by the trial court. Plaintiff in O'Brien, a preferred shareholder of a Virginia corporation, brought an action in the Chancery Division seeking a declaration that Virginia law entitled her to continuing dividends in spite of a corporate recapitalization forcing preferred stockholders to accept new types of stock. The recapitalization had been approved by the Corporate Commission, a Virginia state agency. After canvassing the Virginia corporate statutes and judicial opinions, our Supreme Court deemed it unclear whether Virginia law would or would not recognize plaintiff's claim to receive continuing dividends in such a recapitalization scenario. O'Brien, supra, 44 N.J. at 40.

Given that lack of clarity in Virginia law, and the importance of the legal issues at stake for Virginia corporations and their constituents, the Supreme Court upheld the Chancery Division's dismissal of plaintiff's lawsuit in the New Jersey courts. As Justice Francis wrote:

There is no doubt that since defendant is a Virginia corporation, validity of the recapitalization plan depends upon application of the law of that state. Ordinarily the courts of one state are reluctant to interfere in controversies involving the internal affairs or management of a corporation of a sister state or in controversies between such a corporation and its stockholders. The basic question, however, is not one of power to exercise jurisdiction but of the wisdom of doing so. In most situations it is desirable to leave such matters to the courts of the state of creation of the corporation. New Jersey recognizes that principle as one of interstate amenity . . . [.]

[Id. at 39 (emphasis added).]

To advance such "interstate amenity," O'Brien lists several factors that "influence [New Jersey courts'] discretion in reaching a decision to reject or to retain such actions" involving the construction of foreign law:

(a) whether the right sought to be enforced or protected is clear; (b) whether the judgment can be enforced; (c) whether enough parties are before the court to enable it to dispose of the entire controversy; (d) whether it would be more convenient for the parties to dispose of the case in the foreign jurisdiction; (e) whether the corporation has stockholders resident in states other than New Jersey and the state of corporate domicile, thus giving rise to the possibility of disparate judicial determinations in a number of states; and (f) whether the controlling law of the corporate domicile state is doubtful or uncertain or the particular statute at the core of the controversy has not been definitively construed or its validity adjudicated in the home state.

[Ibid. (citations omitted).]

At least three of the above factors from O'Brien compel us to stay our hand in meddling too far here into the corporate laws of Delaware. First, as we noted above, we believe that "the right sought to be enforced or protected" is anything but "clear" under Delaware law. In that same vein, we further conclude that "the controlling law of the corporate domicile state is doubtful or uncertain" and that "the particular statute[s] at the core of the controversy" [i.e., the Delaware corporate laws] have "not been definitively construed . . . in the home state." We also presume that as a publicly-traded company, Beneficial, although its holding company was centered in New Jersey, had "stockholders resident in states other than New Jersey and the state of corporate domicile [Delaware], thus giving rise to the possibility of disparate judicial determinations in a number of states."

The cautionary principles of O'Brien in approaching novel legal issues arising under another state's law are not, as plaintiff suggests, altered by Fink v. Codey (In re PSE&G S'holder Litig.), 173 N.J. 258 (2002). Our Supreme Court in PSE&G did look at settled principles of Delaware law as to the futility of a shareholder's pre-litigation demand on a board of directors before filing a derivative action, and the assessment of the directors' response to such a demand under the business-judgment rule. See id. at 279-82. However, our Supreme Court did so in the context of fashioning and articulating the common law of New Jersey, not of Delaware, enabling it to apply those principles to PSE&G, a New Jersey corporation.

All of these factors support Judge Ashrafi's prudent exercise of comity and restraint here. See City of Philadelphia v. Austin, 86 N.J. 55, 64 (1981)(comity is "a courtesy voluntarily extended to another state for reasons of practice, convenience and expediency")(quoting Mast Foos & Co. v. Stoerer Mrg. Co., 177 U.S. 485, 488, 20 S. Ct. 708, 710, 44 L. Ed. 856, 858 (1900); Polyckronos v. Polyckronos, 17 N.J. Misc. 250, 255 (Ch. 1939)).

We are also mindful that the corporations law of the State of Delaware has unique significance on a national scale, given that many companies choose to incorporate there and the strong tradition of complex business litigation in that state. If Delaware is going to recognize the sort of due-diligence obligation for directors advocated by plaintiff, that recognition should come from a Delaware tribunal rather than from a foreign state's court. We are also cognizant that a stock-for-stock exchange in a corporate merger or acquisition is not unusual, which makes the dearth of Delaware case law imposing a duty of due diligence in that particular factual context all the more significant.

Nor do we fault the trial court for resolving the strictly legal question of the presence or absence of a duty under Delaware law on a motion to dismiss before the completion of discovery. Indeed, we believe such an early disposition was prudent before the parties had incurred substantial time and expense in document production, depositions, expert analyses, and the like. The pure legal question, and the related considerations of interstate comity, were ripe for disposition on a motion to dismiss under R. 4:6-2(e). See Banco Popular N. Am. v. Gandi, 184 N.J. 161, 166 (2005)("if the complaint states no basis for relief and discovery would not provide one, dismissal is the appropriate remedy.")(citing Pressler, Current N.J. Court Rules, comment 4.1 on R. 4:6-2 (2005)(citing Camden County Energy Recovery Assocs. v. N.J. Dep't of Envtl. Prot., 320 N.J. Super 59, 64 (App. Div. 1999), aff'd o.b., 170 N.J. 246 (2001)).

 
Accordingly, we affirm Judge Ashrafi's well-reasoned determination, subject to the one modification described in footnote 6.

Affirmed as modified.

Plaintiff asserts that through January of 1998, Beneficial's shares were traded between $76.00 and $83.00 per share. By the completion of the merger on June 30, 1998, after the market had reacted to public announcements of the pending transaction, Beneficial's price per share had risen to $153.18. The intervening post-announcement rise in Beneficial's stock price does not alter our analysis of the issues before us.

Plaintiff has not appealed that aspect of the trial court's disposition dismissing its conflict-of-interest claims without prejudice. We therefore will not comment on the merits of that ruling.

We do not comment on the unpublished cases cited by the parties involving the application of Delaware corporations law. See R. 1:36-3.

For these reasons, we sustain the trial court's dismissal of plaintiff's gross negligence claims based on the same lack-of-due-diligence theory.

Indeed, the record reflects at least one other attempt by other Beneficial shareholders to sue the defendants in state court in Illinois, which was dismissed for lack of in personam jurisdiction.

We do, however, impose one modification upon the trial court's ruling that, quite properly, applied these guiding principles of interstate comity. Specifically, the trial court dismissed plaintiff's due-diligence claims "with prejudice," in contrast to its "without prejudice" dismissal of plaintiff's conflict-of-interest claims. We believe that similar "without prejudice" treatment should be extended to the dismissal of the due-diligence allegations, which may or may not enable plaintiff to refile those claims in the courts of Delaware or in some other forum that may not share our strong deference to Delaware's role in shaping and clarifying its own corporations law. Accord, O'Brien, supra, 44 N.J. at 43 (conditioning New Jersey's dismissal of plaintiff's shareholder claims as the availability of the Virginia courts to resolve those claims). The parties apparently disagree on whether a subsequent action by plaintiff in the Delaware courts would now be time-barred under the relevant statutes of limitation, and we do not have that issue before us. Regardless of whether such litigation in Delaware is or is not now time-barred, we believe that our own disposition should not automatically preclude, under principles of res judicata or otherwise, an effort by plaintiff to seek a resolution of these timeliness concerns in the Delaware courts. Thus, we modify the trial court's dismissal order to the extent that it should continue to bar plaintiff from pursuing due-diligence claims in the New Jersey courts, with a proviso that plaintiff would not be foreclosed by that dismissal from relitigating the substantive due-diligence issue in the courts of Delaware or in another court outside of New Jersey.

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A-3956-04T1

February 24, 2006