Shaper v. Bryan

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Shaper v. Bryan

State: Illinois

Court: 1st District Appellate

Docket No: 1-05-3849 Rel

Case Date: 03/08/2007

Preview:FOURTH DIVISION March 8, 2007

No. 1-05-3849

SERENE SHAPER and LIONEL BRAZEN, Plaintiffs-Appellants, v. JOHN H. BRYAN, STEPHEN B. BURKE, JAMES S. CROWN, JAMES DIMON, DR. MAUREEN A. FAY, O.P., JOHN R. HALL, LABAN P. JACKSON, JR., JOHN W. KESSLER, ROBERT I. LIPP, RICHARD A. MANOOGIAN, DAVID C. NOVAK, JOHN W. ROGERS, JR. and FREDERICK R. STRATTON, JR., Defendants-Appellees, (Bank One Corporation, Nominal Defendant).

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Appeal from the Circuit Court of Cook County.

Honorable Mary Anne Mason, Judge Presiding.

PRESIDING JUSTICE QUINN delivered the opinion of the court: Plaintiff shareholders of the former Bank One Corporation (Bank One) filed a complaint against certain members of the board of directors (Board), alleging that the Board breached its fiduciary duties during the negotiation and approval of Bank One's merger with J.P. Morgan Chase & Co. (J.P. Morgan). The circuit court granted defendants' motion to dismiss plaintiffs' second amended complaint with prejudice, and plaintiffs now appeal. On appeal, plaintiffs

1-05-3849 contend that the circuit court erred by dismissing their second amended complaint, where plaintiffs alleged sufficient facts to both rebut the presumption of the business judgment rule and substitute a heightened standard of scrutiny for the business judgment rule. For the following reasons, we affirm. I. Background Prior to its merger with J.P. Morgan, Bank One was engaged in the businesses of retail banking, commercial banking, credit card services, investment management and private client services. J.P. Morgan is a global financial services firm engaged in investment banking, financial services for consumers and businesses, financial transaction processing, investment management, private banking and private equity. On January 14, 2004, J.P. Morgan and Bank One announced that J.P. Morgan would acquire Bank One by a merger of the two companies, resulting in what was expected to create the second largest financial institution in the country, measured by total assets. Pursuant to the agreed-upon merger, J.P. Morgan would issue shares of its common stock to Bank One shareholders at a premium of 14% over the closing prices of Bank One common stock on the date of the announcement of the merger. The terms of the merger agreement were included in the joint proxy statement filed with the Securities and Exchange Commission. The merger agreement provided a succession plan for J.P. Morgan. Following the merger, the chief executive officer (CEO) of J.P. Morgan, William B. Harrison, Jr., would continue as CEO for two years, after which time the CEO of Bank One, defendant James Dimon, would succeed Harrison. During the interim two years, Dimon would serve as president and

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1-05-3849 chief operating officer (COO) of J.P. Morgan. Harrison, who was chairman of J.P. Morgan before the merger, would continue in that role indefinitely beyond the two years. The merger agreement also described the compensation Dimon was to receive, following the merger, under his employment agreement with J.P. Morgan. Dimon was provided a "pay pledge," in which he was to receive an annual base salary of $1 million and annual bonuses and equity-based awards no less than 90% of the value of those provided to Harrison. The merger agreement included a provision requiring both Bank One and J.P. Morgan to pay a termination fee to the other of up to $2.3 billion if either party terminated the merger agreement for various reasons, including the failure of a party's board to recommend the merger and the breach by a party of its obligation to call a meeting and use its reasonable best efforts to obtain the approval of its shareholders. The termination fee provision also provided that if the merger agreement was terminated by either party because the required stockholder vote of a party was not obtained at that party's stockholders' meeting and a competing acquisition proposal for that party was publicly announced before its stockholders' meeting, then the party whose stockholders failed to approve the merger would owe the other party one-third of the termination fee and the remaining two-thirds of the termination fee would become payable to the other party if the terminating party enters into an agreement or completes an acquisition within 18 months of the termination of the merger agreement. The termination fee provision also provided that if: (1) the merger agreement was terminated by either party because the merger had not been consummated by January 14, 2005, or because of a material breach by the other party that causes a condition to the merger to not be satisfied; (2) a competing acquisition proposal for a party was

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1-05-3849 made before the merger agreement was terminated; and (3) after the announcement of the competing acquisition proposal, the party for which the competing acquisition proposal was made intentionally breached any of its representations, warranties, covenants or agreements and the breach materially contributed to the failure of the merger to become effective, then the party that committed the breach will owe the other party one-third of the termination fee, and if within 18 months after this termination of the merger agreement the breaching party enters into an agreement for, or completes, an acquisition proposal, the remaining two-thirds of the termination fee will become payable to the other party. The merger agreement also included a reciprocal stock option agreement between J.P. Morgan and Bank One, in which each party granted the other an irrevocable option to purchase, in whole or in part, up to 19% of its outstanding common stock. The stock option granted by Bank One had an exercise price of $44.61 a share, and J.P. Morgan's stock option had an exercise price of $38.90 a share. The stock options could be exercised, in whole or in part, if the merger agreement is terminated because the breaching company changes or withdraws its recommendation of the merger, recommends an alternative merger, or fails to call its shareholders' meeting to vote on the merger, or if a third party acquires 20% or more of the company. The merger agreement further described Bank One's negotiation and investigation of the proposed merger. The Board of Bank One conducted several meetings with legal and financial advisors in January 2004, to review and discuss strategic considerations relating to the proposed merger, the due diligence review of J.P. Morgan, the status of discussions regarding the terms of

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1-05-3849 the proposed merger, and financial information regarding the proposed merger. The Board received a formal opinion from Lazard, Fr

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