O'Reilly v. Transworld Healthcare, Inc.

In November 1996, Health Management, Inc. (HMI) entered into stock-purchase and merger agreements with Transworld Healthcare, Inc. (Transworld) (defendant). Pursuant to the stock agreement, Transworld agreed to purchase 49 percent of HMI’s stock for $1 per share, had an option to buy an additional 2 percent of HMI’s stock, and agreed to acquire HMI’s senior debt, extend HMI’s senior-debt-payment deadline, and make additional loans. Pursuant to the merger agreement, Transworld agreed to purchase HMI’s publicly traded stock for $2 per share. In January 1997, Transworld advised HMI that due to HMI’s adverse business results, Transworld would not consummate the merger unless HMI reduced the stock price to $1.50 per share. HMI’s board agreed on January 13; Transworld purchased 49 percent of HMI’s stock that day. Transworld sought an additional price reduction after due diligence, which allegedly revealed that HMI had no equity value, leading Transworld to state that it was interested in the merger only because it owned significant HMI equity. On March 26, the parties agreed to a $.30 per-share price. Also on March 26, Counsel Corporation expressed interest in buying an HMI business line. HMI’s board of directors (defendants) declined to explore a Counsel deal because Transworld stated that Counsel discussions could jeopardize the merger. On June 16, HMI distributed a proxy statement seeking shareholder approval for the merger, which HMI’s shareholders approved on July 11. The merger was completed on October 1. On October 10, Transworld sold HMI’s assets to Counsel at a profit. HMI shareholder Kathleen O’Reilly (plaintiff) sued Transworld and HMI’s former board, alleging that they breached their fiduciary duties of disclosure because the proxy statement falsely stated that (1) Transworld intended to operate HMI’s business and (2) Transworld and HMI negotiated at arm’s length. O’Reilly also claimed that the $.30-per-share price was unfair. O’Reilly sought damages on her disclosure claim based on the alleged inadequacy of the deal price. Transworld and HMI’s former board responded that Transworld did not have discussions with Counsel about selling HMI to Counsel until after the merger was approved, the proxy statement adequately disclosed the negotiation circumstances so shareholders could judge whether they were arm’s length, and O’Reilly was limited to nominal damages.