About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 181 posts in Fiduciary Duty.
It is not easy to sufficiently plead a bad faith breach of fiduciary duty by a board in approving a merger when a majority of the directors were disinterested and independent. One basis for such a bad faith breach might be that the board approved a merger where management extracted side deals, such as employment arrangements with the post-merger entity or performance-based sale bonuses. As this decision explains after reviewing the precedent, an extreme set of facts is required to survive dismissal on this theory.
Under M&F Worldwide, the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders if, from the outset of the negotiations, the controlling stockholder conditions the merger on both (i) negotiation and approval by a special committee of independent directors, free to select its advisors, empowered to say no, which fulfills its duty of care, and (ii) approval by an uncoerced, fully informed majority-of-the-minority vote. Compliance with M&F Worldwide limits plaintiffs to untenable waste claims. Significantly, this decision extends M&F Worldwide to circumstances where the controlling stockholder is a seller, rather than the buyer, and may have engaged in a conflicted transaction based on alleged side deals. The decision also holds that the dual protections of M&F Worldwide must apply from the start of the negotiations with the controller to be given effect.
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.
While directors have the right to issue options, when the grant is to themselves and there are specific facts suggesting unfairness, those directors will have the burden of proving the grants were entirely fair in a stockholder challenge. The same is true when stock is issued conditioned on an agreement to vote that stock as the directors wish.
This is an important decision if only because it explains a further limitation on the Corwin rule that an informed uncoerced stockholder vote insulates a corporate transaction from attack. First, the decision explains when a minority stockholder is a “controller” for purposes of even being able to avoid Corwin. That decision does not apply to transactions with a controller. Merely being able to appoint some of the directors does not make one a controller, at least when the certificate of incorporation limits the power of that stockholder to dictate corporate action. More ›
This is an interesting decision because it examines an intriguing legal theory for holding a controlling stockholder liable in a sale: the “known looter” theory. Generally speaking, controllers can sell their stock to whoever they want. After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company. Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.
This decision is a primer on most of the major issues in Delaware corporate law. However, what it is most likely to be remembered for is its explanation of the duties that directors have to the enterprise as a whole, even when they are elected by or beholden to preferred stockholders. Thus, it has big implications for venture capital investors. Briefly, the decision holds that it may be a breach of the directors’ fiduciary duty to cause the corporation to sell off parts of its business to satisfy a liquidation preference of its preferred stockholders. More ›
This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock). As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner. More ›
Directors may face liability for a failure of oversight that caused the company to suffer a loss, often involving fines imposed by various authorities. Claims alleging this oversight liability under Delaware law are governed by the famous Caremark standard. A considerable hurdle for the plaintiff is the Caremark standard’s sometimes overlooked scienter requirement—the need to show bad faith, meaning that the directors knew that they were not discharging their fiduciary obligations. This decision carefully analyzes a complaint’s allegations and the Caremark precedent to conclude the complaint should be dismissed for failure to meet that test.
Revenue projections are an inexact science, but they should have some basis in fact. Where they are alleged to be without a basis in reality, and indeed contrary to reality, a court may, as here, find that an officer’s fiduciary duties are implicated.
This decision holds that Revlon duties are not implicated by a decision to liquidate a company. Hence, the Court will not scrutinize whether the board sought to get the best possible deal for company assets. The decision is also helpful in reminding us that a stockholders’ agreement is not necessarily binding on the company’s board of directors who have not signed the agreement in their personal capacity.
This decision is helpful in clarifying that claims alleging disclosure violations in a proxy statement need to be pressed before a merger closes. After the merger, those claims are for damages and all the hurdles for such a claim, such as the director exculpation provisions in most charters, will usually defeat the claim absent bad faith.
This is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of the deal involving a controlling stockholder who suffers from a conflict in the merger. More ›
In addition to explaining the seldom-used doctrines of mutual, running accounts and continuing wrongs as exceptions to the running of the statute of limitations, this decision is important for its review of when a claim of breach of duty may be tolled. A plaintiff cannot simply stand by without using means available to her to monitor her investment and then claim her case was tolled. While it is still possible to show a claim was inherently unknowable or that the plaintiff justifiably relied on a fiduciary to not seek information, the more sophisticated the plaintiff the less those exceptions to the running of the statute of limitations will apply.
This decision applies the Corwin doctrine to dismiss a suit attacking a merger that received stockholder approval. It explains that approval by a fully-informed, uncoerced majority of disinterested and independent stockholders invokes the business judgment rule standard of review – leaving waste as the only grounds to attack the transaction. Interestingly, the decision still examined whether the plaintiffs had alleged a basis for entire fairness review. Here, those allegations concerned whether a majority of the directors were either self-interested in the transaction or were manipulated by improper conduct.