Chancery Addresses Fiduciary Duty Claims Related To Financial Statements Created For Merger
In re Baker Hughes Inc. Merger Litigation, C.A. No. 2019-0638 AGB (Del. Ch. Oct. 27, 2020).
This decision arose out of a merger involving Baker Hughes and the oil and gas segment of General Electric (GE). Stockholders of Baker Hughes brought post-closing breach of fiduciary duty claims against certain officers of Baker Hughes and aiding and abetting claims against GE, with the allegations focused on certain financial statements provided by GE in connection with the merger. GE did not maintain separate statements for its oil and gas business line in the ordinary course. The parties accounted for this by having GE prepare unaudited financial statements for that business line and conditioning closing obligations on GE providing audited financial statements that did not differ materially in an adverse manner.
In the ensuing lawsuit, the Court of Chancery dismissed the aiding abetting claim against GE for lack of a predicate breach of fiduciary duty by the Baker Hughes’ board, but upheld a claim for breach of fiduciary duty against the Baker Hughes’ CEO. Among the relevant rulings, the Court rejected the stockholder-plaintiffs’ theory that GE caused the disinterested and independent board of Baker Hughes to breach its fiduciary duties by creating an informational vacuum that induced the board to strike an allegedly bad deal based on the unaudited financial statements. Applying Revlon enhanced scrutiny, and citing in part the protections Baker Hughes secured in the merger agreement, the Court found that the Baker Hughes’ board acted reasonably in the circumstances of GE’s consolidated reporting practices. The Court also distinguished the “informational vacuum” decisions advanced by plaintiff (i.e., Rural Metro, PLX, KCG, and TIBCO). Unlike the arms’ length circumstances of this action, each of those cases “involved a player – privy to the internal deliberations or process of a target board that had conflicting financial interests – who deliberately withheld material information from the board, thus casting doubt on the integrity of a sale process.”
The Court, however, upheld a claim against Baker Hughes’ CEO for allegedly breaching his fiduciary duties in connection with the company’s proxy statement. The Court found that the omission of the unaudited financial statements from the proxy in the circumstances was an omission of material information supporting a disclosure violation. This was true even though the information contained in those statements was publicly available in GE’s SEC filings because, as the Court explained, Delaware law “does not impose a duty on stockholders to rummage through a company’s prior public filings” to obtain potentially material information. This disclosure violation prevented the stockholder vote approving the deal from invoking business judgment review under Corwin and supported a claim against the CEO, who was involved in the negotiations, signed the proxy, and conceivably may be liable for breaching his duty of care.