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Chancery Confirms that, Without More, Threat of Proxy Contest from Activist Investor is Insufficient to Render Director Defendants Conflicted in Sale Transaction

Rudd v. Brown, C.A. No. 2019-0775 MTZ (Del. Ch. Sept. 11, 2020)

The Court of Chancery recently confirmed that the threat of a proxy contest from an activist investor alone was insufficient to render director defendants conflicted in a post-closing challenge to a sale of the company. Here, an activist investor that acquired a significant stake in the corporation expressed dissatisfaction with the board of directors for not exploring a potential sale of the company. Thereafter, the company announced that it would explore strategic alternatives. The company then entered into a cooperation agreement permitting the investor to appoint three members of the nine member board in exchange for not mounting a proxy fight. The strategic process resulted in a sale to a financial acquirer. The plaintiff then brought suit against the company’s board of directors and an officer alleging that that board’s acceptance of an inadequate offer was motivated by self-interest to avoid a proxy contest.

Addressing defendants’ motions to dismiss, Vice Chancellor Morgan T. Zurn reasoned that Delaware courts have been reluctant to find that a looming proxy contest alone renders directors conflicted. The Court distinguished the few cases that plaintiff cited as involving allegations of gross negligence or disloyalty over and above the potential proxy contest. There were no allegations that the directors revised their own compensation structures to benefit from a change in control (as in In re Tangoe, Inc. Shareholders Litigation, 2018 WL 6074435 (Del. Ch. Nov. 20, 2018)), or “rubber-stamped” a self-dealing sale of important assets to an incoming CEO to resolve the proxy context (as in Koffeff v. Ciocia, 2006 WL 2337593 (Del. Ch. Aug. 3, 2006)), or that the directors had repeatedly initiated a sale process in response to activist pressure and ultimately agreed to sell at a price that was less than what they had indicated was fair value (as in In re PLX Technology Inc. Stockholders Litigation, C.A. No. 9880-VCL (Transcript) (Del. Ch. Sept. 3, 2015)). Here by contrast, conclusory allegations that the defendants feared a costly and embarrassing ouster, without more, “have no logical force” and were insufficient to support a finding of director conflict. Because the plaintiff could not sufficiently plead a non-exculpated claim against the directors in connection with the merger, the Court granted their motion to dismiss.

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