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Chancery Dismisses Merger Challenge Concerning Board’s Delegation of Merger Negotiations and Management’s Undisclosed Compensation Discussions

Posted In Fiduciary Duty, M&A

In re Towers Watson & Co. Stockholder Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019).

The ultimate responsibility for considering a merger falls on the board to carry out consistent with each director's fiduciary duties.  But management usually takes the lead role in negotiating with the counterparty.  It is not uncommon for stockholder plaintiffs to make hay out of a board allowing potentially conflicted members of management to pick up that mantle.  Sometimes those circumstances support a claim for breach of fiduciary duty and sometimes they do not.  This motion to dismiss decision addresses claims in that context, with the Court of Chancery finding the case falls in the latter category.

Towers Watson & Co. and Willis Group Holdings plc, two similar professional services firms, planned merger of equals, with: (i) the Towers CEO, John K. Haley designated as the CEO of the combined entity; (ii) the Willis shareholders owning a slight majority of the combined entity; and (iii) Willis paying a dividend to the Towers shareholders to account for the relative market value of the entities. 

Haley led the negotiations for Towers.  The merger’s initial structure included a dividend below $5.00 per share to the Towers shareholders, information that was not well received by the market.  Following announcement, Haley met with a key Willis executive and discussed his possible compensation scenarios, a discussion he never disclosed to the Towers board.  In light of the negative reactions, Towers and Willis eventually renegotiated the merger’s terms.  The dividend amount to Towers shareholders was increased to $10 per share, which Haley had allegedly indicated was the “minimum increase necessary” to get the deal done. 

Shareholder of Towers brought breach of fiduciary duty claims concerning the merger against Haley, the Towers board, and others in the Delaware Court of Chancery.  Briefly, one way a shareholder plaintiff can rebut the business judgment rule based on a material conflict held by a minority of the directors is sufficiently alleging that the conflicted fiduciary failed to disclose his conflict to the board and a reasonable director would have regarded the conflict as a significant fact in evaluating the proposed transaction.  The plaintiffs in this case pursued such a theory, relying on Haley’s undisclosed compensation discussions.  According to plaintiffs, Haley was inappropriately incentivized to get the deal done and had no incentive to demand a dividend higher than the “minimum increase necessary,” circumstances supporting claims against him and the board. 

The Court of Chancery disagreed, first finding deferential business judgment review was the applicable standard.  While alleged fraud on a board by a conflicted fiduciary can rebut the business judgment rule, the Court cited three facts, alleged or inferred, which foreclosed an inference that the Towers board would have found the undisclosed compensation proposal significant.  First, the board knew Haley would likely receive a larger salary when running the combined entity, and so was fully informed of the conflict and the risk when appointing him as lead negotiator.  Second, the board was generally kept apprised of the negotiations.  Third, the compensation discussion in question concerned a mere proposal, and the actual compensation was not negotiated until after the merger closed.  Plaintiffs’ allegations therefore did not trigger entire fairness review and otherwise did not state a non-exculpated claim for bad faith in connection with the board’s delegation and oversight of negotiating responsibility to Haley.