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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Chancery Dismisses Stockholder Claims that a Minority Owner was a Controlling Stockholder or that a Majority of the Board was Beholden to the Minority Owner in Approving a Merger Transaction with the Minority Owner
When as here a Delaware corporation’s charter contains an exculpation provision under Section 102(b)(7) of the Delaware General Corporation Law, stockholders who bring suit against directors who approve a merger transaction must allege violations of the duty of loyalty to state a non-exculpated claim. They may state such a claim if they adequately plead that a controlling stockholder breached duties for self-interested reasons, or that a majority of the board was self-interested or beholden to the buyer. They may also attempt to state a non-exculpated claim by claiming that a majority of the board acted in bad faith. To meet this bad faith standard, a plaintiff must plead facts showing that the decision to approve the transaction lacked any rationally conceivable basis associated with maximizing stockholder value. As the Court explained, allegations of mis- or non-disclosure will not suffice unless plaintiffs plead intentional misstatements or omissions based on a “factual narrative that would allow any inferential explanation of why these fiduciaries would so abandon their duties as to engage in bad faith." (emphasis in original).
In this decision, the Court of Chancery dismissed a stockholder class action attacking a merger transaction with a 12% stockholder. The 12% stockholder had proposed an all cash-transaction at $12.80 per share. At the time of the offer, the Company had pending a merger agreement with a different party for a stock-for-stock merger transaction that its financial advisor had valued at a range of $13.30-$23.90 per share (of which $8.35 to $11.25 per share was from estimated synergies). In spite of the facially higher value of the existing merger agreement, the Company abandoned the stock-for-stock merger transaction and accepted the 12% stockholder’s offer. The Court rejected plaintiffs’ claim that the 12% stockholder owed fiduciary duties as a controlling stockholder because plaintiffs failed to allege majority ownership or that the buyer exercised “such formidable voting and managerial power that, as a practical matter …. it had majority voting control.” Similarly, the Court rejected plaintiffs’ claim that a majority of the board was interested or lacked independence for lack of a well-pleaded factual predicate that would allow for a director-by-director analysis. The Court noted that the mere fact that the disinterested board preferred a cash deal at $12.80 per share to a stock deal at a potentially higher value was not so unusual as to reflect bad faith or a breach of the duty of loyalty. Finally, the Court held that plaintiffs had failed to allege non-exculpated claims based on disclosure violations because the alleged disclosure errors not only were not material but also were not adequately alleged to be knowing or intentional misrepresentations or omissions.