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Chancery Upholds Claim that CEO Breached Her Duty of Care Relating to a Misleading Proxy Statement

City of Warren General Employees’ Retirement System v. Roche, C.A. No. 2019-0740-PAF (Del. Ch. Nov. 30, 2020)

This case illustrates that an officer’s support for a sale of the corporation does not trigger the “entire fairness” standard where a majority of the members of the board of directors are not alleged to have been interested or lacked independence, and the plaintiff’s allegations otherwise do not support that the officer deceived the board. As also illustrated here, however, materially incomplete or inaccurate disclosures in a proxy statement may state a non-exculpated claim against officers for a breach of the duty of care.

Here, the private equity firms Silver Lake Partners, L.P. and P2 Capital Partners (collectively, the “Buyers”) acquired Blackhawk Network Holdings, Inc. (“Blackhawk”) in a going-private transaction (the “Buyout”). A stockholder-plaintiff argued that two Blackhawk officers (the “Officers”) breached their fiduciary duties by manipulating Blackhawk’s board (the “Board”) to vote for the Buyout in order to secure their employment and receive additional benefits from the post-Buyout entity.   

Following Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1279 (Del. 1989), the Court dismissed the loyalty claim based on the Officers’ alleged self-interest, because the plaintiff had not alleged that anyone communicated a concrete threat to their continued employment. The Court stated that it would not infer a threat from the general proposition that activist stockholders often seek to remove officers from their positions. Here, there were no reliable allegations that the Officers feared for their jobs. An activist investor allegedly posing that threat had sold its stock before Silver Lake and P2 made their first offer for Blackhawk. Finally, the Court also found that there was no reason to believe that a payout or employment in the post-Buyout entity motivated the Officers, because the Complaint did not allege that the Officers had discussed their employment prior to closing the transaction.

The Court did find, however, that plaintiff sufficiently alleged that one of the Officers, the CEO, breached her duty of care by approving a misleading proxy statement. The plaintiff alleged that the proxy statement failed to disclose growth projections for Blackhawk that included potential acquisitions, metrics that the Board discussed in depth. The proxy statement disclosed other aspects of the same projections, but omitted this information. The plaintiff stated a claim for breach of duty of care because (1) the CEO was involved with the preparation of the proxy statement and signed the statement, and (2) a reasonable investor would have wanted to know this information in determining how to vote. The Court also found that the plaintiff adequately alleged that the proxy statement was misleading, because it improperly described the go-shop provision in the merger agreement. Because Section 102(b)(7) of the Delaware General Corporation Law does not exculpate officers, the Court sustained the claim against the CEO for breaching her duty of care. 

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