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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Court of Chancery Awards $4.8 Million, Plus Interest, to Minority Shareholders for Damages Suffered from Director Defendants' Breach of the Fiduciary Duty of Loyalty
Oliver v. Boston University, C.A. No. 16570-NC, 2006 WL 1064169 (Del. Ch. Apr. 14, 2006). Defendant Boston University ("BU") was the controlling shareholder of Seragen, a financially troubled biotechnology company. Plaintiffs, a group of former minority stockholders of Seragen's common stock, challenged certain transactions before Seragen was merged and the process by which the merger proceeds were divvied up. The plaintiffs contended that the BU defendants breached their fiduciary duties to Seragen's common shareholders by approving various financial transactions, which were not fair to the common shareholder as a matter of price and process. The Court of Chancery awarded damages in excess of $4.8 million plus interest for breaches of the fiduciary duty of loyalty.
The aggregate consideration for the Seragen merger was approximately $75 million. To determine how to best allocate the proceeds of the merger, the BU defendants negotiated primarily among themselves to establish the discounts they were willing to take on their various investments, while at the same time taking into consideration the least amount of proceeds that would be necessary to divert to the common stockholders in order to avoid the exercise of appraisal rights for more than ten percent of the common shares. The Court of Chancery determined that the allocation of the merger proceeds was a self-interested effort that raised significant doubts about the director defendants' loyalty because these parties stood on both sides of the transaction and sought to gain, for themselves or for BU, at the expense of the common shareholders. The majority of the Seragen board was controlled by BU as five out of the six directors had a substantial stake in the outcome of the negotiation (either personally or because of their relationship with BU). Because the transaction was in violation of the duty of loyalty, the BU defendants had the burden of demonstrating entire fairness--fair dealing and fair price. The court found that the defendants did not demonstrate the entire fairness of the overall allocation, and that the plaintiffs suffered actual harm from the BU defendants' breaches of fiduciary duty.