In Globis Partners, L.P. v. Plumtree Software, Inc., et al. (Del. Ch., Nov. 30, 2007), read opinion here , the Chancery Court addressed claims that the directors of a company breached their fiduciary duties by selling the company for an inadequate price. Hat tip to Rachel Jacobs of the Wilmington office of Skadden for forwarding the opinion to me.
Question for Readers: This blog post is longer than most, not because the topic is recondite, but rather due to the topic being important. For those who make it to the bottom of this post, you will see that it is not quite clear to me why the Revlon case is only mentioned once in this 41-page opinion even though a key claim addressed is that the company should have been sold for a higher price. I hazard a guess below, but if anyone can enlighten me, I would be much obliged.
In granting the Amended Motion to Dismiss, the Court began its analysis by recognizing that claims that the directors agreed to sell the company for an inadequate price are generally protected by the business judgment rule unless sufficient facts are alleged to support a reasonable inference that the directors breached their fiduciary duties, thereby overcoming the presumption by changing the standard of review from business judgment to entire fairness.
The Court recited the basic tenets of Delaware corporate law by reiterating that the affairs of Delaware corporations are managed by the board of directors, who owe to shareholders a duty of unremitting loyalty. However the Court noted that when a board has decided to sell the company for cash or engage in a change of control transaction, it must act reasonably in order to secure the highest price reasonably available (citing Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173,184 (Del.1986)).
The Court repeated the familiar formulation of the business judgment rule as a “presumption that in making a business decision the directors of a corporation acted on informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company” (citing Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984)). The Court further observed that the analysis applied when a business decision of the directors is questioned, is “primarily a process inquiry” and if the proper process is employed, the Court will not apply an objective reasonableness test to examine the wisdom of the decision itself. The burden is on the party challenging the decision to establish facts rebutting the presumption. If the rule is rebutted, the burden shifts to the directors to prove the “entire fairness” of a challenged transaction to the shareholder plaintiff (citing Emerald Partners v. Berlin, 787 A.2d 85, 91(Del. 2001)).
The Court next analyzed whether sufficient facts were alleged to subject the merger decision to an entire fairness analysis.
The plaintiff did not allege a violation of the duty of care in the context of the merger approval, but rather the amended complaint alleges breaches of the duty of loyalty based on the allegations that the merger was, in effect, a “pretext”, at an inadequate price, to shield the directors from personal liability for future derivative actions and to enable them to obtain valuable benefits for themselves.
The Court then reviewed the familiar standards for determining when a director is “interested”, as when she receives a personal financial benefit from the transaction that is not equally shared by the stockholders or when a corporate decision will have a materially detrimental impact on the director but not the corporation or its stockholders (citing Rales v. Blasband, 634 A.2d 927, 936(Del. 1993)).
In connection with concluding that the plaintiff did not plead sufficient facts to support an inference that the directors approved the merger to evade derivative litigation relating to a prior accounting problem, the Court referred to the Delaware Supreme Court decision in Lewis v. Anderson, 477 A.2d 1040, 1046 (Del. 1984), which addressed the standing of shareholders to pursue derivative claims. The Court stated that it was not clear what the plaintiff was alleging, to the extent that they were either alleging that the merger was a pretext to deprive shareholders of standing for a derivative suit or that the directors were interested in the merger such that the Court should review the transaction under an entire fairness standard. The Court recognized that “the vast majority of plaintiffs” in past cases have failed to establish the interestedness of directors especially because the mere threat of personal liability for approving a transaction, standing alone, is insufficient to challenge either the independence or the disinterestedness of directors (citing Rales v. Blasband, supra, and In re infoUSA, Inc. S’holders Litig., 2007 Del. Ch. LEXIS 123, at *58 (Aug. 13, 2007)).
In sum, applying the analysis in Lewis v. Ward, the Court found that the complaint did not sufficiently plead any of the following three prerequisites: (1) that the directors faced substantial liability; (2) that the directors were motivated by such liability; (3) that the merger was pretextual.
The Court remarked that the plaintiff appeared to be making a Caremark duty of oversight claim (see In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del.Ch. 1996).
Referring to a Caremark claim as “possibly the most difficult theory in corporation law upon which a plaintiff may hope to win a judgment”, the Chancery Court cited to the recent Delaware Supreme Court decision confirming the Caremark analysis, in Stone v. Ritter, 911 A.2d 362, 370 (Del. 2006).
The Chancery Court found that the plaintiff: neither alleged that Plumtree “had no system of controls that would have prevented the [liability creating activities, nor] that there was sustained or systemic failure of the board to exercise oversight.” The Court also explained why it found that the other two requirements of Ward were not met, including a discussion of why the compensation that the directors received was not sufficient to establish their lack of disinterestedness.
Lastly the Court analyzed the claims of breach of fiduciary duty based on the allegedly “materially false and misleading proxy” due to allegedly inadequate disclosures. The Court referred to the cases in Delaware that adopted United States Supreme Court’s definition of materiality, including recent Delaware disclosure opinions in the cases of In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 208 n.115 (Del. Ch. 2007 (quoting In re Staples Inc. S’holders Litig., 729 A.2d 934, 954 (Del. Ch. 2001)); and In re CheckFree Corp. S’holders Litig., 2007 Del.Ch. LEXIS 148, at *89 (Nov. 1 2007). The Court found that the following details did not need to be disclosed:
(i) the exact amount of the investment banker’s fees;
(ii) projections that were not reliable (i.e., in this case, no projections at all); nor
(iii) the identity of third parties contacted as potential merger partners.
Finally, based on the Amended Motion to Dismiss that included an argument that relied on the provision in the charter insulating the directors from personal liability provided by Section 102(b)(7), and cases finding that a disclosure violation is a breach of the duty of care as opposed to the duty of loyalty, even if there were a failure to disclose, the directors would be protected from those claims by the Section 102(b)(7) provision. Moreover, the Court found nothing in the complaint that would allow it to infer that any of the alleged breaches was anything other than a good faith, erroneous judgment.
Notably, the Revlon case was only referred to once in the 41-page opinion and was not included (beyond its initial citing) in the 14 or so pages of the opinion that discussed the business judgment rule and the standard of review. I suppose one might take from the foregoing that because the Court found that the complaint did not sufficiently rebut the presumption that the directors were both independent and disinterested, it did not matter for purposes of the conclusion whether the Revlon or the “standard” BJR applied.
Here is a review of the case on the Harvard Corporate Governance Blog.
UPDATE: Here is a copy of the amended complaint in the event any readers are interested in it.
