Chancery Allows Claims Against Ron Burkle in Challenged Transaction

OTK Associates, LLC v. Friedman, C.A. No. 8447-VCL (Del. Ch. Feb. 5, 2014).The Yucaipa Companies A few takeaways from this Court of Chancery opinion involving a challenged recapitalization of Morgans Hotel Group by investor Ron Burkle include the following:

(i) if the court finds a breach of the duty of loyalty by a director, the absence of specific damages to the beneficiary will not prevent the claim from proceeding, and the court will be far-reaching and creative in an effort to find a way to impose a penalty on the faithless fiduciary. See, e.g., Thorpe v. CERBCO, Inc., 676 A.2d 436 (Del. 1996).

(ii) the court found that well-known investor Ron Burkle had effective control of the Morgans Hotel Group and his allegedly heavy-handed orchestration of the disputed transaction filled more than half of the 47-page opinion, a rather routine length of a Chancery decision. Point: when the court devotes that much space to the details of alleged wrongdoing, the result will not be favorable for the defendant.

(iii) the test in Braddock v. Zimmerman, 906 A.2d 776, 786 (Del. 1996), is applied to determine how Rule 23.1 interfaces with a new independent board that is in place at the time of an amended complaint, as compared to the board in place when the original complaint was filed.

(iv) the court refused to enforce a New York forum selection clause governed by New York law, in one of the agreements involved in this case. One claim was that the agreement was unenforceable due to the breach of fiduciary duties that were governed by Delaware law. The court used the analogy of a non-Delaware forum selection clause in a merger agreement not restricting shareholders suing sell-side fiduciaries in Delaware for breach of fiduciary duty claims based on that merger agreement.

(v) this case provides a helpful example of those instances where the exculpation provisions of DGCL Section 102(b)(7) would not support a summary dismissal of claims against directors. That is, this case presented sufficient facts to rebut the business judgment rule and called into question the disinterestedness and independence of the board. Importantly also, the entire fairness standard applied and based on the specific allegations, it was not possible to hold at this stage of the proceedings that the claims solely implicate a duty of care.