Chancery Allows Some Claims to Proceed in Connection with Merger
Chen v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. April 8, 2014).
Why this Case is Noteworthy: This Delaware Court of Chancery opinion addresses the standard of review applicable in a merger that is challenged on Revlon grounds, and the exculpatory provisions that protect directors from some claims. It is 78-pages long and includes 22 substantive footnotes. A short blog post cannot “do justice” to all the nuances and salient features of this exemplary opinion, but several key points should be highlighted:
● The Court granted summary judgment to the directors in this challenged merger suit based on the exculpatory provisions of the corporate charter pursuant to DGCL Section 102(b)(7). However the Court allowed claims to proceed to trial regarding disclosure allegations.
● The Court noted however, that the officers were not able to invoke the exculpatory provision because Section 102(b)(7) only applies to directors.
● The Court discusses and distinguishes between the standard of conduct and the standard of review that applies to corporate fiduciaries when determining whether they have breached their duties. “The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.” (citing In Re Trados Inc. S’holder Litig.) (Trados II), 73 A.3d 17, 35-36 (Del. Ch. 2013).
● The Court reviewed the well known three tiers of review for evaluating director decision-making: “The business judgment rule, enhanced scrutiny, and entire fairness.”
● The Court observed when those standards of review would apply and acknowledged that the standard of review “is more forgiving of directors and more onerous for stockholder plaintiffs than a standard of conduct.”
● Rejecting the argument of the defendants, the Court explained that if the plaintiffs prove at trial that the defendants committed a non-exculpated breach of the fiduciary duty of disclosure, then damages can be awarded using a quasi-appraisal measure. The Court stated that it is not true that simply because the merger closed and because it was neither a short form merger or a merger involving a controlling stockholder, that it was no longer possible for the Court to award a remedy for the breach of the duty of disclosure.
● The Court explained that similar to duties under Revlon and its progeny, the duty of disclosure is not an independent duty but rather the application of the board’s fiduciary duties of care, good faith and loyalty. It was not clear at this stage of the proceedings whether the disclosure violations resulted from a breach of the duty of loyalty or the duty of care. Of course, the exculpation provision would only bar claims resulting from a breach of the duty of care.
For professorial commentary on this case, and the reasoning around the Court’s application of the enhanced standard of review, I refer the reader to the two scholarly commentaries by Professor Bainbridge regarding this decision, available here and here. [It is much easier for a tenured professor to be critical of a court decision than a lawyer who tries to make a living before the author of these opinions.]