Why Notable: This Delaware Chancery decision is essential reading for those involved in corporate litigation who need to know under what circumstances uncoerced and informed stockholder approval will cleanse the vote of a conflicted board and entitle it to the defense of the business judgment rule (BJR) – – when no controlling stockholder is involved either on one-side or on both sides. Larkin v. Shah, C.A. No. 10918-VCS (Del. Ch. Aug. 25, 2016).
Highlights: The background facts of this case feature the increasingly prevalent situation of either a venture capital affiliated stockholder or a private equity affiliated stockholder whose appointed directors are accused of selling the company for less than might have otherwise been negotiated, based on the alleged goal of liquidating their investment early, instead of waiting for a later, perhaps more speculative but potentially more lucrative deal. This opinion provides one of the more pithy restatements of basic corporate governance principles such as the:
1) articulation of the fiduciary duties of directors;
2) presumption of the BJR as a standard of review;
3) when the BJR applies;
4) how the BJR is rebutted.
This opinion also provides an eminently clear articulation and application of the various permutations of one-sided or both-sided controlling stockholder transactions, and what standard of review applies, as well as the standard that applies in this case, where there is no controlling stockholder – – but there is stockholder approval.
An application of the recent Chancery opinion in the Volcano case, and the Supreme Court’s Corwin decision, is also worth the time required to read this 55-page jewel.
Many other important restatements and clarifications of Delaware M&A law are found in this ruling but are not covered in this short overview. This opinion is a likely candidate for one of the most useful opinions of 2016.