In connection with analyzing claims that certain defendants aided and abetted breaches of the directors’ fiduciary duties, a recent Court of Chancery opinion provides an exemplary recitation of important fundamental principles of Delaware corporate law. The court’s decision in the case of In re PLX Technologies Inc. Stockholders Litigation, Cons. C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018), is a 136-page mini-treatise that explains key tenets of Delaware corporate law in the context of a challenged acquistion.
This Chancery decision provides a cautionary tale of how a substantial stockholder who successfully waged a proxy battle to put his nominees on the board should not conduct the sale of the company in order to maximize short-term profit for that stockholder. The major stockholder in this case made himself the Chairman of the Board and then he was appointed as the head of a special committee to consider the sale of the company. His goal was not to satisfy Revlon duties, but to maximize his profits on his recently acquired stock.
Although no damages were proven, the court criticized how the major stockholder “gamed the system” and aided the breach of fiduciary duties. Due to a settlement of the claims against most of the original defendants, the only remaining claim addressed in this post-trial decision is a claim of aiding and abetting breach of fiduciary duty.
Key Issues Addressed:
The court’s comprehensive analysis of the law, and thorough application of the facts, provides a textbook explanation of the fiduciary duties of directors and the applicable standards of care and standards of review that the court applies when challenges are made to the sale of a company. The specific issues related to the court’s finding that the directors breached their duty of disclosure when recommending that stockholders tender, both by (i) failing to disclose communications with a potential acquirer and its investment bank (that also was engaged by PLX); and (ii) by depicting recent projections as (falsely) being prepared in the ordinary course of business.
Highlights of Key Fundamental Delaware Corporate Law Principles:
The highlights of this decision provided below in bullet points are based on an assumption that the reader has a basic familiarity with the relevant concepts. The modest goal is to refer to the page or footnote in the Slip Opinion that an interested reader can turn to for a review of the exemplary treatment by the court of important principles.
I) Existence of Fiduciary Duties:
- The court provides a classic definition of the fiduciary duty of loyalty and due care owed by corporate directors–as well as the subsidiary element of good faith. See page 73.
- The opinion recites the elements of a claim for aiding and abetting the breach of a fiduciary duty. See page 72.
- Regarding the potential basis to question the proper motives for actions taken by those obligated to act in the best interests of others, the following quote from footnote 412 is worth keeping handy for future reference:
Greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, . . . shame or pride. Indeed any human emotion may cause a director to place his own interests, preferences or appetites before the welfare of the corporation. RJR Nabisco, 1989 WL 7036, at *15
- The court explains the context-specific formulations of fiduciary duty, for example, when a corporation is for sale. See page 74 and footnotes 412 and 413.
- The court describes the fiduciary duty of disclosure–which is not a separate duty but rather derives from the duties of care and loyalty–for example, when directors seek action from stockholders. See page 74 and footnotes: 414 to 415.
II) Breach of Duty:
- The court distinguishes between the “standard of conduct” and the “standard of review” in connection with the duties of corporate directors. See page 76 and footnotes 416 to 417.
- The court expounds on the three-tiers of review by the court of director decision-making as follows: (i) the business-judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness. See pages 77 to 80 and footnote 418. The court also instructs on the situations when each of those three standards applies. See footnote 419 and accompanying text.
- A classic definition of the business judgment rule is amplified at footnotes 420 to 423 and accompanying text.
- The entire fairness standard is elucidated at footnotes 424 to 426 and accompanying text.
- The court educates the reader on the intermediate standard of enhanced scrutiny at footnotes 427 through 433 and accompanying text.
- The court recites well-settled law regarding materiality in the context of disclosure duties. See pages 80 to 81.
- When a board of directors relies on a financial advisor, the court explains what needs to be in the summary of the financial advisor’s opinion that is provided to stockholders. See pages 91 and 92.
- When the enhanced scrutiny standard applies, the court provides a description of what directors must demonstrate in order to satisfy their burden of proof. See page 96.
- The plaintiff has the burden to show, in the context of proving an aiding and abetting claim, that directors acted outside the range of reasonableness. See page 96.
- The court describes the reasonableness standard in this context. See 97 to 98.
- The court recounts those instances when a large stockholder who is also a board member has interests that are aligned with all the stockholders, but also observes those instances when the interests of that large stockholder may diverge from those of other stockholders, for example, when that large stockholder either seeks a “quick profit” on a recent purchase of stock–or needs liquidity–as opposed to seeking the highest value in connection with the sale of the company. See page 99 to 103.
- The court cites to several Delaware Supreme Court cases that explain when weight is given to a deal price, and a market-check for valuation purposes, and which supports the finding in this case of no damages notwithstanding the court’s holding that there was a breach of fiduciary duties. See footnotes 605 to 607 and accompanying text.
- A useful Appendix created by the court is attached to this opinion, and includes a chart of key Delaware decisions from 1988 through 2014 with a summary of the highlights of those cases in several columns, regarding: (i) the time it took for the deal to close; (ii) amount of the termination fee involved in the case; and (iii) deal protection measures that were described in the court opinions cited in the Appendix provided by the court.