The New Year brings a confluence of several new Chancery Court decisions to summarize on this blog at the same time that I am in the middle of expedited Chancery Court proceedings for a paying client (with my newest partner, Tom Walsh)–and contemporaneous with me trying to find time to write a requested article for Bloomberg News on highlights of Delaware cases from 2006. With that said, I want to quickly make note of a recent case involving DGCL Section 220, a topic of many cases which have been summarized on this blog.
In Shamrock Activist Value Fund, L.P. v. iPass Inc., (Del. Ch., Dec. 15, 2006), read opinion here, the Chancery Court addressed whether there was a credible basis of mismanagement sufficient to satisfy the "proper purpose" requirement of the Delaware General Corporation Law’s Section 220. The issue was presented in the context of a Motion to Dismiss under Chancery Court Rule 12(b)(6). The stockholder’s main complaint was that management either failed to implement a merger competently or that its projections about the merger were made irresponsibly.
In what will be music to the ears of company executives, the court reasoned that even though claims of mismanagement can be a "proper purpose" under DGCL Section 220:
"[c]redible evidence of mismanagement … requires more than a divergence between forward-looking statements and subsequent results." (citing Trenwick Am. Litigation Trust v. Ernst & Young, LLP, 906 A.2d 168, 193 (Del. Ch. 2006)(noting that the business judgment rule’s utility would be "denuded" if the mere fact that a strategy turned out poorly was in itself sufficient to establish a breach of fiduciary duties)[use search function in right margin to see prior summary of Trenwick on this blog].
However, the court found that in the context of a Rule 12(b)(6) motion, the allegation that the board failed to adopt an integration plan for the merger in a timely and comprehensive fashion that would address the complexity of the merger, was sufficient to "give them the benefit of the doubt" (my words) in this procedural setting [which would not be enjoyed after trial], and provided a sufficient "basis for an inference that mismanagement occurred" (court’s words). This is so, because in the context of a motion to dismiss, the court is "constrained to honor any reasonable inference that could be drawn in favor of Shamrock from the facts alleged." The court observed in a footnote that the "credible basis" standard is the lowest possible burden of proof.
The flip side of the analysis is that, in the context of this motion to dismiss, because the court could not conclude with "reasonable certainty that there is no set of facts which could be proven by Shamrock to support this action" the motion to dismiss had to be denied. The court made a noteworthy concluding comment in footnote 18 when it noted that it was not possible in the setting of a motion to dismiss to address the claim by the company about whether Section 220 was being used in this case as "an effective and troubling tool for harassment and mischief".