In Pfeffer v. Redstone, 2008 WL 308450 (Del. Ch., Feb. 1, 2008), read opinion here, the Chancery Court provides a treasure trove of the applicable standards used to review the conduct of directors in connection with claims for breach of fiduciary duty related to failure to make full disclosure in documents sent to shareholders. The transaction at issue was an exchange of shares between Viacom and Blockbuster when Viacom spun-off Blockbuster (and first declaring a special dividend which benefited Viacom the most as the majority shareholder). The 15-page opinion, in the Westlaw format, examines the detailed factual background that deserves to be read in order to fully appreciate the case, but I will just touch on a few highlights.

The court rejected an effort to have the "entire fairness" standard applied. Despite the fact that Viacom owned a majority of the shares of Blockbuster, the court did not find any special scrutiny "triggers" for a few reasons. First, the transaction at issue was a voluntary, non-coercive tender offer.  Thus, the duty was to disclose all material facts. That is, the directors must not do any of the following: (i) make materially false statements; (ii) omit a material fact; or (iii) make a partial disclosure that is materially misleading. The plaintiff asserted all 3 claims and the court rejected all three types of disclosure claims. The centerpiece of the claimed omissions related to Blockbuster’s cash flow and future profitability.

The opinion picks apart with surgical precision (and similar painful recovery) the allegations that the directors knew about the alleged cash flow projections (that plaintiff’s counsel admitted at oral argument he had not seen). After a discussion about what members of a board are reasonably presumed to have knowledge of (without evidence that they were actually presented with certain data), the court described the allegations that the directors knew about certain projections and failed to disclose them, as : "… a daisy chain of surmise and illogic…."

Under the different standard of the Private Securities Litigation Reform Act, a federal court in Texas also rejected the claims of plaintiff in this case based on substantially the same facts. See Congregation of Ezrasholom v. Blockbuster, 504 F. Supp.2d 151 (E.D. Tex. 2007).

A majority shareholder does not have duties in this context unless they are controlling the whole transaction (e.g., compare a freeze-out merger). Here, the majority owner of Viacom did not even participate in the transaction. In addition, the court found nothing to suggest that the directors who approved the exchange offer structured the transaction to put their own interests above those of Viacom or a specific group of Viacom shareholders. These facts distinguished this case from the (first) Chancery decision in Feldman v. Cutaia, summarized here.

Claims made under DGCL Section 144 were also analyzed and dismissed.