The Delaware Court of Chancery’s opinion in In Re Loral Space and Communications Inc. Consolidated Litigation, 2008 WL 4293781 (Del. Ch., Sept. 19, 2008), provides a reminder that the Delaware courts do not hesitate to uphold fiduciary duties and impose consequences on directors who do not abide by their obligations. In this magnum opus, the Court reformed the terms of a control transaction involving a group that “stood on both sides of the transaction” and breached their fiduciary duties but did not establish the “entire fairness” of the deal that they “pushed through”.
The Court’s opinion in its original format is over 100 pages long (and 44 pages in length in the Westlaw format.) Though it is not uncommon for Chancery Court opinions to be lengthy, it is a challenge for a blogger to summarize in an appropriately brief blog post the highlights of this “small book” on important principles of Delaware law, along with the Court’s extensive discussion of copious and intricate facts. So, I picked below the bullet points that I think should intrigue serious students enough to want to read the whole opinion.
- The Court explained in great detail why, in essence, the directors violated their fiduciary duty of loyalty–and could not establish the entire fairness of the deal they pushed through–due in large part to the self-interested manner in which they rammed through a goal to raise $300 million in equity, regardless of other better options for the company, and with the net result being that control over the company was gained by the group that planned the deal.
- Importantly, the personal liability of the directors was not directly decided. Why? Because the Court reasoned that the application of the equitable remedy of reformation of the deal was sufficient for present purposes, there was no need to add an additional remedy–and there was not sufficient evidence at this point to conclusively analyze the individual liability of each director involved. However, the Court left open the option of considering that issue IF this decision was appealed and the case was remanded by the Delaware Supreme Court and the remedy part of the opinion had to be reconsidered upon direction of the Delaware Supreme Court.
- For DGCL Section 102(b)(7) purposes, the Court emphasized that it is not enough that a “non-independent director” voted in favor of a conflicted deal in order for the director to have personal liability imposed on her. Rather, in order to establish liability for such a director, a plaintiff must overcome the hurdle of Section 102(b)(7) by establishing the relevant “state of mind” of the director, such that it would be a “non-exculpated” breach of the duty of loyalty.
- The “special committee” created in this case was one in name only and did not satisfy the prerequisites, such as independence, that would entitle such a committee to any deference. At least one member of the committee showed no evidence of playing any active role on the committee, in addition to his 6 week vacation–with little or not phone or email access–during the period that the committee was supposed to be doing its work.
- Capacious equitable remedies available in Chancery Court, that were applied here, include reformation of a contract in light of a breach of fiduciary duties. Thus the Court decided to reform the contract by which those who violated their fiduciary duties gained control of the company.
- The Court relied on the equitable remedy of reformation, which–it must by emphasized–is completely separate from the different contractual remedy of reformation based on a breach of contract for such things as fraud or mistake.
- The Indenture at issue was governed under New York law, so I will not dwell on that aspect of the case, but the Court goes into excruciating detail about the terms of the document and the Court explains that it will not use the implied duty of good faith and fair dealing lightly in a highly negotiated agreement between sophisticated parties that were all lawyered up.