In re Alloy, Inc. Shareholders Litigation, C.A. No. 5626-VCP (Del. Ch. Oct. 13, 2011). Read this Delaware Court of Chancery opinion here.
Issue Addressed: Did the directors breach their fiduciary duties in connection with voting on a merger in light of benefits they received that were not enjoyed by all shareholders and in light of the exculpatory provisions in the charter based on DGCL Section 102(b)(7)?
This class action was brought on behalf of former shareholders of Alloy, Inc. in a going-private transaction that cashed out the public shareholders for allegedly inadequate consideration. The shareholders claim that the directors of the now privately-held company unfairly extracted for themselves an opportunity to share in the continued growth of the new company without offering the same opportunity to the cashed out public shareholders, in violation of their fiduciary duty of loyalty. The former shareholders also asserted a claim for aiding and abetting against the investor group that now controls Alloy. Various defendants submitted three separate motions to dismiss including one based on the argument that because plaintiffs only sought money damages, those claims are barred by the exculpatory provision in the certificate of incorporation pursuant to DGCL Section 102 (b)(7).
The Court found that the Complaint failed to state a claim for damages for breach of the fiduciary duty by the directors in negotiating and approving the merger because it did not allege sufficient facts from which one could reasonably infer that the directors did not act in good faith. In addition, regarding the allegations about the failure to disclose material information, the Court found that because of the exculpatory provision, the complaint failed to state a claim for damages because there were not sufficient facts to support an inference that the alleged disclosure violations were the product of anything other than good faith omissions by the directors who authorized them.
The Complaint in this case was filed on August 9, 2010 and at the same time a motion for expedited proceedings was filed, but after briefing and oral argument on that motion the Court denied expedited treatment.
The Court began its analysis with the reference to the recent Delaware Supreme Court decision that reaffirmed the standard for a Motion to Dismiss under Rule 12(b)(6) as “reasonable conceivability”, which asks whether there is a “possibility of recovery”. See footnote 24. The Court expounded on the defenses available despite that rather broad standard. See footnotes 25 to 27.
The Court explained that when a corporation has an exculpatory provision in its charter pursuant to DGCL Section 102(b)(7), barring claims for monetary liability against directors for breaches of their duty of care, the complaint must state a non-exculpated claim; that is, a claim predicated on a breach of the director’s duty of loyalty or bad faith conduct. See footnote 31. The Court gave as an example of an allegation that might prevail: a factual showing that a majority of the board of directors was not both disinterested and independent, which would provide sufficient support for a claim for breach of duty of loyalty to survive a Motion to Dismiss. See footnote 32.
The Court discussed the definitions for independence of a director and when a director is considered interested. The Court also addressed these standards in the context of whether the Special Committee was both disinterested and independent. The Court cited case law which analyzed the situations in which a majority of the board was found to be independent from the CEO.
Regarding the issue of about whether the Special Committee acted in good faith , the Court emphasized that “there is a vast difference between an inadequate and flawed effort to carry out fiduciary duties and a conscious disregard for those duties”. Therefore, the Court explained, that in order to succeed on a claim that the directors did not act in good faith, the Plaintiffs were required to show that: “the decision to approve the merger was so far beyond the bounds of reasonable judgment that it seems essentially explicable on any ground other than bad faith”. See footnote 54 and 55.
The Court also rejected arguments that the merger consideration was so inadequate that the price “was so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on grounds other than bad faith”. Likewise, the Court rejected the argument that the benefits received by two of the Defendants as a result of the merger were sufficient to prevail on a bad faith claim.
The Court concluded by applying the standard under Rule 12(b)(6) for a motion to dismiss, by holding that the Plaintiffs failed to allege specific, well pleaded facts, that would “give rise to a reasonably conceivable set of circumstances under which Plaintiffs could recover on a claim that, in negotiating and approving the merger, the Alloy directors failed to act loyally or in good faith.
The Court likewise found the arguments regarding the disclosure claims to be unconvincing –particularly, the Court explained, as the exculpatory provision in the certificate of incorporation for Alloy precludes monetary liability against the Alloy defendants, and that any omission concerning the engagement of the financial advisor and the analysis it performed would only implicate the duty of care which is covered by the exculpatory provision. Moreover, the plaintiffs did not refute the argument that no monetary damages are available for disclosure claims after a merger is consummated in light of the decision in the case of In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008).