Encite LLC v. Soni, C.A. No. 2476-VCG (Del. Ch. Nov. 28, 2011), read 80-page opinion here. Prior Delaware decisions in this matter have been highlighted on these pages here.
One of the issues addressed in this ruling on two motions for summary judgment was whether “a person can purchase a claim for breach of fiduciary duty in a bankruptcy proceeding.” The Court did not condemn that concept. The more specific issue was whether or not the defendant directors satisfied the entire fairness standard, which they conceded was applicable. See footnote 156.
The sub-issue was whether, for purposes of the entire fairness review, the director defendants used a fair process in seeking and negotiating bids for the assets of the company that were being sold or whether they breached their duty of loyalty by favoring one particular bidder in such a way that other, higher bids were discouraged or precluded, thus causing the company to lose its chance to secure the highest value for its assets.
This opinion includes a helpful summary of the entire fairness standard. The Court noted that due to the fact-intensive nature of Delaware’s most onerous enhanced scrutiny standard, directors face a difficult road in satisfying that standard in the context of a summary judgment motion.
By contrast, when the application of the business judgment rule is appropriate, a motion for summary judgment by defendant board members makes sense because a successful application of that rule often resolves the case. See footnote 155.
The Court explained that the entire fairness standard places the burden on the director defendants to establish “to the Court’s satisfaction that the transaction was the product of both fair dealing and fair price.” Although fair dealing and fair price concern separate lines of inquiry, the determination of entire fairness is not a bifurcated analysis. Citing to recent cases, the Court acknowledged that “at least in non-fraudulent transactions, price may be the preponderant consideration. That is, although evidence of fair dealing may help demonstrate the fairness of the price obtained, what ultimately matters most is that the price was a fair one.” See footnotes 160 through 162.
The Court further explained that the entire fairness analysis requires a transaction to be objectively fair and that “the board’s honest belief that the deal was fair is insufficient to satisfy the test.” The Court noted that due to insufficient evidence in the record, its analysis was mostly limited to “fair process.” The evidence regarding the price and value of the company purchased through the bankruptcy proceeding was odd at best. For example, the argument was that the company should have been worth more and that the actions of the directors depressed the sale price. The plaintiff purchased the company in bankruptcy and he sought to buy at the lowest price possible. In other words, the less the plaintiff paid for the company, according to the argument of the plaintiff, the higher the damages that the defendant directors would be liable for in the pending suit.
Several other key points about the entire fairness standard were made in the opinion. For example, the Court emphasized that fair dealing cannot be established simply by reliance on expert counsel. That is, although “reasonable reliance on expert counsel is a pertinent factor in evaluating whether corporate directors have met a standard of fairness in their dealings with respect to corporate powers, its existence is not outcome determinative of entire fairness.” See footnote 169. Moreover, the Court emphasized that a “defendant may not rely on expert counsel to opine as the actual substantive fairness of a transaction. Rather, the advice given by counsel is relevant to the issue of fair dealing, a question of process. Relevant advice for an entire fairness analysis might therefore include whether counsel advised the defendant that the business judgment rule would apply or that the bidding process was thorough and fair.” See footnotes 170 and 171.
Although Delaware law imposes no specific procedural requirements for the sale of assets or the change of control, “if the Defendant Directors seek to establish fair dealing in regards to an interested transaction, they nonetheless must demonstrate that they used procedural safeguards sufficient to convince the Court that the negotiations provided the equivalent of arm’s length bargaining. Based on the record before me, I cannot make this finding.”
Other important principles in corporate and commercial litigation were also addressed. For example:
(1) The doctrine of unclean hands was discussed at page 67.
(2) The flexible and capacious law of damages and equitable remedies available to the Court of Chancery in connection with breaches of fiduciary duties was discussed at page 71.
(3) In addition, the law of “contribution” among defendants was discussed at footnote 196.