In re BJ’s Wholesale Club, Inc. S’holders Litig., Cons., C.A. No. 6623-VCN (Del. Ch. Jan. 31, 2013).
What this Case is About
This case alleged breaches of fiduciary duty in connection with the purchase of all outstanding shares by private equity firms. The Court granted a motion to dismiss in this 41-page decision.
The Court reviewed the bedrock principle under Delaware law that directors are “charged with an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interest of its shareholders. When directors decide to engage in a change of control transaction, their fiduciary duties of loyalty and care require that they seek to maximize the sale price of the enterprise.” See footnotes 54 and 55 and accompanying text.
Where, as in this case, the Certificate of Incorporation of the corporation contains an exculpatory provision authorized by 8 Del. C. Section 102(b)(7), which immunizes directors from damages arising from a breach of the duty of care, plaintiffs must plead sufficient facts to show that a majority of the board breached the fiduciary duty of loyalty. See footnote 56.
Thus, under these circumstances, the defendant directors are entitled to dismissal unless the plaintiffs have pled facts that, if true, “support the conclusion that the defendant directors failed to secure the highest attainable value as result of their own bad faith or otherwise disloyal conduct.” See footnote 57.
In this case, the facts must show that: (1) A majority of the board was not both disinterested and independent, or (2) “That the board did not act in good faith.” See footnote 58.
The Court discussed the standards in Delaware for determining when a director will be considered “interested” in a transaction, and when their independence would be subject to challenge. The plaintiffs did not meet those tests in this case.
The Court explained how difficult it was to show bad faith, and observed that where it cannot be shown that directors intentionally disregarded their duties, a breach of duty of loyalty can also exist, “notwithstanding approval by a majority of disinterested and independent directors, where the decision under attack is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable for any ground other than bad faith.” See footnote 68.
The Court provides an extensive analysis to explain why the claims should not survive a motion to dismiss. The Court also distinguished the case of In re Answers Corporation S’holders Litig., 2012 WL 1253072 (Del. Ch.).
The Court reiterated how difficult it is to adequately pled a duty of loyalty claim where the board consists of a majority of disinterested and independent directors that actively solicited an interest from other bidders, and especially where a special committee relied in good faith upon financial and legal advisors, and no other topping bids emerged after a lengthy public sales process.
The Court concluded and reasoned that the bad faith inferences that the plaintiffs would have this Court draw were simply not reasonable in light of the rational explanations for the board’s conduct. Therefore, the complaint did not meet the “reasonably conceivable” standard to survive a motion to dismiss.