An Eckert Seamans associate prepared this overview.
A recent Chancery opinion held that stockholder approval and the business judgment rule barred fiduciary duty claims against a board that dissolved the company. The Huff Energy Fund, L.P. v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29, 2016)
Background: The Delaware Court of Chancery recently dismissed a stockholder’s breach of contract and fiduciary claims against a dissolving company. This action stems from Defendant Longview Energy Company’s (“Longview”) decision to dissolve Longview after the company sold a significant portion of its assets. Plaintiff, The Huff Energy Fund (“Huff”), was the largest Longview stockholder, holding approximately 40% of Longview’s common stock. Huff brought suit to challenge the dissolution.
A Shareholders Agreement (the “Agreement”) between Huff and Longview required a unanimous vote of the Board for any act having “a material adverse effect on the rights of [Longview’s stockholders], as set forth in” the Agreement. The Agreement also provided Longview with the right of first offer if Huff were to transfer any shares, and provided that the company would continue to exist and remain in good standing under the law.
The sale and dissolution plan at issue was approved by the Longview Board and shareholders, over the abstention of one Huff board designee.
Huff’s Allegations: Huff alleged that Longview breached the Agreement because the dissolution had “a material adverse effect” on its right to transfer its Longview stock to Longview. Accordingly, Huff alleged that the Board’s decision was subject to the unanimity requirement. Additionally, Huff asserted that dissolution violated the obligation to “continue to exist.” Finally, Huff brought a fiduciary claim against the Board for adopting the dissolution plan without exploring more favorable alternatives in violation of Revlon, and as an unreasonable response to a perceived threat in violation of Unocal.
Court’s Analysis: The court first held that the individual Board defendants could not be liable for breach of contract because they signed the Agreement as company representatives, and not in their individual capacities. Additionally, Huff failed to adequately plead a tortious interference claim, as the allegations were improperly raised for the first time in briefing.
Next, the Court held that Huff failed to plead breach of contract against the Board. Huff argued that the unanimity requirement applied to any act effecting any right referenced in the contract. However, the Court found that Huff’s interpretation contradicted common sense. Huff’s interpretation would unreasonably subject all extra-contractual “rights” to the unanimity requirement, solely because they were referenced in relation to another right actually created by the Agreement. Therefore, because the Agreement did not create a “right of transferability” for Huff, but instead allowed Longview the right of first offer, the Court rejected Huff’s argument that the dissolution vote violated the Agreement.
The Court also found that dissolution itself did not breach the Agreement’s provision requiring Longview to “continue to exist and  remain in good standing under [the law].” The provision was merely a commitment to remain in good standing as a Delaware corporation, and not a “commitment to exist ‘come what may,’” as Huff asserted. Huff’s interpretation was also unreasonable in light of other contract provisions referencing a potential merger or sale.
Next, the Court found that there was no fiduciary violation in approving the transaction. Huff failed to plead that the Board was not disinterested and independent. That the dissolution plan provided severance pay to certain directors, that some members had personal friendships, and that one member acted with alleged “animosity” towards Huff did not indicate that the Board was “interested” in the transaction to a degree that would rebut the business judgment rule. Regardless, despite Huff’s allegations toward individual Board members, Huff failed to plead that a majority of the Board that approved the transaction were not independent. Thus, entire fairness did not apply.
The Court next turned to Huff’s Revlon and Unocal arguments. Revlon did not apply because the applicable policy concerns were absent. Specifically, the adoption of the plan did not constitute a “final stage” transaction or effect a “change of control.” Similarly, Unocal did not apply. The Court noted that Huff “cite[d] no cases…indicating either that (1) the adoption or filing of a certificate of dissolution or (2) the board’s ‘perception’ that a shareholder posed a threat to any individual director’s ‘power’ over the corporation implicates the ‘omnipresent specter’ lingering in those instances where Unocal scrutiny has been invoked.”
Therefore, the Court held that Huff failed to plead any contractual breach or fiduciary violations. The Court also noted the significance of the shareholder vote in addition to Board approval. Even if enhanced scrutiny applied, “the Longview stockholders’ [informed] approval cleansed the transaction thereby irrebuttably reinstating the business judgment rule.” Accordingly, the Court invoked the business judgment rule and dismissed Huff’s complaint in its entirety.