The practical problem of proving a breach of fiduciary duty without being able also to prove damages was recently addressed by the Delaware Court of Chancery in a post-trial opinion styled The Ravenswood Investment Company, L.P. v. The Estate of Bassett S. Winmill, et al., C.A. No. 3730-VCS (Del Ch. Mar. 22, 2018). Several of the many prior decisions in this matter over the last decade have been highlighted on these pages and provide factual and procedural history. In this short blog post, I’ll highlight the key points that may be most useful for those interested in the nuances of corporate and commercial litigation discussed by the court in this decision:
Standard of Review Applicable
- The challenged executive compensation decisions of the board were subject to the entire fairness test. The presumption of the business judgment rule’s applicability was rebutted because the defendant directors stood on both sides of the transaction. See, e.g., cases cited at footnote 125. Thus, the directors needed to establish both fair dealing and fair price in connection with the challenged compensation decisions. The 68-page opinion analyzes the interfacing between the two parts of the test. See, e.g., cases cited at footnote 161. The court found that the board failed the entire fairness test, and that they breached their fiduciary duty of loyalty.
- Although in the past the company had traded on NASDAQ, a father and his two sons constituted the entire board and they alone voted on their own compensation including the disputed stock options. They did not use a compensation consultant and the documentation relating to the “process” and analysis supporting their compensation was, in the court’s description: “thin”. Some of the options exercised were paid with promissory notes that were later forgiven.
- The court found no evidentiary basis for compensatory damages, despite finding a breach of the duty of loyalty in connection with the compensation decisions relating to the stock options. See footnote 174 and accompanying discussion.
- The court considered rescission, rescissory damages, equitable rescission and “cancellation” of the stock options (and the nuanced comparison with that concept and rescission.) The court also grappled with the doctrinal dissonance of fashioning a practical and fair remedy in the context of a derivative action when the corporate benefit would be enjoyed to a large extent by the defendants who are major stockholders, for example. See, e.g., footnotes 180 to 188.
- Nominal damages, in the end, were the only damages that the court determined to be available under the circumstances of this case. See footnotes 215-216.
- Notably, the court acknowledged that the plaintiff was still requesting attorneys’ fees and that it would consider that issue separately. There is precedent in Delaware for a court to award attorneys’ fees when there has been a breach of fiduciary duty but no measurable damages. See, e.g.,William Penn Partnerships v. Saliba, C.A. No. 111 (Del. Supr. Feb. 9, 2011), highlighted on these pages here. The award of attorneys’ fees in such a situation may be slim solace for the plaintiff, and of primary interest to the lawyers, but at the very least it “levels the field” somewhat to the extent that if the plaintiff is not “in the hole” for any attorneys’ fees, then that plaintiff is not disadvantaged by bearing the cost of proving the defendants’ breach of fiduciary duty.