A recent decision of the Delaware Court of Chancery provides a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The 126-page opinion in the matter of Basho Technologies Holdco B, LLC v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch., July 6, 2018), involved an investor who gained control of a company as part of a bad-faith campaign to profit from the sale of the company, and in the process of solidifying its control, caused the company’s failure.
The court found that the controller had a plan to force a near term exit and positioned itself as the point person for any efforts to raise capital. It used its blocking rights to veto any financing that did not conform to its grand scheme. The court ordered substantial damages against the controlling stockholder for breach of fiduciary duty involving self-dealing that resulted in the downfall of the business.
In this lengthy opinion, there are many key principles of Delaware corporate law, and a description of different types of remedies, that are noteworthy and which have wide applicability. Those include the following:
- The court explained that mere blocking rights alone (e.g., to veto new financing), will typically not suffice to support a finding of control. See footnote 315 and accompanying text. The court cited, however, to several sources that supported the view that one can be found to be a controlling stockholder for purposes of a single transaction. See footnote 309 and accompanying text.
- The court provided a list of factors that might contribute to a finding of actual control although it would be “impossible to identify or foresee all of the possible sources of influence that could contribute to a finding of control over a particular decision.” See pages 66 to 70 and supporting footnotes.
- The court provides a comprehensive textbook-style recitation of the elements of a breach of fiduciary duty claim, as well as the definition of a fiduciary relationship. See pages 58 and 59 and footnotes 291 to 293.
- The court instructs how the governing standard of review will impact the analysis for reviewing a claim for breach of fiduciary duty, and how the analysis will be guided by whether the business judgment rule applies or the entire fairness test applies. See pages 60 to 61.
- The court reiterated the truism that one who has majority voting power owes fiduciary duties. See footnote 63. But, importantly, even one without majority voting power can be found to owe fiduciary duties if that person “exercised control over the business and affairs of the corporation.” See footnote 305. The court explains how that requisite degree of control might be shown to exist. Id. The court noted that despite some who might think otherwise, even though the entire fairness standard is the most onerous standard of review, that standard does not always result in a win for the plaintiff and “scholarly research establishes that only exceptional entire fairness cases result in meaningful damage awards.” See footnote 399.
- The court reasoned that when there is a breach of the duty of loyalty as long as there is a connection between the harm and the award, “the law does not require certainty in the award of damages.” See page 123. The court added that: “Responsible estimates that lack mathematical certainty are permissible so long as the court has a basis to make a responsible estimate of damages. Once a breach of duty is established, uncertainties in awarding damages are generally resolved against the wrongdoer.” See page 124 and footnotes 520 and 521.
- The court observed that: “In determining damages, the powers of the Court of Chancery are very broad in fashioning equitable and monetary relief under the entire fairness standard as may be appropriate . . . .” See page 107 and footnotes 456 and 457.
- The court provided an extensive recitation of the wide scope of its authority to fashion equitable remedies for breach of fiduciary duty. For example, the court explained that when the entire fairness test applies and there has been a breach of the duty of loyalty, the stockholders may demand rescission of a transaction or, if that is impractical, the payment of rescissory damages. See footnote 13.
- The court defined rescissory damages as the monetary equivalent of rescission and the Delaware courts have awarded those damages in cases where a fiduciary has selfishly appropriated the property of a beneficiary. These damages differ from compensatory damages in that the loss can be measured at the time of the judgment rather than at the time of the injury. See footnotes 514 through 517.