A recent Delaware Court of Chancery opinion is noteworthy for its discussion of many aspects of the law, but I intend to highlight only a few of them, including its description of the important concept known as the Step –Transaction Doctrine. In PWP XERION Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019), the court engaged in a thorough analysis of the issues related to the failure of a company to obtain prior written consent from a major stockholder before approving certain transactions.
Key Takeaways from this Decision
The doctrine “treats the steps in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan.” See pages 31-32.
The court explained that the step-transaction doctrine applies if the component transactions meet one of three tests. First, the “end result test” will allow the doctrine to be invoked if it appears that a series of separate transactions were pre-arranged parts of what was a single transaction, cast from the outset to achieve the ultimate result. Id.
Second, under the interdependence test, separate transactions will be treated as one if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. The third and most restrictive test is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there is a binding commitment to undertake later steps. Id.
Analysis of the Terms “Affiliate” and “Business Plan.”
The court analyzed the term affiliate as it applied to a company director because consent was required for certain transactions with an affiliate of a director. See pages 17 to 21.
The court also analyzed the meaning of “business plan” because prior consent of a major stockholder was required before any changes could be made to the business plan. See pages 22 to 25.
Other Useful Statements of Delaware Principles of Law Regarding Tension between Board’s Fiduciary and Contractual Duties:
The court also discussed the concept that a board can fulfill its fiduciary duties while making a decision that (complying with those fiduciary duties) might call for engaging in “an efficient breach” of contract. See page 34. Contrariwise, a board could comply with a contract which would result in a breach of fiduciary duty. Id.
The court also explained, in connection with a stockholder and its board-designee who took different positions on the same issue: that the rights of a stockholder, and what a stockholder might lawfully be permitted to do, are much different than the duties of a director-designee of that stockholder. The court explained that a stockholder and its director-designee occupied:
(i) different roles;
(ii) are subject to different decisional frameworks; and
(iii) can legitimately have different views.
Other cases on these pages have addressed the duties of a “blockholder director” who must act in the best interests of all stockholders–and not only the stockholder who appointed the director.