This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
A Delaware Supreme Court majority recently revived a shareholder suit that claimed Towers Watson & Co.’s CEO put his interests ahead of the investors in a merger with Willis Group Holdings Public Limited Co. and didn’t tell his board about a Willis director’s hefty pay proposal to head the combined company in City of Fort Meyers General Employees Pension Fund et al. v. Haley, et al., No. 368, 2019, opinion issued (Sup. Ct. June 30, 2020).
The majority’s June 30 opinion reversed the Court of Chancery’s dismissal of derivative charges that Towers CEO and director John Haley breached a fiduciary duty and that Willis major shareholder ValueAct Capital Management, L.P., and its director delegate to Willis aided that breach with the proposal. In re Towers Watson & Co. S’holders Litig., 2019 WL 3334521 (Del. Ch. July 25, 2019)
The majority of the en banc court said at the motion-to-dismiss stage, the undisclosed prospect of a post-merger CEO job with a five-fold pay increase for Towers’ lead negotiator would have been a conflict-of-interest concern if revealed to his board – especially since Haley subsequently supported a minimum price increase ,
Justice Karen Valihura, writing for the majority, said the high court’s standard for a duty of candor charge, stated in Weinberger v. UOP, Inc., 457 A.2d 701, draws a conflict of interest line where there are well pled charges that directors conceal information the board needs to make an informed decision.
Towers, a prominent Delaware-chartered professional services firm began merger talks in 2015 with Willis, a global advisory, brokering, and solutions business chartered in Ireland. The primary driver of those talks was Jeffrey Ubben, founder of ValueAct, a limited partnership that was a large activist investor in Willis.
According to the opinion, Ubben had been pressing Willis management for a transaction that would boost the stock price, which had allegedly been languishing since the 2008 recession and had threatened to force a breakup sale of Willis if the Towers merger did not happen. The opinion said Ubben met with Haley and promised he could influence the Willis board to offer Haley the CEO position at the five times his then current $14 million pay scale.
Allegedly, Haley informally agreed but did not inform the Towers board, and subsequently backed a merger-of-equals in which Willis shareholders got a 50.1 percent majority control of the combined company and Towers investors got 49.9 percent even though Towers had been the stronger performer.
Moreover, the proposed deal gave Towers investors a price that was significantly less than their stock had been selling for before the merger was announced – even when their $4.87 per share dividend was included. Towers investors threatened to scuttle the deal by withholding their required approval.
Haley backed an increase of the dividend to $10 a share – just enough to win a majority backing from investors, but low enough to spark disgruntled shareholder suits in several courts, including five breach of duty complaints naming Haley, Ubben and ValueAct that were combined in the Chancery Court.
The Court of Chancery dismissal
Chancery dismissed all charges, finding that the deferential business judgment rule gave the defendants the benefit of the doubt because there was insufficient proof that the merger decision was ill-informed or tainted by self-interest.
Vice Chancellor Kathaleen McCormick ruled that the news of Hartley’s proposed position and pay would not likely alter the board’s thinking because it was expected that Hartley would get the job at a significant compensation increase to run the combined company and there was no proof he sold out the Towers investors to get it.
The high court reversed, finding that, as required under the milestone Cinerama decision (Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1134, (Del. Ch. 1994), there is more than mere proof of a conflicted director here, because the plaintiffs showed that:
(i) the director was “materially self-interested” in the transaction,
(ii) the director failed to disclose his “interest in the transaction to the board,” and
(iii) “a reasonable board member would have regarded the existence of [the director’s] material interest as a significant fact in the evaluation of the proposed transaction.”
“Plaintiffs are entitled to an inference that the prospect of the undisclosed enhanced compensation proposal was a motivating factor in Haley’s conduct in the renegotiations to the detriment of Towers stockholders,” the majority said in reversing and remanding the case to proceed in the Court of Chancery.
In a lone dissent, Justice James Vaughn said while he agreed with the criteria the majority set for overcoming the business judgment rule in this case, he determined that the board knew Hartley was in line to be the CEO at a substantial pay increase and was materially self-interested in the deal, so knowledge of the formal offer would not have changed the directors’ votes.