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.
The Delaware Court of Chancery recently decided it was not “reasonably conceivable” that General Electric Corp. aided and abetted breaches of fiduciary duty by oil field services provider Baker Hughes Inc.’s directors who allegedly ignored bad fiscal news about GE’s oil and gas unit in approving a bad merger deal in the matter of In re Baker Hughes Inc. Merger Litigation, C.A. No. 2019-0638-AGB opinion issued (Del. Ch. Oct. 27, 2020).
In his Oct. 27 opinion, Chancellor Andre Bouchard dismissed shareholder charges against General Electric but found that ex-Baker Hughes Chairman and President Martin S. Craighead must face disclosure duty claims for failing to include in the merger proxy the unaudited version of GE’s finances.
Claims against Baker Hughes’ non-employee directors had been dropped because they were protected by an exculpatory clause that barred ordinary negligence claims, but Craighead was sued solely as an officer.
No Revlon liability
Revlon’s enhanced scrutiny test involves:
(a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and
(b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing
The Chancellor found that Baker Hughes Board knew there were risks in using the unaudited financials to negotiate a combination with GE O&G and made a business judgment to “address those risks in a nuanced way” in the merger agreement.
No informational vacuum
Plaintiffs claimed that by delaying the release of audited financials for the oil and gas segment, GE caused the Baker Hughes board to make a bad merger deal in an “informational vacuum,” but Chancellor Bouchard found that the cases plaintiffs cite where there were allegations of “informational vacuums” all share a common theme. “They each involved a player—privy to the internal deliberations or process of a target board that had conflicting financial interests—who deliberately withheld material information from the board, thus casting doubt on the integrity of a sale process. That is not this case.”
Moreover, this case lacks the necessary element of “knowing participation in a board’s fiduciary breach which requires that the third party act with the knowledge“ that the conduct advocated or assisted constitutes such a breach.” he said. This standard requires well-pled facts that the aider and abettor acted with “scienter,” or “knowingly, intentionally or with reckless indifference.”
The court said the plaintiffs’ argument about the cause of goodwill Impairments in the audited financials and its effect on valuation fails for several reasons:
First, plaintiffs’ criticism concerning the failure to disclose GE’s impairment analysis or its “effect on valuation” is illogical given the complaint’s allegations that Baker Hughes did not receive the impairment analysis and that financial advisor Goldman Sachs did not prepare a revised fairness opinion after receiving the audited financials, but “Delaware law does not require fiduciaries to disclose information they do not possess,” the court said.
Second, apart from focusing on GE’s impairment analysis, plaintiffs do not identify an undisclosed “fact” that would have significantly altered the “total mix” of information available to Baker Hughes’ stockholders in evaluating the fairness of the merger.
Third, the Baker Hughes board had the right to use its business judgment to decide that there were no differences between the unaudited and audited financials that were materially averse to the intrinsic value of GE O&G, and therefore there was no reason to terminate the merger.
Only the CEO faces claims
As to whether Craighead and former CFO Kimberly Ross face individual liability or damages for their roles in negotiating and disclosing the merger, the Chancellor began by finding the complaint is devoid of any allegations that Ross had any role in drafting or disseminating the proxy.
However, he said Craighead, in his roles as President, CEO and Chairman had sufficient involvement with respect to the preparation of the proxy he signed as Baker Hughes’ CEO and the decision not to include them in the merger proxy. Given the importance of the unaudited financials there is enough to support a claim that he breached his duty of care. All other claims were dismissed.