A recent Court of Chancery opinion provides a useful reiteration of the reasons why the entire fairness standard will apply to a transaction between a controller and a controlled corporation. The case of In Re Hansen Medical, Inc. Stockholders Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018), arose from a squeeze-out merger. The court addressed claims by a purported class of minority stockholders who alleged that a group that controlled more than 50% of the acquired company, used their control to negotiate a beneficial deal for themselves at the expense of the minority stockholders.
Noteworthy nuggets of Delaware corporate litigation principles applied in this decision include the following:
- The court discusses the two ways in which a person or a group of persons will be considered “controllers” for purposes of determining the applicable standard of review. See Slip. Op. at pages 15 and 16.
- The court explained that the entire fairness standard applies to a transaction between a controller and a controlled corporation. See page 15.
- The court also distinguished several prior decisions, on a factual level, where no control group was found. See footnotes 79 and 80.
- The court provides the definition and an explanation of the entire fairness standard at page 25.
- The court explains that in line with the case of Cornerstone Therapeutics, Inc. Shareholder Litigation, a plaintiff must plead a non-exculpated claim for breach of fiduciary duty against an independent director protected by an exculpatory charter provision adopted pursuant to Section 102(b)(7), or that director will be entitled to be dismissed from the suit. See page 26 (citing 115 A.3d 1173, 1179 (Del. 2015)).
- Notably, the court explained, however, that an exculpatory charter provision does not apply to claims of breaches of the duty of loyalty, claims against officers or claims against controlling stockholders. See footnote 104.
- The fiduciary duty of disclosure was discussed, and in particular the truism that: “Directors of a Delaware corporation have a fiduciary duty to disclose fully and fairly all material information.” See footnote 109. The court added that when a board chooses to disclose a course of events or discuss a specific subject, it cannot do so in a materially misleading way by only disclosing part of the story and leaving the reader with a distorted impression. Rather, “disclosures must provide a balanced, truthful account of all matters they disclose.” See footnote 111.
- The court discusses what facts will be considered material and what omissions will be considered material.
- The court also discusses the prerequisites for satisfying a claim for “aiding and abetting a breach of fiduciary duty.” See pages 31 and 32.