In Re Lear Corp. Shareholder Litigation, 2008 WL 4053221 (Del. Ch., Sept. 2, 2008), read opinion here.

This is the third Chancery Court decision in about as many (business) days that addresses the issue of whether: claims against a board of directors will be dismissed based on the exculpation clause in a corporate charter as authorized by DGCL Section 102(b)(7). The results (if we were to use an analogy from sports) are: 2 to 1. That is, 2 cases involving such claims have been dismissed under Rule 12(b)(6) and 1 decision denied a motion for summary judgment filed by the board.

Two of the 3 cases I am referring to include: (i) the instant Lear case;  and (ii) the McPadden case of Aug. 29 summarized here. The other case I refer to  is the Ryan II decision also of Aug. 29 and summarized here.

A prior decision in this case, partially granting a motion for preliminary injunction, is summarized here. See In Re Lear Corp S’hlder Litig., 926 A.2d 92 (Del. Ch. 2007).

In some ways, this opinion is akin to a scholarly law review article with practical application that also includes a court decision (after a full recitation of the particlular facts of this case.)

There is so much that can be written about this case, but let’s start with a few basics. The primary complaint was that the board agreed to a termination fee of $25 million (less than 1% of the transaction price) in exchange for an increase in the purchase price by the winning bidder for the sale of the company. The plaintiffs claimed that the board knew that the shareholders would most likely not approve the merger and, therefore, by agreeing to pay a termination fee simply upon a "no vote" by the shareholders,  they breached their fiduciary duties.

The court summarized its reasoning thusly:

"Directors are entitled to make  good faith business decisions even if the stockholders might disagree wth them. Where, as here, the complaint itself indicates that an independent board majority used an adequate process, employed reputable financial, legal and proxy solicitation experts, and had a substantial basis to conclude a merger was financially fair, the directors cannot be faulted for being disloyal simply because the stockholders ultimately did not agree with the recommendation. In particular, where, as here, the directors are protected by an exculpatory charter provision, it is critical that the complaint plead facts suggesting a fair inference that the directors breached their duty of loyalty by making a bad faith decision to approve the merger for reasons inimical to the interests of the corporation and its stockholders. Where a complaint, as here, does not even create an inference of mere negligence or gross negligence, it certainly does not satisfy the far more difficult task of stating a non-exculpated duty of loyalty claim."

Although this case started out asserting Revlon claims and proxy disclosure frailties, after the merger was voted down, those claims were dismissed as moot. (Curiously, with Lear’s stock now trading at about $13, the shareholders now wish they would have had voted for the offer at $37.25 per share.)

Aronson and Section 102(b)(7)

The plaintiffs skipped any attempt to satisfy the first prong of the Aronson test, and instead attempted to satisfy the second prong of Aronson by attempting to state particularized facts to establish a non-exculpated breach of fidcuicary duty by the Lear board.

Because the Lear charter contains an exculpatory provision under DGCL Section 102(b)(7), the plaintiffs cannot sustain their complaint even by pleading facts supporting an inference of gross negligence.     (continued below)


Continue Reading Chancery Court Dismisses Claims Against Board of Lear Corp. for Payment of Termination Fee to Bidder Led by Carl Icahn