March 23, 2017

Delaware: Director Self-Interest Cleansed through Stockholder Vote

This Fried Frank memo reviews Vice Chancellor Laster’s recent decision in Columbia Pipeline Group, Inc. Stockholder Litigation (Del. Ch.; 3/17) – which held that the ability to “cleanse” transactions through a fully informed stockholder vote extends to transactions involving alleged director self-interest.  Here’s an excerpt summarizing the Vice Chancellor’s decision:

The plaintiffs alleged that all of the Columbia Pipeline directors and certain officers had breached their duty of loyalty by having engineered a self interested plan (when they were directors and officers of the company’s former parent) to spin the company off and then to sell the post-spin company in order to trigger their change-in-control benefits.

In what has become an increasingly familiar pattern for disposition by the Court of Chancery of post-closing challenges to M&A transactions (not involving a controller who has extracted a personal benefit), the court: (i) found that the stockholders had approved the transaction in a fully informed vote; (ii) held that, as a result, under Corwin, the business judgment rule standard of review applied; and (iii) dismissed the case.

The Vice Chancellor also spoke to the nature of the disclosure required in order to “fully inform” shareholders about alleged self interest – and said it didn’t require “self-flagellation.”  Instead, it’s enough if the proxy disclosure provides information sufficient to allow investors to “stitch together” facts sufficient to draw an inference of self-interest.

This is the fifth time since the Corwin decision that the Chancery Court has allowed a transaction alleged to involve duty of loyalty issues to be cleansed through a fully informed stockholder vote. The path to business judgment rule review that Corwin mapped out for post-closing damage actions is proving to be very wide indeed.

John Jenkins