DealLawyers.com Blog

This Paul Weiss memo reviews the Chancery Court’s recent decision in van der Fluit v. Yates, in which Vice Chancellor Montgomery-Reeves dismissed breach of fiduciary duty claims against a seller’s board – despite concluding that the directors’ decisions were not entitled to business judgment rule deference under Corwin.

This deal was structured as a merger with a front-end, all-cash tender offer under Section 251(h).  Earlier this year, the Delaware Supreme Court held in In re Volcano Corp. that Corwin’s path to the business judgment rule extends to tender offers under Section 251(h).  However, Corwin requires fully-informed, uncoerced shareholder approval of the deal, and the Vice Chancellor found that lacking here.

Nevertheless, she dismissed the plaintiffs’ claims. As this excerpt from the memo explains, despite the inability of the board to rely on Corwin, the plaintiffs were unable to identify any non-exculpated breaches of fiduciary duty:

The court concluded that all breaches of the duty of loyalty alleged by defendants were unsupported by the facts, including conclusory allegations that the director defendants favored Oracle in the bidding process, that the directors sought to maximize their own pre-IPO investments rather than stockholder value, and that the termination fee was unreasonably high.

The court also rejected plaintiff’s claims that the board unreasonably rushed the two-week market check to favor Oracle, and therefore breached its duty of loyalty. The court distinguished the case from its decision in In re Answers Corp., which held a two-week market check to be unreasonably rushed. In that case, the plaintiff made non-conclusory allegations that the market check was unreasonably rushed, citing various warnings from the company’s financial advisor, including that it was not a “real” market check. Here, the court found that the plaintiff did not make any such non-conclusory allegations.

Finally, the plaintiff failed to sufficiently state a duty of loyalty claim through allegations of conflicts of interests that tainted a majority of the board. The court first concluded that the board did not breach its Revlon duties (which duties “are only a specific application of directors’ traditional fiduciary duties of care and loyalty in the context of a control transaction”). Second, the court concluded that the board did not act outside of its business judgment, holding that the plaintiff failed to allege facts showing that interested directors comprised a majority of the board, dominated the other directors, or failed to inform the other directors of their alleged conflicts.

The memo also points out that the applying Revlon to the post-closing damages claims may be inconsistent with reasoning in Corwin suggesting that Revlon and Unocal standards of review are better suited to the preliminary injunction context, & shouldn’t apply to post-closing claims. The Vice Chancellor acknowledged this potential departure from Corwin, but said that the court didn’t decide on the applicable standard of review because the plaintiff failed to state a claim under either enhanced scrutiny or the business judgment rule.

– John Jenkins