January 11, 2019

Pending Appraisal No Bar to Fiduciary Claim

Filing an appraisal action doesn’t necessarily put the kibosh on a shareholder’s ability to assert a fiduciary duty claim – or at least that’s what the Delaware Chancery Court held in In re Xura Stockholder Litigation (Del. Ch.; 12/18). Here’s an excerpt from this Shearman & Sterling blog summarizing Vice Chancellor Slights’ decision:

Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction.  As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company.  Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).

The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.

Discovery conducted after filing the appraisal action led the plaintiff to assert the breach of fiduciary duty claim against the CEO.  In upholding the plaintiff’s ability to make the claim, VC Slights distinguished the case from then Vice Chancellor Strine’s decision in In re Appraisal of Aristotle, (Del. Ch.; 1/12) – in which the Court refused to permit a plaintiff to tack on a disclosure-based fiduciary duty claim late in the appraisal process.

In Aristotle, VC Strine said that the plaintiff sought a quasi-appraisal remedy for its disclosure claim – which would provide it with the same relief as the underlying appraisal action. In contrast, VC Slights noted that the plaintiffs in Xura sought more traditional post-closing remedies for the alleged conflict-based breach, including rescissory damages and disgorgement.  He concluded that Delaware law conferred standing on the plaintiff to bring both claims.

There’s a lot going on in this case – and I’ll blog about another aspect of it next week.

John Jenkins