February 10, 2020

Fiduciary Duties: Del. Chancery Upholds Exercise of “Superior Proposal” Out

In his recent decision in In re Essendant Inc. Stockholder Litigation, (Del. Ch.; 12/19), Vice Chancellor Slights dismissed fiduciary duty claims arising out of a target board’s decision to exercise a merger agreement’s “superior proposal” out & terminate an existing deal in favor of a competing bid.

The claims arose out of Essendant’s decision to terminate a stock-for-stock merger with Genuine Parts Co. in favor of an all-cash bid by Sycamore Partners, a private equity firm. The plaintiffs central allegation was that Essendant’s directors breached their Revlon duties by failing to maximize shareholder value. Because the company’s charter exculpated the directors for breaches of the duty of care, the plaintiffs needed to establish that they breached their duty of loyalty.

The plaintiffs tried to surmount this hurdle by pleading that Sycamore was a controlling shareholder that dominated & controlled the Essendant board, or that a majority of the board acted in self-interest or bad faith. This Shearman & Sterling blog on the case notes that the Vice Chancellor wasn’t buying what the plaintiffs were selling. Here’s an excerpt:

The Court held that plaintiffs failed to plead facts demonstrating that the directors were beholden to an interested party, such as a controlling stockholder. The Court found that the complaint failed to show that the private equity firm was a controlling stockholder, as it was only Essendant’s third-largest stockholder and there were no other “markers of control” alleged. The Court also held that the complaint failed to plead any board-level conflicts, noting that the complaint did not allege “any improper relationship or tie between individual members of the Essendant Board and [the private equity acquiror].”

Likewise, the Court held that the complaint did not adequately plead the directors acted in bad faith. In this regard, the Court explained that in the absence of well-pled allegations that the directors “breached the GPC merger agreement for no reason,” that contractual breach “cannot serve as a factual predicate to support a non-exculpated breach of fiduciary duty claim.” Indeed, the Court noted, a board “may even have a duty to breach a contract if it determines that the benefits [of breach] . . . exceed the costs.”

The plaintiffs brought the inevitable aiding & abetting claim against Sycamore, but VC Slights dismissed that claim as well, holding that even if the directors breached their fiduciary duty, the plaintiffs didn’t adequately allege that Sycamore knowingly participated in the breach.

By the way, if you think it’s a stretch to allege that a company’s third largest shareholder is a controller, well, you may have Corwin to thank for claims like these. As I blogged last year, some commentators have suggested that by allowing a shareholder vote to cleanse a transaction that doesn’t involve a controlling shareholder, the Delaware courts have encouraged plaintiffs to try to find a controller in some pretty unlikely situations – like this one.

John Jenkins