August 25, 2020

Fiduciary Duties: Post-Announcement Renegotiation of Deal Terms

I’ve previously blogged about the Delaware Supreme Court’s decision in Fort Myers Gen. Empl. Pension Fund v. Haley, (Del. 7/20), and the Chancery Court’s decision in In re Dell Technologies Class V Stockholders Litigation, (Del. Ch. 5/20). While the issues raised in those cases were different, they shared one important thing in common – the plaintiffs’ allegations focused on actions taken after the initial announcement of the proposed transactions.

That’s the aspect of the cases that this Cooley blog addresses, and it says that both cases provide important lessons about the need for fiduciaries to exercise their duties throughout the deal process. Here’s an excerpt:

Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders.

Two recent Delaware cases  serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal — that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document.

In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms.

The blog reviews both decisions and identifies key takeaways from each. It notes that the cases underscore the importance of officers and directors keeping the full board or special committee informed of material developments, engaged in the process of renegotiating any material terms post-signing, and ensuring that the board or committee is ultimately in control of the process throughout the transaction.

John Jenkins