November 23, 2020

Disclosure: Del. Chancery Leaves CEO Holding the Bag for Alleged Proxy Deficiencies

Chancellor Bouchard’s recent decision in In re Baker Hughes Inc. Merger Litigation, (Del. Ch.; 10/20), illustrates the potential hazards faced by corporate officers due to the fact that, under Delaware law, exculpatory charter provisions apply to directors only.  In this case, that resulted in the target’s CEO being the sole remaining defendant in a lawsuit in which fiduciary duty and aiding & abetting claims against the target’s board and the buyer were dismissed.

The case arose out of the 2017 merger of Baker Hughes and General Electric’s oil & gas business. The plaintiffs alleged that Baker Hughes’ directors and officers breached their fiduciary duties and that GE aided and abetted that breach.  The plaintiffs also alleged that the Corwin doctrine should not apply to the lawsuit due to the target’s failure to disclose in its proxy statement the unaudited financial information about GE’s oil & gas business that the board relied upon in authorizing the transaction.

Chancellor Bouchard agreed with the plaintiffs’ contention that the unaudited financials should have been disclosed in the proxy statement, and that Corwin therefore did not apply.  However, he nevertheless dismissed fiduciary duty claims against the Baker Hughes’ board premised on allegations that they failed to satisfy their obligations under Revlon, as well as aiding and abetting claims against GE.

The claim against the target’s CEO, however, was a different story.  The Chancellor noted that the plaintiffs’ alleged that the CEO breached his duty of care in preparing the proxy statement, noting that the CEO signed both the proxy statement & the buyer’s Form S-4 registration statement.  He concluded that this allegation was sufficient to permit the plaintiffs’ claim to survive a motion to dismiss:

Although not overwhelming, this allegation is sufficient to support a reasonably conceivable claim that Craighead breached his duty of care with respect to the preparation of the Proxy he signed as Baker Hughes’ CEO. This is so, in my view, given the importance of the Unaudited Financials—the only source of GE O&G historical financial information available to Baker Hughes before it signed the Merger Agreement—and given the categorical obligation in Section 5.04(c) of the Merger Agreement to attach the Unaudited Financials to the Merger Agreement.

Chancellor Bouchard observed that further discovery might demonstrate that the failure to attach the unaudited financials to the proxy statement was inadvertent or handled by advisors upon whom the CEO reasonably relied, but that these factual questions could not be resolved on the pleadings.

This isn’t the first case in which directors were able to avoid fiduciary duty claims – despite the inapplicability of Corwin – due to charter provisions eliminating their liability for breaches of the duty of care.

John Jenkins