One of the great things about the Delaware judiciary is their willingness to weigh-in on important legal issues outside of the courtroom. That’s sometimes prompted criticism from fragile, sensitive souls like activist hedge funds, for example, but I think the judges commentary provides a real benefit for those who have to intepret sometimes enigmatic Delaware case law in order to help guide clients through their transactions.
Vice Chancellor Laster is one of the jurists who hasn’t been shy about addressing topical issues outside of the courtroom, and in an interview for Berkeley’s Spring Forum on M&A and Corporate Governance, he tackled a couple of issues that everyone has been keeping an eye on – officer liability & controlling stockholder liability. This excerpt from a Freshfields blog on the event summarizes his comments:
VC Laster explained that, when establishing a damages claim, the ultimate question is not the standard of review, but whether the officer has liability for a breach of his or her duties. He provided an example of how to state a damages claim against a CEO in a sale of control transaction: the plaintiff will need to show that (i) there was an action by the officer that fell outside the range of reasonableness (i.e., violated the Revlon standard of review) and (ii) the CEO acted on behalf of the corporation for his own personal interests, with bad faith, or gross negligence. Not all breaches of fiduciary duty that would be recognized for purposes of injunctive relief will constitute bases for damages claims against officers even though officers are not entitled to exculpation in the same manner as a director.
VC Laster noted further that a critical factor to determine whether a dual director-officer is acting in his or her capacity as an officer (where exculpation is not available), rather than as a director (where exculpation is available), is to look at the non-management directors to see whether they were participating in that same conduct.
The Vice Chancellor then reviewed recent cases addressing when a stockholder has “control” and therefore subjects its transactions with the corporation to the entire fairness standard absent the satisfaction of the MFW safe harbor criteria. He emphasized that the Delaware courts take a holistic approach and will not be looking at certain stock ownership or voting power thresholds as necessarily determinative. In addition to ownership levels, the role the stockholder plays at the company (i.e., is the stockholder a founder, chair, CEO, or corporate visionary?), indicia of the influence of the stockholder in the boardroom, and the governance regime of the company (such as veto rights).
If you’re interested, the Vice Chancellor’s entire hour-long interview – which covers a number of other issues addressed by the Chancery Court – is available on the Forum’s website.
– John Jenkins