Last week, in In Re Pattern Energy Group Inc. Stockholders Litigation, (Del. Ch.; 5/21), Vice Chancellor Zurn refused to dismiss claims non-exculpated breaches of fiduciary duty against a company’s directors & officers in connection with a sale transaction. In her 212-page opinion, the Vice Chancellor concluded that the plaintiffs adequately alleged that the special committee and management’s failure to manage conflicts and prioritizing a controlling stockholder’s interests constituted bad faith.
There’s nothing particularly noteworthy in most of the shortcomings referenced in the opinion, but as Steve Quinlivan points out in this Dodd-Frank.com blog, one of the Vice Chancellor’s conclusions will definitely get the attention of M&A lawyers:
While the decision on a motion to dismiss covers significant ground on many matters, the Court also found the directors engaged in bad faith when delegating preparation of the proxy statement to management. The Board adopted a resolution giving certain officer defendants the power to “prepare and execute” the merger proxy “containing such information deemed necessary, appropriate or advisable” by only the officer defendants, and then to file the proxy with the SEC without the Board’s review.
The plaintiff contended that the delegation to prepare the proxy constituted an unexculpated acted of bad faith. Specifically, the plaintiff claimed the director defendants acted in bad faith by abdicating their strict and unyielding duty of disclosure, and relatedly, by knowingly fail to correct a proxy statement that they knew was materially incomplete and misleading.
The Court cited precedent which noted that while the board may delegate powers to the officers of the company as in the board’s good faith, informed judgment are appropriate, that power is not without limit. The precedent provided the board may not either formally or effectively abdicate its statutory power and its fiduciary duty to manage or direct the management of the business and affairs of this corporation. As a result, the Court found it is well established that while a board may delegate powers subject to possible review, it may not abdicate them. Under Delaware law, the board must retain the ultimate freedom to direct the strategy and affairs of the Company for the delegation decision to be upheld.
It isn’t uncommon for boards to adopt resolutions giving management broad authority to oversee the preparation of proxy materials and to make decisions regarding disclosure, but the plaintiffs in this case alleged that the directors went beyond that and abdicated their responsibilities. In particular, the plaintiffs claimed that the directors “delegated to conflicted management total and complete authority” to prepare and file the proxy statement, and further claimed that the directors didn’t review the proxy before it was filed.
The defendants disputed these claims, but the Vice Chancellor noted that the allegations were consistent with the language of the resolutions, and that subsequent board minutes didn’t reflect any director oversight of the preparation of proxy statement. Consequently, she concluded that the plaintiffs had adequately pled that the directors had abdicated their responsibilities, and that both the extent of the delegation and the fact that authority was delegated to the company’s conflicted officers were sufficient to establish a claim of bad faith.
– John Jenkins