March 2, 2022

Fiduciary Duty: Director’s Abstention Isn’t a Get Out of Jail Free Card

Sometimes, people assume that if a director has a conflict, abstaining from voting on a transaction will be enough to insulate that individual from a fiduciary duty claim.  While abstaining sometimes may be a prudent decision, the Chancery Court’s recent decision in Lockton v. Rogers, (Del. Ch.; 2/22), provides a reminder that abstaining from a vote on the deal isn’t necessarily a “get out of jail free” card.

The case arose out of a series of transactions engineered by creditors & preferred stockholders of WinView, Inc. who made up a majority of the board and that culminated in a squeeze-out of the common stockholders. The plaintiffs alleged that the director defendants breached their fiduciary duties by ignoring alternative transactions that were better for the common stockholders and by approving a deal that transferred benefits to creditors & preferred holders that weren’t not shared with the common stockholders.

The company’s Executive Chairman, who was a stockholder and Chairman of one of the acquiring entities in the squeeze-out, argued that duty of loyalty allegations against him should be dismissed because he abstained from voting on the merger. Vice Chancellor Glasscock decided that wasn’t enough to allow him to escape the fiduciary duty claim, at least at the pleading stage:

There is “no per se rule that unqualifiedly and categorically relieves a director from liability solely because that director refrains from voting on the challenged transaction.” Notably, Rogers does not contend that he abstained from negotiating the Merger. The Amended Complaint alleges that Rogers told Lockton in November 2019 that he had personally negotiated a binding term sheet for the Merger.

Delaware law does not allow directors who negotiated a transaction to “specifically to shield themselves from any exposure to liability” by “deliberately absent[ing] themselves from the directors’ meeting at which the proposal is to be voted upon.” I therefore decline to “accord[] exculpatory significance” to Rogers’ “nonvote.” It is reasonably conceivable at this pleading stage that Rogers breached his duty of loyalty by participating in the Merger negotiations.

The Vice Chancellor also refused to apply Corwin to the transaction, noting that because the preferred stockholders received benefits that were not shared with the common stockholders, the favorable vote of a majority of the common stockholders was required in order to cleanse the deal under Corwin.

John Jenkins