June 1, 2022

Fiduciary Duty: Another Abstaining Director Can’t Get Off The Hook

Earlier this year, I blogged about the Delaware Chancery Court’s decision in Lockton v. Rogers, (Del. Ch.; 3/22), in which the Vice Chancellor Glasscock refused to dismiss breach of fiduciary duty allegations against a director despite the fact that he abstained from voting on the proposed transaction that gave rise to the claims. More recently, in Harris v. Junger, (Del. Ch.; 5/22), another director gave that defense a try in a motion to dismiss. Vice Chancellor Glasscock once again promptly shot it down:

Junger argues that he should be dismissed because he was not a member of the Special Committee that negotiated the Merger, and because he abstained from voting on the Merger. However, it is reasonable to infer from the allegations of the Complaint that Junger played a role in negotiating the
Merger. Notably, Junger was a member of the initial special committee formed to consider a merger of Fat Brands and Fog Capital. Although that special committee disbanded in May 2020, the Board, including Junger, continued to discuss the Merger, with no special committee in place, between June and August 2020. Even after the Board approved the Special Committee’s charter in September 2020, the Board, including Junger, continued to discuss the Merger at regular Board meetings.

Together, these facts give rise to a reasonable inference that Junger was involved in the Merger negotiations, even if he did not participate in Special Committee meetings or vote to approve the Merger.

Citing both In re Tri-Star Pictures, Inc., Litig. (Del. Ch.; 3/95) and his own recent opinion in Lockton v. Rogers, the Vice Chancellor said that directors involved in negotiating a deal can’t “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.”

John Jenkins