DealLawyers.com Blog

This spring on TheCorporateCounsel.net, John blogged about the Delaware Chancery Court’s decision in In re Baker Hughes, a GE Company, Derivative Litigation, (Del. Ch. 4/23) involving a derivative action arising from the merger of Baker Hughes with General Electric’s oil and gas division claiming that GE exercised control over Baker Hughes and forced it to agree to transactions that unfairly favored GE. Vice Chancellor Will granted a motion to terminate the derivative action based on the recommendation of a one-person special litigation committee, even though that committee’s process wasn’t pristine:

To be sure, the committee was imperfect. Having a single member is not ideal. Nor is the fact that the member exchanged a handful of messages with an investigation subject. The committee’s report also omits any discussion of the potential transaction advisor conflicts it investigated. But despite these flaws, the committee’s independence, the thoroughness of its investigation, and the reasonableness of its conclusions are not in doubt.

John pointed out that special litigation committees can play a helpful role in addressing derivative claims in situations where a plaintiff has established demand futility. That committee has to be comprised solely of independent and disinterested directors, but there doesn’t have to be a room full of them for a company to reap the benefits of such a committee.

Sidley’s Enhanced Scrutiny blog discussed the decision in further detail and highlighted that the court carefully parsed the messages in question. At the time, the SLC member probably thought were totally innocuous — namely, “Thanks for the wine” referring to wine all company directors received as part of virtual social events during the pandemic and commentary about a remote SLC interview that the court ultimately determined was referring to “overcoming internet connection complications, rather than to the substance of the SLC’s investigation.”

Together, the court’s careful parsing of these communications illuminates a set of ground rules for committee member communications.  SLC members should be mindful of their communications with others on the board and should generally not discuss the committee’s work with non-members.  Any concerns in this space are best discussed with counsel.  Indeed, where a reference to the SLC’s work is absolutely essential for logistical planning purposes, the communication should clearly identify the logistical need and clearly limit the communication to that need.  As this case illustrates, innocuous social events such as virtual happy hours that involve de minimis gifts to the entire board likely do not jeopardize the board member’s independence, but they increase litigation risk and highlight the reasons to avoid such discussion if possible.

– Meredith Ervine