May 28, 2024
Chancery Addresses Tension Between Fiduciary & Contractual Duties
One of the most challenging aspects of Delaware’s corporate law jurisprudence over the past 40 years has involved efforts to reconcile the contractual obligations that a target board may commit itself to in connection with a sale transaction and its fiduciary duties to target company stockholders. In his latest decision in In re Columbia Pipeline Merger Litigation, (Del. Ch.; 5/24), Vice Chancellor Laster devotes considerable attention to this tension between contractual and fiduciary obligations. In his blog on the case, Francis Pileggi offers some key takeaways from the Vice Chancellor’s decision. Here’s an excerpt from the blog:
– The court describes why, under Delaware law, fiduciary duties do not trump contracts—but rather, the opposite is true. The court discussed the rationale of the key Delaware cases on this topic over nearly 40 years: Van Gorkom; QVC; Omnicare; post-Omincare cases such as, e.g., C&J Energy Servs., Inc. v. Miami Gen. Empls.’, 107 A.3d 1049, 1072 (Del. 2014). Slip op. at 39 to 64.
– The court emphasized that Delaware law does not regard the fiduciary duties imposed by equity as more important than voluntarily assumed contractual commitments. Slip Op. at 61. Rather, the court instructed that:
“The cases overwhelmingly demonstrate that a court cannot invoke the fiduciary duties of directors to override a counterparty’s contract rights. That is true even when a heightened standard of review applies. To argue that case law empowers a court to set aside a contract when reviewing director actions under an enhanced form of judicial scrutiny, embraces the much-ridiculed position that the Omnicare majority was perceived to take. As consistently interpreted by courts and commentators, QVC does not support that assertion, and post-Omnicare case law soundly rejects it.”
The blog also notes that as part of his explanation of the fact that directors’ fiduciary duties don’t permit the corporation to avoid contractual obligations, the Vice Chancellor recognized the concept of “efficient breach,” and observed that a corporation can engage in efficient breach just like any other contracting party.
– John Jenkins