DealLawyers.com Blog

This Mayer Brown alert outlines a three-step process for evaluating conflict transactions following the DGCL amendments that took effect in March. Below, I’ve streamlined the outline. It also contains details on and analyses of each of these steps and sets forth procedural safeguards to invoke the safe harbors.

Step One: Does the act or transaction involve a controlling stockholder or a control group?

1. Is there a controlling stockholder or a control group?
2. If the corporation has a controlling stockholder or a control group, are they involved in the act or transaction?
3. Is the act or transaction a going private transaction?

 

Step Two: If the act or transaction does not involve controlling stockholders or a control group, are directors or officers of the corporation involved?

Step Three: Are the safe harbor requirements met?

1. Determine which directors and stockholders are disinterested.
2. Will the corporation rely on the fairness safe harbor?

The alert concludes with this reminder:

What if a conflicted transaction fails to qualify for a safe harbor? If a conflicted transaction fails to satisfy any of the safe harbor criteria, including the fairness fallback, the relevant directors, officers, controlling stockholders, and control group members may be exposed to liability, including monetary damages, for breaches of their fiduciary duties. Delaware courts will assess whether to impose liability based on the individual conduct of such corporate actors:

– For breaches of the duty of care, controlling stockholders benefit from §144(d)(5) exculpation, and directors and officers may benefit from similar exculpation under the certificate of incorporation, subject to limitations relating to bad faith, intentional misconduct, knowing violations of law, and receipt of an improper personal benefit.

– Breaches of the duty of loyalty cannot be exculpated and will result in liability if proven that the director, officer, or controlling stockholder acted in a self-interested manner adverse to stockholder interests, lacked independence, or acted in bad faith.

The §144 safe harbors are not exclusive protections and do not preclude other Delaware common law protections, including circumstances under which the business judgment rule is presumed to apply.

– Meredith Ervine