DealLawyers.com Blog

In Guilbeau v. Footprint International Holdco, Inc.,(Del. Ch.; 4/26), the Chancery Court addressed, among other things, the fiduciary duties of a director appointed by a particular shareholder or group.  The case arose out of a challenge by Class A preferred stockholders to a proposed cram-down financing plan.  In connection with his assessment of the plaintiffs’ implied covenant claims, Vice Chancellor Laster was called upon to address the fiduciary duties of the directors appointed by the Class A holders. This excerpt sets forth his analysis of the duties of constituency directors:

Delaware law does not generally recognize constituency directors. Delaware law rests on the bedrock principle that directors of a Delaware corporation owe fiduciary duties to act carefully, loyally, and in good faith to promote the value of the corporation for the benefit of its stockholders.

“In a world with many types of stock— preferred stock, tracking stock, common stock with special rights, common stock with diminished rights (such as non-voting common stock), plain vanilla common stock, etc.—and many types of stockholders—record and beneficial holders, long-term holders, short-term traders, activists, momentum investors, noise traders, etc.—the question naturally arises: which stockholders?” “The answer is the stockholders in the aggregate in their capacity as residual claimants, which means the undifferentiated equity as a collective, without regard to any special rights.”

Directors thus owe fiduciary duties to the entity and the entire body of stockholders generally rather than to individual stockholders or stockholder subgroups.

The Vice Chancellor went on to say that Delaware decisions have consistently rejected the argument that a director can or should serve the interests of the group that appointed that person, and that directors who act to benefit the investors who appointed them instead of acting in the best interests of the corporation and all of its stockholders breach their duty of loyalty.

For more details about this decision, check out Francis Pileggi’s recent blog.

– John Jenkins