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In CIBC v. Barker, (Del. Ch.; 5/26), the Chancery Court dismissed a creditor’s derivative breach of fiduciary duty claims against the board of a distressed company. Those claims were premised on allegations that the board acted in bad faith in rejecting viable acquisition proposals in pursuit of a deal that would provide sufficient funds to satisfy the liquidation preference of its preferred stock and benefit the company’s other equity holders, and that the board failed to appropriately oversee the CEO’s role in the sale process.

According to the complaint, BERA, a distressed SaaS company controlled by a board that included significant stockholders and representatives of its preferred stockholder, PeakEquity, engaged in extensive efforts to pursue a sale transaction, the process was undermined by internal conflicts, particularly the CEO’s insistence on a valuation high enough to benefit equity holders and his alleged interference with potential buyers.

Ultimately, the company became insolvent and the board could not agree over lower-value offers that would not satisfy the preferred liquidation preference. It’s lender, CIBC, therefore moved forward with an Article 9 foreclosure sale. While the company owned CIBC more than $7 million, it realized only $650,000 in that transaction, allegedly due to the collapse of higher bids as a result of the CEO’s conduct.

In rejecting the plaintiff’s bad faith claims, Vice Chancellor Will concluded that stripped of its conclusory allegations, the complaint failed to satisfy the high bar for bad faith claims. CIBC argued that it was unreasonable for the board to pursue a deal that would satisfy PeakEquity’s liquidation preference and leave something for other equity holders. The Vice Chancellor disagreed:

Delaware law does not require directors of an insolvent corporation to abandon efforts to maximize enterprise value simply because creditors stand to capture any incremental recovery. Even accepting that the Board wished to clear Peak’s liquidation preference to generate a return for junior stockholders, that goal aligns with maximizing BERA’s value. That BERA failed to close a going concern sale and ultimately liquidated does not mean that the directors acted in bad faith when evaluating earlier proposals.

Vice Chancellor Will also rejected the oversight allegations – which were not framed as Caremark claims – observing that the complaint engaged in “group pleading” to impute bad faith to the directors from the CEO’s alleged misconduct. Instead of any specific allegations that the directors knew and failed to respond to the CEO’s actions, the complaint simply speculated that “the directors must have known about [the CEO’s] actions based on their “attendance at Board meetings and participation in the management of the Company.” She also found other conduct pointed to by CIBC as indicating failures of oversight by the directors as insufficient to withstand the motion to dismiss.

Ultimately, the Vice Chancellor concluded that the plaintiff was unable to demonstrate either a material benefit on the part of the director defendants or a substantial likelihood of liability for an unexculpated claim. Since both of these factors were required to demonstrate demand futility under Zuckerberg, Vice Chancellor Will dismissed CIBC’s derivative claims.

While the fiduciary duty claims against the company’s directors were dismissed, the CEO wasn’t as fortunate, and the Court allowed CIBC to proceed with tortious interference claims against him.

– John Jenkins