On May 20 2016 Vice Chancellor Glasscock of the Delaware Court of Chancery issued a ruling in In re Chelsea Therapeutics International Ltd Stockholders Litigation(1) granting dismissal of breach of fiduciary duty claims brought against the directors of Chelsea Therapeutics arising from a tender offer and intermediate merger under Section 251(h) of the Delaware General Corporation Law. The plaintiffs contended that the directors had acted in bad faith by knowingly selling the company for an amount substantially below its standalone value, including by instructing the company's financial advisers to ignore a more optimistic internal financial model in favour of projections prepared by a consulting firm when conducting their fairness analysis.
However, the court concluded that the plaintiffs failed to allege that the directors were interested in the transaction or otherwise lacked independence. Because of this, and because Chelsea's governing documents included a Section 102(b)(7) exculpatory provision, the court focused its ruling on the narrow question of whether the plaintiffs had sufficiently alleged a non-exculpated claim that the directors had breached their duty of loyalty. The court noted that the plaintiffs were required to show an extreme set of facts to establish either that "disinterested directors were intentionally disregarding their duties" or that the board's decision was "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith". Scrutinising the plaintiffs' allegations against that high bar, Glasscock dismissed the complaint because it was well within the bounds of reason for the directors to decline to use optimistic projections of speculative value as indicators of the company's value.
In reaching its decision, the court expressly declined to decide whether the holding in Corwin v KKR Financial Holdings LLC – which held that the business judgement rule protects the conduct of directors in connection with transactions approved by a vote of fully informed, uncoerced and disinterested stockholders – would apply to a transaction effected pursuant to Section 251(h). In declining to do so, the court noted that it is unclear under Corwin whether a stockholder vote cleanses a board action in bad faith, even if the act is disclosed to stockholders before the vote. Second, the rule in Corwin applied to one-step mergers, not tender offers where there is no formal vote.(2) Given the particular difficulty of alleging a non-exculpated breach of fiduciary duties, this opinion highlights the deference that Delaware courts will continue to extend to disinterested and independent directors not otherwise shown to be intentionally disregarding their duties in the conduct of a sale process.
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