In July 2005, TRADOS Inc. was acquired for $60 million. Under the company's certificate of incorporation, the acquisition constituted a liquidation that entitled preferred stockholders to a liquidation preference. After payments under the management incentive plan and payments to preferred stockholders, the common stockholders were left without consideration. As a result, one of the company's common stockholders sued the directors arguing that they had a fiduciary duty to continue to operate the company to generate value for the common stock.
Because the acquisition decision was not approved by a majority of independent and disinterested board members (as six of the seven members were interested), the Court applied the entire fairness standard, rather than relying on the business judgment presumption, to evaluate the acquisition and determine whether the directors fulfilled their fiduciary duties.
The Court explained that the proper test of fairness is to analyze whether the minority stockholders received the substantial equivalent in value of what they had before the merger. The Court reasoned that since the common stock had no economic value before the merger, then the common stockholders received the substantial equivalent in value of what they had before, and the merger satisfied the test of fairness. The Court held that although the directors "did not adopt any protective provisions, failed to consider the common stockholders, and sought to exit without recognizing the conflicts of interest presented by the merger, they nevertheless proved that the transaction was fair."
In re Trados Inc. S'holder Litig., Consol. C.A. No. 1512-VCL (Del. Ch. Aug. 16, 2013).