On August 1, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss a stockholder complaint asserting claims for breach of fiduciary duty against directors and executives of AGNC Investment Corp. (the “Company”) in connection with the renewals of investment management agreements with American Capital Mortgage Management, LLC (the “Manager”) and the Company’s subsequent acquisition of the Manager. H&N Mgmt. Group, Inc. & Aff Cos Frozen Money Purchase Plan v. Couch, C.A. No. 12847-VCMR (Del. Ch. Ct. Aug. 1, 2017). The Court concluded that the complaint pleaded particularized facts sufficient to establish demand futility and to allege that the board was grossly negligent in approving the transactions, a non-exculpated breach under the company’s charter.

The Company, a managed REIT, allegedly competes with another REIT managed by the Manager, American Capital Mortgage Investment Corporation (“MTGE”). The investment agreement between the Manager and the Company was renewed annually between 2009 and 2016, and in July 2016, the Company acquired the Manager in a $562 million cash deal. Plaintiff alleged that the board’s approval of the renewals breached its duty of care because the committee responsible for reviewing the renewals met for just 15 minutes for discussion, retained no advisors, and relied solely on information provided by the self-interested Manager, notwithstanding that the renewal was the largest financial decision of the Company each year. Plaintiff also asserted that the committee members were conflicted because they also sat on MTGE’s board. Regarding the acquisition, plaintiff claimed that the board allowed the Company’s CEO, also a director of MTGE, to dictate the transaction structure and ultimate deal terms.

The Court found that under Aronson, plaintiff adequately established demand futility because the specific allegations raised a reasonable doubt as to whether the board was adequately informed—i.e., exercised business judgment—in considering the renewals and acquisition. The Company charter exculpates directors for breaches of fiduciary duty but excludes conduct that constitutes “willful misfeasance, bad faith, gross negligence or reckless disregard of such director’s duties.” VC Montgomery-Reeves observed that, if the charter’s exculpation provision conferred the full protection of Section 102(b)(7)—which would include exculpation for gross negligence—then her ruling on the motion to dismiss might have been different.

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