Delaware Supreme Court Applies Business Judgment Review to Controlling Shareholder Transaction

In mid-March, the Delaware Supreme Court issued what has been described as a landmark ruling in Kahn v. M&F Worldwide Corp., C.A. 6566 (Del. March 14, 2014). This decision affirmed then-Chancellor Leo Strine's application of the more deferential "business judgment" standard of review in granting a motion for summary judgment that dismissed a challenge to a controlling shareholder buyout. Brant Phillips has addressed this decision in depth for Inside Counsel in a May 1 article, found here.

Delaware Chancery Court Finds Investment Bank Aided and Abetted Board’s Breach of Fiduciary Duty

In In re Rural Metro Corp. S’holder Litig., No. 6350-VCL, 2014 Del. Ch. LEXIS 36, at *9 (Del. Ch. Mar. 7, 2014), the Delaware Court of Chancery found RBC Capital Markets LLC liable for aiding and abetting breaches of fiduciary duty by the directors of Rural Metro Corporation in connection with Rural's 2011 acquisition by Warburg Pincus LLC. In the opinion, Chancellor Laster found that RBC, in negotiating the transaction on behalf of Rural, had succumbed to multiple conflicts of interest when it was simultaneously pitching its services to the acquirer. The court found that RBC's undisclosed desire and efforts to secure the lucrative buy-side financing work tainted its valuation materials for Rural's board, making Warburg's offer appear more favorable than it was. These actions, along with a failure to provide timely interim valuation materials to the board or its special committees, did not allow the directors to have a "reasonably adequate understanding of the alternatives available to Rural, including the value of not engaging in a transaction at all."

The court also stressed the "active and direct" role that directors must maintain in the sale process "from beginning to end." The court found that potential liability for investment banks, characterized as "gatekeepers," would create a "powerful financial reason for the banks to provide meaningful fairness opinions and to advise boards in a manner that helps ensure that the directors carry out their fiduciary duties when exploring strategic alternatives and conducting a sale process." The court ultimately held that stockholders were entitled to recover from the bank, but it declined to impose a specific remedy. 

Tennessee Court of Appeals Holds That "Substantial Benefit Doctrine" Does Not Justify Award of Attorneys' Fees in a Class Action That Yields No Monetary Benefit for Shareholders

On February 11, 2014, the Tennessee Court of Appeals affirmed a Chancery Court decision denying plaintiffs' petition for an award of $850,000 in attorneys' fees under the common law "substantial benefit" doctrine. In In re: O’Charley’s, Inc. S’holder Litig., No. M2012-02221-COA-R3-CV (Tenn. Ct. App., Middle Div., Feb. 11, 2004), the Court of Appeals held that, where plaintiffs had filed an action seeking to enjoin the acquisition of O'Charley’s, Inc. by Fidelity National Financial, Inc., but had obtained no monetary recovery or "common fund" for the benefit of shareholders, there was "no legal authority or basis upon which [Plaintiffs were] entitled to recover their attorneys' fees" under Tennessee law, which strictly applies the American Rule absent a recognized statutory or common law exception. Tennessee law recognizes no exception to the American Rule for shareholder class actions that do not provide shareholders with a monetary recovery. 

Overton Thompson, Brant Phillips, and Joe Crace served as counsel for O'Charley's and its board of directors in this action. A copy of the Court of Appeals decision is available here.