On August 31, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims asserted against the directors of USG Corporation by former stockholders following its acquisition by a privately held German manufacturer of building materials. In re USG Stockholder Litigation, C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020). Plaintiffs alleged that defendants failed to secure maximum value for their shares in connection with the merger and sought damages, including by way of quasi-appraisal. Even though an overwhelming majority of the disinterested stockholders approved the sale, the Court declined to dismiss the claims based on Corwin cleansing because plaintiffs had adequately pleaded that the proxy was materially misleading. Nevertheless, the Court granted the motion to dismiss because USG’s corporate charter exculpated the directors, and plaintiffs failed to adequately allege bad faith or disloyalty as required to plead a non-exculpated claim.
Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), breach of fiduciary duty claims with respect to a transaction are subject to dismissal under the business judgment rule if approved by a fully informed, uncoerced majority vote of the disinterested stockholders. Here, the Court found Corwin inapplicable because plaintiffs adequately alleged that the proxy was materially misleading as it did not disclose that defendants had reached a subjective belief that USG had an “intrinsic value” nearly 15% higher than the deal price.
Plaintiffs argued that the deficient disclosure also necessarily raised a reasonable inference of bad faith sufficient to overcome the limitations on liability pursuant to the company’s exculpation provision under Delaware General Corporation Law Section 102(b)(7). The Court, however, explained that “the concept of bad faith, and the determination of adequate disclosure for Corwin purposes, are fundamentally separate” and “involve different inquiries, the outcomes of which are not necessarily mutually supportive.” Moreover, the Court found that “in light of the other disclosures made, it is not reasonably conceivable that [the] non-disclosure rises to the level of conscious disregard of duty.” Among other things, the Court highlighted that the proxy disclosed that defendants had sought (unsuccessfully) a higher price in negotiations and that the board discussed the pros and cons of issuing a public statement regarding its view of intrinsic value, but decided not to issue such a statement.
The Court also rejected plaintiffs’ contention that they had nevertheless sufficiently pleaded a claim for breach of “Revlon duties” to act reasonably to maximize the sale price. As the Court emphasized: “In order to avoid dismissal [of a post-closing damages claim], a pleading from which I can merely infer an unreasonable sales process is not enough to overcome an exculpatory clause’s protections; to survive, such pleading must reasonably imply breach of a non-exculpated duty.”