On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC. In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019). Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction. The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal. Nevertheless, based on its “holistic” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
In determining the adequacy of the complaint’s allegations regarding lack of independence, the Court cited several allegations with respect to the personal and professional relationship of each of the relevant directors with the CEO. For example, for one director, the Court referenced service on two boards with the CEO over the past ten years and noted that “she appears to be” one of the CEO’s “go-to choices for board appointments on companies he controls.” The Court also highlighted that this board service was allegedly material to the director, as it purportedly represented over 30% of her annual income in recent years. In addition, the Court noted her alleged service as the former provost of the CEO’s alma mater, to which he allegedly has a strong connection and donated $65 million. In this regard, the Court added: “It can reasonably be inferred that these donations benefited [the director] professionally as Provost . . . and deepened her personal relationship with [the CEO].” In sum, the Court found that the complaint adequately pleaded allegations that “paint a picture of a close relationship between [the two], both professionally and personally, such that there is a reasonable doubt as to [the director’s] independence from [the CEO] for purposes of deciding whether or not to bring a lawsuit against [him].”
Based on the same allegations of personal and professional relationships with the CEO, the Court also upheld claims at the pleading stage for breach of fiduciary duties against the directors who served on the special committee that approved the transaction, notwithstanding an exculpatory provision in BGC’s certificate of incorporation. The Court explained that the complaint adequately “plead[ed] facts supporting a rational inference that, by voting to approve the Transaction, [the directors] acted to advance the self-interest of an interested party . . . from whom they could not be presumed to act independently.”