The California Court of Appeals has upheld a well-recognized California corporate law principle that boards of directors of California corporations can lawfully obligate themselves to engage in a merger or other extraordinary transaction without the benefit of "fiduciary out." The case was based on an investment agreement providing for a significant capital infusion into a bank to enable it to meet regulatory requirements. Two shareholders unsuccessfully sought to enjoin the capital infusion on several grounds.
In reviewing the lower court's denial of injunctive relief, the California Court of Appeals ruled that the bank's board of directors did not breach its duties to the shareholders by not making the capital infusion subject to a "fiduciary out." The "fiduciary out" would have enabled the bank to terminate the capital infusion if a more favorable transaction became available. In so ruling, the California Court of Appeals refused to follow the Delaware Supreme Court's 2003 Omnicare decision. In Omnicare, the court split 3 to 2, with the majority holding that the target's board of directors had breached its fiduciary duties by agreeing to the target's acquisition pursuant to an agreement that virtually locked up the acquisition. Over time, the Omnicare decision has become one of the more controversial mergers and acquisitions decisions and has been criticized even by the Delaware judiciary.
Monty v. Leis, No. B225646 (Cal. Ct. App. March 30, 2011)