The Delaware Chancery of Court recently addressed whether directors and officers who are affiliated with an entity that is buying company stock from a selling stockholder have a fiduciary duty of disclosure to such stockholder. Brett Stewart, a co-founder and former CEO and director of Wayport, Inc., a privately held Delaware corporation, sold a portion of his shares in Wayport to a private equity firm affiliated with a Wayport director for $3 per share in a first transaction, and for $2.50 per share in a second transaction. Stewart later learned that during the negotiation of the second sale, Wayport sold certain patents to Cisco Systems. A year later, Wayport sold its shares for $6.43 per share to another purchaser. Stewart brought suit in the Delaware Chancery of Court alleging breach of the fiduciary duty of disclosure and breach of the fiduciary duty of loyalty by the directors and officers of Wayport, among other causes of action. Stewart alleged that he would have set a higher price on his shares had he known about the patent sale.
The Court explained that the duty of disclosure is not an independent duty, but derives from the duties of care and loyalty, and that the scope and requirements of the disclosure duty depend on the facts and circumstances of the given situation. Three rules have developed from the case law: (i) the so-called "majority rule," which disavows the existence of any general fiduciary duty in this context, and holds that directors have no special disclosure duties in the purchase and sale of the corporation's stock, and need only refrain from misrepresentation and intentional concealment of material facts, (ii) the so-called "minority rule," which broadly requires directors to disclose all material information bearing on the value of the stock, and (iii) the "special facts doctrine," which imposes a duty of disclosure on directors in special circumstances, including "important transactions, prospective mergers, probable sales of the entire assets or business, agreements with third parties to buy large blocks of stock at a high price and impending declarations of unusual dividends." A "special fact" is a higher standard than a "material fact."
Here, the Court held that Delaware follows the "special facts doctrine." The Court ruled that the Cisco patent sale did not rise to the level of a "special fact," despite findings by Wayport's accountant that the patent sale was a material transaction. Although the Court acknowledged that the Cisco patent sale was a milestone for Wayport to monetize its patents and that the transaction was "sufficiently large" such that it would enter into the decision making of a reasonable stockholder, the Court determined that Stewart did not prove that the patent sale substantially affected the value of Wayport's stock to such an extent where it triggered the special facts doctrine.
In Re Wayport, Inc. Litigation, C.A. No. 4167-VCL (May 1, 2013).