Del. Ch., C.A. No. 2728-VCS
Shareholders of Lear Corporation derivatively sued Lear’s directors for breach of fiduciary duty in connection with a revised merger agreement where the acquiring company increased its offer by $1.25 per share in exchange for a “No-Vote Termination Fee.” This $25 million termination fee was payable by Lear to the acquirer if Lear’s shareholders failed to approve the revised merger agreement. This quid quo pro - the increase of the offer in exchange for the termination fee - occurred because it became apparent that Lear’s shareholders would not approve the merger at the original offer. Procedurally, the case was before the court on defendants’ motion to dismiss for failure to make a demand on Lear’s board of directors. Because Lear’s board was comprised of a “super-majority” of disinterested directors, plaintiffs were relegated to pleading that the transaction was not “the product of a valid exercise of business judgment.” Lear’s certificate of incorporation contained a Section 102(b)(7) exculpatory provision, and the plaintiffs attempted to show that the Lear directors approved the revised merger agreement with the termination fee in bad faith. Vice-Chancellor Strine rejected plaintiffs’ arguments and dismissed their Fourth Amended Complaint. First, the court found that the complaint failed to allege a lack of due care. Next, the court held that although the CEO, who was one of two negotiators for Lear, had an interest in seeing the transaction completed, that interest aligned with the corporation’s shareholders’ interests because he was motivated to seek more money per share through the acquirer’s offer in order to obtain shareholder approval. Finally, the Vice-Chancellor rejected the argument that Lear’s directors violated the duty of loyalty by acting with “’no care’” and in bad faith by approving the revised merger agreement with knowledge that it might not be approved by the shareholders. He stated that “[i]t would be inconsistent with the business judgment rule for this court to sustain a complaint grounded in the concept that directors act disloyally if they adopt a merger agreement in good faith simply because stockholders might (?), were likely (?), or were almost certain (?) to reject it.” In reaching this final conclusion, the court warned against blurring the lines between the standard for breach of the duty of care - gross negligence - and other fiduciary standards. The court admonished and warned against plaintiffs’ attempt to apply the standard from the monitoring context to situations involving approval of discrete transactions. The Vice-Chancellor expressed the view that “Caremark and its progeny have held that directors can be held culpable in the monitoring context if they breach their duty of loyalty by ‘a sustained or systematic failure . . . to exercise oversight,’ or ‘were conscious of the fact that they were not doing their jobs [as monitors].’” (internal footnotes omitted & bracketed material in original). The complaint pled no facts to satisfy this standard. Returning to his warning against using cases in the monitoring context to approval of discrete transaction, Vice-Chancellor Strine discussed the inherent need of a board to allocate time among its decisions, stating that “[c]ourts should therefore be extremely chary about labeling what they perceive as deficiencies in the deliberations of an independent board majority over a discrete transaction as not merely negligence or even gross negligence, but as involving bad faith.”
The full opinion is available here.