recent developments in delaware corporate law - Greenberg Traurig ...

More documents

Recommendations

Info

184 Delaware Law Review Volume 7:2 that the Rales test, 29 as opposed to the Aronson test, 30 should govern the motion to dismiss under Court of Chancery Rule 23.1. 31 The plaintiff alleged that each of the seven members of the NVIDIA board was “‘interested’ for purposes of considering a demand because each traded stock during the Contested Period.” 32 The court rejected “this attempt to extend concepts designed to fit classic self-dealing transactions into another context that is quite different.” 33 Instead, the court determined that the alleged “interested” transaction involved in the insider trading claim was a transaction not between the defendant-directors and NVIDIA, but rather between the defendant-directors and marketplace buyers that did not warrant an automatic conclusion that the directors were “interested.” 34 The court then proceeded to discuss 29. See Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993). The Rales test is outlined in brief in footnote 49 infra. 30. See Aronson v. Lewis, 473 A.2d 805 (Del. 1984). 31. Guttman, 823 A.2d at 499-500 (“As this court held in In re Baxter Int’l, Inc. S’holders Litig. — and both parties concur — these kinds of allegations do not attack a specific business judgment of the board, and, therefore, the Rales test, and not the two-pronged demand excusal test of Aronson v. Lewis, is applied to determine whether demand is excused.”). 32. Id. at 502. See also Rattner v. Bidzos, C.A. No. 19700, 2003 WL 22284323 (Del. Ch. Sept. 30, 2003) (making similar claims of insider trading). 33. Guttman, 823 A.2d at 502. Id. 34. Id. at 502. The court explained as follows: As a matter of course, corporate insiders sell company stock and such sales, in themselves are not quite as suspect as a self-dealing transaction in which the buyer and seller can be viewed as sitting at both sides of the negotiating table. Although insider sales are (rightly) policed by powerful forces — including criminal laws — to prevent insiders from unfairly defrauding outsiders by trading on non-public information, it is unwise to formulate a common law rule that makes a director “interested” whenever a derivative plaintiff cursorily alleges that he made sales of company stock in the market at a time when he possessed material, non-public information.
2004 Recent Developments in Delaware Corporate Law 185 whether the board’s impartiality was compromised by the threat of personal liability for insider trading. 35 In order for the members of the board (other than defendant-directors Huang and Gaither, whose lack of impartiality was assumed by the court) to have their impartiality compromised: [T]hey must face a substantial likelihood of liability for breach of fiduciary duty for one of two alternative reasons: (1) that they personally profited from stock sales while in knowing possession of material, non-public information or (2) that they committed a non-exculpated breach of fiduciary duty by failing to oversee the company’s compliance with legally mandated accounting disclosure standards. 36 The court ultimately concluded that the “cursory allegations of the complaint … do not come close to meeting the plaintiffs’ burden to show that these five defendants face a substantial threat of liability for insider-trading based on fiduciary duty violations,” primarily because the complaint failed to “provide[] any particularized basis to infer that these outside directors had any idea about the questionable accounting practices underlying the insider trading clauses.” 37 In In re eBay, Inc. Shareholders Litigation, 38 the Court of Chancery concluded that compensation paid to the directors of eBay, Inc. (“eBay”) was so significant as to compromise the directors’ independence in the demand futility context. 35. The court assumed without deciding that defendant Huang, the only member of management, and defendant Gaither, former partner and current senior counsel at Cooley Godward, a law firm that had previously represented NVIDIA, could not exercise impartiality with respect to a demand by the plaintiff. Id. at 502-03. 36. Id. at 503. 37. Id. at 504. See also Rattner v. Bidzos, C.A. No. 19700, 2003 WL 22284323 (Del. Ch. Sept. 30, 2003) (similarly concluding that mere allegations of trading during the relevant period, with no accompanying allegations as to the knowledge of the directors of inside information, did not compromise the independence of the directors). 38. C.A. No. 19988, 2004 WL 253521 (Del. Ch. Jan. 23, 2004). The court in eBay also found that the complaint’s “spinning” allegations stated a corporate opportunity claim. In addition, the court concluded that the plaintiff had adequately stated an aiding and abetting claim against Goldman Sachs with respect to the defendant-directors’ breach of fiduciary duty. These claims are not discussed herein.
Page 1 and 2: 2004 Recent Developments in Delawar
Page 7: 2004 Recent Developments in Delawar

recent developments in delaware corporate law - Greenberg Traurig ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?