fiduciary duty issues in m&a transactions - Jackson Walker LLP

has been characterized as including duties of loyalty (including good faith), care andobedience. 11 In Delaware, the fiduciary duties include those of loyalty (including good faith) andcare. 12 Importantly, the duties of due care, good faith and loyalty give rise to a fourth importantprecept of fiduciary obligation under Delaware law – namely, the so-called “duty of disclosure,”which requires the directors disclose full and accurate information when communicating withstockholders. 13 The term “duty of disclosure,” however, is somewhat of a misnomer because noseparate duty of disclosure actually exists. Rather, as indicated, the fiduciary obligations ofdirectors in the disclosure context involve a contextually-specific application of the duties of careand loyalty. 14B. Applicable Law.“The internal affairs doctrine is a conflict of laws principle which recognizes that onlyone State should have the authority to regulate a corporation’s internal affairs,” 15 and “under thecommerce clause a state ‘has no interest in regulating the internal affairs of foreigncorporations.’” 16 “Internal corporate affairs” are “those matters which are peculiar to therelationships among or between the corporation and its current officers, directors, andshareholders,” and are to be distinguished from matters which are not unique to corporations:111213141516“Simply ‘polling board members does not constitute a valid meeting or effective corporation action,’” the Chancellorinstructed. In any event, the Court added, if the meeting did occur, it would be void because the independentdirectors—who kept secret their plan to fire Fogel—obtained Fogel’s attendance by deception. Although Fogel lackedthe votes needed to protect his employment, the Chancellor reasoned that had he known of the defendants’ plansbeforehand, “he could have exercised his right under the bylaws to call for a special meeting before the board met. Thedeception renders the meeting and any action taken there void.” Accordingly, Fogel was still authorized on July 1 tocall for a special shareholder meeting, and corporation and its Board were ordered to hold such a meeting.The Chancellor disagreed with the independent directors’ argument that even if the June 29 meeting and terminationwere deficient, “any problems were cured” when the Board ratified its June 29 actions during the July 1 meeting,holding: “When a corporate action is void, it is invalid ab initio and cannot be ratified later.” The Chancellor said theaction taken at the July 1 meeting may have resulted in Fogel’s termination, but the termination was effective only as ofthat vote. By that time, however, Fogel already had issued his call for a special shareholders’ meeting.Nonetheless, the Court concluded that the independent directors ignoring Fogel’s call for a special meeting was not tothwart a shareholder vote, but because they “believed in good faith” that Fogel had been terminated and thus “lackedthe authority to call for such a meeting.” Accordingly, the Chancellor held that the three independent directors did notbreach their fiduciary obligations of loyalty.Gearhart Industries, Inc. v. Smith Intern., Inc., 741 F.2d at 719.While good faith “may be described colloquially as part of a “triad” of fiduciary duties that includes the duties of careand loyalty,” the Delaware Supreme Court recently clarified the relationship of “good faith” to the duties of care andloyalty, noting that “the obligation to act in good faith does not establish an independent fiduciary duty that stands onthe same footing as the duties of care and loyalty. Only the latter two duties, where violated, may directly result inliability, whereas a failure to act in good faith may do so, but indirectly. The second doctrinal consequence is that thefiduciary duty of loyalty is not limited to cases involving a financial or other cognizable fiduciary conflict of interest. Italso encompasses cases where the fiduciary fails to act in good faith.” Stone v. Ritter, 911 A.2d 362, 2006 WL3169168 (Del. 2006). See infra notes 49-108, 294-334 and related text.“Once [directors] traveled down the road of partial disclosure … an obligation to provide the stockholders with anaccurate, full, and fair characterization” attaches. Arnold v. Society for Savings Bancorp, Inc., 650 A.2d 1270, 1280(Del. 1994); see also In re MONY Group S’holder Litig., 852 A.2d 9, 24-25 (Del. Ch. 2004) (“[O]nce [directors] take itupon themselves to disclose information, that information must not be misleading.”).Malone v. Brincat, 722 A.2d 5, 10 (Del 1998) (“[W]hen directors communicate with stockholders, they must recognizetheir duty of loyalty to do so with honesty and fairness”); see infra notes 306-319 and related text.Edgar v. MITE Corp., 457 U.S. 624, 645 (1982).McDermott, Inc. v. Lewis, 531 A.2d 206, 217 (Del. 1987); Frederick Tung, Before Competition: Origins of the InternalAffairs Doctrine, 32 J. CORP. L. 33 (Fall 2006).5446095v.14