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

of the corporation, and in a manner that is not knowingly unlawful or contrary to public policy.While the Court’s review requires it to examine the Board’s subjective motivation, the Court willutilize objective facts to infer such motivation. Like a duty of care analysis, such review likelywill focus on the process by which the Board reached the decision under review. Consistent withearlier articulations of the level of conduct necessary to infer bad faith (or irrationality), morerecent case law suggests that only fairly egregious conduct (such as a knowing and deliberateindifference to a potential risk of harm to the corporation) will rise to the level of “bad faith.” 60“Waste” constitutes “bad faith,” but director liability for waste requires proof that thedirectors approved an “exchange that is so one sided that no business person of ordinary, soundjudgment could conclude that the corporation has received adequate consideration.” 61 Waste is aderivative claim. 62The impetus for an increased focus on the duty of good faith is the availability ofdamages as a remedy against directors who are found to have acted in bad faith. DGCL§ 102(b)(7) authorizes corporations to include in their certificates of incorporation a provisioneliminating or limiting directors’ liability for breaches of the fiduciary duty of care. However,DGCL § 102(b)(7) also expressly provides that directors cannot be protected from liability foreither actions not taken in good faith or breaches of the duty of loyalty. 63 A finding of a lack ofgood faith has profound significance for directors not only because they may not be exculpatedfrom liability for such conduct, but also because a prerequisite to eligibility for indemnificationunder DGCL § 145 of the DGCL is that the directors who were unsuccessful in their litigationnevertheless must demonstrate that they have acted “in good faith and in a manner the personreasonably believed was in or not opposed to the best interests of the corporation.” 64Accordingly, a director who has breached the duty of good faith not only is exposed to personalliability, but also may not be able to seek indemnification from the corporation for any judgmentobtained against her or for expenses incurred (unsuccessfully) litigating the issue of liability. 65Thus, in cases involving decisions made by directors who are disinterested and independent withrespect to a transaction (and, therefore, the duty of loyalty is not implicated), the duty of goodfaith still provides an avenue for asserting claims of personal liability against the directors.606162636465In re the Walt Disney Company Derivative Litigation, 906 A.2d 27 (Del. 2006).In Re Citigroup Inc. Shareholder Derivative Litigation, C.A. No. 3338-CC, 2009 WL 448192 (Del. Ch. Feb. 24, 2009).Thornton v. Bernard Technologies, Inc., C.A. No. 962-VCN (Del. Ch. February 20, 2009) (“When a director engagesin self-dealing or commits waste, he takes from the corporate treasury and any recovery would flow directly back intothe corporate treasury.”)Specifically, DGCL § 102(b)(7) authorizes the inclusion in a certificate of incorporation of:A provision eliminating or limiting the personal liability of a director to the corporation or itsstockholders for monetary damages for breach of fiduciary duty as a director, provided that suchprovision shall not eliminate or limit the liability or a director: (i) For any breach of the director’s dutyof loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or whichinvolve intentional misconduct or a knowing violation of law; (iii) under §174 of this title [dealing withthe unlawful payment of dividends or unlawful stock purchase or redemption]; or (iv) for anytransaction from which the director derived an improper personal benefit . . . .DGCL §§ 145(a)-(b).In contrast, it is at least theoretically possible that a director who has been found to have breached his or her duty of loyaltycould be found to have acted in good faith and, therefore, be eligible for indemnification of expenses (and, in non-derivativecases, amounts paid in judgment or settlement) by the corporation. See Blasius Industries, Inc. v. Atlas Corp., 564 A.2d651 (Del. Ch. 1988) (directors found to have acted in good faith but nevertheless breached their duty of loyalty).5446095v.114