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

d. Candor.Where directors approve an SEC report that materially misrepresents the nature ofbenefits provided by a corporation to its controlling shareholder, Chancellor Chandler explainedin 2007 that the directors can breach their fiduciary duties of candor and good faith, which aresubsets of the duty of loyalty, when they allow their companies to issue deceptive or incompletecommunications to their stockholders:When a Delaware corporation communicates with its shareholders, even inthe absence of a request for shareholder action, shareholders are entitled to honestcommunication from directors, given with complete candor and in good faith.Communications that depart from this expectation, particularly where it can beshown that the directors involved issued their communication with the knowledgethat it was deceptive or incomplete, violate the fiduciary duties that protectshareholders. Such violations are sufficient to subject directors to liability in aderivative claim.* * *Although directors have a responsibility to communicate with completecandor in all shareholder communications, those that are issued with respect to arequest for shareholder action are especially critical. Where, as here, the directorssought shareholder approval of an amendment to a stock option plan that couldpotentially enrich themselves and their patron, their concern for complete andhonest disclosure should make Caesar appear positively casual about his wife’sinfidelity. 9494setting compensation, at “which point a decision of the directors on executive compensation is so disproportionatelylarge as to be unconscionable and constitute waste.” If waste is found, it is a non-exculpated violation, as wasteconstitutes bad faith. The Court explained why the compensation package for the departing CEO, who allegedly was atleast partially responsible for Citigroup’s staggering losses, had been adequately pleaded as a waste claim:According to plaintiffs’ allegations, the November 4, 2007 letter agreement provides that Prince willreceive $68 million upon his departure from Citigroup, including bonus, salary, and accumulatedstockholdings. Additionally, the letter agreement provides that Prince will receive from Citigroup anoffice, an administrative assistant, and a car and driver for the lesser of five years or until he commencesfull time employment with another employer. Plaintiffs allege that this compensation packageconstituted waste and met the “so one sided” standard because, in part, the Company paid the multimilliondollar compensation package to a departing CEO whose failures as CEO were allegedlyresponsible, in part, for billions of dollars of losses at Citigroup. In exchange for the multi-milliondollar benefits and perquisites package provided for in the letter agreement, the letter agreementcontemplated that Prince would sign a non-compete agreement, a non-disparagement agreement, a nonsolicitationagreement, and a release of claims against the Company. Even considering the text of theletter agreement, I am left with very little information regarding (1) how much additional compensationPrince actually received as a result of the letter agreement and (2) the real value, if any, of the variouspromises given by Prince. Without more information and taking, as I am required, plaintiffs’ wellpleaded allegations as true, there is a reasonable doubt as to whether the letter agreement meets theadmittedly stringent “so one sided” standard or whether the letter agreement awarded compensation thatis beyond the “outer limit” described by the Delaware Supreme Court. Accordingly, the Complaint hasadequately alleged, pursuant to Rule 23.1, that demand is excused with regard to the waste claim basedon the board’s approval of Prince’s compensation under the letter agreement.In Re: INFOUSA, Inc. Shareholders Litigation, CA No. 1956-CC (Del. Ch. August 20, 2007); see infra notes 319 and711 and related text.5446095v.128