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

seek out the advice of legal counsel, financial advisors, and other professionals, as needed; theyshould, where appropriate, reasonably rely upon information, reports, and opinions provided byofficers, experts or board committees; and they should take sufficient time (as may be dictated bythe circumstances) to reflect on decisions before making them. Action by unanimous writtenconsent ordinarily does not provide any opportunity for, or record of, careful Boarddeliberations. 105b. Business Judgment Rule Not Applicable When Board Conflicted.In Gantler v. Stephens, 106 the Delaware Supreme Court held that the business judgmentrule was not applicable to the Board’s decision to approve a going private stock reclassificationproposal in which by amendment to the certificate of incorporation common stock held bysmaller stockholders was converted into non-voting preferred stock because the directors wereconflicted. The complaint (which the Court accepted as true because the decision was ondefendants’ motion to dismiss) alleged that the director defendants improperly rejected a valuemaximizingmerger bid and terminated the sales process to preserve personal benefits, includingretaining their positions and pay as directors, as well as valuable outside business opportunities.The complaint further alleged that the Board failed to deliberate before deciding to reject the bidand to terminate the sales process, yet repeatedly disregarded its financial advisor’s advice.The Court noted that “[a] board’s decision not to pursue a merger opportunity is normallyreviewed within the traditional business judgment framework,” but:[T]he business judgment presumption is two pronged. First, did the Boardreach its decision in the good faith pursuit of a legitimate corporate interest?Second, did the Board do so advisedly? For the Board’s decision here to beentitled to the business judgment presumption, both questions must be answeredaffirmatively.* * *Here, the plaintiffs allege that the Director Defendants had a disqualifyingself-interest because they were financially motivated to maintain the status quo.A claim of this kind must be viewed with caution, because to argue that directorshave an entrenchment motive solely because they could lose their positionsfollowing an acquisition is, to an extent, tautological. By its very nature, a boarddecision to reject a merger proposal could always enable a plaintiff to assert that amajority of the directors had an entrenchment motive. For that reason, theplaintiffs must plead, in addition to a motive to retain corporate control, otherfacts sufficient to state a cognizable claim that the Director Defendants acteddisloyally.105106Official Committee of Unsecured Creditors of Integrated Health Services, Inc. v. Elkins, 2004 WL 1949290 (Del. Ch.Aug. 24, 2004) (Compensation Committee forgiveness of a loan to the CEO by written consent without any evidence ofdirector deliberation or reliance upon a compensation expert raised a Vice Chancellor’s “concern as to whether it actedwith knowing or deliberate indifference.”)___ A.2d ___, 2009 WL 188828 (Del. 2009).5446095v.132