Thursday, April 28, 2016

Delaware justice league disclaims idea of 'super-directors'

By Anne Sherry, J.D.

As sanctions for their misconduct during the litigation, the Delaware Court of Chancery dismissed the claims of OptimisCorp and its CEO against three directors and the CFO. The Delaware Supreme Court affirmed, but its opinion clarified where it diverged from the trial court's 200-page opinion. The high court discouraged the use of "Pearl Harbor-like" plans by board factions to disenfranchise other directors and chided the chancery court for labeling large stockholders as "super directors" (OptimisCorp v. Waite, April 25, 2016, Strine, L.).

Super directors to the rescue? One of the claims by the CEO plaintiff was that the director defendants had intentionally failed to notify him that an amendment to a stockholders agreement to which he was a party would be on the agenda at a special meeting. The chancery court characterized this as a theory in which directors with large holdings and accompanying voting rights enjoy special rights as "super-directors." The high court took issue with this description, which obscured the core question of whether all directors are entitled to fair notice of the agenda for a special meeting. The court wrote that it is "uncomfortable embracing the idea that cliques of the board may confer and sandbag a fellow director" whether that director has a controlling interest or only a few shares.

Furthermore, the "super-director" moniker trivializes the rights that large stockholders procure in exchange for their investment in a corporation. The rights of control that come along with stockholder agreements "are important to the willingness of people to commit capital to corporations and therefore to the ability of society to create wealth through the corporate form."

Fair notice. The supreme court also disagreed with the court of chancery's framework for analyzing whether by leaving the plaintiff in the dark, the defendant directors behaved inequitably. The trial court seemed to assume that if all directors are entitled to fair notice of a special meeting agenda, a director with board appointment rights will simply elect new directors. This may happen, but the actions of those newly appointed directors will be subject to other shareholders' "potent remedies" for breach of fiduciary duty. The supreme court cautioned that new directors who take office during corporate turmoil are likely to know that their actions will draw close scrutiny and likely litigation.

Finally, the high court would not endorse a possible reading of the chancery court opinion permitting deception on the part of a board faction, so long as the faction subjectively believes it is doing right by the corporation. In contrast to such "Pearl Harbor-like" plans, Delaware law values the collaboration that results when all directors are given material information and the entire board deliberates on corporate action.

The case is No. 523, 2015.