A plaintiff challenging a merger when a majority of the board approving the transaction is disinterested and independent and there is no controlling stockholder on both sides cannot state a cognizable claim of breach of fiduciary duty unless it can plead facts demonstrating that the business judgment rule does not apply. One way to plead around the business judgment rule is to assert that a merger partner offered material compensation to the opposing party's lead negotiator in the midst of uncertain merger negotiations to incentivize him to do as little as possible to improve the merger consideration for his stockholders. That allegation would have to be coupled with a claim that the compensation was subjectively material to the lead negotiator and that he failed to disclose it to the full board. Such cases do not often arise so case law guidance concerning materiality in terms of director disclosure to fellow directors is less fulsome than that addressing the standard of materiality in the stockholder disclosure context. In City of Fort Myers General Employees' Pension Fund v. Haley, No. 368, 2019 (Del. Supr. June 30, 2020), the Delaware Supreme Court, by a 4-1 vote, reversed and remanded a Delaware Court of Chancery decision that the plaintiffs had failed to plead around the business judgment rule because the compensation package at issue and its nondisclosure was not material in light of what the board already knew. The case is significant for articulating the standard applicable to evaluating director disclosure to fellow directors and what facts are necessary to plead that the business judgment rule does not apply when the plaintiff attacks the interest of only one officer and director.

Background Facts

This case involved a merger of equals, Willis Group Holdings Plc and Towers Watson & Co. When the parties announced the deal, market reaction was negative for the Towers stockholders. Analysts noted, for example, that the Towers stockholders' shares in the exchange ratio were valued at 9% below the unaffected trading price even though the financial performance metrics for Towers were much stronger than those of Willis. In this atmosphere of uncertainty over deal consummation, a representative of Value Act, a large stockholder of Willis, proposed a compensation package to the CEO of Towers, John Haley, who was to serve as the CEO of the combined entity. That proposal would have significantly increased the upside potential over three years from Haley's existing compensation plan of $24 million to $140 million. When the parties issued their joint proxy, they did not mention the proposal, the extent of the post-signing discussions or Value Act's role in the executive compensation discussions with Haley.