Delaware Supreme Court Clarifies Materiality Standard for Director Disclosure
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.
July 15, 2020 at 09:00 AM
5 minute read
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.
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