What Is Fraud on the Board? 3 Opinions Seek to Answer That Question

In a footnote in a two-page order issued in 2018, the Delaware Supreme Court quietly reminded corporate law practitioners that, per the 1989 case of Mills Acquisition v. Macmillan, a complaint seeking post-closing Revlon damages can survive a motion to dismiss without pleading nonexculpated breaches of fiduciary duty by a majority of directors so long as a single conflicted fiduciary deceived the entire board. See Kahn v. Stern, 183 A.3d 715 (Del. 2018) (TABLE). In the three years that followed, this “fraud-on-the-board” theory of liability has received long-form discussion in at least eight published Delaware opinions and evolved into a Swiss Army knife for stockholder-plaintiffs—indeed, Delaware courts have recently applied the once-obscure theory to serve at least three distinct doctrinal ends. This article describes, at a high level, what fraud on the board is by pinpointing the various doctrinal roles it has played in three recent opinions issued by the Delaware Court of Chancery.

First, fraud on the board can be an independent trigger of entire fairness review. The Court of Chancery so held in In re Pattern Energy Group Shareholders Litigation, 2021 WL 1812674 (Del. Ch. May 6, 2021), a case in which a target company’s stockholder challenged an all-cash merger negotiated by a special committee on grounds that merger consideration was purportedly inequitably low. The court began its analysis by stating that entire fairness review applies in three circumstances, including not only the two familiar triggers of a conflicted controlling stockholder and a majority of conflicted directors, but also a third: “when a plaintiff pleads a fraud-on-the-board theory and the attendant illicit manipulation of a board’s deliberative processes by self-interested corporate fiduciaries.” The court proceeded to evaluate whether the complaint sufficiently alleged an illicit manipulation that would elevate the standard of review from intermediate scrutiny under Revlon to entire fairness. In analyzing and ultimately rejecting the plaintiff’s fraud-on-the-board theory, the court held that the following five elements must be well pled in order to trigger entire fairness review: a materially interested rogue fiduciary, an inattentive board, deception of the board by the fiduciary, deception that was material, and deception that tainted the board’s decision-making process.