Directors of a Delaware corporation have one sure defense to a derivative suit eliminate the pesky stockholder plaintiff’s standing to sue. Of course, that tactic involves also eliminating all of the other stockholders as well by a cash-out merger and that requires a willing merger partner who is willing to pay fair value for all of the stock. But when there is a controlling stockholder involved and the cash is available, the cash-out merger ends what may be costly litigation.
That is no small benefit. For when the derivative litigation challenges a transaction that allegedly benefited a controlling stockholder, that stockholder and his or her affiliated directors bear the burden of proving what they did was “intrinsically fair” to the corporation. While few such cases go to trial, the few that do have occasionally resulted in very big verdicts. The $1 billion threshold for such a verdict has now been crossed, for example. The costs to defend such claims are also worth considering, particularly for closely-held corporations that may find those costs to outweigh the expense of a cash-out merger.
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