Disregard of Speculative Financial Projections Was Not Bad Faith

In a stockholder challenge to a sale of the company, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that at least half of the directors, who approved the sale, were not disinterested or independent in breach of their fiduciary duty of loyalty. While the prohibition against self-interested transactions by the board is the most fundamental obligation under the duty of loyalty, the good-faith corollary to the duty of loyalty under <external_citation citation=”907 A.2d 693″>In re The Walt Disney Derivative Litigation</external_citation>, 907 A.2d 693, 754-55 (Del. Ch. 2005), is “something of a catch-all,” providing a “fiduciary out from the business judgment rule.” Good faith under the duty of loyalty prohibits “intentional dereliction of duty, [or] inaction in the face of a duty to act,” which allegations support a claim for bad faith. In a bad-faith claim, the board’s intentional action, or inaction in the face of a known duty to act, cannot be explained “as in the corporate interest: res ipsa loquitor.” The Delaware Court of Chancery has emphasized that pleading facts to support a bad-faith claim is the “most difficult path to overcome dismissal” and that such facts are a “rara avis.”

In a recent decision, In re Chelsea Therapeutics International Stockholders Litigation, C.A. No. 9640-VCG (Del. Ch. May 20, 2016) (Glasscock, V.C.), the Court of Chancery held that the plaintiff stockholders of Chelsea Therapeutics International Ltd. had failed to plead facts that the Chelsea board’s decision to disregard higher financial projections in recommending the sale of the company to stockholders was so egregious to support a claim for bad faith. The court reasoned that while these higher projections were used to entice bidders in the sale process, they were based on speculation that the U.S. Food and Drug Administration would approve one of Chelsea’s products for currently prohibited uses, or would remove a competing product from the market. Thus, because Chelsea had no control over the contingencies upon which these higher projections were based, the board determined that these projections were too speculative to consider or rely upon before recommending the sale to Chelsea’s stockholders. Accordingly, the court concluded that the complaint failed to state a claim for bad faith under the duty of loyalty, and dismissed the action.

Background