Advising directors of public companies with multiple classes of stockholders is a notoriously tricky business. It is settled law that a board owes indivisible and unremitting fiduciary duties to the company and all of its stockholders. But in companies with two or more classes of stockholders, the interests of the classes may diverge, potentially pulling the directors in conflicting directions even when times are good. Add in complex transactional situations typical in a distressed economy — a struggling corporation contemplating a transaction that would benefit certain preferred stockholders at the expense of the common, for example, or a merger that permits a controlling stockholder to cash out his shares on special terms — and the task of balancing duties to different equity classes can become a liability minefield.
A pair of recent decisions from the nation’s leading corporate-law trial court provides practical guidance for directors with duties to multiple classes of stockholders and the lawyers who advise them. The upshot of both reaffirms a core tenet of mergers and acquisitions practice: Process matters a lot.
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