Chancery Court Holds that Defendant Directors’ Failure to Disclose Material Facts Defeated Application of Corwin, but Nevertheless Dismisses Claims Against Directors Due to Plaintiff’s Failure to Adequately Plead Directorial Breach of Their Duty of Loyalty
Robert S. Reder & Elizabeth F. Shore | 72 Vand. L. Rev. En Banc 41 | Van Der Fluit v. Yates | Chancery Court Holds that Defendant Directors’ Failure to Disclose Material Facts Defeated Application of Corwin, but Nevertheless Dismisses Claims Against Directors Due to Plaintiff’s Failure to Adequately Plead Directorial Breach of Their Duty of Loyalty |
| In 2015, the Supreme Court of Delaware held in Corwin v. KKR Financial Holdings (“Corwin”) that the business judgment standard of review applies where a one-step merger not subject to the entire fairness standard of review is approved by a vote of disinterested stockholders. Under Corwin, if defendant directors can establish that the stockholder vote approving the merger was both (1) fully informed and (2) uncoerced, then, absent a sufficient pleading of waste (no easy feat), a post-closing damages action will be dismissed at the pleading stage. The Delaware Court of Chancery (“Chancery Court”) subsequently expanded Corwin to cover two-step acquisitions, and then clarified that Corwin will apply “even if the transaction might otherwise have been subject to the entire fairness standard due to conflicts faced by individual directors.”
Thus, Corwin and its progeny have provided target company directors with a tool, via disinterested stockholder approval, to cleanse their breaches of fiduciary duty in connection with M&A transactions not involving “a controlling stockholder that extracted personal benefits,” thereby reducing the opportunity for stockholders to obtain post-closing damages.6 The Chancery Court has continued to grapple with establishing the bounds of this expansive holding, including the questions of (i) what constitutes a fully informed stockholder vote and (ii) whether a target company has a controlling stockholder.
Despite concerns expressed by some commentators that the Delaware courts potentially have gone too far in providing target company directors with the ability to obtain a stockholder vote to cleanse their fiduciary breaches, the requirement that the vote be fully informed presents a real limit on the scope of Corwin. For instance, inVan der Fluit v. Yates, Vice Chancellor Tamika Montgomery-Reeves recently determined that Corwin was not available because target company stockholders were not provided with materially accurate disclosures in connection with their approval of the transaction. Specifically, the Vice Chancellor found that stockholders were not adequately informed that the two largest stockholders—who also served on the board of directors, functioned as the company’s top management, and received employment with the acquiring company— led the negotiations with the acquiring company. Notwithstanding Corwin’s inapplicability, however, the Vice Chancellor dismissed plaintiff’s claim for failure to adequately plead that defendant directors had breached their duty of loyalty.