Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote
M&A and Corporate Governance Litigation
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  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote

    On May 25, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative claim against a director of Fat Brands Inc. (the “Corporation”) for alleged breach of fiduciary duty.  Harris v. Junger, C.A. No. 2021-0511-SG (Del. Ch. May 25, 2022).  Plaintiffs challenged the merger of the Corporation with Fog Cutter Capital Group, Inc. (the “Merger Partner”), which allegedly held more than 80% of the Corporation’s stock before the merger.  In a previous oral ruling, the Court had found that the Complaint sufficiently pleaded that the merger “constituted reasonably conceivable bad faith and waste,” but reserved judgment on the claim against one director who had been a minority stockholder of the Merger Partner before the merger and therefore abstained from voting on the merger.  In this decision, the Court declined to dismiss the claim against that director at the pleading stage because the complaint adequately alleged that it was “reasonably conceivable” that he “breached his duty of good faith by participating in negotiating a [m]erger that constituted corporate waste.”

    According to the complaint, the merger was allegedly orchestrated by the Merger Partner’s controlling stockholder (the “Principal”) in order to eliminate debt from a series of loans made by the Merger Partner to the Principal, which were purportedly funded by loans made by the Corporation to the Merger Partner.  The Court previously concluded that the complaint adequately alleged that the Corporation’s directors knew that the Merger Partner had no ability or intention to repay when they approved the loans and that the merger was designed to and did forgive those obligations.

    The conflicted director abstained from voting on the merger after it was recommended to the board by a special committee.  The director was not a member and did not participate in meetings of that special committee.

    Nevertheless, the Court found that plaintiffs’ allegations “give rise to a reasonable inference that [the director] was involved in the [m]erger negotiations.”  The Court highlighted that the director had been a member of a special committee that had initially been formed to evaluate a potential transaction when the Principal first proposed a merger.  Although that initial committee had been disbanded well in advance of the merger recommendation by the subsequent special committee, the Court noted that the full board—including the director—continued to discuss the merger at regular board meetings both before and after the new special committee was established.  The Court explained that directors cannot “shield themselves from any exposure to liability” by merely abstaining from the vote.

    The Court also declined to dismiss a claim of unjust enrichment against the Merger Partner.  The Court noted, however, that it had previously upheld a breach of fiduciary duty against the Merger Partner and it was “skeptical that the unjust enrichment claim will entitle the [p]laintiffs to any relief that is independent of the relief for their breach of fiduciary claim.”
    CATEGORY: Fiduciary Duties