Delaware Court Of Chancery Dismisses Derivative Claims For Failure To Plead Demand Futility Notwithstanding Unocal Enhanced Scrutiny
On November 20, 2020, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery dismissed stockholder derivative claims against the directors of Christopher & Banks Corporation. Gottlieb v. Duskin, C.A. No. 2019-0639-MTZ (Del. Ch. Nov. 20, 2020). Plaintiffs alleged that the directors breached their fiduciary duties by wrongfully enacting defensive measures to rebuff an unsolicited acquisition offer at a substantial premium to the company’s stock price even though the company was in “dire financial condition.” The Court determined that the complaint pled facts sufficient to trigger enhanced scrutiny of the directors’ conduct under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), rather than the deferential business judgment rule. Nevertheless, the Court held that the complaint did not sufficiently plead that the “directors face a substantial likelihood of bad-faith liability.” Therefore, the Court granted the motion to dismiss for failure to plead that pre-suit demand on the directors was excused, as required for a derivative action under Delaware Court of Chancery Rule 23.1.
More specifically, plaintiffs alleged that in order to entrench themselves and management, defendants enacted defensive measures after an “alleged foe” attempted to “kick off a sales process” by making an unsolicited “stalking horse bid.” In particular, defendants allegedly commissioned a “sham” valuation analysis that they knew overvalued the company, which they then used to “fend off and rationalize rejecting the premium bid.”
In a prior unwritten ruling, the Court determined that the allegations were sufficient to plead a claim subject to enhanced scrutiny under Unocal. But the Court held that the “bare-bones Unocal claim does not automatically translate into a nonexculpated duty of loyalty claim, and is not enough” to demonstrate that pre-suit demand was futile. Therefore, the Court dismissed the claims because the complaint did not demonstrate with particularity that a majority of the directors were motivated by self-interest or faced a substantial likelihood of liability in connection with the response to the unsolicited offer.