Delaware Court Of Chancery Dismisses Post-Merger Stockholder Challenge To Executive Incentive Compensation Stock Awards
On June 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought against former officers and directors of Twenty-First Century Fox, Inc. (“Old Fox”) in connection with a transaction in which it spun off part of its business into a new public company, Fox Corporation (“New Fox”), and sold the rest of its business to The Walt Disney Company in a merger (the “Transaction”). Brokerage Jamie Goldenberg Komen Rev Tru U/A 06/10/08 Jaime L Komen Tr. for the Benefit of Jamie Goldenberg Komen v. Breyer, No. 2018-0773-AGB (Del. Ch. June 26, 2020). According to the complaint, the compensation committee of Old Fox approved an incentive compensation program in connection with the Transaction, including an alleged $82.4 million in stock awards granted to Old Fox’s three top executives, who were allegedly the company’s controlling stockholders and collectively owned shares worth over $11.7 billion. Plaintiff was a stockholder of Old Fox that became a stockholder of New Fox in the Transaction. Plaintiff alleged that it was unnecessary and wasteful to approve any “incentive” compensation for these alleged controller-executives because they “already were highly incentivized to pursue and implement the transaction given their collective holdings.” The Court held that plaintiff’s claims were derivative because they challenged a compensation decision by the board of Old Fox and did not adequately plead that the Transaction was “tainted by unfair dealing.” The Court dismissed plaintiff’s claims for lack of standing because plaintiff was not a stockholder of New Fox at the time of the alleged misconduct and, therefore, could not satisfy the continuous ownership requirement for derivative claims.
Plaintiff asserted that its claims should be treated as direct, rather than derivative, because they related to the fairness of the Transaction. But the Court found that the complaint lacked any factual allegations “suggesting a causal link between the [controller-executives’] receipt of the challenged compensation awards and any unfair dealing in negotiating the terms of the Transaction.” Specifically, the complaint was devoid of “factual allegations challenging the bona fides of the sale process.” The Court further explained that plaintiffs had not alleged facts that would have supported an inference that defendants improperly diverted proceeds of consideration that would otherwise have been paid to Old Fox’s stockholders.
Having found the claims derivative, the Court also rejected plaintiff’s argument that it should be permitted to pursue the claims under the “mere reorganization exception” to the continuous ownership rule. The Court concluded that New Fox was “vastly different” than Old Fox and held only a portion of the prior company’s assets and liabilities, while the remainder was transferred to another party in a $71.3 billion merger. The Court also noted that the composition of the new company’s board was different than the old one. In sum, the Court explained, the facts of the Transaction “do not come close” to showing it was a “mere reorganization.”