Delaware Court Of Chancery Dismisses Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
01/14/2020On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm. In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019). The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm. Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available. Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty. The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
In its initial merger agreement with GPC, Essendant allegedly agreed not to solicit or encourage other offers, but was permitted to consider unsolicited alternative proposals. Essendant’s board ultimately decided that the private equity firm’s offer was a superior proposal and terminated the GPC merger agreement, triggering Essendant’s obligation to pay a $12 million termination fee. (Our recent discussion of separate litigation brought by GPC in connection with the termination is here.)
Plaintiffs alleged that Essendant’s directors breached their fiduciary duties by “caving to the will of [the private equity acquiror] and knowingly and willfully allowing the GPC [merger] to be sabotaged by [the acquiror] so that [it] could acquire Essendant at an unfair price.” Plaintiffs also claimed that the private equity firm—which had acquired approximately 11% of Essendant’s shares in advance of the deal—had breached its fiduciary duties as a controlling stockholder, as well as aided and abetted the Essendant directors’ alleged breaches.
The Court held that plaintiffs failed to plead facts demonstrating that the directors were beholden to an interested party, such as a controlling stockholder. The Court found that the complaint failed to show that the private equity firm was a controlling stockholder, as it was only Essendant’s third-largest stockholder and there were no other “markers of control” alleged. The Court also held that the complaint failed to plead any board-level conflicts, noting that the complaint did not allege “any improper relationship or tie between individual members of the Essendant Board and [the private equity acquiror].”
Likewise, the Court held that the complaint did not adequately plead the directors acted in bad faith. In this regard, the Court explained that in the absence of well-pled allegations that the directors “breached the GPC merger agreement for no reason,” that contractual breach “cannot serve as a factual predicate to support a non-exculpated breach of fiduciary duty claim.” Indeed, the Court noted, a board “may even have a duty to breach a contract if it determines that the benefits [of breach] . . . exceed the costs.”
The Court also dismissed the aiding and abetting claim against the private equity firm because—even assuming breach of fiduciary duty claims could have been asserted against the directors in the absence of the exculpatory provision—the complaint failed to allege facts demonstrating that the firm “knowingly participated” in any breaches of fiduciary duty by Essendant's directors.