Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
When the Company was acquired, plaintiff dissented and sought appraisal for its shares. In the discovery that ensued, plaintiff learned of evidence that purportedly led plaintiff to assert claims for breach of fiduciary duty. Specifically, plaintiff alleged that the CEO had an interest in the transaction that differed from the stockholders—namely self-preservation—and allegedly led the company into an unfavorable deal by engaging in negotiations while avoiding the oversight of the remaining members of the board.
Distinguishing a prior decision, In re Appraisal of Aristotle Corp., 2012 WL 70654 (Del. Ch. Jan. 10, 2012), the Court held that plaintiff has standing to simultaneously maintain both the appraisal claim and the fiduciary duty claim. The Court explained that unlike Aristotle, which focused on disclosure allegations, the “gravamen of Plaintiff’s breach of fiduciary duty claim is that a conflicted fiduciary directed the Company to consummate an undervalued transaction for reasons other than the best interests of stockholders.” The Court added that, also unlike Aristotle, where the plaintiff sought only quasi-appraisal as a remedy for the alleged fiduciary duty breach—which was essentially duplicative of the actual appraisal—plaintiff here “sought more traditional post-closing remedies . . . including rescissory damages and disgorgement.”
As to the Corwin doctrine, the Court found that several alleged disclosure violations were sufficiently pled so as to prevent the application of business judgment rule deference at the pleading stage. The Court noted, among others, the alleged failure to disclose that: (1) the CEO regularly communicated with the private equity firm regarding the transaction, including price terms, without the knowledge or approval of the board; (2) the private equity firm “made clear its intention to work with management,” including the CEO, after consummation of the transaction; and (3) the CEO had received word from another director during negotiations that his position “was in jeopardy if the Company was not sold.”