Shearman & Sterling LLP | M&A Litigation Blog | Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment<br >  
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  • Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment
    On February 6, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a summary judgment motion by defendant Potomac Capital Partners II, LP (“Potomac”) in an action by stockholders challenging the sale of PLX Technology, Inc. (“PLX”) to Avago Wireless, Inc.  In re PLX Technology Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. Feb. 6, 2018).  Plaintiffs alleged Potomac, which was PLX’s largest shareholder, aided and abetted members of the PLX board in committing breaches of fiduciary duty in connection with the sale.  In its concise order holding that the case would need to go to trial, the Court rejected Potomac’s contention that the business judgment rule, rather than the enhanced scrutiny test, was the operative standard by which to review the deal.  The Court further determined that—under the enhanced scrutiny standard—there existed disputes of material fact regarding the PLX board’s actions.

    Potomac asserted that under Corwin v. KKR Financial Holdings LLC, 143 A.3d 727 (Del. Ch. 2016), the application of the enhanced scrutiny test was limited to “applications for pre-closing injunctive relief” and could never be applied in post-closing damages actions.  Citing several prior decisions of the Delaware Supreme Court and the Delaware Court of Chancery, the Court found that enhanced scrutiny has been applied frequently, even in post-closing damages actions, including on motions for summary judgment, as well as in such actions involving a claim of aiding and abetting.  Although all of the cited cases predated the Delaware Supreme Court’s decision in Corwin, the Court noted that the Court of Chancery has applied the enhanced scrutiny standard in post-closing damages actions even after the decision in Corwin.  The Court, therefore, declined to decide on this motion that enhanced scrutiny could not be applied to post-closing damages actions, noting that it may not be required to make that determination even after trial, if Potomac demonstrates the absence of liability under either standard.   

    The Court then explained that when enhanced scrutiny is applied, the court must “determine if the directors’ decision was, on balance, within a range of reasonableness.”  Thus, in order for the Court to grant Potomac’s motion for summary judgment, Potomac needed to prove that the PLX board’s actions “fell within a range of reasonableness.”  But the Court noted that there was conflicting evidence on this issue, which resulted in unresolved factual disputes.  Therefore, the Court held that “[i]n this complex case, the better course is to hear the evidence, rather than risking the treacherous shortcut of a summary judgment ruling.”