Delaware Chancery Court Dismisses Breach Of Fiduciary Duty And Quasi-Appraisal Claims Under Corwin
On May 11, 2017, Chancellor Bouchard of the Delaware Court of Chancery dismissed with prejudice a putative class action brought by stockholders of networking solutions company Cyan, Inc. (“Cyan”) against Cyan’s board, asserting a breach of fiduciary duty and “quasi-appraisal” claim in connection with Cyan’s merger with Ciena Corporation in a cash and stock transaction. In re Cyan, Inc. Stockholders Litigation, C.A. No. 11714-CB (Del. Ch. May 11, 2017). Plaintiffs claimed that the board failed to disclose material information in the proxy statement, which allegedly prevented Cyan’s shareholders from determining whether to pursue appraisal rights. The Court dismissed the claims, finding that: (i) the business judgment rule applied because the merger consideration primarily consisted of stock in a publicly traded company and plaintiffs failed to plead a breach of the duty of loyalty; and (ii) in any event the proxy disclosures were sufficient to infer that the 98% stockholder approval of the merger was a fully informed vote, thereby precluding post-closing litigation under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 308-09 (Del. 2015). The Court dismissed plaintiffs’ “quasi-appraisal” claim on the same grounds, observing that quasi-appraisal was merely a remedy for a disclosure claim and not a distinct cause of action.
Plaintiffs asserted that the directors’ approval of the merger was self-interested, because they believed that absent a merger, Cyan would be unable to honor its indemnification obligations to them in connection with a pending Securities Act class action arising from Cyan’s earlier initial public offering. Chancellor Bouchard rejected this argument, finding that Cyan had sufficient cash on hand and that its D&O insurance policies would have covered the indemnity owed to the directors even if Cyan could not. Chancellor Bouchard also rejected plaintiffs’ assertion that three of the seven directors affiliated with Cyan’s largest shareholders stood to gain disproportionate “liquidity” benefits in the transaction and, accordingly, their interests were not aligned with other shareholders; the Court found that plaintiffs failed to allege that those directors or their affiliates had a particularly acute need for liquidity at that time. The Court also noted that because the other four directors approved the transaction and comprised a majority of the board, the votes of the three purportedly interested directors were immaterial.
The Court similarly rejected plaintiffs’ attempts to plead around Corwin by alleging that the proxy omitted material information about a wide variety of matters, leading the Court to direct plaintiffs to identify their primary claims, which were omissions about Cyan’s finances, an alleged conflict of interest of Cyan’s financial advisor, which owned $5.5 million of Cyan’s convertible notes, and the financial advisor’s financial analysis of a segment of Cyan’s business that accounted for five percent of its revenues. The Court found that the allegedly omitted information about Cyan’s finances and the financial advisor’s purported interest in the transaction was adequately disclosed and rejected the deal analysis omission as an immaterial “tell me more” claim.
The decision reinforces that the protections of Corwin cannot easily be side-stepped by pleading run-of-the-mill disclosure claims (even if plaintiffs take the proverbial kitchen-sink approach to pleading). The decision also confirms the Delaware Chancery Court’s continued skepticism of quasi-appraisal claims.