On May 14, 2015, the Delaware Supreme Court clarified that, even in conflict-of-interest transactions subject to “entire fairness” review, breach of fiduciary duty claims against independent, disinterested directors should be dismissed at the pleading stage where a complaint fails to allege a non-exculpated breach. See In re Cornerstone Therapeutics, Inc. S’holder Litig., Case No. 564, 2014; Leal, et al. v. Meeks, et al., Case No. 706, 2014 (Del. May 14, 2015). The Court’s decision resolves two separate consolidated appeals by outside directors of Cornerstone Therapeutics, Inc. and Zhongpin, Inc. (For a discussion of the Chancery Court’s Zhongpin decision, see Jason M. Halper, et al., Delaware Court Determines That 17.5% Stockholder Seeking to Take Company Private Could Be Deemed a Controller, The M&A Lawyer, Jan. 2015, Vol. 19, Issue 1.) In each case, the Chancery Court denied the independent directors’ motions to dismiss, even though there were no allegations that those directors committed a breach of loyalty or acted in bad faith such that the companies’ Section 102(b)(7) charter provisions would not apply. Instead, those courts held that “entire fairness” review effectively precludes dismissal of breach of fiduciary duty claims at the pleading stage based on a Section 102(b)(7) charter provision. The Supreme Court’s rejection of these decisions potentially offers significant protections to independent directors tasked with deciding whether to approve transactions involving interested directors.
On November 26, 2014, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company’s CEO, Chairman and 17.5% stockholder was leading the buyout group. In his decision in the case, In Re Zhongpin Inc. Stockholders Litigation, Vice Chancellor Noble concluded that the complaint pled sufficient facts to raise an inference that the CEO, Xianfu Zhu, was a controlling stockholder, and as a result, the deferential business judgment rule standard of review did not apply. Instead, the far more exacting entire fairness standard governed, which in turn led the Court to deny the motion.
This is the fourth recent decision to address when a less-than 50% stockholder can be considered a controller, an issue that determines whether the alleged controller owes fiduciary duties to other stockholders and the standard of review the Court will apply in evaluating the challenged transaction. The decision therefore provides important guidance for directors and their advisors in structuring transactions involving large stockholders.