• Despite the rhetoric, both candidates are looking at generally similar solutions. They both say the government must do a better job of monitoring financial institutions that deal in complex securities, such as those based on subprime mortgages that triggered the market unrest last year.

• The Obama team reiterated steps Sen. Obama outlined in a speech in March after Bear Stearns Cos. collapsed and the Federal Reserve opened its lending facility to investment banks. He says the Fed should have supervisory authority over any institution with access to its funds, and that regulators should set standards for how much liquidity financial institutions have, not just how much capital.
  

Hard to argue with this approach to regulation, although the devil is, as always, in the details.  But what the approach ignores entirely is the role of the board of directors in the crisis and the role played by Delaware in allowing this to happen.

Boards have fiduciary duties.  The duties require that they act in the best interests of shareholders.  But in fact the board typically has an economic incentive to act in the best interest of the CEO.  This translates into excessive deference to the CEO and the failure to provide adequate oversight.  This can happen because, under cases such as Caremark, the board had little affirmative obligation to seek out information about what is happening in the company and take steps to exercise effective oversight.  The area of law is, as one commentator on this Blog described, a "failed revolution." 

The problem is much larger than this single post can properly address.  But in all of the proposed reforms, the burden of oversight should not simply be placed in the hands of a regulatory body.  It should be shifted back to the board of directors.  As in SOX with the need for internal controls and management supervision, any federal regulation should impose on the board the affirmative duty to monitor risk related issues in the financial sector.  In other words, there needs to be federal preemption of state law.  That should be part of any reform package adopted by either campaign.

• First, our specialized Court of Chancery. This is a collegial Court of five experienced lawyers who engage in efficient fact finding and issue opinions promptly. I should add that our 5-member Supreme Court is made up 3 former Vice Chancellors. Our non-jury equity jurisdiction ensures that the complex and highly technical questions of finance and governance that are at the heart of the disputes are ably resolved.
  

But not all courts are in fact particularly diverse when it comes to gender.  Delaware is a good example.  The Delaware Chancery court has five Chancellors, all men.  The Delaware Supreme Court?  Five Justices, one woman.   So,about 25% of all lawyers, and 44% of all law students, are women, but in the most important corporate law court in the United States, there is only one.  Indeed, it's roughly the same percentage as the number of women in public company board room (13%).

Which leads us back to the lessons from the ivory tower.  VC Noble's opinion in Lyondell could have used a good editor with an eye toward gender neutrality.  In his opinion, he uses the male gender when making a generic point.  Thus, in footnote 39, VC Noble explains:

• "Yes, undeniably, the directors, in this instance, managed to achieve a good result, but a fiduciary’s discharge of his duties and obligations are not judged merely by the result he achieves." (emphasis added)  Sometimes writers alternate genders but this is not the case in Lyondell. 

The only example?  Not quite.  There was also this one in footnote 17:   

• the Court’s decision, as Ryan correctly points out in his brief opposing certification of an interlocutory appeal, will in no way impede a properly motivated and unconflicted corporate director who attempts to discharge his fiduciary obligations in good faith from successfully asserting a Section 102(b)(7) defense on a fully developed summary judgment record (or at any other proper procedural state, for that matter).  

Perhaps if the bench in Delaware were more representative, these things wouldn't happen.  Perhaps if they were more representative, the decisions wouldn't be so consistently oriented against shareholders.

The opinion and some of the pleadings can be found at the DU Corporate Governance web site.

But there is also a chance that the facts produced on the "premature" motion for summary judgment will largely be the same facts produced on the final motion for summary judgment.  In those circumstances, the defendants ought to lose.  That would, however, mean the imposition of personable liability on directors and the erosion of the power of waiver of liability provisions.  This is Delaware and the race to the bottom dictates that this result not occur.  Unsurprisingly, therefore, VC Noble telegraphed that even if the facts are the same, he will grant the second motion for summary judgment.  Throughout the opinion, he listed a number of grounds that would justify dismissal. 

Examples?  The fact that the company received a fairness opinion after it accepted the offer might be sufficient under Revlon. 

• One could argue (as Defendants seem to) that the fairness opinion and other professional advice after-the-fact were enough to satisfy the single-bidder exception to a more robust sale process recognized in Barkan v. Amsted Indus., Inc., 567 A.2d 1279 (Del. 1989). Perhaps that view will carry the day when the Court is in a position to weigh the evidence and find the facts.

• Maybe the Defendants were motivated by a “good faith” belief that theCompany was not in imminent danger of being sold; maybe they had a “good faith” belief that they knew what the Company was worth and were capable of evaluating any offers and negotiating with potential acquirers; or maybe, although it may be unlikely, they were not being attentive to their fiduciary obligations.

• As the Court noted in the Opinion, perhaps the process chosen by the Board in this instance ultimately will be deemed "reasonable" under all the circumstances when the record is more fully developed. Thus, the Court is not suggesting that the directors conduct in this case is necessarily an example of bad faith, non-exculpable conduct, thus, exposing them to personal liability. Instead, the Court is saying that it may be such conduct, but that it is necessary to develop the record more fully in order to make that determination.
  

Finally, the court described the defendants' theory as the “'do nothing, hope for an impressive-enough premium, and buy a fairness opinion' approach to discharging a director’s fiduciary obligations when selling the corporate enterprise" but left open the possibility that this theory was adequate.  As the opinion noted:  "[P]erhaps, under the circumstances, that process, eventually, will be deemed 'reasonable' on a more complete record".  In other words, even if the "full" record continues to show that hte board did nothing, hoped for an impressive premium and bought a fairness opinion after the fact, that this could still be enough to warrant dismissal.

The additional discovery will provide VC Noble with the cover he needs to grant the motion for summary judgment.  He will most likely conclude that the facts show at most a breach of the duty of care rather than the a violation of good faith (permitting application of the waiver of liability provision and allowing for dismissal).  But even if the facts come back largely the same (the board was in fact mostly inactive when it should have been shopping the company), he is ready to dismiss the case on a variety of theories that require no additonal evidence.  

The opinion and some of the pleadings can be found at the DU Corporate Governance web site.

Let's look at the evidence in the opinion. How do we know that VC Noble was annoyed?  First, it's clear he didn't like being told he was wrong.  He described the defendants' interpretation as "inaccurate." 

• The Defendants’ interpretation of the Opinion—that they have been “deprived” of the protection of the Company’s exculpatory charter provision—is not only inaccurate, but, in fact, the Court stated repeatedly throughout the Opinion that on a more developed factual record the directors may very well either prevail on the merits of Ryan’s Revlon claims or, alternatively, on their Section 102(b)(7) defense.

Second, he made it clear that the predicament was of the defendants' own making.  VC Noble described the motion for summary judgment as a "tactical choice [made] very early in this case."   As a result, "the predicament in which the directors presently find themselves is entirely of their own making and the result of their impatience with the litigation process."  

• The Opinion clearly does not preclude the Defendants from prevailing on their Section 102(b)(7) defense at trial, or even on further motion practice after the factual record is better developed; the Court simply denied the defendants’ motion for summary judgment on the current record in light of the open issues of material fact. Defendants can still prevail on their Section 102(b)(7) exculpatory charter provision defense once they establish (assuming they are able to do so) that the potential procedural shortcomings under Revlon and its progeny in fact amount to nothing more than a breach of their fiduciary duty of care.

• The individual defendant members of the board of directors of Defendant Lyondell Chemical Company seek certification of an interlocutory appeal of a portion of the Court’s July 29, 2008, Memorandum Opinion and Order denying them, at least for the moment, on the basis of a limited summary judgment record, the protection of Lyondell’s exculpatory charter provision for potential breaches of their fiduciary duty of care in connection with the sale of the Company to Basell AF for $13 billion in July 2007.
  

•  

  It is these facts that raise the specter of “bad faith” in the present summary judgment record, which, in turn, colors the Court’s view, at least for the moment, of the directors’ later “negotiations” with Basell and their inability to attempt to discharge their known fiduciary obligations after the fact due to the deal protections to which they had agreed. Perhaps in the Opinion, however, the Court was not as clear as it might have been in this regard.

• In denying the Defendants, for the time being, the protection of Lyondell’s exculpatory charter provision pending further development of the record with regard to the directors’ good faith efforts to discharge their known fiduciary duties in connection with the sale of the Company to Basell, the Court, according to the Defendants, applied an incorrect concept of “bad faith.”
  

• Accordingly, for the reasons discussed herein, the Court’s Opinion did nothing more than to assess the application (or potential application) of well-settled law under the peculiar and underdeveloped facts of this case, and, consequently, it did not determine a substantial issue material to the parties’ dispute.
  

• The Defendants’ interpretation of the Opinion—that they have been “deprived” of the protection of the Company’s exculpatory charter provision—is not only inaccurate, but, in fact, the Court stated repeatedly throughout the Opinion that on a more developed factual record the directors may very well either prevail on the merits of Ryan’s Revlon claims or, alternatively, on their Section 102(b)(7) defense.

The opinion and some of the pleadings can be found at the DU Corporate Governance web site.

Viewing the case as another Van Gorkom, the defendants sought to go over the Vice Chancellor's head and appeal to the Delaware Supreme Court to restore order.  But there was a roadblock.  They needed to ask the same VC for permission to file an interlocutory appeal.  VC Noble issued his decision last week and it was a resounding no.  The opinion is posted on the DU Corporate Governance web site.

The decision generated a renewed spate of commentary.  Larry Ribstein wasn't mollified, contending that VC Noble was still making application of waiver of liability dependent upon a trial. Gordon Smith viewed the case as a tempest in a teapot, with the court merely wanting "to see a more developed record. That is all."

Gordon is right, but the decision is more insidious than what he suggests. As we shall show from the language of the opinion, VC Noble viewed his decision not as a victory for shareholders but as punishment for defendants for having prematurely bothered him with a motion for summary judgment on an incomplete record.  He all but invited a second motion for summary judgment and all but telegraphed that he will grant it. 

In other words, Larry Ribstein is wrong.  In this case, there will be no trial.  Plaintiffs will lose but only after having gone through full discovery and two sets of motions.  Said another way, shareholders would have been better off losing the initial motion for summary judgment.  

The opinion and some of the pleadings can be found at theDU Corporate Governance web site.

• the Company points to its concern that Steel Partners and the former CEO of the Company, David H. Brooks ("Brooks"), together control approximately 40% of the vote. Their combined vote, Point Blank contends, is enough to warrant the requested postponement. First, as to Steel Partners, a potential buyer of the Company that has nominated a slate of directors, Point Blank argues that, if elected, these directors will be conflicted and will seek to purchase the Company for Steel Partners' own investors for the lowest possible price. Second, the Company insists, Brooks has a personal interest adverse to the majority of the Company's stockholders because Brooks is currently litigating his claim to advancement fees against the Company, which has asserted the defense of unclean hands, and is also defending a breach of contract action that the Company filed against him in federal court in New York. In addition, Point Blank notes that Brooks has voting control over 22% of the 29% of the Company's stock he owns with his former wife. Though his former wife has beneficial economic ownership of these shares, Brooks has voting control, highlighting the disparity of Brook's interests as compared to those of other stockholders.

• Though I do not fail to recognize the influence that Steel Partners and Brooks may have on the outcome of a shareholder vote, the Company's proper recourse under the circumstances is to communicate its concerns directly to its shareholders. Should the Company wish to communicate its concerns with the shareholders to inform them, for example, of the perceived hazards that may befall the Company if the Steel Partners' slate of directors is elected or, for another example, of the report of the findings of the Institutional Shareholder Services, Inc., then the Company certainly may make any and all communications it determines are necessary and appropriate (and in fact appears to already be doing so). After evaluating all the information made available to them, the stockholders will then decide to stay the course with the Company's current management or else elect a new slate of directors.

• Before the December 20, 2005 meeting, the [Company] board had not approved bonuses near the magnitude of $1.3 million. While the record is imperfect, it suggests [Company] paid no bonuses from 1996 through 1998. From 1999 through 2004, [Company's] bonuses as a percentage of adjusted income hovered between 3.30% and 3.36%. In contrast, the challenged 2005 bonuses constituted 22.28% of adjusted income. Additionally, 2005 marked the first time [the non-brother director] received a bonus beyond the performance-based compensation set forth in his Employment Agreement.
  

The opinion is 73 pages long and, on the whole, managed to avoid casting aspersions at the plaintiffs, not always the case in Delaware.  Unfortunately, VC Noble couldn't stop himself.  In describring the allegations of incomplete disclosure, he noted in the opinion that most fell "woefully short of the mark."  Fair enough.  But the accompanying footnote noted the following:

• Merely rifling through the proxy statement and nitpicking undisclosed, marginally important details, as Ryan has done here (i.e. bullet point argument), without sponsoring specific reasons to support the materiality of the undisclosed information will not suffice to state a cognizable disclosure claim.  

As usual, the opinion and some of the operative documents are on file at the DU Corporate Governance web site.  A number of the pleadings are, however, under seal.

The Court described some of plaintiffs' description as "sloppy and disingenuous."  The opinion, however, noted the following:  "Products used to treat rare diseases are known as 'orphan drugs.'"  The statement is incomplete.  As the FDA web page notes:  "The term 'orphan drug' refers to a product that treats a rare disease affecting fewer than 200,000 Americans."  Sloppy and disingenuous?  You decide.

The case opened with a condescending slap at the role of plaintiffs and presumably their lawyers, likening them to  scavengers who concoct theories of misbehavior out of rubble.

• All corporate combinations leave in their wake certain artifacts-documents, e-mails, conversations, and notes.  If one digs through enough of the rubble of a consummated merger, one will almost invariably find something questionable.  A clever corporate archeologist can extrapolate from these suspicious artifacts and concoct a theory of malfeasance, disloyalty, and bad faith.  Yet theories alone cannot lead to liability. 

Now mind you, the Court found in this case that the  "rubble" revealed that the merger may not have been approved by shareholders, hardly requiring plaintiff to "concoct a theory."  It was not accurate about this plaintiff and an unattractive thing to say about plaintiffs in general.     

These aspersions more or less continued throughout the opinion.  When plaintiffs alleged a possible conflict of interest with respect to one of the directors, the Court accused plaintiffs of "misrepresent[ing] and mischaracteriz[ing] the record in their opposition brief."  As if not blunt enough, the Court further noted that "Plaintiffs' sloppy and disingenuous description of the record cannot create a genuine issue of material fact where none exists."  Put aside that some of the evidence used by the plaintiffs was characterized as hearsay.  In other words, it wasn't that the plaintiffs misrepresented the evidence, it was that the Court chose to exclude it on evidentiary grounds.

The sharpness of the approach was particularly apparent given the Court's treatment of the defendants.  Plaintiffs alleged that the vote tally for the merger was incorrect, that in fact shareholders voted down rather than approved the merger.  As part of that argument, plaintiffs asserted that some votes favoring the merger had been double counted, producing as evidence two proxy cards with the same totals.  The Company responded by contending that the same proxy card had "apparently [been] produced twice."  The Court, however, noted that "[e]ven a cursory examination of each card makes clear that the cards are not identical reproductions or photocopies of each other . . . Thus it is obvious that they are not the same card . . . " 

Imagine if the plaintiffs had made an argument that could be dispelled with a "cursory" examination of the evidence. But where the defendants make the argument, there was no reference to sloppy or disingenuous practices, no reference to mischaracterizing the record.  In this opinion, pejorative language and hostile reactions are reserved for the plaintiffs. 

This disparity is not all.  When Plaintiffs succeeded on an argument, the Court made absolutely clear that the decision was grudging.  Examples?

• I conclude that plaintiffs have sufficiently, albeit scarcely, rebutted this presumption to survive the Company;'s motion for summary judgment on the unlawful merger claim . . . 
• I therefore conclude that plaintiffs have adequately, if barely, demonstrated Shire's knowing participation in Langer's assumptive breach of his duty of loyalty to the Company.
• Without such evidence, however, I am forced to conclude that, with respect to the 776,395 votes at issue on the July 25 proxy card, plaintiffs have raised a genuine issue of material fact . . .
• I hasten to add, however, that this conclusion should not in any way imply that I am optimistic that plaintiffs will succeed in carrying their ultimate burden of proof at trial (emphasis added)

There is more.  Take a look at footnote 137, with plaintiffs criticized for failing to attend the meeting while the court hardly has anything to say about the failure of the defendants to preserve documents.  There is a reference to the 110 page brief opposing summary judgment, clearly intended to suggest a wordy (dare we say prolix) written product, coming from a Court that itself took 63 pages to set out its views. 

Few could read this opinion without detecting a noticeable hostility or dislike towards plaintiffs.  The disparate treatment of the two sides makes this impression even more pronounced.  Could this opinion have been written in a manner that avoided the harsh remarks and grudging references while still conveying the same legal principals?  Of course.  But in the Delaware, such neutrality is apparently not required, at least when it comes to the plaintiffs. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site. 

We have noted numerous times on this Blog how Delaware courts use excessively high pleading standards to dismiss meritorious cases.  This is another example.  Plaintiffs alleged that the votes in the election were miscounted.  The motion for summary judgment was decided about three years after completion of the merger.  This "delay" caused the Court great consternation.

• Given the peculiar facts and history of this case, the Court must acknowledge its reluctance to allow this claim to continue. . . . the Court is not unaware that allowing this claim to advance beyond TKT's motion for summary judgment implicates important policy concerns regarding the need for finality in corporate transactions.  Thus, as with a delayed challenge to an election vote, the Court will demand clear and convincing evidence -- not merely raising a genuine issue of material fact with the benefit of all reasonable inferences -- that the vote was invalid.  

Indeed, the Court was "reluctant to permit even the specter of undermining the finality of this merger, which was consummated nearly three years ago. . . "  In other words, the Court was troubled by the lateness of the suit relative to completion of the merger.  But in the Complaint, the Plaintiffs noted that it was only because of the discovery in the appraisal action.  See Complaint, at para. 77 ("Thus, based on the discovery provided during the appraisal action, there is substantial doubt that TKT actually obtained the necessary votes in favor of the merger.").   Moreover, the Complaint is replete with allegations that the discovery process in the appraisal action was subjected to delay.

• TKT's conduct in the appraisal litigation (conduct that was controlled by Shire, its new corporate parent) was underscored these substantive breaches of duty.  It utterly failed to comply with the Court's discovery orders and then waited until after fact depositions had ended to produce tens of thousands of pages of relevant documents.  These violations of Court orders and rules certainly suggest that TKT and Shire were in no hurry to conclude the litigation or to have evidence of their wrongdoing finally come to light.

Complaint, at para. 7.  In other words, at least according to the Complaint, a portion of the delay resulted from the behavior of some of the Defendants.  In the course of the fiduciary duty case, the Plaintiffs filed a motion to compel, arguing that:

• Rather than provide the requested information, however, defendants assumed an aggressively non-responsive posture that has affected discovery at macro level.  They sidestepped straightforward financial inquiries.  They ignored or recharacterized questions about the core issues in this case.  And with one limited exception, they insisted that they were under no obligation to disclose any information about their affirmative defenses.

Motion to Compel, July 10, 2007, at para. 4.  Plaintiffs noted that "if this case is to stay on-track for trial," there was a need for "judicial intervention." 

While these are only allegations, the record suggests that at least some of the delay in bringing and resolving the matter can be attributed to the behavior of the Defendants.  The Court makes no mention of this, merely referring to the "peculiar facts" in the case.  Yet the Court relies on the delay to raise the bar on Plaintiffs.  From now on, they will need to show not genuine issues of material fact but clear and convincing evidence.  Thus, there is a possibility in this case that the Defendants caused delay and then benefited through the imposition of a higher evidentiary standards.  In other words, the Court used this case as an excuse to try to lift the procedural bars imposed on Plaintiffs. 

We have noted repeatedly that the Delaware courts do this.  This is another example.  As for the requirement of clear and convincing, the Chancery Court relied on an opinion that imposed the standard in a challenge to a corporate election that took place 37 years after the election.  See Opinion at note 125.  First, this case involved an action filed approximately 19 months after the challenged behavior.  This is in no way comparable to a case where the gap was 37 years.  Second, as noted, the 19 month delay (and the three year delay in resolving the matter) may have been a result, at least in part, of the behavior of some of the Defendants. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site. 

When the shares of Transkaryotic fell dramatically in 2003, Warburg "lost over $100 million" and in 2004 considered the investment "problematic."  Plaintiffs alleged that the two Warburg directors had divided loyalties, favoring the interests of Warburg over Transkaryotic.  The Court summarily dismissed the argument.   

• Clearly, the mere fact that Leff was affiliated with a large stockholder does not disable the business judgment rule.  On the contrary, in fact, "[a] director who is also a shareholder of his corporation is more likely to have interest that are aligned with the other shareholders of that corporation as it is in his best interest as a shareholder to negotiate a transaction that will result in the largest return for all shareholders."  Warburg owned about fifteen percent of Transkaryotic, and this substantial stake gave Leff "powerful economic (and psychological) incentives to get the best available deal.  Plaintiffs have failed to show that this normal presumption is inapplicable here because they have not and cannot on this record make "a strong factual showing" that Leff and Warburg "were willing to leave a substantial sum of money on the table -- simply to rid themselves of [Transkaryotic]." 

Several thoughts on this.  First, the quote refers to directors who are also shareholders.  While one of the two directors did own shares, the allegations by Plaintiffs had nothing to do with direct ownership by the directors.  It was an allegation of a conflict of interest because the directors represented the company's largest shareholders.  The issue, therefore, is whether directors representing a large shareholder can have interests that differ from other shareholders, particularly where the large shareholder pays the director a salary (or other compensation).  That issue was entirely ignored by the Court.

Representing a large shareholder can easily create a conflict of interest with other investors.  There are two reasons.  First, there are different types of shareholders with different motivations that can easily be at odds with other investors.  VC Strine has more or less said this.  Thus, the Court apparently treated Warburg as a typical shareholder, all but ignoring its status as a private equity fund.  While it is true that any large shareholder would likely want to maximize the price received for its shares, shareholders that routinely redeploy assets like private equity funds have other temporal concerns.  If there is a better use for the funds, they may be willing to forgo the possibility of a higher offer in the future for an acceptable one now.  In other words, it is not only about whether Warburg would be willing to leave a "substantial sum" on the table but also about what Warburg's alternative uses for the funds.  

Second, size matters.  Large shareholders do not necessarily have the same interests as other shareholders.  This is why, for example, that the Combined Code of Corporate Governance for the United Kingdom provides that a director is presumptively not independent if he or she "represents a significant shareholder."  In other words, this Code (and others) recognizes that a representative on the board of a large shareholder may well have interests that differ from other shareholders.

None of this mattered to the Court.  It was enough that the directors represented a shareholder and, apparently, all shareholders have the same goals irrespective of the nature of their investment history and the size of their investment.    

When the Delaware Supreme Court held that friendship with an interested party could result in the loss of independence in Brehm v. Stewart, 845 A.2d 1040 (Del. 2004), we noted that the test was one almost impossible to meet, particularly when coupled with the excessively high pleading standards used by the Delaware courts.  Thus, plaintiffs had to show that “the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.”  And, despite the inherently subjective nature of the test, they had to do so on a motion to dismiss, without the benefit of any discovery.  So the courts would claim that friendship could be a disqualifying relationship in theory but in practice would ensure that it never was.

This case illustrates the point.  In seeking to acquire Transkaryotic, the CEO of Shire, Matthew Emmens, contacted Wayne Yetter, the chairperson of the board.  Plaintiff alleged that the two had a relationship that went back 20 years, that they knew each other "extremely well" and were "very friendly," and that Emmens and Yetter "worked closely together."  At the time when Emmens was using the "back-channel approach" to contact Yetter, Yetter was using Emmen's as a reference for a job as CEO of Odyssey Pharmaceuticals.  The Court treated the reference almost with derision.

• The actual record evidence, however, shows that Yetter merely included Emmen's name on a list of references submitted in connection with an application for a position with Odyssey Pharmaceuticals.  There is no evidence that Emmens was actually contacted by Odyssey or any affiliates.  In fact, there is no evidence whatsoever that Emmens even knew he was listed as a reference.  Moreover, the suggestion that Yetter would sell his vote for a positive job references is belied by the fact that Yetter . .  . voted affirmatively to reject the initial Shire offer of $31 per share.

The Court's explanation is full of assertion and little reasoning.  That Yetter would choose to use Emmens as a reference at the very time Emmens was seeking information on behalf of Shire creates at least the appearance of a conflict of interest.  The fact that there is no evidence that Odyssey contacted Emmens is irrelevant.  Yetter presumably knew that Emmens might be contacted and presumably knew that an unsuccessful interaction in connection with the Shire/Transkaryotic acquisition might impair the value of the reference. 

Moreover, the fact that there was no evidence that Emmens knew he was listed as a reference cuts against the Court's position.  If Yetter included Emmens without informing him, that suggests that he didn't need permission, indicia of a close relationship.  The Court also omitted to mention that Yetter was hired by Odyssey in November 2004, suggesting that the references may have had some value (whether or not actually contacted).  See Wayne Yetter Profile, Forbes.com ("From November 2004 to September 2005, he served as the Chief Executive Officer of Odyssey Pharmaceuticals, Inc., the specialty pharmaceutical division of Pliva d.d.").   

But in addition, there's at least arguable evidence that Emmens and Yetter thought their relationship close.  The proxy statement for the merger disclosed Emmens approached Yetter for the first time in November 2005.  See Proxy Statement, June 27, 2005 ("On November 15, 2004, Mr. Emmens communicated to Wayne Yetter, who was the chairman of our board of directors at the time, Shire’s interest in pursuing an acquisition of our company.").  Plaintiffs alleged that the proxy statement was misleading because it failed to disclose that "Emmens had secretly approached Yetter about the merger in early October 2004."  To the extent true, the failure to disclose the earlier contact could have been accidental.  But it also could have been an effort to hide the preexisting relationship.   

But the ultimate evidence of the importance of the relationship was the board's response.  Plaintiffs assert on brief that, at a board meeting on January 17, 2005: 

• "Yetter was forced to admit generally his 'past association' with Emmens and to acknowledge that 'they were very close . . .  Those admissions fell far short of full disclosure, but they were troubling enough that the board's 'confidence was shaken' by the news.  Even TKT's counsel stated that Yetter was not 'appropriately ' representing TKT and that there was 'ample reason for [the] board to get rid of [Yetter] based on bad judgment alone.'  It therefore agreed that Yetter should step down as Chairman. (citations to record omitted).

The Court acknowledged that Yetter disclosed that "he had a preexisting relationship" with Emmens at the January 17 meeting but did not disclose "the initial October call from Emmens and did not disclose that he listed Emmens as a reference on his resume."  In other words, Yetter did not make full disclosure about the relationship but from what he did say, the information apparently played a role in the decision to have him step down as chairman.  (The Court is unclear on this point, noting only that "the board expressed that its confidence had been shaken in Yetter" but does not specifically relate it to the discovery of the relationship with Emmens).  If so, it would suggest that the board thought that the information was important. 

Plaintiffs don't have to prove a conflict of interest, but need only show the existence of a factual issue requiring resolution by the jury.  The evidence presented by Plaintiffs would seem to suggest at least a jury question over the issue.  There was evidence of a disqualifying relationship.  There was evidence that suggested others thought the relationship significant.  But not in Delaware, where despite protestations to the contrary, friendship does not result in the loss of independence or a finding of a conflict of interest.  It is another reason why the concept of independence in Delaware is flawed. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site. 

Among other claims, plaintiffs alleged that the proxy materials were incomplete and inaccurate.  The material omissions included "material facts" about the relationship between a director on the Transkaryotic Board and the CEO of Shire, the acquirer.  

The Chancery Court's response?  It "need not determine whether the purported facts are material . . . because all of plaintiffs' disclosure claims are barred."  Why were they barred?  Without any support, the Court determined that disclosure claims could only be cured through equitable relief.  As the opinion stated:

• [T]his Court has explicitly held that a breach of the disclosure duty leads to irreparable harm. On account of this, the Court grants injunctive relief to prevent a vote from taking place where there is a credible threat that shareholders will be asked to vote without such complete and accurate information.  The corollary to this point, however, is that once this irreparable harm has occurred -- i.e., when shareholders have voted without complete and accurate information -- it is, by definition, too late to remedy the harm.  If the Court could redress such an information injury after the fact, then the harm, by definition, would not be irreparable, and injunctive relief would not be available in the first place. . . 

As a result, actions brought after the merger had been consummated would be dismissed because there was no remedy.  "I  hold that this Court cannot grant monetary or injunctive relief for disclosure violations in connection with a proxy solicitation in favor of a merger three years after the merger has been consummated and where there is no evidence of a breach of the duty of loyalty or good faith by the directors who authorized the disclosures." 

There are a number of observations that can be made about this holding.  First, even the Court knows it is going far out on a limb in the case because of the way it confusingly couches the holding.  While concluding that it is "too late to remedy the harm," the Court also found, alternatively, that the case must be dismissed under the waiver of liability clause adopted by the Company.  In other words, the holding that disclosure claims brought post-merger could not be remedied was entirely unnecessary. 

Second, the Court was wrong that the disclosure claims were subject to the waiver of liability provision since they arose out of allegations that implicated the duty of loyalty.

Third, after having said that a disclosure claim cannot be remedied, the Court concluded that this was only true in cases  "where there is no evidence of a breach of the duty of loyalty or good faith."  The quote suggests that disclosure violations can be remedied if they involve bad faith or breach of the duty of loyalty.  Yet this is entirely inconsistent with the Court's reasoning that once the irreparable harm occurs, there can be no remedy. 

Fourth, the reasoning is not by any stretch of the imagination limited to mergers.  Essentially, the same reasoning would apply to any disclosure case involving a shareholder vote.  In other words, once the vote occurs and the matter cannot be undone, there can be no monetary or injunctive action.  The holding, therefore, threatens to eviscerate entirely suits seeking recovery "after the fact" for false disclosure.

Fifth, the complaint alleged that had the disclosure been accurate, "the stockholders of TKT would never have approved the merger."  See Paragraph 90.  In other words, the harm was not some amorphous impairment of voting rights in a matter that passed overwhelmingly; the harm was the approval of a merger as a result of a close vote that otherwise would not have passed.  Moreover, plaintiffs alleged that appraisal did not "provide them a full remedy."

Sixth, the case is internally inconsistent.  Later in the case, the Court concedes that plaintiffs have sufficiently alleged that the votes were miscounted and the merger in fact did not pass.  But if this is true, the Court must understand that there is a remedy for plaintiffs who were subjected to a merger that they didn't approve.  The same remedy would be applicable to shareholders who were subjected to a merger that they wouldn't have approved had they been given proper disclosure. 

We have posted a copy of the opinion and many of the primary documents involved in the case  on the DU Corporate Governance web site.