Nothing Wrong With Eager, Engaged and Involved Directors
June 30, 2008
On June 19, 2008, Chancellor William B. Chandler III of the Delaware Court of Chancery held that there is “nothing inherently wrong with eager, engaged and involved directors” when he granted summary judgment in favor of certain directors, dismissing claims against them for alleged breaches of the duties to disclose and of loyalty. In In re Transkaryotic Therapies, Inc., the plaintiffs alleged that individual directors breached their fiduciary duties by failing to disclose or misrepresenting the facts to shareholders of Transkaryotic before the shareholder vote in July 2005 approving its merger with Shire Pharmaceuticals Group PLC. Specifically, the plaintiffs developed a theory of board malfeasance based on conflicts between the CEO and directors of Transkaryotic, the perceived influence of private equity investors on the board, and what the court referred to as the “sometimes muddled line between principled diligence and overeager disloyalty.”
With regard to the plaintiffs’ claims that certain directors breached the duty of loyalty, the plaintiffs alleged that the directors made decisions based on extraneous considerations or influences and were therefore conflicted in their loyalties with respect to the board’s approval of the merger with Shire. Specifically, the plaintiffs claimed that a director pushed for the sale of the company at an unfairly low price because Warburg, the private equity investor for whom he worked, had tired of its investment and wanted an exit. The plaintiffs attributed his personal involvement in the valuation process as a means to push a bad deal to close. The court found no evidence to support these allegations. The mere fact that the director was affiliated with a large stockholder did not disable the business judgment rule. To the contrary, a director who is also a shareholder of his corporation is more likely to have interests that are aligned with other shareholders as it is in his best interest, as a shareholder, to negotiate a transaction that will result in the largest return for all shareholders. Since Warburg owned 15% of Transkaryotic, the substantial stake gave him powerful incentives to get the best deal. Additionally, the plaintiffs were unable to provide evidence that Warburg needed to divest itself of its shares, or that it had definitively decided to do so. In addressing the allegations disparaging the director’s personal attention to the valuation process, the court noted that there was nothing wrong with eager, engaged and involved directors who push to obtain material information reasonably available to them prior to making a business decision.
(In re Transkaryotic Therapies, Inc., Civ. Action No.2776-CC (Del.Ch. June 19, 2008)