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In re Trados Incorporated Shareholder Litigation, C.A. No. 1512-CC (July 24, 2009) (Chandler, C.)

July 24, 2009

In this opinion, the Delaware Court of Chancery denied a motion to dismiss plaintiff’s claim that corporate directors breached their duty of loyalty by approving a merger in which the common stockholders received no consideration. The Court did dismiss plaintiff’s claim that two directors breached their duty of loyalty by agreeing to alter the company’s revenue recognition practices to benefit the company’s merger partner.

Plaintiff brought this class action lawsuit challenging a merger in which Trados Incorporated became a wholly owned subsidiary of SDL, plc. Of the $60 million paid by SDL, $52 million was distributed to Trados’ preferred stockholders in partial satisfaction of their liquidation preference. The remaining consideration was distributed to Trados’ executive officers under a bonus plan. Trados’ common stockholders received no consideration in the merger. Plaintiff alleged that Trados’ preferred stockholders were interested in exiting their investment in the company, and Trados’ directors breached their duty of loyalty by favoring the interests of the preferred stockholders over the interests of the common. Specifically, plaintiff alleged that the directors approved a merger in which the common stockholders received $0 for their interest at a time when there was no reason the company had to be sold.

The Court noted that it is possible for a director to breach her duty of loyalty by favoring the interests of preferred stockholders over those of common stockholders where those interests diverge. The Court ruled that plaintiff had sufficiently rebutted the presumptions of the business judgment rule for purposes of a Rule 12(b)(6) motion by alleging that four of Trados' seven directors were designated to the board by preferred stockholders, had employment or ownership relationships with such stockholders, and were dependent on preferred stockholders for their livelihood. The Court therefore refused to dismiss plaintiff’s claim that the board improperly favored the interests of the preferred stockholders over the common.

The Court dismissed plaintiff’s claim that two Trados directors, who were also executives at the company, breached their duty of loyalty by “agreeing to manipulate Trados’ ordinary business practices to benefit SDL by artificially increasing its post-merger revenue.” The Court held that plaintiff had not sufficiently alleged that the purported revenue shifting harmed Trados or its stockholders or resulted from any breach by defendants. In addition, the Court held that the claim failed because plaintiff had not alleged facts that reasonably suggested that the two directors received a material benefit as a result of the alleged revenue shifting.

The full opinion is available here