Pfeffer v. Redstone, C.A. No. 2317-VCL (Del. Ch. Feb. 1, 2008) (Lamb, V.C.)
The Court of Chancery dismissed a stockholder complaint brought on behalf of former Viacom stockholders who had participated in an exchange offer pursuant to which Viacom had spun-off Blockbuster nearly two years before the suit was filed. The plaintiff alleged disclosure-based claims and various breaches of fiduciary duty by Viacom’s directors and its majority stockholder in connection with the spin-off transaction, which involved the payment of a special dividend by Blockbuster to Viacom followed by an offer to Viacom’s stockholders to exchange their Viacom shares for shares of Blockbuster. The plaintiff also asserted, on behalf of Blockbuster’s pre-spin-off minority stockholders, a claim alleging that the payment of the special dividend was a breach of the Blockbuster and Viacom directors’ fiduciary duties owed to Blockbuster’s minority stockholders. With regard to the exchange offer, plaintiff alleged that Viacom’s majority stockholder influenced the Viacom directors who approved the transaction, and therefore, the entire fairness standard should apply. The Court, however, held that the entire fairness standard did not apply to a voluntary, non-coercive offer by a corporation to acquire its own shares, and that there was nothing in the complaint to suggest that the Viacom directors had put their own interests or those of the majority stockholder above those of Viacom or any identifiable group of its stockholders in structuring the exchange offer. Thus, the Court examined whether plaintiff adequately alleged that the exchange offer was accomplished through the use of materially false or misleading disclosures. The Court explained that Viacom directors were required to ensure accurate disclosure of all material facts in connection with the exchange offer, a duty that could have been breached in the following ways: (i) by making materially false statements, (ii) by omitting a material fact, or (iii) by making a partial disclosure that is materially misleading. The plaintiff alleged all three types of claims, but each was rejected by the court. Among the claims rejected was plaintiff’s claim that the Viacom directors were aware of an cash flow analysis supposedly prepared by a manager in Blockbuster’s treasury department six or seven months before the prospectus, which analysis allegedly concluded that the special dividend would prevent Blockbuster from funding its initiatives and that certain of Blockbuster’s strategic plans would be unprofitable. The plaintiff alleged, without elaboration, that the Viacom directors were or should have been aware of, yet failed to disclose, the purported analysis (which plaintiff’s counsel himself admitted to never having seen). Describing the plaintiff’s allegations that the directors knew or should have known about the analysis as a “daisy chain of surmise and illogic,” the Court explained that directors, as a matter of general experience, are not presumed to know business operational information that is not of a kind routinely disclosed to boards of directors. The Court also rejected plaintiff’s claims that the exchange offer should be void as an interested transaction under Section 144 of the General Corporation Law. Section 144 was inapplicable to the transaction, the Court explained, because neither the Viacom directors nor Viacom’s majority stockholders stood on both sides of the deal. Next, the Court rejected a claim against Viacom’s majority stockholder alleging that it breached its fiduciary duty of loyalty by causing the Viacom directors to approve the exchange offer, which plaintiff alleged was unfairly designed to benefit the majority stockholder. The Court held that plaintiff failed to plead that the majority stockholder did anything in connection with the challenged transaction, let alone that it directed it. The Court likewise rejected as “frivolous” plaintiff’s allegation that the exchange offer consolidated the majority stockholder’s control over Viacom, given the “de minimis” impact the exchange offer had on Viacom’s capital structure. Accordingly, the Court found that there were no well pleaded facts supporting plaintiff’s conclusory allegations that the majority stockholder had breached its fiduciary duty of loyalty. Finally, the Court dismissed plaintiff’s claims that both Viacom (as the former majority stockholder of Blockbuster) and Blockbuster’s directors had breached their fiduciary duties by causing Blockbuster to declare and pay the special dividend prior to the spin-off. The Court held that those claims were derivative in nature and dismissed them because plaintiff had failed to make demand or plead with particularity why demand should be excused, as required by Court of Chancery Rule 23.1.