Buttonwood Tree Value Partners, L.P. v. R.L Polk & Co., Inc., C.A. No. 9250-VCG (Del. Ch. Aug. 7, 2014) (Glasscock, V.C.)
In this letter opinion, the Court of Chancery dismissed disclosure and aiding and abetting claims brought against a corporation in connection with a self-tender. In granting the defendant-corporation’s motion to dismiss, the Court held that a Delaware corporation owes no fiduciary duties to its stockholders, nor can it aid and abet fiduciary breaches of those who direct its operations.
This class action litigation arose over a self-tender initiated by a Delaware closely held corporation (the “Company”). In the offer to purchase, the Company stated that it was not considering a sale of the Company or other extraordinary transactions, nor had the controlling stockholder expressed an interest in exploring any such transactions. Following the closing of the self-tender, the Company paid extraordinary dividends and ultimately consummated a short-form merger, whereby the remaining minority stockholders received more than three times the amount of cash offered in the self-tender. The plaintiffs alleged that, in reliance upon the misrepresentations in the offer to purchase, they tendered and sold their shares for an inadequate price. In addition to the individual directors, the plaintiffs sued the Company contending that it failed to meet its disclosure obligations under Delaware law, and aided and abetted the directors’ breaches of fiduciary duties. The Company moved to dismiss for failure to state a claim upon which relief could be granted.
Regarding the disclosure claim, the Court held that the Company, as a Delaware corporation, did not owe fiduciary duties to its stockholders. Relying on precedent, the Court stated that any disclosure duty owed by the corporation to its stockholders must be predicated on a theory of equitable or legal fraud. Given that the plaintiffs’ claim arose solely under the internal affairs doctrine and that fraud actions by stockholders against corporations cannot be maintained as class actions, the Court concluded there was no basis upon which the disclosure claim could survive.
Regarding the claim that the Company aided and abetted the directors’ breaches of fiduciary duties, the Court held that a corporation cannot aid and abet the fiduciary breaches of those who direct its operations. The Court explained that to be liable under Delaware law for aiding and abetting a breach of a corporate fiduciary’s duty, a third party must have knowingly participated in the breach. The Court found that the plaintiffs’ aiding and abetting claim lacked the knowing participation of a requisite third party because the only way for the Company to act was through the directors. Concluding that the Company was not an indispensible party, the Court granted the Company’s motion to dismiss.