Chen v. Howard-Anderson, C.A. No. 5868-VCL, (Del. Ch. Apr. 8, 2014) (Laster, V.C.)
In this decision, the Delaware Court of Chancery considered a motion for summary judgment in connection with a stockholder challenge to a merger that previously had been consummated. The Court granted the director defendants’ motion for summary judgment as to plaintiffs’ “Revlon” claims challenging the reasonableness of the sale process, but denied the motion as to the officers who were not covered by the Company’s Section 102(b)(7) exculpatory provision. In addition, the Court denied the motion as to plaintiffs’ disclosure claims.
In September 2010, Occam Networks, Inc. announced that Calix agreed to acquire Occam through a merger in which each share of Occam common stock would be converted into the right to receive 0.2925 shares of Calix common stock and $3.83 in cash. Shortly thereafter, the plaintiffs filed a complaint alleging that the defendants breached their fiduciary duties by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness and (ii) issuing a proxy statement for the shareholder vote on the merger that contained materially misleading disclosures and material omissions.
On January 24, 2011, the Court granted a preliminary injunction blocking the defendants from proceeding with the stockholder vote until the Company made corrective disclosures. Occam made the required disclosures and the merger was subsequently approved and closed.
After the merger closed, the defendants moved for summary judgment. The Court granted the director defendants’ motion for summary judgment as to the sale process claims. Applying enhanced scrutiny as the standard of review, the Court found that the record supported an inference that certain decisions fell outside the range of reasonableness. For example, the Court found the record could support a reasonable inference that the Occam board favored Calix at the expense of generating greater value through a competitive bidding process or by remaining independent. In addition, the Court found the record supported an inference that a board decision imposing a 24-hour timeframe for solicitation of competitive bids fell outside the range of reasonableness given the circumstances.
Nevertheless, the Court granted summary judgment on the sale process claims in favor of the defendants who were directors (but not also officers) of Occam because Occam’s certificate of incorporation contained an exculpatory provision, as permitted by Section 102(b)(7) of the Delaware General Corporation Law, which eliminated the personal monetary liability of directors for breaches of the fiduciary duty of due care. The Court concluded that plaintiffs failed to develop sufficient evidence to support an inference that the directors acted with an improper motive or consciously disregarded their obligations. Thus, even assuming the directors’ decisions ultimately were found at trial to fall outside the range of reasonableness, plaintiffs had failed to show that any breach of fiduciary duty was the result of bad faith or other disloyalty, as opposed to lack of due care. Accordingly, the exculpatory provision in the Company’s charter would insulate the director defendants from liability.
The Court denied the motion of the remaining defendants for summary judgment, holding that a Section 102(b)(7) exculpatory provision cannot limit or eliminate the liability of corporate officers for breaches of fiduciary duty, including any officers who are also directors of the corporation.
The Court also denied the motion for summary judgment as to the plaintiffs’ disclosure claims. The plaintiffs contended that the defendants should have disclosed revenue projections for 2012 in the proxy statement. The defendants argued that the 2012 projections were immaterial because they were unreliable and speculative, making any disclosure unnecessary. The Court held that, at the procedural stage of the case, it was not permitted to weigh the conflicting evidence to determine the reliability of the 2012 projections. Furthermore, it could not be determined on the summary judgment record whether the alleged disclosure violations resulted from a breach of the duty of loyalty or the duty of care. The exculpatory provision would only bar a damages recovery for disclosure claims resulting from a breach of the duty of care. Evidence of the directors’ knowledge and the problems that occurred in discovery prevented the Court from inferring at that procedural stage of the case that the directors acted in good faith.
Finally, the Court rejected defendants’ argument that because the merger closed it was no longer possible for the Court to award a remedy for a breach of the duty of disclosure. The Court explained that if the plaintiffs proved at trial that the defendants committed a non-exculpated breach of the duty of disclosure, then damages could be awarded using a quasi-appraisal measure.