City of Fort Myers General Employees’ Pension Fund v. Haley, No. 368, 2019 (Del. June 30, 2020) (Valihura, J.)

In this decision, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of stockholder-plaintiffs’ action asserting a claim for breach of fiduciary duty against the Chairman and CEO of Towers Watson & Co., a Delaware corporation (“Towers”).  In the underlying action, plaintiffs alleged that the Chairman and CEO, in connection with renegotiating certain terms of a merger with Willis Group Holdings Public Limited Company (“Willis”), failed to disclose to the Towers board of directors that he had received a proposal from a significant stockholder of Willis and future board member of the post-merger entity regarding a potential five-fold increase in his executive compensation as the CEO of the post-merger entity.

Plaintiffs’ claims arose in the context of a “merger of equals” between Willis and Towers, as a result of which the Towers Chairman and CEO would become the CEO of the post-merger entity.  Shortly after the announcement of the proposed merger, certain investors criticized the transaction as a bad deal for Towers and a potential windfall for Willis.  As a result, the parties to the merger became concerned that the Towers stockholders would vote against the merger and ultimately agreed to renegotiate the merger consideration to increase the likelihood of stockholder approval.  Prior to that renegotiation, however, the Chairman and CEO, who was Towers’ chief negotiator, received a presentation on executive compensation from a significant stockholder of Willis, which illustrated a potential five-fold increase in his long-term equity compensation as the new CEO of the post-merger entity.  The Chairman and CEO did not disclose this proposal to the Towers board of directors, and it was not mentioned in any proxy statements filed with the SEC.  The Chairman and CEO eventually negotiated with Willis to increase the special dividend to be distributed to the Towers stockholders in connection with the merger. The merger was subsequently approved by the Towers stockholders.  Following the closing of the merger, the Towers Chairman and CEO became the CEO of the post-merger entity and received an executive compensation package similar to the proposal that was presented by the significant stockholder. 

Plaintiffs then filed this action, claiming that the Chairman and CEO of Towers breached his fiduciary duties by failing to disclose to the Towers board of directors his receipt of the executive compensation proposal in the run-up to the renegotiation of the merger consideration.  The Court of Chancery, on a motion to dismiss, reasoned that the Towers board of directors knew that the Chairman and CEO would become the CEO of the post-merger entity and would likely receive increased compensation and that the executive compensation presentation was only a proposal.  Therefore, the Court of Chancery determined that (i) plaintiffs had not established that “a reasonable director would have considered” the compensation proposal “to be significant when evaluating the merger,” and (ii) the business judgment rule applied.  Accordingly, the Court of Chancery dismissed the case.

On appeal, the Delaware Supreme Court noted that there was a presumption that the business judgment rule applied but that plaintiffs could rebut the presumption by adequately alleging that (i) the Chairman and CEO had a material self-interest in the transaction, (ii) he failed to disclose such interest to the Towers board of directors, and (iii) a “reasonable board member” would have found the “material interest as a significant fact in the evaluation of the proposed transaction.”  

In considering whether the Chairman and CEO had a “material self-interest,” the Delaware Supreme Court considered a director’s fiduciary duty of candor to other directors and the stockholders of the corporation to disclose material facts and not further his or her “private interests,” as well as the timing of the Chairman and CEO’s receipt of the executive compensation proposal and the uncertainty surrounding the approval of the merger.  After a review of the aforementioned considerations, the Delaware Supreme Court held that plaintiffs had adequately alleged that the omitted executive compensation proposal could be material as it related to the Tower board’s consideration of the Chairman and CEO’s ability to negotiate the best deal for Towers and its stockholders.

In considering the Chairman and CEO’s failure to disclose the compensation proposal to the Towers board of directors, the Delaware Supreme Court held that the plaintiffs had adequately alleged that general updates to the Towers board, which did not include an explicit disclosure of the compensation proposal and the Chairman and CEO’s discussions with significant stockholder, did not satisfy his disclosure obligation.

In considering the reasonable director standard, the Delaware Supreme Court held that the plaintiffs had adequately alleged that a reasonable director would want to know about the Chairman and CEO’s receipt of the executive compensation proposal, relying, in part, on the deposition testimony of a disinterested and independent director of Towers who stated that he would have wanted to know that the Chairman and CEO had discussed his compensation at the post-merger entity with the significant stockholder before renegotiating on behalf of Towers and its stockholders.

Based on the foregoing, the Delaware Supreme Court held that plaintiffs had adequately pled their fiduciary duty claims against the Chairman and CEO and reversed the Court of Chancery’s dismissal.  In addition, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of aiding and abetting claims against the significant stockholder and its chief investment officer, finding that, because the predicate breach of fiduciary duty claim against the Chairman and CEO survived the motion to dismiss, the Court of Chancery should review such claims and make a determination whether the aiding and abetting claims also could survive a motion to dismiss.

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