City of Warren General Employees’ Retirement System v. Roche, C.A. No. 2019-0740-PAF (Del. Ch. Nov. 30, 2020) (Fioravanti, V.C.)
In this memorandum opinion, the Delaware Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of fiduciary duty against two executive officers. The plaintiff alleged that the officers, allegedly motivated by personal gain, manipulated the board of directors to push through a sale of the company to private equity buyers. The Court found there were no credible allegations that the officers were self-interested, or that they manipulated the board. However, because the Court found the proxy materially misleading, it found that the plaintiff stated a claim for breach of the duty of care against one of the defendants because she had signed the proxy.
The defendants held the positions of CEO and Executive Chairman (an executive officer position) at Blackhawk Network Holdings, Inc. (“Blackhawk”). Blackhawk sells prepaid gift and reward cards. Originally a division of Safeway, Inc., Blackhawk became an independent company and went public in 2013. In the four years after going public, Blackhawk grew chiefly through acquisitions. Activist shareholder Jana Partners LLC (“Jana”) exercised a great deal of influence at the company. Jana held two board seats, and its activist campaigns appeared to motivate several officers to submit resignations. In early 2017, Silver Lake Partners, L.P. (“Silver Lake”) and P2 Capital Partners (“P2”), two private equity firms, explored an investment in Blackhawk. They made an offer to acquire a minority stake in July 2017. Subsequently, Jana sold its entire stake in the company. In October, Silverlake and P2 indicated an interest to acquire the entire company for $47 to $49 per share. In December, they submitted a revised indication of interest for $44 to $45 per share. After negotiations and consultations with advisors, the board ultimately approved an agreement at $45.25 per share. During negotiations, the board had received another indication of interest, but it postponed engaging with that bidder until the go-shop period in the Silver Lake agreement.
The plaintiff brought a single count for breach of fiduciary duty against the defendants in their roles as officers of Blackhawk. Rather than challenge a board action, the plaintiff alleged, under the Macmillan line of cases, that the defendants manipulated and deceived the board into approving the merger. The plaintiff also alleged that the defendants breached their fiduciary duties by helping to prepare a materially misleading proxy.
The Court found, applying Macmillan, that there were no credible allegations that the defendants were interested, lacked independence, or acted in bad faith. First, the Court found the plaintiff failed to plead that the defendants were self-interested. Because Jana had divested its stake in Blackhawk, and there was no pressure from other shareholders, the Court could not infer the defendants were motivated by a desire to maintain their employment. Additionally, the Court found the defendants were not motivated by future employment because they did not negotiate for employment between signing and closing. Second, the Court found the plaintiff failed to plead that the defendants manipulated or deceived the board into approving the merger. The Court found that the board was active and engaged, rather than supine. The defendants communicated with the board, and the board actively evaluated the offers through frequent meetings and consultation with advisors. Further, the Court found no credible allegations that the defendants deceived the board.
The Court did, however, find that the plaintiff stated a claim for breach of the duty of care related to allegedly misleading disclosures in the proxy. In analyzing this claim, the Court first determined that the defendants were not protected by the company’s exculpatory 102(b)(7) charter provision against liability for actions allegedly taken in their roles as officers. The Court then conducted a two-step analysis. First, it determined that only one of the two defendants (the CEO) participated in preparing the proxy, based chiefly on the fact that she signed the proxy. Second, the Court evaluated the proxy and found that the plaintiff had adequately alleged that two disclosures were materially misleading. The proxy failed to adequately disclose financial projections based on an acquisition strategy that showed a higher value for the company. The proxy also materially misrepresented the merger’s go-shop provision, suggesting the board could opt for a solicited superior proposal when, in fact, the merger agreement only permitted the board to opt for an unsolicited superior proposal. While the contractual go-shop provisions were ambiguous, the Court noted that on a motion to dismiss, it must draw reasonable inferences in favor of the plaintiff. Finally, given its finding that the plaintiff had alleged inadequate disclosures, the Court found the defendants’ Corwin defense inapplicable.
Accordingly, the Court granted the motion to dismiss except for the claim for breach of the fiduciary duty of care against the CEO as a result of materially misleading disclosures in the proxy.