For Directors in Delaware, Voting Abstention is Not Guaranteed Protection

The Delaware Court of Chancery recently issued a reminder that a director’s abstention from a board vote may not insulate the director from liability in connection with the underlying transaction.  Rather, the court looked look to the director’s role in the negotiating the transaction and concluded that he may have breached his fiduciary duties by participating in the negotiations of a transaction that constituted corporate waste.  

In Harris v. Junger, C.A. No. 2021-0511-SG, mem. op. (Del. Ch. May 25, 2022), the plaintiff challenged a merger with the corporation’s controlling stockholder.  The court previously upheld the plaintiff’s allegations that the merger constituted corporate waste because, among other reasons, it involved forgiving debt owed to the corporation by the controller.  One of the directors, however, who owned shares in both the corporation and its controller, moved to dismiss the claims brought against him.  He argued that he was not on the special committee that approved the transaction and he abstained from the board vote to approve the merger.

The court reviewed the allegations and denied the director’s motion to dismiss.  Among other things, the court found that the director allegedly was a member of an earlier special committee that considered the transaction and that he had participated in discussions and negotiations concerning the transaction after that special committee disbanded.  The plaintiff further alleged that the director continued to be involved in the discussions once the second special committee was formed.  “Directors who were involved in negotiating a transaction,” the court wrote, “cannot ‘shield themselves from any exposure to liability’ by ‘deliberately absent[ing] themselves from the directors’ meeting at which the proposal is to be voted upon’” (alteration in original).  As such, the court held that “it is reasonably conceivable at this pleading stage that [the director] breached his duty of good faith by participating in negotiating a Merger that constituted corporate waste.”

The court’s ruling is an important reminder on the role of interested parties when negotiating transactions.  Merely disclosing a conflict and abstaining from a final vote will not insulate a director who has participated in substantively shaping the transaction.