Shareholders of a real estate investment trust (“REIT”) filed a breach of fiduciary duty lawsuit against the board of directors in connection with a proposed acquisition of the REIT in a non-traditional, dividend laden transaction. Per the terms of the acquisition, which was approved by 94% of the independent stockholders, each share would be redeemed for a special pre-closing dividend plus a small payment at closing.

The unique deal structure meant that 98.5% of the acquisition price would technically be payable before the deal closed. The shareholder suit alleged the merger was structured to eliminate the stockholders’ statutory appraisal rights and that the proxy disclosures were confusing and misleading, rendering it unfair for shareholders who may not understand their appraisal rights.  

The Delaware Supreme Court first considered whether the unique deal structure rendered the Delaware statutory right to an appraisal of shares meaningless. Given the dividend payment was “conditioned on the consummation of the merger,” the amount of such dividend was to be treated as part of the merger consideration, and therefore, stockholders did not lose their right to seek appraisal of the total value of consideration offered per the deal, the court determined.

The court also considered the proxy disclosures describing the deal to determine if such disclosures were too confusing to allow shareholders to understand their rights to an appraisal and to understand what values would be used to assess the deal’s value. Here, the Delaware Supreme Court reversed the lower court’s dismissal on this point, finding the proxy disclosures described the merger and appraisal rights in a confusing manner, and therefore, “it is reasonably conceivable” stockholders may believe their appraisal rights to be limited to the value of the payment made, excluding the value of the special dividend.

In a recent case concerning a corporation’s trading scheme, the Delaware Supreme Court held that the special litigation committee (the “SLC”) acted independently and reasonably when it aimed to dismiss a shareholder derivative claim. In its review of committee members’ actions, the court looked to the SLC’s exercise of “independence, good faith, and reasonableness.” 

The court stated that the conduct of committee members is judged by their ability to base their decisions on the merits, rather than other influences. Put another way, the question is whether they would be likely to jeopardize their professional reputation because of a personal relationship with any given director subject to investigation. 

In concluding that the SLC acted with independence and in good faith, the court rejected two of the plaintiff’s arguments. First, the court reasoned that mere membership on the board at the time it dismissed the claims that later formed the basis of the SLC’s investigation did not preclude the committee members’ objectivity. The court found nothing in the record to suggest that the SLC members authorized or meaningfully participated in the motion to dismiss. Second, while acknowledging that there were some social connections between the defendant director and one of the committee members, the court determined that members of the SLC were “unlikely to sacrifice their personal and professional reputations for their relationship with [the director] and his family.” 

The court measured reasonableness by the extent to which committee members exercised good judgment, as well as by the scope of the investigation. Noting that the SLC relied upon contemporaneous reports, reviewed documents, and considered facts both for and against the director, the court determined that committee members acted in a manner consistent with their duty to investigate the allegations objectively.