Supreme Court Affirms Dismissal of Fiduciary Duty Claims Alleging Improper Diversion of Merger Consideration Through Arrangements with Insiders

On March 15, 2018, in Kahn v. Stern, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of allegations that defendant directors “acted in bad faith” and in breach of fiduciary duty when approving a merger that involved arrangements with insiders. The plaintiff alleged that two management directors negotiated unique benefits that were not fully “explained” to stockholders, including the right to rollover equity and post-merger employment for one director and better benefits upon terminating employment for the other. The Supreme Court agreed that the pled facts did not support a rational inference that any directors “faced a non-exculpated claim for breach of fiduciary duty on the theory that merger consideration was improperly diverted into payments for two management directors.” However, the Supreme Court affirmed the lower court’s decision on narrower grounds by stressing that it is not an “invariable requirement that a plaintiff plead facts suggesting that a majority of the board committed a non-exculpated breach of its fiduciary duties in cases where *Revlon *duties are applicable, but the transaction has closed and the plaintiff seeks post-closing damages,” pointing to other cases in which independent directors lacked critical information from conflicted fiduciaries or failed to sufficiently oversee conflicted directors.