On August 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a putative stockholder class action against the directors of Kreisler Manufacturing Corporation (“Kreisler”), rejecting plaintiff’s claims for breach of fiduciary duty and quasi-appraisal in connection with the sale of Kreisler to Arlington Capital Partners (“Arlington”) as inadequately pleaded. Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017). Plaintiff alleged that the directors conditioned the merger on “side deals” that benefited themselves at the stockholders’ expense and that misstatements and omissions in the information statement disseminated to stockholders following the execution of a stockholder support agreement that bound more than 50% of outstanding stock in favor of the merger prevented stockholders from exercising their appraisal rights. The Court found that the complaint failed to plead that the directors acted in bad faith, and thus dismissed the claims, notwithstanding that certain of the allegedly inadequate disclosures—if raised in a pre-closing suit—likely would have warranted injunctive relief pending corrective disclosures.
Vice Chancellor Glasscock interpreted plaintiff’s claims as challenging both the purportedly inadequate merger process resulting from the side deals, and the allegedly insufficient disclosures in the information statement. As to process, the Court determined that because (i) no controlling stockholder was involved in the transaction, (ii) the majority of the board was not interested in the transaction, and (iii) Kreisler’s charter contained an exculpation provision, plaintiff could only plead a breach of fiduciary duty claim by sufficiently alleging that the directors acted in bad faith. Finding that the complaint lacked facts to support the conclusory allegation that “Arlington lowered its bid as a result of the Side Deals,” the Court found no basis to infer that the approval of the side deals was “egregious [or] lack[ed] any rational business purpose” such that it constituted bad faith.
The Court also found plaintiff’s allegations that the disclosures were inadequate due to their lack of detail regarding Kreisler directors’ new employment agreements with Arlington were insufficient to plead bad faith. Vice Chancellor Glasscock cautioned that injunctive relief might have been appropriate in a pre-closing disclosure suit, as the exculpation provision in Kreisler’s charter applied only to claims for monetary damages, but he explained that, post-closing, even material defects in disclosures are not sufficient to plead a breach claim unless the allegations “make it reasonably conceivable that the deficiencies . . . resulted from the directors’ bad faith.” Pointing to the four pages of disclosures concerning insider interests, the Court found no basis for such an inference.
