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A Fresh Take

Insights on M&A, litigation, and corporate governance in the US.

| 6 minutes read

Mind the Gaps: Lessons from the Goldstein Opinion on Why a Target Company’s Approach to Board Minutes Can Make All the Difference in M&A Litigation

Vice Chancellor Laster’s recent opinion in Goldstein v. Denner provides a useful reminder of the importance of documenting board meetings, updates, and communications in formal corporate board documents, as they will likely later be part of the record on any motion to dismiss in a direct or derivative action. This reminder is especially important when a sale of the company or other material determination by the board may be in the company’s future.

As is increasingly common, the Goldstein plaintiffs’ claims for breaches of fiduciary duty relating to a sale of the company were preceded by a Section 220 “books and records” demand through which the plaintiffs obtained not only board minutes and presentations to the board, but also certain electronic communications by officers, directors, and the target’s financial advisor relating to the sale process. Whenever these documents failed to reflect that the board had received certain communications or considered certain subject matter, the Court held that it was required – at least at the pleading stage – to credit the plaintiffs’ assertions that these communications and deliberations had failed to occur. In addition, at one point, the Court pointed to gaps and contradictions between the electronic communications versus the minutes, and drew the inference – again at the pleading stage – that the relevant narrative provided in the minutes was untrue.

Comprehensive minutes, coupled with equally comprehensive (and consistent) disclosure in a merger proxy statement or recommendation statement on Schedule 14D-9, may well be the best defense for target company boards and officers against the risk from Section 220 demands and post-closing “sale process” claims by plaintiffs. The merger proxy statement and recommendation statement on Schedule 14D-9, which are distributed to the stockholders after the merger agreement has been signed and announced, are not the places to start to fill in gaps in the minutes. Moreover, a board is much more likely to be able to exclude electronic communications from a Section 220 demand’s production, and to limit a Section 220 demand’s production to only minutes and the formal board packages, if the minutes are comprehensive.

Inevitably, there will be important communications and activities relating to a sale process that occur outside board meetings. We strongly advise covering the substance of such communications and activities through addendums to board minutes, or through reporting at a board meeting that is memorialized in the minutes. This approach should cut off the need for plaintiffs to have access to electronic communications to satisfy their Section 220 demand. Moreover, this approach helps to assure a consistent and comprehensive narrative for the sale process in one place – the board minutes.

The Goldstein Case

In the Goldstein case, Vice Chancellor Laster denied the motion to dismiss fiduciary duty claims against four of the five directors of a target company that sold itself for cash in a single-bidder process. It is not news that many of the types of behaviors alleged in Goldstein, if true, will constitute breaches of fiduciary duties. The Court ruled that the plaintiffs adequately alleged that, among other things:

  • Two directors began the sale process without informing the rest of the board and without the board’s authorization.
  • One of these two directors (i) caused his activist hedge fund to accumulate a significant number of shares of the company’s stock in the open market after the first, confidential approach from the buyer (and thereby traded on material non-public information) without informing or obtaining permission from the board, (ii) initially manipulated the sale process, without the knowledge of the full board, so that the sale would not occur until after his fund’s short-swing profit disgorgement period (under Section 16 of the Securities Exchange Act) expired, and (iii) subsequently further manipulated the sale process, without the knowledge of the full board and to satisfy liquidity needs of his hedge fund, so that timing of the sale accelerated even though this acceleration resulted in a single-bidder process, precluded a number of strategic bidders from expressing interest due to risks of adverse tax consequences (arising from the spin-off of the target company years earlier) that would have ceased to apply if the sale process had been delayed, and impeded the ability to obtain the best price reasonably available.
  • Two of the other directors were repeat “independent directors” who would regularly serve on boards at the request of the director from the activist hedge fund and manifested inclinations and motivations to act in the best interests of the hedge fund rather than the stockholders of the company.

The Court portrayed all of these items of alleged misconduct as rooted in conflicts of the directors in question and therefore held that, at least at the motion to dismiss phase, plaintiffs had pleaded a claim for which exculpation under Section 102(b)(7) of the Delaware General Corporation Law for actions taken in good faith would not be available.

In addition, the Vice Chancellor denied the motion to dismiss the fiduciary duty claims against the three officer defendants. Although we expect in the near future that amendments to Section 102(b)(7) will extend exculpation for actions taken in good faith to officers, such an extension would not have helped the officer defendants here because the claims against them were for alleged breaches of the duty of loyalty. The Court ruled that the plaintiffs had adequately alleged that, among other things:

  • The chief executive officer and chief financial officer improperly adjusted the internal projections downwards to support the sale and ability of the financial advisor to deliver a fairness opinion.
  • The chief legal officer prepared board minutes that made the sale process seem more proper than it was.

The defendants argued that the claims failed because of the availability of “cleansing” under the Corwin doctrine, which provides for dismissal of claims where the recommendation statement on Schedule 14D-9 contains adequate disclosure of all material information about the underlying allegations and a majority of the disinterested stockholders nonetheless tenders its shares. But the Court looked skeptically upon the disclosures in the Schedule 14D-9. The Court repeatedly held that the problem was not just that there was a gap in the breadth of the disclosure in the Schedule 14D-9. Rather, the Court observed that, more fundamentally, there were meaningful gaps in the board minutes’ portrayal of the sale process and related communications, and therefore the Court permitted these gaps to be filled – at the pleading stage – with inferences in favor of plaintiffs, which in turn led the Court to conclude that material portions of the story of the sale process conveyed by the “Background of the Transaction” section of the Schedule 14D-9 were, for purposes of the motion to dismiss, inaccurate. In short, the defendants lost access to Corwin cleansing, in part, because the Court refused to give credence to a number of portrayals of material events and facts in the “Background of the Transaction” section because the minutes were silent about them.

The Vice Chancellor left the door wide open to the possibility, and even notes that there is evidence in the 628 documents (produced in response to the Section 220 demand) to support the view, that the plaintiffs’ allegations are untrue. The full board may have been properly updated and reasonably and thoughtfully authorized all the alleged missteps by the specified directors and officers. The accumulation of shares by the director’s activist hedge fund may have been known to and encouraged by the full board. The communications with the bidder and tactical decisions about the timing of the sale process may have been socialized with and deemed reasonable by the full board. The modifications to the projections may have been well-founded and understood by and supported by the full board. The gaps in the minutes may end up being filled entirely with evidence of exemplary conduct by the directors and officers once all the facts are on the table as a result of discovery and the potential for a trial that now follows.

For now, and given the continued use of Section 220 demands, we have been provided with yet another case study on the importance of a comprehensive set of minutes for a process to sell a publicly traded company for cash. In particular, this case study reminds us that minutes should contain all information that would be included in the Schedule 14D-9, and as such, drafters of these minutes should try to anticipate the kinds of information that would eventually be disclosed in that filing. In addition, key communications or events that occur outside of board meetings should be reported to the full board and reflected in board minutes – they can either be reported to the board during a meeting and subsequently memorialized in the minutes, or included in an addendum to the minutes – and such records, of course, should accurately reflect what actually happened and be consistent with any separate record of such communications (i.e., emails). Preparing board minutes in such a manner will limit the scope of documents that defendants may need to produce in response to a Section 220 demand, as all communications and events identified in the Schedule 14D-9 will be documented in the minutes. Beyond that, having robust board minutes will be valuable for any defendant filing a motion to dismiss a claim that follows a Section 220 demand.


m&a, litigation, corporate governance, delaware law