Monday, August 19, 2013
Vice Chancellor Laster issued a post-trial opinion in the Trados matter on Friday. Can I just say, I like the fact that the Chancery Court is increasingly releasing opinions on the "free to the world" website. In 2009, Trados caused a bit of a stir when Chancellor Chandler denied the defendant's motion to dismiss. The plaintiffs brought a case against the defedant directors after they approved an acquisition by SDL in which the common stockholders of the sellers received nothing. At the MTD stage, the court observed that it is possible for a director to breach her duty of loyalty by favoring the interests of preferred stockholders over those of common stockholders where those interests diverge. The Court therefore refused to dismiss plaintiff’s claim that the board improperly favored the interests of the preferred stockholders by agreeing to a merger in which the common stockholders received no consideration.
The venture capital community was understandably upset -- afterall they bargain for liquidation preferences and now -- at the MTD stage -- a court held directors might well have violated their fiduciary duties by agreeing to a merger agreement in which the liquidation preferences were honored. If the court's opinion was the last word, then well, it might be required for boards to disregard liquidation preferences going forward.
Well, it turns out that it wasn't the last word. On Friday, Laster issued issued his post-trial opinion in which the world - from the point of view of the VC community - was set right:
Directors of a Delaware corporation owe fiduciary duties to the corporation and its stockholders which require that they strive prudently and in good faith to maximize the value of the corporation for the benefit of its residual claimants. A court determines whether directors have fulfilled their fiduciary duties by evaluating the challenged decision through the lens of the applicable standard of review. Because a board majority comprised of disinterested and independent directors did not approve the Merger, the defendants had to prove that the transaction was entirely fair.
Despite the directors’ failure to follow a fair process and their creation of a trial record replete with contradictions and less-than-credible testimony, the defendants carried their burden of proof on th[e] issue [fair dealing]. Under Trados‘s business plan, the common stock had no economic value before the Merger, making it fair for its holders to receive in the Merger the substantial equivalent of what they had before. The appraised value of the common stock is likewise zero.
Remember Weinberger -- it's fair price and fair dealing. Not just the one. So, here's an example of unfair dealing, but because the price was fair - and the price was $0 - the transaction was entirely fair to the stockholders.