Controllers: The Facebook Decision’s Lessons for M&A
While the Delaware Chancery Court’s recent decision in United Food & Commercial Workers v. Zuckerberg (Del. Ch.; 10/20) has attracted a lot of attention, the case didn’t involve an M&A transaction, and most of that attention has focused on Vice Chancellor Laster’s approach to the demand futility requirement for derivative claims. But a Fried Frank memo says that there are important lessons to be drawn about the risks of back-channel discussions with controlling stockholders that apply in the transactional context as well. This excerpt says that one of those risks is potential personal liability for directors:
It is well-established that, depending on the facts and circumstances, back-channel communications with a controller relating to the board’s consideration and negotiation of a transaction in which the controller has a personal interest can render the board’s process ineffective. Vice Chancellor Laster’s opinion in this case underscores the problematic nature of such communications.
The Vice Chancellor stated, without discussion, that he made the assumption, at the pleading stage, that the Facebook director who engaged in such communications with Zuckerberg had prevented the special committee from functioning effectively–and thus that he had breached his duty of loyalty and acted in bad faith (unexculpated violations for which he would be personally liable in a fiduciary suit).
The Zuckerberg decision also highlights a number of other process flaws involved in the Facebook special committee’s decision to endorse the proposed recapitalization sought by Zuckerberg that would also raise concern in the transactional context. The memo points out that these include the absence of a formal charter delineating the committee’s responsibilities, its failure to meet with its financial and legal advisors before hiring them, and the apparent treatment of the proposed recap by all concerned as a fait accompli.
-John Jenkins, DealLawyers.com November 6, 2020
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