Tuesday, July 28, 2009

Important Delaware decision

Wayne County Employees v. Corti. The Court of Chancery has confirmed that judicial review in the corporate sales context is limited to the boards' "decision making process," not to the substance of what the board decided.

Wayne County Employees' Retirement System, the pension fund for the named Michigan county (which includes the city of Detroit) was invested in Activism in 2007, when that company, a video game producer, developer of Guitar Hero and Call of Duty, agreed to combine with Vivendi Games, of World of Warcraft fame. Both W of W and Guitar Hero have inspired memorable South Park episodes, but I suppose that is neither here nor there, legally. Sigh.

To simplify just a bit: Activism agreed to sell itself to Vivendi, and the pension fund managers in Michigan didn't think they as shareholders were were getting a very good deal. In the usual phrasing, they objected that the shareholders weren't getting a "control premium," and tha the failure to insist on one in negotiations was a breach of their duty of loyalty. Nor (since shareholders had to vote on the combination) did they believe all the crucial information about the deal had been disclosed prior to that vote.

The first-named defendant is Robert Corti, one of the members of the board of directors.

The Court dismissed all of the counts of the complaint. It dismissed the substantive (control-premium related) counts because there is no rule of law requiring a premium for a change of control, and making that a test for satisfaction of the duty of loyalty.

The court's objection to the process-based claim of the same complaint apparently was that the allegedly undisclosed facts were not material.

"Materiality is the essence of a successful disclosure claim, and
plaintiff has failed to demonstrate how any of the alleged omissions
would significantly alter the total mix of information that is already
available in the nearly 300-page definitive proxy released by the

So Delaware once again polishes its reputation as the great management-friendly state. I think there are counter-pressures in existence that will over time weaken Delaware's dominance, but IMHO this decision shows its institutionalized determination to hang onto it.

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