In re Trados
Incorporated Shareholder Litigation Delaware Court of Chancery, 2009.
2009 WL 2225958.
(Merger of venture capital co. that was doing poorly but is now doing very well, interests of common stockholders ignored vs. preferred.)
FACTS
-Class action brought by former stockholder of Trados (D), venture capital firm, for breach of fiduciary duty arising out of transaction where D became a wholly owned subsidiary of SDL.
-Of $60M contributed by SDL, D’s preferred stockholders received approximately $52M, remainder distributed to Company’s executive officers pursuant to previously approved bonus plan.
-D’s common stockholders received nothing for common shares.
P: this transaction was undertaken at behest of certain pref. stockholders who desired a transaction that would trigger their large liquidation preference and allow them to exit D.
-Four of the 7 members combined owned approx. 51% of D’s outstanding stock.
-2004: Scanlan expressed concern that executive officers of D might not have sufficient incentives to remain in D or pursue acquisition due to high liquidation pref. of D’s preferred stock. Board → Scanlan: develop bonus plan to address concern.
-Graduated compensation scale for D’s management based on price obtained for D in acquisition.
-D’s performance improved markedly, but board continued to work toward sale of D.
-Merger discussed, reached for $60, even though D was doing very well.
-Directors unanimously approved merger, $60M price, $7.8M to management, remainder to pref. in partial satisfaction of $57.9M liquidation preference.
Issue: Have at least a majority of the board of directors exercised independent and disinterested business judgment in deciding whether to approve the merger?
Holding: the court states that the P has shown facts sufficient to prove that the majority of the 7 member board did NOT exercise independent/disinterested business judgement re: merger.
RULES
-A director is interested in a transaction if 1. he will receive a personal financial benefit from a transaction that is not equally shared by the stockholders, or
2. if a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders.
-Receipt of a benefit is not sufficient to cause a director to be interested in a transaction.
-Benefit received must be of a sufficiently material importance, in the context of the director’s economic circumstances, so as to have made it improbable that the director could perform his fiduciary duties without being influenced by his overriding personal interest.Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.
ANALYSIS
-Common stockholders received nothing as result of the merger, and lost ability to ever receive anything of value in the future for their ownership interest in D.
-It is reasonable to infer that the common stockholders would have been able to receive some consideration for their Trados shares at some point in the future had merger not occurred. (interests of common and pref. not aligned).
-Generally rights and preferences of preferred are contractual in nature.
→ Directors owe fiduciary duties to preferred stockholders as well as common where right claimed by pref. is not to a preference as against common, but a right shared equally w/ common.
→ Where not the case: it will be duty of board, where discretionary judgement is to be exercised, to prefer the interests of common-as good faith judgement of board sees them to be-the interests created by the special rights, preferences, etc. of preferred stock, where there is a conflict.
→ It is possible that director could breach duty by favoring interests of pref. stockholders over common.
Director D’s approval of the Merger
-4/7 directors was designated to D’s board by holder of significant number of preferred shares (alone not enough to rebut presumption of business judgement rule).
-4/7 each had ownership or employment relationship w/ entity that owned D’s pref. stock. (together 51% stock)
2009 WL 2225958.
(Merger of venture capital co. that was doing poorly but is now doing very well, interests of common stockholders ignored vs. preferred.)
FACTS
-Class action brought by former stockholder of Trados (D), venture capital firm, for breach of fiduciary duty arising out of transaction where D became a wholly owned subsidiary of SDL.
-Of $60M contributed by SDL, D’s preferred stockholders received approximately $52M, remainder distributed to Company’s executive officers pursuant to previously approved bonus plan.
-D’s common stockholders received nothing for common shares.
P: this transaction was undertaken at behest of certain pref. stockholders who desired a transaction that would trigger their large liquidation preference and allow them to exit D.
-Four of the 7 members combined owned approx. 51% of D’s outstanding stock.
-2004: Scanlan expressed concern that executive officers of D might not have sufficient incentives to remain in D or pursue acquisition due to high liquidation pref. of D’s preferred stock. Board → Scanlan: develop bonus plan to address concern.
-Graduated compensation scale for D’s management based on price obtained for D in acquisition.
-D’s performance improved markedly, but board continued to work toward sale of D.
-Merger discussed, reached for $60, even though D was doing very well.
-Directors unanimously approved merger, $60M price, $7.8M to management, remainder to pref. in partial satisfaction of $57.9M liquidation preference.
Issue: Have at least a majority of the board of directors exercised independent and disinterested business judgment in deciding whether to approve the merger?
Holding: the court states that the P has shown facts sufficient to prove that the majority of the 7 member board did NOT exercise independent/disinterested business judgement re: merger.
RULES
-A director is interested in a transaction if 1. he will receive a personal financial benefit from a transaction that is not equally shared by the stockholders, or
2. if a corporate decision will have a materially detrimental impact on a director, but not on the corporation and the stockholders.
-Receipt of a benefit is not sufficient to cause a director to be interested in a transaction.
-Benefit received must be of a sufficiently material importance, in the context of the director’s economic circumstances, so as to have made it improbable that the director could perform his fiduciary duties without being influenced by his overriding personal interest.Independence means that a director’s decision is based on the corporate merits of the subject before the board rather than extraneous considerations or influences.
ANALYSIS
-Common stockholders received nothing as result of the merger, and lost ability to ever receive anything of value in the future for their ownership interest in D.
-It is reasonable to infer that the common stockholders would have been able to receive some consideration for their Trados shares at some point in the future had merger not occurred. (interests of common and pref. not aligned).
-Generally rights and preferences of preferred are contractual in nature.
→ Directors owe fiduciary duties to preferred stockholders as well as common where right claimed by pref. is not to a preference as against common, but a right shared equally w/ common.
→ Where not the case: it will be duty of board, where discretionary judgement is to be exercised, to prefer the interests of common-as good faith judgement of board sees them to be-the interests created by the special rights, preferences, etc. of preferred stock, where there is a conflict.
→ It is possible that director could breach duty by favoring interests of pref. stockholders over common.
Director D’s approval of the Merger
-4/7 directors was designated to D’s board by holder of significant number of preferred shares (alone not enough to rebut presumption of business judgement rule).
-4/7 each had ownership or employment relationship w/ entity that owned D’s pref. stock. (together 51% stock)
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