Fiduciary Duties of Board of Directors in Merger

February 2008

On November 30, 2007, the Delaware Court of Chancery granted the defendant’s motion to dismiss in Globis Partners, L.P. v. Plumtree Software, Inc., et al (Del. Ch., November 30, 2007). The Court of Chancery rejected the claim by the plaintiff against Plumtree Software and its former directors alleging that the former directors had breached their fiduciary duties in connec- tion with the Board’s approval of the sale of Plumtree to BEA Systems, Inc.

During the time of merger discussions between Plumtree and BEA Systems, the Plumtree directors discovered that Plumtree was in breach of a material contract which could have resulted in potential substantial liability to Plumtree. The plaintiff alleged that the directors breached their fiduciary duties to stockholders by agreeing to lower the sale price to BEA Systems because the directors were motivated to sell Plumtree to avoid any personal liability that the directors might have incurred due to this breach of contract. The plaintiff argued that if the merger with BEA Systems was completed, then no derivative litigation suit could be brought against the directors. The Court rejected this argument stating that the plaintiff failed to show (i) that the directors faced substantial liability; (ii) that the directors were motivated by this potential liability; and (iii) that the merger was pretextual.

The plaintiff also claimed that the directors had failed to include material information in the proxy presented to the Plumtree shareholders, particularly with respect to information related to fees paid to investment bankers. The Court of Chancery concluded that the inclusion by Plumtree of statements that the investment bank’s fee was “customary” and “partially contingent” was sufficient because the plaintiff failed to show evidence that improper or extraordinary fees were paid to the investment banker. In addition, the Court opined that the failure of Plumtree to include projections was not actionable since the plaintiff failed to show that Plumtree had reliable projections that could have been included in the proxy statement.

The Court of Chancery also dismissed the plaintiff’s Revlon claim, concluding that the plaintiff ’s complaint failed to allege facts that sufficiently rebutted the well established business judgment rule. Although under Revlon, directors have a fiduciary duty to obtain the highest price reasonably possible in the sale of a company, plaintiffs must have sufficient facts supporting the claims for a breach of fiduciary duty.

For more information on the fiduciary duties of the board of directors in a merger, please contact Mary Beth Kerrigan.

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