Document: Encite, LLC v. Soni, C.A. No. 2476-VCG (Del. Ch. Nov. 28, 2011)
The Delaware Court of Chancery denied defendant directors’ motion for summary judgment on the issue whether they conducted an entirely fair auction process for the sale of a now-defunct technology start-up, Integrated Fuel Cells Technologies, Inc. (“Integrated”), where the defendants relied largely on the defense that they had solicited and followed the advice of counsel. Integrated was a venture-backed company founded by Stephen Marsh (“Marsh”) which entered into an auction process to avoid bankruptcy. The Integrated board, which was comprised of Marsh, a Marsh designee, two designees of Echelon Ventures L.P. (“Echelon”), its largest investor, and an independent director, did not hire an investment advisor to conduct the auction, but did manage to solicit some interest, including an Echelon-backed bid and a Marsh-backed bid. Ultimately, the board approved the Echelon-backed bid, and Marsh sent an e-mail to all stockholders that the board was conflicted and had ignored superior offers. After several stockholders brought derivative claims, all members of the Integrated board resigned other than Marsh, who then abandoned the auction and entered the company into bankruptcy. A Marsh affiliate then purchased Integrated’s assets in bankruptcy and brought this action against the former Integrated directors other than Marsh.
Plaintiff alleged that defendants breached their fiduciary duties in approving the unconsummated transaction with an Echelon affiliate—essentially asking the Court to determine whether the defendants squandered an opportunity to realize the true value of the company by attempting to force through an inferior transaction in which they were interested. On this motion for summary judgment, defendants asked the Court to find that their actions passed muster under the exacting entire fairness standard of review applicable to interested transactions. The Court denied the motion on the basis that defendants had not set forth any evidence from which it could make that decision. Instead, the defendants relied on conclusionary statements that the process had been fair because their counsel told them it was a fair process. The Court noted that reasonable reliance on expert counsel is a pertinent factor in evaluating whether corporate directors have met a standard of fairness in their dealings with corporate powers; however, its existence is not outcome determinative.