Document: In re Wayport Inc. Litig., Consol. C.A. No. 4167-VCL (Del. Ch. May 1, 2013)
The Delaware Court of Chancery resolved a conflict in authority over the circumstances under which a director of a Delaware corporation owes a fiduciary duty to disclose material information known to such director by virtue of his position in connection with a private stock sale between the director and a stockholder of the corporation. The Court held that Delaware follows the “special facts doctrine” under which a fiduciary’s failure to disclose material information to a selling stockholder relating to prospective or pending corporate events could constitute a breach of fiduciary duty if the corporate events substantially affect the value of the corporation’s stock and the failure to disclose the events constituted a deliberate attempt to mislead the stockholder.
In this case, the Court considered, inter alia, whether members of the board of directors of Wayport Inc. (“Wayport”) were required to disclose Wayport’s likely sale of a portion of its patent portfolio during private negotiations between affiliates of the board members and plaintiffs for the purchase of plaintiffs’ Wayport stock. The stock sales were consummated in June and September 2007. During the negotiations, plaintiff Brett Stewart, a former CEO and board member of Wayport, repeatedly expressed concern that he was negotiating at a disadvantage because, unlike the buyers, he was not an officer or director of Wayport or an affiliate of such persons. On June 8, 2007, one of the defendants tried to appease Stewart by sending him an email which stated that there were no “bluebirds of happiness in the Wayport world[.]” In actuality, Wayport was then negotiating the divestiture of a number of its patents (the “Patents”) with two potential bidders. Several days later, plaintiffs sold stock to defendants without being informed about the possible sale of the Patents. On June 27, 2007, Wayport executed a definitive agreement with Cisco for the sale of the Patents (the “Sale”). In September 2007, plaintiffs sold additional stock to the defendants without knowledge of the Sale.
In this action, plaintiffs alleged, inter alia, that the defendants breached a fiduciary duty of disclosure by failing to disclose the Sale. In its post-trial opinion, the Court rejected the plaintiffs’ fiduciary claims, but found for plaintiffs with respect to a common law fraud claim. In the Court’s view, the Sale was a “milestone in the Company’s process of monetizing its patent portfolio and it was sufficiently large to enter into the decision-making of a reasonable stockholder.” However, for plaintiffs to prevail under the special facts doctrine, they also had to prove that the Sale substantially affected the value of their stock. At trial, Stewart admitted that the Sale may not have significantly impacted the value of Wayport’s stock because the company’s remaining assets were substantial.
However, the Court did find that one of the defendants was liable for common law fraud in connection with the “bluebirds” email.