Document: OTK Associates, LLC v. Friedman, C.A. No. 8447-VCL (Del. Ch. February 5, 2014)
A minority shareholder alleged breaches of fiduciary duty by the controlling shareholder and a group of directors in connection with a transaction. Alternatively, the complaint alleged aiding and abetting by the controlling shareholder, and also sought a declaration of the unenforceability of the transaction documents. The defendants moved to dismiss the fiduciary duty counts based on mootness, because the transaction never closed. They also moved to dismiss the declaratory judgment count for failure to make a demand on the board.
The Delaware Court of Chancery denied the motion to dismiss certain counts as moot, stating that the complaint alleged facts that allowed a possibility of success as to the fiduciary duty claims, which is all that is required at the pleading stage. These included the absence of an independent majority of board members, the failure to properly inform all the members of the special committee, and a failure to consider alternative transactions. Moreover, the Court noted that when a “challenged transaction goes away, the absence of transactional damages arising out of the abandoned deal does not necessarily render the underlying claims moot. When directors have breached their fiduciary duties pursuing the abandoned transaction, ‘[e]quity may require that the directors of a Delaware corporation reimburse the company for sums spent pursuing such faithless ends,’” citing In re INFO USA, Inc., S’holder Litig., 953 A.2d 963, 996 (Del. Ch. 2007).
The minority shareholder also sought a declaration that the transactional documents were unenforceable. The declaratory judgment count was based on two things 1) breaches of fiduciary duty, and 2) the fact that the defendants had repudiated the deal after it was enjoined by the Court. Only that portion of the count based on the first item survived. The portion based on the second item was dismissed for failure to make a demand on the board, because a new board had been elected by the time of the repudiation and demand could not be said to be futile.
In addition, the defendant directors’ attempt to have the suit dismissed based on the exculpation clause in the corporate charter failed because the minority shareholder presented evidence that the directors had breached their duty of loyalty, which cannot be exculpated under 8 Del C. § 102(b)(7). Finally, the defendants’ efforts to have the case dismissed based on a forum selection clause choosing New York courts failed because the breach of fiduciary claims concerned the internal affairs of the corporation and are governed by Delaware law, and not by the contract containing the forum selection clause. The request to have the suit stayed in favor of litigation in New York failed for similar reasons.