Opinion ID: 1947768
Heading Depth: 2
Heading Rank: 2

Heading: The Obligations of Directors in a Sale or Change of Control Transaction

Text: The consequences of a sale of control impose special obligations on the directors of a corporation. [13] In particular, they have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders. The courts will apply enhanced scrutiny to ensure that the directors have acted reasonably. The obligations of the directors and the enhanced scrutiny of the courts are well-established by the decisions of this Court. The directors' fiduciary duties in a sale of control context are those which generally attach. In short, the directors must act in accordance with their fundamental duties of care and loyalty. Barkan v. Amsted Indus., Inc., Del.Supr., 567 A.2d 1279, 1286 (1989). As we held in Macmillan: It is basic to our law that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. This unremitting obligation extends equally to board conduct in a sale of corporate control. 559 A.2d at 1280 (emphasis supplied) (citations omitted). In the sale of control context, the directors must focus on one primary objective  to secure the transaction offering the best value reasonably available for the stockholders  and they must exercise their fiduciary duties to further that end. The decisions of this Court have consistently emphasized this goal. Revlon, 506 A.2d at 182 (The duty of the board ... [is] the maximization of the company's value at a sale for the stockholders' benefit.); Macmillan, 559 A.2d at 1288 ([I]n a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders.); Barkan, 567 A.2d at 1286 ([T]he board must act in a neutral manner to encourage the highest possible price for shareholders.). See also Wilmington Trust Co. v. Coulter, Del.Supr., 200 A.2d 441, 448 (1964) (in the context of the duty of a trustee, [w]hen all is equal ... it is plain that the Trustee is bound to obtain the best price obtainable). In pursuing this objective, the directors must be especially diligent. See Citron v. Fairchild Camera and Instrument Corp., Del.Supr., 569 A.2d 53, 66 (1989) (discussing a board's active and direct role in the sale process). In particular, this Court has stressed the importance of the board being adequately informed in negotiating a sale of control: The need for adequate information is central to the enlightened evaluation of a transaction that a board must make. Barkan, 567 A.2d at 1287. This requirement is consistent with the general principle that directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them. Aronson, 473 A.2d at 812. See also Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872 (1985). Moreover, the role of outside, independent directors becomes particularly important because of the magnitude of a sale of control transaction and the possibility, in certain cases, that management may not necessarily be impartial. See Macmillan, 559 A.2d at 1285 (requiring the intense scrutiny and participation of the independent directors). Barkan teaches some of the methods by which a board can fulfill its obligation to seek the best value reasonably available to the stockholders. 567 A.2d at 1286-87. These methods are designed to determine the existence and viability of possible alternatives. They include conducting an auction, canvassing the market, etc. Delaware law recognizes that there is no single blueprint that directors must follow. Id. at 1286-87; Citron 569 A.2d at 68; Macmillan, 559 A.2d at 1287. In determining which alternative provides the best value for the stockholders, a board of directors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance. See Macmillan, 559 A.2d at 1282 n. 29. Instead, the directors should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other non-cash consideration is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternatives. [14] In addition, the board may assess a variety of practical considerations relating to each alternative, including: [an offer's] fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; ... the risk of nonconsum[m]ation;... the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests. Macmillan, 559 A.2d at 1282 n. 29. These considerations are important because the selection of one alternative may permanently foreclose other opportunities. While the assessment of these factors may be complex, the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.