Opinion ID: 1532151
Heading Depth: 1
Heading Rank: 2

Heading: The Claims Presented And The Rulings Of The Court of Chancery

Text: Following the CRC's adoption of the Rights Plan, International brought this action against Black and Inc., for a preliminary injunction preventing the Barclays transaction and any further breaches of the Restructuring Proposal Agreement. The basis for the Company's lawsuit was that the defendants' conduct constituted breaches of fiduciary duty and breaches of contract. The Company also sought a declaration that the ByLaw Amendments were legally ineffective because (among other things) they had been adopted for an inequitable purpose. Finally, the Company sought a determination that the Rights Plan was legally valid. Defendants Black and Inc. opposed these claims and interposed counterclaims for an expedited declaration that the Rights Plan was invalid, and for an injunction against the implementation of the Rights Plan. [5] These claims and counterclaims were the subject of an expedited trial and preliminary injunction proceeding, that were resolved, finally and on the merits, in an opinion handed down by the Court of Chancery on February 26, 2004, and in a summary judgment bench ruling handed down on May 19, 2004. Those rulings were implemented in Orders entered on March 3, 2004 and June 28, 2004, [6] respectively, in which the Court of Chancery made the determinations, and entered judgments providing, as follows: First, the Court of Chancery rejected the Company's claim that the ByLaw Amendments, insofar as they abolished the CRC and stripped it of authority, were invalid under 8 Del. C. § 141(c)(2). Although the Court of Chancery determined that the ByLaw Amendments were not per se invalid under that statute, it did hold that the ByLaw Amendments were invalid in equity and of no force and effect, because they had been adopted for an inequitable purpose and had an inequitable effect. Second, the Court of Chancery determined that Black had breached his fiduciary duties during the process leading to the Barclays transaction. Specifically, the Court held that Black violated his duty of loyalty by: (1) purposefully denying the International board its prerogative to consider fairly and responsibly a strategic opportunity within the scope of the Strategic Process (the opportunity to sell The Telegraph ) and by diverting that opportunity to himself; (2) misleading his fellow directors about his course of conduct and not disclosing his dealings with the Barclays, in circumstances where full disclosure was expected; (3) improperly using confidential information of International to further his own personal interests and not those of International, without the authorization of his fellow directors; and (4) urging the Barclays to make improper inducements to International's investment banker to betray its client (International) by attempting to secure the Company board's assent to the Barclays transaction. Third, the Court of Chancery determined that Black had violated material provisions of the Restructuring Proposal Agreement by: (1) failing to repay the non-compete payments as the Agreement required; (2) not devoting his principal time and energy to the Strategic Process as the Agreement required; (3) entering into the Barclays transaction, which preempted International's ability to consummate a transaction as intended by paragraph 7 of that Agreement; and (4) not giving advance notice of the Barclays transaction, as required by paragraph 6 of the Agreement. The Court also held that those contractual breaches were not excused. Fourth, the Court of Chancery rejected Black's (and Inc.'s) claim that the Rights Plan was statutorily and equitably impermissible, and determined that: (1) the Rights Plan was not inconsistent with or violative of any provision of the Delaware General Corporation Law; and (2) the Rights Plan was not equitably impermissible, because it satisfied the criteria established by this Court's decision in Unocal Corp. v. Mesa Petroleum Co. [7] More specifically, the Court of Chancery found that the board reasonably perceived that the Barclays transaction posed several threats to the Company's best interests after a reasonable investigation. Primary among these was the threat that the Barclays transaction posed to the board's ability to complete the contractually bargained-for Strategic Process. The Court of Chancery also determined that the Rights Plan was not a disproportionate response to that threat. That Court observed that the replacement of a subsidiary's controlling stockholder with a different controlling stockholder in a transaction at the parent level should ordinarily pose no cognizable threat to the subsidiary, but the Court also observed that that is not always the case. As the Vice Chancellor noted, the Court of Chancery has recognized that in extraordinary circumstances a subsidiary may be legitimately entitled to contest a parent company's sale of its control position, even by taking action that could dilute the parent's control position. One such circumstance might be where the controlling stockholder ... was in the process or threatening to violate his fiduciary duties to the corporation. [8] Here, the Court of Chancery found that the Rights Plan was not disproportionate to the threat, because if concrete action to dilute majority control might be justified, then so might be the far less extreme act of interposing a rights plan that only threatened such a dilution. The Rights Plan was found to be justified in this case because of the extraordinary threat presented, and because the duration of the Plan's use would be time-limited; that is, the Rights Plan would be needed only until the board was able to complete the Strategic Process and to develop its preferred option. Lastly, the Court of Chancery found that the Rights Plan was the most narrowly tailored remedy for Black's misconduct, because it would flexibly police the Restructuring Proposal Agreement while allowing Inc. to demand redemption at a later time. [9] Fifth, as a consequence of these determinations, the Court of Chancery: (1) entered a money judgment in favor of International, and against Black, for $8,693,053.66, plus interest; (2) entered a money judgment in favor of International, and against Black and Inc. jointly, for $21,154,025.92, plus interest; and (3) permanently enjoined Black and all persons or entities acting in concert with him, from consummating a transaction in violation of the Restructuring Proposal Agreement, from committing further breaches of that Agreement and breaches of fiduciary duty in connection with the Strategic Process, and also from tortiously interfering with the Restructuring Proposal Agreement. [10]