Opinion ID: 1959481
Heading Depth: 1
Heading Rank: 5

Heading: Fiduciary Responsibility Is Contextually Specific

Text: This case relates to a complete sale of Chemical. The Chemical Board owed fiduciary duties of care, loyalty and good faith to all Chemical shareholders in recommending a sale of the entire corporation. [21] In the context of an entire sale, and in the absence of an extant majority shareholder, the directors must focus on one primary objective  to secure the transaction offering the best value reasonably available for all stockholders. [22] In pursuing that objective, the directors must be especially diligent [23] and they must exercise their fiduciary duties to further that end. [24] In the absence of a majority shareholder, this Court has described some of the methods by which a board can fulfill its fiduciary obligation to seek the best value reasonably available to the stockholders when the board is engaged in the process of selling the corporation. [25] Those methods may include conducting an auction, canvassing the market, etc. [26] There is, however, no single blueprint that directors of Delaware corporations must follow. [27] The statutory duties and common law fiduciary responsibilities that directors of a Delaware corporation are required to discharge depends upon the specific context that gives occasion to the board's exercise of its business judgment. [28] Whenever the board is deciding whether to approve a proposed all shares tender offer that is to be followed by a cash-out merger, the decision constitutes a final-stage transaction for all shareholders. [29] Consequently, the time frame for the board's analysis is immediate value maximization for all shareholders. [30] The questions presented in this case require an examination of the Chemical Board's statutory duty and fiduciary responsibilities to minority shareholders in the specific context of evaluating a proposal for a sale of the entire corporation to a third party at the behest of the majority shareholder. When a board is presented with the majority shareholder's proposal to sell the entire corporation to a third party, the ultimate focus on value maximization is the same as if the board itself had decided to sell the corporation to a third party. [31] When the entire sale to a third-party is proposed, negotiated and timed by a majority shareholder, however, the board cannot realistically seek any alternative because the majority shareholder has the right to vote its shares in favor of the third-party transaction it proposed for the board's consideration. [32] Nevertheless, in such situations, the directors are obliged to make an informed and deliberate judgment, in good faith, about whether the sale to a third party that is being proposed by the majority shareholder will result in a maximization of value for the minority shareholders. [33] In this case, because the minority shareholders of Chemical were powerless to out-vote ARCO, they had only one decision to make: whether to accept the tender offer from Lyondell or to seek an appraisal value of their shares in the ensuing merger. Given ARCO's majority shareholder 80% voting power, under the circumstances of this case, the Chemical Directors did not have the ability to act on an informed basis to secure the best value reasonably available for all shareholders in any alternative to the third-party transaction with Lyondell that ARCO had negotiated. [34] The Chemical Directors did, however, have the duty to act on an informed basis to independently ascertain how the merger consideration being offered in the third party Transaction with Lyondell compared to Chemical's value as a going concern. As noted, a board of directors has a duty under 8 Del. C. § 251(b) to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. In the absence of a majority shareholder, we have held that directors may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. [35] A fortiori, when the proposal to merge with a third party is negotiated by the majority shareholder, the board cannot abdicate that duty by leaving it to the shareholders alone to approve or disprove the merger agreement [36] because the majority shareholder's voting power makes the outcome a preordained conclusion. To paraphrase the Court of Chancery in a similar context and applying its holding to this case: [O]nce having assumed the position of directors of [Chemical], a corporation that had stockholders other than [ARCO], [the directors] become fiduciaries for the minority shareholders, with a concomitant affirmative duty to protect the interests of the minority, as well as the majority, stockholders. Thus, the [Chemical] Board, in carrying out its affirmative duty to protect the interests of the minority, could not abdicate its obligation to make an informed decision on the fairness of the merger by simply deferring to the judgment of the controlling shareholder ... [37] When a majority of a corporation's voting shares are owned by a single entity, there is a significant diminution in the voting power of the minority stockholders. [38] Consequently, minority stockholders must rely for protection on the fiduciary duties owed to them by the board of directors. [39] Under the circumstances presented in this case, although the Chemical Board could not effectively seek an alternative to the proposed Lyondell sale by auction or agreement, and had no fiduciary responsibility to engage in either futile exercise, [40] its ultimate statutory duties under Section 251 and attendant fiduciary obligations remained inviolable. Effective representation of the financial interests of the minority shareholders imposed upon the Chemical Board an affirmative responsibility to protect those minority shareholders' interests. This responsibility required the Chemical Board to: first, conduct a critical assessment of the third-party Transaction with Lyondell that was proposed by the majority shareholder; and second, make an independent determination whether that transaction maximized value for all shareholders. The Chemical Directors had a duty to fulfill this obligation faithfully and with due care so that the minority shareholders would be able to make an informed decision about whether to accept the Lyondell Transaction tender offer price or to seek an appraisal of their shares. [41] McMullin's Amended Complaint alleges that these statutory duties and fiduciary responsibilities were not discharged properly by the directors of Chemical.