Opinion ID: 1535019
Heading Depth: 1
Heading Rank: 3

Heading: The Duty of Loyalty Claim

Text: The central claim in the amended complaint is that the sale of Frederick's to Knightsbridge constituted a breach of [the Frederick's board's] fiduciary obligation to maximize shareholder value because the board did not conduct an auction with a `level playing field' as required by Revlon, Inc. v. MacAndrews & Forbes Holdings. [20] The plaintiffs contend that this sort of allegation cannot be neatly divided into duty of care claims and duty of loyalty claims. In our view, Revlon neither creates a new type of fiduciary duty in the sale-of-control context nor alters the nature of the fiduciary duties that generally apply. Rather, Revlon emphasizes that the board must perform its fiduciary duties in the service of a specific objective: maximizing the sale price of the enterprise. [21] Although the Revlon doctrine imposes enhanced judicial scrutiny of certain transactions involving a sale of control, it does not eliminate the requirement that plaintiffs plead sufficient facts to support the underlying claims for a breach of fiduciary duties in conducting the sale. [22] Accordingly, we proceed to analyze the amended complaint to determine whether it alleges sufficient facts to support a claim that the board breached any of its fiduciary duties. [23] The Court of Chancery concluded, and the plaintiffs do not appear to contest on appeal, that the amended complaint adequately alleges a conflict of interest with respect to only one of the directors who approved the Knightsbridge merger. [24] The amended complaint does not allege that the lone conflicted director dominated the three other directors who approved the merger on September 6, 1997. [25] The Court of Chancery therefore correctly held that the Knightsbridge merger was approved by a majority of disinterested directors. The plaintiffs nevertheless argue that the amended complaint supports a claim that the directors breached their duty of loyalty by approving the Knightsbridge merger. [26] The complaint alleges that Frederick's representatives expressed concern that if Frederick's approved the [June 15, 1997] Merger Agreement in favor of a transaction with Veritas, Knightsbridge would sue Frederick's and its directors. The plaintiffs argue that this allegation supports a reasonable inference that the directors' individual interests in avoiding personal liability to Knightsbridge influenced their decision to approve the Knightsbridge merger. Except in egregious cases, the threat of personal liability for approving a merger transaction does not in itself provide a sufficient basis to question the disinterestedness of directors because the risk of litigation is present whenever a board decides to sell the company. [27] Moreover, even assuming arguendo that the threat of personal liability did raise some concerns about the disinterestedness of the directors, the amended complaint goes on to allege that Veritas agreed to indemnify the directors in the event that Knightsbridge sued them. This allegation undermines the plaintiffs' inference that the directors rejected the Veritas offer to avoid becoming embroiled in litigation with Knightsbridge. [28] We therefore conclude that the facts alleged in the complaint do not state a cognizable claim that the directors acted in their own personal interests rather than in the best interests of the stockholders when they approved the Knightsbridge merger. [29]