Central Laborers' Pension Fund v. McAfee, Inc.Central Laborers' Pension Fund v. McAfee, Inc.
Plaintiff and Appellant,
v.
MCAFEE, INC. et al.,
Defendants and Respondents.
This is a class action brought by former public shareholders of security technology company McAfee, Inc. Intel Corporation acquired McAfee in a cash sale at $48 per share for a total of $7.68 billion (merger). Plaintiff Central Laborers’ Pension Fund (plaintiff), on behalf of itself and the class, alleges that McAfee, Intel, and the former members of McAfee‘s board of directors—comprised of nine outside directors and the former president and CEO, David DeWalt (together defendants)—engaged in an unfair merger process contaminated by conflicts. Plaintiff claims that in pursuit of his own self-interest, DeWalt withheld material information about negotiations with Intel management from McAfee‘s board of directors, whose members failed to safeguard the process and who consequently approved an undervalued price per share. Plaintiff also claims that defendants omitted material information from the merger proxy statement on which McAfee‘s public shareholders relied in voting for the merger.
The trial court, applying Delaware law, granted summary judgment for defendants. The court found no triable issue of material fact regarding the individual defendants’ alleged breaches of fiduciary duty, and concomitantly no liability on behalf
For the reasons stated herein, we affirm the judgment as to the nine outside director defendants and reverse the judgment as to DeWalt and the corporate defendants.
I. FACTUAL AND PROCEDURAL BACKGROUND1
A. FACTUAL OVERVIEW
1. The Company
McAfee was founded in 1989 as a Delaware corporation with headquarters in Santa Clara. At the time of the merger, it was the world‘s largest dedicated security technology company. David DeWalt joined McAfee in 2007 as president and CEO and served on the board of directors, bringing about 15 years of executive experience in the software industry, including the sale of a company under his leadership. DeWalt‘s reputation according to one investment bank‘s analysis was “for building and subsequently selling businesses.”
McAfee maintained close working relationships and alliances with numerous technology companies. As part of its regular diligence, the board of direсtors discussed McAfee‘s strategic relationships with other technology companies along a “full spectrum of options” from technology partnerships to mergers and acquisitions. It was DeWalt‘s role to update the board on these ongoing discussions, which he did as part of a “regular review process that the board and management went through . . . almost every meeting.”
2. McAfee and Intel—Business Relationship and Early Merger Discussions
Before the merger, McAfee had a nearly decade-long relationship with Intel as a supplier of security software and a partner in research and development and marketing initiatives. In 2009, the companies agreed to collaborate in developing enhanced security technology using the expertise of both companies through a joint research-and-development project called “Patmos.” Intel‘s Software and Services Group, led by the group‘s general manager and senior vice-president Renee James (James), was around this time also considering potential acquisitions as part of Intel‘s security strategy, including the possibility of acquiring an existing platform security company such as McAfee.
In March 2010, Intel requested a meeting with McAfee. DeWalt and Gerhard Watzinger, a McAfee executive vice-president, speculated that Intel might want to “beat us up about Patmos” because McAfee had not prioritized the project, leading Intel to complain on multiple occasions that McAfee was not meeting the collaboration
James later testified that the McAfee presentation “surprised” her because she anticipated a meeting about the joint development effort. DeWalt testified that the group led by James met “to ask questions about our business in the spirit of partnership, but certainly the questions that were being asked were probably more leading than just a partnership discussion.”
After the March 2010 meeting, McAfee and Intel management continued their partnership discussions. Intel began vetting investment banks for advisory services in connection with a potential “deal” in the security sector. At one point Intel offered the advisory position to Morgan Stanley. Morgan Stanley declined, noting internally that it anticipated a more lucrative “revenue opportunity” providing sell-side advice to McAfee.
Meanwhile, DeWalt and James stayed in regular contact, which DeWalt understood as “partner oriented” and indicative of Intel‘s interest in security and in McAfee. A close collaboration began between McAfee and Intel management in a project that was dubbed “Inca.” On April 4, 2010, representatives of both sides met at Intel‘s headquarters. The objective of the Inca meeting was to provide Intel with “necessary McAfee and technology background to build synergy matrix and [financial] model” and to “[i]dentify top opportunities for combined assets.” The discussion centered on a list of eight joint business opportunities, including Patmos, that each
In May and June 2010, James proposed to Intel‘s board of directors that Intel engage in acquisition discussions with McAfee. Intel‘s internal valuation analyses of McAfee as presented to the Intel board of directors in June 2010 reflected a range of values from a standalone price per share of $42 to as high as $56 to $90 per share for “strategic synergies” from an acquisition. The Intel board of directors approved an acquisition offer range of $45 to $49 per share.
3. June 11 Proposal at $45 per share
James met with DeWalt on June 10, 2010 and verbally conveyed Intel‘s interest in making an offer at the price of $45 per share. DeWalt recalled it as the “first meeting . . . where there was a strong indication of interest and that there might be an offer to follow.” DeWalt‘s response to James was “if it didn‘t start with a five, it was a non starter.” James later testified that “Dave [DeWalt] let me know 45 didn‘t work. . . . Dave‘s words were: It needs to start with a 5.”
The next day, James sent DeWalt a written request for exclusive negotiating rights and nonbinding proposal to acquire McAfee in a cash offer at $45 per share (June 11 proposal) subject to the completion of due diligence and board and regulatory approvals. The proposed price represented a 43 percent premium over McAfee‘s stock price, which had fallen since late 2009 and was trading in the low 30s. The June 11 proposal stated that Intel intended to operate McAfee as a standalone subsidiary and to retain “the current management team.” DeWalt notified McAfee board chairman Robel, who called a special meeting for the next day.
4. McAfee‘s Response to the June 11 Proposal
The McAfee board was informed of ongoing joint partnership discussions between Intel and McAfee in the spring of 2010. Several board members testified that Intel had indicated “a stronger interest in security” and a “greater interest beyond the partnering development deal” or product development relationship that “could have the potential to turn into something.”
Yet several directors described Intel‘s June 11 proposal as unexpected and a surprise, based on views that Intel was not a likely acquirer and that DeWalt‘s briefings about discussions with Intel had remained focused on the joint venture. Defendant Robel explained that he thought Intel‘s increased interest in security and questions about McAfee‘s business might have been a “fishing expedition” because a combination with Intel was “pretty out of the box.” The board members were not aware of project Inca and management‘s detailed analysis of potential synergies that could be developed in an Intel acquisition. Robel testified that before the June 11 proposal, the board had not placed a view on a value of the company in a sale “because the board hadn‘t even considered putting the company in play.”
McAfee‘s board reconvened several days later for an update on the due diligence sessions and McAfee‘s internal forecast. Morgan Stanley offered its preliminary analysis of the July 11 proposal in view of McAfee‘s financial performance, possible standalone scenarios, other potential bidders, and Morgan Stanley‘s valuation of McAfee at between $55.09 per share (base case) to $60.20 per share (high case). Following these discussions, the board decided to reject the June 11 proposal and directed DeWalt to communicate to Intel that $45 per share was inadequate. The focus of the board was to obtain an offer at a price that was “something above $50.” According to defendant Lorrie Norrington, the board “had the specific conversation that 45 was too low and that . . . it has to start with a five in order for the board to consider the offer.”
DeWalt and Morgan Stanley separately communicated McAfee‘s rejection of the $45 offer. DeWalt testified that there was “an impasse” because “Intel wouldn‘t accept anything that started with a five and we wouldn‘t accept anything that didn‘t start with a five . . . .” James similarly recalled that DeWalt told her “that he thought it needed to be in the mid 50s. Fifty-two to 54.” James‘s internal communications with Andy Bryant reflected this understanding of McAfee‘s position as well, based on conversations with
James spoke with DeWalt over the July 4th weekend and asked “will 50 get the deal done, if we go back to the board?” DeWalt, according to James, “said, no, 52 to 54. He stuck to it.” James explained that she did not speak with DeWalt for “a couple weeks after” and decided to wait until the second quarter results, noting that McAfee was “in a falling market, their stock was going down, and we knew their quarter wasn‘t goоd. So we said: You know what? We see real weaknesses in their business. And we were concerned that we needed to wait and get more data.”
Correspondence continued between James and DeWalt immediately following the July 4th weekend. DeWalt provided Intel with McAfee‘s preliminary second quarter results, which he described to James as “very strong,” adding “Renee, I‘m hoping this is exactly the type of ‘good new news’ that might help move things forward on your end.” The view internally was more subdued. DeWalt testified the results were “mixed” with McAfee having “missed pretty substantially” analyst expectations in a few key categories but having beat expectations in others. Robel explained that “we believed, and the Street believed, it was not a good quarter. And it was not . . . there was a cloud around the company‘s ability to grow in the future.” James also recalled McAfee‘s second quarter results as being “weak” with “very weak forward guidance.”
McAfee‘s board met again on July 8, at which time DeWalt reported a pause in the merger discussions as Intel wished to wait until the full financial statements from McAfee‘s second quarter became available. Morgan Stanley confirmed DeWalt‘s information and reported that they had reiterated that Intel would need to increase its $45-per-share offer before McAfee would engage in more complete due diligence.
5. Revised Offer at $48 per share, Merger Agreement, and Proxy Statement
Intel revised its acquisition offer to $48 per share in a letter dated July 19 and delivered to DeWalt on July 20. The offer represented a 58 percent premium over McAfee‘s stock closing price on July 19 and demanded a 30-day exclusivity agreement.
McAfee‘s board convened special meetings on July 21 and July 22 to discuss the revised offer. DeWalt reported that based on his discussions with James, Intel “was not willing to further increase its offer” price. Morgan Stanley reported that it had received similar information from Intel‘s financial advisor and that it believed Intel would withdraw its offer if McAfee sought alternative bids or failed to agree to a 30-day exclusivity period. Morgan Stanley presented a valuation summary and the board discussed the conditions of the offer, market trends for mergers and acquisitions, the interest and ability of other potential acquirers to complete an acquisition, and whether to seek a further increase in the offer price. DeWalt reviewed the second quarter financial results and reasons that revenues had fallen below expectations, as well as several successes that McAfee had achieved that quarter. At the end of the meeting on July 22, McAfee‘s board authorized negotiations based on the $48-per-share offer but directed counsel to seek a shorter term of exclusivity.
The McAfee board held three special meetings in August to consider aspects of the proposed transaction. DeWalt‘s compensation and employment agreement with Intel also was negotiated and reviewed by the board‘s compensation committee. At the meeting on August 18, Morgan Stanley delivered a formal fairness opinion concluding that the acquisition price of $48 per share was “fair from a financial point of view” to the
The proxy statement dated September 21, 2010, described in relevant part the McAfee-Intel joint partnership (Patmos) in 2009 and the meeting between James and DeWalt on June 10, 2010. It described McAfee‘s process, price negotiations, and communications with Intel between the June 11 proposal at $45 per share and receipt of the revised offer on July 20 at $48 per share, as well as Morgan Stanley‘s fairness opinion and the board‘s deliberations and consideration of alternative prospects before approving the agreement on August 18. It did not mention project Inca or pre-due diligence discussions or exchanges prior to the June 11 proposal. It also did not mention any $50 per share “overture” but stated that on June 26, James and DeWalt “agreed to revisit valuation discussions at a later date” after DeWalt had indicated that McAfee‘s board would not be interested in accepting an offer below $50 per share, and James had responded that Intel‘s board would not support an offer price of $50 per share. The proxy statement summarized details of the merger agreement, including the $230 million termination fee, nonsolicitation (“no shop“) provision, “fiduciary out” provision, and DeWalt‘s and other executive‘s employment agreements.
No other company expressed interest in purchasing McAfee following the merger announcement. On November 2, 2010, McAfee‘s shareholders approved the merger, with 99.9 percent of voting shares in favor.
This class action consolidated several lawsuits filed in the Superior Court of Santa Clara County in August 20102 after Intel and McAfee announced the merger agreement on August 19. The plаintiffs did not seek a preliminary injunction to prevent the McAfee shareholder vote from going forward.
1. Operative Complaint
The operative, consolidated amended complaint (complaint) was filed on January 6, 2011, after McAfee‘s shareholders voted in favor of the merger on November 2, 2010, but before the deal closed after regulatory approvals. The complaint asserted a single cause of action for breach of fiduciary duties and aiding and abetting, claiming that the 10 individual defendants,3 aided and abetted by McAfee and Intel (both Delaware corporations), breached their fiduciary duties of care, loyalty, candor, good faith and independence by failing to ensure a fair process and by depriving McAfee‘s public shareholders of the true and fair value of their McAfee stock.
The complaint alleged that DeWalt “in particular” acted out of self-interest during the merger process in order to ensure his gains in an acquisition, and that he allegedly kept the other board members “in the dark” throughout the merger process—including by concealing information about management‘s exchanges with Intel on the value of McAfee‘s prospects and future products and by effectively “capping” McAfee‘s price expectations at $50. The complaint further alleged that the individual defendants, who stood to receive accelerated vesting of their stock upon completion of the merger “at a
It alleged that in order to protect the deal with Intel, defendants entered into a merger agreement that was “steeped in preclusive deal protection provisions designed to guarantee that Intel did not lose its preferred position.” These included a ” ‘No Shop’ ” provision that required McAfee to discontinue any discussions with other potential acquirers, a ” ‘Matching Rights’ ” provision that gave Intel five days to match any competing acquisition proposals that McAfee might receive, and a ” ‘Termination Fee’ ” provision in which McAfee would pay Intel $230 million if it accepted a higher offer despite the no shop provision.
The complaint also alleged that defendants withheld material information in proxy statements, depriving McAfee‘s shareholders of information about the flawed sales process, conflicts of interest that burdened the board and its advisors, McAfee‘s intrinsic value and prospects going forward, material benefits that defendants and McAfee management would secure only if the acquisition succeeded, and the flawed financial analysis supporting Morgan Stanley‘s fairness opinion.
The complaint in sum asserted thаt (1) defendants were motivated by lucrative personal gains, (2) the acquisition price of $48 per share was unfair and undervalued below McAfee management‘s own estimates, (3) the proxy statements to McAfee‘s public shareholders omitted material information about the merger process and the basis for Morgan Stanley‘s fairness analysis, and (4) defendants consequently breached their fiduciary obligation to obtain the highest value reasonably available for McAfee‘s shareholders.
The trial court overruled demurrers to the consolidated amended complaint on June 29, 2011.
In January 2012, the trial court granted plaintiff‘s motion to intervene, certified the class, and appointed plaintiff as class representative. Several months later, defendants moved to amend certain pretrial and trial-setting orders to specify that the case would be tried to the court in a bench trial. Defendants argued that plaintiff was not entitled to a jury trial because under Delaware law, breach of fiduciary duty claims are equitable in nature and are subject to the exclusive jurisdiction of the Delaware Court of Chancery, with no right to a trial by jury in that court. Plaintiff opposed the motion and argued, in an effort to secure a jury trial, that although Delaware law applies as to issues of corporate governance, California law mandates the right to a jury trial, as determined by the legal or equitable nature of the claims in the case. The trial court rejected plaintiff‘s argument that its fiduciary duty claims were legal in nature and granted defendants’ motion to amend, setting the matter for a trial to the court without a jury.4
In August 2012, the court denied a motion by plaintiff for leave to file a second amended complaint.
3. Summary Judgment
Defendants moved for summary judgment (
The trial court granted judgment in favor of defendants on November 2, 2012. The court noted there was no dispute that the McAfee charter contained an exculpatory provision pursuant to section 102, subdivision (b)(7) of the Delaware General Corporation Law (
Regarding DeWalt, the court found that DeWalt‘s interest in the merger did not present a disqualifying conflict, particularly because Intel‘s interest in retaining McAfee management was disclosed in the June 11 proposal, and DeWalt‘s employment terms were negotiated after the board accepted the $48 price-per-share offer and were approved by the compensation committee. The court found no evidence that DeWalt‘s failure to notify McAfee‘s board about project Inca and the synergy discussions with Intel was the result of self-interest or placed McAfee “at a strategic disadvantage.” The court found that DeWalt‘s rejection of James‘s overture of a $50-per-share sale price could not be “reasonably construed as anything but negotiating for an authorized, higher amount, not an effort to drive McAfee‘s expectations lower,” since it was undisputed that DeWalt actually “sought a higher price in the ‘$52 to $54’ range.” Thе court thus concluded that there was no triable issue regarding DeWalt‘s alleged manipulation of the disinterested majority of the board.
Having found no triable issues of material fact related to the fiduciary duty claims, the court concluded there was no basis for relief for any alleged disclosure violations and that McAfee and Intel could not be liable for aiding and abetting. The trial court entered judgment for defendants on February 13, 2013. Plaintiff timely appealed.
II. DISCUSSION
Plaintiff asserts that in deciding the motion for summary judgment, the trial court disregarded its fundamental task to construe the evidence and draw all reasonable inferences in favor of the nonmoving party. Plaintiff contends that the court drew improper inferences in defendants’ favor and granted summary judgment in the face of
A. SUMMARY JUDGMENT AND STANDARD OF REVIEW
A motion for summary judgment provides “a mechanism to cut through the parties’ pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 (Aguilar).) The trial court must grant a motion for summary judgment “if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (
On appeal from a summary judgment, we “examine the record de novo, liberally construing the evidence in support of the party opposing summary judgment and resolving doubts concerning the evidence in favor of that party.” (Miller v. Department of Corrections (2005) 36 Cal.4th 446, 460.) Defendants as the moving party have the initial burden of showing that one or more elements of the cause of action cannot be established, justifying judgment in their favor. (
B. PRINCIPLES OF DELAWARE LAW: FIDUCIARY DUTY, THE BUSINESS JUDGMENT RULE, ENHANCED SCRUTINY, AND ENTIRE FAIRNESS
A fundamental principle of Delaware law is that the “ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors.” (Revlon, Inc. v. MacAndrews & Forbes Holdings (Del. 1986) 506 A.2d 173, 179 (Revlon).) Corporate directors have “an unyielding fiduciary duty to protect the interests of the corporation and to act in the best interests of its shareholders.” (Cede & Co. v. Technicolor, Inc. (Del. 1993) 634 A.2d 345, 360 (Cede).) In a proposed merger or change of control transaction, “the board has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders.” (Unocal Corp. v. Mesa Petroleum Co. (Del. 1985) 493 A.2d 946, 954 (Unocal).) Unless the board determines it is in the corporation‘s best interest to avoid a change in control, “obtaining the highest price for the benefit of the stockholders should [be] the central theme guiding director action.” (Revlon, supra, at p. 182.)
“When shareholders challenge actions by a board of directors, generally one of three standards of judicial review is applied: the traditional business judgment rule, an intermediate standard of enhanced judicial scrutiny, or the entire fairness analysis.” (Emerald Partners v. Berlin (Del. 2001) 787 A.2d 85, 89 (Emerald Partners).) Ordinarily, the propriety of director conduct is measured by the business judgment rule. (Unocal, supra, 493 A.2d at p. 954.) “The business judgment rule is a ‘presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.’ ” (Ibid.) It “posits a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by
In certain circumstances, however, including a sale of control, courts apply “enhanced scrutiny” to the decisions and actions of the directors to ensure that the directors’ conduct is “reasonable.” (Paramount Communications v. QVC Network (Del. 1993) 637 A.2d 34, 42 (Paramount).) “The duty to seek the best available price applies . . . when a company embarks on a transaction—on its own initiative or in response to an unsolicited offer—that will result in a change of control.” (Lyondell Chemical Co. v. Ryan (Del. 2009) 970 A.2d 235, 242 (Lyondell).) The directors’ obligation in this context is “to secure the transaction offering the best value reasonably available for the stockholders” and to “exercise their fiduciary duties to further that end.” (Paramount, supra, at p. 44; Revlon, supra, 506 A.2d at p. 182.)
Courts apply “even more exacting scrutiny” when there is evidence of “actual self-interest” that “affects a majority of the directors approving a transaction . . . .” (Paramount, supra, 637 A.2d at p. 42, fn. 9.) This is the entire fairness standard, which is triggered by rebuttal of the presumption of the business judgment rule and which shifts the burden to the defendant directors to prove the ” ‘entire fairness’ ” of the transaction to the shareholders.7 (Cede, supra, 634 A.2d at p. 361; Cinerama, Inc. v. Technicolor, Inc.
In sum, “[w]hen determining whether corporate fiduciaries have breached their duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review.” (Chen v. Howard-Anderson (Del. Ch. 2014) 87 A.3d 648, 666 (Chen).) “The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.” (In re Trados Inc. S‘holder Litig. (Del. Ch. 2013) 73 A.3d 17, 35-36 (Trados).)
C. ANALYSIS
Our review of the grant of summary judgment in this case is closely bound to the applicable standard of review of the challenged transaction under Delaware law. (See Mills, supra, 559 A.2d at p. 1279 [” ‘[b]ecause the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative . . . .’ “].) Plaintiff invokes the entire fairness standard, contending that
attaches as a substantive rule of law to protect the directors and their business decisions. (Ibid.; Citron, supra, at p. 64.) If the business judgment rule is rebutted, the burden shifts to the defendant directors to prove the ” ‘entire fairness’ ” of the transaction to the shareholders. (Cede, supra, at p. 361.)
Defendants respond that plaintiff has not satisfied the prerequisites for entire fairness because there is no evidence that a majority of the directors acted out of self-interest (Paramount, supra, 637 A.2d at p. 42, fn. 9) or were dominated by a minority of interested directors (Cinerama, supra, 663 A.2d at p. 1170, fn. 25). Defendants analyze DeWalt‘s and the board of directors’ actions under the presumptive standard of enhanced scrutiny. Enhanced scrutiny requires a determination only “whether the directors made a reasonable decision, not a perfect decision.” (Paramount, supra, at p. 45.)
The parties also dispute the effect of the exculpatory provision in McAfee‘s charter to limit personal liability of any independent directors for breaches of the duty of care. (See
We begin by analyzing plaintiff‘s claim for entire fairness review and find that the standard was not met.8 Accordingly, we review defendants’ conduct in the merger proceedings under the enhanced scrutiny standard of review. We find that there are no triable issues оf material fact related to the breach of fiduciary duty action against the nine independent directors and affirm the grant of summary judgment in their favor. We find that triable issues remain related to defendant DeWalt‘s apparent nondisclosure of arguably material information to the board and the shareholders and reverse the grant of
1. Operative Standard of Review
As summarized above, the operative standard of review “depends initially on whether the board members (i) were disinterested and independent (the business judgment rule), (ii) faced potential conflicts of interest because of the decisional dynamics present in particular recurring and recognizable situations (enhanced scrutiny), or (iii) confronted actual conflicts of interest such that the directors making the decision did not comprise a disinterested and independent board majority (entire fairness).” (Trados, supra, 73 A.3d at p. 36.) Resolution of this threshold issue turns on whether the evidence, viewed in the light most favorable to plaintiff, supports rebuttal of the presumption that the directors acted in the best interests of the shareholders—either by breach of the duty of loyalty or of the duty of care. (Cede, supra, 634 A.2d at p. 371.) This requires us to examine whether an alleged breach by an individual director, such as DeWalt, triggers entire fairness review for the actions of the entire board. We also must consider how the exculpatory provision in the McAfee charter affects our review.
a. Duty of Loyalty
The duty of loyalty under Delaware law “mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.” (Cede, supra, 634 A.2d at p. 361.) A director is considered independent “only when the director‘s decision is based entirely on the corporate merits of the transaction and is not influenced by personal or extraneous considerations.” (Id. at p. 362.)
The Delaware Supreme Court in Cede, supra, 634 A.2d at page 362 examined “the quantum of evidence required to rebut the business judgment rule‘s presumption of director loyalty.” The court clarified that self-interest on the part of a single director does not necessarily bar application of the business judgment rule to board action. (Id. at p. 363.) Rather, “there must be evidence of disloyalty,” which may be found in such misconduct as “the motives of entrenchment,” “fraud upon the corporation or the board,” “abdication of directorial duty,” “or the sale of one‘s vote.” (Ibid.) There is no “bright-line rule for determining when a director‘s breach of duty of independence through self-interest translates into evidence sufficient to rebut the business judgment presumption accorded board action.” (Id. at p. 364.)
b. Duty of Care
“A director‘s duty to exercise an informed business judgment implicates the duty of care. Director liability for breaching the duty of care ‘is predicated upon concepts of gross negligence.’ ” (McMullin v. Beran (Del. 2000) 765 A.2d 910, 921, fn. omitted.) It requires the directors to ” ‘use that amount of care which ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider all material information reasonably available’ in making business decisions, and that deficiencies in the directors’ process are actionable only if the directors’ actions are grossly negligent.” (In re Walt Disney Co. Derivative Litigation (Del. Ch. 2005) 907 A.2d 693, 749, fn. omitted, aff‘d by In re Walt Disney Co. Derivative Litigation (Del. Ch. 2006) 906 A.2d 27 (Walt Disney).) In the context of a merger or sale, the duty of care “requires a director, before voting on a proposed plan of merger or sale, to inform himself and his fellow directors of all material information that is reasonably available to them.” (Cede, supra, 634 A.2d at p. 368.) “[A] trial court will not find a board to have breached its duty of care unless the directors individually and the board collectively have failed to inform themselves fully and in a deliberate manner before voting as a board upon a transaction as significant as a proposed merger or sale of the company. [Citations.] Only on such a judicial finding will a board lose the protection of the business judgment rule under the duty of care element and will a trial court be required to scrutinize the challenged transaction under an entire fairness standard of review.” (Ibid.)
We address as a preliminary matter the effect of the exculpatory provision in McAfee‘s charter, adopted pursuant to
There is no dispute that McAfee‘s charter during the relevant time period contained a section 102(b)(7) exculpatory provision. The trial court found that McAfee‘s independent directors could not be held personally liable for breaches of the fiduciary duty of care, and accordingly analyzed the evidence as it pertained to the directors’ alleged breaches of the duties of loyalty and good faith.
Plaintiff urges on appeal that any consideration of the exculpatory provision and its impact on defendants’ potential liability is not proper at summary judgment and must be made after trial on the merits. (See, e.g., In re Emerging Communs., Inc. S‘holders Litig., 2004 Del. Ch. LEXIS 70, at *116, *139 (Emerging Communications)9 [addressing application of § 102(b)(7) exculpatory provision only after trial finding that “freeze-out merger of the minority” by majority stockholders failed entire fairness review].)
For present purposes, plaintiff is incorrect. “Depending on the facts of the case, the standard of review, and the procedural stage of the litigation, a court may be able to determine that a plaintiff‘s claims only involve breaches of the duty of care such that the court can apply an exculpatory provision to enter judgment in favor of the defendant directors before making a post-trial finding of a breach of fiduciary duty and determining the nature of the breach. If a court cannot make the requisite determination as a matter of law on a pre-trial record, then it becomes necessary to hold a trial and evaluate each director‘s potential liability individually.” (Chen, supra, 87 A.3d at pp. 676-677.)
Plaintiff‘s reliance on Emerging Communications is misplaced, because the transaction in that case (a ” ‘going private’ acquisition of a corporation‘s minority stock by its majority stockholder“) dictated the standard of review for entire fairness. (Emerging Communications, supra, 2004 LEXIS 70 at *35-36.) As the Delaware Supreme Court explained in Emerald Partners, transactions that “require judicial review pursuant to the entire fairness standard ab initio do so because, by definition, the inherently interested nature of those transactions are inextricably intertwined with issues of loyalty.” (Emerald Partners, supra, 787 A.2d at p. 93.) In those cases, the exculpatory effect of a section 102(b)(7) provision may only be decided after the directors’ potential personal liability has been established based on a finding the transaction was not entirely fair. (Emerald Partners, supra, at p. 93.) But in cases that “begin with the presumption of the business judgment rule, ab initio, . . . proper invocation of a Section 102(b)(7) provision can obviate a trial pursuant to the entire
The transaction before us is not presumptively subject to entire fairness review. Since we proceed from the starting point of the business judgment rule (or enhanced scrutiny in connection with actions taken when merger negotiations began, see Lyondell, supra, 970 A.2d at p. 242), invocation of McAfee‘s section 102(b)(7) charter provision “can obviate a trial pursuant to the entire fairness standard, even if the presumption of the business judgment rule is successfully rebutted by a duty of care violation . . . .” (Emerald Partners, supra, 787 A.2d at p. 92.) Inasmuch as a breach of the independent directors’ duty of care cannot serve as a basis for their personal liability in this case, it cannot serve as a basis for rebutting the presumptions of the business judgment rule.
We conclude that plaintiff‘s quest to establish entire fairness as the applicable standard of review and to defeat summary judgment as to the independent directors requires a showing of one or more triable issues of material fact pertaining to the non-exculpated loyalty or good faith claims against those directors. A failure to present evidence of a triable issue of material fact as to the non-exculpated breach of the fiduciary duty claims properly results in the affirmance of judgment in their favor. (See, e.g., Lyondell, supra, 970 A.2d at pp. 237-239; In re S. Peru Copper Corp. S‘holder Derivative Litig. (Del. Ch. 2011) 52 A.3d 761, 785 [dismissing certain director defendants at summary judgment “because the plaintiff had failed to present evidence supporting a non-exculpated breach of their fiduciary duty of loyalty . . . .“].)
d. The Record Does Not Support Review for Entire Fairness
Plaintiff argues that DeWalt‘s interest in the merger and alleged manipulation of the independent directors necessitates the application of entire fairness review. Plaintiff focuses on DeWalt‘s alleged concealment of James‘s $50-per-share overture and of the pre-due diligence, project Inca exchanges between McAfee and Intel leading up to the
Mills involved an ongoing “battle for control” of Macmillan, Inc. (Mills, supra, 559 A.2d at p. 1265.) Faced with an unsolicited takeover bid of the company, Macmillan‘s chairman and CEO (Evans) and president and COO (Reilly), pursued a management-sponsored buyout of Macmillan by an investment firm specializing in leveraged buyouts (KKR). (Id. at p. 1264.) Macmillan‘s board of directors granted an asset option agreement (known as a ” ‘lockup’ “) to KKR after it prevailed “as the purported high bidder” in a stilted ” ‘auction’ for control of Macmillan.” (Ibid.) The record teemed with examples of fiduciary misconduct. For example, Evans and his team agreed to endorse the leveraged buyout to Macmillan‘s board of directors before KKR had even disclosed the amount of its bid. (Id. at p. 1273.) During the auction, Evans and Reilly called a KKR representative and ” ‘tipped’ ” the competing bidder‘s offer to KKR (id. at p. 1275), then concealed that information from Macmillan‘s board of directors. (Id. at pp. 1279-1280.) Throughout the auction process, “KKR was consistently and deliberately favored” (id. at p. 1278) while the competing bidder was “deliberately misled” (id. at p. 1281) and met “continuing hostility . . . .” (Id. at p. 1282.)
On appeal, the Delaware Supreme Court emphasized that “judicial reluctance to assess the merits of a business decision ends in the face of illicit manipulation of a board‘s deliberative processes by self-interested corporate fiduciaries.” (Mills, supra, 559 A.2d at p. 1279.) The court found that “Evans and Reilly, as participants in the leveraged buyout, had significant self-interest in ensuring the success of a KKR bid” and “their deliberate concealment of material information from the Macmillan board must
Bomarko involved the merger of International Telecharge, Inc. (ITI), into a corporation that was wholly-owned by ITI‘s chairman and CEO, Ronald Haan. (Bomarko, supra, 794 A.2d at pp. 1164-1165.) ITI was facing default on its long-term debt. Haan, who also was a significant creditor and large stockholder of ITI, approached Bell Atlantic about a possible loan. Bell Atlantic initially proposed a loan that did not meet ITI‘s needs, but later sent Haan a term sheet that more closely reflected ITI‘s request. (Id. at pp. 1168-1169.) Haan did not disclose the term sheet to ITI‘s board of directors or disabuse their understanding that Bell Atlantic likely could not meet ITI‘s needs. (Id. at p. 1169.) Instead, Haan proposed that he might be able to provide financing or purchase ITI‘s assets. (Ibid.) Haan then contacted Bell Atlantic without informing the board‘s special committee and counter-proposed terms that were “materially inconsistent with ITI‘s needs.” (Id. at p. 1170.) The board eventually approved a merger between ITI and Haan‘s corporation, in part based on the belief that ITI was unable to obtain financing or otherwise avoid bankruptcy. (Id. at p. 1175.)
The Court of Chancery observed that Haan‘s illicit counter-proposal “interfered with whatever opportunity ITI had to obtain financing from Bell Atlantic.” (Bomarko, supra, 794 A.2d at p. 1170.) The court found it to be evidence of bad faith, because Haan
In Weinberger, acquirer (Signal) owned a majority interest of stock in target (UOP), and several Signal directors and employees served on UOP‘s board of directors. (Weinberger, supra, 457 A.2d at pp. 703-704.) Two members of Signal‘s senior management, who were also UOP directors, prepared a feasibility study about acquiring the balance of UOP‘s outstanding shares. The study concluded that it “would be a good investment for Signal . . . at any price up to $24 [per share].” (Id. at p. 705.) After UOP‘s president and CEO (who also was a Signal director) responded favorably to Signal‘s intent to acquire full ownership of UOP at a proposed price range of $20 to $21, Signal authorized a cash-out merger at $21 per share. (Ibid.) The feasibility study was not shown to the independent UOP directors or disclosed to UOP‘s minority shareholders before their approval of the merger. (Id. at p. 707.)
The Delaware Supreme Court emphasized that the feasibility study was of material significance to UOP and its shareholders. (Weinberger, supra, 457 A.2d at p. 709.) “Since the study was prepared by two UOP directors, using UOP information for the exclusive benefit of Signal, and nothing whatever was done to disclose it to the outside UOP directors or the minority shareholders, a question of breach of fiduciary duty arises. This problem occurs because there were common Signal-UOP directors participating, at least to some extent, in the UOP board‘s decision-making processes without full disclosure of the conflicts they faced.” (Ibid.) The court further explained that when directors are on both sides of the transaction, “[g]iven the absence of any
Plaintiff likens DeWalt‘s conduct to that of the CEOs in Mills and Bomarko and the conflicted directors in Weinberger. Plaintiff points out that DeWalt never disclosed James‘s inquiry about $50-per-share to the McAfee board or its financial advisors, depriving them of material information against which to gauge the $48-per-share offer that came after. Plaintiff also asserts that DeWalt concealed project Inca and the pre-June 2010 merger discussions with Intel from the McAfee board members, produced key documents associated with project Inca only at the very end of discovery in this case, and was evasive and “affirmatively lied” in his deposition regarding McAfee‘s pre-June 2010 dealings with Intel and the timing of discussions with Intel about keeping McAfee‘s management team in a transition.
Defendants contest the relevance of Mills, Bomarko, and Weinberger to this case. We agree that the record as it relates to DeWalt‘s self-interest, alleged acts of deceit and concealment, and the efficacy of the board as a neutral decisionmaking body, contains no semblance of the conflicting interests or obstructive, manipulative conduct that permeated those cases and mandated review for entire fairness.
First, regarding DeWalt‘s self-interest, plaintiff presents DeWalt‘s actions as motivated by a lucrative career built on “pushing the companies he leads into change-of-control transactions” at “extraordinary financial benefits” to himself. Plaintiff asserts that DeWalt‘s expectation of post-merger employment predated the June 11 proposal by a few months based on indications that Intel would want a McAfee acquisition to be consistent with its recent acquisition of another company called Wind River. In support, plaintiff points to deposition testimony in which DeWalt stated that during discussions Intel “would point to the ways in which they had acquired a previous firm called Wind River and what they had done with that structure.” Plaintiff argues that like Haan in Bomarko, supra, 794 A.2d at pages 1173 through 1174, who the court found
Plaintiff also points to notes produced in connection with the deposition of James‘s colleague at Intel, Donald Harbert, as support for plaintiff‘s argument that DeWalt angled early for his employment terms with Intel. The notes appear to indicate that James described her June 10 meeting with DeWalt to Harbert, who wrote that McAfee‘s top management would need a retention plan and that DeWalt would only want to stay two years.10 Plaintiff points to DeWalt‘s employment agreement with Intel, with its promised special retention bonuses, acceleration of stock options, and other valuable equity awards; but it is undisputed that these terms were negotiated well after the companies’ joint merger announcement. And plaintiff does not dispute that DeWalt stood to earn over $1.3 million for each additional dollar per share that Intel paid for McAfee, providing an obvious incentive to negotiate a higher sale price if possible.
In fact, the Delaware Supreme Court spoke to the issue of actual or assumed director interest in Cinerama: ” ‘The fact that some interested transactions are permitted under our corporate law demonstrates that they are not inherently detrimental to a corporation. As long as a given transaction is fair to the corporation, and no confidential relationship betrayed, it may not matter that certain corporate officers will profit as the result of it. . . . The key to upholding an interested transaction is the approval of some neutral decision-making body.’ ” (Cinerama, supra, 663 A.2d at p. 1170.) The high court thus approved the Court of Chancery‘s reasoning that ” ‘the interest of [the directors] was disclosed and a majority of the non-interested directors approved the transaction in good faith,’ ” and that ” ‘the alleged hope of better employment opportunities’ ” or “assumed interest” of another director was insufficient. (Ibid.)