Corporate Governance

Delaware's Top Five Worst Shareholder Decisions for 2008 (#3)

By J. Robert Brown

In re Transkaryotic Therapies, Inc., 954 A.2d 346 (Del. Ch. 2008).

The case involved a merger. It turns out that during an appraisal action, plaintiffs discovered that in fact the votes for the merger may have been miscounted and the merger never approved. In other words, management potentially effectuated an unapproved merger. The court treated the claim with something akin to derision. As the court described:

• If one digs through enough of the rubble of a consummated merger, one will almost invariably find something questionable. A clever corporate archeologist can extrapolate from these suspicious artifacts and concoct a theory of malfeasance, disloyalty, and bad faith. Yet, theories alone cannot lead to liability.

But worse than attitude, the case contains very bad law and demonstrates once again that the Delaware courts have no interest in imposing meaningful standards on boards of directors. First, the Court, without authority, held that it could not grant injunctive or monetary relief for false disclosure in connection with a merger once the merger was consummated. This was apparently true even where the false disclosure was only discovered after the merger closed and the vote was "close" (the merger passed "by less than a million votes."). While this is only the opinion of one person on the Chancery Court, if it becomes controlling, it is tantamount to a holding that companies can issue false disclosure that affects the vote of shareholders and escape any consequence so long as the false disclosure remains undisclosed until after the merger closes.

Second, the Court arbitrarily lifted the standard of proof for Plaintiffs challenging the vote to approve a merger, requiring clear and convincing evidence. The opinion implied that this was necessary in cases of excessive delay between the date of the merger and the date of the law suit. In this case, the delay was about 19 months, hardly an excessive time period, and the Plaintiffs alleged that the delay occurred at least in part because of the actions of the Defendants. The Court ignored both and used the case as a vehicle to impose the higher standard.

Third, the opinion once again demonstrated the often impossible barrier thrown up by the Chancery Court with respect to the issue of independent directors. Plaintiff challenged the independence of a director, Wayne Yetter, on the Transkaryotic board becasue of his preexisting relationship with the CEO of the acquirer, Matthew Emmens. Emmens made the initial "expression of interest" through a "confidential call" to Yetters. In addition, as the court noted:

• Yetter and Emmens had a prior relationship. Emmens first worked for Yetter at Merck for about two years in the mid-1980s. Several years later, after Yetter had moved to a position with Astra Merck, he again hired Emmens. The two worked together at Astra from 1992 to 1997, when Yetter left to become CEO of Novartis Pharmaceuticals. They did not work for the same company again. Although he held positions on several boards, Yetter was looking for a new primary job when Shire first approached TKT, and his resume listed Emmens as one of his references.

Ultimately, Yetter stepped down from the board, the board having "expressed that its confidence had been shaken in Yetter, and Yetter believed that his relationship with the CEO was fractured." The court's treatment of the evidence? In a conclusory fashion, ignored it. The case demonstrates that allegations of disqualifying friendship with the CEO will largely be ignored. The courts treat these allegations entirely differently when they involve relationships with a controlling shareholder.  See In re Loral Space & Communs. Consol. Litig., 2008 Del. Ch. LEXIS 136 (Del. Ch. June 20, 2008).

Full post as published by The Race to the Bottom on December 31, 2008 (boomark / email).