Corporate Governance

Del. Ch. Rejects Inference that is ?At Odds? with ?Common Experience? ? Pfeffer v. Redstone

By William Garehime

In Pfeffer v. Redstone, No. 2317-VCL, 2008 WL 308450 (Del. Ch. 2008); a stockholder brought suit alleging the board breached various fiduciary duties.  The stockholder’s claims arose from Viacom’s special dividend and a stock swap plan with its subsidiary Blockbuster.  The Court of Chancery dismissed the claim.     

In June of 2004, Viacom and Blockbuster made two simultaneous announcements.  First, Viacom announced it would divest its 81.5% interest in Blockbuster by giving 5.15 shares of Blockbuster for each share of Viacom it received; and second, Blockbuster would pay a special cash dividend of five dollars per share, resulting in $738 million to Viacom.  At the time of this announcement Blockbuster’s in-store rental business was slowing.  Viacom believed an independent Blockbuster would be a better-positioned company. 

In response to the dividend and Viacom’s divesture, Blockbuster’s CEO optimistically announced that they were “taking the right steps to position [Blockbuster] for future growth in both revenues and profits.”  Despite the CEO’s positive outlook, the next quarter Blockbuster suffered a $57.2 million loss and its debt rating was downgraded.  Because of these events, the plaintiff brought several claims against Blockbuster and Viacom.  Two of the dismissed claims are noteworthy. 

First, the court dismissed the plaintiff’s claim that the Viacom directors breached their duty of good faith by filing a false and misleading Prospectus in connection with Viacom’s divesture of Blockbuster stock.  The plaintiff asked the court to review the transaction under the entire fairness standard alleging the terms of the stock exchange offer benefitted Viacom and its directors more than Viacom’s minority shareholders.  The entire fairness standard requires that the defendant show fair price and fair dealing only if the plaintiff shows coercion or disclosure violations.  Solomon v. Pathe Commc’n Corp., 672 A.2d 35 (Del. 1996).  

The court was not persuaded by the plaintiff’s argument to apply the entire fairness standard.  The court found nothing to suggest the directors structured the stock exchange offer to put their interests before the stockholders’ interest.  Thus, the “law does not impose a duty of entire fairness on controlling stockholders making a non-coercive tender or exchange offer.”  Since the court did not apply the entire fairness standard, the court analyzed the plaintiff’s claims under a duty of loyalty analysis and dismissed the claim because the pleadings did not show the directors “acted disloyally in authorizing the . . . Prospectus.”

The second noteworthy holding is that the court dismissed the plaintiff’s allegation that Blockbuster omitted material information from its Prospectus.  The complaint alleged that Blockbuster’s directors should have known the Prospectus contained omissions and false statements.  The plaintiff claimed the CEO received a report that forecast, inter alia, the negative impact of financing the dividend through a $1.45 billion credit facility.  The court found no direct evidence to support this claim.  During oral arguments, the plaintiff asked the court to infer that because the CEO, who sits on the board, knew about the report, other board members must have known about the report.  The court noted that this was “a daisy chain of surmise and illogic” and was “at odds” with “common experience.”  As such, the court found the complaint lacked well-pleaded facts to infer the defendants knew about the report.  Thus, the court dismissed the complaint.

The primary materials for this case may be found on theDU Corporate Governance website.

Full post as published by The Race to the Bottom on March 01, 2008 (boomark / email).