Lear: Strine on No Vote Termination Fees
In Re Lear Corporation Shareholder Litigation (Del. Ch. Sept. 2, 2008):
"In this case, stockholder plaintiffs seek to hold the board of Lear Corporation (“Lear” or “the company”) responsible in damages for agreeing to pay a bidder a termination fee payable upon a no vote on a merger in exchange for that bidder increasing its bid from the original merger agreement by $1.25 per share (“the Merger”). The bidder did not face competition from a rival bidder; in fact, Lear had been fully shopped, and no topping bid had emerged. Rather, in a frothy M & A market, stockholders perceived that the original merger price of $36 per share was inadequate and that the original bidder could do better. Facing likely defeat on the $36 merger at the polls, the Lear board bargained to get another $1.25 per share. In exchange, the bidder demanded $25 million in compensation contingent solely upon a no vote, in contrast to the original termination fee, the bulk of which was payable only if Lear consummated an alternative transaction within twelve months. The $25 million represented only 0.9% of the total deal value. According to the amended complaint, the Lear board approved the “Revised Merger Agreement” knowing that it was improbable that its stockholders would agree to the enhanced deal. And, in fact, the shareholders did not approve, and the Merger was defeated.
The defendants have moved to dismiss the complaint against them, primarily arguing that the complaint fails to state with particularity a non-exculpated claim for breach of fiduciary duty. In this opinion, I grant that motion. At bottom, the plaintiffs’ theory is that directors who believe in good faith that a merger is good for the stockholders cannot adopt it if stockholder approval is unlikely. That notion is at odds with our law.
Directors are entitled to make good faith business decisions even if the stockholders might disagree with them. Where, as here, the complaint itself indicates that an independent board majority used an adequate process, employed reputable financial, legal, and proxy solicitation experts, and had a substantial basis to conclude a merger was financially fair, the directors cannot be faulted for being disloyal simply because the stockholders ultimately did not agree with their recommendation. In particular, where, as here, the directors are protected by an exculpatory charter provision, it is critical that the complaint plead facts suggesting a fair inference that the directors breached their duty of loyalty by making a bad faith decision to approve the merger for reasons inimical to the interests of the corporation and its stockholders. Where a complaint, as here, does not even create an inference of mere negligence or gross negligence, it certainly does not satisfy the far more difficult task of stating a non-exculpated duty of loyalty claim."
