New Delaware Decision on Board's Duty of Loyalty in Leveraged Buyout

by Andrew Bor, Naomi A. Sheffield, Patrick J. Simpson, Evelyn Cruz Sroufe

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In this Emerging Issues commentary, Perkins Coie attorneys discuss a recent decision of the Delaware Court of Chancery in Louisiana Municipal Police Employees' Retirement System v. Fertitta, 2009 Del. Ch. LEXIS 144. This decision illustrates that a board of directors must defend the interests of noncontrolling stockholders if it's negotiating with a controlling stockholder. The expert attorneys also provide practice tips for other boards in light of this decision.

The authors write: The Fertitta court's decision to deny the motion to dismiss is a reminder of the difficult duty of loyalty issues that can face a board of directors in negotiating with a controlling stockholder, especially one who is also the CEO.

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The case is a reminder that, if a board is negotiating with a controlling stockholder, its actions will be seen through the prism of possible dominance by that stockholder, and even good faith errors of process may appear to be driven by an improper intent to benefit the controlling stockholder.

The court may change its view on a more complete record, but the current decision underscores one primary lesson in negotiating with a controlling stockholder: however little leverage the board thinks it has, it must test its assumptions about what terms the controlling stockholder (or other parties, such as the buyout lenders) will accept.

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