In re Trados Inc. S'holder Litig. - Civil Action No. 1512-CC, 2009 Del. Ch. LEXIS 128 (Ch. July 24, 2009)

Rule:

A party challenging corporate directors' decision bears the burden of rebutting the presumption of the business judgment rule. If the presumption of the rule is not rebutted, then a court will not second-guess the business decisions of the board. If the presumption of the rule is rebutted, then the burden of proving entire fairness shifts to the director defendants. A plaintiff can survive a motion to dismiss under Del. Ch. Ct. R. 12(b)(6) by pleading facts from which a reasonable inference can be drawn that a majority of the board was interested or lacked independence with respect to the relevant decision.

Facts:

When Trados Incorporated became a wholly owned subsidiary of SDL, plc, Trados’ preferred stockholders received some of SDL’s contribution through the triggering of a liquidation preference, and the remainder was paid to the executive officers of Trados pursuant to a bonus plan. However, the common stockholders received nothing for their common shares. Plaintiff former stockholder of Trados filed suit, alleging that the corporate board favored the interests of the preferred stockholders and that SDL and some of its officers conspired with certain corporate directors to defer revenue until after the merger. The directors sought dismissal for failure to state a claim under Del. Ch. Ct. R. 12(b)(6).

Issue:

Should the directors’ motion to dismiss be granted for failure to state a claim? 

Answer:

No, with respect to the breach of fiduciary duty claims. Yes, with respect to the breach of duty and aiding and abetting claims based on the alleged revenue manipulation.

Conclusion:

The court held that the plaintiffs successfully rebutted the presumption of the business judgment rule pursuant to Del. Code Ann. tit. 8, § 141(a) for purposes of surviving the dismissal motion. According to the court, the plaintiffs showed that the interests of the preferred stockholders and the common stockholders were not aligned. The directors owned preferred stock and had relationships with preferred stockholders, such that they were either interested or lacked independence with respect to the merger decision. However, the plaintiffs did not sufficiently allege a claim based on the alleged revenue manipulation, as it required the court to make unnecessary inferences.