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The board of directors has the ultimate responsibility for managing the business and affairs of a corporation. Del. Code Ann. tit. 8, § 141(a). In discharging this function, the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. This unremitting obligation extends equally to board conduct in a sale of corporate control.
When plaintiff sought control of defendant, defendant's board of directors granted an asset option agreement, known as a lockup, to a rival bidder. The rival bidder was the purported high bidder in an auction for control of defendant. Plaintiff contended that defendant should be enjoined from entering into the lockup agreement. The Court of Chancery denied the plaintiff’s motion for injunction. Plaintiff appealed.
Under the circumstances, should the lower court have enjoined the defendant from entering into a lockup agreement with the rival bidder?
On appeal, the court held that the record before the trial court indicated breaches of the duties of loyalty and care by various of defendant's corporate fiduciaries, which adversely affected the general interest of defendant's stockholders, therefore the lockup option could not stand. Additionally, it was not shown that defendant's directors met the standard of intrinsic fairness, the trial court erred in not applying this standard, and the auction was found insupportable under Delaware law. Accordingly, the court reversed the judgment denying plaintiff’s injunction.