No Fiduciary Breach in Reclassification Challenge
A shareholder filed a lawsuit asserting members of the company’s board of directors breached their fiduciary duties relating to their approval of a stock reclassification and that the controlling stockholder breached its fiduciary duty by causing the company to undertake the reclassification. According to the plaintiff, the reclassification enabled the controlling stockholder to maintain its control over the company making it a “non-ratable” benefit not shared with the company’s minority shareholders. Although it found the plaintiff adequately pleaded that the reclassification was a conflicted transaction subject to an entire fairness review, the Delaware Court of Chancery dismissed the complaint for failure to state a claim. It reasoned the analytical framework articulated in Kahn v. MFW, a 2014 squeeze out merger case, applied to the reclassification, and that framework was satisfied in this case based on the face of the pleadings. The Court also rejected plaintiff’s claim that the stockholder vote was not adequately informed, finding the proxy adequately disclosed all material information, including that the company was close to losing majority control of yield.