Contract and fiduciary duty law intersect when how a board acts, including the vote required, is affected by a shareholder agreement. Such agreements are common to enable investors to protect their investment, either through negotiated buybacks or issuance of additional shares upon certain milestones, through board seats or through super-majority vote requirements where the investment, while substantial, does not result in majority control. When a dispute arises over the effect of a shareholder agreement on a board vote a Delaware court will apply traditional principles of contract interpretation to ascertain and enforce the parties’ intent. The language the parties use to reflect their agreement at the time of the investment will determine the outcome of the dispute when it arises long after, such as when the board acts to dissolve the entity. The Delaware Court of Chancery’s well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets.
Background
Huff arises out of a decision in May 2015 by the board of Longview Energy Company to dissolve after selling a significant portion of its assets. Plaintiff Huff Energy Fund, a holder of 40 percent of Longview stock with two board designees, had insisted that Longview dissolve following any significant asset sale to avoid a tax burden. When Longview actually dissolved, Huff Energy claimed that because the plan of dissolution had a material adverse effect on Longview’s stockholders, a unanimous vote was required under a shareholders agreement entered into at the time of Huff Energy’s investment. The plaintiff claimed that because a Huff Energy director abstained, the vote was not unanimous and therefore invalid. The plaintiff also claimed that the board breached fiduciary duties under Revlon by dissolving without exploring more favorable alternatives or Unocal by approving the plan of dissolution as an unreasonable response to a perceived threat. Defendants claimed directors who were not parties to the shareholders agreement cannot be liable for breach of contract by Longwood, that unanimous approval was not required because the plan of dissolution did not harm Longwood’s shareholders and had no material adverse effect on Huff Energy, that neither Revlon nor Unocal applied and that in any event, the uncoerced, fully informed vote of a majority of shareholders results in the business judgment rule irrebuttably applying and thus required dismissal. As explained below the court sided with defendants in dismissing Huff Energy’s complaint.
