Delaware Court Of Chancery Finds Breach Of Fiduciary Duty In Activist-Induced Sale

Author:Mr James Dougherty, Robert S Faxon, Benjamin L. Stulberg and Brandon Mordue
Profession:Jones Day
 
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The Situation : A Delaware court recently found that a board breached its fiduciary duties by bowing to activist pressure and engaging in a sale rather than continuing the business as a going concern.

The Case: In re PLX Technology Inc. Stockholders Litigation involved a technology company that sold itself after incumbent directors lost three board seats in a proxy contest. After the proxy contest, the activist used his director position to steer the company toward a sale. The court held the directors breached their fiduciary duties by engaging in a sale when, but for the activist's pressure, they otherwise would not have sold the company.

Looking Ahead: The PLX decision will likely encourage plaintiffs to bring claims when a sale follows the installation of activist directors on the board, either by proxy contest or negotiated agreement. Directors must ensure that they act in the best interests of the company and the stockholders as a whole, rather than catering to the wants of a vocal minority with potentially divergent interests.

Directors approving a cash sale of a company must seek to obtain the highest value reasonably available, an obligation commonly referred to as the Revlon duty. Although Revlon-based claims typically involve allegations that the board mishandled the sale process, the recent PLX decision involved claims that the board violated its fiduciary duties by selling the company at all. According to the plaintiffs, the company was worth more as a stand-alone entity. PLX appears to be the first case finding a breach of fiduciary duties directly premised on such a theory (although the court ultimately awarded no damages for this breach).

Following a decline in PLX Technology Inc.'s share price, Potomac Capital Partners II, L.P. acquired a minority position in PLX's stock and launched an activist campaign demanding a sale. After discussions with its investment bank, PLX's board concluded that then-available sale prices were inadequate. Nevertheless, the board attempted to head off the proxy contest by creating a special committee that would consider a sale of the company.

Potomac won the proxy contest, and the board allowed the Potomac nominee to chair the special committee. A potential purchaser contacted PLX's investment bank. The potential purchaser expressed interest and signaled its price but noted that it needed time to close a different deal before engaging in a potential acquisition of PLX. PLX's investment bank...

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