Suppose a corporate director objects to some decision that has received approval by a majority of the corporation's board of directors. How far can the director go in opposing that decision? Shocking Technologies Inc v. Michael, C.A. 7164-VCP (September 28, 2012, revised October 1, 2012) provides an answer (HT: McNally):
As part of his strategy to gain an additional board seat for a group of investors with which he believed he shared common objectives, Michael, who understood that the Company was in dire financial condition, sought to dissuade the only remaining potential investor from investing in the Company, and he shared confidential Company information with the potential investor. Michael anticipated that he would be more likely to achieve his goals if the potential investor withheld any additional investment in the Company, thereby leaving the Company’s management desperate for funding, or if the potential investor used the confidential information to get a “better deal” for its investment. The “better deal,” Michael presaged, would undercut the authority of the balance of the Company’s board of directors which he was challenging. Whether a director may engage in such conduct without breaching his fiduciary duty of loyalty is the key question before the Court.
The court opined that:
Michael knew how vulnerable the Company was and he undertook steps to gain advantage from its weakness. Michael’s actions clearly demonstrated a desire to interfere with the Company’s funding. The funding process—sale of stock to Littelfuse with the accompanying warrants—had been unanimously approved, without any apparent dissension.
Yet Michael sought to frustrate that objective. The best interests of the Company—finding enough cash to survive—were immediate and unmistakable. Michael, knowing the consequences if he was successful, acted against the Company’s best interests. For that, he was disloyal.
But then the court paused to consider a possible mitigating concern:
Michael had concerns about corporate governance. Could these concerns justify or excuse his conduct?
Although some legitimate actions might be excused by such concerns, Michael had clearly crossed the line and gone far to far:
The steps that a shareholder-director may take to achieve objectives are not without limits. A director may not harm the corporation by, for example, interfering with crucial financing efforts in an effort to further such objectives. Moreover, he may not use confidential information, especially information gleaned because of his board membership, to aid a third party which has a position necessarily adverse to that of the corporation.
That is what Michael did.
This strikes me as a pretty easy case. The harder case would be, for example, a director who goes to the press to bad mouth the organization and his fellow directors. The court did not address that scenario, but it did caution that:
First, fair debate may be an important aspect of board performance. A board majority may not muzzle a minority board member simply because it does not like what she may be saying. Second, criticism of the conduct of a board majority does not necessarily equate with criticism of the corporation and its mission. The majority may be managing the business and affairs of the corporation, but a dissident board member has significant freedom to challenge the majority’s decisions and to share her concerns with other shareholders.
Hunton & Williams lawyer Steven Haas has a briefing paper on Shocking, which begins:
In Shocking Technologies, Inc. v. Michael, the Delaware Court of Chancery held that a dissident director breached his fiduciary duty of loyalty by sharing confidential information with a third party and trying to discourage that third party from investing in the company. The court’s post-trial ruling came in spite of the director’s claim that he acted in good faith and believed his actions would address certain governance disputes that he had with the other directors. The court observed that “fair debate” is an important issue in corporate governance, but there are clear limits on director conduct in trying to resolve disagreements. Among other things, the court’s decision serves as a reminder to stockholders who sit on boards or otherwise have board representation that directors’ duties run to all stockholders.
It's a good read.
