My friend Robert T Miller of the University of Iowa law school sent along this email in response to my post Does Van Gorkom's requirement of an informed decision survive Corwin? I'm stumped:
I stand by my conclusion in the article on Van Gorkom. I get there primarily because I don’t read Stroud as expansively as you do. In addition, I’m not completely clear what meaning you’re attributing to Singh, but as I read it, there’s nothing in Singh that contradicts what I said in the article. And, to be clear, my article does not predate Singh. Singh was decided in 2016, and I wrote the Van Gorkom article in 2017. I cite Singh twice in the article, in nn. 631 and 676.
To start with Stroud, I read the case to mean that, in fulfilling its duty of candor, a board need not draw legal conclusions such, “We breached our duty of care.” Nevertheless, to fulfill its duty of candor, it must disclose all the material facts in its possession, including any facts that tend to show that it breached its duty of care. That is, the board does not need to say, “We were grossly negligent,” even if it actually believes that. But the board does need to say (provided this is true), “We met for one hour to discuss the merger, but we spent most of the time talking about baseball.” I believe the rule here is same as it is under the federal securities laws.
As to Singh, I read it as merely correcting VC Parson’s misunderstanding of Corwin in the opinion below, which is In re Zales Corp. Stockholders Litig., 2015 WL 6551418 (Del. Ch. 2015). That is, in Corwin, the Supreme Court talked about “the business judgment rule” applying after an uncoerced, fully-informed shareholder vote (compare how the court talked in Unocal).Such language, however, is ambiguous. On one reading, it means this: in a Revlon transaction, after an effective Corwin vote, the standard of review shifts from Revlon to the BJR, in the sense that the court will review the board’s actions from the beginning asking not whether the board took reasonable steps to get the best price reasonably available but whether the board breached its duty of loyalty or its Van Gorkom duty of care. On another reading, the language in Corwin means this: in a merger that would be reviewed under either Revlon or the BJR, after an effective Corwin vote, the standard of review shifts to the rational business purpose test, the standard of review that applies when the BJR is satisfied (i.e., there has been no breach of the board’s duties of loyalty or care). In the opinion below, the Court of Chancery had read Corwin the first way at the re-argument phrase. What Strine is saying in Singh is that this reading is a mistake. It is the second interpretation of Corwin that is correct: after an effective Corwin vote, the suit should be dismissed unless the merger lacks a rational business purpose (i.e., amounts to waste).
To turn to your problem, then, my answer is the following. The board’s duty of candor requires that it state all material facts in its possession in the proxy but not that it state legal conclusions such as, “We breached our duty of care.” If the board really was grossly negligent in approving the merger, then the board must state the material facts, which will support the conclusion that it breached its duty of care. If the board fulfills this duty and the shareholders vote to approve the merger anyway, then the vote will be effective under Corwin. Hence, the cause of action for breach of the duty of care will be extinguished, and the only possible claim is for waste. That claim will fail, and the suit will be dismissed.
If the board fails to state all the material facts about its process, however, then the Corwin vote will not be effective. As a result, the shareholders may sue for any breach the board committed, including a breach of the duty of care. Nevertheless, if the corporation has a 102(b)(7) charter provision, any claim sounding in the duty of care will be immediately dismissible under Malpiede v. Townsend. In the extremely unlikely event that the corporation does not have a 102(b)(7) provision, however, the shareholder’s suit will go forward, and the directors will be liable in damages for their breach of the duty of care. This is the same conclusion I reached in the Van Gorkom article.
We are disagreeing here, I think, primarily because of our disagreement about Stroud. If I follow you, you’re reading Stroud as meaning that a board’s duty of candor does not include stating material facts in its possession that tend to show it breached its fiduciary duties. If it were right, then a board could breach its duty of care, not disclose the material facts about the breach in the proxy, get an effective Corwin vote on the basis of that proxy, and then use that Corwin vote to extinguish the claim based on its duty of care. In my view, that would be an outrageous result, and, as I say, I don’t think that’s the law. I note too that your example concerns breaches of the duty of care related to the approval of the merger. Part of what I’m talking about in the passage you quote concerns breaches of the duty of candor—i.e., it goes to why the proxy omitted to state material facts. Such omissions can arise either from breaches of the duty of loyalty or from the duty of care. Those questions get more complicated, but, as I saw, I understand your example as applying to the simpler issue of a breach of the duty of care in the approval process of the merger.
That was very helpful.
