SS M&A Litigation Outlook - Flipbook - Page 27
Rudd v. Brown,
No. 2019-0775-MTZ (Del. Ch. Sept. 11, 2020
Why it is important
Summary
In Rudd v. Brown, the Delaware Court of Chancery
dismissed a lawsuit against the directors and chief
financial officer of Outerwall, Inc. (Outerwall) that
alleged that the defendants breached their duties of
loyalty by selling the company too cheaply in order to
avoid a proxy fight and to secure certain contingent
payments. The court enforced the Section 102(b)
(7) exculpatory clause in Outerwall’s charter and
concluded that the plaintiffs’ allegations did not state
a claim for breach of the duty of loyalty or good faith.
In particular, the court rejected the plaintiff’s two
conflict of interest theories, one based on an activist
shareholder’s threat of a proxy fight to remove the
directors if a strategic alternative was not pursued
and the other based on “golden parachute-related
payments” owed to the defendants if a transaction
was consummated. Rudd reaffirms the high bar that
a plaintiff must meet if a company’s charter contains
a Section 102(b)(7) clause and also provides guidance
on situations in which directors may be found
conflicted for the purposes of determining whether
a breach of the duty of loyalty occurred.
Outerwall operates self-service kiosks, including
Redbox, which allows customers to rent or purchase
movies and video games; Coinstar, which converts
coins to cash; and ecoATM, which allows customers
to sell certain electronic devices. Meanwhile, in early
2016, Engaged Capital, LLC (Engaged) had acquired
a significant share of Outerwall stock. Shortly
thereafter, Engaged sent a letter to the Outerwall
board, threatening to launch a proxy contest to
replace the board if they did not “explore strategic
alternatives for the entire business.”
Shortly after receiving Engaged’s letter, and as the
revenues for Outerwall’s business declined, including
the revenues associated with its most lucrative
Redbox business, management began to consider a
possible sale of the company. In May 2016, several
companies submitted proposals to purchase the
business for a price of between US$27 and US$57
per share in cash. Two of the original bidders
pursued a transaction, Apollo and Company A. After
several rounds of bidding, Apollo offered US$52 per
share and Company A offered US$50.82 per share.
Outerwall’s board ultimately voted to sell to Apollo
on July 24, 2016. The two-step merger transaction
closed on September 27, 2016.
In September 2019, Rudd filed a class action
suit alleging breach of fiduciary duty against
Outerwall’s board and chief financial officer. The
complaint alleged that the defendants “failed to
take reasonable efforts to maximize the value of
the Company for the benefit of Outerwall’s public
stockholders, instead accepting grossly inadequate
consideration,” and “failed to disclose material
information concerning the Acquisition, thus
rendering the Company’s stockholders unable to
make an informed decision whether to tender their
shares and whether to seek appraisal.”
The court found that, taking all allegations as true
as it is required to do on a motion to dismiss, it
could not dismiss the claim based on stockholder
ratification under Corwin. However, even “assuming
that Plaintiff’s claim is timely and that Outerwall
stockholders were not fully informed when they
tendered their share,” the court concluded that the
plaintiff had not stated a claim. The court found
that the Section 102(b)(7) exculpatory clause in
Outerwall’s charter barred all fiduciary duty claims
except claims for breach of the duties of loyalty or
good faith even though enhanced scrutiny under
Revlon was appropriate. The court found that the
plaintiff failed to adequately plead facts supporting a
rational inference that a majority of the board acted
based on self-interest, to advance the self-interest
of an interested party, or acted in bad faith. In
particular, the court found that the plaintiff failed to
adequately plead that the defendants were conflicted
because (1) the bare-bones conflict theory that the
directors acted in their own interest to avoid a proxy
fight and preserve their board seats fails under
Delaware law and (2) allegations regarding the mere
possibility of change-in-control benefits, interests
in post-closing employment or assertions regarding
conflicts as a stockholder appointees likewise are
insufficient. Finding no conflict, the court rejected
the plaintiff’s loyalty claim and dismissed the
complaint in its entirety.
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