Del. Chancery Court: Exculpatory Provision Creates Specific Pleading Hurdles

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By Michael Greene

Nov. 28 — A §102(b)(7) exculpatory provision requires a plaintiff to plead a failure to act loyally or in good faith, even if the plaintiff's complaint's alleges that the disputed merger agreement was conducted at a price that could conceivably implicate the fiduciary duty of care, according to a Nov. 25 Delaware Chancery Court ruling.

Vice Chancellor Donald F. Parsons Jr. additionally opined that “[a]dequately pleading bad faith conduct on the part of a director requires allegations of an ‘extreme set of facts' in order to give rise to the ‘notion that disinterested directors were intentionally disregarding their duties.'”

He added that “[f]or this Court to conclude that Plaintiffs‘ Complaint adequately pleads bad faith conduct as to the sale process, it must be reasonably conceivable that ‘the decision to approve the Merger was so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.'”

Here, even though the plaintiffs' claims that the Comverge merger price was inadequate could not overcome the defendants' exculpatiory provision, the court declined to dismiss the portion of the complaint related to the deal's termination fee structure.

Inadequate Price

The plaintiff stockholders challenged a now-completed merger in which a private equity and venture capital firm acquired Comverge, Inc. They alleged that the merger was the product of a flawed sales process that resulted in an inadequate price.

The final merger price was 7.4 percent lower that what investors in the market were willing to pay for Comverge common stock the day before the transaction's announcement.

Additionally, the board the rejected a higher offer from the same bidder almost a month earlier because it was “too low.”

Based on the record, Vice Chancellor Parsons concluded “that it is reasonably conceivable that the ultimate merger price was far enough ‘off-the-mark' as to implicate the fiduciary duty of care.”

However, Comverge's certificate of incorporation contained an exculpation provision that limited its directors' liability to the fullest extent permitted under Delaware law. Thus, the court determined that the plaintiffs' allegations “must implicate the non-exculpated duty of loyalty, or its subsidiary element of good faith.”

Vice Chancellor Parsons acknowledged that it was reasonable to infer that the acquirer outmaneuvered Comverge, which enabled itself to buy the company at a substantially lower price that it was willing to pay a month earlier.

However, he found that the directors' conduct could not conceivably rise to the level of bad faith because during the 18-month period leading up to the merger, the board formed a disinterested committee, hired advisors, held numerous meetings, searched the market for other bidders and considered alternatives to selling the company.

He opined: “the Board and Company management may have made some poor moves or decisions in allowing themselves to be placed in such a predicament. The record indicates, however, that the Board was highly engaged in the process, and this type of engagement precludes a finding of bad faith conduct.”

Deal Protection Measures

Even though the plaintiffs' price and process claims failed, Vice Chancellor Parson held that it was reasonably conceivable that the board accepted deal protection devices that precluded a topping bid that could overcome Comverge's exculpation provision.

In conjunction with the merger agreement, convertible notes were executed in which the acquirer provided Comverge with $12 million in bridge financing.

Vice Chancellor Parsons noted that potential bidders may have viewed these convertible notes as additional termination fees, which would effectively result in a termination fee of approximately 13 percent of the equity value of the transaction.

He noted that this was “well more than double the termination fee percentages that this Court has found to be at the upper bounds of reasonableness.”

He opined, “[t]hese potential findings of unreasonable deal protection measures are cause for legitimate concern, particularly in the context of a deal with a negative premium to market.” Adding, “[t]his circumstance distinguishes this case from many in which this Court has not questioned the reasonableness of similar deal protection devices.”

To contact the reporter on this story: Michael Greene in Washington at

To contact the editor responsible for this story: Ryan Tuck at

The opinion is available at


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