Delegating Preparation of Proxy Statement to Management was an Unexculpated Act of Bad Faith
In Re Pattern Energy Group Inc. Stockholders Litigation involved an M&A transaction where the sales process of Pattern Energy Group Inc. was run by an undisputedly disinterested and independent special committee that recognized and nominally managed conflicts, proceeded with advice from an unconflicted banker and counsel, and conducted a lengthy process attracting numerous suitors that the special committee pressed for value. The foregoing positive attributes were offset by selecting a bidder that did not offer the highest price at the behest of perhaps conflicted parties supported by conflicted management.
While the decision on a motion to dismiss covers significant ground on many matters, the Court also found the directors engaged in bad faith when delegating preparation of the proxy statement to management. The Board adopted a resolution giving certain officer defendants the power to “prepare and execute” the merger proxy “containing such information deemed necessary, appropriate or advisable” by only the officer defendants, and then to file the proxy with the SEC without the Board’s review.
The plaintiff contended that the delegation to prepare the proxy constituted an unexculpated acted of bad faith. Specifically, the plaintiff claimed the director defendants acted in bad faith by abdicating their strict and unyielding duty of disclosure, and relatedly, by knowingly fail to correct a proxy statement that they knew was materially incomplete and misleading.
The Court cited precedent which noted that while the board may delegate powers to the officers of the company as in the board’s good faith, informed judgment are appropriate, that power is not without limit. The precedent provided the board may not either formally or effectively abdicate its statutory power and its fiduciary duty to manage or direct the management of the business and affairs of this corporation. As a result, the Court found it is well established that while a board may delegate powers subject to possible review, it may not abdicate them. Under Delaware law, the board must retain the ultimate freedom to direct the strategy and affairs of the Company for the delegation decision to be upheld.
In the next step of the analysis, the Court noted abdication of directorial duty evidences disloyalty. In this case the Court noted the plaintiff alleged that the director defendants delegated to conflicted management total and complete authority to prepare and file the proxy and that the director defendants did not review the proxy before it was filed.
The director defendants did not provide any information to rebut the plaintiff’s allegations. The plaintiff’s allegations were consistent with the delegating Board resolution. For example, there were no meeting minutes demonstrating that the director defendants oversaw the proxy’s preparation or that they reviewed the proxy before the officer defendants filed it with the SEC.
The Court had to accept the plaintiff’s allegations as true for the purpose of the motion to dismiss. Therefore, the Court found plaintiff had alleged facts making it reasonably conceivable that the director defendants delegated full authority to prepare and disseminate the Proxy to the allegedly conflicted officer defendants, and did so in bad faith. According to the Court, bad faith is reflected in the choice of agent and the complete scope of delegation.
Expanding on the bad faith analysis, the Court noted the Board delegated drafting the proxy to the officer defendants, known conflicted individuals who had been ostensibly walled off from the sale process but still assisted in tilting the playing field toward buyer. Second, the Court found the scope of the delegation went too far. The Board’s resolution granted the officer Defendants full power and discretion to prepare the Proxy with information they thought it needed to contain, and then to file the Proxy with the SEC without the Board’s review. The Board authorized interested parties to unilaterally describe the process to the stockholders with finality, thereby infecting the stockholder vote as well.
According to the Court, the plaintiff also adequately alleged that the director defendants failed to correct a proxy they knew to be false and misleading. The Complaint’s allegations indicated that the director defendants knew the truth so if the director defendants had reviewed the proxy, even if only after it was issued, they would have known it was false or misleading. Because the Company issued further disclosures before the stockholder vote in a supplemental proxy, the director defendants conceivably had the opportunity to correct any alleged misstatements but failed to do so.
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