In van der Fluit v. Yates, the Delaware Chancery Court dismissed fiduciary claims against the board of Opower Inc., a venture-backed computer software provider, in connection with Oracle Corp.’s 2016 acquisition of the company. The court concluded that even though the defendants were not entitled to the business judgment rule, the plaintiff failed to show the board breached its duty of loyalty. The decision provides important guidance for VC-backed companies.
Peter van der Fluit, a stockholder of Opower, filed a lawsuit against several directors and Oracle, arguing the transaction results from an unfair deal orchestrated by a control group made up of Opower’s co-founders and two early venture capital investors. The plaintiff alleged this control group “extracted unique personal benefits” that weren’t shared with Opower’s other stockholders.
Based on this alleged differential consideration, the plaintiff argued the transaction should be judged under the entire fairness standard, which places the burden on the corporation to show the price that was achieved was fair to the stockholders. In the alternative, if the entire fairness standard didn’t apply, the plaintiff argued the board breached its so-called Revlon duties, which require a board to to make a reasonable effort to obtain the highest value for a company in a change-of-control context.
In an August 2017 ruling, Vice Chancellor Tamika Montgomery-Reeves rejected the application of the entire fairness standard of review to the transaction, finding there was no control group because an investor rights agreement and tender and support agreements signed in connection with the deal were insufficient to establish the alleged control group.
The court said the investor rights agreement contained “no voting, decision-making, or other agreements that bear on the transaction,” and there was no evidence to suggest the support agreements were anything more than a “concurrence of self-interest among certain stockholders.” As for the co-founders – who together held 30 percent of outstanding Opower stock at the time of the transaction, the court said the plaintiff hadn’t offered any facts about their personal relationship, or argued they operated Opower in unison. “In short, the Complaint does not plead facts sufficient to show meaningful connections between [the co-founders] or managerial control of Opower,” the court wrote.
However, the court found the plaintiff had pled facts suggesting that Opower’s stockholders were not fully informed when tendering their shares, which precluded the application of the business judgment rule (when the business judgment rule applies in a duty of care case, claims are dismissed unless there is a showing of waste, fraud, misappropriate of corporate funds, etc.).
The court said the tender offer documents did not disclose whether the co-founders, who received post-transaction employment and the conversion of unvested Opower options into unvested Oracle options, were part of the negotiations. “The vague language regarding the identities of the negotiators prohibited Opower stockholders from determining the interests of those fiduciaries who negotiated the deal on behalf of the stockholders,” the court wrote.
Nevertheless, the court dismissed claims that the board breached its duty of loyalty under Revlon, concluding the plaintiff’s allegations were unsupported by facts. This included allegations that the board favored Oracle in the bidding process and directors sold Opower to maximize their own investments, rather than stockholder value for the company.
The plaintiff also argued the two-week market check conducted by Opower was rushed to ensure Oracle emerged as the winning bidder. Rejecting that argument, the court distinguished this case from In re Answers, in which a two-week market check was found to be unreasonably rushed. The court noted that in Answers, the company’s banker warned the market check, which coincided with the December holidays, was not a “real” market check, and warned the board that “time is not a friend to this deal” – to which the board responded by speeding up the sales process.
“No such non-conclusory allegations are present in the instant case,” the court wrote.