Corporate Governance

Limiting the Duty of Loyalty: Pfeffer v. Redstone (Student Post)

By Laura Almquist

Last year we covered the Court of Chancery’s decision in Pfeffer v. Redstone, No. 2317-VCL, 2008 WL 308450 (Del. Ch. 2008).  On January 23, the Delaware Supreme Court upheld the Court of Chancery’s dismissal of the plaintiff’s claims. Pfeffer v. Redstone, 2009 WL 188887 (Del. 2009).

The plaintiff’s claims arose from two transactions: a special dividend paid to Blockbuster shareholders and an offer for Viacom shareholders to exchange their stock for Blockbuster stock. Pfeffer, a Blockbuster shareholder, claimed Viacom’s directors breached their fiduciary duties of loyalty and care by structuring the exchange offer in a way that favored their own interests at the expense of the minority shareholders, and by failing to disclose material information in its prospectus.

First, the court upheld the Vice Chancellor’s dismissal of Pfeffer’s claim that the Viacom directors breached their fiduciary duties in structuring the special dividend and exchange offer. Pfeffer alleged that the exchange offer and special dividend should be subject to entire fairness scrutiny because NAI, Viacom’s controlling stockholder, elevated its financial interest over Viacom and Blockbuster’s minority shareholders. The court agreed with the Vice Chancellor that Delaware law does not require entire fairness scrutiny in a voluntary, non-coercive offer. The Viacom directors met their duty by structuring the Exchange Offer non-coersively and disclosing all material facts.

The court also upheld the dismissal of Pfeffer’s claim that Viacom’s directors omitted material information from its prospectus. Pfeffer claimed that the directors should have known that Blockbuster faced cash flow problems before the exchange offer, based on a midlevel treasury manager’s cash flow analysis. According to Pfeffer, the directors knew or should have known about the report because the CEO, who sits on the board, knew about the report. The directors denied receiving the report. The Vice Chancellor determined that Pfeffer’s pleading was “based entirely on a daisy chain of surmise and illogic.” The court agreed, holding that Pfeffer must offer “well-pleaded facts from which it can be reasonably inferred that this ‘something’ was knowable and that the defendant was in a position to know it.” Pfeffer did not sufficiently plead any facts, other than her conclusory statement that Viacom’s directors “would (or must) have been told this information.” Furthermore, Pfeffer failed to allege that a “cash flow analysis performed by a midlevel treasury manager of a subsidiary corporation would be routinely available to the Viacom Directors.”

The primary materials for this case are available on the DU Corporate Governance website.

Full post as published by The Race to the Bottom on February 23, 2009 (boomark / email).