Philadelphia partner Doug Raymond authored an article for Directors & Boards titled “Managing Conflicts of Interest and Disclosure.” The article discusses Morrison v. Berry, a recent Delaware Supreme Court decision that underscores the need for boards to set clear guidelines when considering transactions in which the interests of management may diverge from those of the stockholders.
In Morrison, the founder of a supermarket chain failed to make necessary disclosures to the company’s stockholders before they voted to sell the chain. The Delaware Court of Chancery had held that the board had not breached its fiduciary duties, since the stockholders had voted to approve the transaction. The Supreme Court reversed, ruling that the disinterested stockholder vote can “cleanse” purported breaches of fiduciary duty only if the stockholders were fully informed and aware of any conflicts of interest – which wasn’t the case in Morrison.
Doug discusses the implications of this decision for boards and CEOs and reminds them to proceed with caution when negotiating a transaction in which there could be a conflict of interest. Boards should be transparent if management stands to benefit from the transaction in a way the stockholders do not, and should disclose and manage all conflicts of interest. These steps can help boards to avoid costly post-closing litigation.