13 June 2018
A recent decision by the Delaware Court of Chancery illustrates that a company's material non-disclosure disqualifies the company's directors from deferential scrutiny under the Corwin rule. In 2015, the Delaware Supreme Court's landmark decision of Corwin v. KKR Fin. Hldgs, LLC held that a merger is reviewable under the deferential business judgment rule if it is approved by an uncoerced and fully-informed majority of disinterested stockholders. Effectively, the Corwin rule provides a company's directors with a powerful defense against allegations of breach of fiduciary duties because stockholder approval “cleanses” the transaction by virtue of an uncoerced and fully-informed majority vote. In so holding, the Corwin rule displaced the longstanding Revlon rule, which dictates that certain mergers are reviewed under an enhanced scrutiny standard, rather than the deferential business judgment rule. However, in Van der Fluit v. Yates, the Court of Chancery found that the target company's directors' failure to disclose that its primary negotiators were the company's two co-founders, both of whom would receive post-merger employment benefits, rendered the Corwin rule and its cleansing effect inapplicable. Notwithstanding, under the enhanced scrutiny rule, the Court of Chancery dismissed the claims finding that plaintiff could not state any non-exculpated claims against the company's directors. For more information, see: https://courts.delaware.gov/Opinions/Download.aspx?id=265870.