In this memorandum opinion, the Court of Chancery granted defendants’ motion to dismiss with respect to plaintiffs’ breach of fiduciary duty and aiding and abetting claims relating to a going private transaction. The Court’s decision was based on its finding that it was not “reasonably conceivable that the Board” acted in bad faith based upon the allegations of the complaint, and therefore the plaintiffs failed to state a non-exculpated breach of fiduciary duty claim.
Plaintiffs were former shareholders of BJ’s Wholesale Club, Inc. (“BJ’s”). Defendants were the former board of directors of BJ’s (the “Board”), private equity firms Leonard Green & Partners, L.P. (“LGP”) and CVC Capital Partners (“CVC”), Beacon Holding, Inc., an affiliate of LGP and CVC (“Beacon Holding”), and Beacon Merger Sub, a wholly owned subsidiary of Beacon Holding used to carry out the transaction (collectively with LGP, CVC, and Beacon Holding, the “Buyout Group”).
On July 1, 2010, LGP disclosed its 9.5% beneficial ownership of BJ’s common stock and indicated its interest in a private buyout of BJ’s. BJ’s engaged a financial advisor to assist the company in exploring strategic alternatives, and formed a special committee of the Board (the “Special Committee”) to evaluate potential strategic alternatives. On February 3, 2011, BJ’s publicly announced it would “explore strategic alternatives” based on the recommendation of the Special Committee. Shortly thereafter, “Party A,” one of BJ’s competitors, expressed interest in acquiring BJ’s. Although the Board “provided a confidential memorandum to twenty-three private equity firms,” it did not share this information with Party A. In April 2011, Party A made a preliminary $55 to $60 per share, all-cash offer. Thereafter, the Board decided it was not in BJ’s best interests to negotiate with Party A. Around the same time, the Board received a preliminary all-cash offer from Party B indicating a price of between $50 to $53 per share. Party B did not advance into the final round of bidding and none of the other private equity firms that had expressed some interest submitted a bid. Ultimately, after negotiation, the Board accepted the Buyout Group’s $51.25 per share, all-cash offer. This represented a 38% premium to BJ’s stock price prior to LGP’s indication of interest.
Plaintiffs sought damages for breaches of fiduciary duties by the Board and aiding and abetting by the Buyout Group. Plaintiffs asserted, in part, that the Board failed to maximize shareholder value because it was “improperly motivated to support the Buyout Group.” Further, plaintiffs alleged the Buyout Group substantially assisted the Board in breaching its fiduciary duties.
Since the certificate of incorporation contained an exculpatory provision under Section 102(b)(7) and a majority of the Board was disinterested and independent, plaintiffs were required to show the Board acted in bad faith. The Court will find bad faith where a fiduciary intentionally fails to act in the face of a known duty to act.” The Court found that plaintiffs did not allege facts sufficient to find that “the Board consciously disregarded its so-called Revlon duties.” In fact, the Board’s actions cut against such a claim. In part, the Board regularly met to discuss strategic alternatives, drove up the price of the only formal offer, and relied on its financial advisor’s fairness opinion. Additionally, the Special Committee “met with every party which made a serious overture.” As such, plaintiffs were required to “allege that the decision to sell [BJ’s] was ‘so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.’” The Court found that the Board’s decisions to not share confidential information with a competitor, treat Party A as a non-serious bidder, and sell BJ’s at a 38% premium did not meet this standard.
The Court next considered the aiding and abetting claim. To withstand a motion to dismiss on an aiding and abetting claim, plaintiffs must plead “(1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty . . . , (3) knowing participation in that breach by the defendants, and (4) damages proximately caused by the breach.” Plaintiffs’ claim fails because they failed to allege knowing participation. The Court found that Plaintiffs’ allegations did not suggest the Buyout Group’s actions rose above the level of hard bargaining.
The full opinion is available here.