In re Trados: Directors Dodge a Bullet

Vice Chancellor J. Travis Laster’s August 16 post-trial opinion in In re Trados Inc. Shareholder Litigation1 (hereinafter, “In re Trados”) has attracted a significant amount of attention. Much as both the Chancery and the Delaware Supreme Court did in the Disney/Ovitz case of the mid-2000s, the In re Trados court portrays an extremely deficient board process in vivid and unflattering detail, while ultimately finding — perhaps reluctantly — in favor of the defendants. Disney and In re Trados differ substantially on the factual circumstances (Disney involved an employment contract with a senior executive under which extraordinary severance amounts were paid when the executive’s brief tenure with the company was terminated; In re Trados, a merger in which common shareholders received no consideration) as well as the standard of review applied by the courts to the actions in dispute (Disney considered whether the actions were protected by the business judgment rule; In re Trados, whether the challenged merger could withstand “entire fairness” review). However, in addition to the similarity of the respective defendant directors escaping liability seemingly by the skin of their teeth, In re Trados like Disney provides an example of how not to manage a board process in a manner designed to avoid disruptive litigation (if not actual liability).

In re Trados: The Facts and Holdings -

Facts -

Trados Inc. (“Trados”) was a privately held company that produced translation software. In 2000, Trados obtained funding from various venture capital (“VC”) investors. The VC investors received preferred shares with liquidation preferences payable upon a change-of-control transaction, voting rights identical to common shares on an asconverted basis and other customary VC negative control rights (including the right to veto a change-in-control transaction). Additionally, certain of the VC investors received the power to designate representatives to the Trados Board of Directors (the “Board”).