Background
This case was spawned by the board of directors of Bioverativ, Inc.’s (the Company or Bioverativ) decision to merge with Sanofi S.A (Sanofi). In May 2017, Sanofi approached two Company directors and expressed interest in the transaction. One of those directors was defendant Alexander J. Denner, an activist investor who was responsible for placing a number of key directors on the Company’s board. Denner did not disclose the offer to the rest of the Company’s board of directors. However, Denner allegedly directed a hedge fund that he controlled (collectively, Sarissa) to purchase over 1 million shares of the Company’s stock, in violation of the Company’s insider trading policy.
Plaintiff alleges that in order to sidestep section 16(b) of the Securities Exchange Act of 1934 – which requires an insider to disgorge short-swing profits from any sale that occurs within six months of purchase – Denner rejected Sanofi’s repeated attempts to purchase the Company until the six-month short-swing period had expired. Following that expiration, the Company’s board agreed to the acquisition, allegedly at a price approximately 30 percent below the Company’s stand-alone long-term planning model.
A Company stockholder plaintiff subsequently filed suit alleging that various directors and officers had breached their fiduciary duties by (i) failing to make required disclosures, (ii) approving, falsifying, and omitting material information about the transaction, and (iii) failing to secure the highest value for the Company’s stockholders in favor of the directors’ own self-interest. The complaint also alleges that Denner had engaged in insider trading and that Sarissa had aided and abetted this breach of fiduciary duty.
Analysis
One of the issues the court focused on was whether the Company’s directors acted independently of Denner in authorizing the transaction. The court explained that the appointment of past directorships – and the possibility of future board opportunities – may be sufficient to compromise a director’s independence. Specifically, the court stated: “Although a director’s nomination to a board standing alone is not enough to call into question the director’s independence from the nominating party, a pattern of facts surrounding the director’s service can do the trick.”
Plaintiff alleges that four board members – some of whom had personally benefited from Denner’s actions in the past – were beholden to him and lacked independence. The court quickly rejected the claim that one director was dominated by Denner because both had served on Bioverativ’s parent corporation’s board since 2009 and both had been placed on that board by activist investor Carl Icahn, and also because Icahn previously had nominated that director to the board of Yahoo!
Similarly, the court also rejected the plaintiff’s claim that another board member lacked independence because Denner had appointed him to serve on the board of Sarissa’s acquisition company.
However, the court noted that determinations of the other two directors’ independence was a “close call.” One director had previously supported and financially benefited from a similar transaction orchestrated by Denner. Then, two weeks later, Denner appointed that same director to a position on the Company’s board. The court reasoned that, when viewed together with Denner’s “practice of rewarding directors with lucrative directorships on other Sarissa-affiliated boards,” and the allegedly dubious sale terms, the allegations were sufficient to support a reasonable inference that the director lacked independence.
Similarly, the court ruled that it was reasonable to conclude that another director – who was unemployed until Denner secured him a seat on the Company’s board and who was also placed on an additional board by Denner (which resulted in a $3 million gain) – was not independent.
Ultimately, the court found that at least half of the six-person board, including Denner, was either potentially interested in the transaction or lacked independence in rendering the decision to effect the merger.
Importantly, however, the court emphasized that “outside of a Rule 12(b)(6) motion in a case governed by enhanced scrutiny, it is unlikely that a similar constellation of facts would be sufficient to overcome the presumption of good faith or to call a director’s independence into question…. Nor is it clear that the same constellation of facts would render [the board member] non-independent for purposes of rebutting the business judgment rule and causing entire fairness to apply.”
Takeaways
The general principles regarding independence are firmly rooted in Delaware law. However, analysis of these principles with regard to directors who have been repeatedly placed on boards by activist investors is less common. For now, the Court of Chancery is inclined to allow those claims to move forward if it is reasonably conceivable that those directors could lack independence – even if, without more, those claims may ultimately fail.
Client Alert 2022-206
