Delaware Court Issues Cautionary Tale on DGCL § 144
A recent Court of Chancery decision highlights the risks of failing to protect confidential information in transactions involving interested directors, even when seeking safe harbor protection under Section 144.
In Dodiya v. Franklin, the Delaware Court of Chancery provided an updated analysis of Section 144 of the Delaware General Corporation Law, which offers a "safe harbor" to protect conflicted-director transactions from the exacting entire-fairness standard of review. This decision serves as a significant cautionary tale for boards and their counsel, demonstrating that mere technical compliance with the statute may not be sufficient to secure its protections. The court focused on the board's failure to safeguard confidential company information from the conflicted directors, finding that this procedural flaw could undermine the integrity of the approval process by disinterested directors.
Sophisticated counsel and their clients should care because the ruling emphasizes the importance of process in managing director conflicts. It suggests that even if a board obtains approval from a majority of its disinterested directors, the safe harbor can be lost if the conflicted directors' access to information taints the process. Boards should review and potentially tighten their protocols for walling off conflicted directors from sensitive information and deliberations concerning transactions in which they have an interest.