conflicted transaction, this is the very stuff of which business judgment is made,” concluded the court. 1
duties include the fiduciary obligation to act in the best interests of the corporation, and such duties carry with them an expectation that in all circumstances the nominee exercise independent judgment and subordinate the interests of the nominating shareholder to those of the corporation. Had there been evidence that the fund’s interests diverged from those of the company’s other stockholders (for example, if the fund had felt compelled to sell the company in 2017 “consequences (and price) be damned”), the nominees would likely not have had the benefit of receiving judicial deference to their business judgment, and it would have been prudent to ensure that the sale process was overseen by independent directors. In this respect, Manti Holdings represents a cautionary tale: boards must ensure that sales processes are not tainted by the participation or influence of conflicted directors; and nominee directors must consider the propriety of their involvement in transactions in light of potential conflicts of interest (real or perceived) that may arise from their relationship with their nominating shareholder. Conflicts can materialize overtly or more subtly, and it is incumbent on the board and the nominee to identify and manage potential conflicts on an ongoing basis.
Dual Fiduciaries in Canada: A Cautionary Tale Although the Court of Chancery declined to rule that the directors in question were conflicted, the court was abundantly clear regarding the dilemma that would be faced by a director who owes duties of loyalty to their nominating shareholder: The [nominee directors] were dual fiduciaries of [the fund] and [the company], serving as directors of [the company] and as managing directors and officers of [the fund]. If the interests of the beneficiaries to whom the dual fiduciary owes duties are aligned, then there is no conflict. But if the interests of the beneficiaries diverge, the fiduciary faces an inherent conflict of interest. 2 Delaware law and Canadian law align in this respect. Canadian law has not recognized any distinction in responsibilities between a director nominated by a shareholder and a director nominated by management – a nominee director owes the same duties to the corporation as all other directors. In Canada, these
1 The plaintiff’s chief claim was that the transaction should be subject to the “entire fairness” standard of review, an exacting level of Delaware judicial scrutiny that requires the directors of the subject corporation to prove the fairness of both the price and the process of the transaction. Under Delaware law, a transaction in which a controller (such as the fund, in this case) receives a unique benefit (such as a timely exit from the fund’s investee company, as the plaintiff’s alleged) will generally be subject to entire fairness review, unless certain governance procedures are followed (such as independent board approval and majority of minority shareholder approval). Because the nominees were not independent of the fund, they themselves would have been subject to the entire fairness standard if the court found that the interests of the fund diverged from those of the investee company and its stockholders: “Here, [the fund] is a controller but does not have a disabling conflict of interest that triggers entire fairness. As such, the [fund’s nominee directors] were not incentivized to sell [the company] at a less-than-fair price to the special benefit of [the fund], as no such benefit is demonstrated in the record.”
2 See the Court of Chancery’s reasons in respect of the motion to dismiss brought by the defendants (internal citations omitted).
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