In a short, three-page order, the Delaware Supreme Court affirmed the Delaware Court of Chancery's decision in City of Miami General Employees v. Comstock ( (Del. Ch. Aug. 24, 2016), aff'd, (Del. Mar. 23, 2017) (ORDER)).

The facts of the case and the Chancery Court's decision are summarized in Legal Update, Delaware Court of Chancery Applies "Corwin" in Two Post-Closing Decisions, Takes Divergent Approaches to Conflicted-Board Transactions.

In affirming the Chancery Court's decision, the Supreme Court explained that it did so "largely on the basis" of the lower court's decision. The Supreme Court added that it disagreed, at least in part, with the reasoning of the Chancery Court on two disclosure-related grounds. Nevertheless, even as the Supreme Court acknowledged that the plaintiff had enhanced its disclosure-related claims on appeal, the court still found them lacking in substance and ruled that the disputed omissions were immaterial.

Significantly, the Supreme Court's decision failed to address the Chancery Court's reasoning for dismissing the plaintiff's two arguments that the transaction should have been reviewed under the entire fairness standard. Specifically, the plaintiff had argued that that the transaction was appropriately reviewable for its entire fairness on two grounds:

Notably, rather than dismissing these entire fairness claims based on an application of the principles first established in Corwin (Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304, 312 (Del. 2015)), the Chancery Court in Comstock addressed, and rejected, the plaintiff's underlying allegation of interest on the part of the directors. This reasoning is at odds with several other recent Chancery Court decisions that have applied the Corwin principle under these circumstances, holding that the cleansing effect of a fully informed, uncoerced stockholder vote extends to the extinguishment of duty of loyalty claims based on director conflicts of interest. For example, in Larkin v. Shah (decided just one day after Comstock) the Chancery Court held that the business judgment rule can be restored not only in ordinary Revlon deals, but even if entire fairness would have ordinarily applied because of a conflicted board of directors. The Larkin court went on to conclude that a fully informed and uncoerced vote of the disinterested stockholders cleansed the conduct of the conflicted board, making it unnecessary to analyze the underlying facts to determine whether the directors did indeed suffer disabling conflicts like the Comstock court had done. (, at *10-13 (Del. Ch. Aug 25, 2016).) Subsequent decisions of the Chancery Court have followed the approach of Larkin (for example, see In re Solera Hldgs. S'holder Litig., , at *6 n.28 and In re Merge Healthcare S'holder Litig., , at *6).

Rather than take the opportunity to address this split in the Chancery Court, however, the Supreme Court merely stated that it affirms the Comstock decision "largely on the basis of the decision of the Court of Chancery" and only noted that it did "not fully embrace" the Chancery Court's reasoning in connection with the two disclosure-related claims. This may mean that the Delaware Supreme Court affirms the Comstock reasoning for dismissing the entire fairness claims, which would mean that the cleansing effect of Corwin does not extend to conflicted-director transactions. On the other hand, the Supreme Court's focus on the disclosure claims, to the exclusion of any reference to the conflict-of-interest-based entire fairness arguments, may mean otherwise. Accordingly, practitioners will likely need to wait until a later opinion from the Delaware Supreme Court with express language on this specific issue before determining whether or not the Corwin principle extends to restoring the business judgment rule in conflicted-board transactions.

For more information about the duties of directors and the appropriate standard of review in M&A transactions, see Practice Note, Fiduciary Duties in M&A Transactions.