In re Encore Computer
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COURT OF CHANCERY OF THE STATE OF DELAWARE June 16.2000 Norman M. Monhait, Esquire Rosenthal, Monhait, Gross & Goddess Mellon Bank Center, Suite 140 1 P.O. Box 1070 Wilmington, DE 19899 Stephen J. Bailick, Esquire Ashby & Geddes One Rodney Square Suite 302 P.O. Box 1150 Wilmington, DE 19899 R. Franklin Balotti, Esquire Richards, Layton & Finger One Rodney Square P.0. Box 55 1 Wil.mington, DE 19899 RE: In Re Encore Computer Corporation Shareholders Litigation C.A. No. 16044 Dear Counsel: Two typographical errors were found in the Opinion issued earlier today in the above-captioned matter. Please substitute the enclosed pages 12 and 16 with your copy of the Opinion. I apologize for any inconvenience this may have caused. Very truly yours, lycx IQ* f? Enclosures cc: Register in Chancery supported by specific factual allegations will not be accepted as true.4 A. The Duty of Loyalty Claims It is well-established Delaware law that the business judgement rule creates a powerful presumption in favor of actions taken by the directors in that a decision made by a loyal and informed board will not be overturned by the courts unlless it cannot be attributed to any rational business purpose. 5 To rebut that presumption, the plaintiffs may allege facts sufficient to plead a cognizable claim for a breach of duty of loyalty, more specifically, that the defendants were materially interested in the transaction or failed to act independently on behalf of the corporation. j I conclude that the plaintiffs have failed to allege facts sufficient to establish that the Encore directors either had a material sell.f-interest in, or failed to act independently with respect to, the challenged transacti~ons. I find also that the complaint in fact alleges that the Sun and the Gores Transactions served legitimate business purposes. My reasons follow. 4 Weinberger v. UOP. Inc., Del. Ch., 409 A.2d 1262, 1264 (1979). SCede & Co. v. Technicolor,&, Del. Supr., 634 A.2d 345, 361 (1993) (citing Sinclair WCoro. v. Levien, Del. Supr., 280 A.2d 717, 720 (1971)), see alsQ Mills Acquisition Co. v. MacMillan. Inc., Del. Supr., 559 A.2d 1261, 1279 (1989). Q-obow v. Perot, Del. Supr., 539 A.2d 180, 188 (1988). 12 were aligned. Because the plaintiffs have not sufficiently pleaded facts demonstrating that Thomas or Fisher were subject to a disabling interest, the :lEncore Board s decision to alpprove the Sun Transaction is entitled to review under the business judgment rule. The plaintiffs next argue, in the alternative, that even under the business judgment standard they have stated a claim, because the complaint sufficiently alleges that the Sun Transaction lacked any valid business justification. I disagree. Without the Sun Transaction the Encore stockholders would have received nothing. That transaction enabled Encore to discharge sig,nificant amounts of debt, while still retaining $30 million for operating purposes. For that to occur, however, it was necessary for Gould to surrender several valuable assets to Sun, inc.luding Gould s security interest in the Storage Products Business assets and the Gould License that covered the intellectual property for th1.e Storage Products Business. The consideration for Gould s cooperation was Encore s agreement for Gould to receive $60 million of the Sun Transaction proceeds, which would be used to redeem the preferred stock. Even in that connection, Gould agreed that in any liquidation it would not participate in the first $30 million of distributable assets-- a significant concession because the net proceeds available after paying 16
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