Private Equity and the Heightened Fiduciary Duty of Disclosure
Lloyd L. Drury III
Loyola University New Orleans College of Law
December 16, 2009
NYU Journal of Law & Business, Vol. 6, p. 101, 2009
In the first six months of 2007, four major cases in the Delaware Chancery Court relied on the disclosure duty to enjoin pending acquisitions. Based on these holdings, scholars identified disclosure as the next battleground in the tug of war between Delaware and the SEC over corporate governance. However, eleven of the next twelve cases seeking a disclosure-based injunction were denied. The question this Article answers is why there was such an abrupt turnaround; and, by answering this question, it provides a deeper understanding of how and why Delaware courts are invoking the fiduciary duty of disclosure. This Article argues that it is not, or at least not primarily, the SEC that the Delaware courts are responding to; but rather it is the relatively recent rise to prominence of a new type of transaction - the private equity deal - that led to the Delaware court’s assertion of influence.
In several recent opinions, the Delaware courts have explicitly described their concern over potential conflicts of interest inherent in private equity transactions. This Article argues that the courts are addressing these concerns, not by using the duty of loyalty as one might expect, but rather by invoking the fiduciary duty of disclosure. Part I describes the rise of the private equity industry in the middle of this decade, its sudden and dramatic collapse in the fall of 2007, and the potential for conflicts of interest in private equity deals as identified by the Delaware Chancery Court. Part II discusses recent cases that raise the fiduciary duty of disclosure, drawing a distinction between those where transactions were enjoined and those where the court found no violation. This Part concludes that courts are scrutinizing private equity and similarly conflicted transactions more closely than other transactions where disclosure violations have been raised, and are using the disclosure mechanism to partially remedy loyalty concerns. Part III assesses the significance of this strategy by the Delaware courts. It first identifies this approach as another strategic use of indeterminacy in Delaware law. It also praises the effort as an example of judicial modesty, but warns that the approach brings the danger of under-enforcing conflicts of interest and misshaping the disclosure doctrine.
Number of Pages in PDF File: 44
Date posted: December 19, 2009
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