Delaware Court of Chancery Applies Corwin to Dismiss Fiduciary Duty Claims Against Seller’s Directors and Officers in Acquisition by Private Investment Firms

Background

Prior to the acquisition, Paratek was a publicly traded Delaware corporation focused on combating antimicrobial resistance through the development and commercialization of treatments. It had a nine-person Board of Directors (“the Board”), a majority of whom were conceded by plaintiffs to be independent and disinterested with respect to the transaction. Its flagship product was NUZYRA (omadacycline), a modern tetracycline indicated for community‑acquired bacterial pneumonia and acute bacterial skin and skin structure infections, which in June 2022 received an FDA “Fast Track” designation resulting in an expedited FDA process. Despite the drug’s promise, the Company faced financial challenges. To raise capital for the high development costs of NUZYRA, Paratek had issued $165 million of unsecured convertible notes in April 2018, with a stated maturity of May 1, 2024. The notes were payable in full at maturity, subject to the Company’s optional redemption or the holders’ optional conversion into equity before maturity. The approaching 2024 maturity became a key strategic constraint considered by the Board and its advisors alongside operating cash needs. In addition, the Company was experiencing “lower-than-expected” sales, with NUZYRA generating only $154 million in cumulative product revenues by the end of the first quarter of 2021.

To address these issues, beginning in mid‑2021, the Board and the Company’s banker, Moelis & Company, began exploring strategic alternatives. Moelis and the Company contacted 18 parties; 11 expressed interest and three submitted non-binding indications of interest. In May 2022, the Board formed a Transaction Committee (“the Committee”) consisting of three outside directors, and vested it with authority to “‘direct, oversee and monitor the Company’s evaluation of potential business combination transactions,’ with the Board retaining authority over final approval of any transaction.” Negotiations with several parties proceeded through the rest of 2022 and into 2023. On June 6, 2023, the Company entered into a merger agreement with Gurnet Point and Novo, pursuant to which the buyers would acquire the Company for $2.15/share cash along with a CVR entitling stockholders to receive an additional $.85/share upon satisfaction of certain post-closing milestones. On September 18, 2023, the Company’s stockholders approved the transaction, which closed on September 22, 2023.

After the announcement of the merger agreement, plaintiffs obtained certain Company information pursuant to a books and records demand under Section 220 of the Delaware General Corporation Law. They filed their complaint in February 2024, asserting that Bigham and Loh breached their fiduciary duties as directors and that Randy Brenner (the Chief Development and Regulatory Officer), William Haskel (the Chief Legal Officer), Adam Woodrow (the President) and Loh breached their fiduciary duties as officers. Ultimately, the Court granted defendants’ motion to dismiss the complaint with prejudice.

Takeaways

The standard of review often is outcome-determinative, particularly at the pleading stage. The Court concluded that Corwin applied, and therefore, the transaction was subject to business judgment rule review, not enhanced scrutiny under Revlon, ultimately leading to dismissal of the action. The Court recognized that when “a stockholder challenges a change of control transaction, such as an all-cash merger, enhanced scrutiny under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.,” as opposed to deferential business judgment rule review, “is the presumptive standard of review.” If Revlon applied, the transaction would be assessed for both the “reasonableness of the decision-making process employed by the directors” and the “reasonableness of the directors’ action in light of the circumstances then existing.” Both plaintiffs and defendants argued that Revlon did not apply. According to plaintiffs, entire fairness review applied (even though they conceded that seven of nine Board members were independent and disinterested with respect to the merger, including all members of the Transaction Committee) because the five defendants were “conflicted and self-interested in the transaction” due to potential payouts upon consummation of a transaction under the Company’s Revenue Performance Incentive Plan (the “RPIP,” described below) and “the opportunity to obtain employment in the Company after the Merger.” Plaintiffs argued that defendants furthered “this self-interest by withholding material information from the Board and the Transaction Committee to advance their personal interests–perpetrating a fraud on the Board.” Allegations that a minority of conflicted fiduciaries’ fraud on the board “tainted the board’s process” should, according to plaintiffs, elevate the standard of review to entire fairness under Mills Acq. Co. v. Macmillan, Inc., 559 A.2d 1261 (Del. 1989) and In re Oracle Corporation Derivative Litigation, 339 A.3d 1 (Del. 2025). Defendants, in contrast, argued that they were able to “restore the business judgment rule through Corwin cleansing” by demonstrating that the merger was approved by a fully informed, uncoerced majority of disinterested stockholders. As discussed below, the Court rejected plaintiffs’ fraud-on-the board-theory (and thus entire fairness review) as well as plaintiffs’ grounds for concluding that the stockholder vote was not fully informed. Given the absence of well-pled allegations calling into question whether stockholders approved the merger on an informed basis, the Court found that Corwin applied, resulting in business judgment rule review and dismissal of the action.

To prevail on a fraud‑on‑the‑board theory, plaintiffs must establish a breach of the duty of loyalty, i.e., the fiduciary must be conflicted and act disloyally. Conflicts alone are not enough. Rather, to plead fraud on the board, a plaintiff must plead and ultimately prove sufficient facts to establish that a conflicted fiduciary “withholds material information from the board, engages in deceptive conduct, or otherwise misleads the board.” The Court added that if a plaintiff does plead such facts, “the board need not be ineffective for a plaintiff to prevail on a breach of the duty of loyalty claim.”

The Court’s discussion of whether the complaint pled disloyal conduct demonstrates the importance of a well-run sales process that does not tilt the playing field in favor of a preferred bidder. The Court concluded that the complaint did not contain facts demonstrating that defendants acted disloyally by withholding information from the Board or otherwise. It assumed for purposes of the motion that the defendants were conflicted based on allegations that they sabotaged any potential deal for nearly two years, so that the Company could grow NUZYRA sales and increase their RPIP payout¹; were permitted to reinvest some of their RPIP payments into equity in the post-merger entity; and steered the sales process to the ultimate buyers because they were willing to continue employing Loh, Woodrow and Brenner. The problem for plaintiffs was the Court’s conclusion that there were no allegations of disloyal conduct in the form of withholding material information from the Board or Committee. That conclusion, in turn, is premised in large part on the Court’s assessment of the sales process.

• Management should timely disclose communications with a potential bidder to the Board or committee overseeing a potential transaction, but such disclosure need not be simultaneous with the communication. The significance of the interaction with the bidder and timeliness of disclosure relative to transaction signing likely are important factors in whether late-disclosed communications will taint the sales process. Plaintiffs alleged that management did not contemporaneously disclose certain communications with Gurnet Point because they wanted to delay the sales process and, had there been earlier disclosure, the Company could have struck a better deal. The Court found, however, that the “initial discussions were ultimately disclosed to the Transaction Committee on November 28, 2022—more than six months before the Merger Agreement was signed.” There also were no allegations that management attempted to conceal these discussions or that they were material: “Nor do the allegations make it reasonably conceivable that the meetings and discussions with Gurnet Point in 2022, all of which were general in nature, were of a magnitude to be important to directors in carrying out their fiduciary duty of care in decisionmaking.” There is a cautionary note here: The Court reached this conclusion even though Gurnet Point first contacted Loh and met with Loh and Chris Bostrom (the Company’s then-Vice President of Finance) in January 2022 (eight months before disclosure to the Committee, which had not been formed yet), management and Gurnet Point had another discussion and executed an NDA in August 2022, and Gurnet Point had access to a data room, met with Company representatives and “communicated its interest in acquiring the Company” in September 2022. That amount of interaction with a potential bidder, led by management that arguably had incentives to favor Gurnet Point over other bidders, likely warranted earlier disclosure to the Board or Committee.

Other decisions have found that the failure to disclose management-bidder interactions to the Board can call into question the integrity of the sales process. City of Fort Myers Gen. Emps.’ Pension Fund v. Haley, 235 A.3d 702, 723-24 (Del. 2020) (complaint sufficiently alleged that a seller’s CEO and lead negotiator engaged in secret meetings and failed to inform the board that he received a proposed compensation package with potential upside of nearly five times his compensation from the acquirer); In re Mindbody, Inc., 2020 WL 5870084 (Del. Ch. Oct. 2, 2020) at *24–25 (complaint stated claim for fraud on the board where CEO initiated a sale process, did not disclose interactions with his favored bidder to the board, instructed members of management not to disclose expression of interest to the board, vetoed outreach to bidders, controlled the level of diligence provided to potential bidders, and eliminated bidders from the sale and go-shop process, while simultaneously providing his favored bidder with timing and informational advantages); In re Columbia Pipeline Grp., Inc. Merger Litig., 2021 WL 772562, at *40 (Del. Ch. Mar. 1, 2021) (complaint stated claim premised on a fraud on the board where the CEO initiated a sale process without board approval, the CFO provided the favored buyer 109 pages of confidential documents and talking points on how it could convince the target board to agree to a deal without putting the target in play, and the CEO deceived the board by providing a misleading presentation that convinced the board to grant exclusivity to the favored buyer).

• Sellers should provide all credible bidders with access to substantially the same information, but immaterial discrepancies in the timing of that access do not necessarily taint the sales process and plaintiffs need to specifically allege facts demonstrating that one bidder received an unfair advantage. Plaintiffs argued that management shared information with Gurnet Point in December 2022 that gave it an “unfair tactical advantage” over other bidders and did not disclose that communication to the Board. Plaintiffs theorized that the information involved a NUZYRA efficacy study because Moelis advised the Company to pause negotiations with another bidder at that time due to the Company being in possession of material nonpublic information. But the Court found that the Company released information about the study days after the Gurnet Point meeting, at which time Gurnet Point was still seeking financing; it did not make a proposal until months later. The Court contrasted the facts in Macmillan, where a “self-interested manager provided a tip to the favored bidder, revealing every crucial element, including both the price and form of a different bidder’s first round bid,” leading to the favored bidder placing a “nominally higher bid” and imposing a no-shop requirement as part of its offer. Here, the Court concluded that no facts were alleged as to how Gurnet Point derived any unfair advantage by having received nonpublic information about the NUZYRA efficacy study under these circumstances.
• Similarly, all bidders should be subject to the same ground rules in terms of timing and content of bids. Plaintiffs’ focus on a June 4, 2023 “tip” from Loh to Gurnet Point, i.e., a statement to Gurnet Point that a competing strategic party had “meaningfully increased negotiation efforts,” likewise fell short. According to plaintiffs, that information encouraged Gurnet Point to sign the merger agreement and deprived the Board of an opportunity to obtain a counteroffer from a competing bidder. The Court disagreed, and distinguished cases like Firefighters’ Pension System of Kansas City, Missouri Trust v. Presidio, 251 A.3d 212 (Del. Ch. 2021) and Macmillan, noting that here the Committee had established its own deadline for submitting bids before the alleged “tip,” and the record reflected that the competing bidder had already indicated it could not meet that timeline. There were no allegations that the Board or Committee’s “rules of the game” were changed or that management’s communication forced premature closure of the process. In Presidio, in contrast, the bidder and ultimate buyer “had been informed of a competitor’s bid, leveraged the tip, outbid competitor by $.10 per share, demanded an increase in the termination fee, and required the company to respond within twenty-four hours,” all with the Board being “oblivious of the tip.”
• A board of directors can properly discharge its fiduciary obligation to oversee a sales process even while permitting management to lead or have a role in negotiations so long as it is aware of potential management conflicts and is actively involved in managing those conflicts. The Court recognized that directors are required to be active and reasonably informed when overseeing a sales process, including identifying and responding to actual or potential conflicts of interest on the part of management or its financial advisor. While plaintiffs argued that Loh and Bigham were given “outsized roles in leading negotiations,” there is nothing “inherently wrong with a board delegating to a conflicted CEO the task of negotiating a transaction,” and here there was no allegation that the Board was unaware of Loh or Bigham’s alleged conflicts. Moreover, the complaint did not suggest that the Board or Committee failed to oversee management. The Committee was active, advised by independent counsel and a financial advisor, set and adjusted negotiating parameters, and engaged with multiple counterparties. The Board was informed of management’s interests, including the RPIP and potential post-closing arrangements, and cabined retention discussions until after price was agreed. While the plaintiffs claimed that management convinced the Committee to reject a rival bid in January 2023 to preserve a Gurnet Point deal, the complaint itself alleged that the rival bid had a CVR component and the milestones proposed made it unlikely there would ever be payouts under the CVR. Likewise, while management refused to reduce its RPIP payouts in connection with the rival bid, the Court found that they were “not required to surrender their contractual rights” or engage in “self-sacrifice” in order to discharge fiduciary duties. In short, the process was neither “torpid” nor ceded to conflicted managers in a manner that resembled Macmillan. Importantly, however, and unlike here, other decisions have found that a failure to identify and manage actual and potential conflicts can lead to a finding that the Board failed to provide active and direct oversight. RBC Cap. Mkts., LLC v. Jervis, 129 A.3d 816, 831, 850−57 (Del. 2015) (“While a board may be free to consent to certain conflicts, … directors need to be active and reasonably informed when overseeing the sale process, including identifying and responding to actual or potential conflicts of interest.”); In re PLX Tech. Inc. S’holders Litig., C.A. No. 9880, at 39 (Del. Ch. Sept. 3, 2015) (TRANSCRIPT) (allegations in complaint support a reasonable inference that committee did not take sufficient steps to determine whether conflicts of interests on the part of special committee’s financial advisor existed at the outset and whether they emerged during the process); In re Pattern Energy Grp. Inc. S’holders Litig., No. CV 2020-0357-MTZ, 2021 WL 1812674, at *51 (Del. Ch. May 6, 2021) (allowing conflicted directors, management, and advisors to participate in deliberations without adequate management infected the sales process).

• The Court found that the complaint failed to plead a material misstatement or omission in the merger proxy statement, resulting in Corwin cleansing and application of the business judgment rule. The Court’s discussion of plaintiffs’ challenges to the proxy statement reaffirms the extent and limits of required disclosure. The Court emphasized that while Delaware law demands an “accurate, full, and fair characterization” of relevant events, it does not require encyclopedic detail, speculation about negotiations, or a transcript-level account of every meeting. What matters is whether the claimed omissions would have changed a reasonable stockholder’s assessment of the competitive dynamic, management’s incentives, or the Committee’s control of the process. For instance, plaintiffs claimed that the proxy statement did not adequately explain the Committee’s reasons for rejecting earlier or allegedly “superior” proposals, even though the bids themselves were disclosed. The Court reiterated that Delaware law does not require a play-by-play of every negotiating turn or a detailed analysis of “why” specific counter-prices were selected, particularly where the proxy disclosed the substantive bid history, the evolving structure and terms, and the Board’s ultimate rationale for the agreed deal. The Committee’s decision to proceed with Gurnet Point, after a competing bidder could not meet a firm response deadline, against a backdrop of business headwinds and timing risk, was adequately disclosed. Likewise, while plaintiffs complained that the proxy statement should have itemized which executives attended each Committee meeting, the Court declined to impose that “level of granularity.” Unlike cases where stockholders were left unaware of whether conflicted managers led or dominated negotiations, the proxy here identified the relevant participants and disclosed management’s interests and their involvement in meetings and discussions with interested parties during the process.

¹ The RPIP was intended to incentivize management to market NUZYRA and established a $50 million cash pool (plus interest), split evenly across two revenue‑based tranches tied to cumulative NUZYRA product revenues, with time‑based vesting through 2022 and change‑of‑control mechanics that accelerated vesting and deemed partial achievement if milestones were not fully met at closing. Participants who remained employed through a change of control would become fully vested in each tranche of their RPIP award. The five defendants collectively held 80% of the pool.