In a case involving a common fact pattern, Trados “Part 2” provides a very helpful analysis of a board’s fiduciary obligations when common stockholders receive no consideration in an acquisition. Trados was acquired in 2005 for $60 million in cash and stock. The preferred stockholders received $52.2 million of the purchase price, which was less than their full liquidation preferences, and management received $7.8 million through a management incentive plan. The common stockholders received nothing. The venture capital funds invested in Trados had representatives on the Trados board. In Trados “Part 1”, then-Chancellor Chandler held that the plaintiff had sufficiently alleged that a majority of the directors were interested or had a conflict in the merger.
In Trados “Part 2” the court applied the entire fairness standard and held that the board proved that the transaction was entirely fair to common stockholders despite the fact that the board followed a flawed process and “the directors did not adopt protective provisions, failed to consider the common stockholders, and sought to exit without recognizing the conflicts of interest”. Notwithstanding these shortcomings, the court found that the board had not breached its fiduciary duties because the common stock had no economic value. Since what the common stockholders received in the merger was equal to the appraised value of the common stock, the board had proved that the transaction was entirely fair to the common stockholders.