Newport based Mindspeed, Inc. was sued in Orange County Superior Court by several of its shareholders on November 15th. The shareholders claim that the company broke its fiduciary duty in connection with Mindspeed’s acceptance of M/A-Com Technology Solutions Holdings Inc’s offer to purchase Mindspeed shares.
M/A-Com announced its acquisition of Mindspeed on November 5, 2013, which amounted to a sale at $5.05 per share. However, several shareholders asserted that this was too low because the stock had reportedly traded for up to $5.27 earlier in the year and upwards of $6.87 in 2012. The shareholders claim that Mindspeed’s acceptance of this deal unlawfully disadvantaged the shareholders’ interests.
M/A-Com is a supplier of wireless and optical communications infrastructure products. Mindspeed, a Delaware corporation that operates in California, produces network infrastructure semiconductor chips and applications as well as a wireless and VoIP technologies. The total cost of the deal was $272 million.
Corporate Director’s Duties in Transfer of Ownership
The board of directors owes a fiduciary duty to its shareholders. The extent of the duties can differ slightly depending on whether the corporation is incorporated in Delaware, like Mindspeed or incorporated in California. However, the basic concept is the same under both states.
According to Cal. Corp. Code section 309(a) the duty of care requires that the directors act in an informed and considered way. The directors must review all reasonably available material information before deciding a corporate matter.
The directors also have a duty of loyalty, which requires that the directors act in the best interests of the corporation, in a way that an ordinarily prudent person in the position and similar circumstances would behave. This prohibits the directors from engaging in decisions that only benefit themselves and not the shareholders. The directors must also carry out their duties in good faith.
Examples of conflicts of interest that violate the duty of care include business dealings with another entity that is a competitor to the corporation, taking advantage of an opportunity of the corporation, or directly competing with the corporation.
In the context of the sale of a business, these duties are not precisely defined; this can result in shareholders claiming that the directors breached their duty of care. However, simple negligence will not be sufficient to prove a violation of the fiduciary duty and duty of care.
Business Judgment Rule Provides Defense to Breach of Fiduciary Duties
One defense to the breach of fiduciary duty is the business judgment rule. The business judgment rule provides the directors with a rebuttable presumption that the directors acted within their duty so long as the decision was honestly and in good faith made to better the corporation.
However, the business judgment rule does not apply in situations involving conflicts of interest or violations of the duty of loyalty, failures of the board to act, or failures of the board to investigate. The board is entitled to rely on the judgment and expertise of experts that are properly presented.
Shareholder Litigation Services
If you are involved in a dispute over a merger or acquisition contact the Law Offices of Tony T. Liu. Our offices have significant experience handling shareholder litigation claims. To learn more about our litigation services call (714)415-2007.