The Delaware Court of Chancery recently issued its first decision on Public Benefit Corporations, ruling that Public Benefit Corporations are not subject to the same high standard of care as other corporations in a change-of-control transaction.

Takeaway:  The duty of directors to maximize price in change-of-control transactions does not apply to directors of public benefit corporations (“PBC”).

Earlier this year, the Delaware Court of Chancery heard Drakes Landing Associates, L.P., et al. v. Tilden Park Capital Management, L.P., et al. (“Drakes Landing”). In Drakes Landing, the Court of Chancery considered for the first time whether directors of a PBC owed the same duties as a director of a traditional Delaware Corporation. In a traditional Delaware Corporation, a director, under Revlon, has a fiduciary duty to maximize the price in any change-of-control.

In Drakes Landing, a PBC desperately needed funding. So, two of the company’s lenders proposed a financing transaction which would give the company $20 million and convert the lenders’ debt into equity. After the transaction, the lenders’ stock position would increase from 25% to 85%. An independent and disinterested special committee of the company retained independent legal and financial advisors and ultimately approved the deal.

Several former stockholders of the company challenged the transaction on the grounds that it failed to maximize price above all else.The Court of Chancery held that price maximization is not required for change-of-control transactions involving a PBC.  

The Court of Chancery left open the question about exactly what standard may apply in the future and suggested “PBC enhanced scrutiny” may apply as a standard of review.  The Court of Chancery ultimately dismissed the case on other grounds rather than deciding the standard of review question.