Gail Weinstein is a Senior Counsel, and Philip Richter and Rachel C. Strickland are Partners, at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Ms. Strickland, Steven Epstein, Steven Steinman, and Mark Hayek, and is part of the Delaware law series; links to other posts in the series are available here.
In GB-SP v. Walker (Nov. 15, 2024), the Delaware Court of Chancery found that directors of Bridgestreet Worldwide, Inc. (the “Company”), by securing indemnification rights for themselves in connection with approving a Foreclosure Agreement with the Company’s creditor, rendered themselves materially conflicted.
As a result, the court reviewed the Plaintiff’s claim—that the directors breached their fiduciary duties in approving the Agreement—under the entire fairness standard. The court found that the Foreclosure Agreement was not entirely fair; that the directors therefore breached their fiduciary duties when they approved it; and that the creditor, an affiliate of private equity firm Versa Capital Management, LLC, aided and abetted the directors’ fiduciary breaches.
Notably, the circumstances were unusual. The scope of the indemnification rights in the Indemnity Agreement between Versa and the Company extended beyond claims arising out of the Foreclosure Agreement, to cover also any claims brought by the company’s controlling stockholder, GB-SP, Inc. (whether relating to the Foreclosure Agreement or not). When the directors sought the indemnification rights, they knew that they had breached GB-SP’s rights under a Shareholders Agreement, and knew that they could not obtain insurance that would cover liability for those breaches because the policy excluded claims from major shareholders.
