## Facts

- Cadant, Inc., a venture-backed startup, issued common stock to founders/early investors and preferred stock to later investors, including Venrock Associates and J.P. Morgan, who also obtained board influence.
- Cadant faced severe financial distress after market and company-specific setbacks and pursued financing alternatives, including insider financing from Venrock and J.P. Morgan.
- Cadant’s board approved an $11 million short-term loan from Venrock and J.P. Morgan and later a second $9 million loan; Cadant ultimately defaulted.
- The transactions allegedly favored preferred investors and lenders through pricing, protections, and priority, while reducing or eliminating any realistic recovery for common shareholders.
- When Cadant could not repay, it exchanged operating assets for stock in another company; the consideration was structured to satisfy creditors and preferred interests, leaving no residual value for common stock.
- Cadant entered bankruptcy; its remaining asset (the acquired-company stock) fell below creditor claims, and common shareholders recovered nothing.
- A liquidating trust representing common shareholder interests sued directors/officers for breach of the duty of loyalty and sued Venrock and J.P. Morgan for aiding and abetting.
- After the plaintiff rested in a bifurcated jury trial, the district court granted defendants judgment as a matter of law under Rule 50; the trust appealed.

## Issues

1. Whether the evidence permitted a reasonable jury to find that directors breached the duty of loyalty, triggering Delaware’s entire fairness standard and related burden shifting.
2. Whether the evidence permitted a reasonable jury to find that Venrock and J.P. Morgan knowingly participated in, and thus aided and abetted, fiduciary breaches.
3. Whether the district court improperly removed the case from the jury by granting judgment as a matter of law after the plaintiff’s case-in-chief.

## Decision

- The Seventh Circuit reversed the judgment as a matter of law and remanded for further proceedings.
- The court held that the record contained sufficient evidence for a jury to find director disloyalty and to apply an entire fairness analysis to the challenged transactions.
- The court held that the record also contained sufficient evidence for a jury to find that Venrock and J.P. Morgan aided and abetted the alleged loyalty breaches.
- The court rejected the view that market forces alone made causation too speculative for a jury, concluding that the challenged decisions could reasonably be found to have contributed to the harm to common shareholders.

## Legal Principles

- Under the internal affairs doctrine, fiduciary-duty claims are governed by the law of the state of incorporation; where a corporation reincorporates, different states’ laws may apply to conduct occurring in different periods.
- A Delaware charter provision authorized by Del. Gen. Corp. L. § 102(b)(7) can exculpate directors from monetary liability for duty-of-care violations, but it does not exculpate loyalty or bad-faith breaches.
- Evidence of director conflicts or self-interest can shift the burden to directors to prove the entire fairness (fair dealing and fair price) of the challenged transaction, making jury resolution appropriate where competing inferences exist.
- Aiding-and-abetting liability may be found where a non-fiduciary knowingly participates in a fiduciary breach; sophisticated investors with board influence and transactional control may satisfy the “knowing participation” element.
- Judgment as a matter of law under Rule 50 is improper if, viewing the evidence favorably to the non-movant, a reasonable jury could find for that party on the essential elements.

## Conclusion

The Seventh Circuit held that the plaintiff presented enough evidence for a jury to consider whether conflicted directors favored preferred investors during distress financing and restructuring and whether those investors knowingly participated, so the district court’s mid-trial judgment as a matter of law was reversed and the case was remanded.


CDX Liquidating Tr. v. Venrock Assocs., 640 F.3d 209 (7th Cir. 2011)