## Facts

- Trados Inc., a software company, raised venture capital beginning in 2000, issuing preferred stock with substantial liquidation preferences and granting venture investors board representation.
- By 2004, the venture investors sought an exit and explored a sale of the company.
- The board adopted a management incentive plan (MIP) that paid management upon a sale even if common stockholders received nothing.
- In July 2005, SDL plc acquired Trados for $60 million in cash and stock; the transaction was treated as a liquidation under the charter, triggering preferred stockholders’ liquidation preference of approximately $57.9 million.
- Deal proceeds were allocated first to the MIP ($7.8 million), then to preferred stockholders (about $52.2 million), leaving common stockholders with $0; without the MIP, common would have received about $2.1 million.
- A common stockholder (about 5% of the common) brought a class action alleging breaches of fiduciary duty in approving the merger, running the sale process, and structuring incentives.

## Issues

1. Whether the merger approval was subject to business judgment review or entire fairness due to alleged director conflicts and lack of independence.
2. Whether the directors breached fiduciary duties owed to common stockholders by pursuing a sale that yielded no consideration to the common rather than continuing to operate the business.
3. Whether the transaction was entirely fair in both fair dealing (process) and fair price (economic outcome).

## Decision

- The court held that entire fairness was the governing standard because a majority of the approving board was not disinterested and independent.
- The court found significant process defects and conflicts affecting fair dealing, including sale-driven incentives created by the MIP and the absence of a protective structure for the common stockholders.
- Despite unfair dealing, the court concluded the merger was entirely fair overall because the price was fair: the common stock had no economic value before the merger.
- Judgment was entered for the defendants on the fiduciary duty claims.

## Legal Principles

- When a board majority is conflicted or lacks independence in approving a transaction, the defendants must prove entire fairness, encompassing fair dealing and fair price.
- Directors owe fiduciary duties to the corporation and its stockholders and generally must seek to maximize value for the residual claimants, typically the common stock.
- In applying entire fairness, serious process flaws do not necessarily result in liability if the defendants prove that the consideration was economically fair under the company’s realistic prospects and capital structure.
- In a venture-backed company with liquidation preferences, a transaction that delivers nothing to the common can be fair if the common is economically “out of the money” on a reasonable valuation.

## Conclusion

The court applied entire fairness to a venture-backed sale with conflicted incentives, found the sale process deficient, but upheld the transaction because credible valuation evidence showed the common stock had no economic value pre-merger, making a zero recovery for the common fair.


In re Trados Inc. S'holder Litig., 73 A.3d 17 (Del. Ch. 2013)