## Facts

- Trados Inc., a Delaware software company, issued preferred stock to venture capital investors that carried a large liquidation preference and the right to designate a majority of the board.
- Four of seven directors were designated by preferred stockholders and allegedly had employment or ownership ties to, and financial dependence on, those preferred holders.
- Trados agreed to be acquired by SDL plc for $60 million.
- Under the capital structure and an incentive/bonus plan, about $52 million of the merger consideration went to preferred stockholders, with the remaining consideration paid to executives; common stockholders received nothing.
- A former common stockholder filed a class action alleging the board approved the transaction to satisfy preferred holders’ desire to exit and to benefit management, despite no need to sell at that time.
- The complaint also alleged two director-officers agreed to alter revenue recognition practices to shift revenues post-merger to benefit SDL.

## Issues

1. Whether the complaint plausibly alleged a non-exculpated breach of the duty of loyalty by directors who approved a merger yielding no consideration to common stockholders, where a board majority allegedly lacked independence from preferred stockholders with divergent interests.
2. Whether the complaint stated a duty of loyalty claim against two director-officers based on alleged manipulation of revenue recognition practices to benefit the acquirer.

## Decision

- Motion to dismiss denied as to the merger-based duty of loyalty claim.
- Motion to dismiss granted as to the revenue-manipulation duty of loyalty claim.

## Legal Principles

- Directors owe fiduciary duties to the corporation and, where preferred and common interests diverge, may breach the duty of loyalty by favoring preferred stockholders over common stockholders.
- The business judgment presumption can be rebutted at the pleading stage by well-pled facts supporting an inference of director interest or lack of independence.
- Allegations that a board majority is beholden to preferred holders with a liquidity-driven motive, combined with a transaction structure that pays preferred and management while leaving common with nothing, can be sufficient to state a loyalty claim and defeat dismissal.
- A loyalty claim premised on managerial manipulation must plead non-speculative harm to the corporation or stockholders and/or a material personal benefit to the fiduciaries tied to the challenged conduct.

## Conclusion

The court allowed the merger challenge to proceed because the complaint plausibly alleged that a preferred-influenced, non-independent board approved a deal that advantaged preferred holders and management at the expense of the common; it dismissed the separate revenue-manipulation theory for failure to plead harm or a material personal benefit.


In re Trados Inc. S’holder Litig., No. 1512-CC, 2009 WL 2225958 (Del. Ch. July 24, 2009)