When the board of a Delaware corporation has established—and follows—specific policies and procedures for approval of related party agreements, the directors should be mindful that a related party agreement, if challenged, would nonetheless be subject to the court’s “entire fairness” framework of review.
In re EZCORP Inc. Consulting Agreement Derivative Litigation (Jan. 25, 2016) serves as a reminder that the court generally will review claims alleging fiduciary breach relating to agreements between a corporation and its controller under the “entire fairness” framework (rather than the more deferential business judgment rule). This will be the case even for agreements that relate to business transactions other than a squeeze-out merger and even when the agreements have been approved by independent and disinterested directors through a board-established process for the consideration of related party transactions. While not the subject of the decision, EZCORP also serves as a reminder that, in the context of initial public offerings and spin-offs, proper advance planning should significantly reduce or even eliminate any breach of fiduciary duty issues with respect to agreements between the newco (i.e., the corporation that will become public) and its controller.
