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In re PLX: Delaware Court Provides Guidance on Potential Conflicts Involving Activist Directors

January 2019

In In re PLX Technology Inc. Stockholders Litigation, the Delaware Court of Chancery found that the directors of PLX Technology, Inc. (PLX), in approving the company’s sale to Avago Technologies (Avago), breached their duty of disclosure as well as their so-called Revlon duties to establish a process designed to seek the best transaction reasonably available. Interestingly, the breach associated with the sales process stemmed not from specific misconduct on the part of a majority of the directors but from the fact that the board’s approval was provided in the absence of a material fact that one of the directors, Eric Singer, a principal and designee of the activist hedge fund Potomac Capital Partners, neglected to disclose to his fellow directors. That predicate breach, together with Singer’s position with Potomac, led to the finding that Potomac aided and abetted the directors’ breach of fiduciary duties.

In spite of the foregoing, the Court held that Potomac was not liable to the plaintiffs for monetary damages. The Court observed that PLX’s sales process, albeit flawed, was sufficient to provide evidence of the value of PLX’s stock. In reaching its conclusions, the Court provided significant guidance around the types of issues that may result in potential conflicts of interest in the M&A context, particularly with respect to directors representing activist hedge funds.

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