CDX Liquidating Trust v. Venrock Associates et al.

Summarized by Jonathan Brand , Transworld Systems, Inc.
14 years 11 months ago

Citation:

CDX Liquidating Trust v. Venrock Associates, No.10-1953 (7th Cir. March 29, 2011)

Tag(s):

7th Circuit

Ruling:

Reversed and Remanded with Directions. The Seventh Circuit held, among other items, that disclosure of a conflict of a director’s interest may “insulate [a transaction or] agreement from attack, but does not, per se, protect the director from a claim for breach of fiduciary duty.” With this in mind, Judge Posner provided that under Delaware law the burden of proof on the issue of causation (or if one prefers, of "proximate causation") was on the defendant directors rather than on the plaintiff. The circuit court found the lower court erred by ending the trial before the defendants presented their defenses. Second, there was enough evidence that the bursting of the dot-com bubble did not account for the entire loss to Cadant to make causation an issue requiring fact finding. Therefore, the case should have been submitted to the jury for resolution. Third, while outside lenders, which eventually became preferred shareholders, did not owe a duty of loyalty to Cadant, sufficient evidence existed in the transcript to create an issue of fact or the jury to consider whether the lenders aided and abetted Cadant's directors.

Procedural context:

Plaintiff appealed after the district court granted judgment as a matter of law to the defendants. The district court determined that there was insufficient evidence of proximate cause to allow a reasonable jury to render a verdict for the plaintiff, and that there was a likewise insufficient evidence of a breach of fiduciary duty.

Facts:

The plaintiff, CDX Liquidating Trust ("CDX"), is a trust that holds common stock of a bankrupt company formerly known as Cadant. CDX charged several former directors with breaches of their duty of loyalty to Cadent and two venture-capital groups (collectively, the "VCs") with aiding and abetting the disloyal directors. Cadant was created in 1998 to develop "cable modem termination systems" when enable high-speed internet access to home computers. While based in Illinois, Cadant was incorporated in Maryland and later reincorporated in Delaware. In April 2000, the board turned down a tentative offer for the purchase of Cadant's assets for $300 million. Later that year, the board proposed and the shareholders approved the reincorporation of Cadant in Delaware, effective January 1, 2001. The suit involves decisions by Cadant's board when Cadant was incorporated in Maryland and Delaware. In the fall of 2000, Cadant found itself in financial trouble. The board considered a propose from a group of Chicago investors and a joint proposal from defendants VCs of an $11 million bridge loan from the VCs. Cadant's board of directors during this time period had grown to seven. Four of the seven board members were employed by one of the VCs. The bridge loan was for 90 days, at an annual interest rate of 10 percent. After the first bridge loan, the VCs extended a second bridge loan for $9 million. The loan agreement on the second bridge loan provided that in the event that Cadant was liquidated its lenders would be entitled to twice the outstanding principal of the loan plus any accrued but unpaid interest on it. The directors of Cadant with no affiliation or connection to either of the VCs who voted for the loan were engineers without financial acumen. Because the disinterested directors did not seek their own independent financial adviser, they were at the mercy of the conflicted directors. Cadant defaulted on the second bridge loan and agreed to sell all of its assets to a firm called Arris Group in exchange for stock worth $55 million at the time the sale closed in January 2002. This amount was just enough to satisfy Cadant's creditors and preferred shareholders (which included the VCs). The sale was approved by Cadant's board, but also, as required by Delaware law and the company's articles of incorporation, by a simple majority both of Cadant's common and preferred shareholders voting together as a single class and of the preferred shareholders voting separately.

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