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Directors who are mere “stooges” for a controlling shareholder who loots a company may face personal liability for their lassitude, even if they don’t benefit from the shareholder’s conduct, a Delaware judge has ruled. Vice Chancellor Leo E. Strine Jr. held in ATR-Kim Eng Financial Corp. v. Carlos Araneta, No. 489-N (New Castle Co., Del., Ch.), that two directors of Delaware-based PMHI Holdings Corp. violated their fiduciary duties by remaining passive while the company’s 90% shareholder transferred its assets to his family for no consideration. Strine was harsh in his assessment of the shareholder, Filipino businessman Carlos Araneta, citing his “shamelessness about telling lies so extreme as to make it impossible to address all of the numerous false statements and assertions he made both from his own lips and through theories he provided to counsel.” Araneta and ATR Chairman Ramon Arnaiz had been childhood friends whose parents played mahjong together several times a week. The two businessmen teamed up in 1999 to buy an insurance company and combine it with one of Araneta’s companies. ATR, a Philippines-listed company, paid $3.9 million for a 10% stake in the new entity, LBC Operating Cos. ‘This case is personal’ The two men had a falling out over another business deal, motivating Araneta to transfer LBC’s assets to his family. “This case is personal,” Strine wrote. One of LBC’s three directors, Liza Berenguer, is Araneta’s niece and the chief financial officer of his businesses worldwide, while another, Hugo Bonilla, headed his operations in the United States. Both admitted that they did nothing to stop Araneta, the third director, from reshuffling LBC’s assets into his deck. The judge held the three directors jointly and severally liable to ATR for the $3.9 million that the plaintiff had initially invested in LBC, as well as pre- and post-judgment interest. Strine also ordered Araneta to pay the plaintiffs’ attorney fees, a very unusual holding that reflected the judge’s displeasure with the defendant’s conduct of the litigation. Though Delaware courts almost never hold directors personally liable for a corporation’s behavior, Wilmington, Del., lawyer J. Travis Laster cautioned against reading too much into the case because of its “truly egregious” facts. Laster, a partner at Abrams & Laster, noted that LBC didn’t even have regular board meetings or monitoring systems, which greatly reduces the case’s implications for companies that adhere to such practices.

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