Delaware Court Of Chancery Finds Controlling Investor’s Cash-Accumulation Strategy In Advance Of Preferred Stock Redemption Payments Satisfied Entire Fairness
On May 4, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that a controlling investor’s efforts to accumulate cash in anticipation of its preferred stock redemptions were entirely fair. Frederick Hsu Living Trust v. ODN Holding Corp., No. 12108-VCL (Del. Ch. May 4, 2020). Plaintiff, a common stockholder of ODN Holding Corporation, alleged that the private equity firm that held a controlling interest—including a majority of the common stock and a series of preferred stock—along with the company’s directors and officers, breached their fiduciary duties by engaging in a cash accumulation strategy, rather than seeking to enhance the company’s long-term growth. Having previously sustained plaintiff’s claims at the pleadings stage, the Court held that defendants proved at trial that their conduct was entirely fair and entered judgment in favor of defendants.
Delaware Court Of Chancery Grants Motion To Dismiss Finding Demand Was Not Excused In Connection With Alleged Failure To Update Revenue Guidance
On April 28, 2020, Vice Chancellor Joseph R. Slights III granted a motion to dismiss a derivative action alleging claims of breach of fiduciary duty and improper trading brought by stockholders of GoPro, Inc. against certain of the company’s current and former directors and officers. In re GoPro, Inc. Stockholder Derivative Litigation, C.A. No. 018-0784-JRS (Del. Ch. April 28, 2020). Plaintiffs alleged that defendants failed to disclose that the company’s revenue guidance was unachievable in light of emerging problems with a product launch. Dismissing the claims, the Court held that the complaint did not plead with particularity that a majority of the board faced a substantial risk of liability, and therefore, rejected plaintiffs’ contention that pre-suit demand on the board to sue was excused as futile. Specifically, the Court found that the board presentations incorporated by reference into the complaint revealed that management regularly advised the board that the company was still on track to meet the revenue guidance. As the Court explained, the board was “under no obligation to disclose what it did not know or did not believe to be true.”
Delaware Court Of Chancery Holds That A Special Committee Must Be Constituted Ab Initio In Order To Cleanse A Transaction Involving A Conflicted Board Majority
On February 27, 2020, Vice Chancellor Sam Glasscock III denied a motion to dismiss breach of fiduciary duty claims brought by a former stockholder of Intersections, Inc. (the “Company”), challenging the take-private acquisition of the Company. Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020). The complaint alleged that the Company was sold at an unfairly depressed price and that insiders influenced the transaction to divert consideration to themselves. Moreover, plaintiff asserted that the transaction was subject to entire fairness review because at least half the directors were conflicted by virtue of having rolled over substantial portions of their equity into the merger. Although defendants did not contest that a majority of the board was conflicted, they argued that the claims should be dismissed under the business judgment rule because the deal was negotiated and approved by a special committee of unconflicted directors. The Court, however, held that “to effectively cleanse a transaction . . . the special committee must be constituted ab initio . . . prior to substantive economic negotiations.” The Court denied the motion to dismiss because it found that the complaint adequately pleaded the existence of substantive economic negotiations before the special committee was empowered.
Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Squeeze-Out Merger Because Special Committee Members Were Allegedly “Interested”
On February 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by former shareholders of AmTrust, Inc., challenging the take-private buyout of the company by its controlling stockholders and a private equity firm. In re AmTrust Financial Services, Inc. Stockholder Litigation
, C.A. No. 2018-0396-AGB (Del. Ch. Feb. 26, 2020). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp
., 88 A.3d 635 (Del. 2014) (“MFW
”)—the buyout group conditioned its offer on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Plaintiffs challenged the independence of three of four members of the special committee because the buyout allegedly was expected to extinguish their potential liability in a pre-existing derivative action. The Court held that the MFW
requirement of “independent” special committee approval “was intended to ensure not only that members of a special committee must be independent
in the sense of not being beholden to a controlling stockholder, but also that the committee members must have no disabling personal interest
in the transaction at issue.” Therefore, the Court found the transaction subject to entire fairness rather than business judgment review and denied the motion to dismiss as to the controlling stockholders and their affiliated directors.
Delaware Supreme Court Finds Dissident Board Nominees Ineligible Because Of Noncompliance With Bylaws Deadline To Respond To Supplemental Information Request
On January 13, 2020, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware held that defendants—two investment trusts—were permitted to disqualify the board nominees of a plaintiff shareholder for missing a deadline in the trusts’ bylaws to respond to board requests for additional information. Blackrock Credit Allocation Income Trust v. Saba Capital Master Fund Ltd., C.A. No. 2019-0416-MTZ (Del. Jan. 13, 2020). The Supreme Court’s decision reversed in part a ruling by Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery that plaintiff’s nominees were improperly excluded. Even though the requests for information may have exceeded the contemplated scope and plaintiff may have misread the bylaws and believed the deadline was inapplicable, the Delaware Supreme Court held that a rule that would excuse deadline non-compliance could “potentially frustrate the purpose of advance notice bylaws” intended to facilitate orderly meetings and election contests.
Delaware Supreme Court Affirms Dismissal Of Derivative Suit Alleging Board Approved Transaction Involving Unnecessary Litigation Exposure
On January 13, 2020, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware affirmed the dismissal by Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery of a stockholder derivative suit for lack of pre-suit demand. McElrath v. Kalanick, et al.
, C.A. No. 2017-0888 (Del. Jan. 13, 2020). As discussed in our post
on the prior decision, plaintiff alleged that the directors of a technology company had breached fiduciary duties in connection with the approval of an acquisition, in particular as related to purported intellectual property infringement by the target. Noting that the company had an exculpatory charter provision, the Delaware Supreme Court explained that the directors were insulated from due care violations and could only be liable for bad faith. Referring to allegations that the board heard a presentation that summarized the transaction, reviewed the risk of litigation, generally discussed due diligence and asked questions, the Court found that the complaint raised an inference of a “functioning board” and did not reasonably suggest the board intentionally ignored relevant risks. Thus, the Court affirmed the dismissal because a majority of the board was disinterested for purposes of pre-suit demand as it “had no real threat of personal liability.”
Delaware Court Of Chancery Dismisses Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm. In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019). The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm. Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available. Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty. The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
Delaware Court Of Chancery Orders Acquiror To Consummate Merger Finding That Misrepresentations Did Not Amount To A Material Adverse Effect
On December 18, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled that defendant Boston Scientific Corporation was not entitled to terminate its merger agreement with plaintiff Channel Medsystems, Inc. Channel Medsystems, Inc. v. Bos. Sci. Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019). After the merger agreement was signed, plaintiff—a pre-approval stage medical device company with one product—discovered that its vice president of quality had falsified various documents as part of a multiyear scheme in which he stole $2.6 million from the company. According to the Court, upon discovery, plaintiff was “transparent” with the FDA and with defendant regarding the fraud finding and “acted with dispatch to address it.” Defendant nevertheless notified plaintiff that it was terminating the merger based on provisions in the agreement that permitted termination for misrepresentations that would be expected to result in a “Material Adverse Effect.” Following trial, the Court found that—notwithstanding plaintiff’s breaches of certain representations, including with respect to the accuracy of its FDA submissions—there was no reasonable expectation of a Material Adverse Effect. The Court emphasized that plaintiff did obtain FDA approval for its medical device, which demonstrated that it was “safe and effective” and undercut defendant’s claim that defendant would need to “remediate and retest” the device at great cost before marketing. The Court thus granted specific performance and directed defendant to close the merger.
District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger.
Delaware Court Of Chancery Rejects Demand To Inspect Books And Records Under Section 220 To Aid In Proxy Contest
On November 14, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery rejected a demand by stockholders of Occidental Petroleum Corporation under Section 220, 8 Del. C. § 220, for documents and information relating to the corporation’s acquisition of Anadarko Petroleum and related transactions. High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019). According to the Court, plaintiffs considered the transactions “bad deals” and acknowledged that their primary purpose in seeking the documents was to aid them in their proxy contest to replace certain directors. In a post-trial decision in favor of the corporation, the Court explained that “an imminent proxy contest is not enough to earn access” to broad sets of documents relating to “substantive business decisions.”
Delaware Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner. Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019). Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.” Defendants argued that their approval was protected under three “safe harbors” in the agreement: (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner. Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment. The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent. Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point. Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.
Delaware Court Of Chancery Dismisses Caremark Claims Against Directors After Company Publicly Disclosed Misconduct
On October 31, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder derivative suit against the directors of LendingClub Corporation for failure to plead demand futility. In re LendingClub Derivative Litigation, C.A. No. 12984-VCM (Del. Ch. Oct. 31, 2019). Plaintiffs asserted breach of fiduciary duty claims against the directors after the company disclosed that it had self-reported certain alleged misconduct by the CEO and others to the SEC, as well as the problems that prompted the company’s internal investigation, the results of that investigation, and the company’s remediation efforts. Plaintiffs alleged that the board did not adequately implement a system of controls or monitor company operations and “thus disabled itself from being informed of problems requiring its attention.” Determining that the complaint did not allege facts demonstrating bad faith—as is necessary to prevail on a Caremark claim for violation of oversight duties—and, therefore, that a majority of the directors did not face a substantial risk of liability, the Court concluded that pre-suit demand was not excused.
Second Circuit Affirms Denial Of Certain Claims For Investment Banking Fees
On October 11, 2019, the United States Court of Appeals for the Second Circuit affirmed a decision by District Judge Jesse Furman denying in part breach of contract claims for advisory fees brought by investment bank Stone Key LLC and its affiliate against its former client, Monster Worldwide, Inc. Stone Key Partners LLC v. Monster Worldwide Inc.
, No. 18-2804 (2d Cir. October 11, 2019). As discussed in our prior post
, the trial court had denied claims for fees related to a transaction that it found post-dated termination of the advisor’s contract and a claim for an earlier transaction that it found did not qualify as a “partial sale” for which the advisor was entitled to a fee. Significantly, as we discussed, the trial court also based its denial of the claim related to the earlier transaction on its finding that the partial sale fee provision in the engagement letter amounted to an unenforceable agreement to agree. By summary order, the Second Circuit affirmed largely for the reasons articulated by the lower court. However, because the Second Circuit agreed that the earlier transaction did not constitute a “partial sale” under the contract and affirmed the lower court’s denial of the claim on that basis, the Second Circuit “decline[d] to consider whether the compensation provision itself was enforceable.” Summary orders do not have binding precedential effect.
Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration. JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019). The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale. The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
Delaware Court Of Chancery Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC. In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019). Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction. The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal. Nevertheless, based on its “holistic” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
Delaware Court Of Chancery Denies Motion To Dismiss Merger Agreement Breach Claims Even Though Defendant Paid The Contractual Termination Fee
On September 9, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied Essendant Inc.’s motion to dismiss an action for breach of a merger agreement brought by Genuine Parts Company (“GPC”). Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019). The claims arose after defendant terminated the two office supply companies’ merger agreement in favor of an acquisition of defendant by a private equity firm. The Court held that the complaint adequately pled that defendant had materially breached the merger agreement’s non-solicitation provision and the agreement did not unambiguously limit plaintiff’s possible recovery to the termination fee.
Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement. Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019). Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time. Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—had not been implemented. Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty. But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
On August 28, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to stay filed by the special litigation committee formed by defendant Blue Bell Creameries, Inc. (“BBGP”) in connection with a derivative action by limited partners of Blue Bell Creameries, LLP (“Blue Bell” or the “Partnership”) against BBGP, which is the sole general partner of Blue Bell, and others. Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019). The Court previously denied a motion to dismiss the derivative action because it determined that BBGP had “a disabling interest for pre-suit demand purposes.” BBGP then appointed two new directors to its board, who established a special litigation committee consisting of three non-director members empowered to determine the interests of the Partnership in the derivative litigation. The special litigation committee promptly moved to stay the derivative action to permit its investigation and make a determination. But the Court denied the motion. It explained that “[a]ny conflict that disables the principal disables the agent” and “[b]ecause BBGP, as principal, is not fit to decide how to manage the Partnership’s claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled.”
Delaware Court Of Chancery Finds Fair Value Equal To Deal Price Of Publicly Traded Company In Appraisal Action
On August 12, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the fair value of Columbia Pipeline Group, Inc. (“Columbia”) was equal to the deal price in an appraisal action arising from Columbia’s acquisition by TransCanada Corporation (“TransCanada”). In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. No. 12736-VCL (Del. Ch. Aug. 12, 2019). Relying on the Delaware Supreme Court’s recent decisions in DFC, Dell, and Aruba, the Court found the deal price of $25.50 per share to be Columbia’s fair value as of the closing date.
Delaware Supreme Court Clarifies That Section 220 Books And Records Demands Are Not Subject To A Presumption Of Confidentiality
On August 7, 2019, in a decision authored by Justice Gary F. Traynor, the Delaware Supreme Court concluded that books and records produced to a stockholder under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. Tiger v. Boast Apparel, Inc., C.A. No. 23, 2019 (Del. Aug. 7, 2019). In this case, the Delaware Court of Chancery referenced such a presumption when it issued an order requiring the stockholder to keep such records confidential indefinitely. The Delaware Supreme Court affirmed the indefinite confidentiality order as “within the range of reasonableness … given the facts and circumstances of this case.” But the Court expressly clarified that there is no such presumption of confidentiality and the Court of Chancery must instead “assess and compare benefits and harms when determining the initial degree and duration of confidentiality” in connection with a Section 220 demand.
Delaware Court Of Chancery Dismisses Caremark Claim, Finding Consumer Class Action Settlement Was Not A “Red Flag” For Consumer Protection Law Violations
On July 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a stockholder derivative action asserting breaches of fiduciary duty claims against the directors of J.C. Penney Company, Inc. for failure to make a pre-suit demand on the board. Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019). After the Los Angeles City Attorney initiated litigation against the company asserting violations of California’s consumer protection laws, plaintiff filed this derivative action alleging that the company’s directors consciously disregarded their responsibility to oversee the company’s compliance with laws governing price-comparison advertising. Repeating past statements of the Court about the difficulty of proving director liability for a failure to monitor corporate affairs—known as a Caremark claim—Chancellor Bouchard determined that the complaint failed to plead facts demonstrating that the directors would face a substantial likelihood of personal liability. In particular, the Court found that a settlement of a consumer class action suit without any admission of liability was not a “red flag” with respect to any ongoing violations of law. Therefore, the Court concluded that pre-suit demand on the board was not excused.
Delaware Court Of Chancery Dismisses Stockholder Challenge To Merger For Failure To Rebut Business Judgment Rule
On July 25, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder suit challenging the $18 billion merger of equals between Towers Watson & Co. and Willis Group Holdings plc, finding that plaintiffs failed to plead facts sufficient to rebut the presumption of the business judgment rule. In Re Towers Watson & Co. Stockholders Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019). Asserting claims for breaches of fiduciary duty, plaintiffs, who had been Towers Watson stockholders, argued that the company’s CEO did not properly disclose to the board a compensation proposal he had received from Willis’s second largest stockholder while the CEO was negotiating the merger. But the Court found that the compensation proposal was ultimately immaterial and that the otherwise independent board members were well aware that the merger would likely lead to increased compensation for the CEO. Noting that because the transaction was primarily a stock-for-stock merger, the Court explained that there was no dispute that the “business judgment rule presumptively applies,” and concluded that plaintiffs had failed to rebut that presumption.
Delaware Court Of Chancery Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
On July 15, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed an aiding and abetting claim asserted against a private equity buyer and its principals in a stockholder class action involving breach of fiduciary duty claims against the former CEO of a technology company in connection with its take-private sale to the private equity buyer. In re Xura Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. July 12, 2019). As we discussed in a prior post
, Vice Chancellor Slights declined to dismiss a different stockholder’s breach of fiduciary duty claims against the former CEO based on his allegedly self-interested participation in the merger, but the Court dismissed aiding and abetting claims asserted against the buyer and its principals. In re Xura, Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).
Ten days after this opinion was issued, a different stockholder filed a “nearly identical” complaint—this time asserting class action claims—
raising “the same theories of aiding and abetting” that the Court had dismissed just days earlier. In a separate summary order, the Court denied the former CEO’s motion to dismiss this new complaint. In this decision, the Court dismissed the aiding and abetting claims for the same reason it did so in the prior suit—the complaint failed to include “well-pled allegations that [the buyer] ‘knowingly participated’ in the … alleged breaches of fiduciary duty.”
Delaware Court Of Chancery Approves $3 Million In Attorneys’ Fees For Successful Challenge To Forum-Selection Charter Provisions
On July 8, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery awarded $3 million to plaintiffs’ lawyers in Sciabacucchi v. Salzberg
, C.A. No. 2017-0931-JTL (Del. Ch. July 8, 2019). As we discussed in a prior post
, Vice Chancellor Laster had previously granted summary judgment to a shareholder challenging the validity of forum-selection charter provisions adopted by three corporations requiring shareholders to litigate claims under the Securities Act of 1933 in federal courts. Sciabacucchi v. Salzberg
, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 18, 2018). Even though the relief awarded—the invalidation of the provisions—was non-monetary and non-quantifiable, plaintiff’s counsel argued that $3 million in aggregate fees was warranted because of the significance of the result achieved. The Court agreed.
Reversing A Dismissal, The Delaware Supreme Court Finds The Absence Of Board-Level Monitoring Of "Central Compliance Risks" Sufficient To State A Caremark Claim
On June 18, 2019, in a decision authored by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court en banc reversed the dismissal of a stockholder derivative suit against the directors and officers of Blue Bell Creameries USA, Inc. (the “Company”). Marchand v. Barnhill, No. 533, 2018, (Del. June 18, 2019). After a listeria outbreak at the ice cream manufacturer, the Company purportedly faced a liquidity crisis and accepted a dilutive private equity investment. Plaintiff alleged that the CEO and vice president of operations breached their fiduciary duties of care and loyalty by disregarding contamination risks and that the directors breached their duty of loyalty under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). As to the claims against the executives, the Court held that the complaint adequately pleaded demand futility because it alleged facts regarding the personal relationship of an additional director to the CEO sufficient to raise a reasonable doubt as to whether the director could impartially consider a demand. Reversing the dismissal of the Caremark claim, the Court found that “the complaint supports an inference that no system of board-level compliance monitoring and reporting existed at [the company].”
Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claims Related To Repricing Of Stock Options
On June 13, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery largely denied a motion to dismiss a derivative action for breach of fiduciary duty and unjust enrichment against directors and officers of a biosciences company (the “Company”) in connection with the alleged repricing of stock options shortly before the company announced the issuance of a “key” patent to its subsidiary. Howland v. Kumar, C.A. No. 2018-0804-KSJM (Del. Ch. June 13, 2019). Plaintiff, a stockholder in the Company, alleged that the directors and officers were aware of the patent issuance yet delayed the public announcement until after the board’s compensation committee approved the reduction in the strike price of more than 2 million stock options primarily held by defendants. The Court held that pre-suit demand on the board was excused, because a majority of the board was “interested by virtue of having received the repriced options.” Applying an “entire fairness” standard of review, the Court found that it was reasonably conceivable from the pleadings that the process and price were unfair and, therefore, denied the motion to dismiss.
Delaware Court Of Chancery Grants Books And Records Request Arising From Caremark Claims Related To Facebook User Privacy
On May 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder demand to inspect Facebook’s books and records in connection with their Caremark claims arising from alleged data privacy breaches. In re Facebook, Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 30, 2019). The Court concluded that, as a matter of law, it would be improper to assess the merits of plaintiffs’ Caremark claims in the context of a books-and-records demand and ruled that plaintiffs met the minimum burden of proof under Section 220 of the Delaware General Corporation Law (“Section 220”), noting that this standard was more easily met where, as here, the underlying claims allege the failure to prevent corporate violations of law, rather than challenging routine business operations.
Delaware Court Of Chancery Holds Merger Agreement Preserved Sellers’ Ability To Assert Privilege Over Pre-Merger Attorney-Client Communications, Notwithstanding The Transfer Of Those Communications To The Buyer
On May 29, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery ruled that plaintiff Shareholder Representative Services LLC (“Shareholder Representative”) as the designated representative of Radixx Solutions International, Inc.’s (“Radixx”) selling stockholders, retained the ability to assert privilege over Radixx’s pre-merger attorney-client communications in a post-closing litigation against the acquiring company, RSI Holdco, LLC (“Holdco”). Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019). Specifically, the Court held that by its plain terms the merger agreement between the parties preserved the privilege, even though the communications were physically transferred to the buyer at closing. Therefore, the Court granted plaintiff’s request for a protective order and barred Holdco from using or relying on any of Radixx’s pre-merger attorney-client communications.
Delaware Supreme Court Affirms Judgment In Favor Of Defendant On The Basis Of Plaintiffs’ Failure To Prove Damages
On May 16, 2019, the Supreme Court of Delaware affirmed a judgment by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery in favor of Potomac Capital Partners II, LP on claims by shareholder plaintiffs that the activist investor aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. In re PLX Technology Inc. S’holders Litig.
, C.A. No. 571, 2018 (Del. May 16, 2019). As discussed in our post regarding that decision
, the Court of Chancery found in a post-trial opinion that defendant had aided and abetted breaches of fiduciary duty but also concluded that plaintiffs failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged. On appeal, plaintiffs contended that the Court of Chancery erred in deciding the damages issue by importing principles from appraisal jurisprudence to give deference to the deal price. In a summary order, the Delaware Supreme Court affirmed the Court of Chancery’s “decision that the plaintiff-appellants did not prove that they suffered damages.” The Court expressly declined to reach defendant’s arguments on cross-appeal that it had not aided and abetted any breaches of fiduciary duty because its affirmance on the damages issue “suffices to affirm the judgment.”
Delaware Chancery Court Finds Limited Liability Companies Can Be Liable For Advancement To Members, Even Under Delaware Corporate Law
On April 30, 2019, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery held that plaintiff Freeman Family LLC (“Freeman”), a member of Park Avenue Landing LLC (the “Company”), is entitled to advancement pursuant to Delaware corporate case law. Freeman Family LLC v. Park Avenue Landing LLC, No. C.A. 2018-0683 (Del. Ch. April 30, 2019). In January 2017, plaintiff was sued by the Company’s managing member in the United States District Court for the District of New Jersey (the “New Jersey action”). Thereafter, plaintiff argued the Company must provide advancement of legal fees arising from the New Jersey action because its operating agreement provides that all members shall receive advancement if they are made party to an action as a result of their status as a member. In granting plaintiff’s motion for judgment on the pleadings, the Court first found that Delaware corporate case law applied “by analogy” because the advancement provision in the Company’s operating agreement incorporated language from the Delaware General Corporation Law, 8 Del. C. § 145. However, the Court found that plaintiff was nevertheless entitled to advancement because a “causal relationship” existed between the New Jersey action and plaintiff’s official capacity as manager.
Delaware Supreme Court Finds Deal Price Minus Synergies As Fair Value In Aruba Networks Appraisal Appeal, Rather Than Average Preannouncement Stock Price
On April 16, 2019, the Delaware Supreme Court, in a per curiam
decision, held that Aruba Networks, Inc.’s (“Aruba”) fair value in an appraisal action was $19.10 per share, reversing the Court of Chancery’s valuation of $17.13 per share. Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.
, C.A. No. 11448-VCL (Del. Apr. 16, 2019). As we discussed in a prior post
, the Court of Chancery ruled that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba in connection with its acquisition by Hewlett-Packard Company (“HP”). In his opinion, Vice Chancellor Laster concluded that he was compelled by recent decisions of the Delaware Supreme Court to disregard other metrics, but expressed reservations about doing so. Moreover, while the Court of Chancery viewed the deal price minus synergies as compelling evidence of fair value, it indicated that it could not estimate agency cost reductions to exclude from that calculation.
Delaware Supreme Court Revives Stockholder Claims, Finding MFW Protections Were Not In Place Prior To Economic Negotiations
On April 5, 2019, the Delaware Supreme Court reversed in part and affirmed in part a decision of the Delaware Court of Chancery that had dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”). Olenik v. Lodzinski et al.
, No. 392, 2018 (Del. April 5, 2019). Plaintiffs claimed that Earthstone’s directors, officers, and Earthstone’s alleged controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders. As discussed in our prior post
on the case, the Court of Chancery dismissed the case after concluding that the transaction was properly structured under Kahn v. M&F Worldwide
, 88 A.2d 635 (Del. 2014) (“MFW
”), and the business judgment rule applied. On appeal, the Delaware Supreme Court reversed, finding that Earthstone initiated economic negotiations before the requisite MFW
protections were put in place. Accordingly, the Court reinstated the breach of fiduciary claim as to the terms of the transaction; the Court sustained dismissal of the disclosure-based claim.
Delaware Court Of Chancery Applies Corwin To Dismiss Breach Of Fiduciary Duty Claims, Finding Allegations Of A Controlling Stockholder Conflict Inadequately Pleaded
On March 20, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed class action claims asserted by former shareholders of NCI, Inc. against its former directors for breach of fiduciary duty in connection with the company’s acquisition by affiliates of H.I.G. Capital, LLC in a tender offer followed by a merger.
English v. Narang, C.A. No. 2018-0221-AGB (Del. Ch. Mar. 20, 2019). Plaintiffs alleged that the company’s founder, who held approximately 34% of the shares and controlled about 83.5% of the voting power, orchestrated a sale of the company at a discounted price to address a personal need for liquidity prompted by his retirement as the company’s CEO at age 73. But the Court found that the complaint “contained no concrete facts from which it reasonably can be inferred that [the founder] had an exigent or immediate need for liquidity.” Therefore, the Court applied Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and dismissed the claims because a majority of NCI’s disinterested stockholders tendered their shares in an uncoerced and fully-informed tender offer.
Delaware Court Of Chancery Dismisses Derivative Suit Alleging Tech Company Exposed Itself To Unnecessary Litigation Risk With Acquisition
On April 1, 2019, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of demand a stockholder derivative suit against directors of Uber Technologies, Inc. (“Uber”) that asserted breach of fiduciary duty claims in connection with Uber’s acquisition of self-driving car startup Ottomotto, LLC (“Otto”). McElrath v. Kalanick, et al., C.A. No. 2017-0888-SG (Del. Ch. April 1, 2019). After Uber acquired Otto, which was founded by a former Google employee, Google sued for infringement and Uber paid $245 million to resolve the claims. Plaintiff in McElrath claimed that the Uber board violated its duties by failing to adequately investigate the Otto transaction.
Delaware Court Of Chancery Enjoins Stockholder Vote For Inadequate Disclosures
On March 11, 2019, Vice Chancellor Kathaleen S. McCormick enjoined a stockholder vote to approve the proposed combination of Medley Management, Inc. (“Medley Management”) with two affiliates it advised, Medley Capital Corporation (“Medley Capital”) and Sierra Income Corporation (“Sierra”). Medley Capital stockholders FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”) sued to suspend the vote until competing offers were solicited and additional proxy disclosures were made. Plaintiffs alleged that the merger was not entirely fair because the two controlling stockholders of Medley Management controlled the deal process, and the process and the terms were unfair to Medley Capital, and further claimed that the proxy made inadequate disclosures; plaintiffs also asserted an aiding and abetting claim against Sierra. After expedited litigation and trial, the Court enjoined the vote, ruling that corrective disclosures were necessary but that a go-shop period could not be required because Sierra’s rights under the transaction agreements would be negatively impacted.
Delaware Court Of Chancery Finds Implicit Consent To Jurisdiction By A Foreign Controlling Stockholder In Connection With The Adoption Of A Delaware Forum-Selection Bylaw At The Time Of An Interested Transaction
On March 15, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery declined to dismiss a derivative suit brought by minority stockholders of Pilgrim’s Pride Corporation (the “Company”) against the Company’s controlling stockholder, JBS S.A. (“Parent”), and five of the Company’s directors affiliated with Parent. In re Pilgrim’s Pride Corp. Deriv. Litig., No. C.A. 2018-0058 (Del. Ch. Mar. 15, 2019). Plaintiffs challenged the Company’s $1.3 billion acquisition of one of Parent’s other subsidiaries in a deal that Parent solicited, alleging that the Company did not engage in “true arm’s-length bargaining” and that it paid a price unsupported by the Company’s internal analyses. Parent, an entity organized under Brazilian law, moved to dismiss for lack of personal jurisdiction. The Court held that Parent “consented implicitly” to personal jurisdiction in Delaware “when its representatives on the Board participated in the vote to adopt [a Delaware] Forum-Selection Bylaw.” The Court also found allegations of participation in the deal sufficient at the pleading stage to preclude dismissal of the claims against each of the Parent-affiliated directors, even though the board had delegated exclusive negotiation and approval authority to a special committee of independent directors.
Delaware Court Of Chancery Holds Merger Termination Valid After Plaintiffs “Forgot” To Provide A Notice To Extend, But Reserves Decision On Reverse Termination Fee
On March 14, 2019, after a two-day trial, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery rejected requests by plaintiff Vintage Capital Management, LLC and its affiliates for a declaration that defendant Rent-A-Center, Inc.’s termination of the parties’ merger was ineffective and an order that the parties must proceed with the deal. Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). Pursuant to the merger agreement, both parties had a right to provide a notice of extension by the contractual “End Date.” If neither party elected to extend, then either could terminate the agreement thereafter. Plaintiffs argued that both parties had been working toward closing the deal and had expressly recognized that the closing could not occur until after the End Date. On this basis plaintiffs contended that the contractual notice of extension had been effectively provided or waived. But the Court held that defendant’s termination of the merger agreement after plaintiffs apparently “forgot” to provide a notice of extension by the End Date was valid. However, the Court reserved judgment on defendant’s counterclaim for a reverse termination fee pending supplemental briefing, noting that it was “dubious whether the parties meant for a reverse breakup fee to apply in this situation.”
Delaware Court Of Chancery Finds A Circumstantial Connection To Negative Corporate Developments Insufficient To Trigger Inspection Rights Under Section 220
On February 12, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a books and records demand of a mattress company’s (the “Company”) stockholder in connection with the termination of the Company’s contract with its largest customer and related litigation. Hoeller v. Tempur Sealy Int’l Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019). Plaintiff sought the records pursuant to Delaware General Corporation Law Section 220, 8 Del. C. § 220, purportedly to investigate breaches of fiduciary duty by the board. Attempting to articulate his justification, plaintiff relied on what the Court referred to as a “where there’s smoke there’s fire syllogism” in plaintiff’s contention that such a significant customer does not “just leave” in the absence of board culpability. Rejecting the request, the Court held that a “smoke then fire circumstantial connection” does not provide the “credible basis” to suspect wrongdoing that is required to entitle a stockholder to inspect a corporation’s books and records.
Delaware Supreme Court Affirms Dismissal Of Misappropriation Claims Against Private Equity Investor That Invested In A Competitor
On February 7, 2019, the Delaware Supreme Court issued an order affirming the dismissal of misappropriation claims by Alarm.com Holdings, Inc. against ABS Capital Partners Inc. (and its affiliates), a private equity firm that had a controlling interest in plaintiff and whose partners served on plaintiff’s board, with one as chairman. Alarm.com Holdings, Inc. v. ABS Capital Partners Inc., No. 360, 2018 (Del. Feb. 7, 2019). After its subsequent initial public offering, plaintiff alleged that defendant misappropriated its confidential information by investing in a competitor and asserted claims for violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) and common law misappropriation. The Delaware Court of Chancery found that multiple agreements between defendant and plaintiff made it clear that defendant could invest in competitors and this fact was also evident in plaintiff’s charter of corporation, which included a provision under Delaware General Corporation Law (“DGCL”) Section 122(17) to exempt stockholders and certain directors from any duty not to pursue corporate opportunities that otherwise might arguably belong to plaintiff. In addition, in the complaint, plaintiff “relies only on [defendant’s] investment in [a competitor],” which was made approximately a year after defendant’s representative left the board, and does not allege specific facts demonstrating the misuse of plaintiff’s confidential information. Therefore, the Court of Chancery held that the facts “do not support a reasonably conceivable inference of misappropriation.” In a summary order, the Delaware Supreme Court affirmed on the same basis.
Delaware Supreme Court Grants Stockholder’s Section 220 Demand As To Certain Email, And Grants Requested Exceptions To Jurisdictional Use Restriction
On January 29, 2019, in a decision authored by Chief Justice Leo E. Strine Jr., the Supreme Court of Delaware unanimously granted a stockholder petitioner’s demand under Delaware General Corporation Law Section 220, 8 Del. C. § 220, to inspect the books and records of respondent Palantir Technologies Inc. for the purpose of investigating potential mismanagement and breaches of fiduciary duty. KT4 Partners LLC v. Palantir Techs. Inc., C.A. No. 281-2018 (Del. Jan. 29, 2019). Previously, the Delaware Court of Chancery had issued a post-trial opinion partially granting petitioner’s demand for books and records, but denying access to email and ruling that information secured in the action could not be used in litigation outside of the Delaware Court of Chancery. Reversing in part on appeal, the Supreme Court held that respondent—which allegedly conducted board-level business electronically and did not maintain traditional board records—was required to produce certain email and granted petitioner’s request for certain exceptions to the jurisdictional use restriction.
Delaware Court of Chancery Grants Section 220 Demand By Director And Former CEO For Documents Related To His Ouster From The Company
On January 15, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a former director’s petition under 8 Del. C. § 220, demanding that Papa John’s International Inc. (the “Company”) hand over various documents, including text messages and personal emails among board members, pertaining to plaintiff’s removal as a director and ouster as CEO of the Company. Schnatter v. Papa John’s Int’l Inc., C.A. No. 2018-0542 (Del. Ch. Jan. 15, 2019). Following allegedly racially tinged commentary on an earning’s call, plaintiff was asked to step down as CEO and later resigned as chairman of the board and was terminated as spokesman. In granting the 220 demand, the Court rejected the Company’s arguments that the demand was personally motivated and was not reasonably related to plaintiff’s position as a director of the Company.
Delaware Court Of Chancery Finds That Equitable Defenses To Board Composition Can Be Litigated In A Section 225 Action And Rules Actions By Majority Stockholder Written Consent Effective Even Without Notice To Minority Stockholders
On December 21, 2018, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied plaintiff stockholder’s motion for summary judgment in an action to determine the board composition of SPAR Group, Inc. (“SGRP”) under 8 Del. C. § 255. Brown v. Kellar, et al., C.A. No. 2018-0687-MTZ (Del. Ch. Dec. 21, 2018). Plaintiff claimed that written consents delivered to the SGRP board by plaintiff and a fellow majority stockholder removed and replaced an incumbent director. The defendant directors asserted that the consents were ineffective for two reasons: (i) the majority stockholders were engaged in an inequitable scheme to divert corporate opportunities and entrench themselves as directors, and (ii) the company had not given notice of the written consents to minority stockholders. The Court rejected plaintiff’s assertion that Delaware law prohibited the Court from considering the alleged inequitable conduct because it fell outside the proper scope of a § 225 action. The Court also found, however, that the consents were effective upon delivery (unless inequitable conduct precluded replacement of the director) and ordered that trial proceed with respect to the equitable defenses raised by defendants.
Delaware Court Of Chancery Rejects Forum-Selection Charter Provision For Federal Securities Law Claims
On December 19, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted summary judgment to a shareholder challenging the validity of forum-selection charter provisions requiring shareholders to litigate claims under the Securities Act of 1933 (the “Securities Act”) in federal courts. Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 18, 2018). The case involved three corporations that adopted federal forum-selection provisions for Securities Act claims in their respective certificates of incorporation prior to their initial public offerings. Plaintiff had purchased shares of common stock in the initial public offerings (or shortly thereafter), and therefore, according to the Court, “could sue under Section 11 of the [Securities] Act to address any material misstatements or omissions in the registration statements.” Without actually asserting claims for violations of the Securities Act, however, plaintiff challenged the forum-selection provisions in a declaratory judgment suit. Reasoning that “[t]he constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law,” the Court held that the federal forum-selection provisions are “ineffective and invalid.”
Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Contract Claim For Failure To Use “Commercially Reasonable Efforts” To Obtain Regulatory Approval For Pharmaceuticals
On December 28, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss a breach of contract claim brought by former stockholders of Ception Therapeutics, Inc. (“Ception”) against pharmaceutical company Cephalon, Inc. (“Cephalon”), which acquired Ception, alleging violations of an earn-out provision in their merger agreement. Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018). Ception claimed that Cephalon failed to use “commercially reasonable efforts,” as defined in the merger agreement, to obtain FDA approval for an antibody as treatment for a specific medical condition. The Court found that because the agreement defined the standard for “commercially reasonable efforts” objectively, with reference to the effort that would have been expended by other companies similarly situated, the question of what constituted “commercially reasonable efforts” could not be decided on the pleadings. The Court also dismissed an implied covenant claim against Cephalon and tortious interference claims against Teva Pharmaceutical Industries Ltd. and its affiliates (together, “Teva”), which acquired Cephalon after the Cephalon-Ception merger.
Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Delaware Court Of Chancery Dismisses Demand-Refused Derivative Litigation, Notwithstanding Allegations Of Board Misrepresentations In Advance Of Demand
On November 14, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a motion to dismiss a stockholder derivative suit asserting breach of fiduciary duty claims against certain directors of Richardson Electronics (the “Company”). Busch v. Richardson Electronics, Ltd., C.A. No. 2017-0868-AGB (Del. Ch. Nov. 14, 2018). The claims were based on allegations that the board improperly refused plaintiff’s demand to take action to unwind certain allegedly improper related-party transactions. Plaintiff also asserted he was misled by the board about its involvement in the underlying transactions before he issued the litigation demand. Therefore, according to plaintiff, the motion to dismiss should have been evaluated under the test applicable when demand is excused, as articulated in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), which does not entail the same broad deference to a board’s decision whether to bring claims as the standard typically applicable in demand-refused cases under Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990). The Court rejected the argument that the Zapata standard applied but concluded that under either test plaintiff’s claims were subject to dismissal.
Delaware Supreme Court Affirms Landmark Decision That Found MAE Justified Termination Of Deal
On December 7, 2018, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s landmark ruling that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG
, C.A. No. 2018–0300–JTL (Del. Dec. 7, 2018). As discussed in our post
on the Court of Chancery’s decision, Akorn sued for specific performance after Fresenius walked away from the deal citing the discovery of various regulatory compliance problems, which Fresenius asserted amounted to a material adverse effect (“MAE”). The Court of Chancery concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred and termination of the deal was justified. Concluding that the factual record adequately supported the determination that Akorn’s breach of its regulatory representations and warranties gave rise to an MAE and that Akorn had suffered a general MAE, the Delaware Supreme Court affirmed the dismissal of Akorn’s claims.
Delaware Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
On November 20, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss a putative class action asserting claims for breach of fiduciary duty brought by former stockholders of Tangoe, Inc. (the “Company”) against former members of its board of directors in connection with the take-private acquisition of the Company by a private equity buyer group in June 2017. In Re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del Ch. Nov. 20, 2018). Plaintiffs alleged that defendants recommended an ill-advised and self-interested sale while a restatement of audited financials was pending and following the NASDAQ delisting of the Company. Defendants contended that they were entitled to business judgment rule deference under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015)—because a majority of stockholders tendered their shares—and that dismissal was also required because of an exculpatory charter provision pursuant to 8 Del. C. § 102(b)(7). But the Court concluded that the alleged failures to provide adequate company financial information and to disclose the status of the restatement efforts precluded dismissal under Corwin. The Court also found that plaintiffs adequately pled a non-exculpated claim for breach of the duty of loyalty, given the timing and structure of certain director compensation adjustments, which allegedly incentivized a change in control and supported an inference that defendants acted out of material self-interest.
New York Appellate Court Reverses Dismissal Of Derivative Claims Involving U.K. Company
On November 14, 2018, the New York State Appellate Division Second Judicial Department reversed the dismissal of a shareholder derivative suit against directors and officers of a U.K. company and certain of its affiliates asserting claims for breaches of fiduciary duties in connection with the companies’ conduct underlying penalties and settlement agreements related to alleged sanctions violations. Michael Mason-Mahon v. Douglas J. Flint, 602052/14 (N.Y. App. Div. Nov. 14, 2018).
Delaware Court Of Chancery Holds Alleged Breaches Of Representations Do Not Excuse Buyers’ Noncompliance With Post-Closing Obligations Where Buyers Seek To Enforce Claims For Indemnification
On October 29, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered final judgment on counterclaims seeking to enforce covenants in a stock purchase agreement requiring the buyers to remit certain tax refunds and insurance proceeds. Post Holdings, Inc. and Michael Foods of Delaware, Inc. v. NPE Seller Rep LLC, C.A. No. 2017-0772 AGB (Del. Ch. Oct. 29, 2018). National Pasteurized Eggs, Inc. (“NPE”) was sold pursuant to a stock purchase agreement. Thereafter, the buyers initiated an action asserting claims for fraud and breaches of representations and warranties, seeking indemnification under the agreement. The sellers filed counterclaims to enforce covenants in the agreement requiring the buyers to remit certain tax refunds and insurance proceeds. The buyers argued that their obligation to remit such proceeds “should be excused” because of the sellers’ alleged prior material breach. Granting judgment on the pleadings to the buyers, the Court held that “buyers cannot continue to accept the benefits of the contract—as they seek to do in this action through their claim for indemnification—while disclaiming their contractual obligation to remit the tax refunds and insurance proceeds to the sellers promptly after they were received.”