Addressing The Enforceability Of Con Ed Provisions In Merger Agreements, Delaware Court Of Chancery Rejects Petition For Post-Closing Mootness Fee, Finding Stockholders Lacked Third-Party Beneficiary Standing To Seek Lost-Premium Damages
On October 31, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued final judgment denying a petition for a mootness fee award to a stockholder—who had previously asserted claims for breach of a merger agreement—after the merger closed. Crispo v. Musk, No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023). The Court explained that, to obtain a mootness fee, a “plaintiff-stockholder must demonstrate that his mooted claim was meritorious when filed.” The claim at issue was for breach of a so-called “Con Ed provision” in the merger agreement purporting to provide for lost-premium damages. The Court found that plaintiff did not have third-party beneficiary status, at least at the time he filed suit, and therefore his claim was not meritorious.
Delaware Court Of Chancery Rejects Stockholder Demand For Corporation To Supplement Its Section 220 Production With Searches And Production Of Email
On August 25, 2023, Magistrate Bonnie W. David of the Delaware Chancery Court issued a post-trial report denying stockholder requests for supplemental productions of emails from Zendesk, Inc. (the “Company”) pursuant to a books and records demand. In re Zendesk, Inc. Section 220 Litig., C.A. No. 2023-0454-BWD (Del. Ch. Aug. 25, 2023). Plaintiffs served the demands pursuant to 8 Del. C. § 220 seeking to investigate possible wrongdoing in connection with the Company’s entry into a merger (the “Transaction”). The Company voluntarily produced “Formal Board Materials,” including board minutes, presentations, and other board-level documents in response. Plaintiffs, however, asserted that there were “gaps” and “inconsistencies” that purportedly necessitated searches and production of email. The Court found that plaintiffs “have not met their burden to prove that [the requested] electronic communications … are essential to accomplishing the proper purposes stated in their [d]emands.”
Delaware Court Of Chancery Clarifies Standard Applicable To Mootness Fee Awards For Supplemental Disclosures
On July 6, 2023, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery issued a written opinion explaining a prior bench ruling on a mootness fee awarded to plaintiff’s counsel in connection with a putative stockholder class action brought against Magellan Health, Inc. (the “Company”) and its directors in connection with its acquisition by Centene Corporation. Anderson v. Magellan Health, Inc., C.A. No. 2021-0202-KSJM (Del. Ch. July 6, 2023). Plaintiff’s suit, commenced after the publication of the merger proxy and prior to closing, alleged that “don’t-ask-don’t-waive” provisions contained in confidentiality agreements between the Company and other prospective bidders impeded the deal process and were not fully disclosed in the proxy.
Delaware Court Of Chancery Rejects Stockholder’s Section 220 Books And Record Demand In Connection With Corporation’s Expression Of Opposition To Legislation
On June 27, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery issued a judgment in favor of a “leading media and entertainment” company with a “substantial presence in Florida” (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220. Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023). As explained by the Court, the Corporation publicly expressed opposition to certain Florida state legislation “limit[ing] instruction on sexual orientation or gender identity in Florida classrooms” (the “Legislation”). Thereafter, Florida’s legislature voted to dissolve a special district that had benefitted the Corporation. Plaintiff, a stockholder, sought the records purportedly to investigate potential breaches of fiduciary duties by the Corporation’s directors and officers in connection with the opposition to the Legislation. The Court explained that “Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues” and found that plaintiff “decidedly” had not “demonstrated a proper purpose” for the records request.
Delaware Supreme Court Affirms Decision Rejecting Fiduciary Duty Claims As To Allegedly Conflicted Acquisition Because It Satisfied Entire Fairness Review
On June 6, 2023, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware sitting en banc
unanimously affirmed judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”). In re Tesla Motors, Inc. Stockholder Litig.
, No. 181, 2022 (Del. June 6, 2023). Plaintiffs alleged that the Chairman was the Company’s controlling stockholder and that he was conflicted because he also was the chairman of the board and largest stockholder of the Target. As discussed in our prior post
, following a trial, the Delaware Court of Chancery found that the transaction was “entirely fair” and rejected plaintiffs’ claims. In re Tesla Motors, Inc. Stockholder Litig
., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022). On appeal, the Delaware Supreme Court held that the record supported the trial court’s determinations that “despite certain process flaws, the [a]cquisition was the product of fair dealing” and “the price paid was a fair one.”
Delaware Court Of Chancery Concludes Founder And Largest Shareholder Was Not A Controller In Connection With Allegedly Conflicted Transaction
On May 12, 2023, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled in favor of defendant, the founder and largest shareholder (the “Founder”) of a technology company (the “Company”), on derivative breach of fiduciary duty claims in connection with the Company’s acquisition of a financial software company (the “Target”), for which he was also a co-founder and the largest shareholder. In re Oracle Corporation Derivative Litigation, No. 2017-0337-SG (Del. Ch. May 12, 2023). Defendant owned approximately 28% of the Company and 40% of the Target. Plaintiff shareholders alleged that the Founder, who was also a director and Chief Technology Officer of the Company, “used his outsized influence” to cause it to overpay because he owned a larger percentage of the Target than of the Company. After a ten-day trial, the Court determined that the Founder “was not in control of [the Company] generally” and, although he “could have influenced the directors’ decision” in connection with the transaction, “he did not.” Accordingly, the Court concluded that the Founder was not a “controller” and, therefore, the transaction was entitled to deferential review under the business judgment rule.
Delaware Court Of Chancery Holds That Corwin Cleansing Does Not Apply To Claims For Injunctive Relief Related To Alleged Defensive Measures
On May 1, 2023, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion to dismiss a putative stockholder class action asserting a breach of fiduciary duty claim against the directors of a telecommunications company (the “Corporation”) and seeking to enjoin alleged defensive measures. In re Edgio, Inc. Stockholders Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023). The action was brought after the Corporation acquired a portfolio company of an investor (the “Investor”) in exchange for a 35% stake in the post-merger entity and entry into a stockholders’ agreement that allegedly “restricted the [I]nvestor’s voting and transfer rights.” The stockholders of the Corporation voted in favor of the transaction in advance. Defendants argued that they were entitled to the “irrebuttable presumption of the business judgment rule” that applies “when a transaction is approved by a fully informed, uncoerced vote of the disinterested stockholders” under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). The Court, however, found that the relevant provisions in the stockholders’ agreement were subject at the pleading stage to “enhanced scrutiny” as alleged “defensive measures . . . designed to entrench the board.” The Court held that “Corwin cleansing” does not apply to a claim seeking to enjoin such alleged defensive measures.
Delaware Court Of Chancery Dismisses Breach Of Contract Claims Against Buyer, Finding Seller Retained Post-Closing Liability Related To Certain Product-Liability Litigations
On April 3, 2023, Vice Chancellor Nathan A. Cook of the Delaware Chancery Court dismissed the breach of contract claims by one pharmaceutical company (the “Seller”) against another (the “Buyer”) in connection with the Buyer’s acquisition of Seller’s consumer product lines in 2014 pursuant to a Stock and Asset Purchase Agreement (the “Agreement’). Merck & Co., Inc. v. Bayer AG, No. 2021-0838-NAC (Del. Ch. Apr. 3, 2023). After closing, product liability claims relating to talcum powder used in one of the product lines were filed against both companies. Seven years after the closing, Seller informed Buyer that as of the seventh anniversary, it would no longer pay for defense and liability stemming from the claims and, after Buyer refused to assume the liability, sued Buyer for breach of the Agreement. The Court found that the Agreement—which was negotiated by sophisticated parties—unambiguously established that Seller was indefinitely liable for the products liability claims for products sold before closing.
Delaware Court of Chancery Finds Revlon Violation For Founder Who Favored Buyer And Failed To Disclose, And Aiding & Abetting Violation For Buyer
On March 15, 2022, Chancellor Kathaleen McCormick of the Delaware Court of Chancery ruled that the founder and former CEO of Mindbody Inc. (the “Company”) breached his fiduciary duties to stockholders in connection with the 2019 sale of the Company to private equity firm Vista Equity Partners Management, LLC (“Buyer”). In Re Mindbody, Inc., Stockholder Litigation, CA. No. 2019-0442-KSJM (Del. Ch. Mar. 15, 2023). The Court ruled that the founder breached his duty of loyalty by structuring the sale process to favor the Buyer for personal gain and breached his duty of disclosure by creating a “false narrative” in the proxy to obscure the truth about the flawed process. The Court also concluded that Buyer aided and abetted the founder’s disclosure breaches by failing to correct the inaccuracies in the proxy. The Court awarded $1 per share in damages for the fiduciary duty breach, based on the difference between the deal price and the price that the Court concluded Buyer would have paid in a fair process, and the same $1 per share as nominal damages for the disclosure breach and aiding and abetting.
Delaware Court Of Chancery Dismisses Caremark Claims Against Directors For Failure To Allege Bad Faith After Permitting Related Claims To Advance Against Officer
On March 1, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed derivative claims brought by stockholders for breach of the fiduciary duty of oversight under Caremark
against the directors of McDonald’s Corporation (the “Company”). The decision follows the Court’s earlier decision to deny a motion to dismiss similar claims brought against the Company’s officers and to extend the Caremark
duty to corporate officers, as discussed here
. In re McDonald’s Corp. S’holder Deriv. Litig.
, Case No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023).
Applying Entire Fairness, Delaware Court of Chancery Sustains Class Action Claims for Breaches of Fiduciary Duties Arising from Alleged Omissions in SPAC Merger Proxy
On March 1, 2023, Vice Chancellor Lori Will of the Delaware Court of Chancery declined to dismiss a putative class action brought by stockholders of special purpose acquisition company (or “SPAC”) GigCapital2, Inc. (“Gig2”) against Gig2’s controlling stockholder and directors, asserting that they breached their fiduciary duties in connection with Gig2’s acquisition of UpHealth Holdings, Inc. and Cloudbreak Health, LLC in a so-called “de-SPAC” merger. Laidlaw v. Gigacquisitions2, LLC, et. al., C.A. No. 2021-0821-LWW (Del. Ct. Ch. Mar. 1, 2023) (“Gigacquisitions2”). Plaintiffs alleged that defendants issued a false and misleading merger proxy to obtain approval of a value-destructive de-SPAC transaction and thereby enrich themselves through their unique ownership interests. Defendants moved to dismiss, arguing that (i) plaintiffs’ claims were derivative (alleging harm to the company rather to individual stockholders) but plaintiffs failed to make a demand or plead demand futility, and (ii) the business judgment rule applied. The Court held that plaintiffs’ claims were direct, not derivative, and that entire fairness—Delaware law’s most stringent standard of review—applied because inherent conflicts of interest existed between defendants and Gig2’s public stockholders.
Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision
On February 21, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted the petition of Lordstown Motors Corporation (the “Company”) under Section 205 of the Delaware General Corporation Law (“DGCL”) to validate and declare effective the Company’s certificate of incorporation as amended in connection with a “de-SPAC” merger more than two years ago. In Re Lordstown Motors Corp.
, C.A. 2023-0083-LWW (Del. Ch. Feb. 21, 2023). In advance of the merger, the Company—then a special purpose acquisition company (“SPAC”)—adopted the amendment to increase the number of authorized Class A common shares, which were subsequently issued in connection with the merger. The Company requested validation from the Court after the approval of the amendment—by a majority of Class A and Class B shares voting together rather than a vote exclusively by the Class A stock—was called into question by a recent decision related to another SPAC. Because a “significant number of SPACs” had similar provisions and followed a similar process, that decision, Garfield v. Boxed, Inc.
, No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022)—discussed in a prior post
—resulted in “pervasive uncertainty” regarding their capital structures and the validity of their stock. Granting the petition, the Court concluded that validation of the charter amendment would be “just and equitable.” The Court added that its decision “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts.”
Delaware Court Of Chancery Declines To Dismiss Breach Of Fiduciary Duty Claims Against Nondirector Officer, Holding That Officers Owe A Caremark Duty Of Oversight
On January 25, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss a derivative suit brought by stockholders asserting breach of fiduciary duty claims against a former officer of McDonald’s Corporation (the “Company”). In Re McDonald’s Corp. Stockholder Derivative Litig., Case No. 2021-0324-JTL (Del. Ch. Jan. 25, 2023). Plaintiffs alleged that defendant, who served as the Chief People Officer responsible for human resources at the Company, breached oversight duties by “consciously ignoring red flags” regarding sexual harassment at the Company. The Court acknowledged that Delaware courts had not previously “expressly held that officers . . . owe oversight duties” comparable to the duty of oversight owed by directors under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). But the Court sustained the claim, noting that “[t]his decision clarifies that corporate officers owe a duty of oversight.” The Court also found that plaintiffs adequately pled a claim against defendant for breach of the duty of loyalty based on specific purported acts of sexual harassment in which he allegedly engaged.
Delaware Court Of Chancery Grants Plaintiff Attorneys’ Fees Award Under Corporate Benefit Doctrine For Demand To SPAC Board Leading To Adjusted Voting Structure In Connection With Merger
On December 27, 2022, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery substantially granted plaintiff’s motion for summary judgment in an action seeking attorneys’ fees. Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022). Plaintiff, a stockholder of defendant Seven Oaks Acquisition Corp., a special purpose acquisition company (the “SPAC”), made a demand on the board challenging the structure of stockholder votes on proposed charter amendments regarding the issuance of shares in connection with a merger. The SPAC made the change demanded by plaintiff and consummated the deal. However, defendant opposed the attorneys’ fees award, contending that the previously contemplated voting structure had already been legally compliant. The Court held that plaintiff had correctly determined that the contemplated voting structure would have been inconsistent with Delaware law. The Court thus awarded attorneys’ fees because “[b]y taking the [SPAC] off a path that violated [Delaware law] and the stockholder franchise, [p]laintiff conferred a substantial benefit.”
Delaware Court Of Chancery Assesses The Application Of Timeliness Principles To Caremark Red Flags Claim And Applies “Separate Accrual Approach” But Subsequently Dismisses Complaint For Failure To Plead Demand Futility
On December 15, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss claims as untimely in a derivative action brought by stockholders against the officers and directors of AmerisourceBergen Corporation (the “Company”). Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022). The Company is a wholesale distributor of pharmaceuticals that faced extensive investigations and litigation related to the opioid epidemic. Plaintiffs primarily alleged that defendants breached their fiduciary duties by ignoring “red flags” related to the Company’s purported failure to report suspicious opioid orders. Although the challenged conduct began nearly a decade earlier, plaintiffs did not even seek books and records until 2019. The Court highlighted that “[n]o Delaware court has addressed the timeliness principles that govern” a Caremark red-flags claim. The Court held that the “separate accrual approach” applies and, therefore, plaintiffs could assert claims with respect to alleged “conduct and consequences” that occurred within the three-year limitations period prior to their “vigilant” pursuit of claims.
Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims Against Special Committee Defendants For Failure To Plead Breach Of Loyalty
On November 30, 2022, Vice Chancellor Glasscock of the Delaware Court of Chancery granted a motion to dismiss claims asserted against directors who served as members of the special committee (the “Special Committee”) of Isramco Inc. (the “Company”) for failure to plead a breach of the duty of loyalty in connection with a take-private merger. Ligos v. Tsuff, et. al., C.A., No. 2020-0435-SG (Del. Ct. Ch, Nov. 30, 2022). Plaintiff asserted that the Special Committee lacked independence because it was selected by the Company’s controlling stockholder, who also allegedly controlled the company with whom the Company merged, Naptha Israel Petroleum Corporation Ltd. (the “Buyer”) and allegedly negotiated in bad faith. Vice Chancellor Glasscock held that even with the “plaintiff-friendly inferences” required on a motion to dismiss, there was no reasonably conceivable basis for Plaintiff’s claims.
Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC
On October 26, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss for lack of personal jurisdiction claims of tortious interference asserted against a principal of a private equity fund (the “Fund”), which had been the majority investor of a limited liability company (the “LLC”). In re P3 Health Grp. Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022). Plaintiff — which had been the second largest investor in the LLC — alleged that defendant tortiously interfered with its contractual rights under the limited liability company agreement in connection with the merger of the LLC with a special purpose acquisition company (“SPAC”). The Court concluded that the complaint adequately alleged that defendant “participated materially in the management” of the LLC such that he “can be served [process] as an acting manager” and that the “exercise of personal jurisdiction over [defendant] comports with … due process.”
New York Appellate Court Dismisses Breach Of Fiduciary Duty Claims Under Foreign Law, Clarifying That The Internal Affairs Doctrine Applies To Directors And Officers Even If They Are No Longer Serving At The Time Of Suit
On October 13, 2022, a five-judge panel of the Appellate Division of the New York State Supreme Court, First Department, unanimously reversed a trial court decision and dismissed a breach of fiduciary duty action brought by former shareholders of an online fantasy sports company (the “Company”) against its directors and officers following a merger. Eccles v. Shamrock Cap. Advisors, LLC, Case No. 2022-00866 (N.Y. App. Div. Oct. 13, 2022). The Company was incorporated in Scotland and headquartered in New York. The trial court had upheld the claims under New York law, declining to apply the internal affairs doctrine to former directors and officers. Applying Scots law, the Appellate Division reversed, explaining: “To the extent our past decisions could be interpreted as suggesting otherwise we clarify that the internal affairs doctrine applies to an officer or director at the time of the conduct at issue.”
Delaware Court Of Chancery Finds Buyer Assumed Post-Closing Liability In Connection With Seller’s Pre-Existing Settlement Agreement
On September 30, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted summary judgment to the seller of several cigarette brands, finding that the buyer was responsible pursuant to an asset purchase agreement (“APA”) for post-closing liability in connection with a pre-existing settlement between the State of Florida and the seller. ITG Brands, LLC v. Reynolds American Inc., et. al., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022). As part of the settlement entered nearly twenty years before the sale of the brands, the seller and other tobacco companies agreed to make annual payments to Florida based on the companies’ respective market shares of annual tobacco product sales in the United States. The Court focused on a provision of the APA that stated that the buyer assumed “all Liabilities … to the extent arising, directly or indirectly, out of … the use of the Transferred Assets … from and after the Closing.” The Court found that the provision unambiguously assigned the post-closing liability in connection with the Florida settlement to the buyer.
Delaware Court Of Chancery Dismisses Caremark Claims Alleging Breaches Of Fiduciary Duty Following A Cyberattack
On September 6, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by stockholders of a software company (the “Company”) against its directors following a cyberattack. Construction Industry Laborers’ Pension Fund v. Bingle, No. CV 2021-0940-SG (Del. Ch. Sep. 6, 2022). After the Company allegedly fell victim to hackers who accessed confidential information on the systems of thousands of its customers, plaintiffs alleged that defendants had failed to adequately address the risk to cybersecurity in breach of their oversight obligations under Caremark. The Court indicated that cybersecurity is “mission critical” for online service providers and the complaint alleged oversight practices that were “far from ideal.” But the Court held that pre-suit demand was not excused because the complaint did not plead “specific facts” from which the Court could “infer bad faith liability.”
Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman
On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”). According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure. Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment. The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
Delaware Supreme Court Reverses Dismissal Of A Post-Merger Suit For Alleged Breach Of Fiduciary Duty Related To Disclosures On Appraisal Rights
On July 19, 2022, in an opinion authored by Justice Gary F. Traynor, a majority of the Supreme Court of Delaware sitting en banc affirmed in part and reversed in part the dismissal of breach of fiduciary duty claims against the directors of a real estate investment trust (the “Company”) brought by former stockholders of the Company after its acquisition. In re GGP, Inc. Stockholder Litigation, No. 202, 2021 (Del. July 19, 2022). Plaintiffs alleged that the merger was structured to eliminate the statutory appraisal rights of the Company’s stockholders and that the proxy disclosures regarding appraisal rights were misleading. The Delaware Court of Chancery had dismissed the claims. On appeal, the Delaware Supreme Court affirmed the dismissal of the claim alleging an improper merger structure because “defendants did not, by paying a large portion of the merger consideration by way of a pre-closing dividend, structure the merger in a manner that effectively and unlawfully eliminated appraisal rights.” However, the Court reversed the dismissal of the disclosure claim because it found the complaint adequately alleged that defendants “consciously crafted the transaction and the related disclosures in such a way as to deter [the Company’s] stockholders from exercising their appraisal rights.”
Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Allege Substantial Likelihood Of Liability Sufficient To Excuse Pre-Suit Demand
On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by a stockholder of an energy company (the “Company”) against its directors following an incident involving explosions in the pipeline system of one of its natural gas distribution subsidiaries. City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022). Plaintiff claimed that the board breached its oversight obligations under Caremark by allegedly failing to implement a reporting and monitoring system relating to pipeline safety and ignoring “red flags.” The Court held that pre-suit demand under Court of Chancery Rule 23.1 was not excused because the complaint did not adequately plead that the directors faced a substantial likelihood of liability.
Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle
On June 16, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted declaratory judgment in favor of plaintiffs — four members of the board of Aerojet Rocketdyne Holdings, Inc. (the “Company”), including its Executive Chairman — against defendants — the other four members of the Company’s board, including its CEO — after the eight-member board had deadlocked in connection with the Company’s impending board election. In Re Aerojet Rocketdyne Holdings Inc., No. CV 2022-0127-LWW (Del. Ch. June 16, 2022). The case arose after each faction had proposed its own slate of board nominees. Plaintiffs challenged certain actions allegedly undertaken by the Company at the behest of defendants, such as the issuance of a Company press release purporting to express the Company’s disappointment in the slate proposed by plaintiffs and the retention of counsel on behalf of the Company to pursue litigation against plaintiffs. Following a trial, the Court held that such actions were unauthorized and contrary to the corporate neutrality principle. The Court explained that a Delaware corporation “must remain neutral when a there is a legitimate question as to who is entitled to speak or act on its behalf,” and [w]here a board cannot validly exercise its ultimate decision-making power, neither faction has a greater claim to the company’s name or resources.”
Delaware Court Of Chancery Declines To Dismiss Claims Related To Direct Offering At The Outset Of The Pandemic
On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied a motion to dismiss stockholder derivative claims for alleged breaches of fiduciary duty against the CEO/Chairman of an e-commerce car company (the “Company”). In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ct. Ch, Jun. 30, 2022). Plaintiffs alleged that the CEO/Chairman and his father controlled the Company and “orchestrated” a $600 million direct offering to selected investors in which they purchased $50 million of common stock in March 2020 when the Company’s stock price was depressed due to pandemic-related volatility. The Court held that plaintiffs adequately pleaded that pre-suit demand was excused because two of the Company’s other directors lacked independence from the CEO/Chairman. The Court further found that the transaction was subject to entire fairness—rather than deferential business judgment—review because it allegedly involved a non-ratable benefit not shared by the public stockholders and half the board lacked independence. Finally, the Court held that the CEO/Chairman’s abstention from the board’s vote approving the offering was insufficient to warrant dismissal at the pleadings stage.
Delaware Court Of Chancery Issues Post-Trial Judgment In Favor Of Defendant, Rejecting Stockholder’s Section 220 Books And Records Demand
On June 1, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of defendant retail company (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220. Plaintiff, a stockholder, sought the records purportedly to investigate possible mismanagement in connection with the Corporation’s compliance with certain antitrust and tax laws. In response to the demand, the Corporation produced certain board-level materials but declined to comply with plaintiff’s request for a wide array of additional documents. Following a trial on a paper record, the Court found that plaintiff failed to demonstrate the requisite “credible basis” to suspect wrongdoing, and in any event, the demand was “satisfied” because the Corporation “produced all necessary and essential documents related to the alleged wrongdoing discussed in the demand.”
Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote
On May 25, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative claim against a director of Fat Brands Inc. (the “Corporation”) for alleged breach of fiduciary duty. Harris v. Junger, C.A. No. 2021-0511-SG (Del. Ch. May 25, 2022). Plaintiffs challenged the merger of the Corporation with Fog Cutter Capital Group, Inc. (the “Merger Partner”), which allegedly held more than 80% of the Corporation’s stock before the merger. In a previous oral ruling, the Court had found that the Complaint sufficiently pleaded that the merger “constituted reasonably conceivable bad faith and waste,” but reserved judgment on the claim against one director who had been a minority stockholder of the Merger Partner before the merger and therefore abstained from voting on the merger. In this decision, the Court declined to dismiss the claim against that director at the pleading stage because the complaint adequately alleged that it was “reasonably conceivable” that he “breached his duty of good faith by participating in negotiating a [m]erger that constituted corporate waste.”
California Superior Court Strikes Down Director Diversity Mandate
On May 13, 2022, Judge Maureen Duffy Lewis of the Superior Court of the State of California for Los Angeles County entered judgement in favor of three taxpayers bringing state constitutional challenges to S.B. 826, a bill for a California law that required the boards of California corporations to include women. Crest v. Padilla, Case No. 19 STCV 27561 (Cal. Super. Ct. L.A. Cnty. May 13, 2022). The law mandated that, by December 31, 2021, publicly held companies incorporated in California must appoint at least one woman on boards of four or fewer directors, two women on boards of five directors, and three women on boards of six or more directors. The Court agreed with plaintiffs that the law violated the California constitution’s Equal Protection Clause.
Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty And Unjust Enrichment Claims Related To Compensation Committee Awards
On April 27, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied, in part, a motion to dismiss a derivative complaint against directors for breaches of fiduciary duties brought by stockholders of Universal Health Services Inc. (the “Corporation”). Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022). Plaintiff, a stockholder, alleged that the directors serving on the board’s compensation committee took advantage of an “obvious dip” in stock price in the wake of the emergence of COVID-19 in March 2020 to grant option awards, including to themselves. Noting that “[s]elf-interested compensation decisions are subject to the entire fairness standard of review,” the Court found that plaintiff “cleared the low hurdle of pleading sufficient facts to make it plausible that the price and process of the option awards transaction were not entirely fair.”
Delaware Court Of Chancery Applies Contemporaneous Ownership Requirement And Declines To Extend Equitable Derivative Standing
On May 13, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed certain stockholder derivative claims for breaches of fiduciary duty brought against the founder-CEO and other directors of Flashpoint Technology, Incorporated (the “Corporation”). SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May. 13, 2022). Plaintiffs were a limited liability company (the “New LLC”) that held shares in the Corporation and its sole owner (the “Beneficial Owner”). The New LLC received its shares from another limited liability company (the “Old LLC”) — a nonparty to the suit — also wholly owned by the Beneficial Owner. Plaintiffs challenged certain related-party transactions, including leases from and loans to entities affiliated with the CEO. Applying the “contemporaneous ownership requirement,” the Court granted summary judgment to defendants for claims based on conduct that predated the acquisition of shares by the New LLC. In doing so, the Court rejected plaintiffs’ contention that the Beneficial Owner should have “equitable standing.”
Finding That Allegedly Conflicted Acquisition Satisfied Entire Fairness Review, Delaware Court Of Chancery Rejects Breach Of Fiduciary Duty Claims
On April 27, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery entered judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), following a trial on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”). In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022). Plaintiffs alleged that at the time of the acquisition, the Chairman, who held approximately 22% of the Company’s stock, was its controlling stockholder. He also was the chairman of the board and largest stockholder of the Target. Plaintiffs asserted that the Chairman caused the Company’s allegedly conflicted Board to approve the deal—despite the Target’s alleged insolvency—at a purportedly “patently unfair price.” Assuming without deciding that the Chairman was the Company’s controlling stockholder and that a majority of the Company’s Board was conflicted, the Court reviewed the claims under an “entire fairness” standard. Noting that the process was “far from perfect” and that “defense verdicts after an entire fairness review” are “not commonplace,” the Court nevertheless found that the Company’s Board “meaningfully vetted” the acquisition and the price paid was “entirely fair in the truest sense of the word”—and rejected plaintiffs’ claims.
Eighth Circuit Affirms Dismissal Of Merger-Related Derivative Suit For Failure To Plead Demand Excusal
On April 7, 2022, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of derivative claims brought by shareholders of Centene Corporation (the “Corporation”) against directors and officers of the Corporation following its merger with Health Net, Inc. (the “Target”). Carpenters’ Pension Fund of Ill. v. Neidorff, No. 20-3216 (8th Cir. Apr. 7, 2022). In connection with the merger, the companies issued a joint proxy statement soliciting shareholder approval of the merger. Plaintiffs’ central allegation was that defendants purportedly concealed their knowledge of “significant financial problems” faced by the Target. Plaintiffs thus asserted derivative claims for violation of Section 14(a) of the Securities Exchange Act and breaches of fiduciary duty. The Court held that pre-suit demand was not excused, because the complaint failed to adequately plead that at least five of the nine board members at the time the suit was filed faced a substantial likelihood of liability.
Delaware Court Of Chancery Grants Motion To Stay Pending Appeal Of Specific Performance Judgment Requiring Completion Of Acquisition Of Yoga Studios
On March 31, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted the motion of CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”) to stay the Court’s judgment in favor of plaintiff Level 4 Yoga, LLC pending defendant’s appeal. Level 4 Yoga, LLC v. CorePower Yoga, LLC
, C.A. No. 2020-0249-JRS (Del. Ch. Mar. 31, 2022). As discussed in our prior post
, the Court of Chancery previously (i) found that defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant failed to close on the acquisition of plaintiff’s yoga studios, and (ii) issued a decree of specific performance directing defendant to complete the transaction. “Balanc[ing] all of the equities” and highlighting that defendant “is at risk of suffering irreparable harm,” the court issued the stay.
Delaware Court Of Chancery Rejects Motion To Stay SPAC Breach Of Fiduciary Duty Suit Pending Parallel Federal Securities Action
On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”). In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”). Plaintiffs alleged that defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders. Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio. The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
Delaware Court Of Chancery Holds COVID-19 Pandemic Did Not Excuse Purchaser’s Obligation To Complete Acquisition Of Its Franchisee’s Yoga Studios
On March 1, 2022, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery ruled in favor of plaintiff Level 4 Yoga, LLC in a breach of contract action against CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”), stemming from the parties’ pre-COVID agreement for defendant to acquire plaintiff’s yoga studios. Level 4 Yoga, LLC v. CorePower Yoga, LLC, CorePower Yoga Franchising, LLC, No. CV 2020-0249-JRS (Del. Ch. Mar. 1, 2022). Plaintiff alleged defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant refused to close the transaction, failed to deliver required payments under the APA, and failed to take possession of plaintiff’s yoga studios. The Court found that the APA “unambiguously contain[ed] no conditions to closing and no express right for either party to terminate the contract pre-closing.” The Court further held that plaintiff neither repudiated nor materially breached the APA. Therefore, the Court issued a verdict with a decree of specific performance directing defendant to complete the transaction.
Delaware Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
On February 14, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of Lee Enterprises, Inc. (the “Company”) and its directors following an expedited trial on claims for breach of the Company’s bylaws and the directors’ fiduciary duties. Strategic Investment Opportunities LLC v. Lee Enterprises, Inc., C.A. No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022). Plaintiff, a beneficial stockholder, sought declaratory and injunctive relief to allow its nomination of directors—attempted in conjunction with a takeover bid by plaintiff—to move forward. The Court found that plaintiff did not comply with advance notice requirements for director nominations in the Company’s “clear and unambiguous” bylaws. Applying “enhanced scrutiny,” the Court also concluded that the board did not breach fiduciary duties by rejecting plaintiff’s nomination based on “a validly adopted bylaw with a legitimate corporate purpose.”
Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims
On February 14, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a post-closing damages action for breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. (“Authentix” or the “Company”), rejecting defendant’s claim that stockholders waived the right to bring suit. Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No. 2020-0657-SG, (Del. Ch. Feb. 14, 2022). The Court concluded that language in a Stockholders Agreement consenting to the transaction was not sufficiently specific to waive the stockholders’ right to challenge the sale.
Southern District Of New York Denies Application For Mootness Fee In Connection With Merger-Disclosure Litigation
On February 7, 2022, Judge J. Paul Oetken of the United States District Court for the Southern District of New York denied an application by plaintiff’s counsel for attorneys’ fees after plaintiff’s merger-related disclosure claims were “mooted” by defendant Nuance Communications Inc. (“Nuance”). Serion v. Nuance Communications, No. 21-CV-4701 (S.D.N.Y. Feb. 7, 2022). Although the Court found that the lawsuit prompted the company to issue supplemental disclosures, the Court held that the disclosure of this additional information did not confer a “substantial benefit” on shareholders.
Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand
On January 21, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of GrafTech International Ltd. (the “Company”) against the Company’s directors and the Company’s controlling stockholder, Brookfield Asset Management (“Brookfield”), in connection with the Company’s repurchase of shares from Brookfield. Simons v. Brookfield Asset Mgmt., C.A. No. 2020-0841-KSJM (Del. Ch. Jan. 21, 2022). The Court held that the demand was not excused because five of the nine board members were capable of impartially considering a litigation demand under the recently affirmed Zuckerberg “universal test.” United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020).
Delaware Court Of Chancery Limits Discovery In Appraisal Proceeding To Materials Available In Books-And-Records Demand
On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
Delaware Court Of Chancery Finds Transfer Restrictions On Stock Issued In Connection With A De-SPAC Merger Inapplicable To A Legacy Operating Company Stockholder Based On The Language Of The Relevant Bylaw
On January 10, 2022, Vice Chancellor Lori W. Will held that shares of defendant Matterport Inc. (“New Company”) issued to plaintiff in connection with the acquisition of Matterport Operating, LLC (“Legacy Company”) by a special purpose acquisition company (“SPAC”) in a “de-SPAC” merger were not subject to a transfer restriction in the New Company’s bylaws. As part of the transaction, Legacy Company stockholders, including plaintiff, were given the right to receive shares of the New Company. Prior to closing, the SPAC adopted a bylaw that restricted the transfer by such stockholders of shares “held . . . immediately following the closing” of the transaction. After a two-day trial, the Court found that plaintiff was not issued shares of the New Company until more than three months after the merger when he executed letters of transmittal to the transfer agent. Concluding that the “plain language” of the bylaw was “straightforward,” and that plaintiff had not held shares “immediately” following the merger, the Court granted declaratory relief in favor of plaintiff.
Delaware Court Of Chancery Dismisses Derivative Claims Challenging Stock Sale Allegedly Based On Adverse Nonpublic Information For Failure To Plead Demand Futility
On December 15, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed stockholder derivative claims for breaches of fiduciary duty asserted on behalf The Kraft Heinz Company (the “Company”) against an investment firm (the “Investment Firm”) that had previously held 24.2% of the Company’s shares, as well as against certain alleged dual fiduciaries of the two entities. In re Kraft Heinz Company Derivative Litigation, C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021). Plaintiffs alleged that defendants sold $1.2 billion in Company stock on the basis of nonpublic information that the Company was expected to miss its full-year earnings target by $700 million. The Court held that plaintiffs failed to establish demand futility because the complaint did not raise a reasonable doubt that a majority of the Company’s board members lacked independence from defendants.
Delaware Court Of Chancery Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
On January 3, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery largely denied a motion to dismiss a putative class action brought by the stockholders of Churchill Capital Corp. III, a special purpose acquisition company or “SPAC” (“Churchill”) alleging that the company’s controlling stockholder, officers, and directors (“the Company Defendants”) breached their fiduciary duties and the company’s financial advisor aided and abetted that breach in connection with the SPAC’s acquisition of MultiPlan, Inc. (“MultiPlan”). In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022). Plaintiffs alleged that defendants omitted to disclose that a large customer of MultiPlan would soon stop using MultiPlan’s services, allegedly causing stockholders to approve the merger based on faulty information. Defendants argued that the claim was derivative in nature, rather than one that could be asserted directly, and moved to dismiss for failure to plead demand futility and on the grounds that the business judgment rule applied. The Court held that plaintiffs’ claims were direct, rather than derivative, and that entire fairness applied because of what it found to be inherent conflicts of interest between defendants and the company’s public stockholders.
Delaware Supreme Court Affirms Excused Performance For Breach Of “Ordinary Course” Covenant During Pandemic
On December 8, 2021, the Supreme Court of Delaware sitting en banc affirmed a Court of Chancery ruling that excused the buyer of a group of high-end hotel properties (the “Buyer”) from closing on the acquisition from AB Stable VIII LLC (the “Seller”)—an indirect subsidiary of Dajia Insurance Group, Ltd. (“Dajia”), formerly Anbang Insurance Group, Ltd. (“Anbang”)—because the Seller breached its covenant to operate the hotels in the ordinary course between signing and closing. AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310 (Del. Dec. 8, 2021). Because the Court found this issue dispositive, it did not reach any other issues on appeal.
Delaware Court Of Chancery Dismisses Section 220 Action Initiated Hours After Certificate Of Merger Was Filed With Delaware Secretary Of State
On December 3, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted a motion to dismiss claims to compel inspection of books and records brought by a former stockholder of Houston Wire & Cable Company (the “Company”) in connection with the Company’s all-cash merger into Omni Cable, LLC. Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021). The merger agreement provided that each share of the Company would be cancelled and converted into the right to receive $5.30 in cash at the “Effective Time,” which it explained was “such time as [a] Certificate of Merger” is filed. Plaintiff filed the action under Section 220 of the Delaware General Corporation Law (“DGCL”) hours after the Company’s certificate of merger was filed with the Delaware Secretary of State. The Court held that Section 220 requires a plaintiff to be a current stockholder at the time the litigation is initiated. The Court found that plaintiff “ceased to own stock” when the certificate of merger was filed and, therefore, lacked standing when the complaint was filed later the same day.
Delaware Court Of Chancery Dismisses Derivative Claims Challenging A Convertible Debt Issuance At The Onset Of The COVID-19 Pandemic For Failure To Plead That Demand Was Excused
On November 23, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder derivative claims for breach of fiduciary duty against the directors of Wayfair, Inc. (the “Company”). Equity-League Pension Tr. v. Great Hill Partners, C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021). Plaintiff challenged the sale by the Company of $535 million in convertible notes at the outset of the COVID-19 pandemic to a consortium of investors allegedly tied to four of the Company’s directors, including the two co-chairmen, one of whom was also the CEO. There was no dispute that two of the nine board members were disinterested and independent. As to three others, plaintiff alleged that their service on the audit committee presented a substantial likelihood of liability because it was charged with reviewing conflicted transactions. Highlighting that the Company’s charter exculpated directors for breaches of the duty of care, however, the Court explained that the complaint must therefore plead bad faith, which it referred to as a “rara avis.” Although the Court acknowledged that the transaction was not a “model of best practices,” it found that the complaint and the documents incorporated by reference therein did not support an inference of bad faith.
Delaware Court Of Chancery Declines To Dismiss Derivative Claims, Finding Wrongful Refusal Of Demand Adequately Pleaded
On October 29, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to dismiss derivative claims for breach of fiduciary duties brought by stockholders of BioDelivery Sciences International, Inc. (the “Company”). Drachman v. BioDelivery Scis. Int’l, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021). Plaintiffs alleged that the board improperly adopted two amendments to the Company’s certificate of incorporation. Plaintiffs made a pre-suit demand on the board requesting that it deem the amendments ineffective and indicating they would otherwise commence litigation. The board responded by noting that it had determined the demand was “without merit.” The Court held that plaintiffs adequately pleaded wrongful refusal because the allegations raised a reasonable doubt as to the good faith of the board in “rebuffing” the demand.
Delaware Court Of Chancery Rejects Challenge To Board’s Enforcement Of Advance Notice Bylaw
On October 13, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a request for injunctive relief in a stockholder action against the board of CytoDyn (the “Company”). Rosenbaum v. Cyotodyn Inc., C.A. No. 2021-0728-JRS, 2021 WL 4775140 (Del. Ch. Oct. 13, 2021). Plaintiffs attempted to nominate a dissident slate of director candidates. They alleged that the board wrongfully rejected plaintiffs’ timely notice of their nominations. After a trial on a “paper record,” the Court found that plaintiffs’ notice did not comply with the Company’s advance notice bylaw—because it omitted information that was required under the bylaw to have been disclosed—and the board was thus “justified in rejecting” the notice.
Delaware Supreme Court Overrules Gentile Carve-out, Holding An Improper Transfer Of Economic Value And Voting Power To A Controlling Stockholder Through An Equity Overpayment Is A Derivative Claim
On September 20, 2021, in a decision authored by Justice Karen L. Valihura, the Delaware Supreme Court sitting en banc
reversed the denial of defendants’ motion to dismiss breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”). Brookfield Asset Management, Inc. v. Rosson
, No. 406, 2020, 2021 WL 4260639 (Del. Sept. 20, 2021). As we discussed in our prior post
, plaintiffs alleged that a private placement of stock to the Company’s controlling stockholder at a price that undervalued the shares diluted the financial and voting interest of the minority stockholders. The trial court found that the claims were nearly identical to corporate overpayment claims asserted by former stockholders and upheld as “direct”—rather than “derivative”—by the Delaware Supreme Court in Gentile v. Rossette
, 906 A.2d 91 (Del. 2006). Reversing, the Delaware Supreme Court reaffirmed the “classic” test for distinguishing stockholder “derivative” claims from “direct” claims established in Tooley v. Donaldson, Lufkin & Jenrette, Inc
., 845 A.2d 1031 (Del. 2004), and expressly overruled Gentile
and its carve-out from Tooley
Delaware Supreme Court Adopts Refined Test For Demand Futility And Holds Exculpated Claims Do Not Excuse Demand
On September 23, 2021, in a decision authored by Justice Tamika Montgomery-Reeves, the Delaware Supreme Court sitting en banc affirmed the dismissal of a derivative complaint filed by a stockholder of Facebook, Inc. (the “Company”) against the CEO, who is also the founder, controlling stockholder and chairman of the board, as well as certain other directors. United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., No. 404, 2020 (Del. Sept. 23, 2021). Plaintiff asserted that the directors breached their fiduciary duties by improperly approving a stock reclassification allegedly for the benefit of the CEO, which though ultimately abandoned resulted in litigation and settlement costs. The Court concluded that the Delaware Court of Chancery properly dismissed plaintiff’s complaint for failing to make a pre-suit demand on the board. In so holding, the Court adopted a refined test for demand futility and also determined that exculpated claims cannot excuse demand because they do not entail a substantial likelihood of liability.