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  • Delaware Court Of Chancery Holds Merger Termination Valid After Plaintiffs “Forgot” To Provide A Notice To Extend, But Reserves Decision On Reverse Termination Fee
     
    03/19/2019

    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.”
    CATEGORY: Deal Disputes
  • Delaware Court Of Chancery Finds A Circumstantial Connection To Negative Corporate Developments Insufficient To Trigger Inspection Rights Under Section 220
     
    03/05/2019

    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
     
    02/12/2019

    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.
    CATEGORY: Charters & Bylaws
  • Delaware Supreme Court Grants Stockholder’s Section 220 Demand As To Certain Email, And Grants Requested Exceptions To Jurisdictional Use Restriction
     
    02/05/2019

    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.
    CATEGORY: Books and Records
  • Delaware Court of Chancery Grants Section 220 Demand By Director And Former CEO For Documents Related To His Ouster From The Company
     
    01/29/2019

    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.
    CATEGORY: Books and Records
  • 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
     
    01/08/2019

    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
     
    01/08/2019

    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.”
    CATEGORY: Charters & Bylaws
  • 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
     
    01/08/2019

    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. 
    CATEGORY: Deal Disputes
  • Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
     
    12/18/2018

    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
     
    12/11/2018

    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
     
    12/11/2018

    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.
    CATEGORY: Deal Disputes
  • Delaware Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
     
    11/27/2018

    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
     
    11/20/2018

    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).  
    CATEGORIES: Fiduciary DutiesStanding
  • 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
     
    11/06/2018

    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.”
    CATEGORY: Deal Disputes
  • Finding Insufficient Proof Of Damages, Delaware Court Of Chancery Enters Judgment In Favor Of Defendant Despite Finding Fiduciary Duty Breaches
     
    10/23/2018

    On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages.  In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).  After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company.  As discussed in our prior post, see Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable.  Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
  • Delaware Supreme Court Holds That Business Judgment Rule Applies To Controller Transactions As Long As MFW Conditions Are In Place Prior To Economic Negotiation
     
    10/16/2018

    On October 9, 2018, the Delaware Supreme Court affirmed a decision of the Delaware Court of Chancery dismissing a lawsuit brought by stockholders of Synutra International Inc. (the “Company”) challenging a controlling stockholder’s takeover of the Company.  Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).  Plaintiffs asserted breach of fiduciary duty claims and argued that the transaction did not meet the requirements of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) for business judgment review because the controller group’s initial proposal did not contain the MFW conditions—recommendation by a special committee and approval by a majority of the disinterested stockholders—although they were added later.  As discussed in our prior post on this case, the Court of Chancery applied business judgment review (rather than entire fairness review) and dismissed the complaint because the controller announced the conditions before any negotiations took place.  Affirming, the Delaware Supreme Court confirmed that MFW does not require that the conditions be included in the controller’s first offer, but instead that the controller condition its offer on the two key procedural protections “early in the process—i.e., before any substantive economic negotiations begin.”  The Court also clarified that the sufficiency of the price is not subject to evaluation under the business judgment standard and affirmed the Court of Chancery’s finding that plaintiffs failed to allege that the Company’s special committee acted with gross negligence with respect to the negotiations.
  • Delaware Court Of Chancery Rules For The First Time That MAE Justifies Termination Of Deal
     
    10/09/2018

    In a first-of-its-kind ruling, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled post-trial that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”).  Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc., and Fresenius SE & Co. KGaA, C.A. No. 2018–0300–JTL (Del. Ch. Oct. 1, 2018).  Fresenius walked away from the deal after discovering various data integrity and regulatory compliance problems, asserting that the issues were so serious that they amounted to a material adverse effect (“MAE”).  Akorn sued for specific performance, alleging that Fresenius was merely suffering from buyer’s remorse.  Vice Chancellor Laster 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.
    CATEGORY: Deal Disputes
  • Delaware Court Of Chancery Denies Motion To Exclude Post-Signing Evidence
     
    10/02/2018

    On September 7, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to exclude certain documents relating to Jarden Corporation’s (“Jarden”) post-signing financial performance offered as evidence during a statutory appraisal trial.  In re Appraisal of Jarden Corporation, C.A. No. 12456-VCS (Del. Ch. Sep. 7, 2018).  Newell Rubbermaid, Inc. (“Newell”) acquired Jarden pursuant to a merger agreement executed on December 13, 2015, in a deal that closed on April 15, 2016.  Petitioners filed for appraisal on June 14, 2016.  At trial, petitioners objected to the admission of certain documents relating to Jarden’s post-signing financial performance.  Rejecting petitioners’ relevancy objection, the Court determined that “[t]he post-signing financial documents address the condition of Jarden during a timeframe relevant to the ‘fair value’ determination.”  In making the relevancy determination, the Court relied on prior cases indicating that a change in value between signing and closing should be addressed in an appraisal analysis because “fair value” must be measured by the “operative reality” of the corporation at the effective time of the merger.  However, the Court highlighted that it had not yet determined “[w]hat weight, if any, the evidence will be given in the Court’s deliberations.”
    CATEGORY: Appraisals
  • Finding That The Implied Covenant Of Good Faith And Fair Dealing Could Not Import Revlon-Type Duties, Delaware Supreme Court Affirms Dismissal Of Breach Claim
     
    09/25/2018

    On September 20, 2018, the Delaware Supreme Court affirmed the dismissal of claims for breach of the implied covenant of good faith and fair dealing brought against the controlling unitholder and its affiliates on the board of a company that provides services to children with disabilities in connection with the sale of that company.  Miller v. HCP Trumpet Investments, LLC, No. 107, 2018 (Del. Sept. 20, 2018).  Pursuant to a waterfall set forth in the company’s operating agreement (the “OA”), the controlling investor was entitled to nearly all of the first $30 million in proceeds in the event of a sale.  The OA, which included an explicit waiver of fiduciary duties, provided that the board could approve a sale of the company to an independent third party and “determine in its sole discretion the manner in which [such sale] shall occur, whether as a sale of assets, merger, transfer of [m]embership [i]nterests or otherwise.”  After the company was sold for $43 million, minority members sued for breach of the implied covenant of good faith and fair dealing, arguing that it imposed an obligation to conduct an “open-market” sale process to ensure maximum value for all members.  Although the Delaware Supreme Court disagreed with the Delaware Court of Chancery’s holding that the implied covenant did not apply to the sale, the Court affirmed the dismissal on the basis that the implied covenant did not imply Revlon-type sale requirements.
  • District Of Delaware Finds Successful Section 220 Action Tolled Claims For Alleged Mismanagement
     
    09/17/2018

    On September 4, 2018, Judge Leonard P. Stark of the United States District Court for District of Delaware ruled that a shareholder’s separate Section 220 action for books and records tolled claims against the managing shareholder.  Norman v. Elkin, C.A. No. 06-005-LPS (D. Del. Sept. 4, 2018).  Plaintiff, the only minority shareholder of U.S. Mobilecomm, Inc. (“USM”), brought various contract, fraud, and breach of fiduciary duty claims against USM’s majority shareholder—who managed the affairs of the company—in connection with the sale of company assets and the subsequent distributions of the proceeds.  Explaining that there is “no hard and fast rule” under Delaware law for determining whether a Section 220 action tolls a statute of limitations, the Court considered various factors and held that plaintiff met its burden to demonstrate that tolling should apply.  In particular, the Court highlighted that the Section 220 action sought to investigate possible mismanagement related to the asset sales and distributions of proceeds and the claims subsequently advanced “were related to that information.”
    CATEGORY: Books and Records
  • Delaware Court Of Chancery Denies Motion To Dismiss LPA Breach Claims, Including Aiding And Abetting Claim Against Financial Advisor
     
    09/05/2018

    On August 29, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied defendants’ motions to dismiss an amended complaint in a long-running lawsuit arising from a sale of an interest in a pipeline by a general partner to a master limited partnership in which it held a controlling interest.  Mesirov v. Enbridge Energy Co. Inc., C.A. No. 11314 (Del. Ch. Aug. 29, 2018).  Plaintiff, a common unitholder of a Delaware master limited partnership (the “MLP”), brought claims for breach of the MLP’s Limited Partnership Agreement (“LPA”) against the general partner (the “GP”), its parent, and other affiliates.  Plaintiff alleged that the GP acted in bad faith by purportedly selling the interest for $1 billion even though it had previously acquired the same interest from the MLP five years earlier for $800 million and earnings metrics had declined over the period by 20%.  As discussed in our previous post, Vice Chancellor Slights originally dismissed this suit in April 2016, but the Delaware Supreme Court reversed and remanded in March 2017, holding that bad faith was sufficiently pleaded.  Here, Vice Chancellor Slights denied the GP’s motion to dismiss claims for breach of the LPA, finding them to be duplicative of the claims in the motion rejected by the Delaware Supreme Court in 2017.  Vice Chancellor Slights also declined to dismiss new claims for aiding and abetting against the GP’s financial advisor, which had delivered a fairness opinion regarding the transaction.
  • Delaware Court Of Chancery Validates Ratification Of Defective Corporate Acts Impacting Merger And Declines To Expand Universe Of Claims Classified As Both Direct And Derivative
     
    08/28/2018

    On August 17, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied all of plaintiffs’ claims challenging a series of transactions culminating in the acquisition of defendant Design Within Reach, Inc. (“DWR”) by Herman Miller, Inc. (“HM”) in July 2014.  Charles Almond as Trustee for the Almond Family 2001 Trust v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. Aug. 17, 2018).  The claims related in large part to the documentation of a reverse stock split by DWR in 2010 that had the unintended effect of diluting the number of shares of common stock into which preferred stock could be converted by a factor of 50.  As this went unnoticed until after the merger, the preferred stock was converted into common stock as if there had been no error.  Plaintiffs, who were pre-merger minority stockholders of DWR, asserted various claims that defendants, including DWR’s controlling stockholder, thus improperly benefited from a greater percentage of equity and merger consideration than that to which they were legally entitled.  HM ratified the correction of the conversion factor (pursuant to 8 Del. C. § 204) and asserted a counterclaim for judicial validation of the defective corporate acts (under 8 Del. C. § 205).  Finding all relevant factors weighed “overwhelmingly in favor of judicial validation” the Court granted defendants’ request to validate the defective corporate acts and rejected plaintiffs’ claims.  Separately, the Court rejected breach of fiduciary duty claims unrelated to the merger.
  • Finding Merger Agreement Provisions Regarding Milestone Payments Ambiguous, Delaware Court Of Chancery Denies Dismissal Of Post-Merger Breach Claims
     
    08/21/2018

    On August 10, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of contract claims stemming from a merger agreement pursuant to which defendant, Stora Enso AB, acquired non-party, Virdia, Inc.  Fortis Advisors LLC v. Stora Enso Ab, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018).  Plaintiff, Fortis Advisors LLC, as shareholder representative of Virdia’s pre-merger equity holders, asserted that Stora Enso breached the merger agreement in connection with its failure to achieve certain post-closing milestones obligating it to make certain contingent milestone payments.  Finding competing interpretations of the merger agreement both reasonable, the Court declined to dismiss the breach claims. 
    CATEGORY: Deal Disputes
  • Southern District Of New York Denies Claims For Investment Banking Fees, Holding That The Engagement Terminated And The “Agreement To Agree” Was Unenforceable
     
    08/21/2018

    On August 10, 2018, Judge Jesse Furman of the United States District Court for the Southern District of New York denied claims for advisory fees brought by investment bank Stone Key Partners LLC (together with Stone Key Securities LLC, “Stone Key”) against its former client, Monster Worldwide, Inc. (“Monster”).  Stone Key Partners LLC v. Monster Worldwide, Inc., Case No. 1:17-cv-3851-JMF (S.D.N.Y. Aug. 10, 2018).  Monster engaged Stone Key in April 2012 to assist in a “review of strategic alternatives,” including a possible sale, and agreed to compensate Stone Key if it entered into certain transactions within 12 months of any termination of the engagement; Monster engaged another financial institution as a co-advisor.  The engagement letter with Stone Key did not clearly require written notice of termination and provided that Stone Key would be paid 55% of a fee that “shall be mutually acceptable . . . and consistent with compensation agreements customarily agreed to by” investment banks for similar transactions in connection with any “partial sale” transaction within the tail period.  The Court found that the engagement ended in August 2013, when it was clear (in the eyes of the Court) that the sale exploration process was over, and thus denied claims for transactions completed in 2015 and 2016.  The Court also rejected as unenforceable the partial sale fee provision, finding it to be an unenforceable agreement to agree.
  • Applying Dell  and DFC, Delaware Court Of Chancery Finds “Fair Value” Is Deal Price Less Synergies In Appraisal Action
     
    08/07/2018

    On July 30, 2018, Chancellor Andre Bouchard of the Delaware Court of Chancery determined that the deal price minus synergies was the best evidence of the fair value of Solera Holdings, Inc. (“Solera”) in an appraisal action arising from the acquisition of Solera by Vista Equity Partners.  In re Solera Holdings Stockholder Litigation, C.A. No. 12080-CB (Del Ch. July 30, 2018).  Applying recent guidance from the Delaware Supreme Court, the Court found that the deal price should be afforded “dispositive” weight because the transaction process was characterized by “objective indicia of reliability,” including a robust sales process directed by an independent special committee and an efficient market for Solera shares.  Accordingly, the Court found petitioners were entitled to $53.95 per share, consisting of the deal price ($55.85 per share) less the value of merger synergies ($1.90 per share).
    CATEGORY: Appraisals
  • Delaware Court Of Chancery Grants Minority Stockholder’s Section 220 Demand As To Emails But Denies Access To Merger-Related Drafts
     
    08/07/2018

    On July 30, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery partially granted a Section 220 demand for the books and records of Globalstar, Inc. brought by the company’s largest minority stockholder, Mudrick Capital Management, L.P.  Mudrick Cap. Mgmt, L.P. v. Globalstar, Inc., C.A. No. 2018-0351-TMR (Del. Ch. July 30, 2018).  The demand arose in the context of a pending merger between Globalstar and Thermo Acquisitions, Inc., an entity controlled by Globalstar’s CEO and controlling stockholder.  The parties did not dispute that Mudrick Capital’s demand was based on several proper purposes in connection with evaluating certain aspects of the merger and Globalstar agreed to produce various categories of documents.  Resolving remaining disputes about the scope of the production, however, the Court held that emails were subject to production, but denied the demand for draft board minutes and other draft materials.
    CATEGORY: Books and Records
  • Delaware Court Of Chancery Applies MFW  To Stockholder Challenge To An All-Stock Transaction With Allegedly Controlling Stockholder
     
    07/31/2018

    On July 20, 2018, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery 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., C.A. No. 2017-0414 (Del. Ch. July 20, 2018).  Plaintiffs claimed that Earthstone’s directors, officers, and an allegedly 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.  Plaintiffs argued that, because EnCap was a majority stockholder in Oak Valley, and thus also a beneficial controlling stockholder in Earthstone, as well as a majority stockholder in Bold, Oak Valley and EnCap stood on both sides of the transaction, making it unfair.  The Court dismissed plaintiffs’ claims, concluding that, because Earthstone structured the transaction in the manner prescribed by Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), the business judgment rule standard of review applied.
  • Finding Disclosures Inadequate To Merit Application Of Corwin, Delaware Supreme Court Reverses Court of Chancery Dismissal Of Post-Closing Breach Of Fiduciary Duty Claims
     
    07/17/2018

    On July 9, 2018, the Delaware Supreme Court reversed and remanded a decision by the Delaware Court of Chancery to dismiss stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (TFM) after its acquisition in a two-step take-private merger by affiliates of Apollo Global Management, LLC (“Apollo”).  Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018).  As discussed in our prior post on this case, the Court of Chancery dismissed claims that the sale process undertaken by TFM was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor.  Specifically, the Court of Chancery concluded that the facts regarding the involvement of TFM’s founder with Apollo were adequately disclosed in connection with the tender offer—in which 68.2% of shares were tendered—and the deal was therefore subject to the deferential business judgment rule under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  Finding that the complaint adequately alleged several “materially incomplete and misleading” disclosures, the Delaware Supreme Court reversed.
  • Delaware Court Of Chancery Finds Allegations Of A Controlling Stockholder Group Sufficient To Preclude Dismissal Of Merger-Related Fiduciary Duty Breach Claims
    06/26/2018
    On June 18, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss claims of breach of fiduciary duty brought by a putative class of minority stockholders of Hansen Medical Inc. (“Hansen”) against an alleged group of controlling stockholders, in connection with the squeeze-out merger of Hansen into Auris Surgical Robotics, Inc. (“Auris”). In re Hansen Medical, Inc. Stockholder Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018).
  • Delaware Supreme Court Affirms Court Of Chancery, Finding That General Partner Complied With Obligations Under Limited Partnership Agreement
    06/19/2018
    On June 8, 2018, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of a putative class action challenging the merger of El Paso Pipeline Partners, L.P. (the “MLP”) with a subsidiary of its general partner, El Paso Pipeline GP Company, L.L.C. (the “GP”), all of which were controlled by defendant Kinder Morgan, Inc.

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  • Delaware Court Of Chancery Rejects Appraisal Rights For Stockholders Of Merger Parent, Even When Transaction Results In Sale Of Control Over The Surviving Corporation.
    06/13/2018

    On May 25, 2018, Chancellor Andre G. Bouchard dismissed a class action lawsuit brought by stockholders of Dr. Pepper Snapple Group, Inc. (“Dr. Pepper”) against the company and its directors asserting that the merger with Maple Parent Holdings Corp. (“Maple Parent”), the parent company of Keurig Green Mountain, Inc., deprived them of their statutory appraisal rights.  City of North Miami Beach General Employee’s Retirement Plan v. Dr. Pepper Snapple Group, Inc., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018).  Plaintiffs alleged that Dr. Pepper’s directors breached their fiduciary duties, and the corporation violated Section 262 of the Delaware General Corporation Law, when Dr. Pepper filed a proxy statement that informed stockholders that they were not entitled to appraisal rights in connection with the proposed merger.

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    CATEGORY: Appraisals
  • Delaware Supreme Court Clarifies Standard For Contract Formation, Reversing And Remanding Court Of Chancery Decision On Enforceability
     
    06/05/2018

    On May 24, 2018, in an opinion by Justice Karen L. Valihura, the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery dismissing breach of contract and related claims.  Eagle Force Holdings, LLC, et al. v. Campbell, C.A. No. 10803-VCMR (Del. May 24, 2018).  As discussed in our prior post on this case, the Court of Chancery found that a limited liability company agreement and associated contribution agreement under which plaintiff-appellant purported to bring claims were not binding because they lacked several “essential” terms.  Reversing, the Delaware Supreme Court concluded that the agreements “sufficiently address[ed] all issues identified by the trial court as material to the parties.”  But the Court remanded for reconsideration of the evidence to make a finding on the parties’ “intent to be bound.”

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    CATEGORY: Deal Disputes
  • Delaware Court Of Chancery Reaffirms Decision That “Fair Value” For Appraisal Was The Unaffected Market Price, Based On Dell And DFC
     
    05/30/2018

    On May 21, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery reaffirmed the Court’s earlier ruling that the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) for purposes of appraisal in connection with its acquisition by Hewlett-Packard Company (“HP”) was Aruba’s 30-day average unaffected market price ($17.13 per share), notwithstanding the deal price ($24.67 per share).  Verition v. Aruba Networks, C.A. No. 11448-VCL (Del. Ch. May 21, 2018).  As we discussed in our post regarding the prior decision, the Court made that determination by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell and DFC, but seemed to express reservations about doing so.  Petitioners moved for reargument, contending the Court misapprehended the law and facts, in part due to “frustration” with the Delaware Supreme Court’s recent pronouncements on appraisal in those two cases.  In this new decision denying the motion for reargument, the Court explained that it viewed “the Delaware Supreme Court’s endorsement of the efficient capital markets hypothesis and its emphasis on market indicators over the subjective views of knowledgeable insiders as altering the decisional landscape and authorizing greater reliance on market value.”

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    CATEGORY: Appraisals
  • Delaware Supreme Court Affirms Court Of Chancery Appraisal Determination At Nearly 60% Discount To Deal Price
     
    05/01/2018

    On April 23, 2018, the Supreme Court of Delaware affirmed a decision by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery appraising the shares of Clearwire Corporation at $2.13 per share, notwithstanding that Clearwire was acquired for $5.00 per share.  ACP Master, Ltd., et al. v. Sprint Corporation, et al. & ACP Master, Ltd., et al. v. Clearwire Corporation, C.A. No. 8508-VCL, C.A. No. 9042-VCL (Del. Apr. 23, 2018).  As discussed in our post regarding that decision, stockholder petitioners had challenged the merger of Clearwire with Sprint Nextel Corporation, alleging that Sprint had been a controlling shareholder of Clearwire prior to the transaction and had breached its fiduciary duties during merger negotiations.  Petitioners also sought appraisal, asserting that the $5.00 deal price substantially undervalued their shares.  As we highlighted previously, the Court of Chancery found no breach of fiduciary duties even under an entire fairness standard and determined that fair value of the shares amounted to $2.13, even though that price reflected nearly a 60% discount to the deal price.  With regard to the breach claims, the Court of Chancery concluded that instances of unfair dealing in an early phase of the process were “render[ed] immaterial” in light of subsequent arm’s-length negotiations and “overwhelming evidence” that the final deal price was fair.   As to the appraisal finding, the Court of Chancery explained that the appraisal statute requires the exclusion of “any synergies present in the deal price” and was persuaded by the discounted cash flow analysis offered by defendants’ expert.  The Delaware Supreme Court, sitting en banc, affirmed without issuing an opinion.

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  • New York Supreme Court Dismisses Derivate Suit, Finding That Shareholder’s Letter Constituted A Demand And Business Judgment Rule Applied
     
    04/03/2018

    On March 23, 2018, Justice Charles E. Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice a purported derivative suit alleging that the board of Intercept Pharmaceuticals, Inc. (“Intercept”) breached their duty of loyalty and good faith and squandered corporate assets by approving, without a stockholder vote, a non-employee director compensation policy.  Solak v. Fundaro, No. 655205 (N.Y. Sup. Ct. Mar. 23, 2018).  Though plaintiff sent a letter to Intercept prior to filing suit, demanding that the company take “all action necessary” to remedy the waste allegedly caused by the directors’ compensation policy, plaintiff argued that the letter was not a demand within the meaning of Delaware Court of Chancery Rule 23.1, and that demand would have been futile because self-compensation decisions are inherently conflicted transactions.  The Court held that plaintiff’s letter fulfilled all the requirements of a demand under Delaware law and that the board’s investigation of and response to the demand was sound under the business judgment rule.

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  • Delaware Court Of Chancery Denies Corwin Motion To Dismiss, Finding Allegations Of Control Adequately Pleaded As To 22% Stockholder
     
    04/03/2018

    On March 28, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss several derivative and class action claims brought by stockholders of Tesla, Inc. (“Tesla”) asserting that its directors breached their fiduciary duties in connection with its acquisition of SolarCity.  In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VCS (Del. Ch. Mar. 28, 2018).  Plaintiffs claimed the acquisition was an effort to rescue a distressed SolarCity to the detriment of Tesla stockholders, allegedly at the direction of Elon Musk, Tesla’s Chairman and CEO, who held 22.1% of Tesla’s common stock and was also SolarCity’s Chairman and largest stockholder.  Defendants contended that the claims were subject to dismissal pursuant to Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), in light of the approval of the deal by a majority of Tesla’s disinterested stockholders.  Plaintiffs argued that Corwin was inapplicable because the acquisition allegedly involved a conflicted controlling stockholder.  Declining to dismiss the claims, the Court explained that, notwithstanding his minority stake, the allegations demonstrated “extraordinary influence” and the complaint adequately pleaded that Musk “exercised his influence as a controlling stockholder with respect to the [a]cquisition.” 

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  • Superior Court Of Delaware Rules That Delaware Public Policy Does Not Prohibit Indemnification For Breach Of Duty Of Loyalty Based On Fraud
     
    03/27/2018

    On March 1, 2018, Judge Eric M. Davis of the Superior Court of the State of Delaware denied in part and granted in part the summary judgment motion brought by plaintiff-insurers, which provided directors and officers liability insurance coverage to Dole Food Company, Inc. (“Dole”) and sought a declaratory judgment that they were not obligated to fund the settlement of fiduciary duty claims against the defendant-insureds.  Arch Ins. Co. v. Murdock, No. N16C-01-104 EMD CCLD (Del. Super. Mar. 1, 2018).  The Court rejected the insurers’ argument that Delaware public policy prohibited indemnification for liability resulting from breaches of fiduciary duty based on fraudulent conduct, the basis of the claims against the insureds (including David Murdock, Dole’s former CEO who took the company private in 2013, and Michael Charter, Dole’s former COO) litigated in the Delaware Court of Chancery in In re Dole Food Co., Inc. Stockholder Litigation., C.A. No. 8703-VCL, 2015 WL 5052214 (Del. Ch. Aug. 27, 2015) (“In re Dole”).  The Superior Court also found that the parties were collaterally estopped from re-litigating factual matters decided in In re Dole, declined to rule on plaintiffs’ breach of contract defenses and defendants’ bad faith counterclaims, and dismissed defendants’ fraudulent inducement claims. 

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    CATEGORY: D&O Insurance
  • Delaware Court Of Chancery Relies On Corwin To Dismiss Post-Closing Fiduciary Duty Claims After Finding Acquiror Was Not A Controlling Stockholder
     
    03/20/2018

    On March 9, 2018, Vice Chancellor Joseph R. Slights III, of the Delaware Court of Chancery, dismissed a stockholder class action complaint seeking damages for alleged breaches of fiduciary duty by directors of Rouse Properties Inc. (“Rouse”) and its 33.5% stockholder, Brookfield Asset Management, Inc. (“Brookfield”), arising out of Rouse’s merger with Brookfield in 2016. In Re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS (Del. Ch. Mar. 9, 2018). Plaintiffs, pre-merger stockholders of Rouse, alleged that breaches of fiduciary duty by a special committee of the Rouse board that negotiated the deal, and Brookfield, as an alleged controlling stockholder, led to a transaction that grossly undervalued Rouse. The Court found that the complaint did not come even “remotely close” to pleading that Brookfield exercised the “managerial clout and retributive power to infer actual control.” Concluding that Brookfield was not a controlling stockholder, the Court dismissed the breach of fiduciary duty claims against Brookfield and, in light of the approval of the deal by a majority of the disinterested stockholders, applied the business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to dismiss the claims against the special committee directors as well.

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  • Delaware Supreme Court Affirms Delaware Court Of Chancery’s Dismissal Of Fiduciary Duty Breach Claims, Finding Non-Exculpated Claim Inadequately Pled 
     
    03/20/2018

    On March 15, 2018, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s dismissal of a putative stockholder class action asserting claims for breach of fiduciary duty and quasi-appraisal against the directors of Kreisler Manufacturing Corporation (“Kreisler”) in connection with Kreisler’s sale to Arlington Capital Partners (“Arlington”). Kahn v. Stern, No. 393, 2017 (Del. March 15, 2018). As discussed in our post regarding that decision, plaintiffs argued that merger consideration was improperly diverted into payments for two management directors. In a short order, the Delaware Supreme Court affirmed the dismissal on the basis that the pled facts did not support a rational inference that these payments were improperly diverted. Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017). However, the Supreme Court expressed its disagreement with the Court of Chancery’s opinion “to the extent” that it “suggests that it is an invariable requirement that a plaintiff plead facts suggesting that a majority of the board committed a non-exculpated breach of its fiduciary duties in cases where Revlon duties are applicable, but the transaction has closed and the plaintiff seeks post-closing damages.” The Court noted that Revlon duties remain applicable notwithstanding an exculpatory charter provision even though directors may only be held liable for a non-exculpated breach of those duties.

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  • Delaware Court Of Chancery Denies Stay Of Columbia Pipeline Appraisal, Finding That Pendency Of An Appeal Of Aruba Networks Did Not Warrant A Stay
     
    03/13/2018

    On March 7, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to stay or extend discovery filed by an appraisal petitioner in light of Vice Chancellor Laster’s recent ruling in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (the subject of a prior post).  In re Appraisal of Columbia Pipeline Group, Inc., C.A. No. 12736-VCL (Del. Ch. Mar. 7, 2018).  Vice Chancellor Laster rejected petitioners’ assertion that Aruba Networks created a “cloud of uncertainty” about the evidence considered and standards applied in Delaware appraisal proceedings, and held that the Court’s reliance on unaffected market price to determine fair value was in line with the Delaware Supreme Court’s decisions in DFC and Dell.

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    CATEGORY: Appraisals
  • Delaware Court Of Chancery Rejects Challenge To Books And Records Demand, Holding That Evidence From Qui Tam Action Demonstrated “Credible Basis” From Which To Infer Wrongdoing
     
    03/06/2018

    On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted stockholders’ Section 220 demand to inspect the books and records of UnitedHealth Group Inc. (“UnitedHealth”) in order to investigate allegedly fraudulent Medicare billing practices.  In re UnitedHealth Group, Inc. Sec. 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28 2018).  The Court held that plaintiffs could rely on evidence cited by the government in a qui tam complaint against UnitedHealth to demonstrate a “credible basis” from which to infer wrongdoing or mismanagement so as to justify authorizing the Section 220 demand in part. 

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    CATEGORY: Books and Records
  • Delaware Court Of Chancery Dismisses Derivative Breach Of Fiduciary Duty Claims In Connection With Publication Of Non-Final Drug Trial Results For Lack Of Demand Futility
     
    03/06/2018

    On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims against the directors of Orexigen Therapeutics Inc. (“Orexigen”) for alleged breaches of fiduciary duty in connection with the company’s clinical drug trials.  Orexigen Therapeutics Inc. v. Michael A. Narachi, et al., C.A. No. 12412-VCMR (De. Ch. Feb. 28, 2018).  Plaintiffs asserted that the directors violated the law because they failed to follow best practices with respect to clinical trials; consequently, plaintiffs argued that demand was futile because a majority of the board faced substantial risk of liability.  The Court dismissed these claims, finding that the Company’s actions were not “so egregious or irrational” as to violate the business judgment rule and, accordingly, demand futility had not been adequately pleaded.

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  • Delaware Court Of Chancery Uses DCF Analysis To Arrive At Fair Value Below Deal Price, Even Though Deal Process Was Not “Dell Compliant”
     
    03/06/2018

    ​On February 23, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled, based on his own discounted cash flow (“DCF”) analysis, that the fair value of AOL Inc. (“AOL”) was below the deal price paid by Verizon Communications Inc. (“Verizon”) to acquire it.  In re: Appraisal of AOL Inc., C.A. 11204-VCG.  The Court reached this conclusion after finding that the deal process was not “Dell Compliant”—a newly coined phrase—because various deal protections and statements by AOL’s CEO may have discouraged other potential buyers who would have paid more to acquire AOL.  Accordingly, the Court afforded no weight to the deal price in its valuation of AOL but rather used that price as a “check” on his DCF analysis.

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    CATEGORY: Appraisals
  • Reinstating A Post-Closing Merger Challenge, Delaware Supreme Court Holds Views Expressed By Directors In Connection With A Transaction Vote Are Not Per Se Immaterial 
     
    02/27/2018

    On February 20, 2018, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr., reversed the dismissal of a suit brought by former stockholders of Diamond Resorts International (“Diamond”) challenging the company’s two-step cash-out merger.  Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018).  As discussed in our prior post on this case, the Delaware Court of Chancery dismissed plaintiffs’ breach of fiduciary duty claims because the disinterested stockholders of Diamond, who were “fully informed,” overwhelmingly accepted the tender offer.  In reaching that decision, the Court of Chancery found it immaterial that the proxy did not disclose that Diamond’s chairman—who abstained from the board vote on the deal—had expressed disappointment with the price and indicated that “it was not the right time to sell.”  Reversing and remanding, the Delaware Supreme Court held that when a board discloses its reasons for recommending a transaction, “the contrary view of an individual board member may be material.”  In this case, the Delaware Supreme Court concluded, the chairman’s expressed views regarding the wisdom of the sale were material and the omission rendered the proxy misleadingly incomplete.

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  • Delaware Court Of Chancery Applies Dell And DFC To Find “Fair Value” Of Widely Traded Company With No Controlling Stockholder Is Equal To Unaffected Market Price
     
    02/27/2018

    On February 15, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) in an appraisal action arising from the acquisition of Aruba by Hewlett-Packard Company (“HP”).  Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Feb. 15, 2018).  The Court reached this conclusion by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell but expressed reservations about doing so.  Though facially helpful for defendants in appraisal actions, the decision effectively invites the Supreme Court to revisit Dell and DFC, suggesting that those decisions compelled the trial court to ignore evidence of a less-than-robust deal process and undervaluation of Aruba by stock market analysts.

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    CATEGORY: Appraisals
  • Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment
     
    02/21/2018

    On February 6, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a summary judgment motion by defendant Potomac Capital Partners II, LP (“Potomac”) in an action by stockholders challenging the sale of PLX Technology, Inc. (“PLX”) to Avago Wireless, Inc.  In re PLX Technology Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. Feb. 6, 2018).  Plaintiffs alleged Potomac, which was PLX’s largest shareholder, aided and abetted members of the PLX board in committing breaches of fiduciary duty in connection with the sale.  In its concise order holding that the case would need to go to trial, the Court rejected Potomac’s contention that the business judgment rule, rather than the enhanced scrutiny test, was the operative standard by which to review the deal.  The Court further determined that—under the enhanced scrutiny standard—there existed disputes of material fact regarding the PLX board’s actions.

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  • New York Court Denies Approval Of Disclosure-Only Settlement, Finding Supplemental Disclosures “Useless”
     
    02/21/2018

    On February 8, 2018, Justice Shirley Werner Kornreich of the New York Supreme Court denied a motion for final approval of a disclosure-only settlement in a class action suit brought by shareholders of Martin Marietta Materials, Inc. (“MMM”) regarding its acquisition of Texas Industries, Inc. (“TXI”).  City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct., Feb. 8, 2018).  Plaintiff, which owned only ten shares in MMM, asserted breach of fiduciary duty claims and sought to enjoin the merger on the ground of inadequate disclosures in the proxy provided to shareholders.  The parties, however, reached a settlement, which required defendants to make certain “supplemental disclosures” and provided for the payment of $500,000 in attorneys’ fees to plaintiff’s counsel.  Justice Kornreich previously denied approval of the settlement, but that decision was reversed by the New York Supreme Court, Appellate Division and remanded for a fairness hearing.  City Trading Fund v. Nye, 144 A.D.3d 595, 21 (N.Y. App. Div. 2016).  Moreover, in the interim, the Appellate Division, in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017), adopted a more lenient approval standard for disclosure-only settlements than that followed recently by courts in Delaware and elsewhere.  Nevertheless, Justice Kornreich found the supplemental disclosures “utterly useless to the shareholders” and, therefore, declined to approve the settlement.

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  • Delaware Court Of Chancery Holds That Addition Of MFW Protections Following Initial Controller Proposal But Before Negotiations Meets MFW Conditions
     
    02/13/2018

    On February 2, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed a stockholder challenge to the buyout of Synutra International Inc. (“Synutra”) in a squeeze-out merger by a controlling stockholder group.  In re Synutra International Inc. Stockholder Litigation, C.A. No. 2017-0032 (Del. Ch. Feb. 2, 2018).  Plaintiffs asserted breach of fiduciary duty claims against the controller group and the special committee of the Synutra board.  They alleged that the transaction did not satisfy the ab initio requirement under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), because the controller group did not initially condition the proposed transaction on recommendation by a special committee and approval by a majority of the disinterested stockholders, features added weeks after the controller’s initial proposal letter and after the Synutra board had already met and formed a special committee.  Finding that “the controller announce[d] the conditions before any negotiations took place,” the Court held the ab initio requirement was satisfied and dismissed the complaint under MFW

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  • Delaware Court Of Chancery Invalidates Written Consent Of The Majority Of Common Stockholders Purporting To Remove And Replace CEO 
     
    02/06/2018

    On January 10, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion for judgment on the pleadings to plaintiffs, the CEO and another director of TradingScreen Inc., invalidating a written consent of the majority of common stockholders purporting to remove and replace the CEO and effect other changes to the board.  The Court explained that Delaware law provides for the selection of officers as prescribed by a company’s bylaws or determined by the board and found that TradingScreen’s bylaws provide for the board to elect and remove officers.  Therefore, the Court held the written consent was “ineffective.”      

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    CATEGORY: Charters & Bylaws
  • Delaware Supreme Court Affirms Dismissal Of Stockholder Derivative Claims On Issue Preclusion Grounds Based On A Demand-Futility Dismissal Of A Prior Derivative Suit, Holding That The Application Of Issue Preclusion Does Not Violate Federal Due Process 
     
    01/30/2018

    ​On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s  dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights.  In re Wal-Mart Stores Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Jan. 25, 2018).  In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.

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