Delaware Supreme Court Requires Board To Demonstrate “Compelling Justification” For Stock Sale Primarily Intended To Interfere With Stockholder Voting Rights
On June 28, 2021, in an en banc opinion authored by Chief Justice Collins J. Seitz, Jr., the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery, which had upheld a contested stock sale by the board of UIP Companies, Inc. (the “Company”). Coster v. UIP Cos., Inc., No. 49, 2020 (Del. June 28, 2021). Plaintiff was one of the Company’s two equal stockholders. Plaintiff alleged that defendant, the other stockholder, who was also the board chairman, and the two other directors voted to issue stock to one of them in order to dilute plaintiff’s ownership interest. The Court of Chancery found that the board approved the stock sale at a fair price and through a fair process. Reversing and remanding, the Delaware Supreme Court held that—although the sale may have satisfied its entire fairness review—“inequitable action does not become permissible simply because it is legally possible.” The Delaware Supreme Court further held that, if the board acted for the “primary purpose of thwarting” the stockholder’s vote or reducing her leverage as an equal stockholder—even in good faith—the board must demonstrate a “compelling justification.”
Delaware Court Of Chancery Dismisses Caremark Claims For Failure To Plead Demand Futility
On June 28, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of FedEx Corporation (the “Company”) against the Company’s directors for failure to plead that pre-suit demand on the board would have been futile. Pettry v. Smith, et al., No. 2019-0795-JRS (Del. Ch. June 28, 2021). Plaintiff primarily alleged that defendants breached their Caremark duties by failing to oversee the Company’s compliance with laws governing the transportation and delivery of cigarettes. The Court, however, concluded that the complaint did not plead particularized facts demonstrating that a majority of the board faced a substantial likelihood of liability.
Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims Against Certain Officer-Directors Of Acquirer But Upholds A Claim Against A Special Committee Member
On June 21, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by stockholders of Oracle Corporation (the “Company”) against two of its officer-directors in connection with its acquisition of NetSuite, Inc., but upheld a claim against the chairperson of the special committee that had been established to evaluate the transaction. In Re Oracle Corp. Deriv. Litig.,
C.A. No. 2017-0337-SG (Del. Ch. June 21, 2021). Plaintiffs alleged that the acquisition was a “controlled self-dealing transaction” in which the Company overpaid for the target to the benefit of the entities’ common founder, who allegedly controlled both. As discussed in a prior post
, the Court previously dismissed claims for aiding and abetting breaches of fiduciary duty that had been asserted against the target’s CEO and Chairman. Finding that the complaint failed to plead facts demonstrating gross negligence or disloyalty, the Court dismissed fiduciary-duty breach claims against two officer-directors. The Court, however, found the complaint adequately alleged that it is “reasonably conceivable” that the director on the special committee was “not independent” of the founder and “actively participated in the formulation” of the transaction to advance the alleged controller’s interest.
Delaware Court Of Chancery Allows Claim That Purchaser Altered Target’s Business Plan To Avoid Paying Earnout Consideration To Proceed
On June 7, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a motion to dismiss a breach of contract claim against defendant Albertsons Companies, Inc. brought by a representative of former shareholders of DineInFresh, Inc. (the “Company”) in the wake of its acquisition by defendant. Shareholder Representative Services LLC v. Albertsons Companies, Inc., No. CV 2020-0710-JRS (Del. Ch. June 7, 2021). The merger agreement contained an earnout provision whereby the shareholders of the Company would be paid additional consideration contingent upon the Company reaching specified revenue milestones. The merger agreement provided that defendant had complete discretion over the operation of the Company post-closing, except that it was prohibited from taking any action with the “intent of decreasing or avoiding” the earnout. Plaintiff alleged that defendant immediately caused the Company to shift its focus away from its revenue-generating e-commerce business. The Court held that the complaint adequately pleaded that it was “reasonably conceivable that [defendant’s] decision to focus almost exclusively on . . . brick-and-mortar business, despite having knowledge that such a decision would almost certainly cause the company to miss the earnout milestones, was the product of an intent to avoid the earnout.”
Delaware Court Of Chancery Finds Company’s Founders Constitute Control Group And That Entire Fairness Applies To Transaction In Which They Obtained Benefits Not Available To Minority Stockholders
On June 1, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action against the founders of Tilray, Inc. (the “Company”) for breach of fiduciary duties in connection with a merger with Privateer Holdings, Inc., a parent entity through which the Company’s founders had maintained their holdings. In re Tilray, Inc. Reorganization Litig., C.A. No. 2020-0137-KSJM (Del. Ch. June 1, 2021). The alleged purpose of the merger was to effect a reorganization of the business to mitigate expected federal capital gains tax consequences that the founders would incur in connection with the anticipated divestment of their holdings. The Court found that the Company’s three founders constituted a control group and that the reorganization constituted a self-dealing transaction subject to entire fairness review. The Court also found that demand on the board would have been futile as a majority of the board was conflicted.
In A Matter Of First Impression, Delaware Court Of Chancery Allows “Reverse Veil-Piercing” Theory To Proceed In Appraisal Judgment Enforcement Action
On May 25, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery partially denied a motion to dismiss claims brought by dissenting stockholder plaintiffs in a post-merger action to enforce an appraisal judgment. Manichaean Capital, LLC v. Exela Technologies Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021). The Court found that plaintiffs had adequately pleaded facts to allow a reasonable inference that the acquirer diverted funds from the acquiree’s subsidiaries in order to deprive the acquiree of funds to satisfy plaintiffs’ appraisal judgment. In what it called a “matter of first impression,” the Court held that plaintiffs’ allegations were sufficient to support “reverse veil-piercing” and permit execution of the judgment against the subsidiaries, as well as “traditional veil-piercing” as against the acquirer.
Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
On May 10, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss claims for breach of fiduciary duty and unjust enrichment brought by former stockholders of Voltari Corporation, challenging the take-private buyout of the company by its controlling stockholder. Franchi, et al. v. Firestone, et al., C.A. No. 2020-0503-KSJM (Del. Ch. May 10, 2021). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—the buyout offer was conditioned on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Nevertheless, plaintiffs claimed that the purchase price did not account for the value of the company’s net operating loss carryforwards and therefore the controller and the company’s directors breached their fiduciary duties. The Court, however, held that defendants were entitled to the benefit of the business judgment rule under MFW because plaintiffs did not adequately plead (i) a lack of independence as to the members of the special committee; (ii) that the committee acted with gross negligence in approving the merger; or (iii) that the proxy in connection with the stockholder vote failed to disclose material facts.
Delaware Chancery Court Requires Buyers To Close On Pre-Coronavirus Deal Notwithstanding Impact Of Pandemic On Cake-Decorating Business
On April 30, 2021, then-Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted sellers specific performance in a breach of contract action against buyers KCAKE and Kohlberg Funds, arising out of the sale of DecoPac Holdings Inc. (“DecoPac”). Snow Phipps Group, LLC., et al. v. KCake Acquisition, Inc., et al., 2020-0282-KSJM (Del. Ch. Apr. 30, 2021). The Court found that DecoPac had not suffered a Material Adverse Event (“MAE”) and had complied with its ordinary course of business covenant, but that the buyers breached the purchase agreement because they had not used reasonable best efforts to secure the debt financing necessary to close the deal and their actions had caused the debt financing to become unavailable.
Delaware Supreme Court Affirms No Recovery In Cigna-Anthem Star-Crossed Venture
On May 3, 2021, the Supreme Court of Delaware affirmed en banc
the decision of the Delaware Court of Chancery that neither Cigna Corporation nor Anthem, Inc. was entitled to any damages or fees sought in connection with their failed merger. Cigna Corp. v. Anthem, Inc., et al.
, No. 364, 2020 (Del. May 3, 2021). As we discussed in our prior post
, after the Department of Justice (“DOJ”) blocked the merger as anticompetitive, Cigna and Anthem sued each other for expectation damages, and Cigna also sought a reverse termination fee. But the Court of Chancery rejected both parties’ claims and denied all recovery, finding that “[e]ach party must bear the losses it suffered as a result of their star-crossed venture.” The Court of Chancery held in part that (i) any breach of covenants by Cigna did not result in damages because the DOJ would have enjoined the merger anyway, and (ii) Anthem properly terminated the merger due to the covenants breach and thus the reverse termination fee was not available. In a concise order, the Supreme Court affirmed the ruling in its entirety “on the basis of and for the reasons assigned by the Court of Chancery.”
Delaware Court Of Chancery Dismisses Claims For Breach Of Earnout Provision
On April 22, 2021, Vice Chancellor Joseph R. Slights III granted a motion to dismiss filed by defendants ID Experts Holdings, Inc. and its acquiror Identity Theft Guard Solutions, Inc. (together, “ID Experts”), dismissing breach of contract claims filed by Plaintiff Obsidian Finance Group, LLC (“Obsidian”) that arose out of a merger earnout provision. Obsidian Finance Group, LLC. v. Identity Theft Guard Solutions, Inc., No. 2020-0485-JRS (Del. Ch. Apr. 22, 2021). Obsidian, which had been a security holder in ID Experts prior to its sale, sought payment on an earnout provision that was contingent upon a six-year extension of a cybersecurity contract with the U.S. government. In dismissing the case, the Court rejected Obsidian’s argument that they were entitled to the earnout, even though the contract had not been extended for six years, because a regulation prohibited six-year extensions for such contracts.
Delaware Court Of Chancery Orders Production Of Formal, Board-Level Materials In 220 Action
On April 14, 2021, Vice Chancellor Paul A. Fioravanti granted a shareholder plaintiff’s motion to compel production of certain books and records of a pharmaceutical company. Melvin Gross v. Biogen Inc., C.A. No. 2020-0096-PAF (Del. Ch. Apr. 14, 2021). Citing Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020), the Court found that the company’s complete denial of plaintiff’s Section 220 demands followed what the Court described as a recent trend of adopting an “overly aggressive defense strategy” in opposing such requests. The Court held that plaintiff established a proper purpose and was therefore entitled to certain books and records, but restricted the production to formal, board-level materials and compliance policies.
Delaware Court Of Chancery Dismisses Caremark And Disclosure Claims Related To Alleged Consumer Protection Law Violations For Failure To Plead Demand Futility
On March 30, 2021, Chancellor Andre G. Bouchard dismissed a derivative suit brought by a stockholder of LendingClub Corporation (the “Company”) against certain of the Company’s current and former directors and officers for failure to plead demand futility. Fisher v. Sanborn, et al., No. 2019-0631-AGB (Del. Ch. March 30, 2020). Plaintiff asserted breach of fiduciary duty claims against defendants after the Federal Trade Commission (FTC) filed a complaint against the Company for allegedly violating certain consumer protection laws by engaging in deceptive and unfair practices in connection with its lending business. Specifically, plaintiff alleged that defendants (i) breached their oversight duties by failing to monitor and oversee the Company’s compliance with consumer protection laws, and (ii) misrepresented the subject of the FTC investigation. The Court, however, found the complaint did not adequately plead that defendants failed to implement a monitoring system relevant to consumer protection law compliance or consciously disregard indications of noncompliance, as required to be alleged under Caremark. The Court also found that the complaint did not adequately plead that defendants “deliberately lied to investors.” The Court therefore held that the complaint did not demonstrate that the directors faced a substantial likelihood of liability and thus pre-suit demand on the board was not excused.
Delaware Court Of Chancery, Relying On Plain Language Of Purchase Agreement, Rejects Seller’s Attempt To Claw Back Cash Mistakenly Left In Target’s Bank Account
On March 29, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery granted defendants’ motion for judgment on the pleadings in a breach of contract action brought by plaintiff Deluxe Entertainment Services, Inc. in connection with its sale of a wholly-owned subsidiary, Deluxe Media Inc. (“Target”), to defendant, an affiliate of a private equity firm, DLX Acquisition Corporation. Deluxe Ent. Servs. Inc. v. DLX Acquisition Corp., No. CV 2020-0618-MTZ (Del. Ch. Mar. 29, 2021). The dispute arose from a transaction in which plaintiff sold defendant all outstanding shares of Target for approximately $175 million, but failed to sweep nearly $10 million in cash from Target’s bank accounts, as it was allegedly entitled to do in advance of closing. When defendant refused to return the forgotten funds after closing, plaintiff filed suit and asserted claims for breach of the purchase agreement and the implied covenant of good faith and fair dealing, as well as for reformation of the agreement based on mistake. Although the Court noted that defendant “does not dispute [that plaintiff] had the right to sweep those funds before closing” and that plaintiff’s failure to do so was “an operations or accounting mistake,” the Court rejected the claims, finding that the “heavily negotiated” agreement did not require defendant to return the disputed cash.
Delaware Supreme Court Finds D&O Coverage Applies To Fraudulent Conduct
On March 3, 2021, the Supreme Court of Delaware unanimously affirmed a series of rulings by the Superior Court of Delaware requiring a directors and officers (“D&O”) excess insurer, RSUI Indemnity Co. (“RSUI”), to pay over $12 million towards settlements to resolve claims arising from the conduct of Dole Food Co.’s (“Dole”) CEO, which the Delaware Court of Chancery previously found was fraudulent. In so holding, the Delaware Supreme Court ruled that losses stemming from fraudulent conduct are insurable under Delaware law. RSUI Indemnity Co. v. David H. Murdock, et al.
, C.A. No. 154, 2020, opinion (Del. Mar. 3, 2021). As we discussed in a prior post
, the Superior Court applied Delaware law and ordered RSUI to pay the full policy limit plus interest. The Supreme Court affirmed the ruling in its entirety, finding that, as the state of incorporation, Delaware had the “most significant relationship” with the D&O policy even though Dole was headquartered in California. The Supreme Court also held that Delaware law did not prohibit D&O coverage for fraudulent conduct, noting that neither the policy nor the state’s corporation laws prohibited defendants from securing D&O insurance for fraudulent conduct by insureds.
Delaware Court Of Chancery Invalidates Energy Company’s Anti-Activist Poison Pill Adopted At The Outset Of The COVID-19 Pandemic And Amid Global Oil Price War
On February 26, 2021, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery entered judgment in favor of stockholder plaintiffs against the directors of energy corporation The Williams Companies, Inc. and invalidated a stockholder rights plan—or “poison pill”—adopted by the corporation. In re The Williams Cos. Stockholder Litig., C.A. No. 2020-0707-KSJM (Del. Ch. Feb. 26, 2021). The board adopted the poison pill to deter stockholder activism in the midst of the COVID-19 pandemic and a global oil price war. Finding after a trial that the rights plan was not proportional to any legitimate threat identified, the Court held that the directors breached their fiduciary duties, declared the plan unenforceable, and permanently enjoined its operation.
Delaware Court Of Chancery Summarily Grants LLC Members’ Motion For Summary Judgment For Advancement Of Legal Expenses
On February 4, 2021, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion for summary judgment on entitlement to legal fees brought by unitholding members of Benchmark Investments, LLC and Benchmark General, LLC. Agahi, et al. v. Benchmark Investments, LLC, et al., No. 2020-0784 (Del. Ch. Sept. 15, 2020). Plaintiffs asserted claims against the companies for advancement of legal expenses incurred in connection with their defense against claims brought by the companies against them in a separate underlying action for alleged tortious interference and breach of contract. The Court granted plaintiffs’ motion for summary judgment without oral argument, finding it “clear from the complaint” in the underlying action that plaintiffs were entitled to advancement of legal fees under the indemnification and advancement rights conferred by the operative LLC agreements.
Delaware Court of Chancery Holds That Merger Was Fair And Reasonable Despite Mishandled Conflict Committee Appointment
On February 15, 2021, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered post-trial judgment in favor of the defendant-general partner of Regency Energy Partners LP (“Regency”) in a class action brought by Regency’s limited partners alleging breach of the partnership agreement (“Partnership Agreement”) and of the implied covenant of good faith and fair dealing. Dieckman v. Regency GP LP & Regency GP LLC, No. CV 11130-CB, 2021 WL 537325, (Del. Ch. Feb. 15, 2021). The Court held that, notwithstanding inaccurate proxy disclosures about the independence of the conflicts committee, Regency’s merger with Energy Transfer Partners (“ETP”) did not violate the Partnership Agreement’s requirement that the deal be fair and reasonable to the partnership, and that plaintiffs failed to establish bad faith, willful misconduct, or damages.
Delaware Court Of Chancery Partially Grants Section 220 Demand For Materials Related To Facebook FTC Settlement
On February 10, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted in part and denied in part a stockholder demand to inspect Facebook’s books and records related to its July 2019 settlement with the FTC arising from the unauthorized release of user data to data analytics firm Cambridge Analytica. Employees’ Retirement System of Rhode Island v. Facebook, Inc., C.A. No. 2020-0085-JRS (Del. Ch. Feb. 10, 2021). In a post-trial order, the Court directed Facebook to produce electronic communications from board members concerning the FTC settlement but not privileged documents that the stockholder sought.
Southern District Of New York Permits Contract Termination Based On COVID-19, Construes Pandemic As “Natural Disaster” Within Meaning Of Force Majeure Provision
On December 16, 2020, Judge Denise Cote of the United States District Court for the Southern District of New York dismissed an art dealer’s breach of contract action alleging that the defendant auction house had improperly terminated the parties’ agreement. JN Contemporary Art LLC v. Phillips Auctioneers LLC, – F. Supp. 3d – , 2020 WL 7405262 (S.D.N.Y. Dec. 16, 2020). Plaintiff contended that the auction house was not permitted to terminate the parties’ contract because the pandemic did not constitute a “natural disaster” within the meaning of the agreement’s force majeure clause. The Court held, applying New York law, that the COVID-19 pandemic is a “natural disaster” and therefore dismissed the action.
Delaware Supreme Court Affirms The Partial Denial Of Books And Records Demand
On January 26, 2021, the Supreme Court of Delaware affirmed a decision by the Delaware Court of Chancery rejecting in part the request by a member of a limited liability company (LLC) for the production of certain books and records for inspection pursuant to Section 18-305 of the Delaware Limited Liability Company Act (the analog to a Section 220 inspection demand for Delaware corporations). Durham v. Grapetree, LLC, No. 343, 2019 (Del. Jan. 26, 2021). The Delaware Supreme Court clarified that plaintiff was entitled pursuant to the requests approved by the trial court to informal records, such as emails, text messages, and phone records, to the extent the company conducted its business without documenting its actions in minutes, board resolutions, or by other formal means. But the Delaware Supreme Court held that the Court of Chancery did not abuse its discretion in denying requests it found overbroad, unrelated to a proper purpose for inspection, or that required the company to create new records.
Delaware Court Of Chancery Sustains Breach Of Fiduciary Duty Claims Against Target’s CEO And Aiding And Abetting Claims Against Target’s Financial Advisor And Buyer
On January 29, 2021, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied in part a motion to dismiss class action claims for breach of fiduciary duty against the CEO and Chairman of Presidio, Inc. (“Presidio”), its directors, and its controlling stockholder, as well as aiding and abetting breach of fiduciary duty against its financial advisor and BC Partners Advisors LP (“BCP”). The suit was brought by a former Presidio stockholder in connection with BCP’s 2019 acquisition of Presidio. Firefighters’ Pension Sys. of the City of Kansas City, Missouri Trust v. Presidio, Inc., C.A. No. 2019-0839-JTL, 2021 WL 298141 (Del. Ch. Jan. 29, 2021). The Court found that plaintiff adequately alleged that Presidio’s financial advisor and CEO “steered the sale process” toward a bidder who made an inferior offer, but that related claims against the board and controlling stockholder must be dismissed for failure to plead non-exculpated and money damages claims.
Delaware Supreme Court Affirms Appraisal Ruling Relying On DCF Analysis To Determine Fair Value
On January 22, 2021, the Delaware Supreme Court affirmed en banc the Delaware Court of Chancery’s decision appraising outsourcing and financial services company SourceHOV Holdings, Inc. based on a discounted cash flow analysis (“DCF”). SourceHOV Holdings Inc. v. Manichaean Capital LLC, No. 215, 2020 (Del. Jan. 22, 2021). Petitioners were minority stockholders who filed the appraisal action following the company’s participation in a series of transactions that resulted in a three-party business combination. In its concise order, the Delaware Supreme Court affirmed “on the basis of and for the reasons stated” by the lower court it its opinion. The Court of Chancery had explained that the circumstances surrounding the business combination that triggered the appraisal rights “disqualif[ied] market evidence as reliable inputs for a fair value analysis,” leaving the court to consider competing expert opinions on a DCF valuation. Moreover, the Court of Chancery largely adopted petitioners’ analysis, which it found more reliable than that of respondent’s expert.
Delaware Court Of Chancery Exercises Subject Matter Jurisdiction Appropriate Over Merger Agreement Dispute “Legal” Claim
On January 8, 2021, Vice Chancellor Kathaleen McCormick of the Delaware Court of Chancery denied in part a motion to dismiss a complaint by former stockholders of COR Securities Holdings, Inc. (the “Company”) against the buyers of the Company. Legent Grp., LLC v. Axos Fin., Inc., No. C.A. No. 2020-0405-KSJM (Del. Ch. Jan. 08, 2021). Plaintiffs asserted a claim seeking a declaratory judgment that defendants were not entitled to indemnification under the merger agreement. The Court rejected defendants’ contention that it should decline to exercise jurisdiction because it was a “purely legal”—rather than “equitable”—claim. The Court noted that there was no dispute that it had at least discretionary statutory jurisdiction pursuant to Delaware General Corporation Law (“DGCL”) Section 111(a). Declining to dismiss the claim, the Court declared it “appropriate” to exercise jurisdiction, even if discretionary, and therefore found it unnecessary to determine whether jurisdiction under the statute is mandatory.
Delaware Court Of Chancery Applies Zapata To Assess New Board Committee’s Motion To Dismiss Claims Being Pursued By A Previously Established Special Committee
On December 14, 2020, Chancellor Andre G. Bouchard denied a motion to dismiss a lawsuit by a special committee of the board of The We Company (the “Company”) against the Company’s new controlling stockholder and its affiliates (collectively, the “New Controller”). In Re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Dec. 14, 2020). After the New Controller acquired control in a multi-step transaction, the Company’s board established a new committee, which determined that the special committee lacked authority to continue the suit and directed management to move to dismiss. The Court noted that this presented an issue of first impression. The Court determined to engage in an analysis akin to that developed for assessing special committee motions to dismiss derivative claims under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). Zapata entails a two-part assessment (i) testing the independence, good faith and reasonableness of the investigation, and (ii) applying the court’s own independent business judgment as to whether the motion should be granted. The Court denied the motion because it found (i) the new committee did not establish the reasonableness of its investigation and conclusions, and (ii) the special committee was authorized to pursue the litigation and it would be “fundamentally unfair” to dismiss the claims.
Delaware Supreme Court Clarifies That A Section 220 Demand Is Not Necessarily Required To Establish That Suspected Wrongdoing Is “Actionable”
On December 10, 2020, in an en banc opinion authored by Justice Gary F. Traynor, the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery ordering the production of books and records by AmerisourceBergen Corporation pursuant to a Section 220 inspection demand. AmerisourceBergen Corporation v. Lebanon County Employees’ Retirement Fund, C.A. No. 60, 2020 (Del. Dec. 10, 2020). Under Section 220 of the Delaware General Corporation Law, a stockholder may inspect company records for a “proper purpose.” A stockholder who seeks company records for the purpose of investigating corporate wrongdoing must establish a “credible basis” from which the court can infer that wrongdoing may have occurred. Affirming the order of the Court of Chancery, the Delaware Supreme Court clarified that a stockholder who demonstrates such a credible basis “is not required in all cases to establish that the wrongdoing under investigation is actionable.”
Delaware Court Of Chancery Rules Inadequate Disclosure And Pandemic-Driven Changes To Hotel Operations Breached Covenants And Excused Closing
On November 30, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found that Mirae Asset Global Investments Co. was contractually entitled to terminate its agreement to purchase 15 U.S. hotels from a subsidiary of Dajia Insurance Group (“Seller”). AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al., C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020). Mirae refused to close the transaction in April, asserting that Seller had suffered an MAE and failed to satisfy closing covenants for the hotel deal worth $5.8 billion. Seller sued to force Mirae to close, but the Court determined that even though there was no MAE, Mirae nevertheless had the right to terminate the sale agreement because Seller breached its title insurance and ordinary course closing covenants.
Delaware Court Of Chancery Dismisses Derivative Claims For Failure To Plead Demand Futility Notwithstanding Unocal Enhanced Scrutiny
On November 20, 2020, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery dismissed stockholder derivative claims against the directors of Christopher & Banks Corporation. Gottlieb v. Duskin, C.A. No. 2019-0639-MTZ (Del. Ch. Nov. 20, 2020). Plaintiffs alleged that the directors breached their fiduciary duties by wrongfully enacting defensive measures to rebuff an unsolicited acquisition offer at a substantial premium to the company’s stock price even though the company was in “dire financial condition.” The Court determined that the complaint pled facts sufficient to trigger enhanced scrutiny of the directors’ conduct under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), rather than the deferential business judgment rule. Nevertheless, the Court held that the complaint did not sufficiently plead that the “directors face a substantial likelihood of bad-faith liability.” Therefore, the Court granted the motion to dismiss for failure to plead that pre-suit demand on the directors was excused, as required for a derivative action under Delaware Court of Chancery Rule 23.1.
Delaware Court Of Chancery Holds That Former Stockholders Can Pursue Direct Claims For Breach Of Fiduciary Duty Arising From Issuance Of Shares To Controlling Stockholder For Allegedly Insufficient Consideration
On October 30, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery upheld breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”) against its majority stockholder, CEO, and several directors. In re TerraForm Power, Inc. Stockholder Litigation, C.A. No. 2019-0757-SG (Del. Ch. Oct. 30, 2020). Plaintiffs alleged that the Company engaged in a private placement of stock to the controlling stockholder at a price that undervalued the shares that were issued. Accordingly, plaintiffs contended that the transaction diluted the financial and voting interest of the minority stockholders. Defendants moved to dismiss for lack of standing, arguing that such dilution claims are “quintessential derivative claims” that cannot be asserted by former stockholders. Vice Chancellor Glasscock, however, denied the motion to dismiss under “controlling precedent” because the Delaware Supreme Court upheld similar claims by former stockholders in Gentile v. Rossette, 906 A.2d 91 (Del. 2006).
Delaware Court Of Chancery Declines To Dismiss Claims That Officers Tilted Take‑Private Sale Process To Favored Buyer
On October 2, 2020, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by stockholders of Mindbody, Inc. (the “Company”) against two of its officers in connection with the Company’s $1.9 billion sale to a private equity firm. In Re Mindbody, Inc., Stockholders Litigation, C.A. No. 2019-0442-KSJM (Del. Ch. Oct. 2, 2020). Plaintiffs asserted that the Company’s founder-CEO/Chairman tilted the sale process toward the favored buyer, motivated by a need for liquidity and the prospect of post-merger employment with the firm. In particular, plaintiffs alleged that the CEO orchestrated (i) the provision of reduced diligence information in a less timely fashion to other potential bidders, and (ii) the lowering of earnings guidance to depress the stock price and make the Company a more attractive target to the favored firm while enhancing the premium apparent to stockholders. The Court found the allegations sufficient to support a “paradigmatic Revlon claim” and the determination at the pleading stage that the proxy was materially misleading such that the alleged breach was not cleansed under Corwin.
Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Plead Sufficient Facts Showing Demand Futility
On September 30, 2020, Chancellor Andre G. Bouchard dismissed a derivative suit brought by stockholders of TrueCar, Inc. (the “Company”) against certain of its officers and directors (along with allegedly related entities) asserting breaches of fiduciary duty, insider trading, unjust enrichment, contribution and indemnification, as well as aiding and abetting. In Re TrueCar, Inc. Stockholder Derivative Litigation, C.A. No. 2019-0672-AGB (Del. Ch. Sept. 30, 2020). According to the complaint, the Company operated an internet platform designed to facilitate purchases of cars that allegedly depended on consumer traffic directed to TrueCar by its “affinity partners.” The gravamen of the claims was that defendants did not disclose in the Company’s SEC filings that an impending redesign of the website of its most significant affinity partner would negatively impact the Company’s business and that certain defendants and their alleged affiliates engaged in stock sales before the public disclosure of this allegedly adverse development. Dismissing the suit in its entirety, the Court found that plaintiffs failed to plead “particularized facts sufficient to impugn the ability” of any of the directors to consider a pre-suit demand because the allegations did not demonstrate that the directors learned of the development or ignored any red flags before the challenged disclosures and stock sales.
Delaware Court Of Chancery Denies Billion-Dollar Damages In Cigna-Anthem Row
On August 31, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled that neither Cigna Corporation (“Cigna”) nor Anthem, Inc. (“Anthem”) were entitled to the billions of dollars in damages and fees the parties sought in connection with a failed merger between the two companies (the “Merger”). In Re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (Del. Ch. Aug. 31, 2020). After the Department of Justice (“DOJ”) successfully sued to block the Merger, Cigna and Anthem sued each other for expectation damages, and Cigna claimed that it was entitled to a Reverse Termination Fee (“RTF”). In a landmark 306-page opinion, the Court rejected both parties’ claims and denied all recovery, finding that “[e]ach party must bear the losses it suffered as a result of their star-crossed venture.”
Even After Finding Corwin Inapplicable Because Of Alleged Misstatements, Delaware Court Of Chancery Dismisses Post-Merger Damages Claims For Failure To Plead Bad Faith
On August 31, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims asserted against the directors of USG Corporation by former stockholders following its acquisition by a privately held German manufacturer of building materials. In re USG Stockholder Litigation, C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020). Plaintiffs alleged that defendants failed to secure maximum value for their shares in connection with the merger and sought damages, including by way of quasi-appraisal. Even though an overwhelming majority of the disinterested stockholders approved the sale, the Court declined to dismiss the claims based on Corwin cleansing because plaintiffs had adequately pleaded that the proxy was materially misleading. Nevertheless, the Court granted the motion to dismiss because USG’s corporate charter exculpated the directors, and plaintiffs failed to adequately allege bad faith or disloyalty as required to plead a non-exculpated claim.
Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Alleged Controller’s Tender Offer As The “Abstention Principle” Is “Not Absolute” And A De Facto Controller May Obtain Additional Benefits From Mathematical Control
On August 17, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss claims brought by stockholders of Coty Inc. (the “Company”) against its directors and affiliates of its alleged controller. In re Coty, Inc. Stockholder Litigation, C.A. No. 2019-0336-AGB (Del. Ch. Aug. 17, 2020). Plaintiffs claimed that defendants breached their fiduciary duties by initiating and approving a tender offer in which the alleged controller increased its holdings from 40% to 60% allegedly at an unfair price and through an unfair process. Four of the nine director defendants, who were associated with the alleged controller (the “Controller Directors”), recused themselves from the board vote to recommend the tender offer and approve a related stockholders agreement. Nevertheless, the Court held that the “abstention defense” is “not absolute and often implicates factual questions that cannot be resolved on the pleadings.” As to all defendants, the Court upheld the claims even of stockholders that did not tender their shares because a de facto controller may “obtain real benefits from securing mathematical control of a corporation in a transaction and, as a corollary, . . . other stockholders of the corporation potentially may suffer harm as a result of such a transaction.”
Delaware Court Of Chancery Holds Stockholder Inspection Rights For Delaware Corporations Are Governed Exclusively By Delaware Law And Are Subject To A Delaware Forum Selection Provision Addressing Internal Affairs
On August 13, 2020, Vice Chancellor J. Travis Laster held that defendant, a stockholder of plaintiff JUUL Labs, Inc., did not have the right to seek inspection of books and records of the Delaware corporation under any state statutory law other than that of Delaware. JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020). Therefore, because defendant had only sought inspection under a California statutory provision, the Court rejected the demand and granted judgment on the pleadings in favor of plaintiff. The Court also held that a forum selection provision in the certificate of incorporation, providing that the Delaware Court of Chancery is the exclusive forum for actions arising pursuant to the Delaware General Corporation Law (“DGCL”) or asserting claims against the corporation “governed by the internal affairs doctrine,” applies to actions to inspect books and records.
Shareholder Derivative Complaints Allege Lack Of Board And Senior Executive Diversity
In July 2020, shareholders filed three separate but substantially similar derivative suits in U.S. district courts in California against certain directors and officers of three major technology companies, asserting claims related to alleged failures to uphold commitments to diversity.Specifically, plaintiffs allege that defendants breached their fiduciary duties by failing to ensure diversity in particular at the board and executive levels, as well as violations of Section 14(a) of the Securities Exchange Act of 1934 for alleged misrepresentations about the companies’ commitments to diversity.In addition to monetary damages, the complaints seek to compel the companies to advance several wide-ranging proposals regarding diversity initiatives for shareholder votes.
Delaware Court Of Chancery Dismisses Post-Merger Stockholder Challenge To Executive Incentive Compensation Stock Awards
On June 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought against former officers and directors of Twenty-First Century Fox, Inc. (“Old Fox”) in connection with a transaction in which it spun off part of its business into a new public company, Fox Corporation (“New Fox”), and sold the rest of its business to The Walt Disney Company in a merger (the “Transaction”). Brokerage Jamie Goldenberg Komen Rev Tru U/A 06/10/08 Jaime L Komen Tr. for the Benefit of Jamie Goldenberg Komen v. Breyer, No. 2018-0773-AGB (Del. Ch. June 26, 2020). According to the complaint, the compensation committee of Old Fox approved an incentive compensation program in connection with the Transaction, including an alleged $82.4 million in stock awards granted to Old Fox’s three top executives, who were allegedly the company’s controlling stockholders and collectively owned shares worth over $11.7 billion. Plaintiff was a stockholder of Old Fox that became a stockholder of New Fox in the Transaction. Plaintiff alleged that it was unnecessary and wasteful to approve any “incentive” compensation for these alleged controller-executives because they “already were highly incentivized to pursue and implement the transaction given their collective holdings.” The Court held that plaintiff’s claims were derivative because they challenged a compensation decision by the board of Old Fox and did not adequately plead that the Transaction was “tainted by unfair dealing.” The Court dismissed plaintiff’s claims for lack of standing because plaintiff was not a stockholder of New Fox at the time of the alleged misconduct and, therefore, could not satisfy the continuous ownership requirement for derivative claims.
Delaware Supreme Court Affirms Appraisal Ruling Relying On Unaffected Market Price To Determine Fair Value
On July 9, 2020, in an en banc opinion authored by Chief Justice Collins J. Seitz, Jr., the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery, which relied on the unaffected stock price of Jarden Corporation to determine its fair value in a post-merger appraisal action. Fir Tree Value Master Fund, LP v. Jarden Corp., No. 454, 2019 (Del. July 9, 2020). “Although it is not often that a corporation’s unaffected market price alone could support fair value,” explained the Delaware Supreme Court, “there is no long-recognized principle that a corporation’s unaffected stock price cannot equate to fair value.” Here, the Delaware Court of Chancery found that “Jarden stock traded in a semi-strong efficient market, meaning the market quickly assimilated all publicly available information into Jarden’s stock price” and explained its reasons for rejecting alternative measures of fair value. Affirming, the Delaware Supreme Court was “satisfied” that the Court of Chancery determined fair value in a manner “grounded in the record before it.”
Delaware Supreme Court Reverses Dismissal Of Merger-Related Breach Of Fiduciary Duty Claims Regarding Allegedly Undisclosed Conflict Of Interest
On June 30, 2020, in an en banc
opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s dismissal of a stockholder lawsuit arising out of the merger between Towers Watson & Co. (“Towers”) and Willis Group Holdings Public Limited Company (“Willis”). City of Fort Myers Gen. Emps.’ Pension Fund v. Haley
, C.A. 2018-0132-KSJM (Del. June 30, 2020). As we discussed in our prior post
, plaintiffs, who had been stockholders of Towers, alleged that the CEO of Towers breached his fiduciary duty of loyalty by negotiating the merger without adequately disclosing to the rest of the Towers board a compensation proposal he had received from Willis’s second-largest stockholder, whose co-founder and Chief Investment Officer served on the Willis board. Reversing, the Delaware Supreme Court found that plaintiffs adequately pleaded facts sufficient to rebut the business judgment rule.
Delaware Court Of Chancery Grants Motion To Dismiss Holding That Fiduciaries Of Acquired Entity Did Not Aid And Abet Alleged Fiduciary Breaches By Acquirer
On June 22, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss a derivative claim for aiding and abetting breaches of fiduciary duty brought by stockholders of Oracle Corporation against the CEO and Chairman of NetSuite, Inc., in connection with alleged breaches of fiduciary duty by Oracle’s directors arising from its acquisition of NetSuite. In Re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. June 22, 2020). Plaintiffs alleged that defendants had aided and abetted breaches by Oracle’s directors by failing to disclose in NetSuite’s public filings certain aspects of the negotiations that allegedly would have alerted Oracle’s special committee for the merger to the fact that Oracle was overpaying. The Court acknowledged the “incongruity” of plaintiffs’ theory that fiduciaries of a target whose obligation to their stockholders is to “maximize price” could be held liable for aiding and abetting the acquirer’s fiduciaries by not disclosing information that would have led the latter to “scuttle” a deal favoring the target. The Court suggested that there could be such a case—in the Court’s language, “in the infinite garden of theoretical inequity, such a flower may bloom”—but this is not it. Instead, the Court held that it was not reasonably conceivable that the difference between what was disclosed and what plaintiffs alleged should have been disclosed constituted “substantial assistance”—a necessary element for aiding and abetting—to the acquirer’s fiduciaries in their alleged breaches.
Delaware Court Of Chancery Finds Controlling Investor’s Cash-Accumulation Strategy In Advance Of Preferred Stock Redemption Payments Satisfied Entire Fairness
On May 4, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that a controlling investor’s efforts to accumulate cash in anticipation of its preferred stock redemptions were entirely fair. Frederick Hsu Living Trust v. ODN Holding Corp., No. 12108-VCL (Del. Ch. May 4, 2020). Plaintiff, a common stockholder of ODN Holding Corporation, alleged that the private equity firm that held a controlling interest—including a majority of the common stock and a series of preferred stock—along with the company’s directors and officers, breached their fiduciary duties by engaging in a cash accumulation strategy, rather than seeking to enhance the company’s long-term growth. Having previously sustained plaintiff’s claims at the pleadings stage, the Court held that defendants proved at trial that their conduct was entirely fair and entered judgment in favor of defendants.
Delaware Court Of Chancery Grants Motion To Dismiss Finding Demand Was Not Excused In Connection With Alleged Failure To Update Revenue Guidance
On April 28, 2020, Vice Chancellor Joseph R. Slights III granted a motion to dismiss a derivative action alleging claims of breach of fiduciary duty and improper trading brought by stockholders of GoPro, Inc. against certain of the company’s current and former directors and officers. In re GoPro, Inc. Stockholder Derivative Litigation, C.A. No. 018-0784-JRS (Del. Ch. April 28, 2020). Plaintiffs alleged that defendants failed to disclose that the company’s revenue guidance was unachievable in light of emerging problems with a product launch. Dismissing the claims, the Court held that the complaint did not plead with particularity that a majority of the board faced a substantial risk of liability, and therefore, rejected plaintiffs’ contention that pre-suit demand on the board to sue was excused as futile. Specifically, the Court found that the board presentations incorporated by reference into the complaint revealed that management regularly advised the board that the company was still on track to meet the revenue guidance. As the Court explained, the board was “under no obligation to disclose what it did not know or did not believe to be true.”
Delaware Court Of Chancery Holds That A Special Committee Must Be Constituted Ab Initio In Order To Cleanse A Transaction Involving A Conflicted Board Majority
On February 27, 2020, Vice Chancellor Sam Glasscock III denied a motion to dismiss breach of fiduciary duty claims brought by a former stockholder of Intersections, Inc. (the “Company”), challenging the take-private acquisition of the Company. Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020). The complaint alleged that the Company was sold at an unfairly depressed price and that insiders influenced the transaction to divert consideration to themselves. Moreover, plaintiff asserted that the transaction was subject to entire fairness review because at least half the directors were conflicted by virtue of having rolled over substantial portions of their equity into the merger. Although defendants did not contest that a majority of the board was conflicted, they argued that the claims should be dismissed under the business judgment rule because the deal was negotiated and approved by a special committee of unconflicted directors. The Court, however, held that “to effectively cleanse a transaction . . . the special committee must be constituted ab initio . . . prior to substantive economic negotiations.” The Court denied the motion to dismiss because it found that the complaint adequately pleaded the existence of substantive economic negotiations before the special committee was empowered.
Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Squeeze-Out Merger Because Special Committee Members Were Allegedly “Interested”
On February 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by former shareholders of AmTrust, Inc., challenging the take-private buyout of the company by its controlling stockholders and a private equity firm. In re AmTrust Financial Services, Inc. Stockholder Litigation
, C.A. No. 2018-0396-AGB (Del. Ch. Feb. 26, 2020). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp
., 88 A.3d 635 (Del. 2014) (“MFW
”)—the buyout group conditioned its offer on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Plaintiffs challenged the independence of three of four members of the special committee because the buyout allegedly was expected to extinguish their potential liability in a pre-existing derivative action. The Court held that the MFW
requirement of “independent” special committee approval “was intended to ensure not only that members of a special committee must be independent
in the sense of not being beholden to a controlling stockholder, but also that the committee members must have no disabling personal interest
in the transaction at issue.” Therefore, the Court found the transaction subject to entire fairness rather than business judgment review and denied the motion to dismiss as to the controlling stockholders and their affiliated directors.
Delaware Supreme Court Finds Dissident Board Nominees Ineligible Because Of Noncompliance With Bylaws Deadline To Respond To Supplemental Information Request
On January 13, 2020, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware held that defendants—two investment trusts—were permitted to disqualify the board nominees of a plaintiff shareholder for missing a deadline in the trusts’ bylaws to respond to board requests for additional information. Blackrock Credit Allocation Income Trust v. Saba Capital Master Fund Ltd., C.A. No. 2019-0416-MTZ (Del. Jan. 13, 2020). The Supreme Court’s decision reversed in part a ruling by Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery that plaintiff’s nominees were improperly excluded. Even though the requests for information may have exceeded the contemplated scope and plaintiff may have misread the bylaws and believed the deadline was inapplicable, the Delaware Supreme Court held that a rule that would excuse deadline non-compliance could “potentially frustrate the purpose of advance notice bylaws” intended to facilitate orderly meetings and election contests.
Delaware Supreme Court Affirms Dismissal Of Derivative Suit Alleging Board Approved Transaction Involving Unnecessary Litigation Exposure
On January 13, 2020, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware affirmed the dismissal by Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery of a stockholder derivative suit for lack of pre-suit demand. McElrath v. Kalanick, et al.
, C.A. No. 2017-0888 (Del. Jan. 13, 2020). As discussed in our post
on the prior decision, plaintiff alleged that the directors of a technology company had breached fiduciary duties in connection with the approval of an acquisition, in particular as related to purported intellectual property infringement by the target. Noting that the company had an exculpatory charter provision, the Delaware Supreme Court explained that the directors were insulated from due care violations and could only be liable for bad faith. Referring to allegations that the board heard a presentation that summarized the transaction, reviewed the risk of litigation, generally discussed due diligence and asked questions, the Court found that the complaint raised an inference of a “functioning board” and did not reasonably suggest the board intentionally ignored relevant risks. Thus, the Court affirmed the dismissal because a majority of the board was disinterested for purposes of pre-suit demand as it “had no real threat of personal liability.”
Delaware Court Of Chancery Dismisses Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm. In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019). The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm. Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available. Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty. The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
Delaware Court Of Chancery Orders Acquiror To Consummate Merger Finding That Misrepresentations Did Not Amount To A Material Adverse Effect
On December 18, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled that defendant Boston Scientific Corporation was not entitled to terminate its merger agreement with plaintiff Channel Medsystems, Inc. Channel Medsystems, Inc. v. Bos. Sci. Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019). After the merger agreement was signed, plaintiff—a pre-approval stage medical device company with one product—discovered that its vice president of quality had falsified various documents as part of a multiyear scheme in which he stole $2.6 million from the company. According to the Court, upon discovery, plaintiff was “transparent” with the FDA and with defendant regarding the fraud finding and “acted with dispatch to address it.” Defendant nevertheless notified plaintiff that it was terminating the merger based on provisions in the agreement that permitted termination for misrepresentations that would be expected to result in a “Material Adverse Effect.” Following trial, the Court found that—notwithstanding plaintiff’s breaches of certain representations, including with respect to the accuracy of its FDA submissions—there was no reasonable expectation of a Material Adverse Effect. The Court emphasized that plaintiff did obtain FDA approval for its medical device, which demonstrated that it was “safe and effective” and undercut defendant’s claim that defendant would need to “remediate and retest” the device at great cost before marketing. The Court thus granted specific performance and directed defendant to close the merger.
District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger.
Delaware Court Of Chancery Rejects Demand To Inspect Books And Records Under Section 220 To Aid In Proxy Contest
On November 14, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery rejected a demand by stockholders of Occidental Petroleum Corporation under Section 220, 8 Del. C. § 220, for documents and information relating to the corporation’s acquisition of Anadarko Petroleum and related transactions. High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019). According to the Court, plaintiffs considered the transactions “bad deals” and acknowledged that their primary purpose in seeking the documents was to aid them in their proxy contest to replace certain directors. In a post-trial decision in favor of the corporation, the Court explained that “an imminent proxy contest is not enough to earn access” to broad sets of documents relating to “substantive business decisions.”
Delaware Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner. Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019). Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.” Defendants argued that their approval was protected under three “safe harbors” in the agreement: (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner. Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment. The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent. Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point. Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.