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  • Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC
     
    11/01/2022

    On October 26, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss for lack of personal jurisdiction claims of tortious interference asserted against a principal of a private equity fund (the “Fund”), which had been the majority investor of a limited liability company (the “LLC”).  In re P3 Health Grp. Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022).  Plaintiff — which had been the second largest investor in the LLC — alleged that defendant tortiously interfered with its contractual rights under the limited liability company agreement in connection with the merger of the LLC with a special purpose acquisition company (“SPAC”).  The Court concluded that the complaint adequately alleged that defendant “participated materially in the management” of the LLC such that he “can be served [process] as an acting manager” and that the “exercise of personal jurisdiction over [defendant] comports with … due process.”
    CATEGORIES : Corporate GovernanceSPACs
  • New York Appellate Court Dismisses Breach Of Fiduciary Duty Claims Under Foreign Law, Clarifying That The Internal Affairs Doctrine Applies To Directors And Officers Even If They Are No Longer Serving At The Time Of Suit
     
    11/01/2022

    On October 13, 2022, a five-judge panel of the Appellate Division of the New York State Supreme Court, First Department, unanimously reversed a trial court decision and dismissed a breach of fiduciary duty action brought by former shareholders of an online fantasy sports company (the “Company”) against its directors and officers following a merger.  Eccles v. Shamrock Cap. Advisors, LLC, Case No. 2022-00866 (N.Y. App. Div. Oct. 13, 2022).  The Company was incorporated in Scotland and headquartered in New York.  The trial court had upheld the claims under New York law, declining to apply the internal affairs doctrine to former directors and officers.  Applying Scots law, the Appellate Division reversed, explaining: “To the extent our past decisions could be interpreted as suggesting otherwise we clarify that the internal affairs doctrine applies to an officer or director at the time of the conduct at issue.”
    CATEGORY : Fiduciary Duties
  • Delaware Court Of Chancery Finds Buyer Assumed Post-Closing Liability In Connection With Seller’s Pre-Existing Settlement Agreement
     
    10/11/2022

    On September 30, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted summary judgment to the seller of several cigarette brands, finding that the buyer was responsible pursuant to an asset purchase agreement (“APA”) for post-closing liability in connection with a pre-existing settlement between the State of Florida and the seller.  ITG Brands, LLC v. Reynolds American Inc., et. al., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022).  As part of the settlement entered nearly twenty years before the sale of the brands, the seller and other tobacco companies agreed to make annual payments to Florida based on the companies’ respective market shares of annual tobacco product sales in the United States.  The Court focused on a provision of the APA that stated that the buyer assumed “all Liabilities … to the extent arising, directly or indirectly, out of … the use of the Transferred Assets … from and after the Closing.”  The Court found that the provision unambiguously assigned the post-closing liability in connection with the Florida settlement to the buyer.
    CATEGORY : Deal Disputes
  • Delaware Court Of Chancery Dismisses Caremark Claims Alleging Breaches Of Fiduciary Duty Following A Cyberattack
     
    09/15/2022

    On September 6, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by stockholders of a software company (the “Company”) against its directors following a cyberattack.  Construction Industry Laborers’ Pension Fund v. Bingle, No. CV 2021-0940-SG (Del. Ch. Sep. 6, 2022).  After the Company allegedly fell victim to hackers who accessed confidential information on the systems of thousands of its customers, plaintiffs alleged that defendants had failed to adequately address the risk to cybersecurity in breach of their oversight obligations under Caremark.  The Court indicated that cybersecurity is “mission critical” for online service providers and the complaint alleged oversight practices that were “far from ideal.”  But the Court held that pre-suit demand was not excused because the complaint did not plead “specific facts” from which the Court could “infer bad faith liability.”
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman
     
    08/16/2022

    On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”).  According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure.  Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment.  The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
  • Delaware Supreme Court Reverses Dismissal Of A Post-Merger Suit For Alleged Breach Of Fiduciary Duty Related To Disclosures On Appraisal Rights
     
    07/28/2022

    On July 19, 2022, in an opinion authored by Justice Gary F. Traynor, a majority of the Supreme Court of Delaware sitting en banc affirmed in part and reversed in part the dismissal of breach of fiduciary duty claims against the directors of a real estate investment trust (the “Company”) brought by former stockholders of the Company after its acquisition.  In re GGP, Inc. Stockholder Litigation, No. 202, 2021 (Del. July 19, 2022).  Plaintiffs alleged that the merger was structured to eliminate the statutory appraisal rights of the Company’s stockholders and that the proxy disclosures regarding appraisal rights were misleading.  The Delaware Court of Chancery had dismissed the claims.  On appeal, the Delaware Supreme Court affirmed the dismissal of the claim alleging an improper merger structure because “defendants did not, by paying a large portion of the merger consideration by way of a pre-closing dividend, structure the merger in a manner that effectively and unlawfully eliminated appraisal rights.”  However, the Court reversed the dismissal of the disclosure claim because it found the complaint adequately alleged that defendants “consciously crafted the transaction and the related disclosures in such a way as to deter [the Company’s] stockholders from exercising their appraisal rights.”
  • Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Allege Substantial Likelihood Of Liability Sufficient To Excuse Pre-Suit Demand
     
    07/12/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by a stockholder of an energy company (the “Company”) against its directors following an incident involving explosions in the pipeline system of one of its natural gas distribution subsidiaries. City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022).  Plaintiff claimed that the board breached its oversight obligations under Caremark by allegedly failing to implement a reporting and monitoring system relating to pipeline safety and ignoring “red flags.”  The Court held that pre-suit demand under Court of Chancery Rule 23.1 was not excused because the complaint did not adequately plead that the directors faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Declines To Dismiss Claims Related To Direct Offering At The Outset Of The Pandemic
     
    07/06/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied a motion to dismiss stockholder derivative claims for alleged breaches of fiduciary duty against the CEO/Chairman of an e-commerce car company (the “Company”).  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ct. Ch, Jun. 30, 2022).  Plaintiffs alleged that the CEO/Chairman and his father controlled the Company and “orchestrated” a $600 million direct offering to selected investors in which they purchased $50 million of common stock in March 2020 when the Company’s stock price was depressed due to pandemic-related volatility.  The Court held that plaintiffs adequately pleaded that pre-suit demand was excused because two of the Company’s other directors lacked independence from the CEO/Chairman.  The Court further found that the transaction was subject to entire fairness—rather than deferential business judgment—review because it allegedly involved a non-ratable benefit not shared by the public stockholders and half the board lacked independence.  Finally, the Court held that the CEO/Chairman’s abstention from the board’s vote approving the offering was insufficient to warrant dismissal at the pleadings stage.
  • Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle
     
    07/06/2022

    On June 16, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted declaratory judgment in favor of plaintiffs — four members of the board of Aerojet Rocketdyne Holdings, Inc. (the “Company”), including its Executive Chairman — against defendants — the other four members of the Company’s board, including its CEO — after the eight-member board had deadlocked in connection with the Company’s impending board election.  In Re Aerojet Rocketdyne Holdings Inc., No. CV 2022-0127-LWW (Del. Ch. June 16, 2022).  The case arose after each faction had proposed its own slate of board nominees.  Plaintiffs challenged certain actions allegedly undertaken by the Company at the behest of defendants, such as the issuance of a Company press release purporting to express the Company’s disappointment in the slate proposed by plaintiffs and the retention of counsel on behalf of the Company to pursue litigation against plaintiffs.  Following a trial, the Court held that such actions were unauthorized and contrary to the corporate neutrality principle.  The Court explained that a Delaware corporation “must remain neutral when a there is a legitimate question as to who is entitled to speak or act on its behalf,” and [w]here a board cannot validly exercise its ultimate decision-making power, neither faction has a greater claim to the company’s name or resources.”
  • Delaware Court Of Chancery Issues Post-Trial Judgment In Favor Of Defendant, Rejecting Stockholder’s Section 220 Books And Records Demand
     
    06/14/2022

    On June 1, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of defendant retail company (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220.  Plaintiff, a stockholder, sought the records purportedly to investigate possible mismanagement in connection with the Corporation’s compliance with certain antitrust and tax laws.  In response to the demand, the Corporation produced certain board-level materials but declined to comply with plaintiff’s request for a wide array of additional documents.  Following a trial on a paper record, the Court found that plaintiff failed to demonstrate the requisite “credible basis” to suspect wrongdoing, and in any event, the demand was “satisfied” because the Corporation “produced all necessary and essential documents related to the alleged wrongdoing discussed in the demand.”
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote
     
    06/02/2022

    On May 25, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative claim against a director of Fat Brands Inc. (the “Corporation”) for alleged breach of fiduciary duty.  Harris v. Junger, C.A. No. 2021-0511-SG (Del. Ch. May 25, 2022).  Plaintiffs challenged the merger of the Corporation with Fog Cutter Capital Group, Inc. (the “Merger Partner”), which allegedly held more than 80% of the Corporation’s stock before the merger.  In a previous oral ruling, the Court had found that the Complaint sufficiently pleaded that the merger “constituted reasonably conceivable bad faith and waste,” but reserved judgment on the claim against one director who had been a minority stockholder of the Merger Partner before the merger and therefore abstained from voting on the merger.  In this decision, the Court declined to dismiss the claim against that director at the pleading stage because the complaint adequately alleged that it was “reasonably conceivable” that he “breached his duty of good faith by participating in negotiating a [m]erger that constituted corporate waste.”
    CATEGORY : Fiduciary Duties
  • California Superior Court Strikes Down Director Diversity Mandate
     
    05/24/2022

    On May 13, 2022, Judge Maureen Duffy Lewis of the Superior Court of the State of California for Los Angeles County entered judgement in favor of three taxpayers bringing state constitutional challenges to S.B. 826, a bill for a California law that required the boards of California corporations to include women.  Crest v. Padilla, Case No. 19 STCV 27561 (Cal. Super. Ct. L.A. Cnty. May 13, 2022).  The law mandated that, by December 31, 2021, publicly held companies incorporated in California must appoint at least one woman on boards of four or fewer directors, two women on boards of five directors, and three women on boards of six or more directors.  The Court agreed with plaintiffs that the law violated the California constitution’s Equal Protection Clause.
  • Delaware Court Of Chancery Applies Contemporaneous Ownership Requirement And Declines To Extend Equitable Derivative Standing
     
    05/17/2022

    On May 13, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed certain stockholder derivative claims for breaches of fiduciary duty brought against the founder-CEO and other directors of Flashpoint Technology, Incorporated (the “Corporation”).  SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May. 13, 2022).  Plaintiffs were a limited liability company (the “New LLC”) that held shares in the Corporation and its sole owner (the “Beneficial Owner”).  The New LLC received its shares from another limited liability company (the “Old LLC”) — a nonparty to the suit — also wholly owned by the Beneficial Owner.  Plaintiffs challenged certain related-party transactions, including leases from and loans to entities affiliated with the CEO.  Applying the “contemporaneous ownership requirement,” the Court granted summary judgment to defendants for claims based on conduct that predated the acquisition of shares by the New LLC.  In doing so, the Court rejected plaintiffs’ contention that the Beneficial Owner should have “equitable standing.”
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty And Unjust Enrichment Claims Related To Compensation Committee Awards
     
    05/17/2022

    On April 27, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied, in part, a motion to dismiss a derivative complaint against directors for breaches of fiduciary duties brought by stockholders of Universal Health Services Inc. (the “Corporation”).  Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022).  Plaintiff, a stockholder, alleged that the directors serving on the board’s compensation committee took advantage of an “obvious dip” in stock price in the wake of the emergence of COVID-19 in March 2020 to grant option awards, including to themselves.  Noting that “[s]elf-interested compensation decisions are subject to the entire fairness standard of review,” the Court found that plaintiff “cleared the low hurdle of pleading sufficient facts to make it plausible that the price and process of the option awards transaction were not entirely fair.”
  • Finding That Allegedly Conflicted Acquisition Satisfied Entire Fairness Review, Delaware Court Of Chancery Rejects Breach Of Fiduciary Duty Claims
     
    05/04/2022

    On April 27, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery entered judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), following a trial on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”).  In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022).  Plaintiffs alleged that at the time of the acquisition, the Chairman, who held approximately 22% of the Company’s stock, was its controlling stockholder.  He also was the chairman of the board and largest stockholder of the Target.  Plaintiffs asserted that the Chairman caused the Company’s allegedly conflicted Board to approve the deal—despite the Target’s alleged insolvency—at a purportedly “patently unfair price.”  Assuming without deciding that the Chairman was the Company’s controlling stockholder and that a majority of the Company’s Board was conflicted, the Court reviewed the claims under an “entire fairness” standard.  Noting that the process was “far from perfect” and that “defense verdicts after an entire fairness review” are “not commonplace,” the Court nevertheless found that the Company’s Board “meaningfully vetted” the acquisition and the price paid was “entirely fair in the truest sense of the word”—and rejected plaintiffs’ claims.
  • Eighth Circuit Affirms Dismissal Of Merger-Related Derivative Suit For Failure To Plead Demand Excusal
     
    04/19/2022

    On April 7, 2022, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of derivative claims brought by shareholders of Centene Corporation (the “Corporation”) against directors and officers of the Corporation following its merger with Health Net, Inc. (the “Target”).  Carpenters’ Pension Fund of Ill. v. Neidorff, No. 20-3216 (8th Cir. Apr. 7, 2022).  In connection with the merger, the companies issued a joint proxy statement soliciting shareholder approval of the merger.  Plaintiffs’ central allegation was that defendants purportedly concealed their knowledge of “significant financial problems” faced by the Target.  Plaintiffs thus asserted derivative claims for violation of Section 14(a) of the Securities Exchange Act and breaches of fiduciary duty.  The Court held that pre-suit demand was not excused, because the complaint failed to adequately plead that at least five of the nine board members at the time the suit was filed faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Grants Motion To Stay Pending Appeal Of Specific Performance Judgment Requiring Completion Of Acquisition Of Yoga Studios
     
    04/05/2022

    On March 31, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery ­granted the motion of CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”) to stay the Court’s judgment in favor of plaintiff Level 4 Yoga, LLC pending defendant’s appeal.  Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249-JRS (Del. Ch. Mar. 31, 2022).  As discussed in our prior post, the Court of Chancery previously (i) found that defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant failed to close on the acquisition of plaintiff’s yoga studios, and (ii) issued a decree of specific performance directing defendant to complete the transaction.  “Balanc[ing] all of the equities” and highlighting that defendant “is at risk of suffering irreparable harm,” the court issued the stay.
    CATEGORY : Deal Disputes
  • Delaware Court Of Chancery Rejects Motion To Stay SPAC Breach Of Fiduciary Duty Suit Pending Parallel Federal Securities Action
     
    03/15/2022

    On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”).  In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”).  Plaintiffs alleged that  defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders.  Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio.  The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
    CATEGORIES : Fiduciary DutiesSPACs
  • Delaware Court Of Chancery Holds COVID-19 Pandemic Did Not Excuse Purchaser’s Obligation To Complete Acquisition Of Its Franchisee’s Yoga Studios
     
    03/08/2022

    On March 1, 2022, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery ruled in favor of plaintiff Level 4 Yoga, LLC in a breach of contract action against CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”), stemming from the parties’ pre-COVID agreement for defendant to acquire plaintiff’s yoga studios.  Level 4 Yoga, LLC v. CorePower Yoga, LLC, CorePower Yoga Franchising, LLC, No. CV 2020-0249-JRS (Del. Ch. Mar. 1, 2022).  Plaintiff alleged defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant refused to close the transaction, failed to deliver required payments under the APA, and failed to take possession of plaintiff’s yoga studios.  The Court found that the APA “unambiguously contain[ed] no conditions to closing and no express right for either party to terminate the contract pre-closing.”  The Court further held that plaintiff neither repudiated nor materially breached the APA.  Therefore, the Court issued a verdict with a decree of specific performance directing defendant to complete the transaction.
    CATEGORY : Deal Disputes
  • Delaware Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
     
    03/01/2022

    On February 14, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of Lee Enterprises, Inc. (the “Company”) and its directors following an expedited trial on claims for breach of the Company’s bylaws and the directors’ fiduciary duties.  Strategic Investment Opportunities LLC v. Lee Enterprises, Inc., C.A. No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022).  Plaintiff, a beneficial stockholder, sought declaratory and injunctive relief to allow its nomination of directors—attempted in conjunction with a takeover bid by plaintiff—to move forward.  The Court found that plaintiff did not comply with advance notice requirements for director nominations in the Company’s “clear and unambiguous” bylaws.  Applying “enhanced scrutiny,” the Court also concluded that the board did not breach fiduciary duties by rejecting plaintiff’s nomination based on “a validly adopted bylaw with a legitimate corporate purpose.”
  • Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims
     
    02/24/2022

    On February 14, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a post-closing damages action for breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. (“Authentix” or the “Company”), rejecting defendant’s claim that stockholders waived the right to bring suit.  Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No. 2020-0657-SG, (Del. Ch. Feb. 14, 2022).  The Court concluded that language in a Stockholders Agreement consenting to the transaction was not sufficiently specific to waive the stockholders’ right to challenge the sale.
    CATEGORIES : Fiduciary DutiesStanding
  • Southern District Of New York Denies Application For Mootness Fee In Connection With Merger-Disclosure Litigation
     
    02/17/2022

    On February 7, 2022, Judge J. Paul Oetken of the United States District Court for the Southern District of New York denied an application by plaintiff’s counsel for attorneys’ fees after plaintiff’s merger-related disclosure claims were “mooted” by defendant Nuance Communications Inc. (“Nuance”).  Serion v. Nuance Communications, No. 21-CV-4701 (S.D.N.Y. Feb. 7, 2022).  Although the Court found that the lawsuit prompted the company to issue supplemental disclosures, the Court held that the disclosure of this additional information did not confer a “substantial benefit” on shareholders.
  • Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand
     
    02/08/2022

    On January 21, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of GrafTech International Ltd. (the “Company”) against the Company’s directors and the Company’s controlling stockholder, Brookfield Asset Management (“Brookfield”), in connection with the Company’s repurchase of shares from Brookfield.  Simons v. Brookfield Asset Mgmt., C.A. No. 2020-0841-KSJM (Del. Ch. Jan. 21, 2022).  The Court held that the demand was not excused because five of the nine board members were capable of impartially considering a litigation demand under the recently affirmed Zuckerberg “universal test.”  United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020).
  • Delaware Court Of Chancery Limits Discovery In Appraisal Proceeding To Materials Available In Books-And-Records Demand
     
    02/08/2022

    On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
  • Delaware Court Of Chancery Finds Transfer Restrictions On Stock Issued In Connection With A De-SPAC Merger Inapplicable To A Legacy Operating Company Stockholder Based On The Language Of The Relevant Bylaw
    01/25/2022

    On January 10, 2022, Vice Chancellor Lori W. Will held that shares of defendant Matterport Inc. (“New Company”) issued to plaintiff in connection with the acquisition of Matterport Operating, LLC (“Legacy Company”) by a special purpose acquisition company (“SPAC”) in a “de-SPAC” merger were not subject to a transfer restriction in the New Company’s bylaws.  As part of the transaction, Legacy Company stockholders, including plaintiff, were given the right to receive shares of the New Company.  Prior to closing, the SPAC adopted a bylaw that restricted the transfer by such stockholders of shares “held . . . immediately following the closing” of the transaction.  After a two-day trial, the Court found that plaintiff was not issued shares of the New Company until more than three months after the merger when he executed letters of transmittal to the transfer agent.  Concluding that the “plain language” of the bylaw was “straightforward,” and that plaintiff had not held shares “immediately” following the merger, the Court granted declaratory relief in favor of plaintiff.
  • Delaware Court Of Chancery Dismisses Derivative Claims Challenging Stock Sale Allegedly Based On Adverse Nonpublic Information For Failure To Plead Demand Futility
     
    01/19/2022

    On December 15, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed stockholder derivative claims for breaches of fiduciary duty asserted on behalf The Kraft Heinz Company (the “Company”) against an investment firm (the “Investment Firm”) that had previously held 24.2% of the Company’s shares, as well as against certain alleged dual fiduciaries of the two entities.  In re Kraft Heinz Company Derivative Litigation, C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021).  Plaintiffs alleged that defendants sold $1.2 billion in Company stock on the basis of nonpublic information that the Company was expected to miss its full-year earnings target by $700 million.  The Court held that plaintiffs failed to establish demand futility because the complaint did not raise a reasonable doubt that a majority of the Company’s board members lacked independence from defendants.
  • Delaware Court Of Chancery Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
     
    01/11/2022

    On January 3, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery largely denied a motion to dismiss a putative class action brought by the stockholders of Churchill Capital Corp. III, a special purpose acquisition company or “SPAC” (“Churchill”) alleging that the company’s controlling stockholder, officers, and directors (“the Company Defendants”) breached their fiduciary duties and the company’s financial advisor aided and abetted that breach in connection with the SPAC’s acquisition of MultiPlan, Inc. (“MultiPlan”).  In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022).  Plaintiffs alleged that defendants omitted to disclose that a large customer of MultiPlan would soon stop using MultiPlan’s services, allegedly causing stockholders to approve the merger based on faulty information.  Defendants argued that the claim was derivative in nature, rather than one that could be asserted directly, and moved to dismiss for failure to plead demand futility and on the grounds that the business judgment rule applied.  The Court held that plaintiffs’ claims were direct, rather than derivative, and that entire fairness applied because of what it found to be inherent conflicts of interest between defendants and the company’s public stockholders.
  • Delaware Supreme Court Affirms Excused Performance For Breach Of “Ordinary Course” Covenant During Pandemic
     
    12/21/2021

    On December 8, 2021, the Supreme Court of Delaware sitting en banc affirmed a Court of Chancery ruling that excused the buyer of a group of high-end hotel properties (the “Buyer”) from closing on the acquisition from AB Stable VIII LLC (the “Seller”)—an indirect subsidiary of Dajia Insurance Group, Ltd. (“Dajia”), formerly Anbang Insurance Group, Ltd. (“Anbang”)—because the Seller breached its covenant to operate the hotels in the ordinary course between signing and closing.  AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310 (Del. Dec. 8, 2021).  Because the Court found this issue dispositive, it did not reach any other issues on appeal.
    CATEGORY : Deal Disputes
  • Delaware Court Of Chancery Dismisses Section 220 Action Initiated Hours After Certificate Of Merger Was Filed With Delaware Secretary Of State
     
    12/21/2021

    On December 3, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted a motion to dismiss claims to compel inspection of books and records brought by a former stockholder of Houston Wire & Cable Company (the “Company”) in connection with the Company’s all-cash merger into Omni Cable, LLC.  Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021).  The merger agreement provided that each share of the Company would be cancelled and converted into the right to receive $5.30 in cash at the “Effective Time,” which it explained was “such time as [a] Certificate of Merger” is filed.  Plaintiff filed the action under Section 220 of the Delaware General Corporation Law (“DGCL”) hours after the Company’s certificate of merger was filed with the Delaware Secretary of State.  The Court held that Section 220 requires a plaintiff to be a current stockholder at the time the litigation is initiated.  The Court found that plaintiff “ceased to own stock” when the certificate of merger was filed and, therefore, lacked standing when the complaint was filed later the same day.
    CATEGORIES : Books and RecordsStanding
  • Delaware Court Of Chancery Dismisses Derivative Claims Challenging A Convertible Debt Issuance At The Onset Of The COVID-19 Pandemic For Failure To Plead That Demand Was Excused
     
    12/08/2021

    On November 23, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder derivative claims for breach of fiduciary duty against the directors of Wayfair, Inc. (the “Company”).  Equity-League Pension Tr. v. Great Hill Partners, C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021).  Plaintiff challenged the sale by the Company of $535 million in convertible notes at the outset of the COVID-19 pandemic to a consortium of investors allegedly tied to four of the Company’s directors, including the two co-chairmen, one of whom was also the CEO.  There was no dispute that two of the nine board members were disinterested and independent.  As to three others, plaintiff alleged that their service on the audit committee presented a substantial likelihood of liability because it was charged with reviewing conflicted transactions.  Highlighting that the Company’s charter exculpated directors for breaches of the duty of care, however, the Court explained that the complaint must therefore plead bad faith, which it referred to as a “rara avis.”  Although the Court acknowledged that the transaction was not a “model of best practices,” it found that the complaint and the documents incorporated by reference therein did not support an inference of bad faith.
  • Delaware Court Of Chancery Declines To Dismiss Derivative Claims, Finding Wrongful Refusal Of Demand Adequately Pleaded
     
    11/09/2021

    On October 29, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to dismiss derivative claims for breach of fiduciary duties brought by stockholders of BioDelivery Sciences International, Inc. (the “Company”).  Drachman v. BioDelivery Scis. Int’l, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021).  Plaintiffs alleged that the board improperly adopted two amendments to the Company’s certificate of incorporation.  Plaintiffs made a pre-suit demand on the board requesting that it deem the amendments ineffective and indicating they would otherwise commence litigation.  The board responded by noting that it had determined the demand was “without merit.”  The Court held that plaintiffs adequately pleaded wrongful refusal because the allegations raised a reasonable doubt as to the good faith of the board in “rebuffing” the demand.
  • Delaware Court Of Chancery Rejects Challenge To Board’s Enforcement Of Advance Notice Bylaw
     
    10/26/2021

    On October 13, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a request for injunctive relief in a stockholder action against the board of CytoDyn (the “Company”).  Rosenbaum v. Cyotodyn Inc., C.A. No. 2021-0728-JRS, 2021 WL 4775140 (Del. Ch. Oct. 13, 2021).  Plaintiffs attempted to nominate a dissident slate of director candidates.  They alleged that the board wrongfully rejected plaintiffs’ timely notice of their nominations.  After a trial on a “paper record,” the Court found that plaintiffs’ notice did not comply with the Company’s advance notice bylaw—because it omitted information that was required under the bylaw to have been disclosed—and the board was thus “justified in rejecting” the notice.
  • Delaware Supreme Court Overrules Gentile  Carve-out, Holding An Improper Transfer Of Economic Value And Voting Power To A Controlling Stockholder Through An Equity Overpayment Is A Derivative Claim
     
    10/19/2021

    On September 20, 2021, in a decision authored by Justice Karen L. Valihura, the Delaware Supreme Court sitting en banc reversed the denial of defendants’ motion to dismiss breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”).  Brookfield Asset Management, Inc. v. Rosson, No. 406, 2020, 2021 WL 4260639 (Del. Sept. 20, 2021).  As we discussed in our prior post, plaintiffs alleged that a private placement of stock to the Company’s controlling stockholder at a price that undervalued the shares diluted the financial and voting interest of the minority stockholders.  The trial court found that the claims were nearly identical to corporate overpayment claims asserted by former stockholders and upheld as “direct”—rather than “derivative”—by the Delaware Supreme Court in Gentile v. Rossette, 906 A.2d 91 (Del. 2006).  Reversing, the Delaware Supreme Court reaffirmed the “classic” test for distinguishing stockholder “derivative” claims from “direct” claims established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and expressly overruled Gentile and its carve-out from Tooley.
    CATEGORIES : Fiduciary DutiesStanding
  • Delaware Supreme Court Adopts Refined Test For Demand Futility And Holds Exculpated Claims Do Not Excuse Demand
     
    10/06/2021

    On September 23, 2021, in a decision authored by Justice Tamika Montgomery-Reeves, the Delaware Supreme Court sitting en banc affirmed the dismissal of a derivative complaint filed by a stockholder of Facebook, Inc. (the “Company”) against the CEO, who is also the founder, controlling stockholder and chairman of the board, as well as certain other directors.  United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., No. 404, 2020 (Del. Sept. 23, 2021).  Plaintiff asserted that the directors breached their fiduciary duties by improperly approving a stock reclassification allegedly for the benefit of the CEO, which though ultimately abandoned resulted in litigation and settlement costs.  The Court concluded that the Delaware Court of Chancery properly dismissed plaintiff’s complaint for failing to make a pre-suit demand on the board.  In so holding, the Court adopted a refined test for demand futility and also determined that exculpated claims cannot excuse demand because they do not entail a substantial likelihood of liability.
  • Delaware Supreme Court Holds That Stockholders’ Statutory Appraisal Rights Can Be Waived In A Negotiated Contract
     
    09/21/2021

    On September 13, 2021, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision holding that a corporation may enforce an advance waiver of appraisal rights against its own stockholders.  Manti Holdings, LLC v. Authentix Acquisition Co., Inc., No. 354, 2020, 2021 WL 4165159 (Del. Sept. 13, 2021).  The Delaware Supreme Court held that Delaware law does not prohibit sophisticated and informed stockholders—who were represented by counsel and had bargaining power—from waiving their statutory appraisal rights in exchange for valuable consideration.
    CATEGORY : Appraisals
  • Delaware Court Of Chancery Upholds Alleged Safety-Related Caremark Claims Against Airplane Manufacturer’s Board
     
    09/15/2021

    On September 7, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery largely denied a motion to dismiss a stockholder derivate suit against the directors of The Boeing Company (the “Company”) in the wake of two fatal crashes of an airplane it manufactured.  In re The Boeing Co. Derivative Litigation, No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021).  Plaintiffs alleged that the board breached its fiduciary duty of oversight under Caremark by failing to ensure adequate safety and quality control.  The Court found that plaintiffs sufficiently pleaded that the board failed to establish board-level reporting systems related to “mission critical” airplane safety and did not adequately respond to red flags, including media reports about the crashes.  Accordingly, the Court held that the complaint demonstrated that the directors faced a substantial likelihood of liability and that pre-suit demand on the board was excused.
  • Delaware Court Of Chancery Dismisses Post-Merger Claims For Alleged Violation Of DGCL § 203 And Breach Of Fiduciary Duty
     
    08/31/2021

    On August 16, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty and other claims brought by a stockholder of Genomic Health, Inc. (the “Company”) in connection with its acquisition by Exact Sciences Corp.  Flannery v. Genomic Health Inc., et al., C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021).  The Court held that the transaction did not violate Delaware General Corporation Law (“DGCL”) § 203, entire fairness did not apply because there was no conflicted controlling stockholder, and enhanced scrutiny under Revlon did not apply because the merger was not a change in control transaction.  Accordingly, the Court found that plaintiff failed to overcome the presumption of the business judgment rule.
  • Delaware Court Of Chancery Declines To Apply Business Judgment Deference To Take-Private Merger Because Of “Deficiencies” In MFW  Protections, Including That The Conditions Were Not Irrevocable
     
    08/19/2021

    On July 23, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied defendants’ motion to dismiss breach of fiduciary duty claims brought by a putative class of minority stockholders of Empire Resorts, Inc. (the “Company”) challenging the Company’s take-private acquisition by the Company’s majority shareholder.  The MH Haberkorn 2006 Trust v. Empire Resorts, Inc., C.A. No. 2020-0619 (Del. Ch. Jul. 23, 2021) (Transcript).  Plaintiffs alleged that a special committee approved the deal even though it undervalued the Company and asserted claims against officers, directors, the controlling shareholder and certain of their affiliates.  Defendants argued that the transaction complied with the procedural protections necessary for deferential review—under the business judgment standard—of a merger process involving a controller pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW ”).  But the Court found the complaint adequately pleaded “deficiencies” in the MFW conditions, including that they were not “irrevocable.”  Therefore, the Court applied the entire fairness standard and found that defendants did not show “conclusively” at the pleading stage that the transaction was entirely fair.
  • Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claim Against Derivative Plaintiffs For Failing To Turn Over Derivative Award To The Corporation
     
    08/03/2021

    On July 15, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion by stockholders of OptimisCorp (the “Company”) to dismiss claims brought by the Company against them for breach of fiduciary duty and unjust enrichment for failing to turn over to the Company a derivative arbitration award that they won in their capacity as derivative plaintiffs.  OptimisCorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2021).  After succeeding in the derivative case against another stockholder—who had been the Company’s outside counsel and a “confederate” of the Company’s CEO—defendants allegedly escrowed the award with intentions to distribute it to certain stockholders but exclude their adversaries.  At an earlier stage in this action, the Court directed defendants to transfer the award to the Company.  In this decision, the Court held that defendants “owed fiduciary duties to the Company and its stockholders with respect to the corporate asset entrusted to them” and the Company adequately alleged that defendants “breached their duty of loyalty by withholding the Award out of animus toward [the CEO] and the Company, and to benefit themselves.”
    CATEGORY : Fiduciary Duties
  • Delaware Court Of Chancery Orders Buyer To Close Acquisition Of Medical Device Company After Finding Reduction In Medicare Reimbursement Rates Was Not A Material Adverse Effect
     
    07/28/2021

    On July 9, 2021, Vice Chancellor Slights of the Delaware Court of Chancery held in a lengthy post-trial opinion that defendant Hill-Rom, Inc. (“Hillrom”) was not excused from closing its acquisition of plaintiff Bardy Diagnostics, Inc. (“Bardy”), a medical device company, due to a Material Adverse Effect (“MAE”).  Bardy Diagnostics, Inc., et al. v. Hill-Rom, Inc., et al., C.A. No. 2021-0175-JRS (Del. Ch. July 9, 2021).  Between signing of the merger agreement and closing, Medicare drastically reduced the rates payable for Bardy’s signature medical device.  Hillrom argued that this change constituted an MAE (or, alternatively, frustration of purpose), excusing its obligation to close.
    CATEGORY : Deal Disputes
  • Delaware Supreme Court Requires Board To Demonstrate “Compelling Justification” For Stock Sale Primarily Intended To Interfere With Stockholder Voting Rights
     
    07/13/2021

    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
     
    07/07/2021

    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
     
    06/29/2021

    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.
    CATEGORIES : DisclosuresFiduciary Duties
  • Delaware Court Of Chancery Allows Claim That Purchaser Altered Target’s Business Plan To Avoid Paying Earnout Consideration To Proceed
     
    06/15/2021

    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.”
    CATEGORY : Deal Disputes
  • 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
     
    06/08/2021

    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
     
    06/02/2021

    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.
    CATEGORIES : AppraisalsDeal Disputes
  • Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
     
    05/18/2021

    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
     
    05/11/2021

    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  
     
    05/11/2021

    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.”
    CATEGORY : Deal Disputes
  • Delaware Court Of Chancery Dismisses Claims For Breach Of Earnout Provision
     
    05/04/2021

    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. 
    CATEGORY : Deal Disputes
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