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  • 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 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 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 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 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 Court of Chancery Holds That Merger Was Fair And Reasonable Despite Mishandled Conflict Committee Appointment
     
    03/02/2021

    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 Supreme Court Affirms The Partial Denial Of Books And Records Demand
     
    02/18/2021

    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
     
    02/11/2021

    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 Court Of Chancery Applies Zapata  To Assess New Board Committee’s Motion To Dismiss Claims Being Pursued By A Previously Established Special Committee
     
    12/22/2020

    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 Court Of Chancery Dismisses Derivative Claims For Failure To Plead Demand Futility Notwithstanding Unocal Enhanced Scrutiny
     
    12/01/2020

    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 Supreme Court Reverses Dismissal Of Merger-Related Breach Of Fiduciary Duty Claims Regarding Allegedly Undisclosed Conflict Of Interest
     
    07/07/2020

    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 Finds Controlling Investor’s Cash-Accumulation Strategy In Advance Of Preferred Stock Redemption Payments Satisfied Entire Fairness
     
    05/12/2020

    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 Holds That A Special Committee Must Be Constituted Ab Initio In Order To Cleanse A Transaction Involving A Conflicted Board Majority
     
    03/17/2020

    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”
     
    03/03/2020

    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 Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
     
    11/12/2019

    On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner.  Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019).  Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.”  Defendants argued that their approval was protected under three “safe harbors” in the agreement:  (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner.  Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment.  The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent.  Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point.  Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.
     
  • Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
     
    10/22/2019

    On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration.  JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019).  The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale.  The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
     
  • Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
     
    09/04/2019

    On August 28, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to stay filed by the special litigation committee formed by defendant Blue Bell Creameries, Inc. (“BBGP”) in connection with a derivative action by limited partners of Blue Bell Creameries, LLP (“Blue Bell” or the “Partnership”) against BBGP, which is the sole general partner of Blue Bell, and others.  Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019).  The Court previously denied a motion to dismiss the derivative action because it determined that BBGP had “a disabling interest for pre-suit demand purposes.”  BBGP then appointed two new directors to its board, who established a special litigation committee consisting of three non-director members empowered to determine the interests of the Partnership in the derivative litigation.  The special litigation committee promptly moved to stay the derivative action to permit its investigation and make a determination.  But the Court denied the motion.  It explained that “[a]ny conflict that disables the principal disables the agent” and “[b]ecause BBGP, as principal, is not fit to decide how to manage the Partnership’s claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled.”
  • Delaware Court Of Chancery Dismisses Caremark Claim, Finding Consumer Class Action Settlement Was Not A “Red Flag” For Consumer Protection Law Violations
     
    08/06/2019

    On July 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a stockholder derivative action asserting breaches of fiduciary duty claims against the directors of J.C. Penney Company, Inc. for failure to make a pre-suit demand on the board.  Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019).  After the Los Angeles City Attorney initiated litigation against the company asserting violations of California’s consumer protection laws, plaintiff filed this derivative action alleging that the company’s directors consciously disregarded their responsibility to oversee the company’s compliance with laws governing price-comparison advertising.  Repeating past statements of the Court about the difficulty of proving director liability for a failure to monitor corporate affairs—known as a Caremark claim—Chancellor Bouchard determined that the complaint failed to plead facts demonstrating that the directors would face a substantial likelihood of personal liability.  In particular, the Court found that a settlement of a consumer class action suit without any admission of liability was not a “red flag” with respect to any ongoing violations of law.  Therefore, the Court concluded that pre-suit demand on the board was not excused. 
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Merger For Failure To Rebut Business Judgment Rule
     
    08/06/2019

    On July 25, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder suit challenging the $18 billion merger of equals between Towers Watson & Co. and Willis Group Holdings plc, finding that plaintiffs failed to plead facts sufficient to rebut the presumption of the business judgment rule.  In Re Towers Watson & Co. Stockholders Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019).  Asserting claims for breaches of fiduciary duty, plaintiffs, who had been Towers Watson stockholders, argued that the company’s CEO did not properly disclose to the board a compensation proposal he had received from Willis’s second largest stockholder while the CEO was negotiating the merger.  But the Court found that the compensation proposal was ultimately immaterial and that the otherwise independent board members were well aware that the merger would likely lead to increased compensation for the CEO.  Noting that because the transaction was primarily a stock-for-stock merger, the Court explained that there was no dispute that the “business judgment rule presumptively applies,” and concluded that plaintiffs had failed to rebut that presumption. 
  • Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claims Related To Repricing Of Stock Options
     
    06/18/2019

    On June 13, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery largely denied a motion to dismiss a derivative action for breach of fiduciary duty and unjust enrichment against directors and officers of a biosciences company (the “Company”) in connection with the alleged repricing of stock options shortly before the company announced the issuance of a “key” patent to its subsidiary.  Howland  v. Kumar, C.A. No. 2018-0804-KSJM (Del. Ch. June 13, 2019).  Plaintiff, a stockholder in the Company, alleged that the directors and officers were aware of the patent issuance yet delayed the public announcement until after the board’s compensation committee approved the reduction in the strike price of more than 2 million stock options primarily held by defendants.  The Court held that pre-suit demand on the board was excused, because a majority of the board was “interested by virtue of having received the repriced options.”  Applying an “entire fairness” standard of review, the Court found that it was reasonably conceivable from the pleadings that the process and price were unfair and, therefore, denied the motion to dismiss.  
  • Delaware Supreme Court Finds Deal Price Minus Synergies As Fair Value In Aruba Networks Appraisal Appeal, Rather Than Average Preannouncement Stock Price
     
    04/23/2019

    On April 16, 2019, the Delaware Supreme Court, in a per curiam decision, held that Aruba Networks, Inc.’s (“Aruba”) fair value in an appraisal action was $19.10 per share, reversing the Court of Chancery’s valuation of $17.13 per share.  Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019).  As we discussed in a prior post, the Court of Chancery ruled that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba in connection with its acquisition by Hewlett-Packard Company (“HP”).  In his opinion, Vice Chancellor Laster concluded that he was compelled by recent decisions of the Delaware Supreme Court to disregard other metrics, but expressed reservations about doing so.  Moreover, while the Court of Chancery viewed the deal price minus synergies as compelling evidence of fair value, it indicated that it could not estimate agency cost reductions to exclude from that calculation.
  • Delaware Supreme Court Revives Stockholder Claims, Finding MFW Protections Were Not In Place Prior To Economic Negotiations
     
    04/16/2019

    On April 5, 2019, the Delaware Supreme Court reversed in part and affirmed in part a decision of the Delaware Court of Chancery that had dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”).  Olenik v. Lodzinski et al., No. 392, 2018 (Del. April 5, 2019).  Plaintiffs claimed that Earthstone’s directors, officers, and Earthstone’s alleged controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders.  As discussed in our prior post on the case, the Court of Chancery dismissed the case after concluding that the transaction was properly structured under Kahn v. M&F Worldwide, 88 A.2d 635 (Del. 2014) (“MFW”), and the business judgment rule applied.  On appeal, the Delaware Supreme Court reversed, finding that Earthstone initiated economic negotiations before the requisite MFW protections were put in place.  Accordingly, the Court reinstated the breach of fiduciary claim as to the terms of the transaction; the Court sustained dismissal of the disclosure-based claim.
  • Delaware Court Of Chancery Applies Corwin To Dismiss Breach Of Fiduciary Duty Claims, Finding Allegations Of A Controlling Stockholder Conflict Inadequately Pleaded
     
    04/09/2019
    On March 20, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed class action claims asserted by former shareholders of NCI, Inc. against its former directors for breach of fiduciary duty in connection with the company’s acquisition by affiliates of H.I.G. Capital, LLC in a tender offer followed by a merger.  
    English v. Narang, C.A. No. 2018-0221-AGB (Del. Ch. Mar. 20, 2019).  Plaintiffs alleged that the company’s founder, who held approximately 34% of the shares and controlled about 83.5% of the voting power, orchestrated a sale of the company at a discounted price to address a personal need for liquidity prompted by his retirement as the company’s CEO at age 73.  But the Court found that the complaint “contained no concrete facts from which it reasonably can be inferred that [the founder] had an exigent or immediate need for liquidity.”  Therefore, the Court applied Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and dismissed the claims because a majority of NCI’s disinterested stockholders tendered their shares in an uncoerced and fully-informed tender offer.
  • Delaware Court Of Chancery Dismisses Demand-Refused Derivative Litigation, Notwithstanding Allegations Of Board Misrepresentations In Advance Of Demand
     
    12/11/2018

    On November 14, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a motion to dismiss a stockholder derivative suit asserting breach of fiduciary duty claims against certain directors of Richardson Electronics (the “Company”).  Busch v. Richardson Electronics, Ltd., C.A. No. 2017-0868-AGB (Del. Ch. Nov. 14, 2018).  The claims were based on allegations that the board improperly refused plaintiff’s demand to take action to unwind certain allegedly improper related-party transactions.  Plaintiff also asserted he was misled by the board about its involvement in the underlying transactions before he issued the litigation demand.  Therefore, according to plaintiff, the motion to dismiss should have been evaluated under the test applicable when demand is excused, as articulated in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), which does not entail the same broad deference to a board’s decision whether to bring claims as the standard typically applicable in demand-refused cases under Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990).  The Court rejected the argument that the Zapata standard applied but concluded that under either test plaintiff’s claims were subject to dismissal. 
  • Delaware Supreme Court Holds That Business Judgment Rule Applies To Controller Transactions As Long As MFW Conditions Are In Place Prior To Economic Negotiation
     
    10/16/2018

    On October 9, 2018, the Delaware Supreme Court affirmed a decision of the Delaware Court of Chancery dismissing a lawsuit brought by stockholders of Synutra International Inc. (the “Company”) challenging a controlling stockholder’s takeover of the Company.  Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).  Plaintiffs asserted breach of fiduciary duty claims and argued that the transaction did not meet the requirements of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) for business judgment review because the controller group’s initial proposal did not contain the MFW conditions—recommendation by a special committee and approval by a majority of the disinterested stockholders—although they were added later.  As discussed in our prior post on this case, the Court of Chancery applied business judgment review (rather than entire fairness review) and dismissed the complaint because the controller announced the conditions before any negotiations took place.  Affirming, the Delaware Supreme Court confirmed that MFW does not require that the conditions be included in the controller’s first offer, but instead that the controller condition its offer on the two key procedural protections “early in the process—i.e., before any substantive economic negotiations begin.”  The Court also clarified that the sufficiency of the price is not subject to evaluation under the business judgment standard and affirmed the Court of Chancery’s finding that plaintiffs failed to allege that the Company’s special committee acted with gross negligence with respect to the negotiations.
  • Delaware Court Of Chancery Applies MFW  To Stockholder Challenge To An All-Stock Transaction With Allegedly Controlling Stockholder
     
    07/31/2018

    On July 20, 2018, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”).  Olenik v. Lodzinski, et al., C.A. No. 2017-0414 (Del. Ch. July 20, 2018).  Plaintiffs claimed that Earthstone’s directors, officers, and an allegedly controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders.  Plaintiffs argued that, because EnCap was a majority stockholder in Oak Valley, and thus also a beneficial controlling stockholder in Earthstone, as well as a majority stockholder in Bold, Oak Valley and EnCap stood on both sides of the transaction, making it unfair.  The Court dismissed plaintiffs’ claims, concluding that, because Earthstone structured the transaction in the manner prescribed by Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), the business judgment rule standard of review applied.
  • Delaware Court Of Chancery Finds Allegations Of A Controlling Stockholder Group Sufficient To Preclude Dismissal Of Merger-Related Fiduciary Duty Breach Claims
    06/26/2018
    On June 18, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss claims of breach of fiduciary duty brought by a putative class of minority stockholders of Hansen Medical Inc. (“Hansen”) against an alleged group of controlling stockholders, in connection with the squeeze-out merger of Hansen into Auris Surgical Robotics, Inc. (“Auris”). In re Hansen Medical, Inc. Stockholder Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018).
  • Delaware Supreme Court Affirms Court Of Chancery Appraisal Determination At Nearly 60% Discount To Deal Price
     
    05/01/2018

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

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

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

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

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

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

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

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

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

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

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

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

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

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  • Delaware Court Of Chancery Upholds Shareholder’s Disclosure Claim In Connection With Tender Offer, But Indicates Relief, If Any, Will Likely Be Limited To Nominal Damages
     
    01/10/2018

    On December 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery declined to dismiss a direct breach of fiduciary duty claim brought by a shareholder plaintiff against directors and officers of casino company Twin River Worldwide Holdings, Inc. (“Twin River”) for allegedly misleading disclosures in an offer-to-purchase circular in connection with a tender offer.  Chatham Asset Mgmt. LLC, et al. v. Papanier, et al., C.A. No. 2017-0088-AGB (Del. Ch. Dec. 22, 2017).  Plaintiff, which sold a portion of its shares in the tender offer, alleged that the circular stated that defendants “may” sell shares “from time to time,” but the “true intent” of defendants was to increase the price of Twin River stock and sell their shares shortly after the tender offer closed (even though they ultimately did not).  Plaintiff, however, acknowledged that it participated in the tender offer only because of a regulatory requirement that capped its ownership position.  The Court found that the complaint stated a disclosure claim because “stating an outcome as a possibility” when in fact there was a “firm intention by defendants to sell their shares” is misleading.  But the Court noted that the “recourse appears to be limited” to nominal damages because plaintiff’s allegations “suggest that it likely will be unable to establish reliance and causation.”    

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  • Delaware Supreme Court Affirms Decision That Well-Pled Unocal Claim Does Not Automatically Excuse Pre-Suit Demand
     
    01/10/2018

    On December 18, 2017, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s dismissal of a shareholder derivative action asserting that the directors of The Williams Companies, Inc. (“Williams”) breached their fiduciary duties in connection with its entry into, and subsequent cancellation of, an agreement to acquire the remaining interest in its affiliate, Williams Partners L.P. (“WPZ”).  Ryan v. Armstrong, No. 230, 2017 (Del. Dec. 18, 2017).  As discussed in our post regarding that decision, plaintiff alleged that the directors sought to entrench themselves by approving the WPZ transaction while Williams was the subject of acquisition overtures from another company.  Ryan v. Armstrong, C.A. No. 12717-VCG (Del. Ch. May 15, 2017).  The Court of Chancery held that even a “well-pled” claim under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)—which applies enhanced scrutiny to certain takeover defensive measures—is not, standing alone, sufficient to excuse a pre-suit demand on the board under Court of Chancery Rule 23.1 where plaintiff failed to plead sufficient “particularized facts to imply a substantial likelihood of liability for damages . . . on the part of a majority of the directors.”  In its short order, the Supreme Court affirmed on the basis of the Court of Chancery’s opinion.

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  • Reversing A Dismissal, Delaware Supreme Court Declines To Apply Ratification Defense For Discretionary Compensation Awards Under Stockholder-Approved Equity Incentive Plan
     
    12/19/2017

    On December 13, 2017, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of fiduciary duty breach claims brought derivatively by stockholders of Investors Bancorp, Inc. against its directors in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity compensation plan previously approved by a stockholder vote. In re Inv’rs Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS (Del. Ch. December 13, 2017).  As discussed in our post regarding that decision, the Court of Chancery dismissed the claims, finding that the stockholder approval constituted ratification of the awards, rendering them subject to the presumption of protection under the business judgment rule.  In an opinion by Justice Collins J. Seitz, Jr., however, the Delaware Supreme Court reversed, holding that defendants must demonstrate the entire fairness of their equity awards, because plaintiffs adequately alleged that the directors “inequitably exercised [their] discretion” under the compensation plan’s “general parameters,” notwithstanding stockholder approval.

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  • Delaware Court Of Chancery Applies MFW Protections To Stock Reclassification That Allegedly Preserved Controlling Stockholder’s Control Of Company
     
    12/19/2017

    On December 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a putative stockholder suit asserting breach of fiduciary duty claims against NRG Energy, Inc. (“NRG”), the controlling stockholder of NRG Yield, Inc. (“Yield”), and the Yield directors in connection with a reclassification of Yield’s shares.  IRA Trust FBO Bobbie Ahmed v. David Crane, et al., Consol. C.A. No. 12742-CB (Dec. 11, 2017).  Plaintiff claimed that the reclassification enabled NRG to maintain its control over Yield and that this qualified as a “non-ratable” benefit that was not shared with Yield’s minority stockholders.  The Court agreed that plaintiff adequately pleaded that the reclassification was a conflicted transaction such that the entire fairness standard would apply but ultimately dismissed the case after finding that the transaction met the requirements for application of the business judgment rule under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).

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  • Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims In Connection With Two-Step Merger, Despite Finding Corwin Inapplicable
     
    12/12/2017

    ​On November 30, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty claims against the board of Opower, Inc. (“Opower”) in connection with Opower’s acquisition by Oracle Corporation (“Oracle”).  Van der Fluit v. Yates, C.A. No. 12553-VCMR (Del. Ch. Nov. 30, 2017).  The Court found that the failure to disclose that certain executives who received transaction-related benefits were the primary negotiators of the transaction constituted a material disclosure violation.  Therefore, the Court declined to rely on stockholder approval to cleanse the transaction under the doctrine of Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), because the tender was not fully informed.  Nevertheless, the Court granted defendants’ motion to dismiss, concluding that plaintiff had failed to plead a non-exculpated claim for breach of the duty of loyalty. 

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  • Finding Complaint Did Not Adequately Plead Claims For Breach Of Fiduciary Duty, Delaware Supreme Court Affirms Court Of Chancery Decision In GAMCO
     
    10/24/2017

    On October 12, 2017, the Supreme Court of Delaware affirmed a decision by the Delaware Court of Chancery to dismiss breach of fiduciary duty claims against the directors of Clear Channel Outdoor Holdings, Inc. (“CCOH”) in connection with (i) a debt offering and asset sales allegedly undertaken in order to fund special dividends for the purpose of enabling its controlling stockholder to address liquidity needs, and (ii) the alleged failure of CCOH to extricate itself from unfavorable intercompany agreements with the controlling stockholder as its financial condition deteriorated.  GAMCO Asset Management Inc. v iHeartMedia Inc., et al., C.A. No. 12312-VCS (Del. Oct. 12, 2017).  As discussed in our post regarding that decision, as to the debt offering and asset sales, the Court of Chancery applied the business judgment rule because the allegations regarding the debt offering and asset sales did not fall within the “very narrow circumstances” in which “a controlling stockholder’s immediate need for liquidity could constitute a disabling conflict of interest irrespective of pro rata treatment.”  In its short order, the Supreme Court affirmed without further elaboration.  As to the intercompany agreements, the Supreme Court found it unnecessary to reach the Court of Chancery’s determination that the claims were barred by a settlement agreement and res judicata because “the Court of Chancery properly found that under the pled circumstances, which included the board acting within the framework established by a forward-looking settlement agreement and the company’s binding contractual obligations . . . the complaint failed to state a claim for breach of fiduciary duty.”  

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  • Delaware Court Of Chancery Finds Demand Futility As To Fiduciary Duty Breach Claims Arising From Costly Loan Approved By Interested Directors And Allegedly Illegal Conduct Known To The Board
     
    10/10/2017

    On September 29, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted in part and denied in part a motion to dismiss derivative claims for breach of fiduciary duty against the board of foreign exchange broker FXCM Inc. (“FXCM”), sustaining two grounds for breach after finding that demand would have been futile.  Kandell v. Dror Niv et al., C.A. No. 11812 (Del. Ch. September 29, 2017).  Specifically, the Court held that demand was excused with respect to (i) the board’s approval of a hastily procured loan in the wake of the “flash crash” generated by the 2015 decoupling of the Swiss franc from the euro, and (ii) FXCM’s alleged violations regulations prohibiting foreign exchange (or FX) brokers from limiting losses on behalf of customers (a feature of FXCM’s business).  The Court dismissed plaintiff’s other claims, including as to a stockholder rights plan and an employee bonus plan, finding that the complaint lacked particularized facts necessary to excuse demand.

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  • Finding Disclosures Were Adequate, Delaware Court Of Chancery Applies Corwin And Volcano To Dismiss Post-Closing Breach Of Fiduciary Duty Claims 
     
    10/03/2017

    On September 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (“TFM”) after its acquisition in a two-step merger by affiliates of Apollo Global Management, LLC (“Apollo”).  Morrison v. Berry, et al., C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017).  Among other allegations, plaintiff had alleged that the auction process in which the company had engaged was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor.  The Court, however, dismissed the claims because plaintiff did not satisfy its burden, under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and In re Volcano Corp. Stockholder Litigation, 143 A.3d 727 (Del. Ch. 2016), “to plead facts from which it is reasonably conceivable that the potentially ratifying tender was materially uninformed.”

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  • Delaware Court Of Chancery Dismisses Post-Closing Stockholder Suit Asserting Fiduciary Duty Breach Claims And Also Seeking Quasi-Appraisal Remedy
     
    09/06/2017

    On August 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a putative stockholder class action against the directors of Kreisler Manufacturing Corporation (“Kreisler”), rejecting plaintiff’s claims for breach of fiduciary duty and quasi-appraisal in connection with the sale of Kreisler to Arlington Capital Partners (“Arlington”) as inadequately pleaded.  Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017).  Plaintiff alleged that the directors conditioned the merger on “side deals” that benefited themselves at the stockholders’ expense and that misstatements and omissions in the information statement disseminated to stockholders following the execution of a stockholder support agreement that bound more than 50% of outstanding stock in favor of the merger prevented stockholders from exercising their appraisal rights.  The Court found that the complaint failed to plead that the directors acted in bad faith, and thus dismissed the claims, notwithstanding that certain of the allegedly inadequate disclosures—if raised in a pre-closing suit—likely would have warranted injunctive relief pending corrective disclosures.  

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  • Delaware Court Of Chancery Extends MFW Protections To One-Sided Controller Transactions 
     
    08/29/2017

    On August 18, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a putative shareholder suit asserting claims for breach of fiduciary duty against Martha Stewart, the controlling stockholder of Martha Stewart Living Omnimedia, Inc. (“MSLO”), and aiding and abetting claims against third-party acquirer Sequential Brands Group Inc. (“Sequential”) in connection with Sequential’s strategic merger with MSLO.  In re Martha Stewart Living Omnimedia, Inc. Stockholders Litig., Consol. C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017).  Plaintiffs asserted that the sale was conflicted because Stewart negotiated for greater consideration for herself than for other stockholders and that the transaction did not meet the standards for application of the business judgment rule.  The Court found that plaintiffs failed to plead that the transaction was conflicted and that, even if it were, the protections afforded to stockholders through the establishment of an independent special committee and imposition of a majority-of-the-minority approval requirement warranted dismissal under the business judgment rule, in accordance with the standards set forth in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).  

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  • Delaware Chancery Court Upholds Fiduciary Duty Breach Claims Regarding Self-Tender Against Controlling Stockholder Group And Affiliated Directors, But Dismisses Claims Against Independent Directors And Financial And Legal Advisors
     
    08/01/2017

    On July 24, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss former stockholders’ claims for breach of fiduciary duty brought in connection with a self-tender by R. L. Polk and Co., Inc. (“Polk”) against the family that held approximately 90% of Polk shares (the “Controlling Family”) and affiliated directors, but dismissed related claims against the company’s independent directors and its financial and legal advisors on the transaction.  Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., C.A. No. 9250-VCG (Del. Ch. Ct. July 24, 2017).  The Court concluded that plaintiffs pled facts sufficient to allege that the self-tender was “a self-dealing transaction” by a controlling group of stockholders “as part of an overall scheme to later sell the Company for three times the [s]elf-[t]ender valuation.”  Therefore, the Court held that an “entire fairness” standard of review was applicable and declined to dismiss the claims against the Controlling Family and their affiliated directors.  The Court nevertheless dismissed fiduciary duty breach claims against the independent directors, finding bad faith inadequately pleaded.  The Court also dismissed aiding and abetting claims against the outside advisors, finding the complaint inadequate “to support an inference of scienter or knowing participation in a breach” (emphasis in original). 
  • Delaware Chancery Court Declines To Dismiss Challenges To Director Option Grants And Outside Investor Voting Agreement
     
    07/11/2017

    On June 28, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery declined to dismiss purported derivative and direct stockholder claims for breaches of fiduciary duty against the directors of Sorrento Therapeutics, Inc. (“Sorrento”) regarding the directors’ decisions to grant themselves stock options in several subsidiaries and their decision to condition a private placement investor’s acquisition of newly issued shares on a voting agreement requiring the investor to vote the shares as the board directs.  Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017).  Declining to dismiss the complaint, the Court determined that the options grants to the directors themselves “are subject to the same entire fairness review as any other interested transaction.”  As to the voting agreement, the Court held that defendants must establish that “the agreement is intrinsically fair and not designed to disenfranchise Sorrento stockholders.”     

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  • Delaware Supreme Court Affirms Dismissal Of Disclosure Claim Based On Subsequent Employment Of Special Committee Chair By Legal Counsel That Advised Committee
     
    06/27/2017

    On June 15, 2017, the Supreme Court of Delaware affirmed dismissal of a putative stockholder class action alleging breach of fiduciary duty by the directors of Blount International, Inc. (“Blount”) and aiding and abetting claims against other defendants, including Blount’s financial advisor, following Blount’s acquisition by a buyout group consisting of Blount’s CEO and COO, who are also board members, and several entities.  Chester Cty. Ret. Sys. v. Collins, No. 603, 2016 (Del. June 15, 2017).  Plaintiffs claimed that the proxy statement was materially misleading because it failed to disclose inter alia that the special committee chairman would become a partner at the law firm advising the committee shortly after closing.  Although Chief Justice Strine, writing for the Court, observed that “prudence would seem to have counseled for bringing [] to light earlier” the chairman’s impending partnership, the Court agreed with the decision of the Delaware Court of Chancery in Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924 (Del. Ch. Dec. 6, 2016), that this and the other omissions were immaterial and affirmed the dismissal. 

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  • Delaware Chancery Court Declines To Dismiss Claims Under Corwin, Finding The Complaint Adequately Pleaded That The Shareholder Vote Was Structurally Coercive
     
    06/16/2017

    On May 31, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss purported derivative and direct stockholder claims for breaches of fiduciary duty against the directors of Charter Communications, Inc. (“Charter”) regarding share issuances to, and a voting proxy agreement with, its largest stockholder, Liberty Broadband Corporation (“Liberty”), in connection with Charter’s recent acquisition of Bright House Networks, LLC (“Bright House”) and merger with Time Warner Cable (“TWC”) (the “Acquisitions”).  Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418-VCG (Del. Ch. May 31, 2017).  The Court found that, while plaintiff did not sufficiently allege that Liberty controlled Charter, plaintiff did adequately plead that the stockholder vote approving the share issuances and voting proxy agreement suffered from “structural coercion,” and therefore failed to ratify the transactions under the doctrine established by Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  Because it found the briefing insufficient to efficiently analyze whether plaintiff’s claims were direct or derivative, however, the Court reserved decision on the motion to dismiss and requested supplemental briefing on the issue. 

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  • Delaware Supreme Court Affirms Dismissal Of Challenge To Controlling Stockholder Take‑Private Deal
     
    05/31/2017

    On May 22, 2017, the Supreme Court of Delaware affirmed the dismissal of a breach of fiduciary duty action against the directors of Books-A-Million, Inc. and other defendants following a “squeeze-out” merger by the company’s controlling stockholders.  In re Books-A-Million, Inc. Stockholders Litigation v. Anderson, Consol. C.A. No. 11343-VCL.  Without further elaboration, the Supreme Court’s brief order provides that the decision of the Delaware Court of Chancery “should be affirmed on the basis of and for the reasons assigned” in its opinion (citing In re Books-A-Million, Inc., C.A. No. 11343 (Del. Ch. Oct. 10, 2016)).  As discussed in our post on the Chancery Court’s decision, the lower court found—based on the complaint and the proxy filed by the company in connection with the merger—that the transaction followed the framework established by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).  Under that framework, a controlling stockholder transaction that is approved by both an independent special committee of the board—with access to its own advisors and the ability to definitively reject the deal—and an informed, uncoerced vote of the majority of minority (i.e., non-controlling) stockholders will be reviewed under the deferential “business judgment rule,” as opposed to the entire fairness standard typically applied to controlling stockholder transactions.

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