Delaware Court of Chancery Holds That Merger Was Fair And Reasonable Despite Mishandled Conflict Committee Appointment
On February 15, 2021, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered post-trial judgment in favor of the defendant-general partner of Regency Energy Partners LP (“Regency”) in a class action brought by Regency’s limited partners alleging breach of the partnership agreement (“Partnership Agreement”) and of the implied covenant of good faith and fair dealing. Dieckman v. Regency GP LP & Regency GP LLC, No. CV 11130-CB, 2021 WL 537325, (Del. Ch. Feb. 15, 2021). The Court held that, notwithstanding inaccurate proxy disclosures about the independence of the conflicts committee, Regency’s merger with Energy Transfer Partners (“ETP”) did not violate the Partnership Agreement’s requirement that the deal be fair and reasonable to the partnership, and that plaintiffs failed to establish bad faith, willful misconduct, or damages.
Delaware Court Of Chancery Dismisses Derivative Claims For Failure To Plead Demand Futility Notwithstanding Unocal Enhanced Scrutiny
On November 20, 2020, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery dismissed stockholder derivative claims against the directors of Christopher & Banks Corporation. Gottlieb v. Duskin, C.A. No. 2019-0639-MTZ (Del. Ch. Nov. 20, 2020). Plaintiffs alleged that the directors breached their fiduciary duties by wrongfully enacting defensive measures to rebuff an unsolicited acquisition offer at a substantial premium to the company’s stock price even though the company was in “dire financial condition.” The Court determined that the complaint pled facts sufficient to trigger enhanced scrutiny of the directors’ conduct under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), rather than the deferential business judgment rule. Nevertheless, the Court held that the complaint did not sufficiently plead that the “directors face a substantial likelihood of bad-faith liability.” Therefore, the Court granted the motion to dismiss for failure to plead that pre-suit demand on the directors was excused, as required for a derivative action under Delaware Court of Chancery Rule 23.1.
Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Plead Sufficient Facts Showing Demand Futility
On September 30, 2020, Chancellor Andre G. Bouchard dismissed a derivative suit brought by stockholders of TrueCar, Inc. (the “Company”) against certain of its officers and directors (along with allegedly related entities) asserting breaches of fiduciary duty, insider trading, unjust enrichment, contribution and indemnification, as well as aiding and abetting. In Re TrueCar, Inc. Stockholder Derivative Litigation, C.A. No. 2019-0672-AGB (Del. Ch. Sept. 30, 2020). According to the complaint, the Company operated an internet platform designed to facilitate purchases of cars that allegedly depended on consumer traffic directed to TrueCar by its “affinity partners.” The gravamen of the claims was that defendants did not disclose in the Company’s SEC filings that an impending redesign of the website of its most significant affinity partner would negatively impact the Company’s business and that certain defendants and their alleged affiliates engaged in stock sales before the public disclosure of this allegedly adverse development. Dismissing the suit in its entirety, the Court found that plaintiffs failed to plead “particularized facts sufficient to impugn the ability” of any of the directors to consider a pre-suit demand because the allegations did not demonstrate that the directors learned of the development or ignored any red flags before the challenged disclosures and stock sales.
Delaware Court Of Chancery Grants Motion To Dismiss Finding Demand Was Not Excused In Connection With Alleged Failure To Update Revenue Guidance
On April 28, 2020, Vice Chancellor Joseph R. Slights III granted a motion to dismiss a derivative action alleging claims of breach of fiduciary duty and improper trading brought by stockholders of GoPro, Inc. against certain of the company’s current and former directors and officers. In re GoPro, Inc. Stockholder Derivative Litigation, C.A. No. 018-0784-JRS (Del. Ch. April 28, 2020). Plaintiffs alleged that defendants failed to disclose that the company’s revenue guidance was unachievable in light of emerging problems with a product launch. Dismissing the claims, the Court held that the complaint did not plead with particularity that a majority of the board faced a substantial risk of liability, and therefore, rejected plaintiffs’ contention that pre-suit demand on the board to sue was excused as futile. Specifically, the Court found that the board presentations incorporated by reference into the complaint revealed that management regularly advised the board that the company was still on track to meet the revenue guidance. As the Court explained, the board was “under no obligation to disclose what it did not know or did not believe to be true.”
Delaware Supreme Court Affirms Dismissal Of Derivative Suit Alleging Board Approved Transaction Involving Unnecessary Litigation Exposure
On January 13, 2020, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware affirmed the dismissal by Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery of a stockholder derivative suit for lack of pre-suit demand. McElrath v. Kalanick, et al.
, C.A. No. 2017-0888 (Del. Jan. 13, 2020). As discussed in our post
on the prior decision, plaintiff alleged that the directors of a technology company had breached fiduciary duties in connection with the approval of an acquisition, in particular as related to purported intellectual property infringement by the target. Noting that the company had an exculpatory charter provision, the Delaware Supreme Court explained that the directors were insulated from due care violations and could only be liable for bad faith. Referring to allegations that the board heard a presentation that summarized the transaction, reviewed the risk of litigation, generally discussed due diligence and asked questions, the Court found that the complaint raised an inference of a “functioning board” and did not reasonably suggest the board intentionally ignored relevant risks. Thus, the Court affirmed the dismissal because a majority of the board was disinterested for purposes of pre-suit demand as it “had no real threat of personal liability.”
Delaware Court Of Chancery Dismisses Caremark Claims Against Directors After Company Publicly Disclosed Misconduct
On October 31, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder derivative suit against the directors of LendingClub Corporation for failure to plead demand futility. In re LendingClub Derivative Litigation, C.A. No. 12984-VCM (Del. Ch. Oct. 31, 2019). Plaintiffs asserted breach of fiduciary duty claims against the directors after the company disclosed that it had self-reported certain alleged misconduct by the CEO and others to the SEC, as well as the problems that prompted the company’s internal investigation, the results of that investigation, and the company’s remediation efforts. Plaintiffs alleged that the board did not adequately implement a system of controls or monitor company operations and “thus disabled itself from being informed of problems requiring its attention.” Determining that the complaint did not allege facts demonstrating bad faith—as is necessary to prevail on a Caremark claim for violation of oversight duties—and, therefore, that a majority of the directors did not face a substantial risk of liability, the Court concluded that pre-suit demand was not excused.
Delaware Court Of Chancery Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC. In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019). Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction. The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal. Nevertheless, based on its “holistic” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement. Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019). Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time. Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and 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”)—had not been implemented. Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty. But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
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 Supreme Court Clarifies That Section 220 Books And Records Demands Are Not Subject To A Presumption Of Confidentiality
On August 7, 2019, in a decision authored by Justice Gary F. Traynor, the Delaware Supreme Court concluded that books and records produced to a stockholder under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. Tiger v. Boast Apparel, Inc., C.A. No. 23, 2019 (Del. Aug. 7, 2019). In this case, the Delaware Court of Chancery referenced such a presumption when it issued an order requiring the stockholder to keep such records confidential indefinitely. The Delaware Supreme Court affirmed the indefinite confidentiality order as “within the range of reasonableness … given the facts and circumstances of this case.” But the Court expressly clarified that there is no such presumption of confidentiality and the Court of Chancery must instead “assess and compare benefits and harms when determining the initial degree and duration of confidentiality” in connection with a Section 220 demand.
Delaware Court Of Chancery Dismisses Caremark Claim, Finding Consumer Class Action Settlement Was Not A “Red Flag” For Consumer Protection Law Violations
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.
Reversing A Dismissal, The Delaware Supreme Court Finds The Absence Of Board-Level Monitoring Of "Central Compliance Risks" Sufficient To State A Caremark Claim
On June 18, 2019, in a decision authored by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court en banc reversed the dismissal of a stockholder derivative suit against the directors and officers of Blue Bell Creameries USA, Inc. (the “Company”). Marchand v. Barnhill, No. 533, 2018, (Del. June 18, 2019). After a listeria outbreak at the ice cream manufacturer, the Company purportedly faced a liquidity crisis and accepted a dilutive private equity investment. Plaintiff alleged that the CEO and vice president of operations breached their fiduciary duties of care and loyalty by disregarding contamination risks and that the directors breached their duty of loyalty under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996). As to the claims against the executives, the Court held that the complaint adequately pleaded demand futility because it alleged facts regarding the personal relationship of an additional director to the CEO sufficient to raise a reasonable doubt as to whether the director could impartially consider a demand. Reversing the dismissal of the Caremark claim, the Court found that “the complaint supports an inference that no system of board-level compliance monitoring and reporting existed at [the company].”
Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claims Related To Repricing Of Stock Options
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 Court Of Chancery Dismisses Derivative Suit Alleging Tech Company Exposed Itself To Unnecessary Litigation Risk With Acquisition
On April 1, 2019, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of demand a stockholder derivative suit against directors of Uber Technologies, Inc. (“Uber”) that asserted breach of fiduciary duty claims in connection with Uber’s acquisition of self-driving car startup Ottomotto, LLC (“Otto”). McElrath v. Kalanick, et al., C.A. No. 2017-0888-SG (Del. Ch. April 1, 2019). After Uber acquired Otto, which was founded by a former Google employee, Google sued for infringement and Uber paid $245 million to resolve the claims. Plaintiff in McElrath claimed that the Uber board violated its duties by failing to adequately investigate the Otto transaction.
Delaware Court Of Chancery Dismisses Demand-Refused Derivative Litigation, Notwithstanding Allegations Of Board Misrepresentations In Advance Of Demand
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.
New York Supreme Court Dismisses Derivate Suit, Finding That Shareholder’s Letter Constituted A Demand And Business Judgment Rule Applied
On March 23, 2018, Justice Charles E. Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice a purported derivative suit alleging that the board of Intercept Pharmaceuticals, Inc. (“Intercept”) breached their duty of loyalty and good faith and squandered corporate assets by approving, without a stockholder vote, a non-employee director compensation policy. Solak v. Fundaro
, No. 655205 (N.Y. Sup. Ct. Mar. 23, 2018). Though plaintiff sent a letter to Intercept prior to filing suit, demanding that the company take “all action necessary” to remedy the waste allegedly caused by the directors’ compensation policy, plaintiff argued that the letter was not a demand within the meaning of Delaware Court of Chancery Rule 23.1, and that demand would have been futile because self-compensation decisions are inherently conflicted transactions. The Court held that plaintiff’s letter fulfilled all the requirements of a demand under Delaware law and that the board’s investigation of and response to the demand was sound under the business judgment rule.
Delaware Court Of Chancery Dismisses Derivative Breach Of Fiduciary Duty Claims In Connection With Publication Of Non-Final Drug Trial Results For Lack Of Demand Futility
On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims against the directors of Orexigen Therapeutics Inc. (“Orexigen”) for alleged breaches of fiduciary duty in connection with the company’s clinical drug trials. Orexigen Therapeutics Inc. v. Michael A. Narachi, et al.
, C.A. No. 12412-VCMR (De. Ch. Feb. 28, 2018). Plaintiffs asserted that the directors violated the law because they failed to follow best practices with respect to clinical trials; consequently, plaintiffs argued that demand was futile because a majority of the board faced substantial risk of liability. The Court dismissed these claims, finding that the Company’s actions were not “so egregious or irrational” as to violate the business judgment rule and, accordingly, demand futility had not been adequately pleaded.
Delaware Supreme Court Affirms Dismissal Of Stockholder Derivative Claims On Issue Preclusion Grounds Based On A Demand-Futility Dismissal Of A Prior Derivative Suit, Holding That The Application Of Issue Preclusion Does Not Violate Federal Due Process
On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights. In re Wal-Mart Stores Inc. Del. Deriv. Litig.
, C.A. No. 7455-CB (Del. Jan. 25, 2018). In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.
Delaware Supreme Court Affirms Decision That Well-Pled Unocal Claim Does Not Automatically Excuse Pre-Suit Demand
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.
Reversing A Dismissal, Delaware Supreme Court Declines To Apply Ratification Defense For Discretionary Compensation Awards Under Stockholder-Approved Equity Incentive Plan
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.
Delaware Supreme Court Affirms Finding Of Failure To Allege Demand Futility Based On Board Composition Days After Complaint Was Filed
On November 27, 2017, the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery dismissing a stockholder derivative complaint against certain directors and officers of BioScrip, Inc. for failing to allege that a demand on BioScrip’s board of directors to bring the litigation would have been futile. Park Employees’ and Retirement Bd. Employees’ Annuity and Benefit Fund of Chicago v. Smith
, No. 198 (Del. Nov. 27, 2017). As discussed in our post
regarding that decision, the Court of Chancery departed from its usual practice of assessing plaintiff’s allegations of demand futility based on the composition of the board on the date the complaint was filed. Park Employees’ and Retirement Bd. Employees’ Annuity and Benefit Fund of Chicago v. Smith
, C.A. No. 11000-VCG (Del. Ch. May 31, 2016). Instead, the Court of Chancery made an “equitable” exception to that rule and dismissed the complaint for failing to establish demand futility based on the board as it existed four days later based on “unique facts,” including that it was publicly known that those board changes were imminent prior to the filing of the complaint and that the new board was in place by the time defendants had received service of the complaint. In its short order, the Supreme Court affirmed without further elaboration.
Delaware Court Of Chancery Dismisses Derivative Action, Finding Demand Unexcused Because Plaintiff Did Not Plead Non-Exculpated Claims Against A Majority Of Directors
On November 7, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted a motion to dismiss a derivative and putative class action brought by a minority stockholder of Erin Energy Corporation (“Erin”), challenging a series of transactions involving Erin, Allied Energy PLC (“Allied”)—an entity affiliated with Kase Lukman Lawal, Erin’s chairman, CEO, and controlling stockholder—and another party, Public Investment Corporation Limited (“PIC”). Lenois v. Lawal
, C.A. No. 11963 (Del. Ch. Nov. 7, 2017). Plaintiff alleged that the CEO—who together with an affiliated entity (Allied’s parent company) controlled nearly 60% of Erin’s shares—effectively stood on all sides of the challenged transactions and negotiated in his own self-interest. Plaintiff asserted derivative claims for breach of fiduciary duty against the CEO and the remaining directors. The Court found that plaintiff adequately pleaded that the CEO acted in bad faith, but dismissed the derivative claims because the complaint “failed to plead non-exculpated claims against a majority of the Erin Board” and, thus, demand on the board was not excused.
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
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.
Delaware Court Of Chancery Recommends Limiting The Preclusive Effect Of Prior Decisions On Demand Futility In Derivative Lawsuits
On July 25, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery issued a supplemental opinion, responding to a remand order from the Delaware Supreme Court, in which Chancellor Bouchard recommended that the Delaware Supreme Court adopt a new preclusion threshold to determine whether collateral estoppel precludes a new plaintiff from pursuing derivative claims that have already been dismissed. In re Wal-Mart Stores, Inc. Del. Deriv. Litig.
, C.A. No. 7455-CB (Del. Ch. July 25, 2017). Chancellor Bouchard originally dismissed the Delaware suit (“Wal-Mart I
”) after finding that the plaintiff was barred from relitigating demand futility, which the federal court in the District of Arkansas found was inadequately pleaded in an earlier-filed federal suit. While the Delaware plaintiffs spent the three years litigating a books and records demand under 8 Del. C.
§ 220, the plaintiffs in the federal suit filed suit (in what Chancellor Bouchard described as a race to the courthouse) without making a Section 220 demand.
Delaware Court Of Chancery Finds Demand Futility Where Plaintiff Adequately Alleged That Board’s Approval Of Challenged Transactions Was Grossly Negligent And Board Was Not Adequately Informed
On August 1, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss a stockholder complaint asserting claims for breach of fiduciary duty against directors and executives of AGNC Investment Corp. (the “Company”) in connection with the renewals of investment management agreements with American Capital Mortgage Management, LLC (the “Manager”) and the Company’s subsequent acquisition of the Manager. H&N Mgmt. Group, Inc. & Aff Cos Frozen Money Purchase Plan v. Couch
, C.A. No. 12847-VCMR (Del. Ch. Ct. Aug. 1, 2017). The Court concluded that the complaint pleaded particularized facts sufficient to establish demand futility and to allege that the board was grossly negligent in approving the transactions, a non-exculpated breach under the company’s charter.
Delaware Chancery Court Dismisses Caremark Claim For Failure To Adequately Allege That The Board Consciously Disregarded FCPA Violation Red Flags
On June 16, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty and other claims brought derivatively against the directors and former chief financial officer of Qualcomm, Inc. (“Qualcomm”) for failure to plead demand futility, finding that the complaint did not adequately demonstrate that the directors faced a substantial likelihood of personal liability. In re Qualcomm Inc. FCPA Stockholder Derivative Litigation
, C.A. No. 11152-VCMR (Del. Ch. June 16, 2017) (letter). The stockholder plaintiffs’ derivative complaint alleged that Qualcomm’s board ignored red flags that resulted in alleged violations of the Foreign Corrupt Practices Act (“FCPA”) and a March 2016 U.S. Securities and Exchange Commission (“SEC”) cease-and-desist order. The Court found, however, that the complaint did not adequately allege that “the board consciously disregarded the [alleged] red flags” and dismissed the claims.
Delaware Chancery Court Holds That Well-Pled Unocal Claim Does Not Automatically Excuse Pre-Suit Demand
On May 15, 2017, Vice Chancellor Sam Glasscock III of the Delaware Chancery Court dismissed a shareholder derivative action asserting that the directors of The Williams Companies, Inc. (“Williams”) breached their duty of loyalty 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
, C.A. No. 12717-VCG (Del. Ch. May 15, 2017). Plaintiff, a Williams shareholder, alleged that Williams’ directors were “motivated . . . by a desire . . . to entrench themselves” when they approved the WPZ acquisition in the context of “acquisition overtures” made toward Williams by another company, Energy Transfer Equity, L.P. (“ETE”). The Court held that allegations of “defensive measures”—even if sufficient to trigger enhanced scrutiny under Unocal Corp. v. Mesa Petroleum Co.
, 493 A.2d 946 (Del. 1985)—do not result in “automatic demand excusal.” Therefore, because demand futility was not otherwise adequately pleaded, the Court granted dismissal under Court of Chancery Rule 23.1 for plaintiff’s failure to make a pre-suit demand on the Williams board to pursue the litigation.
Second Circuit Affirms Dismissal Of Shareholder Suit, Finding Subject Matter Jurisdiction Was Properly Exercised, Equity Dilution Claim Was Derivative, And Demand Futility Was Inadequately Pleaded
On April 26, 2017, the United States Court of Appeals for the Second Circuit affirmed the dismissal of a lawsuit brought by a shareholder of Star Bulk Carriers Corp. (“Star Bulk”) against its directors and entities affiliated with the director defendants. F5 Capital v. Pappas
, No. 16-530 (2d Cir. April 26, 2017). Challenging various transactions in which Star Bulk had engaged, plaintiff asserted derivative claims for breaches of fiduciary duty and waste, as well as a purported direct class-action claim for wrongful equity dilution. Affirming the dismissal of all claims, the Second Circuit held that (1) the equity dilution claim was not within the “limited circumstances involving controlling stockholders” to enable it to be considered a direct (rather than derivative) claim; (2) the district court nevertheless had and properly retained subject matter jurisdiction; and (3) plaintiff failed to plead demand futility, as required under Federal Rule of Civil Procedure 23.1 to maintain shareholder derivative claims.
Delaware Chancery Court Dismisses Suit Challenging Board Compensation Awards Under A Stockholder-Approved Compensation Plan
On April 5, 2017, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery granted defendants’ motion to dismiss a stockholder derivative suit against the directors of Investors Bancorp, Inc., which had asserted a claim for breach of fiduciary duty 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 Investors Bancorp, Inc. Stockholder Litigation
, C.A. No. 12327-VCS (Del. Ch. Apr. 5, 2017). Plaintiffs, Investors Bancorp stockholders, had challenged the awards as “grossly excessive compensation” and also alleged that stockholder approval of the equity compensation plan was ineffective because the plan did not contain “meaningful limits” and, in any event, the disclosures in connection with the vote were materially misleading. But the Court found that the plan—even as alleged—did contain “director-specific limits” on equity compensation, the awards were within those limits, and the stockholder vote was fully informed. Therefore, the Court held that the stockholder approval constituted “ratification of the awards,” rendering them subject to the “business judgment rule’s presumptive protection” and reviewable only as “waste,” which plaintiffs did not plead.
Massachusetts Supreme Court Affirms Dismissal Of Shareholder Class Action And Clarifies That Directors Generally Owe Fiduciary Duties To The Corporation, And Not Its Shareholders
On March 6, 2017, in a decision authored by Justice Margot Botsford, the Massachusetts Supreme Judicial Court affirmed the dismissal of an action for breach of fiduciary duty brought by former shareholders of EMC Corporation against its directors in connection with its merger with Dell Inc., finding that the claims could only have been brought derivatively. Int’l Brotherhood of Electrical Workers Loc. No. 129 Benefit Fund v. Tucci
, SJC-12137 (Mass. Mar. 6, 2017). In its decision, the Court clarified that “the general rule of Massachusetts corporate law is that a director of a Massachusetts corporation owes a fiduciary duty to the corporation itself, and not its shareholders.” Further, the Court found that the injury alleged—the undervaluation of EMC in the transaction—“qualifies as a direct injury to the corporation” and “fit[s] squarely within the framework of a derivative action,” which plaintiffs as former shareholders did not—and could not—bring.
Delaware Chancery Court Holds That Former Stockholder Lacks Standing To Bring Section 220 Action For Inspection Of Books And Records
On February 27, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of standing a lawsuit for inspection of corporate books and records brought by a former stockholder squeezed out in a two-step merger. Weingarten v. Monster Worldwide Inc.
, C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017). As noted by the Court, this case presented an issue of first impression: whether a plaintiff seeking corporate records under Section 220 of the Delaware General Corporation Law, 8 Del. C.
§ 220, must be a stockholder at the time the complaint is filed. Based on the language of the statute, the Court held that the former stockholder lacked standing to bring a Section 220 action because he no longer owned shares following the merger.
Delaware Chancery Court Dismisses Caremark Claim Highlighting That Unsupported Inferences Do Not Demonstrate Demand Futility
On January 19, 2017, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a shareholder derivative suit claiming a breach of fiduciary duty by the directors of United Parcel Service, Inc. (“UPS”) for an alleged failure of oversight in connection with UPS’s compliance with laws governing the transportation and delivery of cigarettes. Horman v. Abney
, C.A. No. 12290-VCS (Del. Ch. Jan. 19, 2017). Specifically, the Court found that plaintiffs failed to plead adequately that making a demand on UPS’s board to pursue the claims would have been futile because the complaint did not contain factual allegations sufficient to support a reasonable inference that the director defendants faced a substantial likelihood of personal liability.
Delaware Chancery Court Dismisses Derivative Claims For Failure To Allege Wrongful Demand Refusal With Particularity
On January 19, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a derivative suit brought by a shareholder of Mattel, Inc. (“Mattel”), after its board of directors declined to sue management to recover payments made to its former CEO under severance and consulting agreements. Andersen v. Mattel, Inc.
, C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017). Vice Chancellor Montgomery-Reeves found that plaintiff failed to plead sufficiently particularized facts alleging gross negligence or bad faith, where the board made its decision after an investigation of the underlying events and also considered the potential consequences of the contemplated litigation.
Delaware Court Of Chancery Dismisses Pair Of “Demand-Refused” Derivative Suits, Highlighting The Difficulties In Bringing Such Actions
On November 30, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a pair of shareholder derivative suits against nominal defendant The Bank of New York Mellon Corporation (“BNYM”) that sought to hold certain of its current and former directors and officers liable for allegedly causing or permitting certain misconduct to occur in the bank’s foreign exchange business. Zucker v. Hassell, et al.
, C.A. No. 11625-VCG (Del. Ch. Ct. Nov. 30, 2016); Kops v. Hassell, et al.
, C.A. No. 11982-VCG (Del. Ch. Ct. Nov. 30, 2016). The Court dismissed both complaints for failure to adequately plead that BNYM’s board of directors wrongfully refused the shareholders’ respective litigation demands, further reinforcing the difficulties that would-be plaintiffs face in satisfying the pleading standards required to obtain derivative standing to sue on behalf of a Delaware corporation.
Delaware Supreme Court Reverses Dismissal Of Derivative Suit After Finding Directors Lacked Independence
On December 5, 2016, the Supreme Court of the State of Delaware reversed a dismissal of a shareholder derivative action after finding that the complaint adequately pled that a majority of the directors of Zynga Inc. (“Zynga”) lacked the independence to impartially consider a lawsuit asserting breach of fiduciary duty claims against Zynga’s controlling stockholder and former CEO and another director. Sandys v. Pincus
, C.A. No. 9512-CB (Del. Dec. 5, 2016).
Shareholder Fails To Demonstrate Demand Futility Because Allegations Did Not Plead That Board Consciously Ignored Supposed Red Flags Regarding BSA/AML Controls
On October 18, 2016, Chancellor Andre Bouchard of the Delaware Court of Chancery dismissed a shareholder derivative action against the directors of Capital One Financial Corporation (“Capital One”), finding that plaintiff failed to plead demand futility in connection with his breach of fiduciary duty claims. Reiter v. Fairbank, C.A. No. 11693-CB, 2016 WL 6081823 (Del. Ch. Oct. 18, 2016). The Court held that the allegations—relying in large part on records obtained from Capital One under Section 220 of the Delaware General Corporation Law, which the Court found were incorporated by reference into the complaint—did not “reasonably permit . . . an inference that the defendants consciously allowed Capital One to violate the law” so as to demonstrate bad faith and excuse the demand requirement.
Delaware Court Of Chancery Holds Duke Energy Stockholders’ Derivative Suit Following Ouster Of CEO Partially Barred By Collateral Estoppel As A Result Of An Earlier Dismissal In North Carolina
On August 31, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted in part and denied in part a motion to dismiss derivative claims against eleven directors of Duke Energy Corp. (“Duke”). In re Duke Energy Corp. Derivative Litig.
, No. 7705-VCG, 2016 WL 4543788 (Del. Ch. Aug. 31, 2016). The Court made two key rulings: 1) some, but not all, of plaintiffs’ claims were precluded by a prior ruling by a North Carolina court; and 2) for the non-precluded claims, plaintiffs adequately alleged demand futility.
Delaware Chancery Court Grants Motion to Dismiss in Caremark Action Against Qualcomm Directors and Officers
On August 1, 2016, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Chancery Court granted a motion to dismiss “Caremark
” claims against directors of Qualcomm, Inc. for failure to plead that demand on the board of directors was futile, finding that the complaint failed to set forth particularized allegations of fact supporting an inference that a majority of the board faced a substantial likelihood of personal liability. Melbourne Mun. Firefighter’s Pension Trust v. Paul E. Jacobs, et al. and Qualcomm, Inc.
, C.A. No. 10872, memo. op. (Del. Ch. Aug 1, 2016). The complaint alleged that directors and officers of Qualcomm consciously disregarded antitrust enforcement actions in several international jurisdictions, ignored red flags regarding the firm’s compliance with international antitrust laws, and failed to remedy its business practices to comply with international antitrust laws, resulting in the imposition of fines and judgments against the company from multiple regulators in a number of jurisdictions, including a $975 million fine issued by the National Development and Reform Commission of the People’s Republic of China.
Ninth Circuit Dismisses Director Defendant from Investor Suit to Cure Jurisdictional Defect, Affirms Dismissal for Failure to Make Demand
On July 18, 2016, a unanimous panel of the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a shareholder derivative action against Wynn Resorts, Limited (“Wynn Resorts”) and eleven individuals—including Steve Wynn—who sit or sat on its board of directors. La. Mun. Police Employees’ Retirement Sys. v. Wynn
, __ F. 3d __, No. 14-15695, 2016 WL 3878228, (9th Cir. July 18, 2016). Its ruling confirmed that the federal courts may dismiss, sua sponte
, a “stateless” defendant if necessary to perfect their diversity jurisdiction; that trial court determinations regarding demand futility are reviewed for abuse of discretion in the Ninth Circuit; and that plaintiffs alleging demand futility must plead their case with particularity.
Delaware Court of Chancery Finds Suit against Lululemon Chairman and Board Is Precluded by Previous Dismissal of New York Lawsuit
On June 15, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a derivative action against current and former directors of Lululemon Athletica, Inc., finding that plaintiffs’ claims were precluded by a previous dismissal of similar allegations in a New York based action. Laborers District Council Constr. Indus. Pension Fund v. Bensoussan et al.
, C.A. No. 11293-CB (Del. Ch. June 14, 2016).