Delaware Court Of Chancery Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
On January 3, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery largely denied a motion to dismiss a putative class action brought by the stockholders of Churchill Capital Corp. III, a special purpose acquisition company or “SPAC” (“Churchill”) alleging that the company’s controlling stockholder, officers, and directors (“the Company Defendants”) breached their fiduciary duties and the company’s financial advisor aided and abetted that breach in connection with the SPAC’s acquisition of MultiPlan, Inc. (“MultiPlan”). In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022). Plaintiffs alleged that defendants omitted to disclose that a large customer of MultiPlan would soon stop using MultiPlan’s services, allegedly causing stockholders to approve the merger based on faulty information. Defendants argued that the claim was derivative in nature, rather than one that could be asserted directly, and moved to dismiss for failure to plead demand futility and on the grounds that the business judgment rule applied. The Court held that plaintiffs’ claims were direct, rather than derivative, and that entire fairness applied because of what it found to be inherent conflicts of interest between defendants and the company’s public stockholders.
Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
On May 10, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss claims for breach of fiduciary duty and unjust enrichment brought by former stockholders of Voltari Corporation, challenging the take-private buyout of the company by its controlling stockholder. Franchi, et al. v. Firestone, et al., C.A. No. 2020-0503-KSJM (Del. Ch. May 10, 2021). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—the buyout offer was conditioned on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Nevertheless, plaintiffs claimed that the purchase price did not account for the value of the company’s net operating loss carryforwards and therefore the controller and the company’s directors breached their fiduciary duties. The Court, however, held that defendants were entitled to the benefit of the business judgment rule under MFW because plaintiffs did not adequately plead (i) a lack of independence as to the members of the special committee; (ii) that the committee acted with gross negligence in approving the merger; or (iii) that the proxy in connection with the stockholder vote failed to disclose material facts.
Delaware Court Of Chancery Sustains Breach Of Fiduciary Duty Claims Against Target’s CEO And Aiding And Abetting Claims Against Target’s Financial Advisor And Buyer
On January 29, 2021, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied in part a motion to dismiss class action claims for breach of fiduciary duty against the CEO and Chairman of Presidio, Inc. (“Presidio”), its directors, and its controlling stockholder, as well as aiding and abetting breach of fiduciary duty against its financial advisor and BC Partners Advisors LP (“BCP”). The suit was brought by a former Presidio stockholder in connection with BCP’s 2019 acquisition of Presidio. Firefighters’ Pension Sys. of the City of Kansas City, Missouri Trust v. Presidio, Inc., C.A. No. 2019-0839-JTL, 2021 WL 298141 (Del. Ch. Jan. 29, 2021). The Court found that plaintiff adequately alleged that Presidio’s financial advisor and CEO “steered the sale process” toward a bidder who made an inferior offer, but that related claims against the board and controlling stockholder must be dismissed for failure to plead non-exculpated and money damages claims.
District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger.
Second Circuit Affirms Denial Of Certain Claims For Investment Banking Fees
On October 11, 2019, the United States Court of Appeals for the Second Circuit affirmed a decision by District Judge Jesse Furman denying in part breach of contract claims for advisory fees brought by investment bank Stone Key LLC and its affiliate against its former client, Monster Worldwide, Inc. Stone Key Partners LLC v. Monster Worldwide Inc.
, No. 18-2804 (2d Cir. October 11, 2019). As discussed in our prior post
, the trial court had denied claims for fees related to a transaction that it found post-dated termination of the advisor’s contract and a claim for an earlier transaction that it found did not qualify as a “partial sale” for which the advisor was entitled to a fee. Significantly, as we discussed, the trial court also based its denial of the claim related to the earlier transaction on its finding that the partial sale fee provision in the engagement letter amounted to an unenforceable agreement to agree. By summary order, the Second Circuit affirmed largely for the reasons articulated by the lower court. However, because the Second Circuit agreed that the earlier transaction did not constitute a “partial sale” under the contract and affirmed the lower court’s denial of the claim on that basis, the Second Circuit “decline[d] to consider whether the compensation provision itself was enforceable.” Summary orders do not have binding precedential effect.
Delaware Court Of Chancery Applies Corwin To Dismiss Breach Of Fiduciary Duty Claims, Finding Allegations Of A Controlling Stockholder Conflict Inadequately Pleaded
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.
Southern District Of New York Denies Claims For Investment Banking Fees, Holding That The Engagement Terminated And The “Agreement To Agree” Was Unenforceable
On August 10, 2018, Judge Jesse Furman of the United States District Court for the Southern District of New York denied claims for advisory fees brought by investment bank Stone Key Partners LLC (together with Stone Key Securities LLC, “Stone Key”) against its former client, Monster Worldwide, Inc. (“Monster”). Stone Key Partners LLC v. Monster Worldwide, Inc., Case No. 1:17-cv-3851-JMF (S.D.N.Y. Aug. 10, 2018). Monster engaged Stone Key in April 2012 to assist in a “review of strategic alternatives,” including a possible sale, and agreed to compensate Stone Key if it entered into certain transactions within 12 months of any termination of the engagement; Monster engaged another financial institution as a co-advisor. The engagement letter with Stone Key did not clearly require written notice of termination and provided that Stone Key would be paid 55% of a fee that “shall be mutually acceptable . . . and consistent with compensation agreements customarily agreed to by” investment banks for similar transactions in connection with any “partial sale” transaction within the tail period. The Court found that the engagement ended in August 2013, when it was clear (in the eyes of the Court) that the sale exploration process was over, and thus denied claims for transactions completed in 2015 and 2016. The Court also rejected as unenforceable the partial sale fee provision, finding it to be an unenforceable agreement to agree.
Delaware Court Of Chancery Declines To Compel Production Under The Garner Privilege Exception
On January 10, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to compel the production of attorney-client privileged documents under the Garner
doctrine in the context of direct breach of fiduciary duty claims brought by former minority shareholders of R.L. Polk & Co. Inc. (“Polk”) against its controlling shareholders in connection with a self-tender. Buttonwood Tree Value Partners, L.P., et al. v. R.L. Polk & Co., Inc., et al
., C.A. No. 9250-VCG (Jan. 10, 2018). As discussed in our post
regarding a prior decision, the Court denied a motion to dismiss the complaint, which alleges that the self-tender was a self-dealing transaction by the controlling shareholders “as part of an overall scheme to later sell the Company for three times the [s]elf-[t]ender valuation.” In the subsequent course of discovery, plaintiffs moved to compel the production of documents relating to legal advice Polk sought in connection with the sale of the company, the self-tender, and various restructuring options that were considered at the time. The Court declined to compel the production because plaintiffs failed to establish that “the information contained in the privileged documents is both necessary and unavailable from other sources.”
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
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 Dismisses Post-Closing Challenge To Two-Step Merger Under Corwin Finding Tendering Stockholders Were Fully Informed
On July 13, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a former stockholder’s breach of fiduciary duty claims against the former directors of Diamond Resorts International (“Diamond”) and an aiding and abetting claim against Diamond’s financial advisor in connection with Apollo Global Management LLC’s (“Apollo”) acquisition of Diamond in a two-step merger under Section 251(h) of the Delaware General Corporation Law, 8 Del. C.
§ 251(h). Appel v. Berkman
, C.A. No. 12844-VCMR (Del. Ch. July 13, 2017). Relying on 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), the Court held the merger was “cleanse[d]” because “the disinterested stockholders of Diamond were fully informed and uncoerced when they overwhelmingly accepted the tender offer.”
Delaware Supreme Court Affirms Dismissal Of Disclosure Claim Based On Subsequent Employment Of Special Committee Chair By Legal Counsel That Advised Committee
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.
After Settlement By Director Defendants Of Merger-Related Fiduciary Duty Breach Claims, Delaware Chancery Court Rejects Financial Advisor’s Bid To Invoke Settlement Consent Provision To Stay Trial On Aiding-And-Abetting Claims
On May 26, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted plaintiffs’ request to sever and stay fiduciary duty breach claims settled with directors of Good Technology Corporation (“Good”) and other defendants, notwithstanding the opposition of the sole remaining defendant, a financial advisor to Good, in connection with the acquisition of Good by BlackBerry Ltd. (“BlackBerry”), alleged to have aided and abetted those breaches. In re Good Tech. Corp. Stockholder Litig
., C.A. No. 11580-VCL (Del. Ch. May 26, 2017) (Transcript). Stockholder plaintiffs reached agreement on preliminary settlement terms with defendants other than the financial advisor weeks before a scheduled trial and sought to sever and stay those settled claims. The financial advisor opposed the severance and sought a continuance of the trial, arguing that the settlement contravened the settlement consent and indemnification provisions in its engagement letter with Good—drafted in the wake of In re Rural Metro Corp
., 88 A.3d 54 (Del. Ch. 2014)—intended to protect against just such an eventuality. Noting that neither plaintiffs nor the settling defendants were parties to the engagement letter, and concluding that the advisor could recover money damages were it subsequently determined that the provisions were breached, Vice Chancellor Laster granted the severance request, denied the continuance request, and ordered the claims against the financial advisor to proceed to trial as previously scheduled. Shortly thereafter, according to a transcript of a June 1, 2017 settlement conference, the advisor settled the claims against it for $35 million, to be funded pursuant to the indemnification agreement.
Delaware Chancery Court Dismisses Breach Of Fiduciary Duty And Quasi-Appraisal Claims Under Corwin
On May 11, 2017, Chancellor Bouchard of the Delaware Court of Chancery dismissed with prejudice a putative class action brought by stockholders of networking solutions company Cyan, Inc. (“Cyan”) against Cyan’s board, asserting a breach of fiduciary duty and “quasi-appraisal” claim in connection with Cyan’s merger with Ciena Corporation in a cash and stock transaction. In re Cyan, Inc. Stockholders Litigation
, C.A. No. 11714-CB (Del. Ch. May 11, 2017). Plaintiffs claimed that the board failed to disclose material information in the proxy statement, which allegedly prevented Cyan’s shareholders from determining whether to pursue appraisal rights. The Court dismissed the claims, finding that: (i) the business judgment rule applied because the merger consideration primarily consisted of stock in a publicly traded company and plaintiffs failed to plead a breach of the duty of loyalty; and (ii) in any event the proxy disclosures were sufficient to infer that the 98% stockholder approval of the merger was a fully informed vote, thereby precluding post-closing litigation under Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304, 308-09 (Del. 2015). The Court dismissed plaintiffs’ “quasi-appraisal” claim on the same grounds, observing that quasi-appraisal was merely a remedy for a disclosure claim and not a distinct cause of action.
Delaware Chancery Preliminarily Enjoins Merger-Related Stockholder Meeting Until Financial Advisor’s Fees For Merger-Related Financing Are Disclosed
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. (“Consolidated”) of FairPoint Communications, Inc. (“FairPoint”). Vento v. Curry
, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017). Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
Delaware Chancery Dismisses Cash-Out Merger Challenge, Holding That Informed Stockholder Vote Triggered Business Judgment Review Notwithstanding “Disquieting” Allegations
On October 12, 2016, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a putative shareholder class action alleging fiduciary breaches by the board of directors of OM Group, Inc. (“OM”) arising from OM’s cash-out merger with Apollo Global Management, LLC (“Apollo”). In re OM Group, Inc. S’holders Litig.
, Consol. C.A. No. 11216-VCS (Del. Ch. Oct. 12, 2016). The conduct of directors in cash-out mergers is typically subject to enhanced scrutiny under Revlon
. Because OM’s shareholders had voted overwhelmingly to approve the merger in an uncoerced vote that the Court found to be fully informed, the Court found the board’s conduct was protected by the “irrebutable business judgment rule” under Corwin v. KKR Fin. Holdings, LLC
, 125 A.3d 304 (Del. 2015), and dismissed the case. The Court reached this conclusion despite allegations of an egregiously flawed sales process that the Court described as “disquieting.”
Delaware Chancery Court Dismisses Post-Closing Merger Challenge Alleging Inadequate Disclosures Of Projections And Financial Advisor Fees
On September 28, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a shareholder challenge to the acquisition of Millennial Media, Inc. (“Millennial”) by AOL Inc. (“AOL”). Nguyen v. Barrett
, C.A. No. 11511-VCG (Del. Ch. Sept. 28, 2016). Plaintiff had sought post-closing damages for the Millennial board’s alleged failure to disclose (1) certain unlevered free cash flows and (2) details of compensation for Millennial’s financial advisor. The Court rejected both claims.