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  • Delaware Supreme Court Holds MFW Is Applicable To Controlling Stockholder Transactions Even Outside Of Freeze-Out Context

    On April 4, 2024, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware sitting en banc held that the framework articulated in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) applies to a controlling stockholder transaction, even if it does not involve a freeze-out merger. In re Match Group, Inc. Derivative Litigation, No. 368, 2022 (Del. Apr. 4, 2024). The Court reached this conclusion in considering the Delaware Court of Chancery’s dismissal of breach fiduciary duty claims asserted by pre-transaction minority stockholders relating to a reverse spin-off transaction. The Delaware Supreme Court clarified that “entire fairness” is the “presumptive standard of review” for a controlling stockholder transaction and that only compliance with the “procedural safeguards” of MFW changes it to “the more deferential business judgment standard.” The Court further held that the special committee required by MFW must be “wholly independent.” Because the complaint adequately pleaded that one of the special committee members was not independent of the controller, the Court reversed the dismissal.

  • Court Of Chancery Rescinds CEO Compensation Package Under Entire Fairness Review

    In a January 30, 2024, post-trial ruling, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery rescinded a compensation package valued at $55.8 billion awarded by Tesla, Inc. to its CEO, notwithstanding that stockholders had previously voted to approve the package.  Tornetta v. Musk, No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024).  In so holding, the Court found that neither the value of the compensation nor the process by which it was achieved was entirely fair to stockholders.
  • Delaware Court Of Chancery Rejects Stockholder’s Section 220 Books And Record Demand In Connection With Corporation’s Expression Of Opposition To Legislation

    On June 27, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery issued a judgment in favor of a “leading media and entertainment” company with a “substantial presence in Florida” (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220.  Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023).  As explained by the Court, the Corporation publicly expressed opposition to certain Florida state legislation “limit[ing] instruction on sexual orientation or gender identity in Florida classrooms” (the “Legislation”).  Thereafter, Florida’s legislature voted to dissolve a special district that had benefitted the Corporation.  Plaintiff, a stockholder, sought the records purportedly to investigate potential breaches of fiduciary duties by the Corporation’s directors and officers in connection with the opposition to the Legislation.  The Court explained that “Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues” and found that plaintiff “decidedly” had not “demonstrated a proper purpose” for the records request.
  • Delaware Supreme Court Affirms Decision Rejecting Fiduciary Duty Claims As To Allegedly Conflicted Acquisition Because It Satisfied Entire Fairness Review

    On June 6, 2023, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware sitting en banc unanimously affirmed judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”).  In re Tesla Motors, Inc. Stockholder Litig., No. 181, 2022 (Del. June 6, 2023).  Plaintiffs alleged that the Chairman was the Company’s controlling stockholder and that he was conflicted because he also was the chairman of the board and largest stockholder of the Target.  As discussed in our prior post, following a trial, the Delaware Court of Chancery found that the transaction was “entirely fair” and rejected plaintiffs’ claims.  In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022).  On appeal, the Delaware Supreme Court held that the record supported the trial court’s determinations that “despite certain process flaws, the [a]cquisition was the product of fair dealing” and “the price paid was a fair one.”
  • Delaware Court Of Chancery Concludes Founder And Largest Shareholder Was Not A Controller In Connection With Allegedly Conflicted Transaction

    On May 12, 2023, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled in favor of defendant, the founder and largest shareholder (the “Founder”) of a technology company (the “Company”), on derivative breach of fiduciary duty claims in connection with the Company’s acquisition of a financial software company (the “Target”), for which he was also a co-founder and the largest shareholder.  In re Oracle Corporation Derivative Litigation, No. 2017-0337-SG (Del. Ch. May 12, 2023).  Defendant owned approximately 28% of the Company and 40% of the Target.  Plaintiff shareholders alleged that the Founder, who was also a director and Chief Technology Officer of the Company, “used his outsized influence” to cause it to overpay because he owned a larger percentage of the Target than of the Company.  After a ten-day trial, the Court determined that the Founder “was not in control of [the Company] generally” and, although he “could have influenced the directors’ decision” in connection with the transaction, “he did not.”  Accordingly, the Court concluded that the Founder was not a “controller” and, therefore, the transaction was entitled to deferential review under the business judgment rule.
  • Delaware Court Of Chancery Holds That Corwin Cleansing Does Not Apply To Claims For Injunctive Relief Related To Alleged Defensive Measures

    On May 1, 2023, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion to dismiss a putative stockholder class action asserting a breach of fiduciary duty claim against the directors of a telecommunications company (the “Corporation”) and seeking to enjoin alleged defensive measures.  In re Edgio, Inc. Stockholders Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023).  The action was brought after the Corporation acquired a portfolio company of an investor (the “Investor”) in exchange for a 35% stake in the post-merger entity and entry into a stockholders’ agreement that allegedly “restricted the [I]nvestor’s voting and transfer rights.”  The stockholders of the Corporation voted in favor of the transaction in advance.  Defendants argued that they were entitled to the “irrebuttable presumption of the business judgment rule” that applies “when a transaction is approved by a fully informed, uncoerced vote of the disinterested stockholders” under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  The Court, however, found that the relevant provisions in the stockholders’ agreement were subject at the pleading stage to “enhanced scrutiny” as alleged “defensive measures . . . designed to entrench the board.”  The Court held that “Corwin cleansing” does not apply to a claim seeking to enjoin such alleged defensive measures.
  • Delaware Court Of Chancery Dismisses Caremark Claims Against Directors For Failure To Allege Bad Faith After Permitting Related Claims To Advance Against Officer

    On March 1, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed derivative claims brought by stockholders for breach of the fiduciary duty of oversight under Caremark against the directors of McDonald’s Corporation (the “Company”). The decision follows the Court’s earlier decision to deny a motion to dismiss similar claims brought against the Company’s officers and to extend the Caremark duty to corporate officers, as discussed here. In re McDonald’s Corp. S’holder Deriv. Litig., Case No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023).
  • Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision

    On February 21, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted the petition of Lordstown Motors Corporation (the “Company”) under Section 205 of the Delaware General Corporation Law (“DGCL”) to validate and declare effective the Company’s certificate of incorporation as amended in connection with a “de-SPAC” merger more than two years ago.  In Re Lordstown Motors Corp., C.A. 2023-0083-LWW (Del. Ch. Feb. 21, 2023).  In advance of the merger, the Company—then a special purpose acquisition company (“SPAC”)—adopted the amendment to increase the number of authorized Class A common shares, which were subsequently issued in connection with the merger.  The Company requested validation from the Court after the approval of the amendment—by a majority of Class A and Class B shares voting together rather than a vote exclusively by the Class A stock—was called into question by a recent decision related to another SPAC.  Because a “significant number of SPACs” had similar provisions and followed a similar process, that decision, Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022)—discussed in a prior post—resulted in “pervasive uncertainty” regarding their capital structures and the validity of their stock.  Granting the petition, the Court concluded that validation of the charter amendment would be “just and equitable.”  The Court added that its decision “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts.”
  • Delaware Court Of Chancery Finds Personal Jurisdiction Over LLC “Acting Manager” In Post-Closing Investor Action Challenging Merger With SPAC

    On October 26, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss for lack of personal jurisdiction claims of tortious interference asserted against a principal of a private equity fund (the “Fund”), which had been the majority investor of a limited liability company (the “LLC”).  In re P3 Health Grp. Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022).  Plaintiff — which had been the second largest investor in the LLC — alleged that defendant tortiously interfered with its contractual rights under the limited liability company agreement in connection with the merger of the LLC with a special purpose acquisition company (“SPAC”).  The Court concluded that the complaint adequately alleged that defendant “participated materially in the management” of the LLC such that he “can be served [process] as an acting manager” and that the “exercise of personal jurisdiction over [defendant] comports with … due process.”
    CATEGORIES : Corporate GovernanceSPACs
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman

    On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”).  According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure.  Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment.  The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
  • Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle

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

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