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  • Delaware Court Of Chancery Invalidates Energy Company’s Anti-Activist Poison Pill Adopted At The Outset Of The COVID-19 Pandemic And Amid Global Oil Price War
     
    03/09/2021

    On February 26, 2021, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery entered judgment in favor of stockholder plaintiffs against the directors of energy corporation The Williams Companies, Inc. and invalidated a stockholder rights plan—or “poison pill”—adopted by the corporation.  In re The Williams Cos. Stockholder Litig., C.A. No. 2020-0707-KSJM (Del. Ch. Feb. 26, 2021).  The board adopted the poison pill to deter stockholder activism in the midst of the COVID-19 pandemic and a global oil price war.  Finding after a trial that the rights plan was not proportional to any legitimate threat identified, the Court held that the directors breached their fiduciary duties, declared the plan unenforceable, and permanently enjoined its operation.
     
  • 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 Supreme Court Clarifies That A Section 220 Demand Is Not Necessarily Required To Establish That Suspected Wrongdoing Is “Actionable”
     
    12/15/2020

    On December 10, 2020, in an en banc opinion authored by Justice Gary F. Traynor, the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery ordering the production of books and records by AmerisourceBergen Corporation pursuant to a Section 220 inspection demand.  AmerisourceBergen Corporation v. Lebanon County Employees’ Retirement Fund, C.A. No. 60, 2020 (Del. Dec. 10, 2020).  Under Section 220 of the Delaware General Corporation Law, a stockholder may inspect company records for a “proper purpose.”  A stockholder who seeks company records for the purpose of investigating corporate wrongdoing must establish a “credible basis” from which the court can infer that wrongdoing may have occurred.  Affirming the order of the Court of Chancery, the Delaware Supreme Court clarified that a stockholder who demonstrates such a credible basis “is not required in all cases to establish that the wrongdoing under investigation is actionable.”
     
  • 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 Court Of Chancery Holds That Former Stockholders Can Pursue Direct Claims For Breach Of Fiduciary Duty Arising From Issuance Of Shares To Controlling Stockholder For Allegedly Insufficient Consideration
     
    11/10/2020

    On October 30, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery upheld breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”) against its majority stockholder, CEO, and several directors.  In re TerraForm Power, Inc. Stockholder Litigation, C.A. No. 2019-0757-SG (Del. Ch. Oct. 30, 2020).  Plaintiffs alleged that the Company engaged in a private placement of stock to the controlling stockholder at a price that undervalued the shares that were issued.  Accordingly, plaintiffs contended that the transaction diluted the financial and voting interest of the minority stockholders.  Defendants moved to dismiss for lack of standing, arguing that such dilution claims are “quintessential derivative claims” that cannot be asserted by former stockholders.  Vice Chancellor Glasscock, however, denied the motion to dismiss under “controlling precedent” because the Delaware Supreme Court upheld similar claims by former stockholders in Gentile v. Rossette, 906 A.2d 91 (Del. 2006).
     
    CATEGORIES: Fiduciary DutiesStanding
  • Delaware Court Of Chancery Declines To Dismiss Claims That Officers Tilted Take‑Private Sale Process To Favored Buyer
     
    10/20/2020

    On October 2, 2020, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by stockholders of Mindbody, Inc. (the “Company”) against two of its officers in connection with the Company’s $1.9 billion sale to a private equity firm.  In Re Mindbody, Inc., Stockholders Litigation, C.A. No. 2019-0442-KSJM (Del. Ch. Oct. 2, 2020).  Plaintiffs asserted that the Company’s founder-CEO/Chairman tilted the sale process toward the favored buyer, motivated by a need for liquidity and the prospect of post-merger employment with the firm.  In particular, plaintiffs alleged that the CEO orchestrated (i) the provision of reduced diligence information in a less timely fashion to other potential bidders, and (ii) the lowering of earnings guidance to depress the stock price and make the Company a more attractive target to the favored firm while enhancing the premium apparent to stockholders.  The Court found the allegations sufficient to support a “paradigmatic Revlon claim” and the determination at the pleading stage that the proxy was materially misleading such that the alleged breach was not cleansed under Corwin.
     
  • Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Plead Sufficient Facts Showing Demand Futility
     
    10/13/2020

    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.
     
  • Even After Finding Corwin Inapplicable Because Of Alleged Misstatements, Delaware Court Of Chancery Dismisses Post-Merger Damages Claims For Failure To Plead Bad Faith
     
    09/09/2020

    On August 31, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims asserted against the directors of USG Corporation by former stockholders following its acquisition by a privately held German manufacturer of building materials.  In re USG Stockholder Litigation, C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020).  Plaintiffs alleged that defendants failed to secure maximum value for their shares in connection with the merger and sought damages, including by way of quasi-appraisal.  Even though an overwhelming majority of the disinterested stockholders approved the sale, the Court declined to dismiss the claims based on Corwin cleansing because plaintiffs had adequately pleaded that the proxy was materially misleading.  Nevertheless, the Court granted the motion to dismiss because USG’s corporate charter exculpated the directors, and plaintiffs failed to adequately allege bad faith or disloyalty as required to plead a non-exculpated claim.
     
  • Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Alleged Controller’s Tender Offer As The “Abstention Principle” Is “Not Absolute” And A De Facto Controller May Obtain Additional Benefits From Mathematical Control
      
    08/25/2020

    On August 17, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss claims brought by stockholders of Coty Inc. (the “Company”) against its directors and affiliates of its alleged controller.  In re Coty, Inc. Stockholder Litigation, C.A. No. 2019-0336-AGB (Del. Ch. Aug. 17, 2020).  Plaintiffs claimed that defendants breached their fiduciary duties by initiating and approving a tender offer in which the alleged controller increased its holdings from 40% to 60% allegedly at an unfair price and through an unfair process.  Four of the nine director defendants, who were associated with the alleged controller (the “Controller Directors”), recused themselves from the board vote to recommend the tender offer and approve a related stockholders agreement.  Nevertheless, the Court held that the “abstention defense” is “not absolute and often implicates factual questions that cannot be resolved on the pleadings.”  As to all defendants, the Court upheld the claims even of stockholders that did not tender their shares because a de facto controller may “obtain real benefits from securing mathematical control of a corporation in a transaction and, as a corollary, . . . other stockholders of the corporation potentially may suffer harm as a result of such a transaction.” 
     
    CATEGORY: Fiduciary Duties
  • Shareholder Derivative Complaints Allege Lack Of Board And Senior Executive Diversity
     
    08/04/2020

    In July 2020, shareholders filed three separate but substantially similar derivative suits in U.S. district courts in California against certain directors and officers of three major technology companies, asserting claims related to alleged failures to uphold commitments to diversity.Specifically, plaintiffs allege that defendants breached their fiduciary duties by failing to ensure diversity in particular at the board and executive levels, as well as violations of Section 14(a) of the Securities Exchange Act of 1934 for alleged misrepresentations about the companies’ commitments to diversity.In addition to monetary damages, the complaints seek to compel the companies to advance several wide-ranging proposals regarding diversity initiatives for shareholder votes.
     
  • Delaware Court Of Chancery Dismisses Post-Merger Stockholder Challenge To Executive Incentive Compensation Stock Awards
     
    07/21/2020

    On June 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought against former officers and directors of Twenty-First Century Fox, Inc. (“Old Fox”) in connection with a transaction in which it spun off part of its business into a new public company, Fox Corporation (“New Fox”), and sold the rest of its business to The Walt Disney Company in a merger (the “Transaction”).  Brokerage Jamie Goldenberg Komen Rev Tru U/A 06/10/08 Jaime L Komen Tr. for the Benefit of Jamie Goldenberg Komen v. Breyer, No. 2018-0773-AGB (Del. Ch. June 26, 2020).  According to the complaint, the compensation committee of Old Fox approved an incentive compensation program in connection with the Transaction, including an alleged $82.4 million in stock awards granted to Old Fox’s three top executives, who were allegedly the company’s controlling stockholders and collectively owned shares worth over $11.7 billion.  Plaintiff was a stockholder of Old Fox that became a stockholder of New Fox in the Transaction.  Plaintiff alleged that it was unnecessary and wasteful to approve any “incentive” compensation for these alleged controller-executives because they “already were highly incentivized to pursue and implement the transaction given their collective holdings.”  The Court held that plaintiff’s claims were derivative because they challenged a compensation decision by the board of Old Fox and did not adequately plead that the Transaction was “tainted by unfair dealing.”  The Court dismissed plaintiff’s claims for lack of standing because plaintiff was not a stockholder of New Fox at the time of the alleged misconduct and, therefore, could not satisfy the continuous ownership requirement for derivative claims.
     
    CATEGORIES: Fiduciary DutiesStanding
  • 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 Grants Motion To Dismiss Holding That Fiduciaries Of Acquired Entity Did Not Aid And Abet Alleged Fiduciary Breaches By Acquirer
     
    06/30/2020

    On June 22, 2020, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss a derivative claim for aiding and abetting breaches of fiduciary duty brought by stockholders of Oracle Corporation against the CEO and Chairman of NetSuite, Inc., in connection with alleged breaches of fiduciary duty by Oracle’s directors arising from its acquisition of NetSuite.  In Re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. June 22, 2020).  Plaintiffs alleged that defendants had aided and abetted breaches by Oracle’s directors by failing to disclose in NetSuite’s public filings certain aspects of the negotiations that allegedly would have alerted Oracle’s special committee for the merger to the fact that Oracle was overpaying.  The Court acknowledged the “incongruity” of plaintiffs’ theory that fiduciaries of a target whose obligation to their stockholders is to “maximize price” could be held liable for aiding and abetting the acquirer’s fiduciaries by not disclosing information that would have led the latter to “scuttle” a deal favoring the target.  The Court suggested that there could be such a case—in the Court’s language, “in the infinite garden of theoretical inequity, such a flower may bloom”—but this is not it.  Instead, the Court held that it was not reasonably conceivable that the difference between what was disclosed and what plaintiffs alleged should have been disclosed constituted “substantial assistance”—a necessary element for aiding and abetting—to the acquirer’s fiduciaries in their alleged breaches.
     
  • 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 Grants Motion To Dismiss Finding Demand Was Not Excused In Connection With Alleged Failure To Update Revenue Guidance
     
    05/05/2020

    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 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 Supreme Court Finds Dissident Board Nominees Ineligible Because Of Noncompliance With Bylaws Deadline To Respond To Supplemental Information Request
     
    01/28/2020

    On January 13, 2020, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware held that defendants—two investment trusts—were permitted to disqualify the board nominees of a plaintiff shareholder for missing a deadline in the trusts’ bylaws to respond to board requests for additional information.  Blackrock Credit Allocation Income Trust v. Saba Capital Master Fund Ltd., C.A. No. 2019-0416-MTZ (Del. Jan. 13, 2020).  The Supreme Court’s decision reversed in part a ruling by Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery that plaintiff’s nominees were improperly excluded.  Even though the requests for information may have exceeded the contemplated scope and plaintiff may have misread the bylaws and believed the deadline was inapplicable, the Delaware Supreme Court held that a rule that would excuse deadline non-compliance could “potentially frustrate the purpose of advance notice bylaws” intended to facilitate orderly meetings and election contests.
    CATEGORIES: BylawsFiduciary Duties
  • Delaware Supreme Court Affirms Dismissal Of Derivative Suit Alleging Board Approved Transaction Involving Unnecessary Litigation Exposure
     
    01/22/2020

    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 Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
     
    01/14/2020

    On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm.  In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019).  The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm.  Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available.  Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty.  The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
  • Delaware Court Of Chancery Dismisses Caremark Claims Against Directors After Company Publicly Disclosed Misconduct
     
    11/05/2019

    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 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 Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
     
    10/08/2019

    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
     
    09/04/2019

    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 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 Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
     
    07/23/2019

    On July 15, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed an aiding and abetting claim asserted against a private equity buyer and its principals in a stockholder class action involving breach of fiduciary duty claims against the former CEO of a technology company in connection with its take-private sale to the private equity buyer.  In re Xura Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. July 12, 2019).  As we discussed in a prior post, Vice Chancellor Slights declined to dismiss a different stockholder’s breach of fiduciary duty claims against the former CEO based on his allegedly self-interested participation in the merger, but the Court dismissed aiding and abetting claims asserted against the buyer and its principals.  In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018)Ten days after this opinion was issued, a different stockholder filed a “nearly identical” complaint—this time asserting class action claimsraising “the same theories of aiding and abetting” that the Court had dismissed just days earlier.  In a separate summary order, the Court denied the former CEO’s motion to dismiss this new complaint.  In this decision, the Court dismissed the aiding and abetting claims for the same reason it did so in the prior suit—the complaint failed to include “well-pled allegations that [the buyer] ‘knowingly participated’ in the … alleged breaches of fiduciary duty.”
  • Reversing A Dismissal, The Delaware Supreme Court Finds The Absence Of Board-Level Monitoring Of "Central Compliance Risks" Sufficient To State A Caremark Claim
     
    06/25/2019


    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
     
    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 Court Of Chancery Grants Books And Records Request Arising From Caremark Claims Related To Facebook User Privacy
     
    06/11/2019

    On May 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder demand to inspect Facebook’s books and records in connection with their Caremark claims arising from alleged data privacy breaches.  In re Facebook, Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 30, 2019).  The Court concluded that, as a matter of law, it would be improper to assess the merits of plaintiffs’ Caremark claims in the context of a books-and-records demand and ruled that plaintiffs met the minimum burden of proof under Section 220 of the Delaware General Corporation Law (“Section 220”), noting that this standard was more easily met where, as here, the underlying claims allege the failure to prevent corporate violations of law, rather than challenging routine business operations.
  • Delaware Supreme Court Affirms Judgment In Favor Of Defendant On The Basis Of Plaintiffs’ Failure To Prove Damages
     
    05/23/2019

    On May 16, 2019, the Supreme Court of Delaware affirmed a judgment by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery in favor of Potomac Capital Partners II, LP on claims by shareholder plaintiffs that the activist investor aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc.  In re PLX Technology Inc. S’holders Litig., C.A. No. 571, 2018 (Del. May 16, 2019).  As discussed in our post regarding that decision, the Court of Chancery found in a post-trial opinion that defendant had aided and abetted breaches of fiduciary duty but also concluded that plaintiffs failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.  On appeal, plaintiffs contended that the Court of Chancery erred in deciding the damages issue by importing principles from appraisal jurisprudence to give deference to the deal price.  In a summary order, the Delaware Supreme Court affirmed the Court of Chancery’s “decision that the plaintiff-appellants did not prove that they suffered damages.”  The Court expressly declined to reach defendant’s arguments on cross-appeal that it had not aided and abetted any breaches of fiduciary duty because its affirmance on the damages issue “suffices to affirm the judgment.” 
  • 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 Derivative Suit Alleging Tech Company Exposed Itself To Unnecessary Litigation Risk With Acquisition
     
    04/09/2019

    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 Enjoins Stockholder Vote For Inadequate Disclosures
     
    03/26/2019

    On March 11, 2019, Vice Chancellor Kathaleen S. McCormick enjoined a stockholder vote to approve the proposed combination of Medley Management, Inc. (“Medley Management”) with two affiliates it advised, Medley Capital Corporation (“Medley Capital”) and Sierra Income Corporation (“Sierra”).  Medley Capital stockholders FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”) sued to suspend the vote until competing offers were solicited and additional proxy disclosures were made.  Plaintiffs alleged that the merger was not entirely fair because the two controlling stockholders of Medley Management controlled the deal process, and the process and the terms were unfair to Medley Capital, and further claimed that the proxy made inadequate disclosures; plaintiffs also asserted an aiding and abetting claim against Sierra.  After expedited litigation and trial, the Court enjoined the vote, ruling that corrective disclosures were necessary but that a go-shop period could not be required because Sierra’s rights under the transaction agreements would be negatively impacted.
  • Delaware Court Of Chancery Finds Implicit Consent To Jurisdiction By A Foreign Controlling Stockholder In Connection With The Adoption Of A Delaware Forum-Selection Bylaw At The Time Of An Interested Transaction
     
    03/26/2019

    On March 15, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery declined to dismiss a derivative suit brought by minority stockholders of Pilgrim’s Pride Corporation (the “Company”) against the Company’s controlling stockholder, JBS S.A. (“Parent”), and five of the Company’s directors affiliated with Parent.  In re Pilgrim’s Pride Corp. Deriv. Litig., No. C.A. 2018-0058 (Del. Ch. Mar. 15, 2019).  Plaintiffs challenged the Company’s $1.3 billion acquisition of one of Parent’s other subsidiaries in a deal that Parent solicited, alleging that the Company did not engage in “true arm’s-length bargaining” and that it paid a price unsupported by the Company’s internal analyses.  Parent, an entity organized under Brazilian law, moved to dismiss for lack of personal jurisdiction.  The Court held that Parent “consented implicitly” to personal jurisdiction in Delaware “when its representatives on the Board participated in the vote to adopt [a Delaware] Forum-Selection Bylaw.”  The Court also found allegations of participation in the deal sufficient at the pleading stage to preclude dismissal of the claims against each of the Parent-affiliated directors, even though the board had delegated exclusive negotiation and approval authority to a special committee of independent directors.
  • Delaware Court Of Chancery Finds A Circumstantial Connection To Negative Corporate Developments Insufficient To Trigger Inspection Rights Under Section 220
     
    03/05/2019

    On February 12, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a books and records demand of a mattress company’s (the “Company”) stockholder in connection with the termination of the Company’s contract with its largest customer and related litigation. Hoeller v. Tempur Sealy Int’l Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019). Plaintiff sought the records pursuant to Delaware General Corporation Law Section 220, 8 Del. C. § 220, purportedly to investigate breaches of fiduciary duty by the board. Attempting to articulate his justification, plaintiff relied on what the Court referred to as a “where there’s smoke there’s fire syllogism” in plaintiff’s contention that such a significant customer does not “just leave” in the absence of board culpability. Rejecting the request, the Court held that a “smoke then fire circumstantial connection” does not provide the “credible basis” to suspect wrongdoing that is required to entitle a stockholder to inspect a corporation’s books and records.
     
  • Delaware Court Of Chancery Finds That Equitable Defenses To Board Composition Can Be Litigated In A Section 225 Action And Rules Actions By Majority Stockholder Written Consent Effective Even Without Notice To Minority Stockholders
     
    01/08/2019

    On December 21, 2018, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied plaintiff stockholder’s motion for summary judgment in an action to determine the board composition of SPAR Group, Inc. (“SGRP”) under 8 Del. C. § 255.  Brown v. Kellar, et al., C.A. No. 2018-0687-MTZ (Del. Ch. Dec. 21, 2018).  Plaintiff claimed that written consents delivered to the SGRP board by plaintiff and a fellow majority stockholder removed and replaced an incumbent director.  The defendant directors asserted that the consents were ineffective for two reasons:  (i) the majority stockholders were engaged in an inequitable scheme to divert corporate opportunities and entrench themselves as directors, and (ii) the company had not given notice of the written consents to minority stockholders.  The Court rejected plaintiff’s assertion that Delaware law prohibited the Court from considering the alleged inequitable conduct because it fell outside the proper scope of a § 225 action.  The Court also found, however, that the consents were effective upon delivery (unless inequitable conduct precluded replacement of the director) and ordered that trial proceed with respect to the equitable defenses raised by defendants.  
     
  • Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
     
    12/18/2018

    On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm.  In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).  Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction.  As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company.  Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).  The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
  • 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 Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
     
    11/27/2018

    On November 20, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss a putative class action asserting claims for breach of fiduciary duty brought by former stockholders of Tangoe, Inc. (the “Company”) against former members of its board of directors in connection with the take-private acquisition of the Company by a private equity buyer group in June 2017.  In Re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del Ch. Nov. 20, 2018).  Plaintiffs alleged that defendants recommended an ill-advised and self-interested sale while a restatement of audited financials was pending and following the NASDAQ delisting of the Company.  Defendants contended that they were entitled to business judgment rule deference under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015)—because a majority of stockholders tendered their shares—and that dismissal was also required because of an exculpatory charter provision pursuant to 8 Del. C. § 102(b)(7).  But the Court concluded that the alleged failures to provide adequate company financial information and to disclose the status of the restatement efforts precluded dismissal under Corwin.  The Court also found that plaintiffs adequately pled a non-exculpated claim for breach of the duty of loyalty, given the timing and structure of certain director compensation adjustments, which allegedly incentivized a change in control and supported an inference that defendants acted out of material self-interest.
  • New York Appellate Court Reverses Dismissal Of Derivative Claims Involving U.K. Company
     
    11/20/2018

    On November 14, 2018, the New York State Appellate Division Second Judicial Department reversed the dismissal of a shareholder derivative suit against directors and officers of a U.K. company and certain of its affiliates asserting claims for breaches of fiduciary duties in connection with the companies’ conduct underlying penalties and settlement agreements related to alleged sanctions violations.  Michael Mason-Mahon v. Douglas J. Flint, 602052/14 (N.Y. App. Div. Nov. 14, 2018).  
    CATEGORIES: Fiduciary DutiesStanding
  • Finding Insufficient Proof Of Damages, Delaware Court Of Chancery Enters Judgment In Favor Of Defendant Despite Finding Fiduciary Duty Breaches
     
    10/23/2018

    On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages.  In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).  After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company.  As discussed in our prior post, see Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable.  Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
  • 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.
  • Finding That The Implied Covenant Of Good Faith And Fair Dealing Could Not Import Revlon-Type Duties, Delaware Supreme Court Affirms Dismissal Of Breach Claim
     
    09/25/2018

    On September 20, 2018, the Delaware Supreme Court affirmed the dismissal of claims for breach of the implied covenant of good faith and fair dealing brought against the controlling unitholder and its affiliates on the board of a company that provides services to children with disabilities in connection with the sale of that company.  Miller v. HCP Trumpet Investments, LLC, No. 107, 2018 (Del. Sept. 20, 2018).  Pursuant to a waterfall set forth in the company’s operating agreement (the “OA”), the controlling investor was entitled to nearly all of the first $30 million in proceeds in the event of a sale.  The OA, which included an explicit waiver of fiduciary duties, provided that the board could approve a sale of the company to an independent third party and “determine in its sole discretion the manner in which [such sale] shall occur, whether as a sale of assets, merger, transfer of [m]embership [i]nterests or otherwise.”  After the company was sold for $43 million, minority members sued for breach of the implied covenant of good faith and fair dealing, arguing that it imposed an obligation to conduct an “open-market” sale process to ensure maximum value for all members.  Although the Delaware Supreme Court disagreed with the Delaware Court of Chancery’s holding that the implied covenant did not apply to the sale, the Court affirmed the dismissal on the basis that the implied covenant did not imply Revlon-type sale requirements.
  • Delaware Court Of Chancery Denies Motion To Dismiss LPA Breach Claims, Including Aiding And Abetting Claim Against Financial Advisor
     
    09/05/2018

    On August 29, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied defendants’ motions to dismiss an amended complaint in a long-running lawsuit arising from a sale of an interest in a pipeline by a general partner to a master limited partnership in which it held a controlling interest.  Mesirov v. Enbridge Energy Co. Inc., C.A. No. 11314 (Del. Ch. Aug. 29, 2018).  Plaintiff, a common unitholder of a Delaware master limited partnership (the “MLP”), brought claims for breach of the MLP’s Limited Partnership Agreement (“LPA”) against the general partner (the “GP”), its parent, and other affiliates.  Plaintiff alleged that the GP acted in bad faith by purportedly selling the interest for $1 billion even though it had previously acquired the same interest from the MLP five years earlier for $800 million and earnings metrics had declined over the period by 20%.  As discussed in our previous post, Vice Chancellor Slights originally dismissed this suit in April 2016, but the Delaware Supreme Court reversed and remanded in March 2017, holding that bad faith was sufficiently pleaded.  Here, Vice Chancellor Slights denied the GP’s motion to dismiss claims for breach of the LPA, finding them to be duplicative of the claims in the motion rejected by the Delaware Supreme Court in 2017.  Vice Chancellor Slights also declined to dismiss new claims for aiding and abetting against the GP’s financial advisor, which had delivered a fairness opinion regarding the transaction.
  • Delaware Court Of Chancery Validates Ratification Of Defective Corporate Acts Impacting Merger And Declines To Expand Universe Of Claims Classified As Both Direct And Derivative
     
    08/28/2018

    On August 17, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied all of plaintiffs’ claims challenging a series of transactions culminating in the acquisition of defendant Design Within Reach, Inc. (“DWR”) by Herman Miller, Inc. (“HM”) in July 2014.  Charles Almond as Trustee for the Almond Family 2001 Trust v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. Aug. 17, 2018).  The claims related in large part to the documentation of a reverse stock split by DWR in 2010 that had the unintended effect of diluting the number of shares of common stock into which preferred stock could be converted by a factor of 50.  As this went unnoticed until after the merger, the preferred stock was converted into common stock as if there had been no error.  Plaintiffs, who were pre-merger minority stockholders of DWR, asserted various claims that defendants, including DWR’s controlling stockholder, thus improperly benefited from a greater percentage of equity and merger consideration than that to which they were legally entitled.  HM ratified the correction of the conversion factor (pursuant to 8 Del. C. § 204) and asserted a counterclaim for judicial validation of the defective corporate acts (under 8 Del. C. § 205).  Finding all relevant factors weighed “overwhelmingly in favor of judicial validation” the Court granted defendants’ request to validate the defective corporate acts and rejected plaintiffs’ claims.  Separately, the Court rejected breach of fiduciary duty claims unrelated to the merger.
  • 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.
  • Finding Disclosures Inadequate To Merit Application Of Corwin, Delaware Supreme Court Reverses Court of Chancery Dismissal Of Post-Closing Breach Of Fiduciary Duty Claims
     
    07/17/2018

    On July 9, 2018, the Delaware Supreme Court reversed and remanded a decision by the Delaware Court of Chancery to dismiss 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 take-private merger by affiliates of Apollo Global Management, LLC (“Apollo”).  Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018).  As discussed in our prior post on this case, the Court of Chancery dismissed claims that the sale process undertaken by TFM was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor.  Specifically, the Court of Chancery concluded that the facts regarding the involvement of TFM’s founder with Apollo were adequately disclosed in connection with the tender offer—in which 68.2% of shares were tendered—and the deal was therefore subject to the deferential business judgment rule under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  Finding that the complaint adequately alleged several “materially incomplete and misleading” disclosures, the Delaware Supreme Court reversed.
  • 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, Finding That General Partner Complied With Obligations Under Limited Partnership Agreement
    06/19/2018
    On June 8, 2018, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of a putative class action challenging the merger of El Paso Pipeline Partners, L.P. (the “MLP”) with a subsidiary of its general partner, El Paso Pipeline GP Company, L.L.C. (the “GP”), all of which were controlled by defendant Kinder Morgan, Inc.

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