SEO Title | Fiduciary Duties
M&A and Corporate Governance Litigation
This links to the home page

FILTERS
  • New York Appellate Court Dismisses Breach Of Fiduciary Duty Claims Under Foreign Law, Clarifying That The Internal Affairs Doctrine Applies To Directors And Officers Even If They Are No Longer Serving At The Time Of Suit
     
    11/01/2022

    On October 13, 2022, a five-judge panel of the Appellate Division of the New York State Supreme Court, First Department, unanimously reversed a trial court decision and dismissed a breach of fiduciary duty action brought by former shareholders of an online fantasy sports company (the “Company”) against its directors and officers following a merger.  Eccles v. Shamrock Cap. Advisors, LLC, Case No. 2022-00866 (N.Y. App. Div. Oct. 13, 2022).  The Company was incorporated in Scotland and headquartered in New York.  The trial court had upheld the claims under New York law, declining to apply the internal affairs doctrine to former directors and officers.  Applying Scots law, the Appellate Division reversed, explaining: “To the extent our past decisions could be interpreted as suggesting otherwise we clarify that the internal affairs doctrine applies to an officer or director at the time of the conduct at issue.”
    CATEGORY : Fiduciary Duties
  • Delaware Court Of Chancery Dismisses Caremark Claims Alleging Breaches Of Fiduciary Duty Following A Cyberattack
     
    09/15/2022

    On September 6, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by stockholders of a software company (the “Company”) against its directors following a cyberattack.  Construction Industry Laborers’ Pension Fund v. Bingle, No. CV 2021-0940-SG (Del. Ch. Sep. 6, 2022).  After the Company allegedly fell victim to hackers who accessed confidential information on the systems of thousands of its customers, plaintiffs alleged that defendants had failed to adequately address the risk to cybersecurity in breach of their oversight obligations under Caremark.  The Court indicated that cybersecurity is “mission critical” for online service providers and the complaint alleged oversight practices that were “far from ideal.”  But the Court held that pre-suit demand was not excused because the complaint did not plead “specific facts” from which the Court could “infer bad faith liability.”
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman
     
    08/16/2022

    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 Supreme Court Reverses Dismissal Of A Post-Merger Suit For Alleged Breach Of Fiduciary Duty Related To Disclosures On Appraisal Rights
     
    07/28/2022

    On July 19, 2022, in an opinion authored by Justice Gary F. Traynor, a majority of the Supreme Court of Delaware sitting en banc affirmed in part and reversed in part the dismissal of breach of fiduciary duty claims against the directors of a real estate investment trust (the “Company”) brought by former stockholders of the Company after its acquisition.  In re GGP, Inc. Stockholder Litigation, No. 202, 2021 (Del. July 19, 2022).  Plaintiffs alleged that the merger was structured to eliminate the statutory appraisal rights of the Company’s stockholders and that the proxy disclosures regarding appraisal rights were misleading.  The Delaware Court of Chancery had dismissed the claims.  On appeal, the Delaware Supreme Court affirmed the dismissal of the claim alleging an improper merger structure because “defendants did not, by paying a large portion of the merger consideration by way of a pre-closing dividend, structure the merger in a manner that effectively and unlawfully eliminated appraisal rights.”  However, the Court reversed the dismissal of the disclosure claim because it found the complaint adequately alleged that defendants “consciously crafted the transaction and the related disclosures in such a way as to deter [the Company’s] stockholders from exercising their appraisal rights.”
  • Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Allege Substantial Likelihood Of Liability Sufficient To Excuse Pre-Suit Demand
     
    07/12/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by a stockholder of an energy company (the “Company”) against its directors following an incident involving explosions in the pipeline system of one of its natural gas distribution subsidiaries. City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022).  Plaintiff claimed that the board breached its oversight obligations under Caremark by allegedly failing to implement a reporting and monitoring system relating to pipeline safety and ignoring “red flags.”  The Court held that pre-suit demand under Court of Chancery Rule 23.1 was not excused because the complaint did not adequately plead that the directors faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Declines To Dismiss Claims Related To Direct Offering At The Outset Of The Pandemic
     
    07/06/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied a motion to dismiss stockholder derivative claims for alleged breaches of fiduciary duty against the CEO/Chairman of an e-commerce car company (the “Company”).  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ct. Ch, Jun. 30, 2022).  Plaintiffs alleged that the CEO/Chairman and his father controlled the Company and “orchestrated” a $600 million direct offering to selected investors in which they purchased $50 million of common stock in March 2020 when the Company’s stock price was depressed due to pandemic-related volatility.  The Court held that plaintiffs adequately pleaded that pre-suit demand was excused because two of the Company’s other directors lacked independence from the CEO/Chairman.  The Court further found that the transaction was subject to entire fairness—rather than deferential business judgment—review because it allegedly involved a non-ratable benefit not shared by the public stockholders and half the board lacked independence.  Finally, the Court held that the CEO/Chairman’s abstention from the board’s vote approving the offering was insufficient to warrant dismissal at the pleadings stage.
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote
     
    06/02/2022

    On May 25, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative claim against a director of Fat Brands Inc. (the “Corporation”) for alleged breach of fiduciary duty.  Harris v. Junger, C.A. No. 2021-0511-SG (Del. Ch. May 25, 2022).  Plaintiffs challenged the merger of the Corporation with Fog Cutter Capital Group, Inc. (the “Merger Partner”), which allegedly held more than 80% of the Corporation’s stock before the merger.  In a previous oral ruling, the Court had found that the Complaint sufficiently pleaded that the merger “constituted reasonably conceivable bad faith and waste,” but reserved judgment on the claim against one director who had been a minority stockholder of the Merger Partner before the merger and therefore abstained from voting on the merger.  In this decision, the Court declined to dismiss the claim against that director at the pleading stage because the complaint adequately alleged that it was “reasonably conceivable” that he “breached his duty of good faith by participating in negotiating a [m]erger that constituted corporate waste.”
    CATEGORY : Fiduciary Duties
  • Delaware Court Of Chancery Applies Contemporaneous Ownership Requirement And Declines To Extend Equitable Derivative Standing
     
    05/17/2022

    On May 13, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed certain stockholder derivative claims for breaches of fiduciary duty brought against the founder-CEO and other directors of Flashpoint Technology, Incorporated (the “Corporation”).  SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May. 13, 2022).  Plaintiffs were a limited liability company (the “New LLC”) that held shares in the Corporation and its sole owner (the “Beneficial Owner”).  The New LLC received its shares from another limited liability company (the “Old LLC”) — a nonparty to the suit — also wholly owned by the Beneficial Owner.  Plaintiffs challenged certain related-party transactions, including leases from and loans to entities affiliated with the CEO.  Applying the “contemporaneous ownership requirement,” the Court granted summary judgment to defendants for claims based on conduct that predated the acquisition of shares by the New LLC.  In doing so, the Court rejected plaintiffs’ contention that the Beneficial Owner should have “equitable standing.”
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty And Unjust Enrichment Claims Related To Compensation Committee Awards
     
    05/17/2022

    On April 27, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied, in part, a motion to dismiss a derivative complaint against directors for breaches of fiduciary duties brought by stockholders of Universal Health Services Inc. (the “Corporation”).  Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022).  Plaintiff, a stockholder, alleged that the directors serving on the board’s compensation committee took advantage of an “obvious dip” in stock price in the wake of the emergence of COVID-19 in March 2020 to grant option awards, including to themselves.  Noting that “[s]elf-interested compensation decisions are subject to the entire fairness standard of review,” the Court found that plaintiff “cleared the low hurdle of pleading sufficient facts to make it plausible that the price and process of the option awards transaction were not entirely fair.”
  • Finding That Allegedly Conflicted Acquisition Satisfied Entire Fairness Review, Delaware Court Of Chancery Rejects Breach Of Fiduciary Duty Claims
     
    05/04/2022

    On April 27, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery entered judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), following a trial 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. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022).  Plaintiffs alleged that at the time of the acquisition, the Chairman, who held approximately 22% of the Company’s stock, was its controlling stockholder.  He also was the chairman of the board and largest stockholder of the Target.  Plaintiffs asserted that the Chairman caused the Company’s allegedly conflicted Board to approve the deal—despite the Target’s alleged insolvency—at a purportedly “patently unfair price.”  Assuming without deciding that the Chairman was the Company’s controlling stockholder and that a majority of the Company’s Board was conflicted, the Court reviewed the claims under an “entire fairness” standard.  Noting that the process was “far from perfect” and that “defense verdicts after an entire fairness review” are “not commonplace,” the Court nevertheless found that the Company’s Board “meaningfully vetted” the acquisition and the price paid was “entirely fair in the truest sense of the word”—and rejected plaintiffs’ claims.
  • Eighth Circuit Affirms Dismissal Of Merger-Related Derivative Suit For Failure To Plead Demand Excusal
     
    04/19/2022

    On April 7, 2022, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of derivative claims brought by shareholders of Centene Corporation (the “Corporation”) against directors and officers of the Corporation following its merger with Health Net, Inc. (the “Target”).  Carpenters’ Pension Fund of Ill. v. Neidorff, No. 20-3216 (8th Cir. Apr. 7, 2022).  In connection with the merger, the companies issued a joint proxy statement soliciting shareholder approval of the merger.  Plaintiffs’ central allegation was that defendants purportedly concealed their knowledge of “significant financial problems” faced by the Target.  Plaintiffs thus asserted derivative claims for violation of Section 14(a) of the Securities Exchange Act and breaches of fiduciary duty.  The Court held that pre-suit demand was not excused, because the complaint failed to adequately plead that at least five of the nine board members at the time the suit was filed faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Rejects Motion To Stay SPAC Breach Of Fiduciary Duty Suit Pending Parallel Federal Securities Action
     
    03/15/2022

    On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”).  In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”).  Plaintiffs alleged that  defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders.  Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio.  The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
    CATEGORIES : Fiduciary DutiesSPACs
  • Delaware Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
     
    03/01/2022

    On February 14, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of Lee Enterprises, Inc. (the “Company”) and its directors following an expedited trial on claims for breach of the Company’s bylaws and the directors’ fiduciary duties.  Strategic Investment Opportunities LLC v. Lee Enterprises, Inc., C.A. No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022).  Plaintiff, a beneficial stockholder, sought declaratory and injunctive relief to allow its nomination of directors—attempted in conjunction with a takeover bid by plaintiff—to move forward.  The Court found that plaintiff did not comply with advance notice requirements for director nominations in the Company’s “clear and unambiguous” bylaws.  Applying “enhanced scrutiny,” the Court also concluded that the board did not breach fiduciary duties by rejecting plaintiff’s nomination based on “a validly adopted bylaw with a legitimate corporate purpose.”
  • Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims
     
    02/24/2022

    On February 14, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a post-closing damages action for breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. (“Authentix” or the “Company”), rejecting defendant’s claim that stockholders waived the right to bring suit.  Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No. 2020-0657-SG, (Del. Ch. Feb. 14, 2022).  The Court concluded that language in a Stockholders Agreement consenting to the transaction was not sufficiently specific to waive the stockholders’ right to challenge the sale.
    CATEGORIES : Fiduciary DutiesStanding
  • Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand
     
    02/08/2022

    On January 21, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of GrafTech International Ltd. (the “Company”) against the Company’s directors and the Company’s controlling stockholder, Brookfield Asset Management (“Brookfield”), in connection with the Company’s repurchase of shares from Brookfield.  Simons v. Brookfield Asset Mgmt., C.A. No. 2020-0841-KSJM (Del. Ch. Jan. 21, 2022).  The Court held that the demand was not excused because five of the nine board members were capable of impartially considering a litigation demand under the recently affirmed Zuckerberg “universal test.”  United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020).
  • Delaware Court Of Chancery Limits Discovery In Appraisal Proceeding To Materials Available In Books-And-Records Demand
     
    02/08/2022

    On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
  • Delaware Court Of Chancery Finds Transfer Restrictions On Stock Issued In Connection With A De-SPAC Merger Inapplicable To A Legacy Operating Company Stockholder Based On The Language Of The Relevant Bylaw
    01/25/2022

    On January 10, 2022, Vice Chancellor Lori W. Will held that shares of defendant Matterport Inc. (“New Company”) issued to plaintiff in connection with the acquisition of Matterport Operating, LLC (“Legacy Company”) by a special purpose acquisition company (“SPAC”) in a “de-SPAC” merger were not subject to a transfer restriction in the New Company’s bylaws.  As part of the transaction, Legacy Company stockholders, including plaintiff, were given the right to receive shares of the New Company.  Prior to closing, the SPAC adopted a bylaw that restricted the transfer by such stockholders of shares “held . . . immediately following the closing” of the transaction.  After a two-day trial, the Court found that plaintiff was not issued shares of the New Company until more than three months after the merger when he executed letters of transmittal to the transfer agent.  Concluding that the “plain language” of the bylaw was “straightforward,” and that plaintiff had not held shares “immediately” following the merger, the Court granted declaratory relief in favor of plaintiff.
  • Delaware Court Of Chancery Dismisses Derivative Claims Challenging Stock Sale Allegedly Based On Adverse Nonpublic Information For Failure To Plead Demand Futility
     
    01/19/2022

    On December 15, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed stockholder derivative claims for breaches of fiduciary duty asserted on behalf The Kraft Heinz Company (the “Company”) against an investment firm (the “Investment Firm”) that had previously held 24.2% of the Company’s shares, as well as against certain alleged dual fiduciaries of the two entities.  In re Kraft Heinz Company Derivative Litigation, C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021).  Plaintiffs alleged that defendants sold $1.2 billion in Company stock on the basis of nonpublic information that the Company was expected to miss its full-year earnings target by $700 million.  The Court held that plaintiffs failed to establish demand futility because the complaint did not raise a reasonable doubt that a majority of the Company’s board members lacked independence from defendants.
  • 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
     
    01/11/2022

    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 Derivative Claims Challenging A Convertible Debt Issuance At The Onset Of The COVID-19 Pandemic For Failure To Plead That Demand Was Excused
     
    12/08/2021

    On November 23, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder derivative claims for breach of fiduciary duty against the directors of Wayfair, Inc. (the “Company”).  Equity-League Pension Tr. v. Great Hill Partners, C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021).  Plaintiff challenged the sale by the Company of $535 million in convertible notes at the outset of the COVID-19 pandemic to a consortium of investors allegedly tied to four of the Company’s directors, including the two co-chairmen, one of whom was also the CEO.  There was no dispute that two of the nine board members were disinterested and independent.  As to three others, plaintiff alleged that their service on the audit committee presented a substantial likelihood of liability because it was charged with reviewing conflicted transactions.  Highlighting that the Company’s charter exculpated directors for breaches of the duty of care, however, the Court explained that the complaint must therefore plead bad faith, which it referred to as a “rara avis.”  Although the Court acknowledged that the transaction was not a “model of best practices,” it found that the complaint and the documents incorporated by reference therein did not support an inference of bad faith.
  • Delaware Court Of Chancery Declines To Dismiss Derivative Claims, Finding Wrongful Refusal Of Demand Adequately Pleaded
     
    11/09/2021

    On October 29, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to dismiss derivative claims for breach of fiduciary duties brought by stockholders of BioDelivery Sciences International, Inc. (the “Company”).  Drachman v. BioDelivery Scis. Int’l, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021).  Plaintiffs alleged that the board improperly adopted two amendments to the Company’s certificate of incorporation.  Plaintiffs made a pre-suit demand on the board requesting that it deem the amendments ineffective and indicating they would otherwise commence litigation.  The board responded by noting that it had determined the demand was “without merit.”  The Court held that plaintiffs adequately pleaded wrongful refusal because the allegations raised a reasonable doubt as to the good faith of the board in “rebuffing” the demand.
  • Delaware Supreme Court Overrules Gentile  Carve-out, Holding An Improper Transfer Of Economic Value And Voting Power To A Controlling Stockholder Through An Equity Overpayment Is A Derivative Claim
     
    10/19/2021

    On September 20, 2021, in a decision authored by Justice Karen L. Valihura, the Delaware Supreme Court sitting en banc reversed the denial of defendants’ motion to dismiss breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”).  Brookfield Asset Management, Inc. v. Rosson, No. 406, 2020, 2021 WL 4260639 (Del. Sept. 20, 2021).  As we discussed in our prior post, plaintiffs alleged that a private placement of stock to the Company’s controlling stockholder at a price that undervalued the shares diluted the financial and voting interest of the minority stockholders.  The trial court found that the claims were nearly identical to corporate overpayment claims asserted by former stockholders and upheld as “direct”—rather than “derivative”—by the Delaware Supreme Court in Gentile v. Rossette, 906 A.2d 91 (Del. 2006).  Reversing, the Delaware Supreme Court reaffirmed the “classic” test for distinguishing stockholder “derivative” claims from “direct” claims established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and expressly overruled Gentile and its carve-out from Tooley.
    CATEGORIES : Fiduciary DutiesStanding
  • Delaware Supreme Court Adopts Refined Test For Demand Futility And Holds Exculpated Claims Do Not Excuse Demand
     
    10/06/2021

    On September 23, 2021, in a decision authored by Justice Tamika Montgomery-Reeves, the Delaware Supreme Court sitting en banc affirmed the dismissal of a derivative complaint filed by a stockholder of Facebook, Inc. (the “Company”) against the CEO, who is also the founder, controlling stockholder and chairman of the board, as well as certain other directors.  United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., No. 404, 2020 (Del. Sept. 23, 2021).  Plaintiff asserted that the directors breached their fiduciary duties by improperly approving a stock reclassification allegedly for the benefit of the CEO, which though ultimately abandoned resulted in litigation and settlement costs.  The Court concluded that the Delaware Court of Chancery properly dismissed plaintiff’s complaint for failing to make a pre-suit demand on the board.  In so holding, the Court adopted a refined test for demand futility and also determined that exculpated claims cannot excuse demand because they do not entail a substantial likelihood of liability.
  • Delaware Court Of Chancery Upholds Alleged Safety-Related Caremark Claims Against Airplane Manufacturer’s Board
     
    09/15/2021

    On September 7, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery largely denied a motion to dismiss a stockholder derivate suit against the directors of The Boeing Company (the “Company”) in the wake of two fatal crashes of an airplane it manufactured.  In re The Boeing Co. Derivative Litigation, No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021).  Plaintiffs alleged that the board breached its fiduciary duty of oversight under Caremark by failing to ensure adequate safety and quality control.  The Court found that plaintiffs sufficiently pleaded that the board failed to establish board-level reporting systems related to “mission critical” airplane safety and did not adequately respond to red flags, including media reports about the crashes.  Accordingly, the Court held that the complaint demonstrated that the directors faced a substantial likelihood of liability and that pre-suit demand on the board was excused.
  • Delaware Court Of Chancery Dismisses Post-Merger Claims For Alleged Violation Of DGCL § 203 And Breach Of Fiduciary Duty
     
    08/31/2021

    On August 16, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty and other claims brought by a stockholder of Genomic Health, Inc. (the “Company”) in connection with its acquisition by Exact Sciences Corp.  Flannery v. Genomic Health Inc., et al., C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021).  The Court held that the transaction did not violate Delaware General Corporation Law (“DGCL”) § 203, entire fairness did not apply because there was no conflicted controlling stockholder, and enhanced scrutiny under Revlon did not apply because the merger was not a change in control transaction.  Accordingly, the Court found that plaintiff failed to overcome the presumption of the business judgment rule.
  • Delaware Court Of Chancery Declines To Apply Business Judgment Deference To Take-Private Merger Because Of “Deficiencies” In MFW  Protections, Including That The Conditions Were Not Irrevocable
     
    08/19/2021

    On July 23, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied defendants’ motion to dismiss breach of fiduciary duty claims brought by a putative class of minority stockholders of Empire Resorts, Inc. (the “Company”) challenging the Company’s take-private acquisition by the Company’s majority shareholder.  The MH Haberkorn 2006 Trust v. Empire Resorts, Inc., C.A. No. 2020-0619 (Del. Ch. Jul. 23, 2021) (Transcript).  Plaintiffs alleged that a special committee approved the deal even though it undervalued the Company and asserted claims against officers, directors, the controlling shareholder and certain of their affiliates.  Defendants argued that the transaction complied with the procedural protections necessary for deferential review—under the business judgment standard—of a merger process involving a controller pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW ”).  But the Court found the complaint adequately pleaded “deficiencies” in the MFW conditions, including that they were not “irrevocable.”  Therefore, the Court applied the entire fairness standard and found that defendants did not show “conclusively” at the pleading stage that the transaction was entirely fair.
  • Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claim Against Derivative Plaintiffs For Failing To Turn Over Derivative Award To The Corporation
     
    08/03/2021

    On July 15, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion by stockholders of OptimisCorp (the “Company”) to dismiss claims brought by the Company against them for breach of fiduciary duty and unjust enrichment for failing to turn over to the Company a derivative arbitration award that they won in their capacity as derivative plaintiffs.  OptimisCorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2021).  After succeeding in the derivative case against another stockholder—who had been the Company’s outside counsel and a “confederate” of the Company’s CEO—defendants allegedly escrowed the award with intentions to distribute it to certain stockholders but exclude their adversaries.  At an earlier stage in this action, the Court directed defendants to transfer the award to the Company.  In this decision, the Court held that defendants “owed fiduciary duties to the Company and its stockholders with respect to the corporate asset entrusted to them” and the Company adequately alleged that defendants “breached their duty of loyalty by withholding the Award out of animus toward [the CEO] and the Company, and to benefit themselves.”
    CATEGORY : Fiduciary Duties
  • Delaware Supreme Court Requires Board To Demonstrate “Compelling Justification” For Stock Sale Primarily Intended To Interfere With Stockholder Voting Rights
     
    07/13/2021

    On June 28, 2021, in an en banc opinion authored by Chief Justice Collins J. Seitz, Jr., the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery, which had upheld a contested stock sale by the board of UIP Companies, Inc. (the “Company”).  Coster v. UIP Cos., Inc., No. 49, 2020 (Del. June 28, 2021).  Plaintiff was one of the Company’s two equal stockholders.  Plaintiff alleged that defendant, the other stockholder, who was also the board chairman, and the two other directors voted to issue stock to one of them in order to dilute plaintiff’s ownership interest.  The Court of Chancery found that the board approved the stock sale at a fair price and through a fair process.  Reversing and remanding, the Delaware Supreme Court held that—although the sale may have satisfied its entire fairness review—“inequitable action does not become permissible simply because it is legally possible.”  The Delaware Supreme Court further held that, if the board acted for the “primary purpose of thwarting” the stockholder’s vote or reducing her leverage as an equal stockholder—even in good faith—the board must demonstrate a “compelling justification.”
  • Delaware Court Of Chancery Dismisses Caremark Claims For Failure To Plead Demand Futility
     
    07/07/2021

    On June 28, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of FedEx Corporation (the “Company”) against the Company’s directors for failure to plead that pre-suit demand on the board would have been futile. Pettry v. Smith, et al., No. 2019-0795-JRS (Del. Ch. June 28, 2021).  Plaintiff primarily alleged that defendants breached their Caremark duties by failing to oversee the Company’s compliance with laws governing the transportation and delivery of cigarettes.  The Court, however, concluded that the complaint did not plead particularized facts demonstrating that a majority of the board faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims Against Certain Officer-Directors Of Acquirer But Upholds A Claim Against A Special Committee Member
     
    06/29/2021

    On June 21, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by stockholders of Oracle Corporation (the “Company”) against two of its officer-directors in connection with its acquisition of NetSuite, Inc., but upheld a claim against the chairperson of the special committee that had been established to evaluate the transaction.  In Re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. June 21, 2021).  Plaintiffs alleged that the acquisition was a “controlled self-dealing transaction” in which the Company overpaid for the target to the benefit of the entities’ common founder, who allegedly controlled both.  As discussed in a prior post, the Court previously dismissed claims for aiding and abetting breaches of fiduciary duty that had been asserted against the target’s CEO and Chairman.  Finding that the complaint failed to plead facts demonstrating gross negligence or disloyalty, the Court dismissed fiduciary-duty breach claims against two officer-directors.  The Court, however, found the complaint adequately alleged that it is “reasonably conceivable” that the director on the special committee was “not independent” of the founder and “actively participated in the formulation” of the transaction to advance the alleged controller’s interest.
    CATEGORIES : DisclosuresFiduciary Duties
  • Delaware Court Of Chancery Finds Company’s Founders Constitute Control Group And That Entire Fairness Applies To Transaction In Which They Obtained Benefits Not Available To Minority Stockholders
     
    06/08/2021

    On June 1, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action against the founders of Tilray, Inc. (the “Company”) for breach of fiduciary duties in connection with a merger with Privateer Holdings, Inc., a parent entity through which the Company’s founders had maintained their holdings.  In re Tilray, Inc. Reorganization Litig., C.A. No. 2020-0137-KSJM (Del. Ch. June 1, 2021).  The alleged purpose of the merger was to effect a reorganization of the business to mitigate expected federal capital gains tax consequences that the founders would incur in connection with the anticipated divestment of their holdings.  The Court found that the Company’s three founders constituted a control group and that the reorganization constituted a self-dealing transaction subject to entire fairness review.  The Court also found that demand on the board would have been futile as a majority of the board was conflicted.
  • Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
     
    05/18/2021

    On May 10, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss claims for breach of fiduciary duty and unjust enrichment brought by former stockholders of Voltari Corporation, challenging the take-private buyout of the company by its controlling stockholder.  Franchi, et al. v. Firestone, et al., C.A. No. 2020-0503-KSJM (Del. Ch. May 10, 2021).  In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—the buyout offer was conditioned on approval by an independent special committee and a fully informed majority of the company’s minority stockholders.  Nevertheless, plaintiffs claimed that the purchase price did not account for the value of the company’s net operating loss carryforwards and therefore the controller and the company’s directors breached their fiduciary duties.  The Court, however, held that defendants were entitled to the benefit of the business judgment rule under MFW because plaintiffs did not adequately plead (i) a lack of independence as to the members of the special committee; (ii) that the committee acted with gross negligence in approving the merger; or (iii) that the proxy in connection with the stockholder vote failed to disclose material facts.
  • Delaware Chancery Court Requires Buyers To Close On Pre-Coronavirus Deal Notwithstanding Impact Of Pandemic On Cake-Decorating Business
     
    05/11/2021

    On April 30, 2021, then-Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted sellers specific performance in a breach of contract action against buyers KCAKE and Kohlberg Funds, arising out of the sale of DecoPac Holdings Inc. (“DecoPac”).  Snow Phipps Group, LLC., et al. v. KCake Acquisition, Inc., et al., 2020-0282-KSJM (Del. Ch. Apr. 30, 2021).  The Court found that DecoPac had not suffered a Material Adverse Event (“MAE”) and had complied with its ordinary course of business covenant, but that the buyers breached the purchase agreement because they had not used reasonable best efforts to secure the debt financing necessary to close the deal and their actions had caused the debt financing to become unavailable.
  • Delaware Court Of Chancery Dismisses Caremark  And Disclosure Claims Related To Alleged Consumer Protection Law Violations For Failure To Plead Demand Futility
     
    04/13/2021

    On March 30, 2021, Chancellor Andre G. Bouchard dismissed a derivative suit brought by a stockholder of LendingClub Corporation (the “Company”) against certain of the Company’s current and former directors and officers for failure to plead demand futility.  Fisher v. Sanborn, et al., No. 2019-0631-AGB (Del. Ch. March 30, 2020).  Plaintiff asserted breach of fiduciary duty claims against defendants after the Federal Trade Commission (FTC) filed a complaint against the Company for allegedly violating certain consumer protection laws by engaging in deceptive and unfair practices in connection with its lending business.  Specifically, plaintiff alleged that defendants (i) breached their oversight duties by failing to monitor and oversee the Company’s compliance with consumer protection laws, and (ii) misrepresented the subject of the FTC investigation.  The Court, however, found the complaint did not adequately plead that defendants failed to implement a monitoring system relevant to consumer protection law compliance or consciously disregard indications of noncompliance, as required to be alleged under Caremark.  The Court also found that the complaint did not adequately plead that defendants “deliberately lied to investors.”  The Court therefore held that the complaint did not demonstrate that the directors faced a substantial likelihood of liability and thus pre-suit demand on the board was not excused. 
     
  • 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.
     
    CATEGORIES : Fiduciary DutiesInjunctions
  • 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.
     
    CATEGORIES : DisclosuresFiduciary Duties
  • 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.
     
View All