Delaware Court Of Chancery Validates SPAC Charter Amendment Called Into Question By A Recent Decision
On February 21, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted the petition of Lordstown Motors Corporation (the “Company”) under Section 205 of the Delaware General Corporation Law (“DGCL”) to validate and declare effective the Company’s certificate of incorporation as amended in connection with a “de-SPAC” merger more than two years ago. In Re Lordstown Motors Corp.
, C.A. 2023-0083-LWW (Del. Ch. Feb. 21, 2023). In advance of the merger, the Company—then a special purpose acquisition company (“SPAC”)—adopted the amendment to increase the number of authorized Class A common shares, which were subsequently issued in connection with the merger. The Company requested validation from the Court after the approval of the amendment—by a majority of Class A and Class B shares voting together rather than a vote exclusively by the Class A stock—was called into question by a recent decision related to another SPAC. Because a “significant number of SPACs” had similar provisions and followed a similar process, that decision, Garfield v. Boxed, Inc.
, No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022)—discussed in a prior post
—resulted in “pervasive uncertainty” regarding their capital structures and the validity of their stock. Granting the petition, the Court concluded that validation of the charter amendment would be “just and equitable.” The Court added that its decision “should prove instructive to other companies seeking the court’s assistance to validate similar corporate acts.”
Delaware Court Of Chancery Grants Plaintiff Attorneys’ Fees Award Under Corporate Benefit Doctrine For Demand To SPAC Board Leading To Adjusted Voting Structure In Connection With Merger
On December 27, 2022, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery substantially granted plaintiff’s motion for summary judgment in an action seeking attorneys’ fees. Garfield v. Boxed, Inc., No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022). Plaintiff, a stockholder of defendant Seven Oaks Acquisition Corp., a special purpose acquisition company (the “SPAC”), made a demand on the board challenging the structure of stockholder votes on proposed charter amendments regarding the issuance of shares in connection with a merger. The SPAC made the change demanded by plaintiff and consummated the deal. However, defendant opposed the attorneys’ fees award, contending that the previously contemplated voting structure had already been legally compliant. The Court held that plaintiff had correctly determined that the contemplated voting structure would have been inconsistent with Delaware law. The Court thus awarded attorneys’ fees because “[b]y taking the [SPAC] off a path that violated [Delaware law] and the stockholder franchise, [p]laintiff conferred a substantial benefit.”
Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman
On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”). According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure. Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment. The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
Delaware Court Of Chancery Declares Company Actions On Behalf Of One Half Of Deadlocked Board Were Unauthorized And Contrary To Corporate Neutrality Principle
On June 16, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery granted declaratory judgment in favor of plaintiffs — four members of the board of Aerojet Rocketdyne Holdings, Inc. (the “Company”), including its Executive Chairman — against defendants — the other four members of the Company’s board, including its CEO — after the eight-member board had deadlocked in connection with the Company’s impending board election. In Re Aerojet Rocketdyne Holdings Inc., No. CV 2022-0127-LWW (Del. Ch. June 16, 2022). The case arose after each faction had proposed its own slate of board nominees. Plaintiffs challenged certain actions allegedly undertaken by the Company at the behest of defendants, such as the issuance of a Company press release purporting to express the Company’s disappointment in the slate proposed by plaintiffs and the retention of counsel on behalf of the Company to pursue litigation against plaintiffs. Following a trial, the Court held that such actions were unauthorized and contrary to the corporate neutrality principle. The Court explained that a Delaware corporation “must remain neutral when a there is a legitimate question as to who is entitled to speak or act on its behalf,” and [w]here a board cannot validly exercise its ultimate decision-making power, neither faction has a greater claim to the company’s name or resources.”
Delaware Supreme Court Adopts Refined Test For Demand Futility And Holds Exculpated Claims Do Not Excuse Demand
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 Dismisses Post-Merger Claims For Alleged Violation Of DGCL § 203 And Breach Of Fiduciary Duty
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.
Even After Finding Corwin Inapplicable Because Of Alleged Misstatements, Delaware Court Of Chancery Dismisses Post-Merger Damages Claims For Failure To Plead Bad Faith
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 Holds Stockholder Inspection Rights For Delaware Corporations Are Governed Exclusively By Delaware Law And Are Subject To A Delaware Forum Selection Provision Addressing Internal Affairs
On August 13, 2020, Vice Chancellor J. Travis Laster held that defendant, a stockholder of plaintiff JUUL Labs, Inc., did not have the right to seek inspection of books and records of the Delaware corporation under any state statutory law other than that of Delaware. JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020). Therefore, because defendant had only sought inspection under a California statutory provision, the Court rejected the demand and granted judgment on the pleadings in favor of plaintiff. The Court also held that a forum selection provision in the certificate of incorporation, providing that the Delaware Court of Chancery is the exclusive forum for actions arising pursuant to the Delaware General Corporation Law (“DGCL”) or asserting claims against the corporation “governed by the internal affairs doctrine,” applies to actions to inspect books and records.
Delaware Court Of Chancery Denies Stay Sought By Special Litigation Committee Appointed By Conflicted General Partner
On August 28, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to stay filed by the special litigation committee formed by defendant Blue Bell Creameries, Inc. (“BBGP”) in connection with a derivative action by limited partners of Blue Bell Creameries, LLP (“Blue Bell” or the “Partnership”) against BBGP, which is the sole general partner of Blue Bell, and others. Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699 (Del. Ch. Aug. 28, 2019). The Court previously denied a motion to dismiss the derivative action because it determined that BBGP had “a disabling interest for pre-suit demand purposes.” BBGP then appointed two new directors to its board, who established a special litigation committee consisting of three non-director members empowered to determine the interests of the Partnership in the derivative litigation. The special litigation committee promptly moved to stay the derivative action to permit its investigation and make a determination. But the Court denied the motion. It explained that “[a]ny conflict that disables the principal disables the agent” and “[b]ecause BBGP, as principal, is not fit to decide how to manage the Partnership’s claims against the Defendants (including the claims against BBGP itself), its purported special litigation committee, as agent, is likewise disabled.”
Delaware Court Of Chancery Approves $3 Million In Attorneys’ Fees For Successful Challenge To Forum-Selection Charter Provisions
On July 8, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery awarded $3 million to plaintiffs’ lawyers in Sciabacucchi v. Salzberg
, C.A. No. 2017-0931-JTL (Del. Ch. July 8, 2019). As we discussed in a prior post
, Vice Chancellor Laster had previously granted summary judgment to a shareholder challenging the validity of forum-selection charter provisions adopted by three corporations requiring shareholders to litigate claims under the Securities Act of 1933 in federal courts. Sciabacucchi v. Salzberg
, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 18, 2018). Even though the relief awarded—the invalidation of the provisions—was non-monetary and non-quantifiable, plaintiff’s counsel argued that $3 million in aggregate fees was warranted because of the significance of the result achieved. The Court agreed.
Delaware Chancery Court Finds Limited Liability Companies Can Be Liable For Advancement To Members, Even Under Delaware Corporate Law
On April 30, 2019, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery held that plaintiff Freeman Family LLC (“Freeman”), a member of Park Avenue Landing LLC (the “Company”), is entitled to advancement pursuant to Delaware corporate case law. Freeman Family LLC v. Park Avenue Landing LLC, No. C.A. 2018-0683 (Del. Ch. April 30, 2019). In January 2017, plaintiff was sued by the Company’s managing member in the United States District Court for the District of New Jersey (the “New Jersey action”). Thereafter, plaintiff argued the Company must provide advancement of legal fees arising from the New Jersey action because its operating agreement provides that all members shall receive advancement if they are made party to an action as a result of their status as a member. In granting plaintiff’s motion for judgment on the pleadings, the Court first found that Delaware corporate case law applied “by analogy” because the advancement provision in the Company’s operating agreement incorporated language from the Delaware General Corporation Law, 8 Del. C. § 145. However, the Court found that plaintiff was nevertheless entitled to advancement because a “causal relationship” existed between the New Jersey action and plaintiff’s official capacity as manager.
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
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 Supreme Court Affirms Dismissal Of Misappropriation Claims Against Private Equity Investor That Invested In A Competitor
On February 7, 2019, the Delaware Supreme Court issued an order affirming the dismissal of misappropriation claims by Alarm.com Holdings, Inc. against ABS Capital Partners Inc. (and its affiliates), a private equity firm that had a controlling interest in plaintiff and whose partners served on plaintiff’s board, with one as chairman. Alarm.com Holdings, Inc. v. ABS Capital Partners Inc., No. 360, 2018 (Del. Feb. 7, 2019). After its subsequent initial public offering, plaintiff alleged that defendant misappropriated its confidential information by investing in a competitor and asserted claims for violation of the Delaware Uniform Trade Secrets Act (“DUTSA”) and common law misappropriation. The Delaware Court of Chancery found that multiple agreements between defendant and plaintiff made it clear that defendant could invest in competitors and this fact was also evident in plaintiff’s charter of corporation, which included a provision under Delaware General Corporation Law (“DGCL”) Section 122(17) to exempt stockholders and certain directors from any duty not to pursue corporate opportunities that otherwise might arguably belong to plaintiff. In addition, in the complaint, plaintiff “relies only on [defendant’s] investment in [a competitor],” which was made approximately a year after defendant’s representative left the board, and does not allege specific facts demonstrating the misuse of plaintiff’s confidential information. Therefore, the Court of Chancery held that the facts “do not support a reasonably conceivable inference of misappropriation.” In a summary order, the Delaware Supreme Court affirmed on the same basis.
Delaware Court Of Chancery Rejects Forum-Selection Charter Provision For Federal Securities Law Claims
On December 19, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted summary judgment to a shareholder challenging the validity of forum-selection charter provisions requiring shareholders to litigate claims under the Securities Act of 1933 (the “Securities Act”) in federal courts. Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 18, 2018). The case involved three corporations that adopted federal forum-selection provisions for Securities Act claims in their respective certificates of incorporation prior to their initial public offerings. Plaintiff had purchased shares of common stock in the initial public offerings (or shortly thereafter), and therefore, according to the Court, “could sue under Section 11 of the [Securities] Act to address any material misstatements or omissions in the registration statements.” Without actually asserting claims for violations of the Securities Act, however, plaintiff challenged the forum-selection provisions in a declaratory judgment suit. Reasoning that “[t]he constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law,” the Court held that the federal forum-selection provisions are “ineffective and invalid.”
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
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 Invalidates Written Consent Of The Majority Of Common Stockholders Purporting To Remove And Replace CEO
On January 10, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion for judgment on the pleadings to plaintiffs, the CEO and another director of TradingScreen Inc., invalidating a written consent of the majority of common stockholders purporting to remove and replace the CEO and effect other changes to the board. The Court explained that Delaware law provides for the selection of officers as prescribed by a company’s bylaws or determined by the board and found that TradingScreen’s bylaws provide for the board to elect and remove officers. Therefore, the Court held the written consent was “ineffective.”
Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims In Connection With Two-Step Merger, Despite Finding Corwin Inapplicable
On November 30, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty claims against the board of Opower, Inc. (“Opower”) in connection with Opower’s acquisition by Oracle Corporation (“Oracle”). Van der Fluit v. Yate
s, C.A. No. 12553-VCMR (Del. Ch. Nov. 30, 2017). The Court found that the failure to disclose that certain executives who received transaction-related benefits were the primary negotiators of the transaction constituted a material disclosure violation. Therefore, the Court declined to rely on stockholder approval to cleanse the transaction under the doctrine of Corwin v. KKR Financial Holdings LLC
, 125 A.3d 304 (Del. 2015), because the tender was not fully informed. Nevertheless, the Court granted defendants’ motion to dismiss, concluding that plaintiff had failed to plead a non-exculpated claim for breach of the duty of loyalty.
Delaware Chancery Court Holds That Corporations Cannot Enact Bylaws To Circumvent Simple Majority Vote Requirement For Shareholder Removal Of Directors
On January 24, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted summary judgment in favor of plaintiff, a shareholder of Nutrisystem, Inc., who sued Nutrisystem and its directors for declaratory judgment to invalidate a provision in Nutrisystem’s bylaws purporting to require a vote of two-thirds of the company’s shares before a director could be removed from the board. Frechter v. Zier
, C.A. No. 12038-VCG (Del. Ch. Ct. Jan. 24, 2017). Specifically, the Court held that the supermajority requirement violated Section 141(k) of the Delaware General Corporation Law (“DGCL”), which permits removal of a director by a simple majority vote of shares.
Delaware Chancery Court Finds Fee-Shifting Bylaw Facially Invalid Notwithstanding Its Limitation To Actions Brought In Violation Of An Exclusive-Forum Bylaw
On December 27, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied in part a motion to dismiss a putative shareholder class action challenging a fee-shifting bylaw recently adopted by Paylocity Holding Corporation. Solak v. Sarowitz
, C.A. No. 12299-CB (Del. Ch. Dec. 27, 2016). Specifically, the Court found the fee-shifting bylaw was facially invalid even though it only applied to actions filed outside of Delaware, which would contravene Paylocity’s valid exclusive-forum bylaw.
Central District of California Denies Motion to Set Aside Judgment, Suggesting that Forum-Shopping May Have Motivated Litigants’ Conduct
On August 17, 2016, Judge George H. King of the United States District Court for the Central District of California denied a joint motion to vacate the court’s prior dismissal of a shareholder derivative action so that the court could approve a proposed settlement. In re CytRx Corp. S’holder Deriv. Litig.
, 14-6414-GHK-PJW, Dkt. 109 (C.D. Cal. Aug. 17, 2016). Judge King found no grounds for vacatur and openly questioned whether forum-shopping—specifically, an attempt to avoid the Delaware Court of Chancery’s scrutiny of a proposed settlement—motivated the parties’ attempt to revive the California action. This ruling highlights the impact of the Chancery Court’s increasing disfavor towards disclosure-only settlements of shareholder actions, and the alertness of other forums to litigants’ efforts to “avoid the glare of the Delaware Chancery Court’s spotlight.”
Government Wins Again In Bid To Stem the Wave of Industry Consolidation, Obtains Preliminary Injunction Against Staples-Office Depot Merger
The ongoing trend of companies in a wide range of industries seeking to grow quickly by acquiring competitors has increasingly been met with government resistance over the past few years. For example, approximately one year ago, cable and broadband provider Comcast abandoned its plans to acquire Time Warner Cable in the wake of scrutiny from Department of Justice antitrust regulators. And earlier this month, oilfield-services giants Halliburton and Baker Hughes announced that they would walk away from their $30 billion merger in the face of opposition from antitrust regulators (which requires payment by Halliburton to Baker Hughes of a $3.5 billion breakup fee). Last week, Judge Emmet Sullivan of the United States District Court for the District of Columbia sided with the Federal Trade Commission (“FTC”) and entered a preliminary injunction blocking the combination of the country’s two largest office supply retailers, Staples and Office Depot, after holding a two-week trial.
Caskey v. OpKo Health Inc., C.A. No. 11415-VCS, hearing (Del. Ch. Apr. 22, 2016)
The newest Vice Chancellor on the Chancery Court, Vice Chancellor Joseph R. Slights, will be formally installed by public investiture on Friday, May 13, 2016 and recently tackled the rarely discussed “pecuniary duty” in denying from the bench defendants’ motion to dismiss in Herbert Caskey, MD v. OpKo Health Inc.