Delaware Court Of Chancery Holds That Corwin Cleansing Does Not Apply To Claims For Injunctive Relief Related To Alleged Defensive Measures
On May 1, 2023, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion to dismiss a putative stockholder class action asserting a breach of fiduciary duty claim against the directors of a telecommunications company (the “Corporation”) and seeking to enjoin alleged defensive measures. In re Edgio, Inc. Stockholders Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023). The action was brought after the Corporation acquired a portfolio company of an investor (the “Investor”) in exchange for a 35% stake in the post-merger entity and entry into a stockholders’ agreement that allegedly “restricted the [I]nvestor’s voting and transfer rights.” The stockholders of the Corporation voted in favor of the transaction in advance. Defendants argued that they were entitled to the “irrebuttable presumption of the business judgment rule” that applies “when a transaction is approved by a fully informed, uncoerced vote of the disinterested stockholders” under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). The Court, however, found that the relevant provisions in the stockholders’ agreement were subject at the pleading stage to “enhanced scrutiny” as alleged “defensive measures . . . designed to entrench the board.” The Court held that “Corwin cleansing” does not apply to a claim seeking to enjoin such alleged defensive measures.
Delaware Court Of Chancery 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 Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
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 Rejects Challenge To Board’s Enforcement Of Advance Notice Bylaw
On October 13, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a request for injunctive relief in a stockholder action against the board of CytoDyn (the “Company”). Rosenbaum v. Cyotodyn Inc., C.A. No. 2021-0728-JRS, 2021 WL 4775140 (Del. Ch. Oct. 13, 2021). Plaintiffs attempted to nominate a dissident slate of director candidates. They alleged that the board wrongfully rejected plaintiffs’ timely notice of their nominations. After a trial on a “paper record,” the Court found that plaintiffs’ notice did not comply with the Company’s advance notice bylaw—because it omitted information that was required under the bylaw to have been disclosed—and the board was thus “justified in rejecting” the notice.
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
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 Denies Billion-Dollar Damages In Cigna-Anthem Row
On August 31, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled that neither Cigna Corporation (“Cigna”) nor Anthem, Inc. (“Anthem”) were entitled to the billions of dollars in damages and fees the parties sought in connection with a failed merger between the two companies (the “Merger”). In Re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (Del. Ch. Aug. 31, 2020). After the Department of Justice (“DOJ”) successfully sued to block the Merger, Cigna and Anthem sued each other for expectation damages, and Cigna claimed that it was entitled to a Reverse Termination Fee (“RTF”). In a landmark 306-page opinion, the Court rejected both parties’ claims and denied all recovery, finding that “[e]ach party must bear the losses it suffered as a result of their star-crossed venture.”
Shareholder Derivative Complaints Allege Lack Of Board And Senior Executive Diversity
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 Enjoins Stockholder Vote For Inadequate Disclosures
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 Supreme Court Determines “Reasonable Best Efforts” Provisions Impose Affirmative Obligations, But Affirms Chancery Court’s Refusal To Enjoin Merger Termination
On March 23, 2017, the Supreme Court of Delaware affirmed the Court of Chancery’s denial of an injunction sought by plaintiff The Williams Companies, Inc. to prevent defendant Energy Transfer Equity, L.P. from terminating a merger of the two energy companies. The Williams Companies., Inc. v. Energy Transfer Equity, L.P.
, C.A. Nos. 12168 & 12337 (Del. Mar. 23, 2017). The 4-1 decision authored by Justice James T. Vaughn, Jr. determined that the Chancery Court erred by “adopt[ing] an unduly narrow view of the obligations imposed” by defendant’s covenants in the merger agreement to use “reasonable best efforts” to consummate the deal and “commercially reasonable efforts” to secure an opinion from its outside tax counsel—a condition precedent to the merger—that the transaction qualified for tax-free treatment. According to the Delaware Supreme Court, those provisions “placed an affirmative obligation on the parties to take all reasonable steps to obtain the [tax-free] opinion and otherwise complete the transaction.” Nevertheless, the Supreme Court affirmed the denial of the injunction because the Chancery Court found that defendant’s conduct (or lack thereof) did not “materially contribute” to outside tax counsel’s decision not to issue the tax-free opinion.
Delaware Chancery Preliminarily Enjoins Merger-Related Stockholder Meeting Until Financial Advisor’s Fees For Merger-Related Financing Are Disclosed
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. (“Consolidated”) of FairPoint Communications, Inc. (“FairPoint”). Vento v. Curry
, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017). Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
Delaware Chancery Court Relies On Deal Emails To Interpret An Ambiguous Non-Compete Covenant In A Stock Purchase Agreement, Reverses A Preliminary Injunction And Permits Recovery Of Loss Suffered Therefrom
On October 31, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery entered a final post-trial decision resolving a dispute concerning the proper scope of a post-closing non-compete covenant entered into by parties to a stock sale. Brace Industrial Contracting, Inc. v. Peterson Enterprises, Inc.
, Consol. C.A. No. 11189-VCG (Del. Ch. Oct. 31, 2016). Although Vice Chancellor Glasscock had previously ruled for plaintiffs, preliminarily enjoining defendants from competitive activities that plaintiffs claimed were barred by the covenant, the Court’s final decision lifted the preliminary injunction after considering extrinsic evidence to interpret the disputed contractual terms.
Third Circuit Halts Pennsylvania Hospital Merger On Antitrust Grounds, Reversing Previous Loss By FTC
On September 27, 2016, the Third Circuit Court of Appeals reversed a District Court ruling and granted the preliminary restraining order sought by the Federal Trade Commission (“FTC”) and the state of Pennsylvania to enjoin a merger of two state hospital systems pending administrative review by the FTC. FTC v. Penn State Hershey Medical Center
, No. 16-2365 (3d Cir. Sept. 27, 2016). The Court rejected as legally incorrect the District Court’s formulation of the geographic market for evaluating the possible anti-competitive effects of the proposed merger.
Delaware Court of Chancery Rejects the Imposition of Non-Competition Restrictions on Selling Shareholders in Context of a Forced Sale
On June 21, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery accepted a custodian’s plan for a judicially ordered sale of a company over the objections of one of the three shareholders of the company, but rejected a proposal to impose expanded non-compete obligations on selling shareholders. See In re TransPerfect Global, Inc, et al.
, C.A. Nos. 9700, 10449-CB, Letter Op. (Del. Ch. June 21, 2016). Specifically, the Court held that the plan “address[ed] the dual goals of maintaining the Company as a going concern and maximizing stockholder value” but that “it would not be appropriate to impose non-competition or non-solicitation restrictions on a selling stockholder as a condition of the sale of the Company absent evidence of wrongdoing.”
Northern District of Illinois Denies FTC’s Bid To Enjoin Chicago Hospital Merger
On June 14, 2016, Judge Jorge Alonso of the United States District Court for the Northern District of Illinois denied the Federal Trade Commission’s (“FTC”) motion for a preliminary injunction against the merger of Advocate Health Care (“Advocate”) and NorthShore University HealthSystem (“NorthShore”), which operate hospitals in Chicago’s northern suburbs. Order, Federal Trade Comm’n v. Advocate Health Care Network
, No. 15 C 11473 (N.D. Ill. June 14, 2016), ECF No. 472. The Order held that the FTC failed to show a likelihood that it would succeed on the merits of its antitrust claims.
Delaware Court of Chancery Invokes Equitable Exception to Rule That Demand Futility Is Assessed as of the Time Complaint Is Filed
Under well-established Delaware law, a plaintiff seeking to pursue a shareholder derivative suit on behalf of the corporation must first either (a) make a demand on the company’s board of directors and have such demand wrongfully refused or (b) establish that such a demand would be futile. Shareholder plaintiffs that opt for the latter approach often claim that the majority of directors who would have been tasked with deciding whether the company should act upon their demands were (or are) unable to reliably exercise their business judgment on the company’s behalf, particularly in cases where the lawsuits would target those same board members.
OptimisCorp v. Waite, No. 523, 2015 (Del. Apr. 25, 2016)
A unanimous Delaware Supreme Court criticizes directors’ use of deceptive “Pearl Harbor-like” tactics against another director, even in the name of protecting the company from perceived misconduct. OptimisCorp v. Waite, No. 523, 2015 (Apr. 25, 2016).