Finding That Allegedly Conflicted Acquisition Satisfied Entire Fairness Review, Delaware Court Of Chancery Rejects Breach Of Fiduciary Duty Claims
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.
Delaware Court Of Chancery Grants Motion To Stay Pending Appeal Of Specific Performance Judgment Requiring Completion Of Acquisition Of Yoga Studios
On March 31, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted the motion of CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”) to stay the Court’s judgment in favor of plaintiff Level 4 Yoga, LLC pending defendant’s appeal. Level 4 Yoga, LLC v. CorePower Yoga, LLC
, C.A. No. 2020-0249-JRS (Del. Ch. Mar. 31, 2022). As discussed in our prior post
, the Court of Chancery previously (i) found that defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant failed to close on the acquisition of plaintiff’s yoga studios, and (ii) issued a decree of specific performance directing defendant to complete the transaction. “Balanc[ing] all of the equities” and highlighting that defendant “is at risk of suffering irreparable harm,” the court issued the stay.
Delaware Court Of Chancery Holds COVID-19 Pandemic Did Not Excuse Purchaser’s Obligation To Complete Acquisition Of Its Franchisee’s Yoga Studios
On March 1, 2022, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery ruled in favor of plaintiff Level 4 Yoga, LLC in a breach of contract action against CorePower Yoga, LLC and CorePower Yoga Franchising, LLC (together, “defendant”), stemming from the parties’ pre-COVID agreement for defendant to acquire plaintiff’s yoga studios. Level 4 Yoga, LLC v. CorePower Yoga, LLC, CorePower Yoga Franchising, LLC, No. CV 2020-0249-JRS (Del. Ch. Mar. 1, 2022). Plaintiff alleged defendant breached the parties’ asset purchase agreement (“APA”) at the outset of the COVID-19 pandemic when defendant refused to close the transaction, failed to deliver required payments under the APA, and failed to take possession of plaintiff’s yoga studios. The Court found that the APA “unambiguously contain[ed] no conditions to closing and no express right for either party to terminate the contract pre-closing.” The Court further held that plaintiff neither repudiated nor materially breached the APA. Therefore, the Court issued a verdict with a decree of specific performance directing defendant to complete the transaction.
Southern District Of New York Denies Application For Mootness Fee In Connection With Merger-Disclosure Litigation
On February 7, 2022, Judge J. Paul Oetken of the United States District Court for the Southern District of New York denied an application by plaintiff’s counsel for attorneys’ fees after plaintiff’s merger-related disclosure claims were “mooted” by defendant Nuance Communications Inc. (“Nuance”). Serion v. Nuance Communications, No. 21-CV-4701 (S.D.N.Y. Feb. 7, 2022). Although the Court found that the lawsuit prompted the company to issue supplemental disclosures, the Court held that the disclosure of this additional information did not confer a “substantial benefit” on shareholders.
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
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 Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
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 Supreme Court Affirms Excused Performance For Breach Of “Ordinary Course” Covenant During Pandemic
On December 8, 2021, the Supreme Court of Delaware sitting en banc affirmed a Court of Chancery ruling that excused the buyer of a group of high-end hotel properties (the “Buyer”) from closing on the acquisition from AB Stable VIII LLC (the “Seller”)—an indirect subsidiary of Dajia Insurance Group, Ltd. (“Dajia”), formerly Anbang Insurance Group, Ltd. (“Anbang”)—because the Seller breached its covenant to operate the hotels in the ordinary course between signing and closing. AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, C.A. No. 2020-0310 (Del. Dec. 8, 2021). Because the Court found this issue dispositive, it did not reach any other issues on appeal.
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.
Delaware Court Of Chancery Orders Buyer To Close Acquisition Of Medical Device Company After Finding Reduction In Medicare Reimbursement Rates Was Not A Material Adverse Effect
On July 9, 2021, Vice Chancellor Slights of the Delaware Court of Chancery held in a lengthy post-trial opinion that defendant Hill-Rom, Inc. (“Hillrom”) was not excused from closing its acquisition of plaintiff Bardy Diagnostics, Inc. (“Bardy”), a medical device company, due to a Material Adverse Effect (“MAE”). Bardy Diagnostics, Inc., et al. v. Hill-Rom, Inc., et al., C.A. No. 2021-0175-JRS (Del. Ch. July 9, 2021). Between signing of the merger agreement and closing, Medicare drastically reduced the rates payable for Bardy’s signature medical device. Hillrom argued that this change constituted an MAE (or, alternatively, frustration of purpose), excusing its obligation to close.
Delaware Court Of Chancery Allows Claim That Purchaser Altered Target’s Business Plan To Avoid Paying Earnout Consideration To Proceed
On June 7, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery denied a motion to dismiss a breach of contract claim against defendant Albertsons Companies, Inc. brought by a representative of former shareholders of DineInFresh, Inc. (the “Company”) in the wake of its acquisition by defendant. Shareholder Representative Services LLC v. Albertsons Companies, Inc., No. CV 2020-0710-JRS (Del. Ch. June 7, 2021). The merger agreement contained an earnout provision whereby the shareholders of the Company would be paid additional consideration contingent upon the Company reaching specified revenue milestones. The merger agreement provided that defendant had complete discretion over the operation of the Company post-closing, except that it was prohibited from taking any action with the “intent of decreasing or avoiding” the earnout. Plaintiff alleged that defendant immediately caused the Company to shift its focus away from its revenue-generating e-commerce business. The Court held that the complaint adequately pleaded that it was “reasonably conceivable that [defendant’s] decision to focus almost exclusively on . . . brick-and-mortar business, despite having knowledge that such a decision would almost certainly cause the company to miss the earnout milestones, was the product of an intent to avoid the earnout.”
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
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.
In A Matter Of First Impression, Delaware Court Of Chancery Allows “Reverse Veil-Piercing” Theory To Proceed In Appraisal Judgment Enforcement Action
On May 25, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery partially denied a motion to dismiss claims brought by dissenting stockholder plaintiffs in a post-merger action to enforce an appraisal judgment. Manichaean Capital, LLC v. Exela Technologies Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021). The Court found that plaintiffs had adequately pleaded facts to allow a reasonable inference that the acquirer diverted funds from the acquiree’s subsidiaries in order to deprive the acquiree of funds to satisfy plaintiffs’ appraisal judgment. In what it called a “matter of first impression,” the Court held that plaintiffs’ allegations were sufficient to support “reverse veil-piercing” and permit execution of the judgment against the subsidiaries, as well as “traditional veil-piercing” as against the acquirer.
Delaware Court Of Chancery Dismisses Claims Challenging Squeeze-Out Merger Because Special Committee Was Not “Interested” And Stockholder Vote Was Uncoerced
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
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 Supreme Court Affirms No Recovery In Cigna-Anthem Star-Crossed Venture
On May 3, 2021, the Supreme Court of Delaware affirmed en banc
the decision of the Delaware Court of Chancery that neither Cigna Corporation nor Anthem, Inc. was entitled to any damages or fees sought in connection with their failed merger. Cigna Corp. v. Anthem, Inc., et al.
, No. 364, 2020 (Del. May 3, 2021). As we discussed in our prior post
, after the Department of Justice (“DOJ”) blocked the merger as anticompetitive, Cigna and Anthem sued each other for expectation damages, and Cigna also sought a reverse termination fee. But the Court of Chancery 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.” The Court of Chancery held in part that (i) any breach of covenants by Cigna did not result in damages because the DOJ would have enjoined the merger anyway, and (ii) Anthem properly terminated the merger due to the covenants breach and thus the reverse termination fee was not available. In a concise order, the Supreme Court affirmed the ruling in its entirety “on the basis of and for the reasons assigned by the Court of Chancery.”
Delaware Court Of Chancery Dismisses Claims For Breach Of Earnout Provision
On April 22, 2021, Vice Chancellor Joseph R. Slights III granted a motion to dismiss filed by defendants ID Experts Holdings, Inc. and its acquiror Identity Theft Guard Solutions, Inc. (together, “ID Experts”), dismissing breach of contract claims filed by Plaintiff Obsidian Finance Group, LLC (“Obsidian”) that arose out of a merger earnout provision. Obsidian Finance Group, LLC. v. Identity Theft Guard Solutions, Inc., No. 2020-0485-JRS (Del. Ch. Apr. 22, 2021). Obsidian, which had been a security holder in ID Experts prior to its sale, sought payment on an earnout provision that was contingent upon a six-year extension of a cybersecurity contract with the U.S. government. In dismissing the case, the Court rejected Obsidian’s argument that they were entitled to the earnout, even though the contract had not been extended for six years, because a regulation prohibited six-year extensions for such contracts.
Delaware Court Of Chancery, Relying On Plain Language Of Purchase Agreement, Rejects Seller’s Attempt To Claw Back Cash Mistakenly Left In Target’s Bank Account
On March 29, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery granted defendants’ motion for judgment on the pleadings in a breach of contract action brought by plaintiff Deluxe Entertainment Services, Inc. in connection with its sale of a wholly-owned subsidiary, Deluxe Media Inc. (“Target”), to defendant, an affiliate of a private equity firm, DLX Acquisition Corporation. Deluxe Ent. Servs. Inc. v. DLX Acquisition Corp., No. CV 2020-0618-MTZ (Del. Ch. Mar. 29, 2021). The dispute arose from a transaction in which plaintiff sold defendant all outstanding shares of Target for approximately $175 million, but failed to sweep nearly $10 million in cash from Target’s bank accounts, as it was allegedly entitled to do in advance of closing. When defendant refused to return the forgotten funds after closing, plaintiff filed suit and asserted claims for breach of the purchase agreement and the implied covenant of good faith and fair dealing, as well as for reformation of the agreement based on mistake. Although the Court noted that defendant “does not dispute [that plaintiff] had the right to sweep those funds before closing” and that plaintiff’s failure to do so was “an operations or accounting mistake,” the Court rejected the claims, finding that the “heavily negotiated” agreement did not require defendant to return the disputed cash.
Delaware Supreme Court Finds D&O Coverage Applies To Fraudulent Conduct
On March 3, 2021, the Supreme Court of Delaware unanimously affirmed a series of rulings by the Superior Court of Delaware requiring a directors and officers (“D&O”) excess insurer, RSUI Indemnity Co. (“RSUI”), to pay over $12 million towards settlements to resolve claims arising from the conduct of Dole Food Co.’s (“Dole”) CEO, which the Delaware Court of Chancery previously found was fraudulent. In so holding, the Delaware Supreme Court ruled that losses stemming from fraudulent conduct are insurable under Delaware law. RSUI Indemnity Co. v. David H. Murdock, et al.
, C.A. No. 154, 2020, opinion (Del. Mar. 3, 2021). As we discussed in a prior post
, the Superior Court applied Delaware law and ordered RSUI to pay the full policy limit plus interest. The Supreme Court affirmed the ruling in its entirety, finding that, as the state of incorporation, Delaware had the “most significant relationship” with the D&O policy even though Dole was headquartered in California. The Supreme Court also held that Delaware law did not prohibit D&O coverage for fraudulent conduct, noting that neither the policy nor the state’s corporation laws prohibited defendants from securing D&O insurance for fraudulent conduct by insureds.
Delaware Court Of Chancery Exercises Subject Matter Jurisdiction Appropriate Over Merger Agreement Dispute “Legal” Claim
On January 8, 2021, Vice Chancellor Kathaleen McCormick of the Delaware Court of Chancery denied in part a motion to dismiss a complaint by former stockholders of COR Securities Holdings, Inc. (the “Company”) against the buyers of the Company. Legent Grp., LLC v. Axos Fin., Inc., No. C.A. No. 2020-0405-KSJM (Del. Ch. Jan. 08, 2021). Plaintiffs asserted a claim seeking a declaratory judgment that defendants were not entitled to indemnification under the merger agreement. The Court rejected defendants’ contention that it should decline to exercise jurisdiction because it was a “purely legal”—rather than “equitable”—claim. The Court noted that there was no dispute that it had at least discretionary statutory jurisdiction pursuant to Delaware General Corporation Law (“DGCL”) Section 111(a). Declining to dismiss the claim, the Court declared it “appropriate” to exercise jurisdiction, even if discretionary, and therefore found it unnecessary to determine whether jurisdiction under the statute is mandatory.
Delaware Court Of Chancery Applies Zapata To Assess New Board Committee’s Motion To Dismiss Claims Being Pursued By A Previously Established Special Committee
On December 14, 2020, Chancellor Andre G. Bouchard denied a motion to dismiss a lawsuit by a special committee of the board of The We Company (the “Company”) against the Company’s new controlling stockholder and its affiliates (collectively, the “New Controller”). In Re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Dec. 14, 2020). After the New Controller acquired control in a multi-step transaction, the Company’s board established a new committee, which determined that the special committee lacked authority to continue the suit and directed management to move to dismiss. The Court noted that this presented an issue of first impression. The Court determined to engage in an analysis akin to that developed for assessing special committee motions to dismiss derivative claims under Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981). Zapata entails a two-part assessment (i) testing the independence, good faith and reasonableness of the investigation, and (ii) applying the court’s own independent business judgment as to whether the motion should be granted. The Court denied the motion because it found (i) the new committee did not establish the reasonableness of its investigation and conclusions, and (ii) the special committee was authorized to pursue the litigation and it would be “fundamentally unfair” to dismiss the claims.
Delaware Court Of Chancery Rules Inadequate Disclosure And Pandemic-Driven Changes To Hotel Operations Breached Covenants And Excused Closing
On November 30, 2020, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found that Mirae Asset Global Investments Co. was contractually entitled to terminate its agreement to purchase 15 U.S. hotels from a subsidiary of Dajia Insurance Group (“Seller”). AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al., C.A. No. 2020-0310-JTL (Del. Ch. Nov. 30, 2020). Mirae refused to close the transaction in April, asserting that Seller had suffered an MAE and failed to satisfy closing covenants for the hotel deal worth $5.8 billion. Seller sued to force Mirae to close, but the Court determined that even though there was no MAE, Mirae nevertheless had the right to terminate the sale agreement because Seller breached its title insurance and ordinary course closing covenants.
Delaware Court Of Chancery Declines To Dismiss Claims That Officers Tilted Take‑Private Sale Process To Favored Buyer
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 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.”
Delaware Court Of Chancery Finds Controlling Investor’s Cash-Accumulation Strategy In Advance Of Preferred Stock Redemption Payments Satisfied Entire Fairness
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 Holds That A Special Committee Must Be Constituted Ab Initio In Order To Cleanse A Transaction Involving A Conflicted Board Majority
On February 27, 2020, Vice Chancellor Sam Glasscock III denied a motion to dismiss breach of fiduciary duty claims brought by a former stockholder of Intersections, Inc. (the “Company”), challenging the take-private acquisition of the Company. Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020). The complaint alleged that the Company was sold at an unfairly depressed price and that insiders influenced the transaction to divert consideration to themselves. Moreover, plaintiff asserted that the transaction was subject to entire fairness review because at least half the directors were conflicted by virtue of having rolled over substantial portions of their equity into the merger. Although defendants did not contest that a majority of the board was conflicted, they argued that the claims should be dismissed under the business judgment rule because the deal was negotiated and approved by a special committee of unconflicted directors. The Court, however, held that “to effectively cleanse a transaction . . . the special committee must be constituted ab initio . . . prior to substantive economic negotiations.” The Court denied the motion to dismiss because it found that the complaint adequately pleaded the existence of substantive economic negotiations before the special committee was empowered.
Delaware Court Of Chancery Denies Motion To Dismiss Claims Regarding Squeeze-Out Merger Because Special Committee Members Were Allegedly “Interested”
On February 26, 2020, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought by former shareholders of AmTrust, Inc., challenging the take-private buyout of the company by its controlling stockholders and a private equity firm. In re AmTrust Financial Services, Inc. Stockholder Litigation
, C.A. No. 2018-0396-AGB (Del. Ch. Feb. 26, 2020). In an effort to comply with the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp
., 88 A.3d 635 (Del. 2014) (“MFW
”)—the buyout group conditioned its offer on approval by an independent special committee and a fully informed majority of the company’s minority stockholders. Plaintiffs challenged the independence of three of four members of the special committee because the buyout allegedly was expected to extinguish their potential liability in a pre-existing derivative action. The Court held that the MFW
requirement of “independent” special committee approval “was intended to ensure not only that members of a special committee must be independent
in the sense of not being beholden to a controlling stockholder, but also that the committee members must have no disabling personal interest
in the transaction at issue.” Therefore, the Court found the transaction subject to entire fairness rather than business judgment review and denied the motion to dismiss as to the controlling stockholders and their affiliated directors.
Delaware Court Of Chancery Dismisses Transaction-Related Breach Of Fiduciary Duty Claims After Board Terminates Merger In Favor Of An Alternative Acquisition
On December 30, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by former stockholders of Essendant Inc. after it was acquired in a tender offer and cash-out merger by a private equity firm. In re Essendant Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019). The claims focused on Essendant’s decision to terminate a merger agreement providing for a stock-for-stock merger with Genuine Parts Co. (“GPC”) in favor of an all-cash deal offered by the private equity firm. Plaintiffs’ central allegation was that Essendant’s directors breached their fiduciary duties by failing to obtain the maximum value reasonably available. Highlighting that Essendant’s charter contained an exculpatory provision, as authorized under 8 Del. C. § 102(b)(7), the Court explained that the claims against them could only be maintained if the complaint adequately pleaded a breach of the duty of loyalty. The Court held that plaintiffs failed to plead facts sufficient to show that Essendant’s board was dominated and controlled by the acquiror, or that a majority of the directors had acted in self-interest or bad faith.
Delaware Court Of Chancery Orders Acquiror To Consummate Merger Finding That Misrepresentations Did Not Amount To A Material Adverse Effect
On December 18, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ruled that defendant Boston Scientific Corporation was not entitled to terminate its merger agreement with plaintiff Channel Medsystems, Inc. Channel Medsystems, Inc. v. Bos. Sci. Corp., C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019). After the merger agreement was signed, plaintiff—a pre-approval stage medical device company with one product—discovered that its vice president of quality had falsified various documents as part of a multiyear scheme in which he stole $2.6 million from the company. According to the Court, upon discovery, plaintiff was “transparent” with the FDA and with defendant regarding the fraud finding and “acted with dispatch to address it.” Defendant nevertheless notified plaintiff that it was terminating the merger based on provisions in the agreement that permitted termination for misrepresentations that would be expected to result in a “Material Adverse Effect.” Following trial, the Court found that—notwithstanding plaintiff’s breaches of certain representations, including with respect to the accuracy of its FDA submissions—there was no reasonable expectation of a Material Adverse Effect. The Court emphasized that plaintiff did obtain FDA approval for its medical device, which demonstrated that it was “safe and effective” and undercut defendant’s claim that defendant would need to “remediate and retest” the device at great cost before marketing. The Court thus granted specific performance and directed defendant to close the merger.
District Of Maryland Dismisses Post-Merger Securities Class Action, Finding Omission Of Public Information Relating To Financial Advisor’s Analysis Did Not Render Proxy Materially Misleading
On December 4, 2019, Judge Ellen L. Hollander of the United States District Court for the District of Maryland dismissed with prejudice a stockholder class action suit against Gramercy Property Trust (“Gramercy” or the “Company”), a real estate investment trust (“REIT”), and its financial advisor for failure to state a claim under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Hurtado v. Gramercy Property Trust, No. ELH-18-2711 (D. Md. Dec. 4, 2019). Following Gramercy’s August 2018 sale to an affiliate of the Blackstone Group L.P. (“Blackstone”), plaintiff filed suit against the financial advisor (which was represented by Shearman & Sterling), Gramercy, and certain of its officers and directors, alleging that defendants materially misled Gramercy’s stockholders by issuing a proxy statement that omitted information plaintiff claimed was relevant to Gramercy’s market value at the time of the merger.
Delaware Court Of Chancery Rejects Demand To Inspect Books And Records Under Section 220 To Aid In Proxy Contest
On November 14, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery rejected a demand by stockholders of Occidental Petroleum Corporation under Section 220, 8 Del. C. § 220, for documents and information relating to the corporation’s acquisition of Anadarko Petroleum and related transactions. High River Ltd. P’ship, Icahn Partners Master Fund LP, and Icahn Partners LP v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019). According to the Court, plaintiffs considered the transactions “bad deals” and acknowledged that their primary purpose in seeking the documents was to aid them in their proxy contest to replace certain directors. In a post-trial decision in favor of the corporation, the Court explained that “an imminent proxy contest is not enough to earn access” to broad sets of documents relating to “substantive business decisions.”
Delaware Court Of Chancery Finds Certain Safe Harbor Protections Inapplicable To Approval Of Merger With General Partner’s Affiliate
On October 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted partial summary judgment to a common unitholder of Regency Energy Partners LP (“Regency”) challenging a merger with an affiliate of Regency’s general partner. Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Oct. 29, 2019). Plaintiff alleged that defendants (Regency’s general partner and its affiliates) breached the limited partnership agreement by approving the merger even though they “did not believe that the [m]erger was in the best interests of Regency.” Defendants argued that their approval was protected under three “safe harbors” in the agreement: (i) reasonable reliance upon the opinion of an investment banker; (ii) “special approval” by an independent conflicts committee; and (iii) a majority vote of the common unitholders unaffiliated with the general partner. Finding a genuine issue of fact as to whether the general partner’s board actually relied on the opinion of the investment banker, the Court denied defendants’ motion for summary judgment. The Court, however, determined plaintiff demonstrated that one of the members of the conflicts committee was not independent. Accordingly, the Court found the “special approval” safe harbor unavailable and granted partial summary judgment to plaintiff on that point. Because the proxy provided to common unitholders stated that the conflicts committee was independent, the Court found it misleading and granted partial summary judgment to plaintiff on the unavailability of the unitholder vote safe harbor.
Second Circuit Affirms Denial Of Certain Claims For Investment Banking Fees
On October 11, 2019, the United States Court of Appeals for the Second Circuit affirmed a decision by District Judge Jesse Furman denying in part breach of contract claims for advisory fees brought by investment bank Stone Key LLC and its affiliate against its former client, Monster Worldwide, Inc. Stone Key Partners LLC v. Monster Worldwide Inc.
, No. 18-2804 (2d Cir. October 11, 2019). As discussed in our prior post
, the trial court had denied claims for fees related to a transaction that it found post-dated termination of the advisor’s contract and a claim for an earlier transaction that it found did not qualify as a “partial sale” for which the advisor was entitled to a fee. Significantly, as we discussed, the trial court also based its denial of the claim related to the earlier transaction on its finding that the partial sale fee provision in the engagement letter amounted to an unenforceable agreement to agree. By summary order, the Second Circuit affirmed largely for the reasons articulated by the lower court. However, because the Second Circuit agreed that the earlier transaction did not constitute a “partial sale” under the contract and affirmed the lower court’s denial of the claim on that basis, the Second Circuit “decline[d] to consider whether the compensation provision itself was enforceable.” Summary orders do not have binding precedential effect.
Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration. JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019). The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale. The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
Delaware Court Of Chancery Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC. In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019). Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction. The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal. Nevertheless, based on its “holistic” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
Delaware Court Of Chancery Denies Motion To Dismiss Merger Agreement Breach Claims Even Though Defendant Paid The Contractual Termination Fee
On September 9, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied Essendant Inc.’s motion to dismiss an action for breach of a merger agreement brought by Genuine Parts Company (“GPC”). Genuine Parts Co. v. Essendant, Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019). The claims arose after defendant terminated the two office supply companies’ merger agreement in favor of an acquisition of defendant by a private equity firm. The Court held that the complaint adequately pled that defendant had materially breached the merger agreement’s non-solicitation provision and the agreement did not unambiguously limit plaintiff’s possible recovery to the termination fee.
Delaware Court Of Chancery Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
On July 15, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed an aiding and abetting claim asserted against a private equity buyer and its principals in a stockholder class action involving breach of fiduciary duty claims against the former CEO of a technology company in connection with its take-private sale to the private equity buyer. In re Xura Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. July 12, 2019). As we discussed in a prior post
, Vice Chancellor Slights declined to dismiss a different stockholder’s breach of fiduciary duty claims against the former CEO based on his allegedly self-interested participation in the merger, but the Court dismissed aiding and abetting claims asserted against the buyer and its principals. In re Xura, Inc. Stockholder Litigation
, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).
Ten days after this opinion was issued, a different stockholder filed a “nearly identical” complaint—this time asserting class action claims—
raising “the same theories of aiding and abetting” that the Court had dismissed just days earlier. In a separate summary order, the Court denied the former CEO’s motion to dismiss this new complaint. In this decision, the Court dismissed the aiding and abetting claims for the same reason it did so in the prior suit—the complaint failed to include “well-pled allegations that [the buyer] ‘knowingly participated’ in the … alleged breaches of fiduciary duty.”
Delaware Court Of Chancery Holds Merger Agreement Preserved Sellers’ Ability To Assert Privilege Over Pre-Merger Attorney-Client Communications, Notwithstanding The Transfer Of Those Communications To The Buyer
On May 29, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery ruled that plaintiff Shareholder Representative Services LLC (“Shareholder Representative”) as the designated representative of Radixx Solutions International, Inc.’s (“Radixx”) selling stockholders, retained the ability to assert privilege over Radixx’s pre-merger attorney-client communications in a post-closing litigation against the acquiring company, RSI Holdco, LLC (“Holdco”). Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019). Specifically, the Court held that by its plain terms the merger agreement between the parties preserved the privilege, even though the communications were physically transferred to the buyer at closing. Therefore, the Court granted plaintiff’s request for a protective order and barred Holdco from using or relying on any of Radixx’s pre-merger attorney-client communications.
Delaware Supreme Court Affirms Judgment In Favor Of Defendant On The Basis Of Plaintiffs’ Failure To Prove Damages
On May 16, 2019, the Supreme Court of Delaware affirmed a judgment by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery in favor of Potomac Capital Partners II, LP on claims by shareholder plaintiffs that the activist investor aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. In re PLX Technology Inc. S’holders Litig.
, C.A. No. 571, 2018 (Del. May 16, 2019). As discussed in our post regarding that decision
, the Court of Chancery found in a post-trial opinion that defendant had aided and abetted breaches of fiduciary duty but also concluded that plaintiffs failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged. On appeal, plaintiffs contended that the Court of Chancery erred in deciding the damages issue by importing principles from appraisal jurisprudence to give deference to the deal price. In a summary order, the Delaware Supreme Court affirmed the Court of Chancery’s “decision that the plaintiff-appellants did not prove that they suffered damages.” The Court expressly declined to reach defendant’s arguments on cross-appeal that it had not aided and abetted any breaches of fiduciary duty because its affirmance on the damages issue “suffices to affirm the judgment.”
Delaware Court Of Chancery Holds Merger Termination Valid After Plaintiffs “Forgot” To Provide A Notice To Extend, But Reserves Decision On Reverse Termination Fee
On March 14, 2019, after a two-day trial, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery rejected requests by plaintiff Vintage Capital Management, LLC and its affiliates for a declaration that defendant Rent-A-Center, Inc.’s termination of the parties’ merger was ineffective and an order that the parties must proceed with the deal. Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019). Pursuant to the merger agreement, both parties had a right to provide a notice of extension by the contractual “End Date.” If neither party elected to extend, then either could terminate the agreement thereafter. Plaintiffs argued that both parties had been working toward closing the deal and had expressly recognized that the closing could not occur until after the End Date. On this basis plaintiffs contended that the contractual notice of extension had been effectively provided or waived. But the Court held that defendant’s termination of the merger agreement after plaintiffs apparently “forgot” to provide a notice of extension by the End Date was valid. However, the Court reserved judgment on defendant’s counterclaim for a reverse termination fee pending supplemental briefing, noting that it was “dubious whether the parties meant for a reverse breakup fee to apply in this situation.”
Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Contract Claim For Failure To Use “Commercially Reasonable Efforts” To Obtain Regulatory Approval For Pharmaceuticals
On December 28, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to dismiss a breach of contract claim brought by former stockholders of Ception Therapeutics, Inc. (“Ception”) against pharmaceutical company Cephalon, Inc. (“Cephalon”), which acquired Ception, alleging violations of an earn-out provision in their merger agreement. Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018). Ception claimed that Cephalon failed to use “commercially reasonable efforts,” as defined in the merger agreement, to obtain FDA approval for an antibody as treatment for a specific medical condition. The Court found that because the agreement defined the standard for “commercially reasonable efforts” objectively, with reference to the effort that would have been expended by other companies similarly situated, the question of what constituted “commercially reasonable efforts” could not be decided on the pleadings. The Court also dismissed an implied covenant claim against Cephalon and tortious interference claims against Teva Pharmaceutical Industries Ltd. and its affiliates (together, “Teva”), which acquired Cephalon after the Cephalon-Ception merger.
Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Delaware Supreme Court Affirms Landmark Decision That Found MAE Justified Termination Of Deal
On December 7, 2018, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s landmark ruling that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG
, C.A. No. 2018–0300–JTL (Del. Dec. 7, 2018). As discussed in our post
on the Court of Chancery’s decision, Akorn sued for specific performance after Fresenius walked away from the deal citing the discovery of various regulatory compliance problems, which Fresenius asserted amounted to a material adverse effect (“MAE”). The Court of Chancery concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred and termination of the deal was justified. Concluding that the factual record adequately supported the determination that Akorn’s breach of its regulatory representations and warranties gave rise to an MAE and that Akorn had suffered a general MAE, the Delaware Supreme Court affirmed the dismissal of Akorn’s claims.
Delaware Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
On November 20, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss a putative class action asserting claims for breach of fiduciary duty brought by former stockholders of Tangoe, Inc. (the “Company”) against former members of its board of directors in connection with the take-private acquisition of the Company by a private equity buyer group in June 2017. In Re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del Ch. Nov. 20, 2018). Plaintiffs alleged that defendants recommended an ill-advised and self-interested sale while a restatement of audited financials was pending and following the NASDAQ delisting of the Company. Defendants contended that they were entitled to business judgment rule deference under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015)—because a majority of stockholders tendered their shares—and that dismissal was also required because of an exculpatory charter provision pursuant to 8 Del. C. § 102(b)(7). But the Court concluded that the alleged failures to provide adequate company financial information and to disclose the status of the restatement efforts precluded dismissal under Corwin. The Court also found that plaintiffs adequately pled a non-exculpated claim for breach of the duty of loyalty, given the timing and structure of certain director compensation adjustments, which allegedly incentivized a change in control and supported an inference that defendants acted out of material self-interest.
Delaware Court Of Chancery Holds Alleged Breaches Of Representations Do Not Excuse Buyers’ Noncompliance With Post-Closing Obligations Where Buyers Seek To Enforce Claims For Indemnification
On October 29, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery entered final judgment on counterclaims seeking to enforce covenants in a stock purchase agreement requiring the buyers to remit certain tax refunds and insurance proceeds. Post Holdings, Inc. and Michael Foods of Delaware, Inc. v. NPE Seller Rep LLC, C.A. No. 2017-0772 AGB (Del. Ch. Oct. 29, 2018). National Pasteurized Eggs, Inc. (“NPE”) was sold pursuant to a stock purchase agreement. Thereafter, the buyers initiated an action asserting claims for fraud and breaches of representations and warranties, seeking indemnification under the agreement. The sellers filed counterclaims to enforce covenants in the agreement requiring the buyers to remit certain tax refunds and insurance proceeds. The buyers argued that their obligation to remit such proceeds “should be excused” because of the sellers’ alleged prior material breach. Granting judgment on the pleadings to the buyers, the Court held that “buyers cannot continue to accept the benefits of the contract—as they seek to do in this action through their claim for indemnification—while disclaiming their contractual obligation to remit the tax refunds and insurance proceeds to the sellers promptly after they were received.”
Finding Insufficient Proof Of Damages, Delaware Court Of Chancery Enters Judgment In Favor Of Defendant Despite Finding Fiduciary Duty Breaches
On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages. In re PLX Technology Inc. S’holders Litig.
, C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company. As discussed in our prior post, see
Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment
, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-
, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable. Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
Delaware Court Of Chancery Rules For The First Time That MAE Justifies Termination Of Deal
In a first-of-its-kind ruling, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled post-trial that Fresenius SE & Co. KGaA (“Fresenius”) properly terminated its $4.3 billion agreement to acquire Akorn, Inc. (“Akorn”). Akorn, Inc. v. Fresenius Kabi AG, Quercus Acquisition, Inc., and Fresenius SE & Co. KGaA, C.A. No. 2018–0300–JTL (Del. Ch. Oct. 1, 2018). Fresenius walked away from the deal after discovering various data integrity and regulatory compliance problems, asserting that the issues were so serious that they amounted to a material adverse effect (“MAE”). Akorn sued for specific performance, alleging that Fresenius was merely suffering from buyer’s remorse. Vice Chancellor Laster concluded that Akorn violated not only multiple representations and covenants in the merger agreement but also the general MAE provision, ruling that an MAE had occurred.
Finding That The Implied Covenant Of Good Faith And Fair Dealing Could Not Import Revlon-Type Duties, Delaware Supreme Court Affirms Dismissal Of Breach Claim
On September 20, 2018, the Delaware Supreme Court affirmed the dismissal of claims for breach of the implied covenant of good faith and fair dealing brought against the controlling unitholder and its affiliates on the board of a company that provides services to children with disabilities in connection with the sale of that company. Miller v. HCP Trumpet Investments, LLC, No. 107, 2018 (Del. Sept. 20, 2018). Pursuant to a waterfall set forth in the company’s operating agreement (the “OA”), the controlling investor was entitled to nearly all of the first $30 million in proceeds in the event of a sale. The OA, which included an explicit waiver of fiduciary duties, provided that the board could approve a sale of the company to an independent third party and “determine in its sole discretion the manner in which [such sale] shall occur, whether as a sale of assets, merger, transfer of [m]embership [i]nterests or otherwise.” After the company was sold for $43 million, minority members sued for breach of the implied covenant of good faith and fair dealing, arguing that it imposed an obligation to conduct an “open-market” sale process to ensure maximum value for all members. Although the Delaware Supreme Court disagreed with the Delaware Court of Chancery’s holding that the implied covenant did not apply to the sale, the Court affirmed the dismissal on the basis that the implied covenant did not imply Revlon-type sale requirements.
Delaware Court Of Chancery Denies Motion To Dismiss LPA Breach Claims, Including Aiding And Abetting Claim Against Financial Advisor
On August 29, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied defendants’ motions to dismiss an amended complaint in a long-running lawsuit arising from a sale of an interest in a pipeline by a general partner to a master limited partnership in which it held a controlling interest. Mesirov v. Enbridge Energy Co. Inc.
, C.A. No. 11314 (Del. Ch. Aug. 29, 2018). Plaintiff, a common unitholder of a Delaware master limited partnership (the “MLP”), brought claims for breach of the MLP’s Limited Partnership Agreement (“LPA”) against the general partner (the “GP”), its parent, and other affiliates. Plaintiff alleged that the GP acted in bad faith by purportedly selling the interest for $1 billion even though it had previously acquired the same interest from the MLP five years earlier for $800 million and earnings metrics had declined over the period by 20%. As discussed in our previous post
, Vice Chancellor Slights originally dismissed this suit in April 2016, but the Delaware Supreme Court reversed and remanded in March 2017, holding that bad faith was sufficiently pleaded. Here, Vice Chancellor Slights denied the GP’s motion to dismiss claims for breach of the LPA, finding them to be duplicative of the claims in the motion rejected by the Delaware Supreme Court in 2017. Vice Chancellor Slights also declined to dismiss new claims for aiding and abetting against the GP’s financial advisor, which had delivered a fairness opinion regarding the transaction.
Finding Merger Agreement Provisions Regarding Milestone Payments Ambiguous, Delaware Court Of Chancery Denies Dismissal Of Post-Merger Breach Claims
On August 10, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of contract claims stemming from a merger agreement pursuant to which defendant, Stora Enso AB, acquired non-party, Virdia, Inc. Fortis Advisors LLC v. Stora Enso Ab, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018). Plaintiff, Fortis Advisors LLC, as shareholder representative of Virdia’s pre-merger equity holders, asserted that Stora Enso breached the merger agreement in connection with its failure to achieve certain post-closing milestones obligating it to make certain contingent milestone payments. Finding competing interpretations of the merger agreement both reasonable, the Court declined to dismiss the breach claims.
Southern District Of New York Denies Claims For Investment Banking Fees, Holding That The Engagement Terminated And The “Agreement To Agree” Was Unenforceable
On August 10, 2018, Judge Jesse Furman of the United States District Court for the Southern District of New York denied claims for advisory fees brought by investment bank Stone Key Partners LLC (together with Stone Key Securities LLC, “Stone Key”) against its former client, Monster Worldwide, Inc. (“Monster”). Stone Key Partners LLC v. Monster Worldwide, Inc., Case No. 1:17-cv-3851-JMF (S.D.N.Y. Aug. 10, 2018). Monster engaged Stone Key in April 2012 to assist in a “review of strategic alternatives,” including a possible sale, and agreed to compensate Stone Key if it entered into certain transactions within 12 months of any termination of the engagement; Monster engaged another financial institution as a co-advisor. The engagement letter with Stone Key did not clearly require written notice of termination and provided that Stone Key would be paid 55% of a fee that “shall be mutually acceptable . . . and consistent with compensation agreements customarily agreed to by” investment banks for similar transactions in connection with any “partial sale” transaction within the tail period. The Court found that the engagement ended in August 2013, when it was clear (in the eyes of the Court) that the sale exploration process was over, and thus denied claims for transactions completed in 2015 and 2016. The Court also rejected as unenforceable the partial sale fee provision, finding it to be an unenforceable agreement to agree.