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  • Delaware Court Of Chancery Dismisses Caremark Claims Against Directors After Company Publicly Disclosed Misconduct
     
    11/05/2019

    On October 31, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder derivative suit against the directors of LendingClub Corporation for failure to plead demand futility.  In re LendingClub Derivative Litigation, C.A. No. 12984-VCM (Del. Ch. Oct. 31, 2019).  Plaintiffs asserted breach of fiduciary duty claims against the directors after the company disclosed that it had self-reported certain alleged misconduct by the CEO and others to the SEC, as well as the problems that prompted the company’s internal investigation, the results of that investigation, and the company’s remediation efforts.  Plaintiffs alleged that the board did not adequately implement a system of controls or monitor company operations and “thus disabled itself from being informed of problems requiring its attention.”  Determining that the complaint did not allege facts demonstrating bad faith—as is necessary to prevail on a Caremark claim for violation of oversight duties—and, therefore, that a majority of the directors did not face a substantial risk of liability, the Court concluded that pre-suit demand was not excused.
     
  • Delaware Court Of Chancery Applies Entire Fairness Standard To Breach Of Fiduciary Duty Claim Arising From Asset Sale That Benefited Senior Preferred Unitholder
     
    10/22/2019

    On October 11, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed all but one claim arising out of an asset sale by Pro Performance Sports, LLC (“Pro Performance”) to private equity firm Implus Footcare LLC (“Implus”) in which the senior unitholder, venture capital fund Steelpoint Capital Partners, LP (“Steelpoint”), received all of the sale consideration.  JJS Ltd. et al., v. Steelpoint CP Holdings LLC et al., C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019).  The common unitholders challenged the sale, asserting that the LLC managers breached their fiduciary duties by structuring and approving the transaction and violated the terms of the LLC Agreement because the common unitholders were not permitted to vote as a separate class on approval of the sale.  The Court dismissed the claims based on the LLC Agreement, but sustained the fiduciary duty claim.
     
  • Delaware Court Of Chancery Finds Allegations Of Personal And Professional Relationships Sufficient To Excuse Pre-Suit Demand
     
    10/08/2019

    On September 30, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied defendants’ motion to dismiss a stockholder derivative action for breach of fiduciary duties in connection with BGC Partners, Inc.’s (“BGC”) acquisition of Berkeley Point Financial LLC.  In re BGC Partners, Inc. Deriv. Litig., C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019).  Plaintiffs alleged that BGC’s CEO and Chairman was a controlling stockholder of both companies who purportedly disproportionately benefited from the transaction.  The Court rejected plaintiffs’ argument that demand was “automatically” excused because the transaction was subject to entire fairness review as a result of the allegations regarding a purported controlling stockholder on both sides of the deal.  Nevertheless, based on its “holistic[]” review of the complaint’s allegations of the CEO’s alleged unilateral ability to remove directors, as well as his alleged relationships with a majority of the other directors, the Court held that the complaint adequately pleaded demand futility because the allegations created a reasonable doubt as to the independence of those directors.
  • Delaware Court Of Chancery Grants Shareholder’s Post-Merger Books And Records Demand, Finding “Credible Basis” To Investigate Merger Process
     
    09/04/2019

    On August 28, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery granted a shareholder’s demand under 8 Del. C. § 220 to inspect the books and records of defendant GGP Inc. for the purpose of investigating potential mismanagement.  Kosinski v. GGP Inc., C.A. No. 2018-0540 (Del. Ch. Aug. 28, 2019).  Plaintiff’s demand stemmed from a merger in which defendant, a real estate company, was acquired by Brookfield Property Partners L.P., another real estate company that owned approximately one third of defendant’s common stock at the time.  Plaintiff contended that the buyer had been defendant’s de facto controlling shareholder and the procedural protections necessary for deferential review of a merger process involving a controller—under Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”)—had not been implemented.  Following trial, the Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, “it is possible that the transaction was not at arm’s length,” and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty.  But the Court noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.”
  • Delaware Court Of Chancery Dismisses Caremark Claim, Finding Consumer Class Action Settlement Was Not A “Red Flag” For Consumer Protection Law Violations
     
    08/06/2019

    On July 29, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a stockholder derivative action asserting breaches of fiduciary duty claims against the directors of J.C. Penney Company, Inc. for failure to make a pre-suit demand on the board.  Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019).  After the Los Angeles City Attorney initiated litigation against the company asserting violations of California’s consumer protection laws, plaintiff filed this derivative action alleging that the company’s directors consciously disregarded their responsibility to oversee the company’s compliance with laws governing price-comparison advertising.  Repeating past statements of the Court about the difficulty of proving director liability for a failure to monitor corporate affairs—known as a Caremark claim—Chancellor Bouchard determined that the complaint failed to plead facts demonstrating that the directors would face a substantial likelihood of personal liability.  In particular, the Court found that a settlement of a consumer class action suit without any admission of liability was not a “red flag” with respect to any ongoing violations of law.  Therefore, the Court concluded that pre-suit demand on the board was not excused. 
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Merger For Failure To Rebut Business Judgment Rule
     
    08/06/2019

    On July 25, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery dismissed a stockholder suit challenging the $18 billion merger of equals between Towers Watson & Co. and Willis Group Holdings plc, finding that plaintiffs failed to plead facts sufficient to rebut the presumption of the business judgment rule.  In Re Towers Watson & Co. Stockholders Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019).  Asserting claims for breaches of fiduciary duty, plaintiffs, who had been Towers Watson stockholders, argued that the company’s CEO did not properly disclose to the board a compensation proposal he had received from Willis’s second largest stockholder while the CEO was negotiating the merger.  But the Court found that the compensation proposal was ultimately immaterial and that the otherwise independent board members were well aware that the merger would likely lead to increased compensation for the CEO.  Noting that because the transaction was primarily a stock-for-stock merger, the Court explained that there was no dispute that the “business judgment rule presumptively applies,” and concluded that plaintiffs had failed to rebut that presumption. 
  • Delaware Court Of Chancery Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
     
    07/23/2019

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


    On June 18, 2019, in a decision authored by Chief Justice Leo E. Strine Jr., the Delaware Supreme Court en banc reversed the dismissal of a stockholder derivative suit against the directors and officers of Blue Bell Creameries USA, Inc. (the “Company”).  Marchand v. Barnhill, No. 533, 2018, (Del. June 18, 2019).  After a listeria outbreak at the ice cream manufacturer, the Company purportedly faced a liquidity crisis and accepted a dilutive private equity investment.  Plaintiff alleged that the CEO and vice president of operations breached their fiduciary duties of care and loyalty by disregarding contamination risks and that the directors breached their duty of loyalty under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).  As to the claims against the executives, the Court held that the complaint adequately pleaded demand futility because it alleged facts regarding the personal relationship of an additional director to the CEO sufficient to raise a reasonable doubt as to whether the director could impartially consider a demand.  Reversing the dismissal of the Caremark claim, the Court found that “the complaint supports an inference that no system of board-level compliance monitoring and reporting existed at [the company].”
     

  • Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claims Related To Repricing Of Stock Options
     
    06/18/2019

    On June 13, 2019, Vice Chancellor Kathaleen S. McCormick of the Delaware Court of Chancery largely denied a motion to dismiss a derivative action for breach of fiduciary duty and unjust enrichment against directors and officers of a biosciences company (the “Company”) in connection with the alleged repricing of stock options shortly before the company announced the issuance of a “key” patent to its subsidiary.  Howland  v. Kumar, C.A. No. 2018-0804-KSJM (Del. Ch. June 13, 2019).  Plaintiff, a stockholder in the Company, alleged that the directors and officers were aware of the patent issuance yet delayed the public announcement until after the board’s compensation committee approved the reduction in the strike price of more than 2 million stock options primarily held by defendants.  The Court held that pre-suit demand on the board was excused, because a majority of the board was “interested by virtue of having received the repriced options.”  Applying an “entire fairness” standard of review, the Court found that it was reasonably conceivable from the pleadings that the process and price were unfair and, therefore, denied the motion to dismiss.  
  • Delaware Court Of Chancery Grants Books And Records Request Arising From Caremark Claims Related To Facebook User Privacy
     
    06/11/2019

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

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

    On April 5, 2019, the Delaware Supreme Court reversed in part and affirmed in part a decision of the Delaware Court of Chancery that had dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”).  Olenik v. Lodzinski et al., No. 392, 2018 (Del. April 5, 2019).  Plaintiffs claimed that Earthstone’s directors, officers, and Earthstone’s alleged controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders.  As discussed in our prior post on the case, the Court of Chancery dismissed the case after concluding that the transaction was properly structured under Kahn v. M&F Worldwide, 88 A.2d 635 (Del. 2014) (“MFW”), and the business judgment rule applied.  On appeal, the Delaware Supreme Court reversed, finding that Earthstone initiated economic negotiations before the requisite MFW protections were put in place.  Accordingly, the Court reinstated the breach of fiduciary claim as to the terms of the transaction; the Court sustained dismissal of the disclosure-based claim.
  • Delaware Court Of Chancery Applies Corwin To Dismiss Breach Of Fiduciary Duty Claims, Finding Allegations Of A Controlling Stockholder Conflict Inadequately Pleaded
     
    04/09/2019
    On March 20, 2019, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed class action claims asserted by former shareholders of NCI, Inc. against its former directors for breach of fiduciary duty in connection with the company’s acquisition by affiliates of H.I.G. Capital, LLC in a tender offer followed by a merger.  
    English v. Narang, C.A. No. 2018-0221-AGB (Del. Ch. Mar. 20, 2019).  Plaintiffs alleged that the company’s founder, who held approximately 34% of the shares and controlled about 83.5% of the voting power, orchestrated a sale of the company at a discounted price to address a personal need for liquidity prompted by his retirement as the company’s CEO at age 73.  But the Court found that the complaint “contained no concrete facts from which it reasonably can be inferred that [the founder] had an exigent or immediate need for liquidity.”  Therefore, the Court applied Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and dismissed the claims because a majority of NCI’s disinterested stockholders tendered their shares in an uncoerced and fully-informed tender offer.
  • Delaware Court Of Chancery Dismisses Derivative Suit Alleging Tech Company Exposed Itself To Unnecessary Litigation Risk With Acquisition
     
    04/09/2019

    On April 1, 2019, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed for lack of demand a stockholder derivative suit against directors of Uber Technologies, Inc. (“Uber”) that asserted breach of fiduciary duty claims in connection with Uber’s acquisition of self-driving car startup Ottomotto, LLC (“Otto”).  McElrath v. Kalanick, et al., C.A. No. 2017-0888-SG (Del. Ch. April 1, 2019).  After Uber acquired Otto, which was founded by a former Google employee, Google sued for infringement and Uber paid $245 million to resolve the claims.  Plaintiff in McElrath claimed that the Uber board violated its duties by failing to adequately investigate the Otto transaction.
  • Delaware Court Of Chancery Enjoins Stockholder Vote For Inadequate Disclosures
     
    03/26/2019

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

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

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

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

    On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm.  In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018).  Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction.  As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company.  Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015).  The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
  • Delaware Court Of Chancery Dismisses Demand-Refused Derivative Litigation, Notwithstanding Allegations Of Board Misrepresentations In Advance Of Demand
     
    12/11/2018

    On November 14, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery granted a motion to dismiss a stockholder derivative suit asserting breach of fiduciary duty claims against certain directors of Richardson Electronics (the “Company”).  Busch v. Richardson Electronics, Ltd., C.A. No. 2017-0868-AGB (Del. Ch. Nov. 14, 2018).  The claims were based on allegations that the board improperly refused plaintiff’s demand to take action to unwind certain allegedly improper related-party transactions.  Plaintiff also asserted he was misled by the board about its involvement in the underlying transactions before he issued the litigation demand.  Therefore, according to plaintiff, the motion to dismiss should have been evaluated under the test applicable when demand is excused, as articulated in Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), which does not entail the same broad deference to a board’s decision whether to bring claims as the standard typically applicable in demand-refused cases under Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990).  The Court rejected the argument that the Zapata standard applied but concluded that under either test plaintiff’s claims were subject to dismissal. 
  • Delaware Court Of Chancery Declines To Dismiss Fiduciary Duty Breach Claims In Connection With Take-Private Acquisition Of Recently Delisted Company
     
    11/27/2018

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

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

    On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery found in a post-trial opinion that Potomac Capital Partners II, LP (“Potomac”), an activist investor, aided and abetted breaches of fiduciary duty by the board of PLX Technology Inc. (“PLX”) in connection with its acquisition by Avago Technologies Wireless (U.S.A.) Manufacturing Inc. (“Avago”), but entered judgment in favor of Potomac because plaintiffs failed to show causally related damages.  In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018).  After the deal closed, plaintiffs alleged that the sale process was unreasonably influenced by Potomac’s managing member, who became a director of PLX and chaired the special committee charged with exploring strategic alternatives for the company.  As discussed in our prior post, see Shearman & Sterling LLP, Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment, Need-to-Know Litigation Weekly, Feb. 21, 2018, https://www.lit-ma.shearman.com/declining-to-find-enhanced-scrutiny-inapplicable-, the Court previously denied a summary judgment motion filed by Potomac, finding that the PLX board’s actions in connection with the sale were subject to enhanced scrutiny and disputes of material fact existed as to whether the sale process was reasonable.  Following trial, the Court concluded that although Potomac aided and abetted breaches of fiduciary duty by PLX’s board, plaintiffs had failed to prove damages because the deal price likely exceeded the standalone value and no higher bidders had emerged.
  • Delaware Supreme Court Holds That Business Judgment Rule Applies To Controller Transactions As Long As MFW Conditions Are In Place Prior To Economic Negotiation
     
    10/16/2018

    On October 9, 2018, the Delaware Supreme Court affirmed a decision of the Delaware Court of Chancery dismissing a lawsuit brought by stockholders of Synutra International Inc. (the “Company”) challenging a controlling stockholder’s takeover of the Company.  Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).  Plaintiffs asserted breach of fiduciary duty claims and argued that the transaction did not meet the requirements of Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) for business judgment review because the controller group’s initial proposal did not contain the MFW conditions—recommendation by a special committee and approval by a majority of the disinterested stockholders—although they were added later.  As discussed in our prior post on this case, the Court of Chancery applied business judgment review (rather than entire fairness review) and dismissed the complaint because the controller announced the conditions before any negotiations took place.  Affirming, the Delaware Supreme Court confirmed that MFW does not require that the conditions be included in the controller’s first offer, but instead that the controller condition its offer on the two key procedural protections “early in the process—i.e., before any substantive economic negotiations begin.”  The Court also clarified that the sufficiency of the price is not subject to evaluation under the business judgment standard and affirmed the Court of Chancery’s finding that plaintiffs failed to allege that the Company’s special committee acted with gross negligence with respect to the negotiations.
  • Finding That The Implied Covenant Of Good Faith And Fair Dealing Could Not Import Revlon-Type Duties, Delaware Supreme Court Affirms Dismissal Of Breach Claim
     
    09/25/2018

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

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

    On August 17, 2018, Chancellor Andre G. Bouchard of the Delaware Court of Chancery denied all of plaintiffs’ claims challenging a series of transactions culminating in the acquisition of defendant Design Within Reach, Inc. (“DWR”) by Herman Miller, Inc. (“HM”) in July 2014.  Charles Almond as Trustee for the Almond Family 2001 Trust v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. Aug. 17, 2018).  The claims related in large part to the documentation of a reverse stock split by DWR in 2010 that had the unintended effect of diluting the number of shares of common stock into which preferred stock could be converted by a factor of 50.  As this went unnoticed until after the merger, the preferred stock was converted into common stock as if there had been no error.  Plaintiffs, who were pre-merger minority stockholders of DWR, asserted various claims that defendants, including DWR’s controlling stockholder, thus improperly benefited from a greater percentage of equity and merger consideration than that to which they were legally entitled.  HM ratified the correction of the conversion factor (pursuant to 8 Del. C. § 204) and asserted a counterclaim for judicial validation of the defective corporate acts (under 8 Del. C. § 205).  Finding all relevant factors weighed “overwhelmingly in favor of judicial validation” the Court granted defendants’ request to validate the defective corporate acts and rejected plaintiffs’ claims.  Separately, the Court rejected breach of fiduciary duty claims unrelated to the merger.
  • Delaware Court Of Chancery Applies MFW  To Stockholder Challenge To An All-Stock Transaction With Allegedly Controlling Stockholder
     
    07/31/2018

    On July 20, 2018, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a stockholder challenge to an all-stock business combination between Earthstone Energy, Inc. (“Earthstone”) and Bold Energy III LLC (“Bold”).  Olenik v. Lodzinski, et al., C.A. No. 2017-0414 (Del. Ch. July 20, 2018).  Plaintiffs claimed that Earthstone’s directors, officers, and an allegedly controlling stockholder, Oak Valley Resources, LLC (“Oak Valley”), breached their fiduciary duties by entering into an unfair transaction that benefited Oak Valley and EnCap Investments, L.P. (“EnCap”), a private equity firm with majority stakes in both Bold and Oak Valley, at the expense of Earthstone and its minority stockholders.  Plaintiffs argued that, because EnCap was a majority stockholder in Oak Valley, and thus also a beneficial controlling stockholder in Earthstone, as well as a majority stockholder in Bold, Oak Valley and EnCap stood on both sides of the transaction, making it unfair.  The Court dismissed plaintiffs’ claims, concluding that, because Earthstone structured the transaction in the manner prescribed by Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), the business judgment rule standard of review applied.
  • Finding Disclosures Inadequate To Merit Application Of Corwin, Delaware Supreme Court Reverses Court of Chancery Dismissal Of Post-Closing Breach Of Fiduciary Duty Claims
     
    07/17/2018

    On July 9, 2018, the Delaware Supreme Court reversed and remanded a decision by the Delaware Court of Chancery to dismiss stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (TFM) after its acquisition in a two-step take-private merger by affiliates of Apollo Global Management, LLC (“Apollo”).  Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018).  As discussed in our prior post on this case, the Court of Chancery dismissed claims that the sale process undertaken by TFM was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor.  Specifically, the Court of Chancery concluded that the facts regarding the involvement of TFM’s founder with Apollo were adequately disclosed in connection with the tender offer—in which 68.2% of shares were tendered—and the deal was therefore subject to the deferential business judgment rule under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  Finding that the complaint adequately alleged several “materially incomplete and misleading” disclosures, the Delaware Supreme Court reversed.
  • Delaware Court Of Chancery Finds Allegations Of A Controlling Stockholder Group Sufficient To Preclude Dismissal Of Merger-Related Fiduciary Duty Breach Claims
    06/26/2018
    On June 18, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss claims of breach of fiduciary duty brought by a putative class of minority stockholders of Hansen Medical Inc. (“Hansen”) against an alleged group of controlling stockholders, in connection with the squeeze-out merger of Hansen into Auris Surgical Robotics, Inc. (“Auris”). In re Hansen Medical, Inc. Stockholder Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018).
  • Delaware Supreme Court Affirms Court Of Chancery, Finding That General Partner Complied With Obligations Under Limited Partnership Agreement
    06/19/2018
    On June 8, 2018, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s dismissal of a putative class action challenging the merger of El Paso Pipeline Partners, L.P. (the “MLP”) with a subsidiary of its general partner, El Paso Pipeline GP Company, L.L.C. (the “GP”), all of which were controlled by defendant Kinder Morgan, Inc.

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  • Delaware Supreme Court Affirms Court Of Chancery Appraisal Determination At Nearly 60% Discount To Deal Price
     
    05/01/2018

    On April 23, 2018, the Supreme Court of Delaware affirmed a decision by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery appraising the shares of Clearwire Corporation at $2.13 per share, notwithstanding that Clearwire was acquired for $5.00 per share.  ACP Master, Ltd., et al. v. Sprint Corporation, et al. & ACP Master, Ltd., et al. v. Clearwire Corporation, C.A. No. 8508-VCL, C.A. No. 9042-VCL (Del. Apr. 23, 2018).  As discussed in our post regarding that decision, stockholder petitioners had challenged the merger of Clearwire with Sprint Nextel Corporation, alleging that Sprint had been a controlling shareholder of Clearwire prior to the transaction and had breached its fiduciary duties during merger negotiations.  Petitioners also sought appraisal, asserting that the $5.00 deal price substantially undervalued their shares.  As we highlighted previously, the Court of Chancery found no breach of fiduciary duties even under an entire fairness standard and determined that fair value of the shares amounted to $2.13, even though that price reflected nearly a 60% discount to the deal price.  With regard to the breach claims, the Court of Chancery concluded that instances of unfair dealing in an early phase of the process were “render[ed] immaterial” in light of subsequent arm’s-length negotiations and “overwhelming evidence” that the final deal price was fair.   As to the appraisal finding, the Court of Chancery explained that the appraisal statute requires the exclusion of “any synergies present in the deal price” and was persuaded by the discounted cash flow analysis offered by defendants’ expert.  The Delaware Supreme Court, sitting en banc, affirmed without issuing an opinion.

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  • New York Supreme Court Dismisses Derivate Suit, Finding That Shareholder’s Letter Constituted A Demand And Business Judgment Rule Applied
     
    04/03/2018

    On March 23, 2018, Justice Charles E. Ramos of the Commercial Division of the New York Supreme Court dismissed with prejudice a purported derivative suit alleging that the board of Intercept Pharmaceuticals, Inc. (“Intercept”) breached their duty of loyalty and good faith and squandered corporate assets by approving, without a stockholder vote, a non-employee director compensation policy.  Solak v. Fundaro, No. 655205 (N.Y. Sup. Ct. Mar. 23, 2018).  Though plaintiff sent a letter to Intercept prior to filing suit, demanding that the company take “all action necessary” to remedy the waste allegedly caused by the directors’ compensation policy, plaintiff argued that the letter was not a demand within the meaning of Delaware Court of Chancery Rule 23.1, and that demand would have been futile because self-compensation decisions are inherently conflicted transactions.  The Court held that plaintiff’s letter fulfilled all the requirements of a demand under Delaware law and that the board’s investigation of and response to the demand was sound under the business judgment rule.

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  • Delaware Court Of Chancery Denies Corwin Motion To Dismiss, Finding Allegations Of Control Adequately Pleaded As To 22% Stockholder
     
    04/03/2018

    On March 28, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss several derivative and class action claims brought by stockholders of Tesla, Inc. (“Tesla”) asserting that its directors breached their fiduciary duties in connection with its acquisition of SolarCity.  In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VCS (Del. Ch. Mar. 28, 2018).  Plaintiffs claimed the acquisition was an effort to rescue a distressed SolarCity to the detriment of Tesla stockholders, allegedly at the direction of Elon Musk, Tesla’s Chairman and CEO, who held 22.1% of Tesla’s common stock and was also SolarCity’s Chairman and largest stockholder.  Defendants contended that the claims were subject to dismissal pursuant to Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), in light of the approval of the deal by a majority of Tesla’s disinterested stockholders.  Plaintiffs argued that Corwin was inapplicable because the acquisition allegedly involved a conflicted controlling stockholder.  Declining to dismiss the claims, the Court explained that, notwithstanding his minority stake, the allegations demonstrated “extraordinary influence” and the complaint adequately pleaded that Musk “exercised his influence as a controlling stockholder with respect to the [a]cquisition.” 

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  • Delaware Court Of Chancery Relies On Corwin To Dismiss Post-Closing Fiduciary Duty Claims After Finding Acquiror Was Not A Controlling Stockholder
     
    03/20/2018

    On March 9, 2018, Vice Chancellor Joseph R. Slights III, of the Delaware Court of Chancery, dismissed a stockholder class action complaint seeking damages for alleged breaches of fiduciary duty by directors of Rouse Properties Inc. (“Rouse”) and its 33.5% stockholder, Brookfield Asset Management, Inc. (“Brookfield”), arising out of Rouse’s merger with Brookfield in 2016. In Re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS (Del. Ch. Mar. 9, 2018). Plaintiffs, pre-merger stockholders of Rouse, alleged that breaches of fiduciary duty by a special committee of the Rouse board that negotiated the deal, and Brookfield, as an alleged controlling stockholder, led to a transaction that grossly undervalued Rouse. The Court found that the complaint did not come even “remotely close” to pleading that Brookfield exercised the “managerial clout and retributive power to infer actual control.” Concluding that Brookfield was not a controlling stockholder, the Court dismissed the breach of fiduciary duty claims against Brookfield and, in light of the approval of the deal by a majority of the disinterested stockholders, applied the business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), to dismiss the claims against the special committee directors as well.

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  • Delaware Supreme Court Affirms Delaware Court Of Chancery’s Dismissal Of Fiduciary Duty Breach Claims, Finding Non-Exculpated Claim Inadequately Pled 
     
    03/20/2018

    On March 15, 2018, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s dismissal of a putative stockholder class action asserting claims for breach of fiduciary duty and quasi-appraisal against the directors of Kreisler Manufacturing Corporation (“Kreisler”) in connection with Kreisler’s sale to Arlington Capital Partners (“Arlington”). Kahn v. Stern, No. 393, 2017 (Del. March 15, 2018). As discussed in our post regarding that decision, plaintiffs argued that merger consideration was improperly diverted into payments for two management directors. In a short order, the Delaware Supreme Court affirmed the dismissal on the basis that the pled facts did not support a rational inference that these payments were improperly diverted. Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017). However, the Supreme Court expressed its disagreement with the Court of Chancery’s opinion “to the extent” that it “suggests that it is an invariable requirement that a plaintiff plead facts suggesting that a majority of the board committed a non-exculpated breach of its fiduciary duties in cases where Revlon duties are applicable, but the transaction has closed and the plaintiff seeks post-closing damages.” The Court noted that Revlon duties remain applicable notwithstanding an exculpatory charter provision even though directors may only be held liable for a non-exculpated breach of those duties.

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  • Delaware Court Of Chancery Dismisses Derivative Breach Of Fiduciary Duty Claims In Connection With Publication Of Non-Final Drug Trial Results For Lack Of Demand Futility
     
    03/06/2018

    On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims against the directors of Orexigen Therapeutics Inc. (“Orexigen”) for alleged breaches of fiduciary duty in connection with the company’s clinical drug trials.  Orexigen Therapeutics Inc. v. Michael A. Narachi, et al., C.A. No. 12412-VCMR (De. Ch. Feb. 28, 2018).  Plaintiffs asserted that the directors violated the law because they failed to follow best practices with respect to clinical trials; consequently, plaintiffs argued that demand was futile because a majority of the board faced substantial risk of liability.  The Court dismissed these claims, finding that the Company’s actions were not “so egregious or irrational” as to violate the business judgment rule and, accordingly, demand futility had not been adequately pleaded.

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  • Reinstating A Post-Closing Merger Challenge, Delaware Supreme Court Holds Views Expressed By Directors In Connection With A Transaction Vote Are Not Per Se Immaterial 
     
    02/27/2018

    On February 20, 2018, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr., reversed the dismissal of a suit brought by former stockholders of Diamond Resorts International (“Diamond”) challenging the company’s two-step cash-out merger.  Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018).  As discussed in our prior post on this case, the Delaware Court of Chancery dismissed plaintiffs’ breach of fiduciary duty claims because the disinterested stockholders of Diamond, who were “fully informed,” overwhelmingly accepted the tender offer.  In reaching that decision, the Court of Chancery found it immaterial that the proxy did not disclose that Diamond’s chairman—who abstained from the board vote on the deal—had expressed disappointment with the price and indicated that “it was not the right time to sell.”  Reversing and remanding, the Delaware Supreme Court held that when a board discloses its reasons for recommending a transaction, “the contrary view of an individual board member may be material.”  In this case, the Delaware Supreme Court concluded, the chairman’s expressed views regarding the wisdom of the sale were material and the omission rendered the proxy misleadingly incomplete.

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  • Declining To Find Enhanced Scrutiny Inapplicable To Post-Closing Damages Actions, Delaware Court Of Chancery Denies Motion For Summary Judgment
     
    02/21/2018

    On February 6, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a summary judgment motion by defendant Potomac Capital Partners II, LP (“Potomac”) in an action by stockholders challenging the sale of PLX Technology, Inc. (“PLX”) to Avago Wireless, Inc.  In re PLX Technology Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. Feb. 6, 2018).  Plaintiffs alleged Potomac, which was PLX’s largest shareholder, aided and abetted members of the PLX board in committing breaches of fiduciary duty in connection with the sale.  In its concise order holding that the case would need to go to trial, the Court rejected Potomac’s contention that the business judgment rule, rather than the enhanced scrutiny test, was the operative standard by which to review the deal.  The Court further determined that—under the enhanced scrutiny standard—there existed disputes of material fact regarding the PLX board’s actions.

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  • New York Court Denies Approval Of Disclosure-Only Settlement, Finding Supplemental Disclosures “Useless”
     
    02/21/2018

    On February 8, 2018, Justice Shirley Werner Kornreich of the New York Supreme Court denied a motion for final approval of a disclosure-only settlement in a class action suit brought by shareholders of Martin Marietta Materials, Inc. (“MMM”) regarding its acquisition of Texas Industries, Inc. (“TXI”).  City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct., Feb. 8, 2018).  Plaintiff, which owned only ten shares in MMM, asserted breach of fiduciary duty claims and sought to enjoin the merger on the ground of inadequate disclosures in the proxy provided to shareholders.  The parties, however, reached a settlement, which required defendants to make certain “supplemental disclosures” and provided for the payment of $500,000 in attorneys’ fees to plaintiff’s counsel.  Justice Kornreich previously denied approval of the settlement, but that decision was reversed by the New York Supreme Court, Appellate Division and remanded for a fairness hearing.  City Trading Fund v. Nye, 144 A.D.3d 595, 21 (N.Y. App. Div. 2016).  Moreover, in the interim, the Appellate Division, in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017), adopted a more lenient approval standard for disclosure-only settlements than that followed recently by courts in Delaware and elsewhere.  Nevertheless, Justice Kornreich found the supplemental disclosures “utterly useless to the shareholders” and, therefore, declined to approve the settlement.

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  • Delaware Court Of Chancery Holds That Addition Of MFW Protections Following Initial Controller Proposal But Before Negotiations Meets MFW Conditions
     
    02/13/2018

    On February 2, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed a stockholder challenge to the buyout of Synutra International Inc. (“Synutra”) in a squeeze-out merger by a controlling stockholder group.  In re Synutra International Inc. Stockholder Litigation, C.A. No. 2017-0032 (Del. Ch. Feb. 2, 2018).  Plaintiffs asserted breach of fiduciary duty claims against the controller group and the special committee of the Synutra board.  They alleged that the transaction did not satisfy the ab initio requirement under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), because the controller group did not initially condition the proposed transaction on recommendation by a special committee and approval by a majority of the disinterested stockholders, features added weeks after the controller’s initial proposal letter and after the Synutra board had already met and formed a special committee.  Finding that “the controller announce[d] the conditions before any negotiations took place,” the Court held the ab initio requirement was satisfied and dismissed the complaint under MFW

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  • Delaware Supreme Court Affirms Dismissal Of Stockholder Derivative Claims On Issue Preclusion Grounds Based On A Demand-Futility Dismissal Of A Prior Derivative Suit, Holding That The Application Of Issue Preclusion Does Not Violate Federal Due Process 
     
    01/30/2018

    ​On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s  dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights.  In re Wal-Mart Stores Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Jan. 25, 2018).  In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.

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  • Delaware Court Of Chancery Declines To Compel Production Under The Garner Privilege Exception 
     
    01/17/2018

    On January 10, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to compel the production of attorney-client privileged documents under the Garner doctrine in the context of direct breach of fiduciary duty claims brought by former minority shareholders of R.L. Polk & Co. Inc. (“Polk”) against its controlling shareholders in connection with a self-tender.  Buttonwood Tree Value Partners, L.P., et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG (Jan. 10, 2018).  As discussed in our post regarding a prior decision, the Court denied a motion to dismiss the complaint, which alleges that the self-tender was a self-dealing transaction by the controlling shareholders “as part of an overall scheme to later sell the Company for three times the [s]elf-[t]ender valuation.”  In the subsequent course of discovery, plaintiffs moved to compel the production of documents relating to legal advice Polk sought in connection with the sale of the company, the self-tender, and various restructuring options that were considered at the time.  The Court declined to compel the production because plaintiffs failed to establish that “the information contained in the privileged documents is both necessary and unavailable from other sources.” 

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  • Delaware Court Of Chancery Grants Books And Records Demand, Holding That Corwin Is Irrelevant To Section 220 Proceedings
     
    01/10/2018

    On December 29, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder’s demand to inspect books and records related to the acquisition of West Corporation (“West”)  by Apollo Global Management (“Apollo”), pursuant to 8 Del. C. § 220.  Lavin v. West Corp., C.A. No. 2017-0547-JRS (Del. Ch. Dec. 29, 2017).  The Court found that plaintiff established a valid primary purpose for seeking inspection of the materials:  to investigate whether West’s directors and officers breached their fiduciary duties under Revlon by approving the sale of West to Apollo when other bids indicated that a sale of West’s various business segments to different purchasers may have yielded greater value for West stockholders.  Plaintiff alleged that the Apollo transaction was preferred because West’s CEO, directors, and financial advisor would receive greater compensation for a whole-company sale than a segmented sale.  Importantly, the Court rejected West’s argument that Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015), precluded a § 220 demand because any possible breaches of fiduciary duties that plaintiff sought to investigate were cleansed by stockholder approval of the Apollo acquisition.  

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  • Delaware Court Of Chancery Upholds Shareholder’s Disclosure Claim In Connection With Tender Offer, But Indicates Relief, If Any, Will Likely Be Limited To Nominal Damages
     
    01/10/2018

    On December 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery declined to dismiss a direct breach of fiduciary duty claim brought by a shareholder plaintiff against directors and officers of casino company Twin River Worldwide Holdings, Inc. (“Twin River”) for allegedly misleading disclosures in an offer-to-purchase circular in connection with a tender offer.  Chatham Asset Mgmt. LLC, et al. v. Papanier, et al., C.A. No. 2017-0088-AGB (Del. Ch. Dec. 22, 2017).  Plaintiff, which sold a portion of its shares in the tender offer, alleged that the circular stated that defendants “may” sell shares “from time to time,” but the “true intent” of defendants was to increase the price of Twin River stock and sell their shares shortly after the tender offer closed (even though they ultimately did not).  Plaintiff, however, acknowledged that it participated in the tender offer only because of a regulatory requirement that capped its ownership position.  The Court found that the complaint stated a disclosure claim because “stating an outcome as a possibility” when in fact there was a “firm intention by defendants to sell their shares” is misleading.  But the Court noted that the “recourse appears to be limited” to nominal damages because plaintiff’s allegations “suggest that it likely will be unable to establish reliance and causation.”    

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  • Delaware Supreme Court Affirms Decision That Well-Pled Unocal Claim Does Not Automatically Excuse Pre-Suit Demand
     
    01/10/2018

    On December 18, 2017, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s dismissal of a shareholder derivative action asserting that the directors of The Williams Companies, Inc. (“Williams”) breached their fiduciary duties in connection with its entry into, and subsequent cancellation of, an agreement to acquire the remaining interest in its affiliate, Williams Partners L.P. (“WPZ”).  Ryan v. Armstrong, No. 230, 2017 (Del. Dec. 18, 2017).  As discussed in our post regarding that decision, plaintiff alleged that the directors sought to entrench themselves by approving the WPZ transaction while Williams was the subject of acquisition overtures from another company.  Ryan v. Armstrong, C.A. No. 12717-VCG (Del. Ch. May 15, 2017).  The Court of Chancery held that even a “well-pled” claim under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)—which applies enhanced scrutiny to certain takeover defensive measures—is not, standing alone, sufficient to excuse a pre-suit demand on the board under Court of Chancery Rule 23.1 where plaintiff failed to plead sufficient “particularized facts to imply a substantial likelihood of liability for damages . . . on the part of a majority of the directors.”  In its short order, the Supreme Court affirmed on the basis of the Court of Chancery’s opinion.

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  • Reversing A Dismissal, Delaware Supreme Court Declines To Apply Ratification Defense For Discretionary Compensation Awards Under Stockholder-Approved Equity Incentive Plan
     
    12/19/2017

    On December 13, 2017, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of fiduciary duty breach claims brought derivatively by stockholders of Investors Bancorp, Inc. against its directors in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity compensation plan previously approved by a stockholder vote. In re Inv’rs Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS (Del. Ch. December 13, 2017).  As discussed in our post regarding that decision, the Court of Chancery dismissed the claims, finding that the stockholder approval constituted ratification of the awards, rendering them subject to the presumption of protection under the business judgment rule.  In an opinion by Justice Collins J. Seitz, Jr., however, the Delaware Supreme Court reversed, holding that defendants must demonstrate the entire fairness of their equity awards, because plaintiffs adequately alleged that the directors “inequitably exercised [their] discretion” under the compensation plan’s “general parameters,” notwithstanding stockholder approval.

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  • Delaware Court Of Chancery Applies MFW Protections To Stock Reclassification That Allegedly Preserved Controlling Stockholder’s Control Of Company
     
    12/19/2017

    On December 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a putative stockholder suit asserting breach of fiduciary duty claims against NRG Energy, Inc. (“NRG”), the controlling stockholder of NRG Yield, Inc. (“Yield”), and the Yield directors in connection with a reclassification of Yield’s shares.  IRA Trust FBO Bobbie Ahmed v. David Crane, et al., Consol. C.A. No. 12742-CB (Dec. 11, 2017).  Plaintiff claimed that the reclassification enabled NRG to maintain its control over Yield and that this qualified as a “non-ratable” benefit that was not shared with Yield’s minority stockholders.  The Court agreed that plaintiff adequately pleaded that the reclassification was a conflicted transaction such that the entire fairness standard would apply but ultimately dismissed the case after finding that the transaction met the requirements for application of the business judgment rule under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).

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  • Finding No Credible Basis For Inferring Wrongdoing, Delaware Court Of Chancery Denies Demand for Books And Records Concerning Alleged Related-Party Transactions
     
    12/12/2017

    On December 5, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion for reargument concerning the Court’s rejection of a shareholder’s demand to inspect documents pertaining to alleged related-party transactions pursuant to 8 Del. C. § 220.  Silverberg v. ATC Healthcare, Inc. C.A. No. 2017-0242-JRS (Del. Ch. Dec. 5, 2017).  After a trial, the Court had rejected the request of plaintiff—a shareholder in ATC Healthcare, Inc. (“ATC”)—for books and records from ATC concerning alleged related-party transactions with Travel Healthcare Solutions, LLC (“Travel Healthcare”), an entity allegedly affiliated with ATC’s controlling shareholders.  Denying plaintiff’s motion to reargue, the Court held that a change in contractual terms favorable to the related party “is not enough on its own to establish a credible basis of wrongdoing; something more is needed.” 

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  • Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims In Connection With Two-Step Merger, Despite Finding Corwin Inapplicable
     
    12/12/2017

    ​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. Yates, 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. 

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