Delaware Court Of Chancery Enjoins Stockholder Vote For Inadequate Disclosures
On March 11, 2019, Vice Chancellor Kathaleen S. McCormick enjoined a stockholder vote to approve the proposed combination of Medley Management, Inc. (“Medley Management”) with two affiliates it advised, Medley Capital Corporation (“Medley Capital”) and Sierra Income Corporation (“Sierra”). Medley Capital stockholders FrontFour Capital Group LLC and FrontFour Master Fund, Ltd. (together, “FrontFour”) sued to suspend the vote until competing offers were solicited and additional proxy disclosures were made. Plaintiffs alleged that the merger was not entirely fair because the two controlling stockholders of Medley Management controlled the deal process, and the process and the terms were unfair to Medley Capital, and further claimed that the proxy made inadequate disclosures; plaintiffs also asserted an aiding and abetting claim against Sierra. After expedited litigation and trial, the Court enjoined the vote, ruling that corrective disclosures were necessary but that a go-shop period could not be required because Sierra’s rights under the transaction agreements would be negatively impacted.
Delaware Supreme Court Determines “Reasonable Best Efforts” Provisions Impose Affirmative Obligations, But Affirms Chancery Court’s Refusal To Enjoin Merger Termination
On March 23, 2017, the Supreme Court of Delaware affirmed the Court of Chancery’s denial of an injunction sought by plaintiff The Williams Companies, Inc. to prevent defendant Energy Transfer Equity, L.P. from terminating a merger of the two energy companies. The Williams Companies., Inc. v. Energy Transfer Equity, L.P., C.A. Nos. 12168 & 12337 (Del. Mar. 23, 2017). The 4-1 decision authored by Justice James T. Vaughn, Jr. determined that the Chancery Court erred by “adopt[ing] an unduly narrow view of the obligations imposed” by defendant’s covenants in the merger agreement to use “reasonable best efforts” to consummate the deal and “commercially reasonable efforts” to secure an opinion from its outside tax counsel—a condition precedent to the merger—that the transaction qualified for tax-free treatment. According to the Delaware Supreme Court, those provisions “placed an affirmative obligation on the parties to take all reasonable steps to obtain the [tax-free] opinion and otherwise complete the transaction.” Nevertheless, the Supreme Court affirmed the denial of the injunction because the Chancery Court found that defendant’s conduct (or lack thereof) did not “materially contribute” to outside tax counsel’s decision not to issue the tax-free opinion.
Delaware Chancery Preliminarily Enjoins Merger-Related Stockholder Meeting Until Financial Advisor’s Fees For Merger-Related Financing Are Disclosed
On March 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery preliminarily enjoined a stockholder vote on the proposed acquisition by Consolidated Communications Holdings, Inc. (“Consolidated”) of FairPoint Communications, Inc. (“FairPoint”). Vento v. Curry, C.A. No. 2017-0157-AGB (Del. Ch. Mar. 22, 2017). Plaintiff, a Consolidated stockholder, alleged that the Consolidated board of directors breached their fiduciary duties by failing to adequately disclose the financial interests of Consolidated’s financial advisor in the transaction and sought to enjoin the vote pending distribution of corrected disclosures. The Court agreed that the disclosure was inadequate and delayed the vote until five days after Consolidated disclosed the amount of the advisor’s fees.
Delaware Chancery Court Relies On Deal Emails To Interpret An Ambiguous Non-Compete Covenant In A Stock Purchase Agreement, Reverses A Preliminary Injunction And Permits Recovery Of Loss Suffered Therefrom
On October 31, 2016, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery entered a final post-trial decision resolving a dispute concerning the proper scope of a post-closing non-compete covenant entered into by parties to a stock sale. Brace Industrial Contracting, Inc. v. Peterson Enterprises, Inc., Consol. C.A. No. 11189-VCG (Del. Ch. Oct. 31, 2016). Although Vice Chancellor Glasscock had previously ruled for plaintiffs, preliminarily enjoining defendants from competitive activities that plaintiffs claimed were barred by the covenant, the Court’s final decision lifted the preliminary injunction after considering extrinsic evidence to interpret the disputed contractual terms.
Third Circuit Halts Pennsylvania Hospital Merger On Antitrust Grounds, Reversing Previous Loss By FTC
On September 27, 2016, the Third Circuit Court of Appeals reversed a District Court ruling and granted the preliminary restraining order sought by the Federal Trade Commission (“FTC”) and the state of Pennsylvania to enjoin a merger of two state hospital systems pending administrative review by the FTC. FTC v. Penn State Hershey Medical Center, No. 16-2365 (3d Cir. Sept. 27, 2016). The Court rejected as legally incorrect the District Court’s formulation of the geographic market for evaluating the possible anti-competitive effects of the proposed merger.
Delaware Court of Chancery Rejects the Imposition of Non-Competition Restrictions on Selling Shareholders in Context of a Forced Sale
On June 21, 2016, Chancellor Andre G. Bouchard of the Delaware Court of Chancery accepted a custodian’s plan for a judicially ordered sale of a company over the objections of one of the three shareholders of the company, but rejected a proposal to impose expanded non-compete obligations on selling shareholders. See In re TransPerfect Global, Inc, et al., C.A. Nos. 9700, 10449-CB, Letter Op. (Del. Ch. June 21, 2016). Specifically, the Court held that the plan “address[ed] the dual goals of maintaining the Company as a going concern and maximizing stockholder value” but that “it would not be appropriate to impose non-competition or non-solicitation restrictions on a selling stockholder as a condition of the sale of the Company absent evidence of wrongdoing.”
Northern District of Illinois Denies FTC’s Bid To Enjoin Chicago Hospital Merger
On June 14, 2016, Judge Jorge Alonso of the United States District Court for the Northern District of Illinois denied the Federal Trade Commission’s (“FTC”) motion for a preliminary injunction against the merger of Advocate Health Care (“Advocate”) and NorthShore University HealthSystem (“NorthShore”), which operate hospitals in Chicago’s northern suburbs. Order, Federal Trade Comm’n v. Advocate Health Care Network, No. 15 C 11473 (N.D. Ill. June 14, 2016), ECF No. 472. The Order held that the FTC failed to show a likelihood that it would succeed on the merits of its antitrust claims.
Delaware Court of Chancery Invokes Equitable Exception to Rule That Demand Futility Is Assessed as of the Time Complaint Is Filed
Under well-established Delaware law, a plaintiff seeking to pursue a shareholder derivative suit on behalf of the corporation must first either (a) make a demand on the company’s board of directors and have such demand wrongfully refused or (b) establish that such a demand would be futile. Shareholder plaintiffs that opt for the latter approach often claim that the majority of directors who would have been tasked with deciding whether the company should act upon their demands were (or are) unable to reliably exercise their business judgment on the company’s behalf, particularly in cases where the lawsuits would target those same board members.
OptimisCorp v. Waite, No. 523, 2015 (Del. Apr. 25, 2016)
A unanimous Delaware Supreme Court criticizes directors’ use of deceptive “Pearl Harbor-like” tactics against another director, even in the name of protecting the company from perceived misconduct. OptimisCorp v. Waite, No. 523, 2015 (Apr. 25, 2016).