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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Court Of Chancery Declines To Hold Unocal Claim Automatically Excuses Demand

Ryan v Armstrong, C.A. No. 12717-VCG (May 15, 2017)

A derivative plaintiff who fails to make a pre-suit demand on the board must show why demand is excused using particularized facts.  Here, the plaintiff argued that demand was automatically excused by sufficiently pleading a Unocal claim.  Some prior case law supports that argument, but the Court in this case rejected an automatic demand excused rule.  Instead, the Court used the more traditional analysis that required either allegations of self-interest or sufficiently egregious conduct that showed bad faith.  Allegations that the board was motivated by a desire to maintain their positions were not sufficient where the complaint lacked facts showing that keeping their jobs was material to each of them.  Similarly, a decision to adopt an entrenchment device is not alone bad faith.

The Hidden Risks in Allocating Risk

There are always risks involved in buying a company. Until you are actually inside a company's operations, you can never be sure you know everything about it. Conversely, sellers too will bear the risk that buyer's remorse will lead to post-closing claims against the sellers when they no longer have the company assets to use to defend themselves. Two related, recent Delaware Court of Chancery decisions illustrate the hidden risks when buyers and sellers try to allocate between them the inherent risks in a deal. More ›

Court Of Chancery Rejects Novel Breach Of Appraisal Rights Claim

Posted In M&A

In re Cyan Inc. Stockholders Litigation, C.A. 1027-CB (May 11, 2017)

This decision begins with a conventional analysis of a claim that disclosure violations and director self-interest have tainted a merger vote. That claim was rejected for want of factual support. More unusual, the decision also rejects the plaintiff’s argument of an alleged independent right to appraisal that, when infringed by disclosure violations, is outside the usual charter exculpation provision for duty of care breaches. As this decision explains, quasi-appraisal is simply a form of remedy, typically sought to address disclosure deficiencies that are the product of a breach of fiduciary duty. Where there is no failure to identify any material misrepresentation or omission, or any other viable claim for breach of fiduciary duty, there is no basis to impose a quasi-appraisal remedy.  

Court Of Chancery Explains The Abry Partners Doctrine

Posted In M&A

EMSI Acquisition Inc. v. Contrarian Funds LLC, C.A. 12648-VCS (May 3, 2017)

Parties to an acquisition often attempt to set limits on what may be recovered in any post-closing dispute between them. This helps the buyer get a lower price in return for the safety the sellers buy with a price concession. Exactly how to do this, however, has proved difficult. The well–known Abry Partners decision sets limits, for example, on what claims may be released in advance, such as a claim for fraud based on deliberate misstatements in a purchase agreement. This decision carefully explains the boundaries of what may be released and how to get the best language to set out the parties’ actual agreement. It is a great guideline to follow.

Court Of Chancery Interprets Claimed Advancement Waiver

Davis v. EMSI Holding Company, C.A. 12854-VCS (May 3, 2017)

This decision explains how to obtain a release of advancement rights from a seller in an agreement to purchase his company. Here that effort failed. However, buyers will continue to not want to have to advance the sellers’ fees if there is a later dispute between them over the transaction. That can happen when the seller is a corporate officer or director and the acquired company’s bylaws confer a broad right to advancement for them. Apart from the obvious point that better drafting helps, the key is to be sure to directly address any rights in the acquired company’s bylaws or employment agreements to be sure those rights are waived. While the noted Cochran case limits advancement rights when the seller has not acted in his capacity as an officer or director, it is hard to fit within that decision’s holding given how much it has been limited over time. This decision explains those limits very well.

Court Of Chancery Explains The “Known Looter” Theory For Controllers

Posted In Fiduciary Duty

Ford v. VMware Inc., C.A. No.11714-VCL (May 2, 2017)

This is an interesting decision because it examines an intriguing legal theory for holding a controlling stockholder liable in a sale: the “known looter” theory.  Generally speaking, controllers can sell their stock to whoever they want.  After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company.  Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.  

Stockholders' Complaint Survives Chancery's 'Corwin' Analysis

After a series of successful applications of the Corwin doctrine in Delaware's Court of Chancery, a plaintiff has finally survived a motion to dismiss where Corwin was applied. In In re Saba Software Stockholder Litigation, the Court of Chancery held, for the first time, that a shareholder-approved all-cash merger did not satisfy Corwin. While limited by the unique facts at issue, the Saba decision provides useful guidance to practitioners as to the parameters of Corwin when analyzing the likelihood of success of challenges to third party mergers. The court's decision in denying a motion to dismiss in Saba, coupled with the court's decision dismissing a complaint under Corwin in In re Columbia Pipeline Group Stockholder Litigation, provide great insight into what constitutes material disclosures in the post-Corwin world. More ›

Court of Chancery Explains When There Is A Basis To Investigate

T.J. Rogers v. Cypress Semiconductor Corp., C.A. No. 2017-0070-AGB (April 17, 2017)

This decision does a good job of explaining when there is an adequate showing of possible wrongdoing sufficient to justify a books and records inspection. It also explains why conducting a proxy contest does not warrant denying inspection.

Court Of Chancery Limits Creditor Standing

Posted In LLC Agreements

Trusa v. Nepo, C.A. No. 12071 (April 13, 2017)

This decision holds that a creditor lacks standing to bring breach of fiduciary duty claims arising out of the management of an LLC. Of course, creditors are better served by drafting the loan documents to protect their rights.

Court Of Chancery Discusses Interrelationship Between Corwin and Santa Fe

Posted In M&A

In Re Paramount Gold And Silver Corp. Stockholders Litigation, C.A. 10499-CB (April 13, 2017)

In its now famous Corwin decision the Delaware Supreme Court held that when a majority of the stockholders in a fully informed, noncoercive vote approve a transaction, the business judgment rule applies and the transaction is virtually immune from attack. However, plaintiffs continue to argue that Corwin did not hold that the stockholder approval precluded a claim based on a Unocal theory that by virtue of excessive deal protection devices the vote was coercive. Such a claim had been upheld in the older Santa Fe case and Corwin expressly declined to overrule Santa Fe. This decision notes that the status of Santa Fe may be unclear, but then goes on to hold that the agreements alleged to be preclusive deal protection devices do not violate Unocal even if it were applicable. More ›

Court Of Chancery Explains Fiduciary Duty Of Preferred Stockholders’ Directors

Posted In Fiduciary Duty

The Frederick Hsu Living Trust v. ODN Holding Corporation, C.A. 12108-VCL (April 14, 2017, corrected April 25, 2017)

This decision is a primer on most of the major issues in Delaware corporate law. However, what it is most likely to be remembered for is its explanation of the duties that directors have to the enterprise as a whole, even when they are elected by or beholden to preferred stockholders. Thus, it has big implications for venture capital investors. Briefly, the decision holds that it may be a breach of the directors’ fiduciary duty to cause the corporation to sell off parts of its business to satisfy a liquidation preference of its preferred stockholders. More ›

Court Of Chancery Explains What Are Direct Claims For An LP

Posted In LP Agreements

Sehoy Energy LP v. Haven Real Estate Group LLC, C.A. 12387-VCG (April 17, 2017)

It matters whether a claim may be characterized as a direct claim belonging to the owners of an entity or as a derivative claim that may only be brought in the name of the entity. This decision explains which is which in the context of a limited partnership.

Court Of Chancery Explains Limits Of The Dual Claims Rule

Dietrichson v. Knott, C.A. 11965-VCMR (April 19, 2017)

Under the well-known Brinckerhoff decision, a claim may be both a direct claim and a derivative claim. When that occurs the complaint need not comply with Rule 32.1 demand requirements. This decision points out that Brinckerhoff is very limited and only claims that involve a dilution of voting rights may be considered dual claims.

Stockholder Vote Enjoined Over Banker's Financial Interest in Merger

Investment bankers play a central role in the exploration, evaluation, selection and implementation of strategic alternatives for Delaware companies. To enable stockholders to carefully assess how much weight to give an investment banker's analysis of a proposed strategic transaction, Delaware law requires full disclosure of a banker's compensation or financial interest, and other potential banker conflicts of interest in connection with the transaction. If the banker's financial interest in the proposed transaction is "material" and "quantifiable," full disclosure of the financial interest to stockholders is required under Delaware law. To obtain meaningful relief for the benefit of stockholders, the Delaware Court of Chancery has indicated its strong preference for plaintiffs to assert claims to correct disclosures to stockholders in advance of the stockholder vote on the proposed transaction. More ›

Court of Chancery Applies Ratification To Equity Grants Under Stockholder Approved Plan

Posted In Directors

In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (April 5, 2017)

Stockholder approval of an equity compensation plan may or may not constitute ratification over awards to the directors under the plan.  When it does, the Court of Chancery will review challenges under the business judgment rule.  There are Delaware decisions coming out both ways on the issue of ratification.  As this decision illustrates, whether or not ratification applies depends on how specific the plan is that the stockholders approved (and whether the vote was informed and uncoerced).  When it comes to the level of specificity required in the plan, generally speaking, a plan that sets specific and meaningful limits on the grants could constitute ratification of grants within those limits.  This decision, where the Court applied ratification, provides guidance on just how specific the plan must be.