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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
A recent decision by the Delaware Court of Chancery has caused the defenders of all things corporate America wants from its courts to complain once again of unfair treatment. While their complaints are misplaced in this particular case, they do raise the question of how Delaware values business entities. More ›
The concept of demand futility, rooted in the fundamental elements of Delaware corporate law, has been present for decades. The demand futility rules developed, as most doctrines of Delaware corporate law do, through judicial decisions over the years. While one can argue about if there is any fundamental difference between the Aronson and Rales tests and whether the standards should be unified, one thing that almost everyone agreed on was that the court tested demand futility as of the date the complaint was filed. Changes in board composition after the filing of the complaint usually did not affect the demand futility analysis, unless the plaintiff amended the complaint after a change in board composition to assert a claim not already validly in litigation, or the complaint was dismissed and then refiled. This rule itself was subject to equitable modification, so, for instance, if the board changes after the filing of the complaint and the plaintiff wants to amend its complaint, she need not plead demand futility as to the board on the date of the amendment for claims already "validly in litigation," e.g., Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006). On the other hand, if the complaint gets dismissed and then refiled, the board on the date of the refiling is the proper board to determine demand futility. In Park Employees' and Retirement Board Employees Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (Del. Ch. May 31, 2016), the Delaware Court of Chancery addressed a new twist on the change in board composition argument: What happens if the board changes as a result of a properly noticed stockholder meeting shortly after the filing of the complaint? On the unique facts of this case, the Court of Chancery held that it would determine demand futility based on the board elected shortly after the plaintiff filed the complaint More ›
Delaware law has long made clear that the price established for a company in a market transaction, while a relevant factor, does not necessarily equate to the fair value that shareholder claimants are entitled to receive in an appraisal proceeding. But a series of more recent decisions in the Delaware Court of Chancery reinforced the view that the market value for a company set in an arm's-length transaction, achieved by a thorough sale process, usually represents the best evidence of fair value. Vice Chancellor J. Travis Laster's May 31 decision, In re Appraisal of Dell, C.A. No. 9522-VCL (Del.Ch. May 31, 2016), provides a sharp reminder of the limits of market price as an indicator of fair value when the transaction involves a leveraged management buyout (MBO), even one resulting from a careful sales effort free of any fiduciary breach.
As Dell makes clear, appraisal claimants in transactions involving inherent conflicts of interest (including an MBO) or an unreliable sales process, or both, will have an excellent opportunity to persuade the court that fair value exceeds the transaction price. The Dell decision affirms the primacy of the court's role in making such determinations in MBO and other conflict transactions. Left unresolved is what effect this will have on the structuring of such transactions and the criteria to which deal participants and their fiduciaries may turn to be confident they have captured fair value. More ›
Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.
Most times, a business divorce is exactly what you think it is: a legal proceeding in which two or more business partners sever their business relationship. While on its face it is “just business,” the business divorce often creates as much emotional drama as a divorce between spouses. Knowing when, how and why the partners need to separate their interests is critical to guiding people through situations that may need a business divorce. More ›
In Underwriters at Lloyd's, London v. DynCorp, No. 5421-JJ (Del. Ch. Mar. 24, 2016), Underwriters at Lloyd's sought reformation of certain aviation liability insurance policies issued to DynCorp. In a prior related action involving the same policies, DynCorp had obtained summary judgment on the issue of Underwriters' duty to defend certain tort actions arising out of DynCorp's aerial spraying of herbicide in South America. In Underwriters' reformation action, DynCorp moved for summary judgment arguing, among other things, that, during the course of the parties' litigation, Underwriters had offered six different coverage positions that should act as a bar to the grant of reformation. According to DynCorp: "The fact that Underwriters have repeatedly changed their position as to what the terms of the purported prior agreement are, demonstrates that Underwriters, themselves, do not know what their own purported intent was with respect to the key provision they seek to reform." Distinguishing the decision in Lions Gate Entertainment v. Image Entertainment, C.A. No.2011-N (Del. Ch. June 5, 2006), the court found that Underwriters consistently took the position that the policies at issue did not cover "chemical liability" resulting from aerial herbicide spraying. Thus, the court denied DynCorp's motion for summary judgment. More ›
Normally it is the board in place at the time the derivative suit is filed that is evaluated to determine if demand is excused. However, when a plaintiff rushes to file knowing that the board is about to change so that its composition will not permit demand to be excused, the new board will be the board whose independence is considered. This prevents gun jumping.
This decision explains when a price in a management lead buy out that is close to a merger price set after a shopping of a company may still not be the “fair value” required by Delaware appraisal law. Thus, it is a good review of the more-recent decisions that have accepted a merger price as fair value when that price was the product of a competitive process. In short, the facts really matter and management lead buy outs will have a hard time doing almost any deal that will be adequate to establish an appraisal value.
In a stockholder challenge to a sale of the company, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that at least half of the directors, who approved the sale, were not disinterested or independent in breach of their fiduciary duty of loyalty. While the prohibition against self-interested transactions by the board is the most fundamental obligation under the duty of loyalty, the good-faith corollary to the duty of loyalty under In re The Walt Disney Derivative Litigation, 907 A.2d 693, 754-55 (Del. Ch. 2005), is "something of a catch-all," providing a "fiduciary out from the business judgment rule." Good faith under the duty of loyalty prohibits "intentional dereliction of duty, [or] inaction in the face of a duty to act," which allegations support a claim for bad faith. In a bad-faith claim, the board's intentional action, or inaction in the face of a known duty to act, cannot be explained "as in the corporate interest: res ipsa loquitor." The Delaware Court of Chancery has emphasized that pleading facts to support a bad-faith claim is the "most difficult path to overcome dismissal" and that such facts are a "rara avis." More ›
Morris James is pleased to announce that fourteen of its partners and five practice areas have been recognized by Chambers USA 2016. More ›
In July 2015, the Delaware Court of Chancery issued an opinion in In re Appraisal of Dell, Consol. C.A. No. 9322-VCL, holding that the technical missteps of a custodial bank necessarily required the court to deny certain beneficial stockholders' demands for appraisal. Nearly a year later and after trial, Vice Chancellor J. Travis Laster held that certain other petitioners seeking appraisal of their Dell shares were barred from doing so because the record holder of the shares voted in favor of the Dell going-private merger and, in doing so, violated the "dissenting stockholder" requirements of Delaware's appraisal statute, Section 262 of the Delaware General Corporation Law. Again, the court was faced with a situation where the petitioners argued that the defect in their appraisal demand was inadvertent. More ›
Morris James partner, Albert H. Manwaring, IV, presented at the Transaction Advisors San Francisco M&A Spring Conference on May 12, 2016. His presentation focused on the developments in strike suits; the rise of appraisal litigation; a review of current case law that is impacting M&A structuring; the nature of multiple jurisdiction lawsuits; global antitrust and competition reviews; and understanding tender offers’ impact on M&A deal litigation. More ›
This is an excellent review of the law governing when the Court will enjoin board action that affects the ability of stockholders to elect directors. Such interference must: (1) be for a proper motive, (2) not be preclusive, and (3) have a compelling justification in the method chosen. Downsizing the board just before an election in the face of a proxy contest over one class of directors does not pass this test, even if done for a proper, unselfish purpose. The bottom line is that incumbent directors cannot determine the outcome of an election contest for the stockholders.
This decision deals with when the actions of directors may be considered to be in bad faith, at least when there is no self-interest involved and the directors are properly informed before taking the time to decide what to do. The short answer is that the “too stupid to be in good faith” test applies to see if their decision is in bad faith.
When alternative entities first came into prominence, questions arose concerning the applicability to them and their stakeholders of corporate law fiduciary duty jurisprudence. Eventually the Delaware General Assembly amended the alternative entity statutes to permit the modification or elimination of fiduciary duties, including the duty of loyalty. While stockholders of Delaware corporations since 1986 were permitted to exculpate directors for liability for monetary damages, they cannot modify, much less eliminate, the duty of loyalty. In contrast, the Delaware courts of late have been consistent in enforcing as written the terms of alternative entity foundational documents that modify or eliminate fiduciary duties, often leaving investors with no remedy even though a similar fact pattern in a corporation would state a claim. The well-written April 29 decision from the court's newest vice chancellor, Joseph R. Slights III, in Brinckerhoff v. Enbridge Energy, C.A. No. 11314-VCS, illustrates this trend. More ›