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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Under the Delaware Supreme Court's decision in Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015), business judgment review applies to cleanse a fiduciary challenge to a noncontrol transaction that was approved by an uncoerced, fully-informed, disinterested stockholder vote. Absent a claim of waste, the result of a Corwin-qualifying stockholder vote is dismissal. The Corwin doctrine is premised on the rationale that when a disinterested majority of stockholders approve a transaction, the vote represents their determination that the transaction is in the corporate interest, and Delaware courts will avoid second-guessing the stockholders' decision by applying the deferential business judgment rule. More ›
This is an important decision if only because it explains a further limitation on the Corwin rule that an informed uncoerced stockholder vote insulates a corporate transaction from attack. First, the decision explains when a minority stockholder is a “controller” for purposes of even being able to avoid Corwin. That decision does not apply to transactions with a controller. Merely being able to appoint some of the directors does not make one a controller, at least when the certificate of incorporation limits the power of that stockholder to dictate corporate action. More ›
Stockholders who believe that a board breached its fiduciary duties in connection with information provided to stockholders asked to vote for a merger transaction can either seek to enjoin the transaction or seek damages post-closing. Of course, the court cannot enjoin a transaction if a stockholder who files a complaint fails to seek injunctive relief, even where that stockholder also alleges disclosure violations. In that circumstance the stockholder post-closing must determine whether to pursue damages, including through quasi-appraisal. In light of the Delaware courts' jurisprudence post-Corwin, such claims are unlikely to succeed where a majority of the disinterested stockholders have approved the merger unless the plaintiff can demonstrate a material disclosure violation or stockholder coercion to approve the merger for reasons unrelated to its merits. The recent Delaware Court of Chancery decision of In Re Cyan Stockholders Litigation, C. A. No. 11027-CB (May 11), dismissing post-closing plaintiffs' claims for breach of fiduciary duty demonstrates the risks stockholder plaintiffs run when they do not seek equitable relief to enjoin a merger transaction and are unable to plead a material disclosure violation sufficient to vitiate approval of the merger transaction by a majority of disinterested stockholders. More ›
Once again, some corporate lawyers are complaining that the Delaware courts are too good to stockholders or, more often, plaintiffs’ lawyers. In the more recent past, those complaints focused on merger litigation that led to disclosure-only settlements. Now the outcry is over so-called appraisal arbitrage. But, just as the Delaware courts eventually curbed disclosure-only settlements in merger litigation, the more recent appraisal decisions are making appraisal litigation much less attractive. In just five days, two Court of Chancery decisions dealt major setbacks to appraisal arbitrage. More ›
Albert H. Manwaring, IV and Albert J. Carroll of the Morris James Corporate and Commercial Litigation Group, collaborated with William M. Lafferty of Morris, Nichols, Arsht & Tunnell, and Peter Adams of Cooley LLP on a recent article titled, " Ten Recent Delaware Merger and Acquisition Cases Applying Corwin", published by the American Bar Association. More ›
P. Clarkson Collins, Jr. and Lewis H. Lazarus participated on May 17, 2017 in the annual Continuing Legal Education Seminar sponsored by the Corporation Law Council of the Delaware State Bar Association. More ›
The Court of Chancery continues to wrestle with the issue of when the negotiated deal price represents "fair value" in an appraisal case. Here, serious problems with the management projections led the Court to reject a discounted cash flow valuation based on those forecasts. Instead, after finding the deal price was the product of a process reasonably designed and appropriately implemented to achieve a fair value, the Court accepted it as fair value. While it is unusual for the Court to find management was too optimistic about their company's future, this decision is not unique in expressing a preference for the product of real-world negotiations between sophisticated parties. Deal prices will continue to heavily influence appraisal valuations when the evidence shows "the price is right.”
Recent criticism of appraisal arbitrage argues that it comes without real risk to the petitioners. This appraisal decision, which values the company below the deal price based on a discounted cash flow analysis, should be part of any reform discussion. The petitioners in SWS Group suffered a sizable loss after refusing to accept the deal price. SWS Group also comes right on the heels of the PetSmart decision, which found the deal price represented the company’s fair value. Hence, petitioners again lost, given all the expense involved in an appraisal proceeding. In short, appraisal litigation is not for the weak at heart. The key to this decision is the Court’s finding that synergies for the buyer drove the merger price past fair value. Of course, while based on precedent, a finding of synergies is always controversial. To petitioners, those possible benefits are what made the company worth buying and are thus part of its inherent appeal.
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.
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 ›
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.
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.
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.
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.
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 ›