About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
This is the rare decision explaining when restrictions on stock transfers (permitted by Section 202 of the DGCL) can be enforced. While the statute seems clear enough, the real lesson from this decision is that it might be difficult to show a stockholder had advanced knowledge of restrictions that are not on the stock certificate when no other written notice exists. Without such advanced knowledge or later assent by the stockholder, the restrictions are not enforceable.
The Delaware Supreme Court's recent decision in Chicago Bridge & Iron v. Westinghouse Electric, resolved a $2 billion post-closing dispute about the interplay between common features of acquisition agreements: sellers' representations of the accuracy of the target's financial statements, and so-called "true up" provisions for purchase price adjustments for working capital changes between signing and closing. The Supreme Court harmonized the provisions by addressing, among other things, the limited purpose of true up provisions. It accordingly rejected the acquirer's attempt to raise longstanding accounting issues to obtain a large price adjustment through the true up process, when the purchase agreement barred the acquirer from any post-closing relief for breach of a similar warranty. More ›
While directors have the right to issue options, when the grant is to themselves and there are specific facts suggesting unfairness, those directors will have the burden of proving the grants were entirely fair in a stockholder challenge. The same is true when stock is issued conditioned on an agreement to vote that stock as the directors wish.
Master limited partnership agreements typically provide protection for the general partner who engages in a self-dealing transaction with the MLP. This decision reviews the existing precedent on how to apply those provisions, especially when a conclusive presumption of good faith is available to the GP. It also explains what language should be used to invoke at least the subjective standard of good faith that is most helpful to a GP using a conflicts committee. Hence, the decision is required reading for drafters of MLP agreements.
A material adverse change or effect clause permits a party to avoid its contractual obligations under certain circumstances. Delaware courts have addressed so-called “MAC” clauses in the merger agreement context on a number of occasions. Under that precedent, the party claiming a MAC has a high burden of proof and the alleged adverse change to a company’s business must be unexpected, serious, and extend over a significant period of time. A short-term hiccup is not a MAC. This decision is notable because it largely extends this law to the commercial contract context.
In In re Appraisal of PetSmart, one of Delaware's largest appraisal litigations in history, the Delaware Court of Chancery held that the deal price in PetSmart Inc.'s going-private transaction was the best evidence of fair value. This decision, along with the Court of Chancery's recent decision in In re Appraisal of SWS Group, where the court held that fair value was less than the deal price, will likely bring joy to deal lawyers across the country while confounding the plaintiffs bar. More ›
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.