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

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Court Of Chancery Explains When Side Deals Are Actionable Under A Bad Faith Theory

Posted In Fiduciary Duty

Kahn v. Stern, C.A. No. 12498-VCG (Aug. 28, 2017)

It is not easy to sufficiently plead a bad faith breach of fiduciary duty by a board in approving a merger when a majority of the directors were disinterested and independent. One basis for such a bad faith breach might be that the board approved a merger where management extracted side deals, such as employment arrangements with the post-merger entity or performance-based sale bonuses. As this decision explains after reviewing the precedent, an extreme set of facts is required to survive dismissal on this theory.

Court Of Chancery Upholds Claim Based On Low-Ball Self Tender

Posted In Fiduciary Duty

Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co. Inc., C.A. No. 9250-VCG (July 24, 2017)

This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.

Court Of Chancery Explains When Entire Fairness Applies To Option Grants And Voting Agreements

Posted In Fiduciary Duty

Williams v. Ji, C.A. No. 12729-VCMR (June 28, 2017)

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.

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.  

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 Holds Revlon Does Not Apply In Dissolution

Posted In Fiduciary Duty

The Huff Energy Fund L.P. v. Gershen, C.A. 11116-VCS (September 29, 2016)

This decision holds that Revlon duties are not implicated by a decision to liquidate a company. Hence, the Court will not scrutinize whether the board sought to get the best possible deal for company assets. The decision is also helpful in reminding us that a stockholders’ agreement is not necessarily binding on the company’s board of directors who have not signed the agreement in their personal capacity.

Court Of Chancery Explains When To Expedite Disclosure Claims

Posted In Fiduciary Duty

Nguyen v. Barrett, C.A. 11511-VCG (September 28, 2016)

This decision is helpful in clarifying that claims alleging disclosure violations in a proxy statement need to be pressed before a merger closes. After the merger, those claims are for damages and all the hurdles for such a claim, such as the director exculpation provisions in most charters, will usually defeat the claim absent bad faith.

Court Of Chancery Again Explains Scope Of The Corwin Doctrine

Posted In Fiduciary Duty

Larkin v Shah, C.A. 10918-VCS (August 25, 2016)

This is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of the deal involving a controlling stockholder who suffers from a conflict in the merger.   More ›

Court of Chancery Explains Tolling Law In Fiduciary Duty Case

Posted In Fiduciary Duty

AM General Holdings LLC v. The Renco Group, C.A. 7639-VCS (August 22, 2016)

In addition to explaining the seldom-used doctrines of mutual, running accounts and continuing wrongs as exceptions to the running of the statute of limitations, this decision is important for its review of when a claim of breach of duty may be tolled. A plaintiff cannot simply stand by without using means available to her to monitor her investment and then claim her case was tolled.  While it is still possible to show a claim was inherently unknowable or that the plaintiff justifiably relied on a fiduciary to not seek information, the more sophisticated the plaintiff the less those exceptions to the running of the statute of limitations will apply.

Court Of Chancery Dismisses Merger Litigation Under The Corwin Doctrine

Posted In Fiduciary Duty

City of Miami General Employees and Sanitation Employees Retirement Trust v. Comstock, C.A. 9980-CB (August 24, 2016), affirmed March 23, 2017

This decision applies the Corwin doctrine to dismiss a suit attacking a merger that received stockholder approval. It explains that approval by a fully-informed, uncoerced majority of disinterested and independent stockholders invokes the business judgment rule standard of review – leaving waste as the only grounds to attack the transaction. Interestingly, the decision still examined whether the plaintiffs had alleged a basis for entire fairness review.  Here, those allegations concerned whether a majority of the directors were either self-interested in the transaction or were manipulated by improper conduct.

Court Of Chancery Explains When Disclosures Required Absent A Stockholder Vote

Posted In Fiduciary Duty

Doppelt v. Windstream Holdings Inc., C.A. 10629-VCN (February 5, 2016)

This is an interesting decision for two reasons. First, it explains when directors might have a duty to cause the company to make disclosures to the stockholders about transactions that do not require the stockholders’ vote.  Briefly, when a transaction not requiring a stockholders vote is so related to a transaction requiring their vote that the two matters are tied together, then the stockholders are entitled to be fully informed about both matters. More ›