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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock). As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner. More ›
Directors may face liability for a failure of oversight that caused the company to suffer a loss, often involving fines imposed by various authorities. Claims alleging this oversight liability under Delaware law are governed by the famous Caremark standard. A considerable hurdle for the plaintiff is the Caremark standard’s sometimes overlooked scienter requirement—the need to show bad faith, meaning that the directors knew that they were not discharging their fiduciary obligations. This decision carefully analyzes a complaint’s allegations and the Caremark precedent to conclude the complaint should be dismissed for failure to meet that test.
Revenue projections are an inexact science, but they should have some basis in fact. Where they are alleged to be without a basis in reality, and indeed contrary to reality, a court may, as here, find that an officer’s fiduciary duties are implicated.
Court Of Chancery Reviews Corporate Opportunity Doctrine Where Derivative Claim Eliminated By Merger
This is an excellent explanation of the corporate opportunity doctrine’s four elements, under which directors may be liable for taking a business opportunity that: (1) the corporation is financially able to take for itself; (2) is within its line of business; (3) would have been of interest to the corporation; and (4) presents a conflict of interest to the directors. More ›
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.
This is another in a series of decisions dealing with the allegation that a minority stockholder controlled a deal through its control of a majority of the board of directors. Its analysis of when such control is present is very helpful. It also points out that there is a Section 228 violation when stockholders are asked to sign stockholder consents without being provided with all the documents needed to understand what that consent includes.
Investment bankers seeking to profit as both adviser to the seller and financier to the buyer in corporate sales processes have faced increased scrutiny by Delaware courts over the last few years. In a highly-publicized 2011 decision, Vice Chancellor Laster criticized investment banker Barclays PLC for acting both as adviser to the seller and financier to the buyer in the Del Monte Foods Co. sale process. The following year, now Chief Justice, then Chancellor Strine, criticized Goldman Sachs’ role in the El Paso Corp. sales process for allegedly steering the sale to its favored buyer Kinder Morgan Inc.
In the latest Delaware decision criticizing bankers guiding corporate sales processes who seek to profit on both sides of a sale, In re Rural Metro Corp. Stockholders Litigation, the Supreme Court affirmed the Court of Chancery’s holding that investment banker RBC Capital Markets LLC (“RBC”) was liable for aiding and abetting the breach of fiduciary duties by the Board of Rural/Metro Corporation’s (“Rural” or the “Company”) in connection with its sale to private equity firm Warburg Pincus LLC (“Warburg”). (No. 140, 2015, 2015 WL 7721882 (Del. Nov. 30, 2015)). More ›
It is settled law that a cause of action accrues when the wrong is committed, not when its effects continue to be felt in the future. But as this decision makes clear, that is not always the case. When additional wrongdoing adds to the injury, the action accrues with each wrongful act.
This is another in the line of decisions that goes back at least as far as the Disney case where the Delaware Court of Chancery declines to upset the compensation awarded to officers and directors. More ›
This interesting decision deals with 3 aspects of fiduciary litigation in Delaware. First, under the Supreme Court's CERBCO decision, even if a transaction is called off, a fiduciary who proposed the invalid deal may be held liable for the company's expenses. This happens so rarely that it is not clear how to apply CERBCO. Well, this decision explains how it applies. The decision also explains when demand is not excused before filing an amended complaint when the composition of the board has changed since the original complaint was filed. Briefly, the Court looks to see if the new complaint is really a new claim and if it is, then the new board's independence is tested to see if demand is excused. Finally, the decision explains when a forum selection clause is not enforceable to remove the court's power to decide a breach of fiduciary duty claim. When the forum selection clause deals with the parties' contract claims, it does not preclude a Delaware court from dealing with fiduciary duty claims.
It is sometime thought that it is enough to state a claim for a complaint to just allege that the directors violated the terms of a stock option plan. Not so. As this opinion points out, the complaint must also contain factual allegations that the directors knowingly violated the terms of the plan. A simple negligent violation is not enough to state a claim. Thus, if the terms of the plan are sufficiently ambiguous that the directors may have believed their actions conformed to the plan's requirements, the directors are not liable for a breach.
This is another example of how the Court of Chancery treats breach of fiduciary duty claims that are duplicative of breach of contract claims. When the 2 claims overlap, the Court will dismiss the breach of fiduciary duty claim. Of course, what constitutes such an overlap is not always easy to determine. This decision illustrates that process.
If you are looking for a case that lists almost every abuse a controlling group of stockholders can make, this is it. The decision also sets out the right scope of review and what are reasonable inferences sufficient to warrant upholding a variety of claims as well.
This is an interesting decision because it discusses the duties, or lack thereof, a large stockholder who is buying more stock on the open market to take control. Here the stockholder had a contract that it entered into when it loaned a lot of money to the company that limited the company's ability to adopt a poison pill or otherwise prevent such stock purchases. Yet even absent that contract, the court indicated that there is no fiduciary duty to offer a "fair" price when buying stock on the open market and no duty of a board to act to prevent those purchases.
When does a corporate fiduciary owe a special disclosure duty to a minority stockholder whose stock he purchases? There are several approaches to this question and this decision fully reviews them all. Ultimately the Court adopted the so-called "special circumstances" rule that requires disclosure when the buying fiduciary knows of material facts not known to the seller. Note that in this context what is "material" is a higher bar to pass than in a more common disclosure case.
The decision is also useful for its review of the equitable fraud and common law fraud rules, particularly after a duty to disclose arises because of a past disclosure.