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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
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.
This decision affirms the long held law that Delaware does not recognize the "abuse of minority stockholders" theory whereby there is a duty to treat minority stockholders in such a way as to give them benefits that are not provided by contract or the law, such as dividends.
This decision permits a suit to proceed that seeks the appointment of a trustee for a solvent corporation based on allegations of breach of fiduciary duty. That may be particularly unusual for prior decisions have required that there be a prior adjudication of a serious breach of duty before an action seeking a trustee might be filed. Perhaps here the gross breaches of duty alleged were enough to convince the Court to let the action go to trial.
When a secured creditor forecloses on its line, the resulting sale must be "commercially reasonable." What does that mean exactly? This decision provides guidance to answer that question. For example, just because the lender works with the company to get the best price does not mean the resulting sale to the lender is tainted.
When a majority of a board of directors is not personally benefiting from a transaction they approve, the business judgment rule applies. How do you overcome that BJR? A plaintiff may do so by showing an "extreme set of facts" sufficient to support the inference the board acted in bad faith. In trying to do so, however, it is not enough to allege the board "should have known" the deal stunk. Instead the plaintiff needs to allege facts that show the board actually knew that the deal was not in their company's best interests.
This is an essential decision for anyone dealing with the corporate opportunity doctrine. Under that doctrine, a fiduciary who takes an opportunity that might have been instead given to his corporation (or LLC or LLP) is liable for any gain made by him as a result. One prime defense to such a claim is that the entity lacked the means to develop the opportunity itself and thus suffered no real harm when it lost that opportunity. This decision significantly undercuts that defense.