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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 10 posts from March 2011.
In this decision the Delaware Superior Court declined to follow federal precedent and adopted the liability theory of the Restatement (Second) of Torts Section 766A. Under that Section, a claim is permitted for interfering with a plaintiff's contract rights with a third party even when the contract is not broken. This is different from a more typical interference claim where the third party refuses to perform because of some wrongful act.
How to divide the fees awarded in a multi-jurisdiction case is a recurring problem. As the Chancellor explains in this opinion, it is preferable if the various courts are notified of a settlement and asked to decide which court should resolve any problems. That has worked well.
However, when the lawyers are too stubborn to do so, then the Court will apply the principle established long ago in the fabled story, The Little Red Hen. She who bakes the bread is she who eats the bread.
This is another in the line of decisions that stress that preferred stockholder rights are what is set out in the certificate of incorporation and nothing more. Thus, if the preferred stockholders bargain for the right to consent to the sale of stock by any subsidiary, then they do not also have the right to vote on the sale of subsidiary stock by the parent.
To be fair, this brief description does not do justice to the Court's careful reasoning and simplifies the charter provisions at issue. However, best to state the principle starkly to avoid any misunderstanding.
Delaware lawyers are often asked to estimate what the Court of Chancery will award in fees following settlement or trial of a derivative action. Well this decision summarizes those fee awards:
10 - 15% for a fast settlement
15 - 25% for contesting motions and other pretrial work that leads to a settlement
25 - 33% for winning after trial
All these percentages apply to monetary settlements, but the Court also explains how to determine fees in cases invovling non-monetary settlements.
Directors Designated By Investors Owe Fiduciary Duties to the Company as a Whole and Not to the Designating Investor
This article was originally published in The Delaware Business Court Insider | 2011-03-23
Investors who make substantial investments often demand a seat on their company’s board of directors. That is a reasonable request as it permits the investor to have a representative on the board of directors with a voice in management of the company. It is well-settled that directors elected by stockholders of a Delaware corporation owe fiduciary duties to the company and all its stockholders once they serve on the board. Thus, they may make decisions in the exercise of their fiduciary duty that are different than what is in the best interest of designating investor. The Court of Chancery’s recent decision in Air Products and Chemicals, Inc. v. Airgas, Inc., 2011 WL 519735 (Del. Ch. Feb. 15, 2011) reflects this issue.
Air Products had sought to acquire control of Airgas since October, 2009. When Airgas rebuffed its inquiries, Air Products launched a hostile tender offer. One of the conditions of its tender offer was that Airgas lift its poison pill. The poison pill made it prohibitively expensive for Air Products to proceed. Airgas refused to lift the pill on the ground that the Air Products offer was inadequate.
Frustrated by its inability to proceed with a tender offer, Air Products nominated three directors to the Airgas board. It stated that its nominees would be impartial in their evaluation of the Air Products tender offer, although they would be replacing Airgas directors who had voted to maintain the Airgas poison pill. Air Products succeeded and its three nominees were elected by the Airgas stockholders to the Airgas board. Once they were on the board of Airgas, the Air Products designees obtained their own legal and financial advisors. Based in part on the advice of their advisors and on their own assessment of the business plans of Airgas, these Air Products nominated directors determined that the Air Products offer was inadequate and voted with their colleagues to maintain the Airgas poison pill.
In so acting, these directors acted consistently with Delaware law. As stated in Phillips v. Insituform of N. Am., Inc., 1987 WL 16285, at *10 (Del. Ch. Aug. 27, 1987) the “law demands of directors … fidelity to the corporation and all of its shareholders and does not recognize a special duty on the part of directors elected by a special class to the class electing them.”
While the Airgas directors’ conflict arose in a highly-publicized battle for control of a public company, issues also arise in privately held companies where investors often condition their investment on the receipt of preferred stock and board representation.
For example, in In re Trados Incorporated Shareholder Litigation, 2009 WL 2225958 (Del. Ch. July 24, 2009), the Court of Chancery sustained a complaint on behalf of a class of stockholders who complained that directors designated by preferred stockholders, constituting a majority of the board, had interests that diverged from the interests of the common stockholders in approving a sale transaction. This divergence arose because the preferred stockholders received a substantial portion of their liquidation preference from the sale, while common stockholders received nothing. The preferred stockholder designated directors also held interests in entities which held preferred stock of the selling company. Those relationships bore on the court’s decision to treat the preferred stock designees as having interests potentially different from, and in conflict with, the interests of the common stockholders. As a result of this finding, the court denied a motion to dismiss because the plaintiffs’ allegations were sufficient to rebut the presumption of the business judgment rule.
These cases teach that directors designated by particular stockholders or investors owe duties generally to the company and all of its stockholders. Where the interests of the investor and the company and its common stockholders potentially diverge, the directors cannot favor the interests of the investor over those of the company and its common stockholders.
Conflicts also are likely to arise over the use of confidential information supplied to the designated directors. Designating directors who owe their livelihood or materially benefit from relationships with the designating investor sharpens the likelihood of conflicts of interest. Companies, investors and directors and their counsel should consider carefully the implications of directors designated by particular stockholders serving on boards of Delaware corporations.
Occasionally a complaint or other document is filed under seal in the Court of Chancery. This decision explains how to do that and the limits on confidentiality you can expect. As the courts are public institutions with a need to have their proceedings out in the open, the short answer is that do not expect much to remain confidential no matter how embarrassing it may be to you or your client.
There are several different ways to value an enterprise. For a while, discounted cash flow seemed to be the courts' preference. Then when the markets were thought to be "efficient," market values were given weight. This opinion is a good example of the current state of flux where the Court is inclined to take into account all approaches, test to see if there are any outliers, look at the business realities involved and thoroughly analyze the parties' contentions before reaching a determination. In short, it no longer is as simple as it once was and the new business world we live in seems to warrant that approach.
In the most recent issue of the Harvard International Law Journal, John Armour, Justice Jacobs and Curtis Milhaupt analyze how hostile takeovers arise under similar circumstances in different countries and how countries enact substantially different regulatory responses to hostile takeovers. The article focuses primarily on hostile takeovers in the United States, United Kingdom and Japan, but also considers the possible trajectory of hostile takeovers in emerging markets like China, India and Brazil.
This decision explains why a stockholder is entitled to inspect the documents surrounding a corporation's refusal to pursue derivative litigation when the board appears independent enough to be able to properly refuse the demand to sue. The Court carefully reviews past Delaware precedent and outlines what documents the stockholder may review.
The decision makes major points. First, the stockholder who has made a pre-suit demand does not thereby conclusively concede the board is independent and disinterested. Second, the decision to not sue is subject to the business judgment rule but that presumption may be rebutted by a showing the decision was not in good faith or was unreasonable. [Note that it is generally thought that the BJR precludes a reasonableness review but we will see if that is still true in this limited area. Most likely what the Court meant is that the decision has to be so unreasonable that no director in good faith could reach that conclusion.] Third, the Court of Chancery has, according to a federal court, exclusive jurisdiction over books and records cases under Delaware law.
This is an important decision because it shows the way much future derivative litigation must proceed. Books and records cases are fairly easy to litigate. This then permits plaintiffs to get behind the usual demand-refused letter that just states the process used and the conclusion not to sue and fails to say why. Of course, it remains to be seen if any plaintiff can make a showing after inspection to overcome a rejection of a demand to sue.
This decision outlines what must be disclosed to shareholders asked to approve a merger. As to the financial adviser giving a fairness opinion, the disclosures should include whether its fee is contingent on a closing and if so, how much of the fee is contingent. The amount of the fee should also be disclosed.
The decision also held that when the CEO learned he would be employed by the acquiror, that should have been disclosed as well.