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Showing 9 posts from June 2016.

The Problem With Delaware Business Valuations

A recent decision by the Delaware Court of Chancery has caused the defenders of all things corporate America wants from its courts to complain once again of unfair treatment. While their complaints are misplaced in this particular case, they do raise the question of how Delaware values business entities. More ›


A Fun New Fact Pattern for Demand Futility

The concept of demand futility, rooted in the fundamental elements of Delaware corporate law, has been present for decades. The demand futility rules developed, as most doctrines of Delaware corporate law do, through judicial decisions over the years. While one can argue about if there is any fundamental difference between the Aronson and Rales tests and whether the standards should be unified, one thing that almost everyone agreed on was that the court tested demand futility as of the date the complaint was filed. Changes in board composition after the filing of the complaint usually did not affect the demand futility analysis, unless the plaintiff amended the complaint after a change in board composition to assert a claim not already validly in litigation, or the complaint was dismissed and then refiled. This rule itself was subject to equitable modification, so, for instance, if the board changes after the filing of the complaint and the plaintiff wants to amend its complaint, she need not plead demand futility as to the board on the date of the amendment for claims already "validly in litigation," e.g., Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006). On the other hand, if the complaint gets dismissed and then refiled, the board on the date of the refiling is the proper board to determine demand futility. In Park Employees' and Retirement Board Employees Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (Del. Ch. May 31, 2016), the Delaware Court of Chancery addressed a new twist on the change in board composition argument: What happens if the board changes as a result of a properly noticed stockholder meeting shortly after the filing of the complaint? On the unique facts of this case, the Court of Chancery held that it would determine demand futility based on the board elected shortly after the plaintiff filed the complaint More ›


Dell Decision Grants Claimants Fair Value Award Above Merger Price

Delaware law has long made clear that the price established for a company in a market transaction, while a relevant factor, does not necessarily equate to the fair value that shareholder claimants are entitled to receive in an appraisal proceeding. But a series of more recent decisions in the Delaware Court of Chancery reinforced the view that the market value for a company set in an arm's-length transaction, achieved by a thorough sale process, usually represents the best evidence of fair value. Vice Chancellor J. Travis Laster's May 31 decision, In re Appraisal of DellC.A. No. 9522-VCL (Del.Ch. May 31, 2016), provides a sharp reminder of the limits of market price as an indicator of fair value when the transaction involves a leveraged management buyout (MBO), even one resulting from a careful sales effort free of any fiduciary breach.

As Dell makes clear, appraisal claimants in transactions involving inherent conflicts of interest (including an MBO) or an unreliable sales process, or both, will have an excellent opportunity to persuade the court that fair value exceeds the transaction price. The Dell decision affirms the primacy of the court's role in making such determinations in MBO and other conflict transactions. Left unresolved is what effect this will have on the structuring of such transactions and the criteria to which deal participants and their fiduciaries may turn to be confident they have captured fair value. More ›


Court Of Chancery Requires SLC Member Be A “Director”

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.


What is Business Divorce?

Most times, a business divorce is exactly what you think it is: a legal proceeding in which two or more business partners sever their business relationship.  While on its face it is “just business,” the business divorce often creates as much emotional drama as a divorce between spouses. Knowing when, how and why the partners need to separate their interests is critical to guiding people through situations that may need a business divorce. More ›


When Do Inconsistent Contract Interpretations Preclude Reformation?

In Underwriters at Lloyd's, London v. DynCorp, No. 5421-JJ (Del. Ch. Mar. 24, 2016), Underwriters at Lloyd's sought reformation of certain aviation liability insurance policies issued to DynCorp. In a prior related action involving the same policies, DynCorp had obtained summary judgment on the issue of Underwriters' duty to defend certain tort actions arising out of DynCorp's aerial spraying of herbicide in South America. In Underwriters' reformation action, DynCorp moved for summary judgment arguing, among other things, that, during the course of the parties' litigation, Underwriters had offered six different coverage positions that should act as a bar to the grant of reformation. According to DynCorp: "The fact that Underwriters have repeatedly changed their position as to what the terms of the purported prior agreement are, demonstrates that Underwriters, themselves, do not know what their own purported intent was with respect to the key provision they seek to reform." Distinguishing the decision in Lions Gate Entertainment v. Image Entertainment, C.A. No.2011-N (Del. Ch. June 5, 2006), the court found that Underwriters consistently took the position that the policies at issue did not cover "chemical liability" resulting from aerial herbicide spraying. Thus, the court denied DynCorp's motion for summary judgment. More ›


Court Of Chancery Lets New Board Review Complaint

Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. 11000-VCG (May 31, 2016)

Normally it is the board in place at the time the derivative suit is filed that is evaluated to determine if demand is excused. However, when a plaintiff rushes to file knowing that the board is about to change so that its composition will not permit demand to be excused, the new board will be the board whose independence is considered. This prevents gun jumping.


Court Of Chancery Explains When Merger Price Not Is The Appraised Value

Posted In Appraisal

In Re: Appraisal of Dell Inc., C.A. 9322-VCL (May 31, 2016)

This decision explains when a price in a management lead buy out that is close to a merger price set after a shopping of a company may still not be the “fair value” required by Delaware appraisal law. Thus, it is a good review of the more-recent decisions that have accepted a merger price as fair value when that price was the product of a competitive process. In short, the facts really matter and management lead buy outs will have a hard time doing almost any deal that will be adequate to establish an appraisal value.


Disregard of Speculative Financial Projections Was Not Bad Faith

In a stockholder challenge to a sale of the company, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that at least half of the directors, who approved the sale, were not disinterested or independent in breach of their fiduciary duty of loyalty. While the prohibition against self-interested transactions by the board is the most fundamental obligation under the duty of loyalty, the good-faith corollary to the duty of loyalty under In re The Walt Disney Derivative Litigation, 907 A.2d 693, 754-55 (Del. Ch. 2005), is "something of a catch-all," providing a "fiduciary out from the business judgment rule." Good faith under the duty of loyalty prohibits "intentional dereliction of duty, [or] inaction in the face of a duty to act," which allegations support a claim for bad faith. In a bad-faith claim, the board's intentional action, or inaction in the face of a known duty to act, cannot be explained "as in the corporate interest: res ipsa loquitor." The Delaware Court of Chancery has emphasized that pleading facts to support a bad-faith claim is the "most difficult path to overcome dismissal" and that such facts are a "rara avis." More ›

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