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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 18 posts from December 2017.
In one of the most anticipated opinions of 2017, Delaware’s Supreme Court reversed the Court of Chancery’s appraisal decision valuing Dell, Inc.’s shares after its management-led buyout in 2013. In its unanimous en banc decision, the Supreme Court ruled that the Court of Chancery abused its discretion by relying exclusively on its own discounted cash flow (DCF) analysis while affording no weight to the transaction price when valuing the company’s shares at the time of its 2013 going-private merger. So, consistent with its recent decision in DFC Global v. Muirfield Value Partners, the Supreme Court provided context where a deal price should represent strong evidence of fair value. More ›
This decision explains again that actual or constructive knowledge of persistent corporate wrongdoing is needed before there is a substantial likelihood the directors may be liable and thus demand is excused. The Chief Justice's modest dissent points out that the facts are not fully developed at the motion to dismiss stage and he thought the complaint was good enough to warrant further discovery. This points out a potential problem in Delaware law. It will be a rare case where the board of director minutes provide clear notice of bad corporate conduct without some sort of corrective measure also promised. How sincere those promises are is hard to gauge just based on the minutes. Hence, pleading a case good enough to survive a motion to dismiss is getting harder.
This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›
In IRA Trust FBO Bobbie Ahmed v. Crane, Consol. C.A. No. 12742-CB, the Court of Chancery dismissed a stockholder challenge to a reclassification implemented through a pro rata dividend to all stockholders. In addressing the motion to dismiss, the Court saw three key questions: (1) does the entire fairness doctrine apply even though the reclassification involved a pro rata distribution of shares; (2) if entire fairness does apply, does the analytical framework articulated by the Delaware Supreme Court in Kahn v. M&F Worldwide, Corp. (“MFW”) apply to the reclassification; and (3) if MFW applies, have the defendants satisfied its requirements on the face of the pleadings. My colleague, Ed McNally, blogged the other day about the Court’s holding that MFW applied to the challenged reclassification. This blog post focuses on the first question in the Court’s analysis: does the entire fairness doctrine apply to a reclassification implemented by a pro rata distribution of shares. More ›
There has been some uncertainly over the effect of stockholder approval of stock option plans for directors, such as does that approval constitute ratification so as to invoke the business judgment rule. This decision clarifies that law. In general, ratification will occur when the directors lack discretion on how the actual stock options are to be granted. For example, if the stock option plan permits the directors to fix the amount of stock or the price they are to pay, then the stockholder vote is not a ratification.
In this much-anticipated decision, the Delaware Supreme Court stresses the importance of the deal price to the award in an appraisal case. The Court is very careful to note how much the deal price reflected a highly efficient market and a prolonged exposure of the company to competing buyers. It probably did not help the petitioners that their expert testified to a value that seemed much too big. The case was remanded to the Court of Chancery so the Dell saga will continue. Finally, the Supreme Court’s comments on how to allocate the expenses of an appraisal may also have a future impact on appraisals arbitrage.
While the standard to win the right to inspect corporate records to investigate alleged wrongdoing is a lenient one, it is still not enough to just allege something was done improperly. As this decision shows, you still need to prove some factual basis for the inspection. Just showing the contract with an insider was amended does not get you the right to inspect.
This is an interesting decision because it explains: (1) when a fraud claim may be brought despite anti-reliance provisions in a contract and (2) when a fraud claim does not overlap and is thereby precluded by a contract claim based on similar facts. In each case, the inquiry is very fact specific.
When an obligation to indemnify includes the fees incurred in the underlying litigation is a surprisingly frequent question. This decision works its way through a series of contractual provisions to answer that question. The lesson is that the contract needs to specifically say fees are to be included.
This decision explains the process and proof required to establish the amount of a fees award.
The conspiracy theory of jurisdiction developed in the Istituto Bancario decision is often misunderstood, for good reasons. This decision explains the theory in a careful and detailed way that is useful for those trying to obtain jurisdiction over non-residents of Delaware.
This decision illustrates the dangers of not following the limited contractual time to file a dispute and instead relying on an arbitration provision to resolve that dispute. Exactly what the arbitrator is going to resolve was not clear to the plaintiff who filed a complaint to cover any claims not subject to arbitration. However, that complaint was not filed within the time permitted by the parties’ agreement. Hence, the complaint was dismissed.
This decision explains what is needed to prove a corporation is insolvent so that a receiver should be appointed for it. It is not enough to just use the balance sheet, but instead additional proof of the actual values of assets needs to be provided when those assets may be worth more than their book value.
This is a great explanation of when a director is authorized to enter into an oral agreement that is enforceable, here to add two directors to a corporate board. To make the agreement depend on entering into a written contract, there must be a “positive agreement” that the oral agreement is not otherwise enforceable.
This is an important decision because it extends the holding of MFW to a stock reclassification. Under the 6-part test of MFW, the business judgment standard of review applied and the complaint was dismissed. The opinion is particularly useful for its historical review of how the decisional law has evolved to cover many different types of transactions with a controller and when, but for the protections for stockholders provided by MFW, the intrinsic fairness test would have applied to the Court’s analysis.
Court Of Chancery Determines When A Proxy Is Irrevocable And When It Has Jurisdiction To Decide Equitable Ownership In A Section 225 Case
This is an important decision for two reasons. First, it determines when a proxy is irrevocable under Delaware law. To be irrevocable under Section 212 of the DGCL, the proxy must be coupled with an interest. While the “interest” requirement is quite broad, the “coupled” requirement is more strict. The “interest” involved must be held by the person or entity receiving the proxy in order to be “coupled.” Thus, when the proxy is in favor of “X”, but the “interest” supporting the grant of the proxy is for “Y”, the proxy is not irrevocable. This prevents a proxy holder from voting in a way that may be inconsistent with the proxy’s purpose. More ›
Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.