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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 42 posts by Lewis H. Lazarus.
A cardinal principle of Delaware law is that directors manage the business and affairs of a Delaware corporation. This includes decisions regarding whether to pursue claims against officers and directors whose breach of duty may have injured the company. A stockholder who believes that the board is not pursuing claims of wrongdoing that harmed the company must first demand that the board investigate or pursue those claims so that the board has an opportunity to exhaust intra-corporate remedies.
It is only if the stockholder believes that demand would be futile that the stockholder can skip that step and file a derivative claim on behalf of the corporation. In that circumstance the stockholder must plead adequately why demand would have been futile or have the action dismissed for failure to do so. Lenois v. Lukman, C. A. No. 11963-VCMR (Del. Ch. Nov. 7) is the most recent guidance from the court on the topic of demand futility and the case illustrates, among other things, that the mere fact that one officer or director may have acted in bad faith does not suffice to excuse demand if the plaintiff is unable to plead particularized facts demonstrating that a majority of the board could not act impartially upon a stockholder demand. Where a company has an exculpatory provision in its charter under Section 102(b)(7) that means a plaintiff must plead facts showing that a majority of the board faces a risk of liability for claims not otherwise exculpated, i.e., claims for violation of the duty of loyalty or for not acting in good faith. More ›
Delaware jurisprudence encourages decision-making by boards of independent and disinterested directors. If a transaction does not involve a controlling stockholder and is approved by a majority of disinterested and independent directors, then a plaintiff cannot attack the transaction and seek damages except upon pleading that a majority of the board acted in bad faith. More ›
Companies often defend against stockholder requests to inspect books and records by contending that the plaintiff stockholder lacks a proper purpose or that his or her stated purpose is not the real purpose. Less common is a contention that the stockholder lacks standing because his or her shares were canceled due to misconduct harmful to the company, a remedy provided for in a stockholder agreement. Such a claim raises issues under Section 202 of the Delaware General Corporation Law as to the enforceability of the remedy where the restrictions set forth in the stockholder agreement were not conspicuously noted on the share certificate. The recent case of Henry v. Phixios Holdings, C.A. No. 12504-VCMR (July 10), provides guidance on the requirements to enforce a restriction on the ownership or alienability of shares of a Delaware corporation when the restriction is not conspicuously noted on the share certificate. As the Chancery Court held, such a restriction is not enforceable except upon proof that the stockholder had actual knowledge prior to purchase of the shares or subsequently agreed or voted to approve the restriction, proof that Phixios failed to provide. More ›
Stockholders who believe that a board breached its fiduciary duties in connection with information provided to stockholders asked to vote for a merger transaction can either seek to enjoin the transaction or seek damages post-closing. Of course, the court cannot enjoin a transaction if a stockholder who files a complaint fails to seek injunctive relief, even where that stockholder also alleges disclosure violations. In that circumstance the stockholder post-closing must determine whether to pursue damages, including through quasi-appraisal. In light of the Delaware courts' jurisprudence post-Corwin, such claims are unlikely to succeed where a majority of the disinterested stockholders have approved the merger unless the plaintiff can demonstrate a material disclosure violation or stockholder coercion to approve the merger for reasons unrelated to its merits. The recent Delaware Court of Chancery decision of In Re Cyan Stockholders Litigation, C. A. No. 11027-CB (May 11), dismissing post-closing plaintiffs' claims for breach of fiduciary duty demonstrates the risks stockholder plaintiffs run when they do not seek equitable relief to enjoin a merger transaction and are unable to plead a material disclosure violation sufficient to vitiate approval of the merger transaction by a majority of disinterested stockholders. More ›
Contract interpretation is a staple of litigation in the Delaware Court of Chancery. Disputes over the meaning of commercial contracts, foundational documents such as certificates of incorporation or bylaws or agreements governing alternative entities such as limited liability companies or limited partnerships require the court to interpret language in contracts. More ›
The Delaware courts have been critical of litigants who bring derivative claims without first seeking books and records. The absence of such records often makes it difficult to overcome the business judgment rule which prevents a stockholder from bringing derivative claims directly without first making a demand on the board of directors. Stockholders cannot so proceed unless they can show that a majority of directors at the time of the demand was not independent or disinterested or that the decision was not the result of a proper exercise of business judgment. The standard is even more difficult if a stockholder makes a demand which the board refuses and then seeks to proceed with litigation by claiming that the board wrongfully refused the demand. The Delaware Court of Chancery's recent decision in Andersen v. Mattel, C.A. No. 11816-VCMR (Jan. 19), illustrates the difficult burden a plaintiff bears in alleging wrongful refusal, particularly when he fails to use the tools at hand to obtain relevant books and records. More ›
The Delaware courts encourage plaintiffs who bring derivative claims in Delaware without making demand on the board of directors to seek books and records under Section 220 of the Delaware General Corporation Law so as to be able to plead facts sufficient to demonstrate that demand is excused. Many claims have been dismissed under Delaware Court of Chancery Rule 23.1 because a plaintiff failed to utilize the "tools at hand" to obtain relevant books and records. When a plaintiff grounds its claim on directors' alleged failure to exercise oversight, however, even receipt of books and records may not enable a plaintiff to plead facts sufficient to demonstrate that the directors knowingly ignored their duties so as to have acted in bad faith. That high standard as articulated by the Delaware Supreme Court in Stone v. Ritter makes a Caremark claim for breach of directors' oversight duties as among the most difficult in corporate law. The Court of Chancery's recent decision in Reiter v. Fairbank, C.A. No. 11693-CB (Del. Ch. Oct. 18), demonstrates that, regardless of the injury allegedly sustained by the subject company, a pleading based on books and records obtained from the company that at best reflects awareness of "yellow flags" is not sufficient to call into question the directors' good faith and hence to excuse demand, thus requiring dismissal of the plaintiff's derivative claim. More ›
Contract and fiduciary duty law intersect when how a board acts, including the vote required, is affected by a shareholder agreement. Such agreements are common to enable investors to protect their investment, either through negotiated buybacks or issuance of additional shares upon certain milestones, through board seats or through super-majority vote requirements where the investment, while substantial, does not result in majority control. When a dispute arises over the effect of a shareholder agreement on a board vote a Delaware court will apply traditional principles of contract interpretation to ascertain and enforce the parties' intent. The language the parties use to reflect their agreement at the time of the investment will determine the outcome of the dispute when it arises long after, such as when the board acts to dissolve the entity. The Delaware Court of Chancery's well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets. More ›
It is well-settled under Delaware law that in a merger a stockholder loses standing to assert a purely derivative claim. That claim passes instead to the acquiring company. As an asset of a Delaware company, derivative claims should be valued in a merger transaction. Directors of a selling company, however, who fail to value derivative claims and who also bargain for their extinguishment following the merger are at risk of being found to have breached their fiduciary duty.
The Court of Chancery's recent decision in In re Riverstone National Stockholder Litigation, C.A. No. 9796-VCG (Del. Ch. July 28), instructs that a complaint asserting that directors, who faced personal liability on known derivative claims, both attributed no value to the derivative claims and bargained in a merger transaction that the buyer would not assert them, is sufficient to avoid dismissal based on the general rule of post-merger loss of standing, if the stockholder pleads the claims as part of a direct attack on the merger. More ›
Parties who at the signing of a merger agreement are eager to close may have a change of heart if intervening adverse market conditions reduce or eliminate the economic benefits.
Those changing market conditions often do not affect the buyer and seller equally. In that circumstance one party may wish to avoid, and the other to consummate, the transaction.
A Delaware court faced with a claim for specific performance on the one hand and a request on the other for declaratory judgment that a party is excused from its contractual obligation will apply traditional principles of contract interpretation and standards applicable to an award of equitable relief. That is exactly what the Delaware Court of Chancery did in denying the plaintiff's request for specific performance in Williams Companies v. Energy Transfer Equity, C.A. No. 12168-VCG (Del. Ch. June 24, 2016), a case with instructive lessons for practitioners regarding when the Court of Chancery will decline specifically to enforce a merger agreement. More ›
When alternative entities first came into prominence, questions arose concerning the applicability to them and their stakeholders of corporate law fiduciary duty jurisprudence. Eventually the Delaware General Assembly amended the alternative entity statutes to permit the modification or elimination of fiduciary duties, including the duty of loyalty. While stockholders of Delaware corporations since 1986 were permitted to exculpate directors for liability for monetary damages, they cannot modify, much less eliminate, the duty of loyalty. In contrast, the Delaware courts of late have been consistent in enforcing as written the terms of alternative entity foundational documents that modify or eliminate fiduciary duties, often leaving investors with no remedy even though a similar fact pattern in a corporation would state a claim. The well-written April 29 decision from the court's newest vice chancellor, Joseph R. Slights III, in Brinckerhoff v. Enbridge Energy, C.A. No. 11314-VCS, illustrates this trend. More ›
In Palkon v. Holmes, C.A. No. 2:14-CV-01234 (SRC) (October 20, 2014), the United States District Court for the District of New Jersey dismissed with prejudice a shareholder derivative action arising from three distinct breaches of Wyndham Worldwide Corporation (“Wyndham”). The Court granted the Defendant Directors’ Motion to Dismiss pursuant to Rules 23.1(b) and 12(b)(6) of the Federal Rules of Civil Procedure. The matter was resolved on demand-refusal grounds, but the opinion provides fresh guidance to corporate boards in how to address their exposure to risk based on cybersecurity breaches and shareholder actions arising from those breaches. Specifically, the decision highlights the importance of independent advice and of making a record of board review of policies and procedures to address the threat of a cyber-security breach. As this decision illustrates, boards who seek independent legal and other advice and who make an appropriate record of reviewing policies for addressing the risk of cyber-security breaches are more likely to be able to withstand a shareholder derivative claim for breach of fiduciary duty. More ›
The record upon which a court evaluates a motion to dismiss is often outcome-determinative. If based upon the well-pleaded allegations of a plaintiff's complaint, the court cannot determine that it is reasonably conceivable that the plaintiff may obtain a recovery, the court must dismiss the complaint. As a general matter, the plaintiff controls the record by virtue of how and what the plaintiff pleads. The Delaware Supreme Court has held, however, that the record fairly before the court on a motion to dismiss may include documents "integral to and incorporated into the complaint." The recent Court of Chancery decision in In re Gardner Denver Shareholders Litigation, Cons. C. A. No. 8505-VCN (Feb. 21, 2014), provides useful guidance concerning how the Court of Chancery will treat deposition transcripts where, as is happening more frequently, a plaintiff pursues but abandons a preliminary injunction after deposing several witnesses, and then amends the complaint by selectively quoting from the deposition record. More ›
Advancement rights assure directors and officers that if they are sued for conduct arising out of their company service, the company will pay their attorney fees and costs as they are incurred. Without advancement rights, many people would not serve out of fear that their personal assets would be depleted in defending suits based on their conduct as directors or officers. For that reason, Delaware courts regularly enforce advancement rights, even after a finding of criminal guilt at the trial level, until the judgment is final and all appeals are exhausted. Nonetheless, mandatory advancement rights apply only if provided by charter, bylaw or contract. The recent case of Grace v. Ashbridge LLC, C.A. No. 8348-VCN (Del. Ch. Dec. 31, 2013), provides a cautionary tale that advancement rights that may have existed when the entity was a corporation do not necessarily survive intact when the entity converts to a limited liability company. More ›