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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 50 posts by Lewis H. Lazarus.
Stockholders who seek to inspect the books and records of a Delaware corporation to investigate mismanagement merely have to demonstrate a “credible suspicion” that officers or directors have breached their fiduciary duties. That low standard means that in most instances either companies themselves or courts respond to narrowly tailored requests by producing, or ordering produced, necessary and specific information to enable a stockholder to investigate alleged wrongdoing.
Recently, the scope of permissible inspection has extended to emails, leading some commentators to become concerned that the courts have tilted the playing field too much in favor of stockholders. As the recent case of Hoeller v. Tempur Sealy International, C.A. No. 2018-0336-JRS, demonstrates, however, the Delaware courts will not permit a stockholder any inspection if he cannot demonstrate a credible suspicion of cognizable wrongdoing, and the mere allegation that a company unexpectedly lost a major customer does not suffice to raise a credible suspicion of fiduciary wrongdoing. More ›
This top ten list summarizes significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past calendar year 2018. The article was originally published in Transaction Advisors.
The cases selected either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware.
One: City of North Miami Beach General Employees’ Retirement Plan v. Dr. Pepper Snapple Group Inc., 189 A.3d 188 (Del. Ch. June 1, 2018) (Bouchard, Chancellor)
This decision arose out of a merger involving the Dr. Pepper and Keurig companies. In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with the target absorbing that subsidiary. That is how Dr. Pepper and Keurig structured their deal. The result was Dr. Pepper stockholders getting cash but retaining their stock, and Keurig’s stockholders getting a controlling interest in Dr. Pepper. Certain Dr. Pepper stockholders sued in the Court of Chancery, asserting that they had appraisal rights to a judicially-determined fair value in connection with the deal under Section 262 of the Delaware General Corporation Law (DGCL), which were being violated. More ›
In 2014, the Delaware Supreme Court in Kahn v. MFW held that the business judgment standard could apply to review of a controlling stockholder merger if at the outset the controlling stockholder conditioned the squeeze-out transaction on negotiation and approval by a committee of independent and disinterested directors and the informed, uncoerced approval of a majority of the minority stockholders (dual stage approvals). The Delaware Supreme Court later affirmed a Delaware Court of Chancery transcript opinion holding that MFW could apply to a pleadings-stage dismissal where the controlling stockholder did not condition its initial proposal on the dual stage approvals, at least where the board, with the majority stockholder’s participation, did so in a resolution establishing a special committee to negotiate prior to any substantive negotiations. The question remained, however, how much latitude the court would afford a controlling stockholder who did not ab initio condition its merger transaction on the requisite dual stage approvals. In Flood v. Synutra International, C. A. No. 101, 2018 (Del. Oct. 9, 2018), the Supreme Court in a majority opinion provided additional guidance, holding that the MFW standard of review could apply to a transaction where the controlling stockholder did not from the beginning condition its transaction on the requisite dual stage approvals, as long as those conditions were established prior to any substantive economic negotiations. The court’s holding and its reasoning provide important guidance to transactional planners and litigators assessing whether to challenge a controlling stockholder merger transaction. More ›
Delaware statutes enabling formation of unincorporated entities like limited liability companies (LLCs) and limited partnerships afford freedom for owners to structure business relationships as they see fit. This freedom carries with it the responsibility to accurately and completely describe the parties’ rights and duties. It also means that when disputes arise among owners or managers, a Delaware court will resolve the dispute through application of principles of contract interpretation. Moreover, if the parties in their foundational agreement do not address an issue, the court will apply default rules under the applicable business entity statute. The recent case of Domain Associates LLC v. Shah, C.A. No. 12921-VCL (Aug. 13, 2018), well illustrates these principles—the court applied default rules under the Limited Liability Company Act to hold that an expelled member of a Delaware LLC was entitled to the fair value of his interest and not simply to the value of his capital account. More ›
When friends go into business, their ties may fray if the business experiences difficulty and the parties have different views of how to proceed and who is responsible. If the principals are directors of a Delaware corporation, however, their duty of loyalty requires them to eschew self-interest and to do what is best for the corporation and its stakeholders. Moreover, when conflict arises, vague promises among friends do not supplant the requirements for binding agreements. More ›
Parties who form Delaware limited liability companies to organize their business affairs do so to structure their relationships contractually. This enables them to organize the governance and economic rights in a manner tailored to the enterprise they are establishing. They do so secure in the knowledge that the Delaware Limited Liability Company Act expressly provides that it is the policy of the Delaware act “to give maximum effect to the principle of freedom of contract and to the enforcement of limited liability company agreements.” If the parties ever have a dispute over their internal affairs, then a Delaware court will apply well-settled principles of contract interpretation to resolve it. The recent decision of Capone v. LDH Management Holdings, C.A. No. 11687-VCG (Del. Ch. Apr. 25, 2018), illustrates the court’s application of contract law principles to determine that two Delaware LLCs’ affairs were not wound up in compliance with the Delaware LLC Act resulting in the nullification of prior-filed certificates of cancellation. More ›
Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2017. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as appraisal rights, duties in the master limited partnership context, director compensation awards, and preclusion in shareholder derivative litigation. Continue reading for the full article. More ›
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 ›