Showing 6 posts in Cases.
Chancery Denies Section 220 Bid for Executive Compensation Records Involving Facebook
Southeastern Pa. Trans. Auth. v. Facebook, Inc., C.A. No. 2019-0228-JRS (Oct. 29, 2019)
Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›Share
Chancery Declines to Dismiss Derivative Claim Challenging Compensation of Goldman Sachs Directors
Stein v. Blankfein, C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019).
Recently, the Delaware Supreme Court held in In re Investors Bancorp, Inc. Stockholder Litigation, 177 A.3d 1208 (Del. 2017) that stockholder approval of director self-compensation plans will shift the standard of review from entire fairness to business judgment only where the stockholders approve a plan that does not involve future director discretion in setting the compensation amounts. In Stein, the Court of Chancery applies Investors Bancorp and declines to dismiss a disloyal compensation claim, notwithstanding that the terms of the challenged compensation plans sought to absolve the directors of self-dealing claims and even though the plaintiff attacked only the compensation amount, not the process by which it was determined. More ›Share
Delaware Supreme Court Revives Fiduciary Duty Claims in Derivative Lawsuit Concerning Blue Bell’s Listeria Outbreak
Marchand v. Barnhill, No. 533, 2018 (Del. June 19, 2019).
As this decision illustrates, while Delaware law imposes a high bar for pleading demand futility and fiduciary oversight claims under what is known as a Caremark theory, the standards are not insurmountable. After Blue Bell Creameries faced a deadly listeria outbreak, recall, and temporary shutdown a few years ago, a stockholder plaintiff sued in the Delaware Court of Chancery alleging breaches of fiduciary duties by two key executives and its board of directors. The stockholder’s derivative claims concerned management’s alleged failure to respond appropriately to food safety issues and the board’s alleged failure to implement any food safety reporting system or to inform itself about the company’s food safety compliance. More ›Share
Officer and Director Entitled to Mandatory Indemnification Regardless of Circuitous Path to Victory
Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019).
Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.Share
Merger Agreement’s Preservation of Privilege for Pre-Merger Communications Found to be Adequate, Notwithstanding that the Surviving Company Took Possession of E-Mails
Shareholder Representative Services LLC v. RSI Holdco, LLC, C.A. No. 2018-0517-KSJM (Del. Ch. May 29, 2019).
This decision confirms that, in a post-merger dispute between an acquirer and the selling stockholders, broad contractual language can prevent a waiver of the acquired company's privileged pre-merger communications, even if the surviving company takes physical possession of the communications. RSI Holdco, LLC acquired Radixx Systems International, Inc. in 2016, and the merger agreement designated Shareholder Representative Services LLC as representative of Radixx's selling shareholders. As part of the merger, RSI Holdco acquired Radixx’s computers and email servers, which contained 1200 pre-merger emails between Radixx and its counsel; Radixx had not excised or segregated the communications from other data. However, the merger agreement contained a detailed provision that (1) preserved Radixx’s privilege, (2) assigned it the representative of selling stockholders, (3) required the parties to take steps to ensure that the privilege remained in effect, and (4) prevented RSI Holdco from relying on the privileged communications in post-merger litigation. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Court had found that privilege transferred to the surviving company in a merger as a matter of law pursuant to section 259 of the DGCL because (i) the parties did not address privilege in the merger agreement, and (ii) because the at-issue communications were turned over. Great Hill cautioned future parties to "use their contractual freedom" to exclude privileged communications from the transferred assets. Here, the Court rejected RSI Holdco's argument that the failure to excise the communications waived privilege in this circumstance, and the Court noted that even if the privilege had been waived, the merger agreement still prevented RSI Holdco from relying on the communications in the litigation. Thus, the Court concluded that the sellers "heeded the Great Hill court's advice" and found the detailed provision in the merger agreement preserved the privilege attached to the pre-merger communications.Share
Delaware Superior Court Finds Civil Investigation Demand Triggers Insurer’s Duty to Defend Insured
Conduent State Healthcare v. AIG Specialty, C. A. No. N18C-12-074 MMJ (Del. Super. June 24, 2019).
Addressing an issue for which there is a split in authority, the Delaware Superior Court held that a Civil Investigative Demand (“CID”) initiated by government authorities will trigger an insurer’s duty to defend and indemnify an insured. After plaintiff Conduent State Healthcare came under investigation for Medicaid fraud, defendant AIG declined to advance defense costs, arguing that the investigation, by itself, did not constitute an insurable claim under plaintiff’s policy. The Superior Court held that the policy language providing coverage for a “Claim alleging a Wrongful Act” extended to the CID. The Court rejected the argument that “investigating an unlawful act by the insured, is different from alleging an unlawful act,” finding that to be a distinction without a difference. The Court relied upon insurance contract interpretation principles and construed the policy against its drafter, holding that the duty to defend and indemnify should be interpreted broadly in favor of coverage.Share