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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 106 posts in Directors.
This opinion addresses two bedrock issues of Delaware corporate law, specifically, proper board authorization under 8 Del. C. § 141 and directors’ fiduciary duty of loyalty. Following other directors’ resignations, defendant George Farley was the only director as of February 2016 of plaintiff Applied Energetics (the “Company”). Shortly after becoming the sole director, Farley executed a written consent to issue himself twenty million shares of Applied Energetics stock for $.001 per share. No contemporaneous valuation was performed, and Farley made no attempts to ensure a fair process. Faced with a request to enjoin Farley from selling the shares at issue, the Court of Chancery held that it was reasonably probable that Farley could not cause the Company to validly issue stock, because he was the only remaining director of a three-person board. The Court also held it was reasonably probable that Farley will be unable to meet his burden at trial of proving the share issuances were entirely fair. Accordingly, the Court enjoined Farley from trading the shares pending a final adjudication of their validity. This decision also provides helpful analysis, as did prior decisions in this matter, regarding how the Court will determine the amount of bond when granting preliminary injunctive relief.
This decision upholds coverage under a D&O policy for a claim alleging fraud by directors. This is not too surprising as the Delaware Corporation Law has long relied on insurance to cover the gap in the DGCL that denies indemnification for some claims based on disloyalty. The business judgment rule, the right to advancement, and indemnification and insurance are the triad of protections for Delaware directors.
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 ›
In a contest over who has been elected to a board of directors under Section 225 of the DGCL, it is sometimes critical to decide if certain stock was validly issued and thus can be voted. This decision sets out a circumstance when that issue may be determined in Section 225 case even when the holders of the contested stock are not parties to the litigation.
Stockholder approval of an equity compensation plan may or may not constitute ratification over awards to the directors under the plan. When it does, the Court of Chancery will review challenges under the business judgment rule. There are Delaware decisions coming out both ways on the issue of ratification. As this decision illustrates, whether or not ratification applies depends on how specific the plan is that the stockholders approved (and whether the vote was informed and uncoerced). When it comes to the level of specificity required in the plan, generally speaking, a plan that sets specific and meaningful limits on the grants could constitute ratification of grants within those limits. This decision, where the Court applied ratification, provides guidance on just how specific the plan must be.
In what might be one of the most important decisions this year, the Court held that the tender of their shares by a majority of the stockholders invokes an “irrebuttable” presumption that the business judgment rule applies and, as a result, the complaint generally must be dismissed. This extends the Delaware Supreme Court’s Corwin decision to the tender offer context. While the tender offer aspect of this case will get the most notice, the concept of an “irrebuttable” business judgment rule may prove to be more important. For when that form of the business judgment rule applies, only facts demonstrating waste will let a complaint survive a motion to dismiss. Of course, waste is almost impossible to successfully allege under Delaware law.
This is an excellent review of the law governing when the Court will enjoin board action that affects the ability of stockholders to elect directors. Such interference must: (1) be for a proper motive, (2) not be preclusive, and (3) have a compelling justification in the method chosen. Downsizing the board just before an election in the face of a proxy contest over one class of directors does not pass this test, even if done for a proper, unselfish purpose. The bottom line is that incumbent directors cannot determine the outcome of an election contest for the stockholders.
Court Of Chancery Explores The Effect Of Federal Settlements On A Delaware Action And Applies Unocal To Bylaw Amendments
This is an interesting decision for two reasons. More ›
In this unusual case, the Court of Chancery has reinstated a director who was tricked into resigning. The opinion has a good discussion of how directors may resign and when their resignation is not effective.
This decision concerns a soap opera with bizarre facts and alleged witness tampering that hopefully will never be repeated. It does have a good discussion on what notice the board of directors must give to a controller before taking action to oust him as CEO. None is the answer.
This decision reviews the history of the effect of stockholder ratification on director compensation. Briefly, stockholder ratification will cause the compensation to be subject to the business judgment standard of review when the stockholders are fully informed and approve a specific level of compensation. In other words, just approving a general compensation plan that is not specific as to the actual compensation to be received is not sufficient to shift the standard of review and instead, assuming all the directors receive the compensation at issue, they will need to meet the entire fairness standard of review. Note also that directors are deemed interested for demand excuse purposes on matters of their own compensation without a showing that it was material as to them individually.
This interesting decision explains the status of a de facto director and what that means in terms of the validity of actions taken by such directors. In general, their actions are valid. The decision is also another illustration of the duties owed by a board of a charity to its beneficiaries.
This decision affirms the standing of someone not yet elected to the board to seek relief under Section 225.