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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 102 posts in Directors.
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.
When may most of a Board of Directors deny another director access to the advice of counsel the majority received? This decision answers that interesting question and concludes "not very often." There are exceptions to that general rule, such as when there is a board committee involved whose counsel has not also been counsel to the excluded director, when the excluded director wants the information for a proven improper purpose, etc.
A Section 225 action is supposed to be limited to the narrow question of the composition of a corporation's board of directors. Subsidiary questions, such as who owns what stock, may be resolved as well but are generally not binding on persons who are not parties to the litigation. However, as this decision points out, if you are a party and consent to the Court deciding stock ownership in a Section 225 action, you are stuck with the judgment.
Everyone agrees that a director should speak up even if he disagrees with the rest of the board of directors. But when does a director go too far in his opposition to policies he wants to change? In this decision, the Court wrestled with this question and decided that leaking confidential corporate information to pressure the company went too far. Significantly, the information was not about any wrongdoing. Hence, the finding of a breach of the duty of loyalty only goes so far as a precedent.
A year or so ago, the DGCL was amended to permit the removal of a director by the Court of Chancery. While the grounds to do are broadly stated (including "breach of the duty of loyalty"), the statute requires that the director first have been convicted of a felony or been found in a prior case to have breached his duty of loyalty. There thus remains the question of whether director removal may be done without a prior action that establishes the grounds to do so.
This decision suggests that such a direct action for removal will be very hard to win, for the Court expressed serious concerns over whether it has that authority absent the statutory prerequisites. The question is still open to be squarely decided in another case.