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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 206 posts in Fiduciary Duty.
Chancery Finds Controlling Stockholder Impliedly Consented to Jurisdiction Through Board’s Adoption of Delaware Forum-Selection Bylaw
Stockholders that control Delaware corporations find themselves subject to fiduciary duties. According to this Court of Chancery decision, in certain situations, they also might find themselves subject to personal jurisdiction in Delaware in connection with the controlled-corporation’s adoption of a Delaware forum-selection bylaw. Past Delaware cases have found that, by expressly consenting to a Delaware forum for disputes, parties may also be deemed to have impliedly consented to personal jurisdiction here. But this decision is the first to find implied consent by a controlling stockholder through the controlled-corporation’s adoption of a forum-selection bylaw. More ›
This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger. Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation. The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%. Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price. By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value. When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger. More ›
Under the corporate opportunity doctrine, one way for a fiduciary to breach her duty of loyalty is to take personal advantage of an opportunity presented to or rightfully belonging to the corporation. This case involved such a breach—a director and executive purchased a building that he knew the company was interested in acquiring in order to house its operations. The test for identifying corporate opportunities is a holistic one in which the Court examines whether: (1) the corporation can afford the opportunity; (2) it is within the corporation’s line of business; (3) the corporation has an interest or expectancy in it; and (4) by taking it, the fiduciary places himself in a position adverse to his corporate duties. The decision is a noteworthy read for its discussion of those factors, in particular, the line of business prong. In that regard, the Court focused on the corporation’s clear interest and expectancy in purchasing the building and the nature of the opportunity as concerning an “operational decision about how to manage or expand an existing line of business.”
Chancery Addresses Earn-Out Dispute Involving Alleged Breaches of Fiduciary Duty and the Implied Covenant
Contingent payments based on an acquired business’s future performance are a frequent feature in M&A transactions. In this case, after selling control, the seller remained a minority member for a time period. Two holdings are noteworthy. More ›
Delaware law recognizes a claim for breach of fiduciary duty based on insider trading under the Brophy decision. This is an important opinion because it recognizes an extension of potential liability under Brophy for trades made, not by the insider himself, but by an entity he or she controls. It is a natural extension that furthers the important policy of preventing insiders from profiting based on non-public information. The opinion also addresses demand futility principles under Braddock. That decision deals with how to conduct a demand futility analysis on an amended complaint after changes in the board’s composition.
Lately, the Delaware Supreme Court has given great weight to the deal price in appraisal cases. As a result, plaintiffs have put a greater focus on showing that the process leading to the merger makes that price unreliable, potentially because of breaches of fiduciary duty. One strategy for recovery is to file a breach of fiduciary case after obtaining valuable discovery in the appraisal case. This decision explains when such a fiduciary duty case can go forward notwithstanding the appraisal proceeding seeking to recover for the same loss. More ›
Transactions between a Delaware company and its controlling stockholder usually are subject to rigorous entire fairness review. But, under the MFW decision, even a merger with a controller may gain the benefit of deferential business judgment review. The MFW requirements include that the controller must condition the procession of the transaction ab initio on approval by a special committee. More ›
This notable decision issued by the Court of Chancery holds an investment fund and its manager liable for over $20 million essentially for destroying a Delaware entity’s value. The litigation arises out of a once promising technology company’s downfall into liquidation. The facts involved an investor that leveraged a series of preferred investments into negative control and used that control to secure a self-dealing financing unfavorable to the company, while simultaneously turning away much needed financing opportunities threatening its control. The investor hoped to position the company for a prompt sale in which it would reap the benefits, but that did not pan out, and the company went under. More ›
Corwin holds that approval of a transaction by a fully-informed, uncoerced majority of the disinterested stockholders invokes the deferential business judgment standard of review for a post-closing damages action, making the transaction almost certainly immune from further judicial scrutiny. This is an important decision for its discussion of the “informed” approval prerequisite to a Corwin defense. This aspect of Corwin turns on thoroughly-developed standards under Delaware law regarding what is or is not material to the stockholders' decision-making. In that way, the decision is not novel. Yet, because a disclosure violation may prevent what would otherwise be an early dismissal of a breach of fiduciary duty action against directors for damages, the issue is of heightened importance post-Corwin. In the Court’s own words, this case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” Here, the material undisclosed facts concerned a founder’s early dealings with the private equity buyer, pressure on the board, and the degree that this influence may have impacted the sale process structure. The stockholder plaintiffs’ arguments were aided substantially by documents obtained in connection with a pre-suit books and records demand. That is another area of increased importance post-Corwin, given the unavailability of a Corwin defense in that setting and the ability to obtain documents that might help one plead around a later Corwin defense.
When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger. More ›
Under 8 Del C. Section 122(17) a corporation may waive any claim that a corporate opportunity was wrongfully taken by a fiduciary. Private equity firms frequently invest in companies in the same line of business. When that investor also puts a director on the board of its investment, a potential conflict of interest may arises when that director obtains confidential information that may be useful to the other company the investor has invested in the same line of business. This decision holds that a trade secret claim under the Delaware Uniform Trade Secret Act is precluded by the type of waiver permitted by Section 122(17). Thus, investors may invest in competing companies if they get the protection provided by this section of the Delaware General Corporation Law.
This is another decision in a series of recent decisions where the Court of Chancery had to decide if a less-than-50% stockholder controlled the corporation. This is an important issue because a controller has fiduciary duties to the other stockholders and the intrinsic fairness test apples to the review of any transaction involving that controller. Here the longstanding close relationship of two stockholders who together owned more than 50% of the entity was enough for the complaint alleging they controlled the entity to survive a motion to dismiss. While all the facts alleged in the complaint on that issue are important to the analysis, perhaps the key fact was that the two stockholders in the past had acted together to get a benefit from the corporation that only they received compared to the other stockholders. That showed their strong influence over the corporation.
Court of Chancery Finds Breach of Fiduciary Duty By Director Selfishly Opposing Cure of Defective Corporate Acts
When a corporation accidentally issues defective stock or takes some other defective corporate act, Delaware law offers avenues to cure under the right set of circumstances. See 8 Del. C. §§ 204, 205. As this decision shows, a director who self-interestedly stands in the way of that cure by attempting to impose selfish conditions breaches his fiduciary duty of loyalty and may be liable for damages. Even if the director later comes around, extra costs incurred from his obstinacy may be charged to him.
Arising out of the highly-publicized dispute over the proposed transaction involving CBS and Viacom, each controlled by the Redstones, this decision is both front-page newsworthy and legally significant. CBS and Viacom used to be one entity but split. The Redstones retained voting control in each through a dual-class voting structure. Later, the Redstones began pushing to merge the entities once again and both entities formed special committees to consider the proposal. More ›
This decision involves the rare case where a waste claim is well plead. As a result, the directors who gave away company money are sufficiently exposed to liability that demand upon them to bring the suit is excused.