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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 193 posts in Fiduciary Duty.
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.
This is an interesting decision for two reasons. First, it distinguishes between classic self-dealing claims and tag-along challenges to business decisions. Just because a plaintiff successfully pleads that a controller is looting a company in some respects, does not mean all allegedly-related challenges will survive dismissal. Second, it explores when an alternative theory of secondary liability or a claim for unjust enrichment may accompany a sufficiently plead breach of fiduciary duty.
Under Delaware law, a controlling stockholder need not be a majority stockholder. Rather, a controlling stockholder might be a group of aligned stockholders who together hold a majority. Or, as in this case, it might be a minority but substantial stockholder who practically has and exercises board-level control with respect to the challenged transaction. The presence of a controller is an important factor in litigation, including because, as here, it might prevent defendants from achieving a prompt dismissal of a post-closing fiduciary duty action based on stockholder approval under the well-known Corwin decision. In this case, the factors relevant to finding control by the roughly 22% minority stockholder (i.e., Elon Musk) at the motion to dismiss stage included: (1) the individual’s history of eliminating opposition; (2) the board’s lack of safeguards to prevent his control over the company’s consideration and negotiation of the self-interested transaction; (3) a board packed with members interested in the transaction or beholden to him; and (4) public disclosures portraying him as in control.
This decision addresses a host of interesting topics. First, it declines to invoke the so-called step-transaction doctrine under which the Court treats the steps in a series of formally separate but substantially-linked transactions involving the transfer of property as a single transaction. Second, it declines to apply the mootness doctrine in a challenge to an unexercised warrant. Third, it wrestles with deciding whether challenges to a financing and a warrant issuance are direct or derivative claims. Fourth, it address the pre-suit demand on the board requirement. Fifth, it finds a sufficiently pled claim of aiding and abetting a breach of fiduciary duty. Sixth, it decides that intermediate scrutiny (i.e., Revlon) may apply when a party is granted an option to acquire a company under a warrant. Finally, it applies Cornerstone to dismiss exculpated directors from a money damages action where the complaint failed to adequately plead a duty of loyalty claim against them.
The Ravenswood Investment Company LP v. The Estate Of Bassett S. Winmill, C.A. No. 3730-VCS (Del. Ch. Mar. 21, 2018)
It is easy to assume that some form of meaningful relief must be available when a fiduciary bears the burden of proving a self-dealing transaction is entirely fair, but fails to carry it. But that is not always true, as this decision shows. For instance, as happened here, if stock options were issued for inadequate consideration, the plaintiff still needs to prove actual damages or that rescission would be appropriate under the circumstances. A failure to do so could foreclose meaningful relief and result in only nominal damages. We can put it no better than the Court did: “[T]here is [an] important lesson to be learned from this case. While this court endeavors always to remedy breaches of fiduciary duty, especially breaches of the duty of loyalty, and has broad discretion in fashioning such remedies, it cannot create what does not exist in the evidentiary record, and cannot reach beyond that record when it finds the evidence lacking. Equity is not a license to make stuff up.”
This decision is particularly helpful in clarifying the effect of Section 141 of the DGCL. A transaction that is passed by the vote of even a single disinterested director is not void because of the language of Section 141. However, that does not mean that the transaction also is then subject to the business judgment standard of review. If the other directors are interested in the transaction, then the entire fairness standard will apply. More ›
It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.
This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›
There has been some uncertainly over the effect of stockholder approval of stock option plans for directors, such as does that approval constitute ratification so as to invoke the business judgment rule. This decision clarifies that law. In general, ratification will occur when the directors lack discretion on how the actual stock options are to be granted. For example, if the stock option plan permits the directors to fix the amount of stock or the price they are to pay, then the stockholder vote is not a ratification.
This is an important decision because it extends the holding of MFW to a stock reclassification. Under the 6-part test of MFW, the business judgment standard of review applied and the complaint was dismissed. The opinion is particularly useful for its historical review of how the decisional law has evolved to cover many different types of transactions with a controller and when, but for the protections for stockholders provided by MFW, the intrinsic fairness test would have applied to the Court’s analysis.
This is an interesting decision with potential implications for future shareholder litigation. Briefly, the complaint alleged that, in connection with a proposed merger, the controlling shareholder secured a side deal at the expense of the corporation and its other shareholders. However, the merger had yet to close and the plaintiff sought only money damages while favoring the merger’s consummation. Further, the plaintiff was trying to advance a direct claim for money damages based on the side deal, as well as derivative allegations based on harm to the company. Under these circumstances, the Court held the action was premature and stayed it until the merger either did or did not take place, when the path forward would be more certain.
It is not easy to sufficiently plead a bad faith breach of fiduciary duty by a board in approving a merger when a majority of the directors were disinterested and independent. One basis for such a bad faith breach might be that the board approved a merger where management extracted side deals, such as employment arrangements with the post-merger entity or performance-based sale bonuses. As this decision explains after reviewing the precedent, an extreme set of facts is required to survive dismissal on this theory.
Under M&F Worldwide, the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders if, from the outset of the negotiations, the controlling stockholder conditions the merger on both (i) negotiation and approval by a special committee of independent directors, free to select its advisors, empowered to say no, which fulfills its duty of care, and (ii) approval by an uncoerced, fully informed majority-of-the-minority vote. Compliance with M&F Worldwide limits plaintiffs to untenable waste claims. Significantly, this decision extends M&F Worldwide to circumstances where the controlling stockholder is a seller, rather than the buyer, and may have engaged in a conflicted transaction based on alleged side deals. The decision also holds that the dual protections of M&F Worldwide must apply from the start of the negotiations with the controller to be given effect.
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.