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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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When seeking stockholder votes it is not always clear when the company must disclose an opinion of an individual director on the merits of the proposed transaction. This decision reviews the Delaware law and concludes that at least when the director involved is a founder and chairman and voices an opinion that the transaction is not good for the company, that opinion must be disclosed.
Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.
As this decision explains, to state a claim attacking a merger on the basis that the Board acted in bad faith you need more than accusations that directors were motivated to avoid a proxy fight involving an activist investor. Informed stockholder approval, disinterested directors, careful consideration, a premium price, reasonable deal protection devices, and prominent advisors all work to negate inferences of bad faith.
This decision begins with a conventional analysis of a claim that disclosure violations and director self-interest have tainted a merger vote. That claim was rejected for want of factual support. More unusual, the decision also rejects the plaintiff’s argument of an alleged independent right to appraisal that, when infringed by disclosure violations, is outside the usual charter exculpation provision for duty of care breaches. As this decision explains, quasi-appraisal is simply a form of remedy, typically sought to address disclosure deficiencies that are the product of a breach of fiduciary duty. Where there is no failure to identify any material misrepresentation or omission, or any other viable claim for breach of fiduciary duty, there is no basis to impose a quasi-appraisal remedy.
Parties to an acquisition often attempt to set limits on what may be recovered in any post-closing dispute between them. This helps the buyer get a lower price in return for the safety the sellers buy with a price concession. Exactly how to do this, however, has proved difficult. The well–known Abry Partners decision sets limits, for example, on what claims may be released in advance, such as a claim for fraud based on deliberate misstatements in a purchase agreement. This decision carefully explains the boundaries of what may be released and how to get the best language to set out the parties’ actual agreement. It is a great guideline to follow.
In its now famous Corwin decision the Delaware Supreme Court held that when a majority of the stockholders in a fully informed, noncoercive vote approve a transaction, the business judgment rule applies and the transaction is virtually immune from attack. However, plaintiffs continue to argue that Corwin did not hold that the stockholder approval precluded a claim based on a Unocal theory that by virtue of excessive deal protection devices the vote was coercive. Such a claim had been upheld in the older Santa Fe case and Corwin expressly declined to overrule Santa Fe. This decision notes that the status of Santa Fe may be unclear, but then goes on to hold that the agreements alleged to be preclusive deal protection devices do not violate Unocal even if it were applicable. More ›
A board must disclose all information material to the stockholder vote for a transaction. Moreover, disclosures may be inadequate when they are buried in various places in a lengthy proxy statement. One piece of material information is conflicts involving the board’s advisors. The Court of Chancery is prepared to preliminary enjoin a transaction where the proxy omits or fails to sufficiently disclose material details concerning, for instance, a banker’s conflict. For example, the inadequately disclosed conflict warranting an injunction in this case involved the fees the buy-side banker expected to receive for its participation in debt financing for the deal.
Under the Corwin doctrine, approval by a majority of the fully-informed, uncoerced, disinterested stockholders invokes the business judgment rule so long as the transaction does not involve a controlling stockholder extracting personal benefits. This decision explains that law very well. More interestingly, however, the decision also applies Corwin to a complaint alleging a violation of the duty of care. That is unusual because almost all Delaware corporations have a duty of care exculpation clause in their charters and the result is that post-closing damages cases against directors usually focus on alleging a violation of the duty of loyalty. Why that should make a difference under Corwin is not clear but at least this decision seems to settle the issue and Corwin applies to duty of care claims as well.
The well-known Corwin decision requires that the Court of Chancery apply the deferential business judgment rule to attacks on a merger approved by a majority of the disinterested stockholders who had all the material information. The current plaintiff strategy is to plead that the stockholders were not fully informed such that the vote should not have a cleansing effect. Most notably, this decision addresses who has the burdens of pleading and proof regarding the sufficiency of the disclosures for a Corwin defense. As the Court explains, the plaintiff must first sufficiently plead one or more disclosure violations, and only then will the burden shift to the defendants to show that the stockholders were fully informed. The decision also explains that Corwin did not change the disclosure standard—directors are only obligated to disclose material information to satisfy Corwin.
Many contracts for the sale of a company have a provision addressing how the parties should resolve disagreements concerning post-closing adjustments to the sale price. Exactly who is to resolve those disputes (be it an accountant, an arbitrator or the court), and the scope of their authority is sometimes unclear. This decision tracks some precedents and explains when the contract may be interpreted to permit an accountant to decide what adjustments are required by GAAP.
Under the recent Corwin decision, a fully-informed vote by uncoerced and disinterested stockholders to approve a merger invokes the business judgment rule and effectively precludes almost any claim the merger was improper. This decision does a very good job of explaining when proxy disclosures are adequate to invoke Corwin. Here, the alleged disclosure violations concerned (i) information regarding a competing bid, (ii) potential conflicts involving one director, and (iii) the banker’s compensation and potential conflicts.
A merger approved in accordance with the criteria set out in the M&F Worldwide decision is subject to the business judgment standard of review, and vulnerable to attack only if its terms are so extreme as to constitute waste. This decision does a good job of explaining how the M&F Worldwide criteria are to be applied to a given set of facts at the motion to dismiss stage.
Merger or company sale agreements frequently include clauses limiting what a buyer may rely upon after due diligence, particularly when there is some hold back of the merger or sale consideration that the buyer may seek to retain after the closing based on a misrepresentation claim. But as this careful decision explains, the elimination of reliance claims needs to be in a clause applying to the buyer, not just in a clause that tries to limit the representations from the seller. These clauses need very careful drafting and this decision explains how that should be done.
Discovery of financial information in M&A litigation, including appraisal actions, often involves two issues: (1) how far back before the transaction should there be discovery and (2) is post-transaction discovery permitted? This decision provides some guidance on both issues.
This is an important decision that reverses a prior opinion in the same case. The Court did so because after it issued its prior opinion, the Delaware Supreme Court issued its Corwin decision holding that when a merger is approved by a disinterested Board and a majority of the fully informed stockholders, the business judgment standard of review applies. This Court concluded that under that standard, the Board’s actions were not grossly negligent.