Posts in Special Committees

Company Did Not Breach Mandatory Redemption Provision Where Special Committee Determined Company Lacked Funds To Redeem All Preferred Shares

Cont’l Investors Fund LLC v. TradingScreen, Inc., C.A. No. 10164-VCL (Del. Ch. July 23, 2021)
A holder of preferred stock often possesses redemption rights that permit the stockholder to require a company to repurchase the stockholder’s shares. But what happens if the company determines that it lacks the funds to repurchase the stock? As illustrated in this case, a stockholder challenging the determination bears the burden of proof to show that the company’s determination was improper. More ›

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Chancery Grants Special Litigation Committee’s Zapata Motion, Finds Committee Was Sufficiently Independent and Reasonable

Diep v. Sather, C.A. No. 12760-CM (Del. Ch. July 30, 2021)
Under Zapata, when analyzing a motion to dismiss by a special litigation committee, the court evaluates whether the committee was independent, acted in good faith, and had a reasonable basis for its conclusions. The court then applies its own independent business judgment to determine whether dismissal is in the best interest of the corporation. Here, the plaintiff challenged the independence of the special litigation committee and the reasonableness of its investigation and findings. More ›

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Chancery Finds No Transaction-Specific Control Where Plaintiffs Failed to Allege that a Majority of the Members of a Special Committee Were Under the Sway of a Would-Be Controller

In re GGP Inc. Stockholder Litig., C.A. No. 2018-0267-JRS (Del. Ch. May 25, 2021).
Under MFW and its progeny, if there is a conflicted controlling stockholder, then in order to receive the benefits of the business judgment rule, the transaction must be negotiated and approved by independent and disinterested directors and conditioned on an informed and uncoerced vote of a majority of the minority stockholders. A stockholder that owns less than 50% of the voting power of the corporation may be a controller if it exercises control over the business affairs of the corporation either generally or with respect to the transaction at-issue. More ›

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Chancery Resolves Dispute Between Competing Special Committees, Finding Second Committee Could Not Voluntarily Dismiss Suit Brought By The First Committee Under The Zapata Framework

In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Dec. 14, 2020)

This decision addresses a matter of first impression arising out of a dispute pitting two special committees of the same company, WeCompany (“WeWork” or the “Company”), against one another over control of a lawsuit on the Company’s behalf. The lawsuit involved claims against the Company’s putative controlling shareholders, SoftBank Group Corp. and SoftBank Vision Fund (AIV MI) L.P. (together, “SoftBank”), for abandoning a multi-step agreement by which SoftBank committed to a $3 billion tender offer for WeWork’s shares in addition to providing equity and debt financing (the “Transaction”). The same two-member committee that negotiated the Transaction on the Company’s behalf (the “Transaction Committee”), initiated the lawsuit with the support of the Company’s management (including WeWork’s Chief Legal Officer) as well as the Company’s outside counsel, Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden”) More ›

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Chancery Addresses Discovery and Privilege Implications of Oracle Special Litigation Committee’s Decision to Defer to Stockholder-Plaintiff’s Prosecution of Derivative Claims

In re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. Dec. 4, 2019). 

In this decision, the Delaware Court of Chancery considered the implications of a decision by a special litigation committee of Oracle Corporation to cede control of derivative claims to a stockholder-plaintiff – including whether that decision required the production of Oracle’s privileged documents that were provided to the committee and its counsel. More ›

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Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner

Wenske v. Blue Bell Creameries, Inc., C. A. No. 2017-0699-JRS (Del. Ch. Aug. 28, 2019).

In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors.  In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.” More ›

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Chancery Sustains Claims Against Special Committee Members Concerning Stock Incentive Plan

Reith v. Lichtenstein, C.A. No. 2018-0277-MTZ (Del. Ch. June 28, 2019).

As Reith explains, directors may lose the protections of the business judgment rule and expose themselves to liability if they knowingly or deliberately fail to adhere to the terms of a stock incentive plan, such as by violating a clear and unambiguous provision.  And, as Reith illustrates, Delaware courts may consider a company’s prior public disclosures about a plan’s terms in addressing that issue. More ›

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Chancery Addresses Pre-Suit Demand Refusal Standard for Special Committees

City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, C.A. No. 2017-0341-KSJM (Del. Ch. Feb. 12, 2019).

Under Delaware law, stockholders who wish to pursue a derivative claim on the corporation’s behalf face an important decision—whether to make a pre-suit demand on the board to handle the suit itself, or bring the suit oneself and plead that the board cannot disinterestedly and independently consider a pre-suit demand under the circumstances. Neither path is easy.  More ›

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Court Of Chancery Requires SLC Member Be A “Director”

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.

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Court Of Chancery Enforces Nearly Ironclad Safe Harbor For Conflict Transactions Involving Alternative Entity

Employee Retirement Systems of the City of St. Louis v. TC Pipelines GP Inc., C.A. 11603-VCG (May 11, 2016)

This is an important decision because it enforces a nearly ironclad protection against any attack on the decision of a special committee to approve a conflict transaction for a LLP and an LLC. More ›

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Court Of Chancery Rejects SLC Report

London v Tyrrell, C.A. 3321-CC (March 11, 2010)

When should the recommendations of a SLC to not pursue a derivative suit be accepted? As this opinion points out, certainly not when the defendants appoint their relative to the SCL and those that are indebted to them. Nor will the SCL be respected when its members approach their investigation with views fixed before their investigation was performed and when their non-Delaware counsel does not understand Delaware law.

This decision summarizes the Zapata principles for examining the report of a SLC, including a good summary of prior case law.  Apart from the basic rules it sets down on burden of proof, independence and the scope of any SLC investigation [all of which alone are worth reading], the decision's analysis of the internal logic of the SLC report is critical. Put simply, the Court wants the report to make sense under an objective review and when it does not, trouble will follow.

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Court of Chancery Explains Role of Special Committee

Louisiana Municipal Police Employees' Retirement System v. Fertitta, C.A. 4339-VCL (July 28, 2009).

This is a major decision with implications for all special committees. The Court denied a motion to dismiss, because the special committee did not stand up to the controlling stockholder. That much is not news. But the decision goes on to at least suggest that a special committee may have more than just the duty to say "no." In addition, a special committee needs to act affirmatively to make the controlling stockholder follow his fiduciary duties.

The decision is very fact specific, and the Court makes it clear that the context of a motion to dismiss strongly affected its analysis. However, it is also clear that those who predicted that  Lyondell v.  Chemical Co v. Ryan, 970 A2d 235 (Del. 2009)  marked a lessening of scrutiny of board action may be wrong.

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Court of Chancery Again Rejects a One Person Special Litigation Committee

Sutherland v. Sutherland, C.A. 2399-VCL (Del. Ch. May 5, 2008)

Once again, the Court of Chancery has shot down a motion to dismiss a derivative suit based on the work of a one person SLC. This time while finding the SLC was independent, the Court felt its work was not adequate because of a lack of effort in reviewing accounting records.

The opinion is a useful collection of SLC law, particularly what not to do if you are going to use a SLC.

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Court of Chancery Permits Special Committee Discovery

Young v. Klaassan, C.A. 2770-VCL (Del. Ch. April 25, 2008)

The use of a special committee of the board to avoid derivative suits over allegations of breach of duty is well recognized. What is less well known is how to use the work of such a committee. Here the defendants improperly argued that a derivative suit should be dismissed because of the conclusions of a special committee formed after the complaint was filed. That use of information not alleged in the complaint converted the motion to dismiss into a motion for summary judgment and thereby permitted discovery into the work of the special committee.

The opinion also notes the "unusual" nature of the special committee in this case. The committee did not issue a report, barely had its existence disclosed, and otherwise proceeded irregularly. One has to wonder why it was even formed if it was to act so poorly.

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SLC Formed After Demand Excused is Not "Too Late"

In re infoUSA, Inc. Shareholders Litigation, Consol. C.A. No. 1956-CC (March 17, 2008).

A special litigation committee was formed by the board of infoUSA, Inc. at the end of December, after a motion to dismiss derivative litigation had been denied and after a finding had been made by the Court of Chancery that demand was excused.   The SLC moved to stay the ongoing derivative litigation in January, seeking a period of 150 days in which it could investigate the substance of the claims in the action.  The plaintiffs opposed such a stay, asserting that the SLC was formed "too late" and should not be allowed to derail the ongoing litigation.

The Court of Chancery rejected this position:  "The fact that I have already determined that demand is excused demonstrates why the board must act by means of a special committee; it does not in any way explain why it cannot act through an SLC."  Consequently, the requested stay was granted.  The Court also rejected as premature any challenge to the independence of the SLC, finding it serves the purposes of judicial economy to do so after the SLC issues its report.  The letter opinion can be viewed here.

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