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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.
This opinion addresses two bedrock issues of Delaware corporate law, specifically, proper board authorization under 8 Del. C. § 141 and directors’ fiduciary duty of loyalty. Following other directors’ resignations, defendant George Farley was the only director as of February 2016 of plaintiff Applied Energetics (the “Company”). Shortly after becoming the sole director, Farley executed a written consent to issue himself twenty million shares of Applied Energetics stock for $.001 per share. No contemporaneous valuation was performed, and Farley made no attempts to ensure a fair process. Faced with a request to enjoin Farley from selling the shares at issue, the Court of Chancery held that it was reasonably probable that Farley could not cause the Company to validly issue stock, because he was the only remaining director of a three-person board. The Court also held it was reasonably probable that Farley will be unable to meet his burden at trial of proving the share issuances were entirely fair. Accordingly, the Court enjoined Farley from trading the shares pending a final adjudication of their validity. This decision also provides helpful analysis, as did prior decisions in this matter, regarding how the Court will determine the amount of bond when granting preliminary injunctive relief.
This decision upholds coverage under a D&O policy for a claim alleging fraud by directors. This is not too surprising as the Delaware Corporation Law has long relied on insurance to cover the gap in the DGCL that denies indemnification for some claims based on disloyalty. The business judgment rule, the right to advancement, and indemnification and insurance are the triad of protections for Delaware directors.
Court Of Chancery Determines When A Proxy Is Irrevocable And When It Has Jurisdiction To Decide Equitable Ownership In A Section 225 Case
This is an important decision for two reasons. First, it determines when a proxy is irrevocable under Delaware law. To be irrevocable under Section 212 of the DGCL, the proxy must be coupled with an interest. While the “interest” requirement is quite broad, the “coupled” requirement is more strict. The “interest” involved must be held by the person or entity receiving the proxy in order to be “coupled.” Thus, when the proxy is in favor of “X”, but the “interest” supporting the grant of the proxy is for “Y”, the proxy is not irrevocable. This prevents a proxy holder from voting in a way that may be inconsistent with the proxy’s purpose. More ›
In a contest over who has been elected to a board of directors under Section 225 of the DGCL, it is sometimes critical to decide if certain stock was validly issued and thus can be voted. This decision sets out a circumstance when that issue may be determined in Section 225 case even when the holders of the contested stock are not parties to the litigation.
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.
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 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.