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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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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.
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.
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.
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.
While directors have the right to issue options, when the grant is to themselves and there are specific facts suggesting unfairness, those directors will have the burden of proving the grants were entirely fair in a stockholder challenge. The same is true when stock is issued conditioned on an agreement to vote that stock as the directors wish.
This is an interesting decision because it examines an intriguing legal theory for holding a controlling stockholder liable in a sale: the “known looter” theory. Generally speaking, controllers can sell their stock to whoever they want. After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company. Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.
This decision is a primer on most of the major issues in Delaware corporate law. However, what it is most likely to be remembered for is its explanation of the duties that directors have to the enterprise as a whole, even when they are elected by or beholden to preferred stockholders. Thus, it has big implications for venture capital investors. Briefly, the decision holds that it may be a breach of the directors’ fiduciary duty to cause the corporation to sell off parts of its business to satisfy a liquidation preference of its preferred stockholders. More ›
This decision holds that Revlon duties are not implicated by a decision to liquidate a company. Hence, the Court will not scrutinize whether the board sought to get the best possible deal for company assets. The decision is also helpful in reminding us that a stockholders’ agreement is not necessarily binding on the company’s board of directors who have not signed the agreement in their personal capacity.
This decision is helpful in clarifying that claims alleging disclosure violations in a proxy statement need to be pressed before a merger closes. After the merger, those claims are for damages and all the hurdles for such a claim, such as the director exculpation provisions in most charters, will usually defeat the claim absent bad faith.
This is one of two recent Court of Chancery decisions explaining that the Corwin case really does mean that there is an “irrebuttable business judgment rule” that bars challenges to a merger approved by a majority of the fully-informed, disinterested and uncoerced stockholders, in the absence of the deal involving a controlling stockholder who suffers from a conflict in the merger. More ›
In addition to explaining the seldom-used doctrines of mutual, running accounts and continuing wrongs as exceptions to the running of the statute of limitations, this decision is important for its review of when a claim of breach of duty may be tolled. A plaintiff cannot simply stand by without using means available to her to monitor her investment and then claim her case was tolled. While it is still possible to show a claim was inherently unknowable or that the plaintiff justifiably relied on a fiduciary to not seek information, the more sophisticated the plaintiff the less those exceptions to the running of the statute of limitations will apply.
This decision applies the Corwin doctrine to dismiss a suit attacking a merger that received stockholder approval. It explains that approval by a fully-informed, uncoerced majority of disinterested and independent stockholders invokes the business judgment rule standard of review – leaving waste as the only grounds to attack the transaction. Interestingly, the decision still examined whether the plaintiffs had alleged a basis for entire fairness review. Here, those allegations concerned whether a majority of the directors were either self-interested in the transaction or were manipulated by improper conduct.