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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 180 posts in Fiduciary Duty.
This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger. Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation. The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%. Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price. By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value. When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger. More ›
Under the corporate opportunity doctrine, one way for a fiduciary to breach her duty of loyalty is to take personal advantage of an opportunity presented to or rightfully belonging to the corporation. This case involved such a breach—a director and executive purchased a building that he knew the company was interested in acquiring in order to house its operations. The test for identifying corporate opportunities is a holistic one in which the Court examines whether: (1) the corporation can afford the opportunity; (2) it is within the corporation’s line of business; (3) the corporation has an interest or expectancy in it; and (4) by taking it, the fiduciary places himself in a position adverse to his corporate duties. The decision is a noteworthy read for its discussion of those factors, in particular, the line of business prong. In that regard, the Court focused on the corporation’s clear interest and expectancy in purchasing the building and the nature of the opportunity as concerning an “operational decision about how to manage or expand an existing line of business.”
Chancery Addresses Earn-Out Dispute Involving Alleged Breaches of Fiduciary Duty and the Implied Covenant
Contingent payments based on an acquired business’s future performance are a frequent feature in M&A transactions. In this case, after selling control, the seller remained a minority member for a time period. Two holdings are noteworthy. More ›
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.
Delaware law recognizes a claim for breach of fiduciary duty based on insider trading under the Brophy decision. This is an important opinion because it recognizes an extension of potential liability under Brophy for trades made, not by the insider himself, but by an entity he or she controls. It is a natural extension that furthers the important policy of preventing insiders from profiting based on non-public information. The opinion also addresses demand futility principles under Braddock. That decision deals with how to conduct a demand futility analysis on an amended complaint after changes in the board’s composition.
Lately, the Delaware Supreme Court has given great weight to the deal price in appraisal cases. As a result, plaintiffs have put a greater focus on showing that the process leading to the merger makes that price unreliable, potentially because of breaches of fiduciary duty. One strategy for recovery is to file a breach of fiduciary case after obtaining valuable discovery in the appraisal case. This decision explains when such a fiduciary duty case can go forward notwithstanding the appraisal proceeding seeking to recover for the same loss. More ›
Transactions between a Delaware company and its controlling stockholder usually are subject to rigorous entire fairness review. But, under the MFW decision, even a merger with a controller may gain the benefit of deferential business judgment review. The MFW requirements include that the controller must condition the procession of the transaction ab initio on approval by a special committee. More ›
This notable decision issued by the Court of Chancery holds an investment fund and its manager liable for over $20 million essentially for destroying a Delaware entity’s value. The litigation arises out of a once promising technology company’s downfall into liquidation. The facts involved an investor that leveraged a series of preferred investments into negative control and used that control to secure a self-dealing financing unfavorable to the company, while simultaneously turning away much needed financing opportunities threatening its control. The investor hoped to position the company for a prompt sale in which it would reap the benefits, but that did not pan out, and the company went under. More ›
Court of Chancery Finds Breach of Fiduciary Duty By Director Selfishly Opposing Cure of Defective Corporate Acts
When a corporation accidentally issues defective stock or takes some other defective corporate act, Delaware law offers avenues to cure under the right set of circumstances. See 8 Del. C. §§ 204, 205. As this decision shows, a director who self-interestedly stands in the way of that cure by attempting to impose selfish conditions breaches his fiduciary duty of loyalty and may be liable for damages. Even if the director later comes around, extra costs incurred from his obstinacy may be charged to him.
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.
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 ›