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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.
Court Of Chancery Explains When A Prediction Is A Misleading Disclosure
Chatham Asset Management LLC v. Papanier, C.A. No. 2017-0088-AGB (Dec. 22, 2017)
It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.
ShareCourt Of Chancery Explains Caremark Claims
Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. 12151-VCG (December 18, 2017)
This decision is an exhaustive review of what constitutes a Caremark claim. It makes it clear that merely because the directors were aware of red flags and the corporation later suffered harm that is not enough to support a Caremark case. Instead, the facts must show scienter deliberate violation of the law or a conscious indifference to wrongdoing. What this may mean in practice is that if the board minutes show some effort to correct corporate problems, that may negate a finding of the necessary scienter. More ›
ShareDelaware Supreme Court Clarifies Ratification Defense In Stock Option Cases
There has been some uncertainly over the effect of stockholder approval of stock option plans for directors, such as does that approval constitute ratification so as to invoke the business judgment rule. This decision clarifies that law. In general, ratification will occur when the directors lack discretion on how the actual stock options are to be granted. For example, if the stock option plan permits the directors to fix the amount of stock or the price they are to pay, then the stockholder vote is not a ratification.
ShareCourt Of Chancery Expands MFW To Recapitalization
IRA Trust FBO Bobbie Ahmed v. Crane, C.A.. 12742-CB (December 11, 2017)
This is an important decision because it extends the holding of MFW to a stock reclassification. Under the 6-part test of MFW, the business judgment standard of review applied and the complaint was dismissed. The opinion is particularly useful for its historical review of how the decisional law has evolved to cover many different types of transactions with a controller and when, but for the protections for stockholders provided by MFW, the intrinsic fairness test would have applied to the Court’s analysis.
ShareCourt Of Chancery Finds Pre-Merger Suit Unripe
This is an interesting decision with potential implications for future shareholder litigation. Briefly, the complaint alleged that, in connection with a proposed merger, the controlling shareholder secured a side deal at the expense of the corporation and its other shareholders. However, the merger had yet to close and the plaintiff sought only money damages while favoring the merger’s consummation. Further, the plaintiff was trying to advance a direct claim for money damages based on the side deal, as well as derivative allegations based on harm to the company. Under these circumstances, the Court held the action was premature and stayed it until the merger either did or did not take place, when the path forward would be more certain.
ShareCourt Of Chancery Applies M&F Worldwide To A Selling Controller
Under M&F Worldwide, the business judgment rule standard of review applies to squeeze-out mergers with controlling stockholders if, from the outset of the negotiations, the controlling stockholder conditions the merger on both (i) negotiation and approval by a special committee of independent directors, free to select its advisors, empowered to say no, which fulfills its duty of care, and (ii) approval by an uncoerced, fully informed majority-of-the-minority vote. Compliance with M&F Worldwide limits plaintiffs to untenable waste claims. Significantly, this decision extends M&F Worldwide to circumstances where the controlling stockholder is a seller, rather than the buyer, and may have engaged in a conflicted transaction based on alleged side deals. The decision also holds that the dual protections of M&F Worldwide must apply from the start of the negotiations with the controller to be given effect.
ShareCourt Of Chancery Explains Corwin Limits
Sciabacucchi v. Liberty Broadband Corp., C.A. 11418-VCG (May 31, 2017)
This is an important decision if only because it explains a further limitation on the Corwin rule that an informed uncoerced stockholder vote insulates a corporate transaction from attack. First, the decision explains when a minority stockholder is a “controller” for purposes of even being able to avoid Corwin. That decision does not apply to transactions with a controller. Merely being able to appoint some of the directors does not make one a controller, at least when the certificate of incorporation limits the power of that stockholder to dictate corporate action. More ›
ShareCourt Of Chancery Explains Standing To Bring Fiduciary Duty Claims After Being Forced to Sell Stock
I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, C.A. 11893-VCG (December 6, 2016)
This is an important decision because it clarifies when a stockholder loses standing to bring a fiduciary duty case because he sold his stock. Briefly, breach of fiduciary duty claims may be direct (belonging to the individual stockholder), derivative (belonging to the corporation generally), or dual-natured (partially direct, partially derivative). Direct/individual claims for breach of fiduciary duty may also be personal (belonging to the individual) or non-personal (attaching to the stock). As explained by In re Activision Blizzard, Inc. Stockholder Litigation, 124 A.3d 1025 (Del. Ch. 2015), a stockholder selling his stock gives up all but direct claims that are personal in nature—the non-personal rights otherwise travel with the shares to the new owner. More ›
ShareCourt Of Chancery Reviews Caremark Pleading Standard
Reiter v. Fairbank, C.A. No. 11693-CB (October 18, 2016)
Directors may face liability for a failure of oversight that caused the company to suffer a loss, often involving fines imposed by various authorities. Claims alleging this oversight liability under Delaware law are governed by the famous Caremark standard. A considerable hurdle for the plaintiff is the Caremark standard’s sometimes overlooked scienter requirement—the need to show bad faith, meaning that the directors knew that they were not discharging their fiduciary obligations. This decision carefully analyzes a complaint’s allegations and the Caremark precedent to conclude the complaint should be dismissed for failure to meet that test.
ShareDelaware District Court Examines An Officer’s Fiduciary Duties When Projecting Revenues
Palmer v. Reali, Civ. No. 15-994-SLR (D. Del. Sept. 29, 2016)
Revenue projections are an inexact science, but they should have some basis in fact. Where they are alleged to be without a basis in reality, and indeed contrary to reality, a court may, as here, find that an officer’s fiduciary duties are implicated.
ShareCourt Of Chancery Reviews Corporate Opportunity Doctrine Where Derivative Claim Eliminated By Merger
In Re Riverstone National Inc. Stockholder Litigation, C.A. 9796-VCG (July 28, 2016)
This is an excellent explanation of the corporate opportunity doctrine’s four elements, under which directors may be liable for taking a business opportunity that: (1) the corporation is financially able to take for itself; (2) is within its line of business; (3) would have been of interest to the corporation; and (4) presents a conflict of interest to the directors. More ›
ShareCourt of Chancery Explains Bad Faith Test
In Re Chelsea Therapeutics International Ltd. Stockholders Litigation, C.A. 9640-VCG (May 20, 2016)
This decision deals with when the actions of directors may be considered to be in bad faith, at least when there is no self-interest involved and the directors are properly informed before taking the time to decide what to do. The short answer is that the “too stupid to be in good faith” test applies to see if their decision is in bad faith.
ShareCourt Of Chancery Explains When A Minority Stockholder May Have Actual Control Over A Deal
Calesa Associates, L.P. v. American Capital Ltd., C.A. 10557-VCG (February 29, 2016)
This is another in a series of decisions dealing with the allegation that a minority stockholder controlled a deal through its control of a majority of the board of directors. Its analysis of when such control is present is very helpful. It also points out that there is a Section 228 violation when stockholders are asked to sign stockholder consents without being provided with all the documents needed to understand what that consent includes.
ShareThe Delaware Supreme Court Upholds $76 Million Judgment Against RBC for Rural/Metro Sale
Investment bankers seeking to profit as both adviser to the seller and financier to the buyer in corporate sales processes have faced increased scrutiny by Delaware courts over the last few years. In a highly-publicized 2011 decision, Vice Chancellor Laster criticized investment banker Barclays PLC for acting both as adviser to the seller and financier to the buyer in the Del Monte Foods Co. sale process. The following year, now Chief Justice, then Chancellor Strine, criticized Goldman Sachs’ role in the El Paso Corp. sales process for allegedly steering the sale to its favored buyer Kinder Morgan Inc.
In the latest Delaware decision criticizing bankers guiding corporate sales processes who seek to profit on both sides of a sale, In re Rural Metro Corp. Stockholders Litigation, the Supreme Court affirmed the Court of Chancery’s holding that investment banker RBC Capital Markets LLC (“RBC”) was liable for aiding and abetting the breach of fiduciary duties by the Board of Rural/Metro Corporation’s (“Rural” or the “Company”) in connection with its sale to private equity firm Warburg Pincus LLC (“Warburg”). (No. 140, 2015, 2015 WL 7721882 (Del. Nov. 30, 2015)). More ›
ShareCourt Of Chancery Explains The Continuing Wrong Doctrine
REDUS Peninsula Millsboro LLC v. Mayer, C.A. No. 8835-VCN (July 13, 2015)
It is settled law that a cause of action accrues when the wrong is committed, not when its effects continue to be felt in the future. But as this decision makes clear, that is not always the case. When additional wrongdoing adds to the injury, the action accrues with each wrongful act.
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