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Morris James postings of significant news, original articles and legal insight related to Delaware.
Chancery Enjoins Unfair Merger Orchestrated by Controlling Stockholder Pending Corrective Disclosures
Under Delaware law, majority or controlling stockholders owe fiduciary duties to the company and its minority stockholders. Under certain circumstances, however, a stockholder that owns less than 50 percent of the company’s outstanding stock can be deemed a controlling stockholder and therefore subject to the same fiduciary obligations. This determination involves a fact-intensive analysis regarding the alleged controller’s dominance of the board generally, or dominance of the corporation, board or the deciding committee with respect to a challenged transaction.
The Delaware Court of Chancery recently addressed this issue in FrontFour Capital Group v. Taube, C.A. No. 2019-0100-KSJM (March 11, 2019), where the court issued a post-trial decision on the plaintiffs’ claims to enjoin a proposed combination of Medley Management (a publicly traded asset management firm) with two corporations it advised, Medley Capital Corp. and Sierra Income Corp. (the proposed transactions). In FrontFour, the court held that twin brothers Brook and Seth Taube, who collectively owned less than 15 percent of Medley Capital’s stock, were nonetheless controlling stockholders because they exercised de facto control over the Medley Capital special committee negotiating the proposed transactions, thereby triggering entire fairness review. Although the defendants failed to show that the proposed transactions were entirely fair, the court could not order the most equitable result—a sales process free from influence and onerous deal protections—because plaintiffs failed to prove that Sierra aided and abetted the breaches of fiduciary duty. Therefore, pursuant to the Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the court could not “strip an innocent third party of its contractual rights” under a merger agreement. However, the court did enjoin the stockholder vote pending corrective disclosures regarding the conflicted sales process. More ›
As part of the Tax Cuts and Jobs Act passed at the end of 2017, Congress provided new tax benefits for investments in designated Opportunity Zones. While the specifics of the new law are still being ironed out, through enactment of further regulations, the Opportunity Zone program is worth a further look for investors seeking preferential tax treatment for capital gains.
Opportunity Zones, covering parts of all 50 states, the District of Columbia and five U.S. Territories, are designed to spur economic development by providing tax benefits for investors. Governor John Carney selected 25 census tracts across the State of Delaware as Opportunity Zones in April 2018. The designated Opportunity Zones are intended to spur additional private sector investment in economically-distressed properties across the State. Under the Act, prospective investors are incentivized to sell appreciated property and to reinvest the gains into qualified Opportunity Zone projects. The incentives consist of tax deferral on prior gains invested in a Qualified Opportunity Fund (“QOF”), as well as a potential step up in basis for the QOF investment.
Unlike the typical capital gain deferral available with a Section 1031 exchange, investors can now shield gains on a much broader class of investments, including not only real estate, but also sales of stocks and bonds, as well as partnership and LLC interests. More ›
Section 220 of the Delaware General Corporation Law permits a stockholder to inspect the books and records of a corporation, provided that the demand for inspection meets certain form and manner requirements, and the inspection is sought for a proper purpose—e.g., one reasonably related to the interests of stockholders. Plaintiff stockholders bear the burden of proving that each category of documents sought is essential to accomplish the stockholders’ purpose for the inspection. Section 220 inspections of books and records are not intended to produce a comprehensive set of documents that would likely be produced under discovery rules in a plenary action. Rather, the goal in a 220 action is to provide stockholders with a discrete set of documents sufficient or necessary to accomplish their purpose. More ›
This top ten list summarizes significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past calendar year 2018. The article was originally published in Transaction Advisors.
The cases selected either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware.
One: City of North Miami Beach General Employees’ Retirement Plan v. Dr. Pepper Snapple Group Inc., 189 A.3d 188 (Del. Ch. June 1, 2018) (Bouchard, Chancellor)
This decision arose out of a merger involving the Dr. Pepper and Keurig companies. In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with the target absorbing that subsidiary. That is how Dr. Pepper and Keurig structured their deal. The result was Dr. Pepper stockholders getting cash but retaining their stock, and Keurig’s stockholders getting a controlling interest in Dr. Pepper. Certain Dr. Pepper stockholders sued in the Court of Chancery, asserting that they had appraisal rights to a judicially-determined fair value in connection with the deal under Section 262 of the Delaware General Corporation Law (DGCL), which were being violated. More ›
Attorney and legislative specialist, Andrew B. Wilson, a member of the Morris James LLP Healthcare Law and Government Relations Groups, will serve as the Distinguished Speaker at the 2nd Annual Healthcare Compliance Symposium. More ›
At a hearing in Wilmington in front of U.S. Bankruptcy Judge Kevin Gross, Angel Medical said issues heading into the confirmation hearing were resolved and a creditor that had rejected the plan changed its vote after it was revised to give a subordinated class of creditors a chance to seek preferred shares in the reorganized company.
Angel Medical Systems is represented by Jeffrey R. Waxman and Eric J. Monzo of Morris James LLP, and Joseph R. Sgroi and Glenn S. Walter of Honigman LLP.
Andrew B. Wilson of Morris James LLP has been elected to The Delaware Center of Health Innovation Board of Directors. DCHI is a public-private partnership comprised of Delaware’s foremost healthcare leaders, dedicated to achieving Delaware’s vision for becoming one of the healthiest states in the nation. More ›
The Administrative Office of the U.S. Courts estimates that federal court operations will remain funded through Jan. 31, 2019. The extension has been achieved by deferring non-critical operating costs and the usage of court filing fees and other available funds.
Court System Notices
- US Courts: Judiciary Has Funds to Operate Through Jan. 31
- DE District Court: Notice Regarding Court Operations During Lapse in Appropriations
- DE Bankruptcy Court: Notice Regarding Court Operations During Lapse in Appropriations
Litigation and filings will continue in Delaware during the federal government shutdown. If you have questions, please contact our Director of Client Relations Dawn Sheiker (302.888.6804; firstname.lastname@example.org).
Court Rejects Use of the Implied Covenant of Good Faith and Fair Dealing to Preserve LLC Members’ Exit Sale Rights
The implied covenant of good faith and fair dealing inheres in all contracts governed by Delaware law. In some circumstances, the implied covenant may apply to fill “gaps” in an agreement consistent with the parties’ reasonable expectations at the time of contracting. Delaware courts have held, however, that implying terms in this manner should be a cautious enterprise.
The Delaware Supreme Court’s recent decision in Oxbow Carbon & Minerals Holdings v. Crestview-Oxbow Acquisition, __ A.3d __, 2019 WL 237360 (Del. Jan. 17, 2019) emphasizes that implying terms as a “gap filler” is “a limited and extraordinary remedy” that does not protect sophisticated parties from the harsh operation of contract provisions in circumstances the parties could have anticipated. Specifically, the Supreme Court held that minority members of a limited liability company had no recourse to the implied covenant when the admission of new members reset certain capital return requirements that had to be satisfied before the minority members had the right to liquidate their investments through a sale of the company. The Supreme Court did so notwithstanding the Delaware Court of Chancery’s finding that, had the issue been identified and addressed at the time the new members were admitted, the minority members would not have agreed to that result. More ›
Delaware Governor John Carney delivered his third State of the State address yesterday, January 17th, in the Senate Chamber. For the healthcare world, what was in it was just as interesting as what was not in it. Highlights included re-emphasis of his existing benchmark proposal as well as Lt. Gov. Hall-Long’s work on mental health and addiction. Looking forward, he signaled a shift in focus to promoting healthy lifestyles, stating support to “raise the age for purchasing cigarettes from 18 to 21.” We’ll unpack these a little more below, but interestingly what didn’t make it in there was any talk about the outcomes of the Medicaid Buy-In Task Force (to not buy the lede – Delaware may become an individual mandate state) or the Primary Care Collaborative, both of which released major reports just a few weeks ago. More ›
Here’s a first look at Governor Carney’s State of the State today, January 17. Plenty of air time on a wide range of healthcare issues, including spending benchmarks, addiction, mental health, raising the legal age to purchase tobacco to 21, and even prison healthcare system reform. All in all an ambitious agenda for the 2019 legislative session.
Chancery Finds Inadequate Disclosure in Connection With a Tender Offer Prevents Dismissal of a Class Action Complaint
The Corwin doctrine provides substantial protection to directors of companies engaged in a sale process. Once a transaction closes, if a stockholder cannot allege that a majority stockholder vote approving a transaction was uninformed or coerced, then the court will dismiss a complaint attacking the fairness of the transaction under the business judgment standard of review. The rationale is that majority disinterested stockholder approval via a vote or a majority tender cleanses the transaction unless plaintiff can meet the high burden of pleading waste. Directors are also protected if a company’s charter contains protections under Section 102(b)(7) of the Delaware General Corporation Law (DGCL) and a plaintiff cannot allege that a majority of the directors acted disloyally or in bad faith. The Court of Chancery’s well-reasoned decision in In re Tangoe Stockholders Litigation, Cons. C. A. No. 2017-0650-JRS (Del. Ch. November 20, 2018), provides important guidance for directors seeking protection under either Corwin or Section 102(b)(7) when a board of a publicly traded company runs a sale process while it is attempting to restate its financials, its stock has been de-listed, and the Securities and Exchange Commission is threatening de-registration. More ›
Once again, there are demands to reform corporate litigation. (See, e.g., Kevin LaCroix, “Time for Another Round of Securities Class Action Litigation Reform,” The D&O Diary, Oct. 23, 2018.) But once again, the Delaware courts are leading the way to cure the problems that litigation critics complain of most. Recent Delaware Court of Chancery decisions are yet another example of that leadership. We begin to show how that is being done, by outlining the perceived problems.
The critics focus on two types of corporation litigation they claim are serious problems: so-called merger objection lawsuits; and event-driven securities litigation. The principal objection to merger objection lawsuits is that they only allege a proposed merger is improper because the proxy statement asking for stockholders’ approval is inadequate, the alleged problem is then “cured” by defendants’ immaterial supplemental disclosures and the case is dismissed after the plaintiffs lawyers are paid off with a substantial fee. That seems to be tolerating a strike lawsuit that really accomplished nothing but a fee for the lawyers.
The principal objection to event-driven securities litigation is that they are based on a failure to disclose that the company was subject to a serious risk that eventually occurred, depressing the company’s stock price. The critics argue these suits are based on a risk the company did not anticipate and thus could not have disclosed. Thus, such claims lack proof of scienter and again are just lawyer-driven fee generators with fees paid to avoid the costs of defense. More ›
A frequent lecturer on The Tax Cuts & Jobs Act of 2017 since its passage in late December, Bruce W. Tigani will be presenting on the New Tax Act at the upcoming Delaware Tax Institute on December 7, 2018. His presentation will focus on the Qualified Business Income (QBI) Deduction and Choice of Entity Planning & Developments, including the recently announced guidance from the IRS impacting S corporation shareholders, LLC members, and proprietors. Bruce will conclude with case-study comparisons illustrating the impact of the QBI deduction and other aspects of the New Tax Act on entity selection for doing business. More ›
The State of Delaware’s policy is to give maximum effect to the principle of freedom of contract. Delaware courts seek to enforce the language in an agreement negotiated by the parties and will not rewrite the agreement after the fact to reallocate risks, especially in an agreement between sophisticated parties that was bargained for at arm’s length. This includes risks allocated through “material adverse effect” (MAE) provisions in a merger or acquisition agreement. The Delaware Court of Chancery’s recent decision in Akorn, Inc. v. Fresenius Kabi AG, No. 2018-0300-JTL, 2018 WL 4719347 (Del. Ch. Oct. 1, 2018) (Laster, V.C.), illustrates how the court applies Delaware’s policy of freedom of contract. While this is the first time that the court has found that an MAE on the seller’s business justified a buyer’s termination of a merger agreement, this decision presented an exceptional set of facts regarding the utter deterioration of Akorn’s business and widespread company regulatory compliance issues affecting its pipeline of new generic drugs. Accordingly, the court’s ruling merely represents the application of a well-known principle to enforce the language of a merger agreement, allocating the risks bargained for by sophisticated parties, to an egregious set of facts. More ›