This top ten list summarizes significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past calendar year. Our criteria for selection are that the decision either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware. We present the decisions in no particular order. The list does not include every significant decision, but provides practitioners with an array of decisions on varied issues likely to affect business transactions or business litigation.
One: AmerisourceBergen Corp. v. Lebanon Cty. Employees’ Ret. Fund, __ A.3d __, 2020 WL 7266362 (Del. Dec. 10, 2020) (Traynor, Justice)
Under Section 220 of the Delaware General Corporation Law (“DGCL”), a stockholder has a qualified right to inspect corporate books and records that are necessary to fulfill the stockholder’s proper purpose. One commonly asserted purpose is investigating suspected corporate wrongdoing or mismanagement. The ultimate end often is exploring plenary claims, but stockholders usually assert multiple ends, like pursuing governance changes. On a few occasions, the Court of Chancery has denied inspections where the stockholder’s sole objective was pursuing plenary claims that faced an insurmountable obstacle. But, as this decision from the Delaware Supreme Court explains, decisions in the Section 220 context turning on defenses to potential plenary claims should be the exception, not the norm.
This decision arose out of a stockholder inspection demand regarding the defendant-company’s opioid distribution practices, which were the subject of several investigations and lawsuits. The defendant opposed the inspection, characterizing the stockholder’s sole purpose as investigating plenary claims that were not actionable based on the corporation’s Section 102(b)(7) exculpatory provision and the doctrine of laches. The Court of Chancery rejected that defense and granted inspection. In doing so, the Court held that a stockholder investigating corporate wrongdoing or mismanagement need not state the ultimate objective of its investigation and generally need not show actionable potential claims.
On appeal, the Delaware Supreme Court agreed. According to the Supreme Court, a stockholder investigating corporate wrongdoing or mismanagement need only establish the requisite credible basis for suspecting wrongdoing by a preponderance of the evidence. There is no added requirement that the stockholder also “specify the ends to which it might use the books and records.” And, where plenary litigation is a potential end, there is no added requirement that the stockholder show “actionable” wrongdoing. The Supreme Court’s reasoning highlighted the purpose of Section 220 and summary nature of books-and-records proceedings, while observing that the frequent “interjection” of merits-based defenses “interferes with that process.”
Key Takeaway: Borrowing from the Delaware Supreme Court, in all but the “rare” case turning on plenary claims doomed for “purely procedural” reasons, like “standing or the statute of limitations,” the Court of Chancery will “defer the consideration of defenses that do not directly bear on the stockholder’s inspection rights, but only on the likelihood that the stockholder might prevail in another action.”
Two: Salzberg v Sciabacucchi, 227 A.3d 102 (Del. 2020) (Valihura, Justice)
Corporate charters are part of the multi-party contract among the directors, officers, and stockholders of a Delaware corporation. In the not-too-distant past, the Delaware courts and legislature sanctioned the use of Delaware exclusive forum provisions as part of the corporate contract. See Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934, 954 (Del. Ch. 2013); 8 Del. C. § 115. Such provisions have since proliferated in corporate charters and bylaws. This decision from the Delaware Supreme Court addressed a related, but novel issue: the validity of charter provisions designating federal courts as the exclusive forum for securities law claims.
Several Delaware corporations launched initial public offerings and included in their certificates of incorporation forum provisions that designated federal courts as the exclusive forum for claims brought under Securities Act of 1933. Purchasers brought declaratory judgment actions in Delaware for a determination that the provisions were facially invalid. The Court of Chancery agreed with the plaintiffs, holding that the “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law."
On appeal, the Delaware Supreme Court reversed and upheld the federal forum provisions as facially valid. The Court found that the provisions fell within the broad language of Section 102(b) of the DGCL governing the contents of corporate charters, as they address the “management of the business” and the “conduct of the affairs of the corporation.” The Court’s reasoning observed the trend of plaintiffs bringing securities claims in state court to avoid federal statutory law (i.e., the PSLRA) aimed at reducing abusive litigation. Considering recent U.S. Supreme Court precedent, once in state court, corporate defendants lack the option to remove to federal court. The federal forum provisions targeted these issues and offered important efficiencies for corporations.
The Court also found that the provisions violated neither Delaware nor federal law or policy. Regarding Delaware law and policy, the Court relied on Section 102(b)’s broad enabling language, the freedom of contract between a corporation and its stockholders, and the flexibility at the heart of the DGCL for corporate actors. Most notably, in upholding the provisions, the Court read Section 102(b) to encompass more than just “internal affairs” matters. According to the Court, Section 102(b) extends to “intra-corporate affairs” that may involve corporate conduct of boards of directors and the corporation-stockholder relationship but are outside the “more traditional realm” of “internal affairs.” Section 102(b)’s reach stops only at “external affairs,” such as a personal injury claim on the premises of the company, or a contract claim involving a commercial contract.
Key Takeaway: Absent legislative change, Section 102(b) of the DGCL generally authorizes charter provisions involving “intra-corporate affairs,” including, but not limited to, federal forum provisions like those upheld in Salzberg.
Three: Germaninvestments AG v. Allomet Corp., 225 A.3d 316 (Del. 2020) (Valihura, Justice)
Delaware courts find themselves at the center of business litigation involving counterparties from across the globe. Not infrequently, these suits implicate causes of action or legal issues arising under foreign law. This decision from the Delaware Supreme Court provides important clarity for litigants concerning the burdens of raising and proving the substance of foreign law.
This decision arose out of a failed joint venture arrangement involving a restructuring and loan agreement that contained an Austrian forum selection clause. At the trial court level, the defendants moved to dismiss based on that clause, supporting their motion without case law and with limited secondary sources describing the substance of Austrian law. The Court of Chancery nonetheless determined that Austrian law governed the clause’s interpretation and that, under Austrian law, the provision was mandatory and required dismissal.
On appeal, the Delaware Supreme Court reversed that determination and clarified the burdens of raising and proving the substance of foreign law. According to the Supreme Court, the party seeking the application of foreign law in a Delaware court has the burden to both raise the foreign law’s application and to establish its substance. The Court found that the defendants in this case did not carry their burden, meaning the trial court should have applied Delaware law, which would read the forum clause as permissive, rather than mandatory. In reaching that conclusion, the Supreme Court observed the utility of using expert testimony to prove the substance of foreign law, but emphasized that it was not establishing a per se rule requiring expert testimony.
Key Takeaway: A party asking a Delaware court to apply foreign law has the burden to raise the law’s application and to establish its substance, and should carefully evaluate the need for expert testimony to prove the law’s substance. A failure to carry these burdens likely will result in the application of Delaware law.
Four: In re Dell Tech. Inc. Class V S’holders Litig., 2020 WL 3096748 (Del. Ch. Jun. 11, 2020) (Laster, Vice Chancellor)
Mergers involving a corporation and its conflicted controlling stockholder invoke Delaware’s most stringent form of judicial scrutiny, i.e., entire fairness review. But, with the right procedural protections in place at the right time, even those transactions can get the benefit of Delaware’s deferential analysis, i.e., business judgment review. Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), a conflicted controller transaction may get the benefit of business judgment review when conditioned on two procedural protections involving approval by (i) an independent special committee and (ii) a majority of the minority stockholders. There are sub-conditions too, such as at the outset empowering the special committee to reject the proposed transaction and the committee satisfying its duty of care in negotiating a fair price.
As this decision illustrates, surface level compliance with MFW is insufficient to invoke its protections—a company must both establish and respect the MFW conditions. The action arose out of Dell’s redemption of minority stockholders in a specific class of the company’s shares. That class of shares was subject to a particular conversion right held by the company. Dell attempted compliance with MFW by forming a special committee and conditioning the proposed redemption on the committee’s recommendation as well as a majority-of-the-minority vote by the relevant shareholder class. While the special committee and the minority ultimately approved a redemption, the Court of Chancery declined to find that Dell satisfied MFW and denied Dell’s motion to dismiss.
Several issues were critical to the Court’s decision. First, the special committee’s mandate was too narrow. It encompassed only approving the redemption. It did not include authority over the company’s conversion right, which the company wielded as an unattractive alternative to the proposed redemption. That circumstance limited the committee’s ability to reject the proposed transaction. Second, the company bypassed the special committee to negotiate directly with minority stockholders after large minority stockholders opposed the first offer recommended by the committee. According to the Court, under MFW, the special committee is to serve as the independent bargaining agent for the minority stockholders. That did not occur in the circumstances. Instead, the committee largely abandoned its role.
Third, the redemption offer was impermissibly coercive. Among the forms of coercion described by the Court, the company’s conversion right, and statements by the company’s controller about exercising that right absent redemption, represented a looming threat that negated the cleansing effect of the minority stockholders’ approval. On this point, the Court engaged in a thorough discussion of what constitutes coercion of minority stockholder voting in the MFW context. Fourth and fifth, the plaintiff sufficiently alleged that the two-member special committee was not independent and that the deal disclosures omitted or misstated material information. Any one of these issues was enough to take the transaction outside of MFW’s protections.
Key Takeaway: Controllers wishing to obtain the pleading-stage benefits of MFW must be careful to not only establish, but also respect the MFW conditions. That includes, at the outset of a transaction, carefully considering the committee’s mandate and, during the transaction process, working through the committee, rather than circumventing it.
Five: In re Anthem-Cigna Merger Litigation, 2020 WL 5106556 (Del. Ch. Aug. 31, 2020) (Laster, Vice Chancellor)
Merger agreements for complex deals naturally are complex themselves. The provisions frequently include detailed representations and warranties, best efforts clauses, covenants and conditions relating to securing regulatory approvals, material adverse effect clauses, termination rights provisions, and related termination fee provisions. Parties often call on the Delaware courts to construe and apply such provisions in busted deal disputes. Each decision turns on the provisions of the particular merger agreement, but still provides important lessons for dealmakers.
This is one such decision, arising from the failed merger transaction involving two of the largest health insurers in the United States. The federal government ultimately enjoined the proposed transaction, preventing closing. But the counterparties nonetheless found themselves in the Court of Chancery litigating over alleged breaches of the merger agreement’s efforts, regulatory approval, and termination fee provisions, each seeking billions of dollars in damages. The Court spilled much ink resolving the parties’ dispute—the opinion spans over 300 pages. In the end, the Court found that one party breached its efforts-related obligations, but the regulatory approval condition would have failed regardless, that the counterparty satisfied its regulatory-related obligations, and that the breaching party was not entitled to a termination fee because its first attempted termination was premature and the counterparty terminated the merger agreement without triggering a fee before the second attempt. Both parties walked away recovering no damages. The true winners are deal lawyers, who can rely on the decision to sharpen the language in merger agreements and strengthen their advice.
Key Takeaway: Anthem-Cigna is an important read for understanding the interpretation and application of complex merger agreement provisions, in particular, efforts and regulatory clauses.
Six: AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, 2020 WL 7024929 (Del. Ch. Nov. 30, 2020) (Laster, Vice Chancellor)
COVID-19 has upended many things. Among them is the travel industry and M&A activity. This decision arises out of the intersection of those topics—a $6 billion deal for luxury hotels sidetracked by the pandemic. Here, the buyer terminated the purchase agreement in the midst of the pandemic, citing circumstances related to the pandemic (and other unrelated issues), and the seller sought specific performance. The Court of Chancery’s decision addressed two important provisions in the M&A context, particularly in the current environment: a “material adverse effect” clause and “ordinary course” covenant.
On the first issue, the Court found that the MAE clause did not give the buyer the right to terminate the purchase agreement. Excepted from the MAE clause were “natural disasters and calamities.” Relying on dictionary definitions, the risk allocation structure of the clause at issue, expert testimony, and industry practice, the Court found that a pandemic fell within the meaning of the word “calamities,” and thus could not trigger an MAE excusing the buyer’s performance. On the second issue, however, the Court found that the seller breached its covenant to conduct its business in the ordinary course, consistent with past practices. The pandemic did not excuse the seller’s adherence to this covenant, yet the seller made extensive operational changes to the hotels, like closing or limiting operations, slashing employee headcount, and minimizing marketing spends. This breach excused the buyer from the obligation to close. The seller’s claim for specific performance therefore failed and the buyer recovered its deposit and other funds in accordance with the parties’ agreement.
Key Takeaway: Given the prevalence of MAE provisions and ordinary course clauses, those attempting to paper or navigate a deal during the pandemic should adhere to the precepts in AB Stable.
Seven: Elburn v. Albanese, 2020 WL 1929169 (Del. Ch. Apr. 21, 2020) (Slights, Vice Chancellor)
Stockholders seeking recourse on a derivative claim for harm to the corporation have two options. They can either make a pre-suit demand on the board to take action, or, alternatively, bring suit themselves while alleging that demand would be futile. A derivative suit faces a heightened pleading standard to justify sidestepping the board’s presumed authority over corporate claims. Under Court of Chancery Rule 23.1, the stockholder plaintiff must allege facts “with particularity” supporting an inference that at least half of the directors cannot consider the suit’s subject matter in a disinterested and independent manner. As the Court of Chancery remarks in this decision, the Delaware courts surprisingly have had “little occasion” to articulate exactly what it means to plead a fact “with particularity” in the Rule 23.1 context. This decision tackles that question.
The action concerned replacement stock awards issued by a board following the settlement of another action regarding the original stock awards, with the replacement awards alleged to be a quid pro quo arrangement with some of the settling fiduciaries. In that setting, the parties disputed the particularity standard, with defendants arguing that the plaintiff needed to satisfy the particularized facts pleading standard generally applicable to fraud claims under Rule 9(b). That standard requires a plaintiff to plead the “newspaper facts”—the “who, what, when, where and how”—of the alleged wrongdoing.
The Court of Chancery declined to apply the “newspaper facts” standard in this context, observing that, unlike a defrauded party, derivative plaintiffs are not in the boardroom, are not the direct targets of the wrongdoing, and may not have access to those details even after a books-and-records inspection under Section 220. According to the Court, it is well settled that particularized facts generally require indicia of specificity. Beyond that, the Court looked to the decision in Kahn Brothers & Co., Inc. Profit Sharing Plan and Trust v. Fischbach Corp., 1989 WL 109406 (Del. Ch. Sept. 19, 1989), in which the Court of Chancery applied a relaxed Rule 9(b) standard in the context of fraudulent omissions. That decision generally articulated the following standard: a plaintiff needs to plead facts sufficient to inform “defendants of the precise transactions at issue” so they have “notice of the precise misconduct with which they are charged.” The Court endorsed this standard in the Rule 23.1 context, finding it goes beyond “notice pleading” under Rule 8, but falls short of pleading “newspaper facts” under Rule 9(b).
Key Takeaway: Under Elburn, pleading a derivative claim “with particularity” under Rule 23.1 does not require the plaintiff to plead the “newspaper facts” sometimes necessary to support a claim for fraud. Still, the closer a plaintiff can get to pleading “newspaper facts,” the better its chances of overcoming the Rule 23.1 hurdle.
Eight: In re WeWork Litigation, 2020 WL 4917593 (Del. Ch. Aug. 21, 2020) (Bouchard, Chancellor)
Directors of a Delaware corporation have broad information rights to discharge their fiduciary duties. Delaware law describes a director’s right to access the corporation’s books and records as “essentially unfettered” and this right extends to the corporation’s privileged information. Events can defeat or limit a director’s right to access privileged information, including the board forming a committee that excludes the director, or the board identifying the existence of sufficient adversity between the interests of the director and the corporation he or she serves. This decision addressed a novel issue relevant to director access: whether management of a Delaware corporation has the unilateral power to block a director’s access to the corporation’s privileged information.
The Court of Chancery answered that question in the negative, finding management generally cannot prevent a director from accessing the corporation’s privileged information. The decision arose from a dispute in a unique posture, with a special committee bringing claims against a contractual counterparty of the company who also was its controlling stockholder, followed by the company forming a new committee in an effort to voluntarily dismiss the first committee’s claims. In this setting, the first committee sought to discover privileged communications between the company’s management and in-house and outside counsel to the company relating to the circumstances surrounding the new committee’s creation. Management opposed the discovery, contending the first committee was adverse to the company on the subject.
The Court, however, determined that the sufficient adversity exception did not apply. Management was trying to block director access, arguing that all the corporation’s warring directors were conflicted on the subject and that management should have the right to confer with company counsel to the directors’ exclusion in those circumstances. But, as the Court explained, “[i]t is the board of directors of a corporation—not management—that has the ultimate responsibility for overseeing the affairs of the corporation under 8 Del. C. § 141(a).” In the Court’s view, allowing management to shield privileged information from the entire board would turn bedrock principles “on their head." In summary, the Court held that “directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.”
Key Takeaway: Under WeWork, management lacks the unilateral authority to block director access to the corporation’s privileged information.
Nine: Palisades Growth Capital II, L.P. v. Bäcker, 2020 WL 1503218 (Del. Ch. Mar. 26, 2020) (Slights, Vice Chancellor), aff’d, --- A.3d ----, 2021 WL 140921 (Del. Jan. 15, 2021) (Montgomery-Reeves, Justice)
Contests for corporate control within the boardroom are common, particularly when stockholders with divergent interests, like founders and private equity preferred stockholders, appoint sets of directors. Directors at odds must tread carefully. Delaware law obliges directors to be candid with each other and does not countenance inequitable conduct among fellow fiduciaries. Even assuming technical compliance with the DGCL and the corporate documents, Delaware courts find that inequitable conduct by fiduciaries in connection with a board meeting, such as procuring a director’s attendance by deception, may be grounds for invalidating board actions taken at that meeting.
This decision explains the circumstances in which Delaware courts will invalidate director action tainted with inequitable conduct. Here, a recently terminated CEO appeared to accept his termination and signaled support for his replacement and other governance changes. But that same individual, together with another director and relative, took advantage of abrupt director resignations and a newfound board majority to retake the CEO position by luring a third director to attend the upcoming board meeting under false pretenses. The deceived director could have avoided this management change by not attending and defeating a quorum. In these circumstances, the Court applied equitable principles to invalidate actions taken at that meeting.
The Delaware Supreme Court recently affirmed the trial court’s decision. Two holdings are notable. First, the Supreme Court found that the trial court did not impose an equitable notice requirement at a regular meeting of the board, where Delaware law does not require notice of an agenda. Rather, the “source of inequity” was not a failure of notice, but the defendants’ “decision to secretly plan an ambush after feigning support for the planned governance items.” Second, the Supreme Court found that the trial court properly applied the attendance-by-deception prohibition to a regular meeting of the board, even though the rule arose from decisions involving special meetings. As the Supreme Court found, “[r]egardless of the type of meeting or form of communications, Delaware law does not countenance deception designed to manufacture a quorum or otherwise induce director action.”
Key Takeaway: Directors must deal candidly with their fellow directors. At a minimum, that means not affirmatively deceiving each other into attending regular or special meetings. Infringing on this prohibition may invalidate board-action taken at the meeting.
Ten: Pettry v. Gilead Sciences, Inc., 2020 WL 6870461 (Del. Ch. Nov. 24, 2020) (McCormick, Vice Chancellor)
Once again, Section 220 of the DGCL grants stockholders a qualified right to inspect the corporate books and records that are necessary to satisfy a proper purpose, like investigating suspected corporate wrongdoing or mismanagement, potentially to explore plenary claims. Section 220 rights have gained significance following the development of various doctrines under Delaware law that pose pleading stage hurdles to stockholder plaintiffs. The burden on stockholder plaintiffs to show their entitlement to inspection is minimal—the “credible basis” standard is the “lowest possible burden of proof” under Delaware law. Despite this plaintiff-friendly standard, and perhaps in part because of it, disputes in a Section 220 action tend to balloon beyond the proceeding’s intended summary nature.
What makes this Section 220 decision notable is the Court of Chancery’s observation of a negative trend, in addition to its proscribed cure. This action involved circumstances where the plaintiff’s credible basis was rather strong and the defendant nonetheless offered a plethora of defenses, including some bordering on “absurd.” According to the Court, the defense strategy was “overly aggressive” and, more broadly, “epitomize[d] a trend.” As the Court elaborated, “defendants are increasingly treating Section 220 actions as ‘surrogate proceeding[s] to litigate the possible merits of the suit’ and ‘place obstacles in the plaintiffs’ way to obstruct them from employing it as a quick and easy pre-filing discovery tool.’” In the Court’s opinion, defendants adopt this strategy believing that there is no real downside. But the potential downside is the Court of Chancery’s “power to shift fees as a tool to deter abusive litigation tactics.” Here, in addition to awarding inspection, the Court granted plaintiffs leave to request fee-shifting under the bad faith exception to the American rule.
Key Takeaway: A corporation remains entitled vigorously to defend against a Section 220 inspection and probe the legitimacy of a plaintiff’s stated purposes. But corporations must be careful to avoid scorched earth defense strategies and should remain mindful of proportionality considerations in summary books-and-records proceedings.
Delaware Business Court Insider l February 17, 2021