On March 7, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to stay or extend discovery filed by an appraisal petitioner in light of Vice Chancellor Laster’s recent ruling in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (the subject of a prior post).  In re Appraisal of Columbia Pipeline Group, Inc., C.A. No. 12736-VCL (Del. Ch. Mar. 7, 2018).  Vice Chancellor Laster rejected petitioners’ assertion that Aruba Networks created a “cloud of uncertainty” about the evidence considered and standards applied in Delaware appraisal proceedings, and held that the Court’s reliance on unaffected market price to determine fair value was in line with the Delaware Supreme Court’s decisions in DFC and Dell.

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On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted stockholders’ Section 220 demand to inspect the books and records of UnitedHealth Group Inc. (“UnitedHealth”) in order to investigate allegedly fraudulent Medicare billing practices.  In re UnitedHealth Group, Inc. Sec. 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28 2018).  The Court held that plaintiffs could rely on evidence cited by the government in a qui tam complaint against UnitedHealth to demonstrate a “credible basis” from which to infer wrongdoing or mismanagement so as to justify authorizing the Section 220 demand in part. 

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On February 28, 2018, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims against the directors of Orexigen Therapeutics Inc. (“Orexigen”) for alleged breaches of fiduciary duty in connection with the company’s clinical drug trials.  Orexigen Therapeutics Inc. v. Michael A. Narachi, et al., C.A. No. 12412-VCMR (De. Ch. Feb. 28, 2018).  Plaintiffs asserted that the directors violated the law because they failed to follow best practices with respect to clinical trials; consequently, plaintiffs argued that demand was futile because a majority of the board faced substantial risk of liability.  The Court dismissed these claims, finding that the Company’s actions were not “so egregious or irrational” as to violate the business judgment rule and, accordingly, demand futility had not been adequately pleaded.

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​On February 23, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled, based on his own discounted cash flow (“DCF”) analysis, that the fair value of AOL Inc. (“AOL”) was below the deal price paid by Verizon Communications Inc. (“Verizon”) to acquire it.  In re: Appraisal of AOL Inc., C.A. 11204-VCG.  The Court reached this conclusion after finding that the deal process was not “Dell Compliant”—a newly coined phrase—because various deal protections and statements by AOL’s CEO may have discouraged other potential buyers who would have paid more to acquire AOL.  Accordingly, the Court afforded no weight to the deal price in its valuation of AOL but rather used that price as a “check” on his DCF analysis.

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On February 20, 2018, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr., reversed the dismissal of a suit brought by former stockholders of Diamond Resorts International (“Diamond”) challenging the company’s two-step cash-out merger.  Appel v. Berkman, No. 316, 2017 (Del. Feb. 20, 2018).  As discussed in our prior post on this case, the Delaware Court of Chancery dismissed plaintiffs’ breach of fiduciary duty claims because the disinterested stockholders of Diamond, who were “fully informed,” overwhelmingly accepted the tender offer.  In reaching that decision, the Court of Chancery found it immaterial that the proxy did not disclose that Diamond’s chairman—who abstained from the board vote on the deal—had expressed disappointment with the price and indicated that “it was not the right time to sell.”  Reversing and remanding, the Delaware Supreme Court held that when a board discloses its reasons for recommending a transaction, “the contrary view of an individual board member may be material.”  In this case, the Delaware Supreme Court concluded, the chairman’s expressed views regarding the wisdom of the sale were material and the omission rendered the proxy misleadingly incomplete.

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On February 15, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) in an appraisal action arising from the acquisition of Aruba by Hewlett-Packard Company (“HP”).  Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Feb. 15, 2018).  The Court reached this conclusion by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell but expressed reservations about doing so.  Though facially helpful for defendants in appraisal actions, the decision effectively invites the Supreme Court to revisit Dell and DFC, suggesting that those decisions compelled the trial court to ignore evidence of a less-than-robust deal process and undervaluation of Aruba by stock market analysts.

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On February 6, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a summary judgment motion by defendant Potomac Capital Partners II, LP (“Potomac”) in an action by stockholders challenging the sale of PLX Technology, Inc. (“PLX”) to Avago Wireless, Inc.  In re PLX Technology Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. Feb. 6, 2018).  Plaintiffs alleged Potomac, which was PLX’s largest shareholder, aided and abetted members of the PLX board in committing breaches of fiduciary duty in connection with the sale.  In its concise order holding that the case would need to go to trial, the Court rejected Potomac’s contention that the business judgment rule, rather than the enhanced scrutiny test, was the operative standard by which to review the deal.  The Court further determined that—under the enhanced scrutiny standard—there existed disputes of material fact regarding the PLX board’s actions.

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On February 8, 2018, Justice Shirley Werner Kornreich of the New York Supreme Court denied a motion for final approval of a disclosure-only settlement in a class action suit brought by shareholders of Martin Marietta Materials, Inc. (“MMM”) regarding its acquisition of Texas Industries, Inc. (“TXI”).  City Trading Fund v. Nye, 2018 WL 792283 (N.Y. Sup. Ct., Feb. 8, 2018).  Plaintiff, which owned only ten shares in MMM, asserted breach of fiduciary duty claims and sought to enjoin the merger on the ground of inadequate disclosures in the proxy provided to shareholders.  The parties, however, reached a settlement, which required defendants to make certain “supplemental disclosures” and provided for the payment of $500,000 in attorneys’ fees to plaintiff’s counsel.  Justice Kornreich previously denied approval of the settlement, but that decision was reversed by the New York Supreme Court, Appellate Division and remanded for a fairness hearing.  City Trading Fund v. Nye, 144 A.D.3d 595, 21 (N.Y. App. Div. 2016).  Moreover, in the interim, the Appellate Division, in Gordon v. Verizon Communications, Inc., 148 A.D.3d 146 (N.Y. App. Div. 2017), adopted a more lenient approval standard for disclosure-only settlements than that followed recently by courts in Delaware and elsewhere.  Nevertheless, Justice Kornreich found the supplemental disclosures “utterly useless to the shareholders” and, therefore, declined to approve the settlement.

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On February 2, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed a stockholder challenge to the buyout of Synutra International Inc. (“Synutra”) in a squeeze-out merger by a controlling stockholder group.  In re Synutra International Inc. Stockholder Litigation, C.A. No. 2017-0032 (Del. Ch. Feb. 2, 2018).  Plaintiffs asserted breach of fiduciary duty claims against the controller group and the special committee of the Synutra board.  They alleged that the transaction did not satisfy the ab initio requirement under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”), because the controller group did not initially condition the proposed transaction on recommendation by a special committee and approval by a majority of the disinterested stockholders, features added weeks after the controller’s initial proposal letter and after the Synutra board had already met and formed a special committee.  Finding that “the controller announce[d] the conditions before any negotiations took place,” the Court held the ab initio requirement was satisfied and dismissed the complaint under MFW. 

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On January 10, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion for judgment on the pleadings to plaintiffs, the CEO and another director of TradingScreen Inc., invalidating a written consent of the majority of common stockholders purporting to remove and replace the CEO and effect other changes to the board.  The Court explained that Delaware law provides for the selection of officers as prescribed by a company’s bylaws or determined by the board and found that TradingScreen’s bylaws provide for the board to elect and remove officers.  Therefore, the Court held the written consent was “ineffective.”      

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​On January 25, 2018, the Supreme Court of Delaware ruled that the Court of Chancery’s  dismissal on issue preclusion grounds of the derivative claims of stockholder plaintiffs against the directors of Wal-Mart Stores, Inc. (“Wal-Mart”)—after a parallel derivative suit in federal court was dismissed for failure to allege demand futility—did not violate plaintiffs’ due process rights.  In re Wal-Mart Stores Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Jan. 25, 2018).  In affirming the dismissal, the Delaware Supreme Court declined to adopt the recommendation of the Delaware Court of Chancery to adopt a rule refusing to give preclusive effect to other courts’ decisions on demand futility on federal due process grounds.

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On January 10, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery declined to compel the production of attorney-client privileged documents under the Garner doctrine in the context of direct breach of fiduciary duty claims brought by former minority shareholders of R.L. Polk & Co. Inc. (“Polk”) against its controlling shareholders in connection with a self-tender.  Buttonwood Tree Value Partners, L.P., et al. v. R.L. Polk & Co., Inc., et al., C.A. No. 9250-VCG (Jan. 10, 2018).  As discussed in our post regarding a prior decision, the Court denied a motion to dismiss the complaint, which alleges that the self-tender was a self-dealing transaction by the controlling shareholders “as part of an overall scheme to later sell the Company for three times the [s]elf-[t]ender valuation.”  In the subsequent course of discovery, plaintiffs moved to compel the production of documents relating to legal advice Polk sought in connection with the sale of the company, the self-tender, and various restructuring options that were considered at the time.  The Court declined to compel the production because plaintiffs failed to establish that “the information contained in the privileged documents is both necessary and unavailable from other sources.” 

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On December 29, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery granted a stockholder’s demand to inspect books and records related to the acquisition of West Corporation (“West”)  by Apollo Global Management (“Apollo”), pursuant to 8 Del. C. § 220.  Lavin v. West Corp., C.A. No. 2017-0547-JRS (Del. Ch. Dec. 29, 2017).  The Court found that plaintiff established a valid primary purpose for seeking inspection of the materials:  to investigate whether West’s directors and officers breached their fiduciary duties under Revlon by approving the sale of West to Apollo when other bids indicated that a sale of West’s various business segments to different purchasers may have yielded greater value for West stockholders.  Plaintiff alleged that the Apollo transaction was preferred because West’s CEO, directors, and financial advisor would receive greater compensation for a whole-company sale than a segmented sale.  Importantly, the Court rejected West’s argument that Corwin v. KKR Fin. Holdings, LLC, 125 A.3d 304 (Del. 2015), precluded a § 220 demand because any possible breaches of fiduciary duties that plaintiff sought to investigate were cleansed by stockholder approval of the Apollo acquisition.  

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On December 22, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery declined to dismiss a direct breach of fiduciary duty claim brought by a shareholder plaintiff against directors and officers of casino company Twin River Worldwide Holdings, Inc. (“Twin River”) for allegedly misleading disclosures in an offer-to-purchase circular in connection with a tender offer.  Chatham Asset Mgmt. LLC, et al. v. Papanier, et al., C.A. No. 2017-0088-AGB (Del. Ch. Dec. 22, 2017).  Plaintiff, which sold a portion of its shares in the tender offer, alleged that the circular stated that defendants “may” sell shares “from time to time,” but the “true intent” of defendants was to increase the price of Twin River stock and sell their shares shortly after the tender offer closed (even though they ultimately did not).  Plaintiff, however, acknowledged that it participated in the tender offer only because of a regulatory requirement that capped its ownership position.  The Court found that the complaint stated a disclosure claim because “stating an outcome as a possibility” when in fact there was a “firm intention by defendants to sell their shares” is misleading.  But the Court noted that the “recourse appears to be limited” to nominal damages because plaintiff’s allegations “suggest that it likely will be unable to establish reliance and causation.”    

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On December 18, 2017, the Supreme Court of Delaware affirmed the Delaware Court of Chancery’s dismissal of a shareholder derivative action asserting that the directors of The Williams Companies, Inc. (“Williams”) breached their fiduciary duties in connection with its entry into, and subsequent cancellation of, an agreement to acquire the remaining interest in its affiliate, Williams Partners L.P. (“WPZ”).  Ryan v. Armstrong, No. 230, 2017 (Del. Dec. 18, 2017).  As discussed in our post regarding that decision, plaintiff alleged that the directors sought to entrench themselves by approving the WPZ transaction while Williams was the subject of acquisition overtures from another company.  Ryan v. Armstrong, C.A. No. 12717-VCG (Del. Ch. May 15, 2017).  The Court of Chancery held that even a “well-pled” claim under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)—which applies enhanced scrutiny to certain takeover defensive measures—is not, standing alone, sufficient to excuse a pre-suit demand on the board under Court of Chancery Rule 23.1 where plaintiff failed to plead sufficient “particularized facts to imply a substantial likelihood of liability for damages . . . on the part of a majority of the directors.”  In its short order, the Supreme Court affirmed on the basis of the Court of Chancery’s opinion.

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On December 14, 2017, the Delaware Supreme Court, in an opinion by Justice Karen L. Valihura, reversed and remanded an appraisal ruling by the Court of Chancery that had determined that the management-led buyout (“MBO”) of Dell, Inc. (“Dell”) by its CEO and founder, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners (“Silver Lake”), at $13.75 per share significantly undervalued the stock of Dell.  In re Appraisal of Dell Inc., No. 565, 2016 (Del. Dec. 14, 2017).  After a trial, the Court of Chancery had disregarded the deal price and instead applied its own discounted cash flow (“DCF”) analysis, arriving at a valuation of $17.62 per share reflecting an approximate 28% premium.  The Delaware Supreme Court, however, found that the evidence suggested that the market for Dell shares was efficient and that features of an MBO that might render a resulting deal price unreliable were largely absent here.  Therefore, the Court concluded that “the deal price deserved heavy, if not dispositive, weight.”  The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or—at the Court of Chancery’s discretion—to enter judgment at the deal price without further proceedings.

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On December 13, 2017, the Delaware Supreme Court reversed the Court of Chancery’s dismissal of fiduciary duty breach claims brought derivatively by stockholders of Investors Bancorp, Inc. against its directors in connection with the directors’ decision to grant themselves restricted stock and stock options under an equity compensation plan previously approved by a stockholder vote. In re Inv’rs Bancorp, Inc. Stockholder Litig., C.A. No. 12327-VCS (Del. Ch. December 13, 2017).  As discussed in our post regarding that decision, the Court of Chancery dismissed the claims, finding that the stockholder approval constituted ratification of the awards, rendering them subject to the presumption of protection under the business judgment rule.  In an opinion by Justice Collins J. Seitz, Jr., however, the Delaware Supreme Court reversed, holding that defendants must demonstrate the entire fairness of their equity awards, because plaintiffs adequately alleged that the directors “inequitably exercised [their] discretion” under the compensation plan’s “general parameters,” notwithstanding stockholder approval.

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On December 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a putative stockholder suit asserting breach of fiduciary duty claims against NRG Energy, Inc. (“NRG”), the controlling stockholder of NRG Yield, Inc. (“Yield”), and the Yield directors in connection with a reclassification of Yield’s shares.  IRA Trust FBO Bobbie Ahmed v. David Crane, et al., Consol. C.A. No. 12742-CB (Dec. 11, 2017).  Plaintiff claimed that the reclassification enabled NRG to maintain its control over Yield and that this qualified as a “non-ratable” benefit that was not shared with Yield’s minority stockholders.  The Court agreed that plaintiff adequately pleaded that the reclassification was a conflicted transaction such that the entire fairness standard would apply but ultimately dismissed the case after finding that the transaction met the requirements for application of the business judgment rule under Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).

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On December 5, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion for reargument concerning the Court’s rejection of a shareholder’s demand to inspect documents pertaining to alleged related-party transactions pursuant to 8 Del. C. § 220.  Silverberg v. ATC Healthcare, Inc. C.A. No. 2017-0242-JRS (Del. Ch. Dec. 5, 2017).  After a trial, the Court had rejected the request of plaintiff—a shareholder in ATC Healthcare, Inc. (“ATC”)—for books and records from ATC concerning alleged related-party transactions with Travel Healthcare Solutions, LLC (“Travel Healthcare”), an entity allegedly affiliated with ATC’s controlling shareholders.  Denying plaintiff’s motion to reargue, the Court held that a change in contractual terms favorable to the related party “is not enough on its own to establish a credible basis of wrongdoing; something more is needed.” 

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​On November 30, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed breach of fiduciary duty claims against the board of Opower, Inc. (“Opower”) in connection with Opower’s acquisition by Oracle Corporation (“Oracle”).  Van der Fluit v. Yates, C.A. No. 12553-VCMR (Del. Ch. Nov. 30, 2017).  The Court found that the failure to disclose that certain executives who received transaction-related benefits were the primary negotiators of the transaction constituted a material disclosure violation.  Therefore, the Court declined to rely on stockholder approval to cleanse the transaction under the doctrine of Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), because the tender was not fully informed.  Nevertheless, the Court granted defendants’ motion to dismiss, concluding that plaintiff had failed to plead a non-exculpated claim for breach of the duty of loyalty. 

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On November 27, 2017, the Delaware Supreme Court affirmed a decision by the Delaware Court of Chancery dismissing a stockholder derivative complaint against certain directors and officers of BioScrip, Inc. for failing to allege that a demand on BioScrip’s board of directors to bring the litigation would have been futile.  Park Employees’ and Retirement Bd. Employees’ Annuity and Benefit Fund of Chicago v. Smith, No. 198 (Del. Nov. 27, 2017).  As discussed in our post regarding that decision, the Court of Chancery departed from its usual practice of assessing plaintiff’s allegations of demand futility based on the composition of the board on the date the complaint was filed.  Park Employees’ and Retirement Bd. Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (Del. Ch. May 31, 2016).  Instead, the Court of Chancery made an “equitable” exception to that rule and dismissed the complaint for failing to establish demand futility based on the board as it existed four days later based on “unique facts,” including that it was publicly known that those board changes were imminent prior to the filing of the complaint and that the new board was in place by the time defendants had received service of the complaint.  In its short order, the Supreme Court affirmed without further elaboration. 

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​At a recent hearing, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery provided guidance on the application of the attorney-client privilege to draft stockholder communications in the context of a stockholder class action involving claims for breach of fiduciary duty against the directors of Windstream Holdings, Inc. (“Windstream”).  Doppelt v. Windstream Holdings, Inc., C.A. No. 10629-VCS (Del. Ch. September 11, 2017) (Transcript).  During discovery, plaintiffs moved to compel the production of drafts of various documents related to communications with stockholders—including talking points, FAQs, and mailings drafted by the company in conjunction with proxy communication firms—which were withheld by defendants on the grounds of attorney-client privilege.  The Court determined that such drafts were not likely to be privileged in their entirety, but could be redacted to the extent they reflect legal advice from counsel, such as comments intended “to ensure that the company is complying with its legal obligations.”   

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On November 20, 2017, the New York State Court of Appeals reversed the dismissal of derivative claims brought by a shareholder of Scottish Re Group, Limited (“Scottish Re”)—a Cayman Islands company—against the company, its directors, and various other entities.  Davis v. Scottish Re Grp. Ltd., No. 111 (N.Y. Nov. 20, 2017).  The New York State Appellate Division had previously affirmed the dismissal of those derivative claims for lack of standing because plaintiff had not sought leave of the Cayman Islands Grand Court to commence a derivative action, as required under Rule 12A of the Rules of the Grand Court of the Cayman Islands.  Reversing and remanding, the Court of Appeals held that “Rule 12A is procedural, and therefore does not apply where, as here, a plaintiff seeks to litigate his derivative claims in New York.” 

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On November 13, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery rejected a stockholder’s demand to inspect books and records of A. Shulman, Inc. (the “Company”) under Delaware General Corporation Law Section 220.  Wilkinson v. A Schulman, Inc., C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017).  The Court explained that a stockholder who lacks a “proper purpose” and has “only minor and non-substantive involvement” in the demand process is not entitled to inspect books and records.  

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On November 7, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery granted a motion to dismiss a derivative and putative class action brought by a minority stockholder of Erin Energy Corporation (“Erin”), challenging a series of transactions involving Erin, Allied Energy PLC (“Allied”)—an entity affiliated with Kase Lukman Lawal, Erin’s chairman, CEO, and controlling stockholder—and another party, Public Investment Corporation Limited (“PIC”).  Lenois v. Lawal, C.A. No. 11963 (Del. Ch. Nov. 7, 2017).  Plaintiff alleged that the CEO—who together with an affiliated entity (Allied’s parent company) controlled nearly 60% of Erin’s shares—effectively stood on all sides of the challenged transactions and negotiated in his own self-interest.  Plaintiff asserted derivative claims for breach of fiduciary duty against the CEO and the remaining directors.  The Court found that plaintiff adequately pleaded that the CEO acted in bad faith, but dismissed the derivative claims because the complaint “failed to plead non-exculpated claims against a majority of the Erin Board” and, thus, demand on the board was not excused.

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On October 30, 2017, the Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery determining the fair value of ISN Software Corp. (“ISN”) in an appraisal action brought by minority stockholders following the cash-out merger of ISN with its wholly-owned subsidiary, at the direction of its controlling stockholder.  In re ISN Software Corp. Appraisal Litig., C.A. No. 8388-VCG (Del. Oct. 30, 2017).  As discussed in our post regarding the Court of Chancery’s August 11, 2016 decision, the Court rejected the various methodologies advanced by the parties’ competing experts and, instead, conducted its own discounted cash flow analysis to arrive at the “fair value” of ISN, which Vice Chancellor Glasscock determined was $357 million, more than double the consideration paid in the merger but significantly less than the valuations sought by plaintiffs.  (See Shearman & Sterling LLP, Delaware Chancery Court Utilizes DCF Method To Determine Fair Value Of ISN Software Corp., August 22, 2016 Need-to-Know Litigation Weekly, http://www.lit-ma.shearman.com/delaware-chancery-court-utilizes-dcf-method-to-de).  The short order from the Delaware Supreme Court states that the decision of the Delaware Court of Chancery “should be affirmed on the basis of and for the reasons assigned” in the lower court’s opinion.  

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On October 24, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery granted a motion to dismiss a putative class action by former stockholders of Morgans Hotel Group Co. (“Morgans”), challenging its $794 million merger with an affiliate of SBEEG Holdings LLC.  In re Morgans Hotel Group Co. Stockholder Litig., C.A. No. 12433 (Del. Ch. Oct. 24, 2017).  Plaintiffs asserted claims for breach of fiduciary duty and unjust enrichment against an alleged controlling stockholder, Ron Burkle, and his affiliated entities, The Yucaipa Companies LLC and affiliates (collectively, “Yucaipa”).  Plaintiffs claimed that Yucaipa (i) owed fiduciary duties—even though it only owned a minority stake in Morgans—because it had contractual blocking rights that gave it effective control; and (ii) breached those duties by causing Morgans to enter into the merger, which allegedly “enriched” Yucaipa.  The Court rejected these arguments and held that the exercise of contractual blocking rights—without more—is insufficient to impose fiduciary duties on a minority stockholder.

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On September 29, 2017, the United States District Court for the Western District of Texas granted summary judgment in favor of the U.S. Chamber of Commerce and Texas Association of Business, holding that the Internal Revenue Service (“IRS”) and U.S. Treasury Department violated the Administrative Procedures Act (“APA”) when they promulgated an anti-inversion rule that ultimately inhibited the merger of Allergan PLC and Pfizer Inc.  Chamber of Com. of the U.S., et al. v. Internal Revenue Service, et al., No. 1:16-CV-944-LY (W.D. Tex. Oct. 6, 2017) (Amended Order).  Specifically, the Court found that the government agency defendants were required—but failed—to provide the public and affected parties adequate notice and an opportunity to comment on the proposed anti-inversion rule before enacting it.  The ruling, which also held that plaintiffs had standing to challenge the rule (and that the government agencies had authority to implement it), creates an opening for other companies considering a possible inversion transaction. 

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On October 12, 2017, the Supreme Court of Delaware affirmed a decision by the Delaware Court of Chancery to dismiss breach of fiduciary duty claims against the directors of Clear Channel Outdoor Holdings, Inc. (“CCOH”) in connection with (i) a debt offering and asset sales allegedly undertaken in order to fund special dividends for the purpose of enabling its controlling stockholder to address liquidity needs, and (ii) the alleged failure of CCOH to extricate itself from unfavorable intercompany agreements with the controlling stockholder as its financial condition deteriorated.  GAMCO Asset Management Inc. v iHeartMedia Inc., et al., C.A. No. 12312-VCS (Del. Oct. 12, 2017).  As discussed in our post regarding that decision, as to the debt offering and asset sales, the Court of Chancery applied the business judgment rule because the allegations regarding the debt offering and asset sales did not fall within the “very narrow circumstances” in which “a controlling stockholder’s immediate need for liquidity could constitute a disabling conflict of interest irrespective of pro rata treatment.”  In its short order, the Supreme Court affirmed without further elaboration.  As to the intercompany agreements, the Supreme Court found it unnecessary to reach the Court of Chancery’s determination that the claims were barred by a settlement agreement and res judicata because “the Court of Chancery properly found that under the pled circumstances, which included the board acting within the framework established by a forward-looking settlement agreement and the company’s binding contractual obligations . . . the complaint failed to state a claim for breach of fiduciary duty.”  

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On October 12, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery agreed to impose an “incorporation-by-reference” condition on any production by Universal Health Services, Inc. (“UHS”) in response to a books-and-records demand under Delaware General Corporation Law Section 220.  City of Cambridge Ret. Sys. v. Universal Health Serv., Inc., C.A. No. 2017-0322-SG (Del. Ch. Oct. 12, 2017).  In so disposing of the action to compel production brought by the UHS stockholder who made the Section 220 demand (The City of Cambridge Retirement System (“City of Cambridge”)), the Court explained that the interests of judicial and litigants’ economy outweighed whatever concern might exist that a company would manipulate “the universe of documents produced” to attempt to frustrate a later-filed derivative action. 

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On September 29, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted in part and denied in part a motion to dismiss derivative claims for breach of fiduciary duty against the board of foreign exchange broker FXCM Inc. (“FXCM”), sustaining two grounds for breach after finding that demand would have been futile.  Kandell v. Dror Niv et al., C.A. No. 11812 (Del. Ch. September 29, 2017).  Specifically, the Court held that demand was excused with respect to (i) the board’s approval of a hastily procured loan in the wake of the “flash crash” generated by the 2015 decoupling of the Swiss franc from the euro, and (ii) FXCM’s alleged violations regulations prohibiting foreign exchange (or FX) brokers from limiting losses on behalf of customers (a feature of FXCM’s business).  The Court dismissed plaintiff’s other claims, including as to a stockholder rights plan and an employee bonus plan, finding that the complaint lacked particularized facts necessary to excuse demand.

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On September 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder class claims for breach of fiduciary duty brought against the former directors of The Fresh Market (“TFM”) after its acquisition in a two-step merger by affiliates of Apollo Global Management, LLC (“Apollo”).  Morrison v. Berry, et al., C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017).  Among other allegations, plaintiff had alleged that the auction process in which the company had engaged was a “sham” designed by TFM’s founder to deliver the company into the hands of a favored suitor.  The Court, however, dismissed the claims because plaintiff did not satisfy its burden, under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), and In re Volcano Corp. Stockholder Litigation, 143 A.3d 727 (Del. Ch. 2016), “to plead facts from which it is reasonably conceivable that the potentially ratifying tender was materially uninformed.”

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On September 18, 2017, Judge John Michael Vazquez of the U.S. District Court of New Jersey granted summary judgment in favor of plaintiffs BCB Bancorp, Inc. (“BCB”) and the former directors and officers of Pamrapo Bancorp, Inc. (“Pamrapo”), finding that insurer Progressive Casualty Insurance Co. (“Progressive”) was obligated to indemnify BCB for the legal expenses incurred in defending the Pamrapo directors and officers in shareholder litigation arising from the merger of BCB and Pamrapo.  In so holding, the Court agreed with plaintiffs that the surviving bank, BCB, had inherited Pamrapo’s D&O policy following the merger in accordance with the New Jersey Business Corporation Act (“NJBCA”).    

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On September 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery ordered defendant, Comdata, Inc. (“Comdata”), to specifically perform under, and pay damages for its termination of, its merchant agreement with plaintiff, TA Operating LLC (“TA”).  TA Operating LLC v. Comdata, Inc., C.A. No. 12954-CB (Del. Ch. Sept. 11, 2017).  Specifically, the Court held that defendant’s termination of the merchant agreement could not be excused because plaintiff had not materially breached its obligation to “reasonably cooperate” with defendant to implement new technology “as soon as reasonably practical.”  In making this determination, the Court engaged in a “fact-specific inquiry” and relied in part on the parties’ “course of conduct,” finding that plaintiff had “made good progress” before encountering technological issues that caused delays and highlighting that defendant stayed “silen[t]” until it purported to terminate the agreement.
 

On September 1, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed claims for breaches of contract and fiduciary duty brought by plaintiffs against a prospective business partner, finding that the forum selection clause in which defendant consented to personal jurisdiction in Delaware was part of an unenforceable contract.  Eagle Force Holdings, LLC v. Campbell, C.A. No. 10803-VCMR (Del. Ch. Sept. 1, 2017).  Specifically, the Court found that a limited liability company agreement and associated contribution agreement (the “Transaction Documents”) under which plaintiffs purported to bring claims were not binding because they lacked several “essential” terms.  Absent agreement on these critical points, the Court held that the parties “did not intend to bind themselves to the written terms of the Transaction Documents.”  Finding no other grounds for personal jurisdiction, the Court dismissed the action.

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On August 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a putative stockholder class action against the directors of Kreisler Manufacturing Corporation (“Kreisler”), rejecting plaintiff’s claims for breach of fiduciary duty and quasi-appraisal in connection with the sale of Kreisler to Arlington Capital Partners (“Arlington”) as inadequately pleaded.  Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017).  Plaintiff alleged that the directors conditioned the merger on “side deals” that benefited themselves at the stockholders’ expense and that misstatements and omissions in the information statement disseminated to stockholders following the execution of a stockholder support agreement that bound more than 50% of outstanding stock in favor of the merger prevented stockholders from exercising their appraisal rights.  The Court found that the complaint failed to plead that the directors acted in bad faith, and thus dismissed the claims, notwithstanding that certain of the allegedly inadequate disclosures—if raised in a pre-closing suit—likely would have warranted injunctive relief pending corrective disclosures.  

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On August 18, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed a putative shareholder suit asserting claims for breach of fiduciary duty against Martha Stewart, the controlling stockholder of Martha Stewart Living Omnimedia, Inc. (“MSLO”), and aiding and abetting claims against third-party acquirer Sequential Brands Group Inc. (“Sequential”) in connection with Sequential’s strategic merger with MSLO.  In re Martha Stewart Living Omnimedia, Inc. Stockholders Litig., Consol. C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017).  Plaintiffs asserted that the sale was conflicted because Stewart negotiated for greater consideration for herself than for other stockholders and that the transaction did not meet the standards for application of the business judgment rule.  The Court found that plaintiffs failed to plead that the transaction was conflicted and that, even if it were, the protections afforded to stockholders through the establishment of an independent special committee and imposition of a majority-of-the-minority approval requirement warranted dismissal under the business judgment rule, in accordance with the standards set forth in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”).  

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On August 17, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery dismissed a shareholder suit asserting breach of fiduciary duty claims against the directors of MeadWestvaco Corporation (“MW”) in connection with MW’s strategic stock-for-stock merger with Rock-Tenn Company (“RockTenn”).  In re MeadWestvaco S’holders Litig., Consol. C.A. No. 10617-CB (Del. Ch. Aug. 17, 2017).  Plaintiffs’ central contention was that MW’s directors had entered into the merger in bad faith in reaction to a threatened proxy contest by an activist investor, leaving behind $3 billion of additional value.  The Court ruled that plaintiffs’ own pleadings suggested the board had been “actively engaged” in the merger process, and that plaintiffs’ contention that the board acted in bad faith was “simply not credible.”

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On August 1, 2017, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr., reversed and remanded an appraisal ruling that had determined the buyout of DFC Global Corporation (“DFC”) by private equity investor Lone Star at $9.50 per share significantly undervalued the stock of DFC.  DFC Global Corp. v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017).  The Court of Chancery had calculated a fair value of $10.30 per share, 8.4% higher than the deal price of $9.50 per share, by giving equal weight to:  (1) the deal price, (2) a comparable companies analysis, and (3) a discounted cash flow analysis.  The Delaware Supreme Court found that the Court of Chancery’s valuation methods were unsupported by the record, which revealed (a) a fair, non-conflicted sale process with a robust market check, (b) debt markets expressing bearish views of DFC’s prospects, and (c) that DFC failed to meet its projections before the deal closed, all of which suggested that the deal price was likely the “most reliable indication of fair value.”  The Court, however, expressly rejected the approach urged by DFC:  a blanket presumption in favor of the deal price for arm’s-length transactions that were subjected to a robust market check.

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On July 25, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery issued a supplemental opinion, responding to a remand order from the Delaware Supreme Court, in which Chancellor Bouchard recommended that the Delaware Supreme Court adopt a new preclusion threshold to determine whether collateral estoppel precludes a new plaintiff from pursuing derivative claims that have already been dismissed.  In re Wal-Mart Stores, Inc. Del. Deriv. Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017).  Chancellor Bouchard originally dismissed the Delaware suit (“Wal-Mart I”) after finding that the plaintiff was barred from relitigating demand futility, which the federal court in the District of Arkansas found was inadequately pleaded in an earlier-filed federal suit.  While the Delaware plaintiffs spent the three years litigating a books and records demand under 8 Del. C. § 220, the plaintiffs in the federal suit filed suit (in what Chancellor Bouchard described as a race to the courthouse) without making a Section 220 demand.

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​On August 1, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery denied a motion to dismiss a stockholder complaint asserting claims for breach of fiduciary duty against directors and executives of AGNC Investment Corp. (the “Company”) in connection with the renewals of investment management agreements with American Capital Mortgage Management, LLC (the “Manager”) and the Company’s subsequent acquisition of the Manager.  H&N Mgmt. Group, Inc. & Aff Cos Frozen Money Purchase Plan v. Couch, C.A. No. 12847-VCMR (Del. Ch. Ct. Aug. 1, 2017).  The Court concluded that the complaint pleaded particularized facts sufficient to establish demand futility and to allege that the board was grossly negligent in approving the transactions, a non-exculpated breach under the company’s charter. 

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On July 27, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery found that stockholder plaintiffs had not satisfied their burden of showing “good cause” under the Garner fiduciary exception to the attorney-client privilege doctrine to require defendant Genworth Financial, Inc. (“Genworth”) to produce privileged communications in response to a books and records demand.  Salberg v. Genworth Fin., Inc., C.A. No. 2017-0018-JRS (Del. Ch. July 27, 2017).  The demand under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, sought documents relating to the same plaintiffs’ claims in a separate derivative action against Genworth’s directors and officers.  The Court held that the Garner exception did not require Genworth to produce the privileged communications during the pendency of the derivative action, because the communications related to the “bona fides” of plaintiffs’ claims in that action.

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On July 24, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss former stockholders’ claims for breach of fiduciary duty brought in connection with a self-tender by R. L. Polk and Co., Inc. (“Polk”) against the family that held approximately 90% of Polk shares (the “Controlling Family”) and affiliated directors, but dismissed related claims against the company’s independent directors and its financial and legal advisors on the transaction.  Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co., C.A. No. 9250-VCG (Del. Ch. Ct. July 24, 2017).  The Court concluded that plaintiffs pled facts sufficient to allege that the self-tender was “a self-dealing transaction” by a controlling group of stockholders “as part of an overall scheme to later sell the Company for three times the [s]elf-[t]ender valuation.”  Therefore, the Court held that an “entire fairness” standard of review was applicable and declined to dismiss the claims against the Controlling Family and their affiliated directors.  The Court nevertheless dismissed fiduciary duty breach claims against the independent directors, finding bad faith inadequately pleaded.  The Court also dismissed aiding and abetting claims against the outside advisors, finding the complaint inadequate “to support an inference of scienter or knowing participation in a breach” (emphasis in original). 

On July 21, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery (i) entered judgment in favor of defendants Sprint Nextel Corporation (“Sprint”) and Softbank Corp. (“Softbank”) on claims of breaches of fiduciary duty and aiding and abetting, respectively, in connection with Sprint’s merger with Clearwire Corporation (“Clearwire”); and (ii) appraised the fair value of Clearwire’s stock at the time of the merger, awarding the dissenting stockholder petitioners $2.13 per share, notwithstanding that the transaction closed at $5.00 per share.  ACP Master, Ltd., et al. v. Sprint Corporation, et al. & ACP Master, Ltd., et al. v. Clearwire Corporation, C.A. No. 8508-VCL, C.A. No. 9042-VCL (Del. Ch. July 21, 2017).  Stockholder petitioners had challenged the merger, alleging that Sprint was a controlling stockholder of Clearwire and allegedly breached its fiduciary duties during negotiations leading to a deal price that substantially undervalued Clearwire.  Applying an entire fairness standard of review, the Court found that Sprint did not breach any fiduciary duties.  Noting that the appraisal statute requires the exclusion of “any synergies present in the deal price,” the Court evaluated the competing discounted cash flow (“DCF”) analyses offered by the parties and adopted the $2.13 per share value determined by the approach offered by Sprint, even though it amounted to less than half of the $5.00 per share deal price. 

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On July 13, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery dismissed a former stockholder’s breach of fiduciary duty claims against the former directors of Diamond Resorts International (“Diamond”) and an aiding and abetting claim against Diamond’s financial advisor in connection with Apollo Global Management LLC’s (“Apollo”) acquisition of Diamond in a two-step merger under Section 251(h) of the Delaware General Corporation Law, 8 Del. C. § 251(h).  Appel v. Berkman, C.A. No. 12844-VCMR (Del. Ch. July 13, 2017).  Relying on Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015) and In re Volcano Corp. Stockholder Litigation, 143 A.3d 727 (Del. Ch. 2016), the Court held the merger was “cleanse[d]” because “the disinterested stockholders of Diamond were fully informed and uncoerced when they overwhelmingly accepted the tender offer.” 

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On July 10, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery found plaintiff was not bound by stock transfer restrictions under which the company had sought to revoke his ownership and was therefore entitled to inspect the books and records of a company in which he held stock.  Henry v. Phixios Holdings, Inc., C.A. No. 12504-VCMR (Del. Ch. Jul. 10, 2017).  The opinion is one of few offering substantive guidance regarding Delaware General Corporation Law (“DGCL”) Section 202, 8 Del. C. § 202, a provision governing stock transfer restrictions.  Applying the statute, the Court held that “in order for a stockholder to be bound by stock transfer restrictions that are not ‘noted conspicuously on the certificate or certificates representing the security,’ he must have actual knowledge of the restrictions before he acquires the stock” or “affirmatively assent[] to the restrictions, either by voting to approve the restrictions or by agreeing to the restrictions.”

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On June 13, 2017, Chief Judge Smith of the United States Court of Appeals for the Third Circuit reversed in part the District Court’s dismissal of claims for breach of contract as untimely.  Norman v. Elkin, No. 16-1924 (3d Cir. June 13, 2017).  The Third Circuit found that plaintiff’s argument that his books-and-records demand tolled the relevant statute of limitations was not categorically barred by a finding that plaintiff had “inquiry notice” of defendant’s wrongdoing at the time he filed the demand.  The Court vacated dismissal of the contract claims and remanded them to the District Court with instructions to determine whether plaintiff’s books-and-records demand tolled the statute of limitations and, if so, whether the claims were timely. 

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On June 28, 2017, Vice Chancellor Tamika Montgomery-Reeves of the Delaware Court of Chancery declined to dismiss purported derivative and direct stockholder claims for breaches of fiduciary duty against the directors of Sorrento Therapeutics, Inc. (“Sorrento”) regarding the directors’ decisions to grant themselves stock options in several subsidiaries and their decision to condition a private placement investor’s acquisition of newly issued shares on a voting agreement requiring the investor to vote the shares as the board directs.  Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017).  Declining to dismiss the complaint, the Court determined that the options grants to the directors themselves “are subject to the same entire fairness review as any other interested transaction.”  As to the voting agreement, the Court held that defendants must establish that “the agreement is intrinsically fair and not designed to disenfranchise Sorrento stockholders.”     

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On June 15, 2017, the Supreme Court of Delaware affirmed dismissal of a putative stockholder class action alleging breach of fiduciary duty by the directors of Blount International, Inc. (“Blount”) and aiding and abetting claims against other defendants, including Blount’s financial advisor, following Blount’s acquisition by a buyout group consisting of Blount’s CEO and COO, who are also board members, and several entities.  Chester Cty. Ret. Sys. v. Collins, No. 603, 2016 (Del. June 15, 2017).  Plaintiffs claimed that the proxy statement was materially misleading because it failed to disclose inter alia that the special committee chairman would become a partner at the law firm advising the committee shortly after closing.  Although Chief Justice Strine, writing for the Court, observed that “prudence would seem to have counseled for bringing [] to light earlier” the chairman’s impending partnership, the Court agreed with the decision of the Delaware Court of Chancery in Chester Cty. Ret. Sys. v. Collins, 2016 WL 7117924 (Del. Ch. Dec. 6, 2016), that this and the other omissions were immaterial and affirmed the dismissal. 

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On June 19, 2017, the Supreme Court of Delaware affirmed the dismissal of a shareholder derivative suit against the board of directors of The Bank of New York Mellon Corporation (“BNYM”) in which plaintiff had asserted a breach of fiduciary duty claim regarding certain alleged misconduct in the bank’s foreign currency exchange business.  Zucker v. Hassell, C.A. No. 11625-VCG (Del. June 19, 2017).  Without further elaboration, the Delaware Supreme Court’s brief order provides that the decision of the Delaware Court of Chancery “should be affirmed on the basis of and for the reasons assigned” in its opinion (see Zucker v. Hassell, C.A. No. 11625-VCG (Del. Ch. Ct. Nov. 30, 2016)).  As discussed in our post regarding that decision, the Chancery Court found that plaintiffs failed to adequately plead that BNYM’s board of directors wrongfully refused the demand to sue, after the board had formed a special committee of independent directors, which hired competent and unconflicted outside counsel, to conduct an investigation and evaluate the demand.    

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