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  • New York Court Of Appeals Clarifies Application Of Internal Affairs Doctrine But Reverses Dismissal Of Fiduciary Duty Breach Claims Under Scottish Law
    05/29/2024

    On May 23, 2024, the New York Court of Appeals reversed the dismissal of breach of fiduciary duty claims brought by former shareholders of a fantasy sports company (the “Company”) against its directors and other defendants following a merger. Eccles v. Shamrock Capital Advisors, LLC, No. 49 (N.Y. May 23, 2024). The Company was incorporated in Scotland and headquartered in New York. As we reported previously, the New York State Appellate Division had found that the trial court erred in applying New York—rather than Scots—law and dismissed the claims. On appeal, the New York Court of Appeals held that the Appellate Division “correctly concluded” that Scots law applied under the internal affairs doctrine. The Court of Appeals nevertheless reversed the dismissal and found that the complaint adequately pleaded Scots law claims for breach of fiduciary duties.

  • Delaware Supreme Court Holds Proxy Disclosures Deficient In Failing To Disclose Advisors’ Conflicts Of Interests
    05/07/2024

    On May 1, 2024, the Delaware Supreme Court, sitting en banc, reversed the dismissal of breach of fiduciary claims against Inovalon Holdings, Inc. (the “Company”) and its CEO and directors in connection with the Company’s acquisition by a private equity firm (the “Acquiror”) and its co-investors (the “Transaction”). City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc., C.A. No. 2022-0698 (Del. May 1, 2024). The Court held that the trial court erred in finding that the MFW1 requirements were met because plaintiffs adequately alleged that the proxy statement seeking approval for the Transaction failed to adequately disclose information that was potentially material to investors. The Court did not address plaintiffs’ argument that MFW “cleansing” was also unavailable because the Company allegedly failed to condition the Transaction ab initio on special committee approval.

  • Delaware Supreme Court Holds MFW Is Applicable To Controlling Stockholder Transactions Even Outside Of Freeze-Out Context
    04/09/2024

    On April 4, 2024, in an opinion authored by Chief Justice Collins J. Seitz, Jr., the Supreme Court of Delaware sitting en banc held that the framework articulated in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) applies to a controlling stockholder transaction, even if it does not involve a freeze-out merger. In re Match Group, Inc. Derivative Litigation, No. 368, 2022 (Del. Apr. 4, 2024). The Court reached this conclusion in considering the Delaware Court of Chancery’s dismissal of breach fiduciary duty claims asserted by pre-transaction minority stockholders relating to a reverse spin-off transaction. The Delaware Supreme Court clarified that “entire fairness” is the “presumptive standard of review” for a controlling stockholder transaction and that only compliance with the “procedural safeguards” of MFW changes it to “the more deferential business judgment standard.” The Court further held that the special committee required by MFW must be “wholly independent.” Because the complaint adequately pleaded that one of the special committee members was not independent of the controller, the Court reversed the dismissal.

  • Delaware Chancery Court Applies Entire Fairness To State Of Incorporation Conversions
    03/26/2024

    On February 20, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied in part and granted in part a motion to dismiss a stockholder action against TripAdvisor, Inc. and its parent (together, the “Company”), controlling stockholder and certain directors and officers challenging the conversion of the Company from a Delaware to a Nevada corporation. Palkon v. Maffei, No. 2023-0449-JTL (Del. Ch. Feb. 20, 2024). The Court held that the conversion was subject to entire fairness review because it conferred benefits to the controller—in the form of more limited fiduciary obligations—that minority stockholders did not receive and found the complaint adequately stated a claim for breach of fiduciary duty but stopped short of enjoining the conversion.

  • Delaware Court Of Chancery Dismisses Derivative Claim For Breach Of Duty Of Oversight, Finding Failure To Establish Demand Futility
    03/26/2024

    On February 19, 2024, Vice Chancellor Lori Will of the Delaware Court of Chancery dismissed a derivative breach of fiduciary duty action against nominal defendant Walgreens Boots Alliance, Inc. (the “Company”) and its board of directors (the “Board”), alleging the Company’s billing practices for insulin resulted in unnecessary refill reminders and overbilling of third-party payers. Clem v. Skinner, No. 2021-0240-LWW (Del. Ch. Feb. 19, 2024). Plaintiffs asserted that pre-suit demand was excused because the Board faced a substantial likelihood of liability for breaching their duty of oversight. The Court found that plaintiffs failed to adequately allege facts suggesting that the Board acted in bad faith, as required to plead a Caremark claim, and thus granted the motion to dismiss, finding that pre-suit demand was not excused.

  • Delaware Court Of Chancery Invalidates Stockholder Agreement Provisions That Deprive Board Of Key Decision-Making Powers
    03/26/2024

    On February 23, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery invalidated a number of significant provisions in a stockholder agreement between a financial institution (the “Company”) and its founder and controlling stockholder. West Palm Beach Firefighters Pension Fund v. Moelis & Co., No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024). The Court found that a number of the provisions impermissibly delegated to the controller authority over governance activities that, under Delaware General Corporation Law, are within the exclusive providence of the board, in violation of Section 141(a) and, as to a provision governing committee composition, Section 141(c). The Court so concluded notwithstanding that many of the provisions are commonly included in controller stockholder agreements.

  • After Derivative Litigation Judgment For Defendants, Delaware Court Of Chancery Denies Application For “Mootness” Fee For Purportedly Prompting Appointment Of Independent Directors Who Served On Special Litigation Committee
     
    02/21/2024


    On February 7, 2024, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion for a “mootness” fee of plaintiffs in a derivative action brought against the founder of a technology company (the “Company”), its CEO, certain of its directors, and other individuals affiliated with a counterparty to an acquisition by the Company. In re Oracle Corporation Derivative Litigation, C.A. No. 2017-0337-SG (Del. Ch. Feb. 7, 2024). Plaintiffs had alleged that the founder and CEO caused the Company to overpay for the target and asserted claims for breaches of fiduciary duty seeking damages. After issuing a post-trial judgment in favor of defendants, plaintiffs applied for a $5 million fee for precipitating the appointment of two independent directors who served on the special litigation committee (“SLC”) of the board. The Court held that the appointment of the new directors “did not moot any issues in the case, nor was it an aim of [p]laintiffs’ litigation.” Accordingly, plaintiffs were not entitled to a fee under the corporate benefit doctrine.

  • Court Of Chancery Rescinds CEO Compensation Package Under Entire Fairness Review
     
    02/13/2024

    In a January 30, 2024, post-trial ruling, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery rescinded a compensation package valued at $55.8 billion awarded by Tesla, Inc. to its CEO, notwithstanding that stockholders had previously voted to approve the package.  Tornetta v. Musk, No. 2018-0408-KSJM, 2024 WL 343699 (Del. Ch. Jan. 30, 2024).  In so holding, the Court found that neither the value of the compensation nor the process by which it was achieved was entirely fair to stockholders.
  • Delaware Court Of Chancery Holds That Controlling Stockholder Conduct Did Not Breach Fiduciary Duties But Rendered Buyout Transaction Unfair
     
    02/13/2024

    On January 24, 2024, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery awarded a stockholder plaintiff class more than $18 million, finding that the acquisition of the “Hometown” division of Sears Hometown and Outlet Stores, Inc. (“SHOS”) by its controlling stockholder failed the entire fairness test.  In re Sears Hometown and Outlet Stores, Inc. Stockholder Litigation, C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24, 2024).  The Court so ruled, even after finding, that the controlling stockholder’s conduct leading up to the transaction—including the ouster of two members of SHOS’s Special Committee and a bylaw amendment limiting the company’s alternatives—did not breach his fiduciary duties.
  • Delaware Court Of Chancery Rejects Claims Related To The Acquisition Of An Alleged Controller’s Portfolio Company For Failure To Plead Demand Futility
     
    01/08/2024

    On December 28, 2023, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery dismissed derivative breach of fiduciary duty and other claims asserted by a plaintiff shareholder after nCino, Inc. (the “Corporation”) acquired a portfolio company (the “Target”) of the Corporation’s alleged controlling shareholder. City of Hialeah Employees’ Retirement System v. Insight Venture Partners, LLC, C.A. No. 2022-0846-MTZ (Del. Ch. Dec. 28, 2023). Plaintiff generally contended that the Corporation overpaid for the Target to the benefit of the alleged controller and the detriment of the Corporation, as reflected in the decline in the Corporation’s stock price after the deal was announced. Plaintiff sought to establish that pre-suit demand was excused because the directors faced a substantial likelihood of liability and were beholden to the alleged controller. The Court found that plaintiff did not adequately allege that the board approved the acquisition in bad faith or lacked independence from the alleged controller and, therefore, failed to plead demand futility.

  • Delaware Court Of Chancery Rejects Stockholder’s Section 220 Books And Record Demand In Connection With Corporation’s Expression Of Opposition To Legislation
     
    07/06/2023

    On June 27, 2023, Vice Chancellor Lori W. Will of the Delaware Court of Chancery issued a judgment in favor of a “leading media and entertainment” company with a “substantial presence in Florida” (the “Corporation”), rejecting a demand for corporate books and records under Delaware General Corporation Law Section 220.  Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023).  As explained by the Court, the Corporation publicly expressed opposition to certain Florida state legislation “limit[ing] instruction on sexual orientation or gender identity in Florida classrooms” (the “Legislation”).  Thereafter, Florida’s legislature voted to dissolve a special district that had benefitted the Corporation.  Plaintiff, a stockholder, sought the records purportedly to investigate potential breaches of fiduciary duties by the Corporation’s directors and officers in connection with the opposition to the Legislation.  The Court explained that “Delaware law vests directors with significant discretion to guide corporate strategy—including on social and political issues” and found that plaintiff “decidedly” had not “demonstrated a proper purpose” for the records request.
  • Delaware Supreme Court Affirms Decision Rejecting Fiduciary Duty Claims As To Allegedly Conflicted Acquisition Because It Satisfied Entire Fairness Review
     
    06/13/2023

    On June 6, 2023, in an opinion authored by Justice Karen L. Valihura, the Supreme Court of Delaware sitting en banc unanimously affirmed judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”).  In re Tesla Motors, Inc. Stockholder Litig., No. 181, 2022 (Del. June 6, 2023).  Plaintiffs alleged that the Chairman was the Company’s controlling stockholder and that he was conflicted because he also was the chairman of the board and largest stockholder of the Target.  As discussed in our prior post, following a trial, the Delaware Court of Chancery found that the transaction was “entirely fair” and rejected plaintiffs’ claims.  In re Tesla Motors, Inc. Stockholder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022).  On appeal, the Delaware Supreme Court held that the record supported the trial court’s determinations that “despite certain process flaws, the [a]cquisition was the product of fair dealing” and “the price paid was a fair one.”
  • Delaware Court Of Chancery Concludes Founder And Largest Shareholder Was Not A Controller In Connection With Allegedly Conflicted Transaction
     
    06/01/2023

    On May 12, 2023, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled in favor of defendant, the founder and largest shareholder (the “Founder”) of a technology company (the “Company”), on derivative breach of fiduciary duty claims in connection with the Company’s acquisition of a financial software company (the “Target”), for which he was also a co-founder and the largest shareholder.  In re Oracle Corporation Derivative Litigation, No. 2017-0337-SG (Del. Ch. May 12, 2023).  Defendant owned approximately 28% of the Company and 40% of the Target.  Plaintiff shareholders alleged that the Founder, who was also a director and Chief Technology Officer of the Company, “used his outsized influence” to cause it to overpay because he owned a larger percentage of the Target than of the Company.  After a ten-day trial, the Court determined that the Founder “was not in control of [the Company] generally” and, although he “could have influenced the directors’ decision” in connection with the transaction, “he did not.”  Accordingly, the Court concluded that the Founder was not a “controller” and, therefore, the transaction was entitled to deferential review under the business judgment rule.
  • Delaware Court Of Chancery Holds That Corwin Cleansing Does Not Apply To Claims For Injunctive Relief Related To Alleged Defensive Measures
     
    05/09/2023

    On May 1, 2023, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion to dismiss a putative stockholder class action asserting a breach of fiduciary duty claim against the directors of a telecommunications company (the “Corporation”) and seeking to enjoin alleged defensive measures.  In re Edgio, Inc. Stockholders Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023).  The action was brought after the Corporation acquired a portfolio company of an investor (the “Investor”) in exchange for a 35% stake in the post-merger entity and entry into a stockholders’ agreement that allegedly “restricted the [I]nvestor’s voting and transfer rights.”  The stockholders of the Corporation voted in favor of the transaction in advance.  Defendants argued that they were entitled to the “irrebuttable presumption of the business judgment rule” that applies “when a transaction is approved by a fully informed, uncoerced vote of the disinterested stockholders” under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015).  The Court, however, found that the relevant provisions in the stockholders’ agreement were subject at the pleading stage to “enhanced scrutiny” as alleged “defensive measures . . . designed to entrench the board.”  The Court held that “Corwin cleansing” does not apply to a claim seeking to enjoin such alleged defensive measures.
  • Delaware Court of Chancery Finds Revlon Violation For Founder Who Favored Buyer And Failed To Disclose, And Aiding & Abetting Violation For Buyer
     
    04/18/2023

    On March 15, 2022, Chancellor Kathaleen McCormick of the Delaware Court of Chancery ruled that the founder and former CEO of Mindbody Inc. (the “Company”) breached his fiduciary duties to stockholders in connection with the 2019 sale of the Company to private equity firm Vista Equity Partners Management, LLC (“Buyer”). In Re Mindbody, Inc., Stockholder Litigation, CA. No. 2019-0442-KSJM (Del. Ch. Mar. 15, 2023). The Court ruled that the founder breached his duty of loyalty by structuring the sale process to favor the Buyer for personal gain and breached his duty of disclosure by creating a “false narrative” in the proxy to obscure the truth about the flawed process. The Court also concluded that Buyer aided and abetted the founder’s disclosure breaches by failing to correct the inaccuracies in the proxy. The Court awarded $1 per share in damages for the fiduciary duty breach, based on the difference between the deal price and the price that the Court concluded Buyer would have paid in a fair process, and the same $1 per share as nominal damages for the disclosure breach and aiding and abetting.
  • Delaware Court Of Chancery Dismisses Caremark Claims Against Directors For Failure To Allege Bad Faith After Permitting Related Claims To Advance Against Officer
     
    03/24/2023

    On March 1, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery dismissed derivative claims brought by stockholders for breach of the fiduciary duty of oversight under Caremark against the directors of McDonald’s Corporation (the “Company”). The decision follows the Court’s earlier decision to deny a motion to dismiss similar claims brought against the Company’s officers and to extend the Caremark duty to corporate officers, as discussed here. In re McDonald’s Corp. S’holder Deriv. Litig., Case No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023).
  • Applying Entire Fairness, Delaware Court of Chancery Sustains Class Action Claims for Breaches of Fiduciary Duties Arising from Alleged Omissions in SPAC Merger Proxy
     
    03/24/2023

    On March 1, 2023, Vice Chancellor Lori Will of the Delaware Court of Chancery declined to dismiss a putative class action brought by stockholders of special purpose acquisition company (or “SPAC”) GigCapital2, Inc. (“Gig2”) against Gig2’s controlling stockholder and directors, asserting that they breached their fiduciary duties in connection with Gig2’s acquisition of UpHealth Holdings, Inc. and Cloudbreak Health, LLC in a so-called “de-SPAC” merger. Laidlaw v. Gigacquisitions2, LLC, et. al., C.A. No. 2021-0821-LWW (Del. Ct. Ch. Mar. 1, 2023) (“Gigacquisitions2”). Plaintiffs alleged that defendants issued a false and misleading merger proxy to obtain approval of a value-destructive de-SPAC transaction and thereby enrich themselves through their unique ownership interests. Defendants moved to dismiss, arguing that (i) plaintiffs’ claims were derivative (alleging harm to the company rather to individual stockholders) but plaintiffs failed to make a demand or plead demand futility, and (ii) the business judgment rule applied. The Court held that plaintiffs’ claims were direct, not derivative, and that entire fairness—Delaware law’s most stringent standard of review—applied because inherent conflicts of interest existed between defendants and Gig2’s public stockholders.
  • Delaware Court Of Chancery Declines To Dismiss Breach Of Fiduciary Duty Claims Against Nondirector Officer, Holding That Officers Owe A Caremark Duty Of Oversight
     
    02/03/2023

    On January 25, 2023, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss a derivative suit brought by stockholders asserting breach of fiduciary duty claims against a former officer of McDonald’s Corporation (the “Company”).  In Re McDonald’s Corp. Stockholder Derivative Litig., Case No. 2021-0324-JTL (Del. Ch. Jan. 25, 2023).  Plaintiffs alleged that defendant, who served as the Chief People Officer responsible for human resources at the Company, breached oversight duties by “consciously ignoring red flags” regarding sexual harassment at the Company.  The Court acknowledged that Delaware courts had not previously “expressly held that officers . . . owe oversight duties” comparable to the duty of oversight owed by directors under In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996).  But the Court sustained the claim, noting that “[t]his decision clarifies that corporate officers owe a duty of oversight.”  The Court also found that plaintiffs adequately pled a claim against defendant for breach of the duty of loyalty based on specific purported acts of sexual harassment in which he allegedly engaged.
    Category : Fiduciary Duties
  • Delaware Court Of Chancery Assesses The Application Of Timeliness Principles To Caremark Red Flags Claim And Applies “Separate Accrual Approach” But Subsequently Dismisses Complaint For Failure To Plead Demand Futility
     
    01/12/2023

    On December 15, 2022, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to dismiss claims as untimely in a derivative action brought by stockholders against the officers and directors of AmerisourceBergen Corporation (the “Company”).  Lebanon County Employees’ Retirement Fund v. Collis, C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).  The Company is a wholesale distributor of pharmaceuticals that faced extensive investigations and litigation related to the opioid epidemic.  Plaintiffs primarily alleged that defendants breached their fiduciary duties by ignoring “red flags” related to the Company’s purported failure to report suspicious opioid orders.  Although the challenged conduct began nearly a decade earlier, plaintiffs did not even seek books and records until 2019.  The Court highlighted that “[n]o Delaware court has addressed the timeliness principles that govern” a Caremark red-flags claim.  The Court held that the “separate accrual approach” applies and, therefore, plaintiffs could assert claims with respect to alleged “conduct and consequences” that occurred within the three-year limitations period prior to their “vigilant[]” pursuit of claims.
  • Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims Against Special Committee Defendants For Failure To Plead Breach Of Loyalty
     
    12/13/2022

    On November 30, 2022, Vice Chancellor Glasscock of the Delaware Court of Chancery granted a motion to dismiss claims asserted against directors who served as members of the special committee (the “Special Committee”) of Isramco Inc. (the “Company”) for failure to plead a breach of the duty of loyalty in connection with a take-private merger. Ligos v. Tsuff, et. al., C.A., No. 2020-0435-SG (Del. Ct. Ch, Nov. 30, 2022). Plaintiff asserted that the Special Committee lacked independence because it was selected by the Company’s controlling stockholder, who also allegedly controlled the company with whom the Company merged, Naptha Israel Petroleum Corporation Ltd. (the “Buyer”) and allegedly negotiated in bad faith. Vice Chancellor Glasscock held that even with the “plaintiff-friendly inferences” required on a motion to dismiss, there was no reasonably conceivable basis for Plaintiff’s claims.
    Category : Fiduciary Duties
  • New York Appellate Court Dismisses Breach Of Fiduciary Duty Claims Under Foreign Law, Clarifying That The Internal Affairs Doctrine Applies To Directors And Officers Even If They Are No Longer Serving At The Time Of Suit
     
    11/01/2022

    On October 13, 2022, a five-judge panel of the Appellate Division of the New York State Supreme Court, First Department, unanimously reversed a trial court decision and dismissed a breach of fiduciary duty action brought by former shareholders of an online fantasy sports company (the “Company”) against its directors and officers following a merger.  Eccles v. Shamrock Cap. Advisors, LLC, Case No. 2022-00866 (N.Y. App. Div. Oct. 13, 2022).  The Company was incorporated in Scotland and headquartered in New York.  The trial court had upheld the claims under New York law, declining to apply the internal affairs doctrine to former directors and officers.  Applying Scots law, the Appellate Division reversed, explaining: “To the extent our past decisions could be interpreted as suggesting otherwise we clarify that the internal affairs doctrine applies to an officer or director at the time of the conduct at issue.”
    Category : Fiduciary Duties
  • Delaware Court Of Chancery Dismisses Caremark Claims Alleging Breaches Of Fiduciary Duty Following A Cyberattack
     
    09/15/2022

    On September 6, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by stockholders of a software company (the “Company”) against its directors following a cyberattack.  Construction Industry Laborers’ Pension Fund v. Bingle, No. CV 2021-0940-SG (Del. Ch. Sep. 6, 2022).  After the Company allegedly fell victim to hackers who accessed confidential information on the systems of thousands of its customers, plaintiffs alleged that defendants had failed to adequately address the risk to cybersecurity in breach of their oversight obligations under Caremark.  The Court indicated that cybersecurity is “mission critical” for online service providers and the complaint alleged oversight practices that were “far from ideal.”  But the Court held that pre-suit demand was not excused because the complaint did not plead “specific facts” from which the Court could “infer bad faith liability.”
  • Delaware Court Of Chancery Dismisses Stockholder Challenge To Certificate Of Incorporation Amendment Prolonging Voting Control By CEO/Chairman
     
    08/16/2022

    On April 11, 2022, Vice Chancellor Paul A. Fiorvanti of the Delaware Court of Chancery dismissed a stockholder challenge to an amendment of the certificate of incorporation of The Trade Desk, Inc. (the “Company”).  According to the complaint, the amendment effectively extended the voting control of the Company’s co-founder, Chairman, and CEO (the “CEO”) by extending the duration of a dual-class stock structure.  Plaintiff asserted claims against the CEO and other directors for breach of fiduciary duties in approving the amendment.  The Court dismissed the complaint because it found that the transaction process complied with the procedural protections necessary for application of the deferential business judgment rule pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).
  • Delaware Supreme Court Reverses Dismissal Of A Post-Merger Suit For Alleged Breach Of Fiduciary Duty Related To Disclosures On Appraisal Rights
     
    07/28/2022

    On July 19, 2022, in an opinion authored by Justice Gary F. Traynor, a majority of the Supreme Court of Delaware sitting en banc affirmed in part and reversed in part the dismissal of breach of fiduciary duty claims against the directors of a real estate investment trust (the “Company”) brought by former stockholders of the Company after its acquisition.  In re GGP, Inc. Stockholder Litigation, No. 202, 2021 (Del. July 19, 2022).  Plaintiffs alleged that the merger was structured to eliminate the statutory appraisal rights of the Company’s stockholders and that the proxy disclosures regarding appraisal rights were misleading.  The Delaware Court of Chancery had dismissed the claims.  On appeal, the Delaware Supreme Court affirmed the dismissal of the claim alleging an improper merger structure because “defendants did not, by paying a large portion of the merger consideration by way of a pre-closing dividend, structure the merger in a manner that effectively and unlawfully eliminated appraisal rights.”  However, the Court reversed the dismissal of the disclosure claim because it found the complaint adequately alleged that defendants “consciously crafted the transaction and the related disclosures in such a way as to deter [the Company’s] stockholders from exercising their appraisal rights.”
  • Delaware Court Of Chancery Dismisses Derivative Suit For Failure To Allege Substantial Likelihood Of Liability Sufficient To Excuse Pre-Suit Demand
     
    07/12/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty brought by a stockholder of an energy company (the “Company”) against its directors following an incident involving explosions in the pipeline system of one of its natural gas distribution subsidiaries. City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022).  Plaintiff claimed that the board breached its oversight obligations under Caremark by allegedly failing to implement a reporting and monitoring system relating to pipeline safety and ignoring “red flags.”  The Court held that pre-suit demand under Court of Chancery Rule 23.1 was not excused because the complaint did not adequately plead that the directors faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Declines To Dismiss Claims Related To Direct Offering At The Outset Of The Pandemic
     
    07/06/2022

    On June 30, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied a motion to dismiss stockholder derivative claims for alleged breaches of fiduciary duty against the CEO/Chairman of an e-commerce car company (the “Company”).  In Re Carvana Co. Stockholders Litigation, C.A. No. 2020-0415-KSJM (Del. Ct. Ch, Jun. 30, 2022).  Plaintiffs alleged that the CEO/Chairman and his father controlled the Company and “orchestrated” a $600 million direct offering to selected investors in which they purchased $50 million of common stock in March 2020 when the Company’s stock price was depressed due to pandemic-related volatility.  The Court held that plaintiffs adequately pleaded that pre-suit demand was excused because two of the Company’s other directors lacked independence from the CEO/Chairman.  The Court further found that the transaction was subject to entire fairness—rather than deferential business judgment—review because it allegedly involved a non-ratable benefit not shared by the public stockholders and half the board lacked independence.  Finally, the Court held that the CEO/Chairman’s abstention from the board’s vote approving the offering was insufficient to warrant dismissal at the pleadings stage.
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty Claim Against Director Who Abstained From Merger Vote
     
    06/02/2022

    On May 25, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative claim against a director of Fat Brands Inc. (the “Corporation”) for alleged breach of fiduciary duty.  Harris v. Junger, C.A. No. 2021-0511-SG (Del. Ch. May 25, 2022).  Plaintiffs challenged the merger of the Corporation with Fog Cutter Capital Group, Inc. (the “Merger Partner”), which allegedly held more than 80% of the Corporation’s stock before the merger.  In a previous oral ruling, the Court had found that the Complaint sufficiently pleaded that the merger “constituted reasonably conceivable bad faith and waste,” but reserved judgment on the claim against one director who had been a minority stockholder of the Merger Partner before the merger and therefore abstained from voting on the merger.  In this decision, the Court declined to dismiss the claim against that director at the pleading stage because the complaint adequately alleged that it was “reasonably conceivable” that he “breached his duty of good faith by participating in negotiating a [m]erger that constituted corporate waste.”
    Category : Fiduciary Duties
  • Delaware Court Of Chancery Denies Motion To Dismiss Breach Of Fiduciary Duty And Unjust Enrichment Claims Related To Compensation Committee Awards
     
    05/17/2022

    On April 27, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied, in part, a motion to dismiss a derivative complaint against directors for breaches of fiduciary duties brought by stockholders of Universal Health Services Inc. (the “Corporation”).  Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022).  Plaintiff, a stockholder, alleged that the directors serving on the board’s compensation committee took advantage of an “obvious dip” in stock price in the wake of the emergence of COVID-19 in March 2020 to grant option awards, including to themselves.  Noting that “[s]elf-interested compensation decisions are subject to the entire fairness standard of review,” the Court found that plaintiff “cleared the low hurdle of pleading sufficient facts to make it plausible that the price and process of the option awards transaction were not entirely fair.”
  • Delaware Court Of Chancery Applies Contemporaneous Ownership Requirement And Declines To Extend Equitable Derivative Standing
     
    05/17/2022

    On May 13, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed certain stockholder derivative claims for breaches of fiduciary duty brought against the founder-CEO and other directors of Flashpoint Technology, Incorporated (the “Corporation”).  SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May. 13, 2022).  Plaintiffs were a limited liability company (the “New LLC”) that held shares in the Corporation and its sole owner (the “Beneficial Owner”).  The New LLC received its shares from another limited liability company (the “Old LLC”) — a nonparty to the suit — also wholly owned by the Beneficial Owner.  Plaintiffs challenged certain related-party transactions, including leases from and loans to entities affiliated with the CEO.  Applying the “contemporaneous ownership requirement,” the Court granted summary judgment to defendants for claims based on conduct that predated the acquisition of shares by the New LLC.  In doing so, the Court rejected plaintiffs’ contention that the Beneficial Owner should have “equitable standing.”
  • Finding That Allegedly Conflicted Acquisition Satisfied Entire Fairness Review, Delaware Court Of Chancery Rejects Breach Of Fiduciary Duty Claims
     
    05/04/2022

    On April 27, 2022, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery entered judgment in favor of defendant, the CEO/Founder and then-Chairman (the “Chairman”) of Tesla Motors, Inc. (the “Company”), following a trial on derivative claims for breach of fiduciary duty asserted by stockholders in connection with the Company’s acquisition of SolarCity Corporation (the “Target”).  In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Apr. 27, 2022).  Plaintiffs alleged that at the time of the acquisition, the Chairman, who held approximately 22% of the Company’s stock, was its controlling stockholder.  He also was the chairman of the board and largest stockholder of the Target.  Plaintiffs asserted that the Chairman caused the Company’s allegedly conflicted Board to approve the deal—despite the Target’s alleged insolvency—at a purportedly “patently unfair price.”  Assuming without deciding that the Chairman was the Company’s controlling stockholder and that a majority of the Company’s Board was conflicted, the Court reviewed the claims under an “entire fairness” standard.  Noting that the process was “far from perfect” and that “defense verdicts after an entire fairness review” are “not commonplace,” the Court nevertheless found that the Company’s Board “meaningfully vetted” the acquisition and the price paid was “entirely fair in the truest sense of the word”—and rejected plaintiffs’ claims.
  • Eighth Circuit Affirms Dismissal Of Merger-Related Derivative Suit For Failure To Plead Demand Excusal
     
    04/19/2022

    On April 7, 2022, the United States Court of Appeals for the Eighth Circuit affirmed the dismissal of derivative claims brought by shareholders of Centene Corporation (the “Corporation”) against directors and officers of the Corporation following its merger with Health Net, Inc. (the “Target”).  Carpenters’ Pension Fund of Ill. v. Neidorff, No. 20-3216 (8th Cir. Apr. 7, 2022).  In connection with the merger, the companies issued a joint proxy statement soliciting shareholder approval of the merger.  Plaintiffs’ central allegation was that defendants purportedly concealed their knowledge of “significant financial problems” faced by the Target.  Plaintiffs thus asserted derivative claims for violation of Section 14(a) of the Securities Exchange Act and breaches of fiduciary duty.  The Court held that pre-suit demand was not excused, because the complaint failed to adequately plead that at least five of the nine board members at the time the suit was filed faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Rejects Motion To Stay SPAC Breach Of Fiduciary Duty Suit Pending Parallel Federal Securities Action
     
    03/15/2022

    On March 7, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to stay a putative class action brought by legacy stockholders of DiamondPeak Holding Corp., a special purpose acquisition company (“SPAC”), alleging that its directors and controlling stockholders breached their fiduciary duties in connection with the SPAC’s acquisition of Lordstown Motors Corp. (“Legacy LMC”).  In re Lordstown Motors Corp. Stockholders Litigation, CA. No. 2021-1066-LWW (Del. Ch. March 10, 2022) (the “Delaware Action”).  Plaintiffs alleged that  defendant directors failed to disclose certain information about Legacy LMC’s business and that the SPAC’s controlling stockholders pursued the acquisition to advance their own interests to the detriment of minority stockholders.  Defendants argued that the Delaware Action should be stayed pending resolution of an earlier-filed securities class action (the “Securities Action”) in the United States District Court for the Northern District of Ohio.  The Court declined to grant the stay, reasoning that application of Delaware fiduciary duty law to SPACs “raises emerging issues” and that the Court’s “essential role in providing guidance in developing areas of our law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.”
    Categories : Fiduciary DutiesSPACs
  • Delaware Court Of Chancery Holds That Company And Its Directors Did Not Breach Bylaws Or Fiduciary Duties In Rejecting Director Nomination Notice
     
    03/01/2022

    On February 14, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery entered judgment in favor of Lee Enterprises, Inc. (the “Company”) and its directors following an expedited trial on claims for breach of the Company’s bylaws and the directors’ fiduciary duties.  Strategic Investment Opportunities LLC v. Lee Enterprises, Inc., C.A. No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022).  Plaintiff, a beneficial stockholder, sought declaratory and injunctive relief to allow its nomination of directors—attempted in conjunction with a takeover bid by plaintiff—to move forward.  The Court found that plaintiff did not comply with advance notice requirements for director nominations in the Company’s “clear and unambiguous” bylaws.  Applying “enhanced scrutiny,” the Court also concluded that the board did not breach fiduciary duties by rejecting plaintiff’s nomination based on “a validly adopted bylaw with a legitimate corporate purpose.”
  • Delaware Court Of Chancery Finds That Consent To Merger In Stockholders Agreement Did Not Waive Right To Bring Post-Closing Fiduciary Duty Claims
     
    02/24/2022

    On February 14, 2022, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery denied a motion to dismiss a post-closing damages action for breaches of fiduciary duty brought by former stockholders of Authentix Acquisition Company, Inc. (“Authentix” or the “Company”), rejecting defendant’s claim that stockholders waived the right to bring suit.  Manti Holdings, LLC v. Carlyle Grp. Inc., C.A. No. 2020-0657-SG, (Del. Ch. Feb. 14, 2022).  The Court concluded that language in a Stockholders Agreement consenting to the transaction was not sufficiently specific to waive the stockholders’ right to challenge the sale.
    Categories : Fiduciary DutiesStanding
  • Delaware Court Of Chancery Applies “Universal Test” To Dismiss Derivative Suit For Failure To Make A Demand
     
    02/08/2022

    On January 21, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of GrafTech International Ltd. (the “Company”) against the Company’s directors and the Company’s controlling stockholder, Brookfield Asset Management (“Brookfield”), in connection with the Company’s repurchase of shares from Brookfield.  Simons v. Brookfield Asset Mgmt., C.A. No. 2020-0841-KSJM (Del. Ch. Jan. 21, 2022).  The Court held that the demand was not excused because five of the nine board members were capable of impartially considering a litigation demand under the recently affirmed Zuckerberg “universal test.”  United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862 (Del. Ch. 2020).
  • Delaware Court Of Chancery Limits Discovery In Appraisal Proceeding To Materials Available In Books-And-Records Demand
     
    02/08/2022

    On January 31, 2022, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery partially granted a protective order brought by Zoox, Inc. (“respondent” or “Zoox”) limiting discovery requests by stockholders in a post-merger appraisal proceeding. Wei v. Zoox, Inc., C.A. No. 2020-1036-KSJM (Del. Ch. Dec. 07, 2020). The Court concluded that the “real purpose” of the discovery was “to facilitate a pre-suit investigation of a fiduciary duty claim,” therefore, discovery would be limited to information petitioners could have obtained in a typical action to inspect a company’s books and records.
  • Delaware Court Of Chancery Finds Transfer Restrictions On Stock Issued In Connection With A De-SPAC Merger Inapplicable To A Legacy Operating Company Stockholder Based On The Language Of The Relevant Bylaw
    01/25/2022

    On January 10, 2022, Vice Chancellor Lori W. Will held that shares of defendant Matterport Inc. (“New Company”) issued to plaintiff in connection with the acquisition of Matterport Operating, LLC (“Legacy Company”) by a special purpose acquisition company (“SPAC”) in a “de-SPAC” merger were not subject to a transfer restriction in the New Company’s bylaws.  As part of the transaction, Legacy Company stockholders, including plaintiff, were given the right to receive shares of the New Company.  Prior to closing, the SPAC adopted a bylaw that restricted the transfer by such stockholders of shares “held . . . immediately following the closing” of the transaction.  After a two-day trial, the Court found that plaintiff was not issued shares of the New Company until more than three months after the merger when he executed letters of transmittal to the transfer agent.  Concluding that the “plain language” of the bylaw was “straightforward,” and that plaintiff had not held shares “immediately” following the merger, the Court granted declaratory relief in favor of plaintiff.
  • Delaware Court Of Chancery Dismisses Derivative Claims Challenging Stock Sale Allegedly Based On Adverse Nonpublic Information For Failure To Plead Demand Futility
     
    01/19/2022

    On December 15, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery dismissed stockholder derivative claims for breaches of fiduciary duty asserted on behalf The Kraft Heinz Company (the “Company”) against an investment firm (the “Investment Firm”) that had previously held 24.2% of the Company’s shares, as well as against certain alleged dual fiduciaries of the two entities.  In re Kraft Heinz Company Derivative Litigation, C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021).  Plaintiffs alleged that defendants sold $1.2 billion in Company stock on the basis of nonpublic information that the Company was expected to miss its full-year earnings target by $700 million.  The Court held that plaintiffs failed to establish demand futility because the complaint did not raise a reasonable doubt that a majority of the Company’s board members lacked independence from defendants.
  • Delaware Court Of Chancery Sustains Class Action Claims For Breaches Of Fiduciary Duties And Aiding And Abetting Arising From Alleged Omissions In SPAC Merger Proxy
     
    01/11/2022

    On January 3, 2022, Vice Chancellor Lori W. Will of the Delaware Court of Chancery largely denied a motion to dismiss a putative class action brought by the stockholders of Churchill Capital Corp. III, a special purpose acquisition company or “SPAC” (“Churchill”) alleging that the company’s controlling stockholder, officers, and directors (“the Company Defendants”) breached their fiduciary duties and the company’s financial advisor aided and abetted that breach in connection with the SPAC’s acquisition of MultiPlan, Inc. (“MultiPlan”).  In re MultiPlan Corp. Stockholders Litig., C.A. No. 2021-0300-LWW (Del. Ch. Jan. 3, 2022).  Plaintiffs alleged that defendants omitted to disclose that a large customer of MultiPlan would soon stop using MultiPlan’s services, allegedly causing stockholders to approve the merger based on faulty information.  Defendants argued that the claim was derivative in nature, rather than one that could be asserted directly, and moved to dismiss for failure to plead demand futility and on the grounds that the business judgment rule applied.  The Court held that plaintiffs’ claims were direct, rather than derivative, and that entire fairness applied because of what it found to be inherent conflicts of interest between defendants and the company’s public stockholders.
  • Delaware Court Of Chancery Dismisses Derivative Claims Challenging A Convertible Debt Issuance At The Onset Of The COVID-19 Pandemic For Failure To Plead That Demand Was Excused
     
    12/08/2021

    On November 23, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed stockholder derivative claims for breach of fiduciary duty against the directors of Wayfair, Inc. (the “Company”).  Equity-League Pension Tr. v. Great Hill Partners, C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021).  Plaintiff challenged the sale by the Company of $535 million in convertible notes at the outset of the COVID-19 pandemic to a consortium of investors allegedly tied to four of the Company’s directors, including the two co-chairmen, one of whom was also the CEO.  There was no dispute that two of the nine board members were disinterested and independent.  As to three others, plaintiff alleged that their service on the audit committee presented a substantial likelihood of liability because it was charged with reviewing conflicted transactions.  Highlighting that the Company’s charter exculpated directors for breaches of the duty of care, however, the Court explained that the complaint must therefore plead bad faith, which it referred to as a “rara avis.”  Although the Court acknowledged that the transaction was not a “model of best practices,” it found that the complaint and the documents incorporated by reference therein did not support an inference of bad faith.
  • Delaware Court Of Chancery Declines To Dismiss Derivative Claims, Finding Wrongful Refusal Of Demand Adequately Pleaded
     
    11/09/2021

    On October 29, 2021, Vice Chancellor Lori W. Will of the Delaware Court of Chancery denied a motion to dismiss derivative claims for breach of fiduciary duties brought by stockholders of BioDelivery Sciences International, Inc. (the “Company”).  Drachman v. BioDelivery Scis. Int’l, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021).  Plaintiffs alleged that the board improperly adopted two amendments to the Company’s certificate of incorporation.  Plaintiffs made a pre-suit demand on the board requesting that it deem the amendments ineffective and indicating they would otherwise commence litigation.  The board responded by noting that it had determined the demand was “without merit.”  The Court held that plaintiffs adequately pleaded wrongful refusal because the allegations raised a reasonable doubt as to the good faith of the board in “rebuffing” the demand.
  • Delaware Supreme Court Overrules Gentile  Carve-out, Holding An Improper Transfer Of Economic Value And Voting Power To A Controlling Stockholder Through An Equity Overpayment Is A Derivative Claim
     
    10/19/2021

    On September 20, 2021, in a decision authored by Justice Karen L. Valihura, the Delaware Supreme Court sitting en banc reversed the denial of defendants’ motion to dismiss breach of fiduciary duty claims brought by former stockholders of TerraForm Power, Inc. (the “Company”).  Brookfield Asset Management, Inc. v. Rosson, No. 406, 2020, 2021 WL 4260639 (Del. Sept. 20, 2021).  As we discussed in our prior post, plaintiffs alleged that a private placement of stock to the Company’s controlling stockholder at a price that undervalued the shares diluted the financial and voting interest of the minority stockholders.  The trial court found that the claims were nearly identical to corporate overpayment claims asserted by former stockholders and upheld as “direct”—rather than “derivative”—by the Delaware Supreme Court in Gentile v. Rossette, 906 A.2d 91 (Del. 2006).  Reversing, the Delaware Supreme Court reaffirmed the “classic” test for distinguishing stockholder “derivative” claims from “direct” claims established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and expressly overruled Gentile and its carve-out from Tooley.
    Categories : Fiduciary DutiesStanding
  • Delaware Supreme Court Adopts Refined Test For Demand Futility And Holds Exculpated Claims Do Not Excuse Demand
     
    10/06/2021

    On September 23, 2021, in a decision authored by Justice Tamika Montgomery-Reeves, the Delaware Supreme Court sitting en banc affirmed the dismissal of a derivative complaint filed by a stockholder of Facebook, Inc. (the “Company”) against the CEO, who is also the founder, controlling stockholder and chairman of the board, as well as certain other directors.  United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., No. 404, 2020 (Del. Sept. 23, 2021).  Plaintiff asserted that the directors breached their fiduciary duties by improperly approving a stock reclassification allegedly for the benefit of the CEO, which though ultimately abandoned resulted in litigation and settlement costs.  The Court concluded that the Delaware Court of Chancery properly dismissed plaintiff’s complaint for failing to make a pre-suit demand on the board.  In so holding, the Court adopted a refined test for demand futility and also determined that exculpated claims cannot excuse demand because they do not entail a substantial likelihood of liability.
  • Delaware Court Of Chancery Upholds Alleged Safety-Related Caremark Claims Against Airplane Manufacturer’s Board
     
    09/15/2021

    On September 7, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery largely denied a motion to dismiss a stockholder derivate suit against the directors of The Boeing Company (the “Company”) in the wake of two fatal crashes of an airplane it manufactured.  In re The Boeing Co. Derivative Litigation, No. 2019-0907-MTZ (Del. Ch. Sept. 7, 2021).  Plaintiffs alleged that the board breached its fiduciary duty of oversight under Caremark by failing to ensure adequate safety and quality control.  The Court found that plaintiffs sufficiently pleaded that the board failed to establish board-level reporting systems related to “mission critical” airplane safety and did not adequately respond to red flags, including media reports about the crashes.  Accordingly, the Court held that the complaint demonstrated that the directors faced a substantial likelihood of liability and that pre-suit demand on the board was excused.
  • Delaware Court Of Chancery Dismisses Post-Merger Claims For Alleged Violation Of DGCL § 203 And Breach Of Fiduciary Duty
     
    08/31/2021

    On August 16, 2021, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed breach of fiduciary duty and other claims brought by a stockholder of Genomic Health, Inc. (the “Company”) in connection with its acquisition by Exact Sciences Corp.  Flannery v. Genomic Health Inc., et al., C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021).  The Court held that the transaction did not violate Delaware General Corporation Law (“DGCL”) § 203, entire fairness did not apply because there was no conflicted controlling stockholder, and enhanced scrutiny under Revlon did not apply because the merger was not a change in control transaction.  Accordingly, the Court found that plaintiff failed to overcome the presumption of the business judgment rule.
  • Delaware Court Of Chancery Declines To Apply Business Judgment Deference To Take-Private Merger Because Of “Deficiencies” In MFW  Protections, Including That The Conditions Were Not Irrevocable
     
    08/19/2021

    On July 23, 2021, Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery denied defendants’ motion to dismiss breach of fiduciary duty claims brought by a putative class of minority stockholders of Empire Resorts, Inc. (the “Company”) challenging the Company’s take-private acquisition by the Company’s majority shareholder.  The MH Haberkorn 2006 Trust v. Empire Resorts, Inc., C.A. No. 2020-0619 (Del. Ch. Jul. 23, 2021) (Transcript).  Plaintiffs alleged that a special committee approved the deal even though it undervalued the Company and asserted claims against officers, directors, the controlling shareholder and certain of their affiliates.  Defendants argued that the transaction complied with the procedural protections necessary for deferential review—under the business judgment standard—of a merger process involving a controller pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW ”).  But the Court found the complaint adequately pleaded “deficiencies” in the MFW conditions, including that they were not “irrevocable.”  Therefore, the Court applied the entire fairness standard and found that defendants did not show “conclusively” at the pleading stage that the transaction was entirely fair.
  • Delaware Court Of Chancery Denies Motion To Dismiss Fiduciary Duty Breach Claim Against Derivative Plaintiffs For Failing To Turn Over Derivative Award To The Corporation
     
    08/03/2021

    On July 15, 2021, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery denied a motion by stockholders of OptimisCorp (the “Company”) to dismiss claims brought by the Company against them for breach of fiduciary duty and unjust enrichment for failing to turn over to the Company a derivative arbitration award that they won in their capacity as derivative plaintiffs.  OptimisCorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2021).  After succeeding in the derivative case against another stockholder—who had been the Company’s outside counsel and a “confederate” of the Company’s CEO—defendants allegedly escrowed the award with intentions to distribute it to certain stockholders but exclude their adversaries.  At an earlier stage in this action, the Court directed defendants to transfer the award to the Company.  In this decision, the Court held that defendants “owed fiduciary duties to the Company and its stockholders with respect to the corporate asset entrusted to them” and the Company adequately alleged that defendants “breached their duty of loyalty by withholding the Award out of animus toward [the CEO] and the Company, and to benefit themselves.”
    Category : Fiduciary Duties
  • Delaware Supreme Court Requires Board To Demonstrate “Compelling Justification” For Stock Sale Primarily Intended To Interfere With Stockholder Voting Rights
     
    07/13/2021

    On June 28, 2021, in an en banc opinion authored by Chief Justice Collins J. Seitz, Jr., the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery, which had upheld a contested stock sale by the board of UIP Companies, Inc. (the “Company”).  Coster v. UIP Cos., Inc., No. 49, 2020 (Del. June 28, 2021).  Plaintiff was one of the Company’s two equal stockholders.  Plaintiff alleged that defendant, the other stockholder, who was also the board chairman, and the two other directors voted to issue stock to one of them in order to dilute plaintiff’s ownership interest.  The Court of Chancery found that the board approved the stock sale at a fair price and through a fair process.  Reversing and remanding, the Delaware Supreme Court held that—although the sale may have satisfied its entire fairness review—“inequitable action does not become permissible simply because it is legally possible.”  The Delaware Supreme Court further held that, if the board acted for the “primary purpose of thwarting” the stockholder’s vote or reducing her leverage as an equal stockholder—even in good faith—the board must demonstrate a “compelling justification.”
  • Delaware Court Of Chancery Dismisses Caremark Claims For Failure To Plead Demand Futility
     
    07/07/2021

    On June 28, 2021, Vice Chancellor Joseph R. Slights of the Delaware Court of Chancery dismissed a derivative lawsuit brought by a stockholder of FedEx Corporation (the “Company”) against the Company’s directors for failure to plead that pre-suit demand on the board would have been futile. Pettry v. Smith, et al., No. 2019-0795-JRS (Del. Ch. June 28, 2021).  Plaintiff primarily alleged that defendants breached their Caremark duties by failing to oversee the Company’s compliance with laws governing the transportation and delivery of cigarettes.  The Court, however, concluded that the complaint did not plead particularized facts demonstrating that a majority of the board faced a substantial likelihood of liability.
  • Delaware Court Of Chancery Dismisses Breach Of Fiduciary Duty Claims Against Certain Officer-Directors Of Acquirer But Upholds A Claim Against A Special Committee Member
     
    06/29/2021

    On June 21, 2021, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed breach of fiduciary duty claims brought by stockholders of Oracle Corporation (the “Company”) against two of its officer-directors in connection with its acquisition of NetSuite, Inc., but upheld a claim against the chairperson of the special committee that had been established to evaluate the transaction.  In Re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. June 21, 2021).  Plaintiffs alleged that the acquisition was a “controlled self-dealing transaction” in which the Company overpaid for the target to the benefit of the entities’ common founder, who allegedly controlled both.  As discussed in a prior post, the Court previously dismissed claims for aiding and abetting breaches of fiduciary duty that had been asserted against the target’s CEO and Chairman.  Finding that the complaint failed to plead facts demonstrating gross negligence or disloyalty, the Court dismissed fiduciary-duty breach claims against two officer-directors.  The Court, however, found the complaint adequately alleged that it is “reasonably conceivable” that the director on the special committee was “not independent” of the founder and “actively participated in the formulation” of the transaction to advance the alleged controller’s interest.
    Categories : DisclosuresFiduciary Duties
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