By Benyamin S. Ross, Jefferson E. Bell and Lauren Kole
The Delaware Supreme Court has reaffirmed the continued applicability of Tooley v. Donaldson, Lufkin & Jenrette, in determining whether a claim is direct or derivative in nature, even when the claim involves a breach of contractual duty owed to a limited partnership.
The derivative complaint alleged that Zynga's CEO, Chairman and controlling stockholder Mark Pincus, along with certain other top managers and directors were given an exception from the company's standing rule preventing insider sales until three days after an earnings announcement.
Buyers unhappy with the performance of a company or assets purchased frequently assert claims that the seller fraudulently induced the purchase by providing false information of the value of the company or assets in the sale process.
The Delaware Supreme Court has affirmed a Court of Chancery holding that a term sheet setting forth the general parameters of the parties' ongoing relationship was not superseded by an operating agreement later entered into by the parties, despite the inclusion of an integration clause in the operating agreement.
Parties typically seek to narrow the scope of potentially responsive documents by meeting and conferring and reaching agreement on appropriate search terms. The parties next run those search terms against the data collected from the relevant custodians and review the resulting information for responsiveness.
In several recent statutory appraisal actions, the Delaware Court of Chancery has concluded that the fair value of the corporation was equal to the agreed-upon deal price. However, in one recent appraisal action, Chancellor Andre G. Bouchard rejected the defendant corporation's argument that the merger consideration could be "relied upon by the court to set the appraisal value."
The Delaware courts encourage plaintiffs who bring derivative claims in Delaware without making demand on the board of directors to seek books and records under Section 220 of the Delaware General Corporation Law so as to be able to plead facts sufficient to demonstrate that demand is excused. Many claims have been dismissed under Delaware Court of Chancery Rule 23.1 because a plaintiff failed to utilize the "tools at hand" to obtain relevant books and records. When a plaintiff grounds its claim on directors' alleged failure to exercise oversight, however, even receipt of books and records may not enable a plaintiff to plead facts sufficient to demonstrate that the directors knowingly ignored their duties so as to have acted in bad faith. That high standard as articulated by the Delaware Supreme Court in Stone v. Ritter makes a Caremark claim for breach of directors' oversight duties as among the most difficult in corporate law. The Court of Chancery's recent decision in Reiter v. Fairbank, C.A. No. 11693-CB (Del. Ch. Oct. 18), demonstrates that, regardless of the injury allegedly sustained by the subject company, a pleading based on books and records obtained from the company that at best reflects awareness of "yellow flags" is not sufficient to call into question the directors' good faith and hence to excuse demand, thus requiring dismissal of the plaintiff's derivative claim.
A recent decision by Vice Chancellor Joseph R. Slights III represents the latest Delaware Court of Chancery decision to rely on the business judgment standard of review to dismiss a Revlon challenge to a cash-out merger.
Delaware courts have recently weighed in on three of the hottest issues in deal law: the standard of review governing controlling-stockholder buyouts, the power of stockholder approval to preclude fiduciary litigation challenging a completed merger, and the law governing merger disclosure documents. The decisions push merger planners toward greater public disclosure before any stockholder vote on a proposed transaction.
Anyone who practices in the Delaware Court of Chancery but sometimes finds himself or herself in the Superior Court Complex Commercial Litigation Division (CCLD) should be aware of the subtle differences between Court of Chancery Rule 26 and Superior Court Rule 26 when it comes to what information of a party's expert is discoverable. Two recent rulings from both courts, CIM Urban Lending GP v. Cantor Commercial Real Estate Sponsor, C.A. No. 11060-VCS (Del. Ch. May 19), and Green v. Nemours Foundation, C.A. No. N15C-03-208 (Del. Super. Aug. 17), help to shed light on the topic.
By Adam H. Offenhartz, Jefferson E. Bell and Anna Karamigios
In a recent ruling, the Delaware Court of Chancery made clear that claims based on allegedly inadequate disclosures brought after a merger closes face an exacting standard on a motion to dismiss. Vice Chancellor Sam Glasscock III in Nguyen v. Barrett, C.A. No. 11511-VCG,rejected the assertion that plaintiffs with a pre-closing disclosure claim can choose to bring the claim post-closing without repercussion—clarifying that the "preferred method for vindicating truly material disclosure claims is to bring them pre-closing, at a time when the court can ensure an informed vote." Glasscock further opined that a rule that disclosure claims "pleaded but not pursued pre-close" are waived would be "salutary."
Appraisal litigation has been a topic at the forefront of the minds of many legal practitioners over the past few years. Recently, amendments to Section 262 of Delaware's General Corporation Law went into effect that were effectuated to eliminate de minimis appraisal claims while also allowing companies to make a pre-judgment payment to dissenting stockholders to reduce interest costs in connection with appraisal litigation. The Delaware Court of Chancery authored several opinions concerning appraisal arbitrage and the technical requirements of Section 262. There have even been unique appraisal cases where the court discussed the circumstances surrounding the proposed settlement of only factions of the appraisal class.
The Delaware Court of Chancery's well-reasoned decision in The Huff Energy Fund v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sept. 29), illustrates the care by which a Delaware court will examine the potential contractual and fiduciary duties at issue when a board adopts a plan of dissolution following a sale of a significant portion of its assets.
The Delaware Court of Chancery has held that there was no credible basis to infer a potential Caremark claim for breach of fiduciary duty for failure to exercise oversight where the stockholder's only identified use of corporate books and records was to investigate mismanagement or wrongdoing to evaluate potential litigation and the board's actions ultimately would be "fully protected" by 8 Del. C. Section 141(e).
By Isaac Greaney, Daniel Gimmel and Justin Avellar
Late on New Year's Eve 2013, Philip Shawe broke into the office of his business partner, Elizabeth Elting, removed her hard drive, instructed an employee to image the hard drive, and then returned the hard drive to Elting's office after concealing any evidence that it had been taken.
Lawyers who practice in the Delaware Court of Chancery probably can recite the shorthand rule that, for most claims, the Court of Chancery will decide whether a claim is filed too late by application of the statute of limitations by analogy.
With the rise of appraisal arbitrage, an increasing number of appraisal petitions and an increase in the size of appraisal classes, corporate practitioners have closely followed recent appraisal decisions in the Delaware Court of Chancery.
In two recent decisions, the Delaware Court of Chancery has addressed the preclusive effect of a dismissal for failure to adequately plead demand futility under Rule 23.1 from another jurisdiction on a pending stockholder complaint in Delaware.
The Delaware Supreme Court held in Corwin v. KKR Financial Holdings, that "when a transaction not subject to the entire fairness standard is approved by a fully-informed, un-coerced vote of the disinterested stockholders, the business judgment rule applies," even when a stockholder vote is statutorily required and the transaction is otherwise subject to the Revlon, 125 A.3d 304, 308-09 (Del. 2015),standard of review. Subsequently, on May 6, the Delaware Supreme Court clarified in Singh v. Attenborough, that the business judgment rule applies irrebuttably to review of a transaction approved by a vote of the majority of the outstanding, fully-informed, uncoerced, disinterested stockholders. Therefore, in Attenborough, the Supreme Court concluded that this standard of review insulates the transaction from challenge, except on the ground of waste—which typically results in dismissal because stockholders are unlikely to approve a "wasteful" transaction where directors are irrationally squandering or giving away corporate assets.