Posts from 2016

Majority of Fully-Informed, Disinterested Stockholders Insulated Merger from Attack

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, uncoerced 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. More ›

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Arbitrator to Decide Arbitrability of Breach of Fiduciary Duty Claim

In Angus v. Ajio, C.A. No. 11895-VCG (Del. Ch. May 13, 2016), the plaintiffs sought to enjoin an arbitration initiated against them as officers of MoGo Sport. In the arbitration, certain members of the company (who were defendants in the court proceeding) asserted claims for breach of fiduciary duty, fraud and violations of the company's operating agreement, arising from the alleged misappropriation of an opportunity presented to the company. The plaintiffs argued, among other things, that the arbitration provision was too narrow to encompass the breach of fiduciary duty claims, as it covered "all disputes among members or former members over the provisions of [the operating agreement]." Applying the holdings in James & Jackson v. Willie Gary, C.A. No. 59 (March 14, 2006),and McLaughlin v. McCann, C.A. No. 3067-VCS (Feb. 21, 2008), the court found that, because the defendants' argument for arbitrability of the claim for breach of fiduciary duty was not frivolous, it should be decided by the arbitrator. Thus, the plaintiffs' request for injunctive relief was denied and the question of arbitrability of the breach of fiduciary claim was referred to arbitration. More ›

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Court Tackles Nonmember Appointed as a Special Litigation Committee

It is often said that Delaware limited liability companies are creatures of contract. Drafters of LLC agreements have the freedom to craft an LLC that best suits their goals. For instance, LLCs can be drafted to allow the members to manage the affairs of the LLC. LLCs can also be created so that members appoint a manager or managers to govern the LLC. Drafters can also mold an LLC to mimic a corporation by having the LLC's affairs governed by a board of directors. What practitioners must know is that when an LLC's governance features mimic another type of entity, a court analyzing a dispute involving that LLC will likely draw from existing precedent. So, where an LLC was created to parrot a corporation's governance structure, a court will likely look to corporate law for guidance in resolving a dispute. More ›

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Court Of Chancery Applies Business Judgment Rule After Majority Tender Shares

In Re Volcano Corp. Stockholder Litigation, C.A. 10485-VCMR (June 30, 2016)

In what might be one of the most important decisions this year, the Court held that the tender of their shares by a majority of the stockholders invokes an “irrebuttable” presumption that the business judgment rule applies and, as a result, the complaint generally must be dismissed.  This extends the Delaware Supreme Court’s Corwin decision to the tender offer context.  While the tender offer aspect of this case will get the most notice, the concept of an “irrebuttable” business judgment rule may prove to be more important.  For when that form of the business judgment rule applies, only facts demonstrating waste will let a complaint survive a motion to dismiss.  Of course, waste is almost impossible to successfully allege under Delaware law.

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Court Of Chancery Dismisses Previously Dismissed Case

Laborers’ District Counsel Construction Industry Pension Fund v. Bensoussan, C.A. 11293-CB (June 14, 2016)

What happens when a derivative claim is filed outside of Delaware and then is dismissed by that other court?  Well even if the other complaint might have stood up in Delaware, the subsequently filed Delaware case will also be dismissed when the law of the state where the case was dismissed gives preclusive affect to such a dismissal.  This result again shows that Delaware is respectful of other jurisdictions and that Delaware litigation may be threatened by bad filings elsewhere.

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Court Of Chancery Explains Difficult Valuation Techniques

In Re Appraisal Of DFC Global Corp., Consol. C.A. 10107-CB (July 8, 2016)

This decision deals with the always difficult world of what beta to use in a DCF valuation.  The Court’s analysis is an exhaustive review of the alternative approaches and is particularly helpful in valuing a publicly traded company in some financial turmoil.

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Court of Chancery Explains How To Apply Multiple Advancement Rights

Narayanan v. Sutherland Global Holdings Inc., C.A. 11757-VCMR (July 5, 2016)

This detailed decision explains how to interpret multiple sources, such as bylaws and contracts, to determine any conditions to the right to have attorney fees advanced. Absent some provision that ties each source together, each acts as an independent right to advancement. Thus, a condition imposed by one source is not a condition to advancement under an independent source of that right.

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Chancery Declines to Require Buyer to Complete Merger Transaction

Parties who at the signing of a merger agreement are eager to close may have a change of heart if intervening adverse market conditions reduce or eliminate the economic benefits.

Those changing market conditions often do not affect the buyer and seller equally. In that circumstance one party may wish to avoid, and the other to consummate, the transaction.

A Delaware court faced with a claim for specific performance on the one hand and a request on the other for declaratory judgment that a party is excused from its contractual obligation will apply traditional principles of contract interpretation and standards applicable to an award of equitable relief. That is exactly what the Delaware Court of Chancery did in denying the plaintiff's request for specific performance in Williams Companies v. Energy Transfer Equity, C.A. No. 12168-VCG (Del. Ch. June 24, 2016), a case with instructive lessons for practitioners regarding when the Court of Chancery will decline specifically to enforce a merger agreement. More ›

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The Problem With Delaware Business Valuations

A recent decision by the Delaware Court of Chancery has caused the defenders of all things corporate America wants from its courts to complain once again of unfair treatment. While their complaints are misplaced in this particular case, they do raise the question of how Delaware values business entities. More ›

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A Fun New Fact Pattern for Demand Futility

The concept of demand futility, rooted in the fundamental elements of Delaware corporate law, has been present for decades. The demand futility rules developed, as most doctrines of Delaware corporate law do, through judicial decisions over the years. While one can argue about if there is any fundamental difference between the Aronson and Rales tests and whether the standards should be unified, one thing that almost everyone agreed on was that the court tested demand futility as of the date the complaint was filed. Changes in board composition after the filing of the complaint usually did not affect the demand futility analysis, unless the plaintiff amended the complaint after a change in board composition to assert a claim not already validly in litigation, or the complaint was dismissed and then refiled. This rule itself was subject to equitable modification, so, for instance, if the board changes after the filing of the complaint and the plaintiff wants to amend its complaint, she need not plead demand futility as to the board on the date of the amendment for claims already "validly in litigation," e.g., Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006). On the other hand, if the complaint gets dismissed and then refiled, the board on the date of the refiling is the proper board to determine demand futility. In Park Employees' and Retirement Board Employees Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (Del. Ch. May 31, 2016), the Delaware Court of Chancery addressed a new twist on the change in board composition argument: What happens if the board changes as a result of a properly noticed stockholder meeting shortly after the filing of the complaint? On the unique facts of this case, the Court of Chancery held that it would determine demand futility based on the board elected shortly after the plaintiff filed the complaint More ›

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Dell Decision Grants Claimants Fair Value Award Above Merger Price

Delaware law has long made clear that the price established for a company in a market transaction, while a relevant factor, does not necessarily equate to the fair value that shareholder claimants are entitled to receive in an appraisal proceeding. But a series of more recent decisions in the Delaware Court of Chancery reinforced the view that the market value for a company set in an arm's-length transaction, achieved by a thorough sale process, usually represents the best evidence of fair value. Vice Chancellor J. Travis Laster's May 31 decision, In re Appraisal of Dell, C.A. No. 9522-VCL (Del.Ch. May 31, 2016), provides a sharp reminder of the limits of market price as an indicator of fair value when the transaction involves a leveraged management buyout (MBO), even one resulting from a careful sales effort free of any fiduciary breach.

As Dell makes clear, appraisal claimants in transactions involving inherent conflicts of interest (including an MBO) or an unreliable sales process, or both, will have an excellent opportunity to persuade the court that fair value exceeds the transaction price. The Dell decision affirms the primacy of the court's role in making such determinations in MBO and other conflict transactions. Left unresolved is what effect this will have on the structuring of such transactions and the criteria to which deal participants and their fiduciaries may turn to be confident they have captured fair value. More ›

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Court Of Chancery Requires SLC Member Be A “Director”

Obeid v. Hogan, C.A. 11900-VCL (June 10, 2016)

Under the famous Zapata decision, a board of directors may take control of a derivative case, provided it meets the test set out in that opinion. But may such a board, or the managers in an LLC, delegate that authority to a non-member? This decision says that delegation is not appropriate for an LLC with a management structure similar to a corporation or in an LLC that limits the delegation authority of it member-managers.

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What is Business Divorce?

Most times, a business divorce is exactly what you think it is: a legal proceeding in which two or more business partners sever their business relationship.  While on its face it is “just business,” the business divorce often creates as much emotional drama as a divorce between spouses. Knowing when, how and why the partners need to separate their interests is critical to guiding people through situations that may need a business divorce. More ›

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When Do Inconsistent Contract Interpretations Preclude Reformation?

In Underwriters at Lloyd's, London v. DynCorp, No. 5421-JJ (Del. Ch. Mar. 24, 2016), Underwriters at Lloyd's sought reformation of certain aviation liability insurance policies issued to DynCorp. In a prior related action involving the same policies, DynCorp had obtained summary judgment on the issue of Underwriters' duty to defend certain tort actions arising out of DynCorp's aerial spraying of herbicide in South America. In Underwriters' reformation action, DynCorp moved for summary judgment arguing, among other things, that, during the course of the parties' litigation, Underwriters had offered six different coverage positions that should act as a bar to the grant of reformation. According to DynCorp: "The fact that Underwriters have repeatedly changed their position as to what the terms of the purported prior agreement are, demonstrates that Underwriters, themselves, do not know what their own purported intent was with respect to the key provision they seek to reform." Distinguishing the decision in Lions Gate Entertainment v. Image Entertainment, C.A. No.2011-N (Del. Ch. June 5, 2006), the court found that Underwriters consistently took the position that the policies at issue did not cover "chemical liability" resulting from aerial herbicide spraying. Thus, the court denied DynCorp's motion for summary judgment. More ›

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Court Of Chancery Lets New Board Review Complaint

Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. 11000-VCG (May 31, 2016)

Normally it is the board in place at the time the derivative suit is filed that is evaluated to determine if demand is excused. However, when a plaintiff rushes to file knowing that the board is about to change so that its composition will not permit demand to be excused, the new board will be the board whose independence is considered. This prevents gun jumping.

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