Posts from 2019

Stockholders Had Third-Party Beneficiary Standing to Enforce Anti-Takeover Protections

Section 203 of the Delaware General Corporation Law is a company anti-takeover statute. Section 203 prohibits a stockholder from engaging in a business combination with a company for three years after the stockholder acquires 15% or more of the company’s voting equity. If a company’s board pre-approves such a business combination, however, the Section 203 anti-takeover protections do not apply. More ›

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CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262

CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262, that Pre-Judgment Interest on an Appraisal Award May be a Covered “Loss” and that a Breach of Consent-to-Defense Clause does not Bar Coverage Absent Prejudice to Insurer

Solera Holdings, Inc. v. XL Specialty Ins. Co., N18C-08-315 AML CCLD (Del. Super. Ct. Jul. 31, 2019).

The Complex Commercial Litigation Division of Delaware’s Superior Court has become a leading venue for complex insurance coverage disputes.  This decision addresses D&O insurers’ denial of coverage for over $13 million spent defending an appraisal proceeding under 8 Del. C. § 262, as well as $38.4 million in pre-judgment interest on the appraisal award.  More ›

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Superior Court CCLD Enters Final Judgment on Penalties and Damages against Overstock.com

French v. Overstock.com, Inc., C.A. No. N13C-06-289 PRW CCLD (Del. Super. June 28, 2019).

After a 6-day jury trial before the Complex Commercial Litigation Division of the Delaware Superior Court, a jury found that Overstock knowingly violated the Delaware False Claims and Reporting Act (“DFCRA”) by failing to report and remit dormant gift card balances to the State of Delaware.  The jury verdict was for approximately $3 million.  The Court held that under 6 Del. C. §1205(a), the DFCRA’s damages and penalties provision, Plaintiffs are entitled to an award of civil penalties, treble damages, and reasonable attorneys’ fees and costs.  After finding that there was sufficient evidence presented to support the jury’s verdict, the Court then found that the statutorily mandated treble damages were not excessive or unconstitutional because they were not disproportionate to the harm caused and to Overstock’s level of culpability.  Finally, the Court held that the proper method for calculating reasonable attorneys’ fees and costs is the lodestar method, which is the method used most often in cases involving fee-shifting statutes including federal False Claims Act cases.  Under the lodestar method, the Court multiplies the hours reasonably expended against a reasonable hourly rate that can then be adjusted to account for additional factors such as the contingent nature of the case and the quality of the attorney’s work.

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Chancery Dismisses Merger Challenge Concerning Board’s Delegation of Merger Negotiations and Management’s Undisclosed Compensation Discussions

In re Towers Watson & Co. Stockholder Litigation, C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019).

The ultimate responsibility for considering a merger falls on the board to carry out consistent with each director's fiduciary duties.  But management usually takes the lead role in negotiating with the counterparty.  It is not uncommon for stockholder plaintiffs to make hay out of a board allowing potentially conflicted members of management to pick up that mantle.  Sometimes those circumstances support a claim for breach of fiduciary duty and sometimes they do not.  This motion to dismiss decision addresses claims in that context, with the Court of Chancery finding the case falls in the latter category. More ›

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Chancery Rejects Second Plaintiff’s Attempt to Correct Pleading Deficiencies Following Dismissal of Aiding and Abetting Claim

In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Jul. 12, 2019).

Under Delaware law, stating a claim for aiding and abetting a breach of fiduciary duty requires sufficiently alleging knowing participation by the non-fiduciary.  That is not an insignificant pleading standard, as this letter opinion illustrates in rejecting a second bite at the apple by a different plaintiff. More ›

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Chancery Awards $3 Million in Attorneys’ Fees Following Invalidation of Charters’ Forum-Selection Provisions for Securities Act Claims

Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Jul. 8, 2019).

In December 2018, the Court of Chancery held that forum-selection provisions in three corporate charters were ineffective.  The provisions had required any claim under the Securities Act of 1933 to be filed in federal court (“Federal Forum Provisions”).  The Court held them to be invalid, because federal securities claims were not “internal affairs” claims for which a Delaware corporation’s charter may choose a forum.  Seven months later, the Court granted an application for an all-in award of attorneys’ fees and expenses in the amount of $3 million under the corporate benefit doctrine.  Defendants had argued that the award should not exceed $364,723 plus expenses.  Reasoning that “the plaintiff achieved a significant and substantive result by successfully invalidating the Federal Forum Provisions,” the Court turned to Delaware precedent to determine an appropriate fee for this kind of non-monetary relief. More ›

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Chancery Upholds Adequacy of Description of Buyer’s Indemnification Claims but Finds Indemnification Request for Pending Litigation Unripe Because Buyer Failed to Allege it Had “Incurred” Losses

Horton v. Organogenesis Inc.,C.A. No. 2018-0537-KSJM (Del. Ch. July 22, 2019).

Sellers in merger agreements generally agree to indemnify buyers for certain “Losses” but require the buyers to provide timely notice of claims.  Whether an indemnification claim succeeds depends on the language the parties use to define the indemnification obligation. In Horton, the seller agreed that indemnification claims would survive if the buyer provided by June 24, 2018 written notice “stating in sufficient detail the nature of, and factual and legal basis for, any such claim for indemnification” and an estimate and calculation of the amount of Losses, if known, resulting therefrom. The buyer timely sent a notice of indemnification with one-paragraph descriptions of the factual and legal basis of each of its five claims, which it said “may involve breaches of representations and warranties in the Merger Agreement.” It also sought a second category of indemnification for Losses arising out of pending litigation. As to the first category, the Court found the buyer’s one-paragraph descriptions sufficient even though the buyer did not specify the specific sections of the merger agreement it claimed were breached. This was because “sellers are charged with knowledge of their representations and warranties in the Merger Agreement.” As to the second category, the Court granted the seller’s motion to dismiss without prejudice, because the buyer had not adequately pleaded that it had incurred any costs, fees or adverse judgments in the litigation.

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Delaware Court of Chancery Orders Full Public Access to Confidential Filings Months After Settlement

GKC Strategic Value Master Fund, L.P. v. Baker Hughes Inc., C.A. No. 2017-0769-SG (Del. Ch. Jun. 25, 2019).

Universal public access to court filings is the default and confidentiality is the exception.  Rule 5.1 of the Court of Chancery provides for the filing of confidential information by litigants.  In this decision, the Court makes clear that a violation of Rule 5.1 may result in the loss of confidential treatment. More ›

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Chancery Sustains Claims Against Special Committee Members Concerning Stock Incentive Plan

Reith v. Lichtenstein, C.A. No. 2018-0277-MTZ (Del. Ch. June 28, 2019).

As Reith explains, directors may lose the protections of the business judgment rule and expose themselves to liability if they knowingly or deliberately fail to adhere to the terms of a stock incentive plan, such as by violating a clear and unambiguous provision.  And, as Reith illustrates, Delaware courts may consider a company’s prior public disclosures about a plan’s terms in addressing that issue. More ›

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Chancery Allows Claims to Proceed Against Stockholder Subjecting It to Entire Fairness Review

An “allegation that a transaction involves a controlling stockholder who stands on both sides is a serious one because it imposes fiduciary duties on the controlling stockholder and potentially strips directors of the deferential business judgment rule,” see Reith v. Lichtenstein, C.A. No. 2018-0277-MTZ (Del. Ch. 6/28/19). In her recent opinion in Reith, Vice Chancellor Morgan Zurn allowed a derivative complaint to proceed against a minority 35.6% stockholder because the complaint alleged with sufficient particularity that the stockholder exercised actual control in the challenged transactions, subjecting it to entire fairness review. Here the court found that the 35.6% stockholder wielded such formidable voting and managerial power in connection with a preferred stock offering and related equity grants that it was no differently situated than if it had majority control. In so ruling, the court adds Reith to a number of Delaware Court of Chancery decisions that have ruled that a minority stockholder’s exercise of actual control subjects the challenged transaction to entire fairness review. More ›

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Chancery Holds Tension Between “Bespoke” Provision Governing Post-Closing Conduct and a Boilerplate Survival Clause Requires Consideration of Parol Evidence

Dolan v. Altice USA, Inc., C.A. No. 2018-0651-JRS (Del. Ch. Jun. 27, 2019).

The founders of Cablevision Systems Corp., the Dolan family, in connection with a $17.7 billion acquisition of that entity by Altice Europe N.V. and Altice USA Inc., obtained a commitment in the Merger Agreement affirming that Altice would operate a particular group of regional cable news channels (News12 Networks LLC) “substantially in accordance with the existing News12 business plan … through at least the end of plan year 2020[.]”  When Altice proceeded to lay off News12 employees after the merger, the Dolan family filed an action in the Court of Chancery for specific performance.  More ›

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Chancery Declines to Stay or Dismiss Second-Filed Derivative Suit Against Google’s Parent Company

Irving Firemen’s Relief and Ret. Fund v. Page, C.A. No. 2019-0355-SG (Del. Ch. Jul. 1, 2019).

Delaware courts typically apply the McWane first-filed doctrine to stay a later-filed Delaware case in favor of a case already pending in another jurisdiction involving substantially the same parties and issues.  In this instance, Alphabet, Inc., a Delaware corporation, and the director defendants, relying on McWane and forum non conveniens, sought to stay or dismiss a second-filed Delaware stockholder derivative action in favor of a first-filed action in California raising similar breach of fiduciary duty and failure of oversight claims.  Both litigations arose from alleged workplace harassment at Google by officers and similar allegations against executives and directors of its parent, Alphabet.  At oral argument, Vice Chancellor Glasscock, from the bench, rejected the forum non conveniens argument, and explained in this opinion “it is difficult to imagine a derivative litigation involving a Delaware corporation, and alleging breaches of fiduciary duty by corporate directors or officers of that Delaware corporation, that is nonetheless subject to dismissal on forum non conveniens grounds; if such an animal exists, it is absent from the menagerie before me here.”  The Court also exercised its discretion to deny the stay motion because (i) the McWane first-filed rationale carries less weight in the context of derivative actions, where Delaware’s interest in promoting well-crafted derivative complaints is more important than filing speed; (ii) the proceedings to date in California were limited to disputes over consolidating related actions and appointing lead counsel; and (iii) Delaware has a higher interest than California in applying Delaware’s common law of corporations and fiduciary duty to the novel issues of corporate law involved in the litigation.

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Material Omissions in Proxy Prevent 'Corwin' Dismissal of Challenge to Merger

Since the Delaware Supreme Court’s 2015 Corwin v. KKR Financial Holdings decision, practitioners in merger transactions have been able to advise clients that a transaction otherwise subject to enhanced scrutiny could be subject to business judgment review if the transaction is approved by a majority of fully informed, noncoerced shareholders. A plaintiff nonetheless can avoid dismissal under this standard if it is able to allege a material misrepresentation or omission in the proxy statement and hence that any shareholder vote was not fully informed. Where the disclosures are adequate defendants can obtain dismissal at the motion to dismiss stage even if the narrative actually disclosed might be troubling. The idea is that where the disinterested shareholders approve the transaction on full information, there is no reason to subject the transaction to further scrutiny. This puts a premium on the quality of the disclosure. The recent case of Chester County Employees’ Retirement Fund v. KCG Holdings, C. A. No. 2017-0421-KSJM (June 21, 2019), illustrates that a failure to provide full disclosure can be fatal to defendants’ motions to dismiss asking the court to dismiss a challenge to a merger transaction at the pleadings stage More ›

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Court of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL

Ark. Teacher Ret. Sys. v. Alon USA Energy, Inc., C.A. No. 2017-0453-KSJM (Del. Ch. Jun. 28, 2019).

Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold.  Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares.  The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year.  A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement.  It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL.  When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary.  The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly.  Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers.  Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders. More ›

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Citing Trulia and Walgreens Decisions, Federal District Court Orders Plaintiffs’ Counsel to Return Agreed-Upon Mootness Fee

House v. Akorn, Inc., Consol. Nos. 17-C-5018, 17-C-5022, 17-C-5026 (N.D. Ill. Jun. 24, 2019).

Disclosure-only settlements of stockholder class actions have received increased scrutiny following the Delaware Court of Chancery’s Trulia decision in 2016 and the Seventh Circuit Court of Appeals’ Walgreens decision later that year.  Those decisions observed the problem of M&A strike suits, expressed disfavor of disclosure-only settlements in M&A class actions, and significantly raised the bar for getting the required court approval of such settlements.  One consequence has been many M&A suits migrating from the Delaware Court of Chancery to federal courts around the country.  Another has been defendants more frequently acting to voluntarily moot the claimed disclosure violations through supplemental disclosures.  In that instance, the parties then face the choice of either litigating the appropriate mootness fee award to plaintiffs’ counsel for the supplemental disclosures prompted by their claims or, alternatively, privately negotiating the mootness fee award and thus avoiding the judicial process, provided no other stockholders object to the negotiated award.  More ›

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