Albert J. Carroll

Court Of Chancery Upholds Deal Price As Fair Value In Appraisal Case

In re Appraisal of PetSmart Inc., C.A. No. 10782-VCS (May 26, 2017)

The Court of Chancery continues to wrestle with the issue of when the negotiated deal price represents "fair value" in an appraisal case. Here, serious problems with the management projections led the Court to reject a discounted cash flow valuation based on those forecasts. Instead, after finding the deal price was the product of a process reasonably designed and appropriately implemented to achieve a fair value, the Court accepted it as fair value. While it is unusual for the Court to find management was too optimistic about their company's future, this decision is not unique in expressing a preference for the product of real-world negotiations between sophisticated parties. Deal prices will continue to heavily influence appraisal valuations when the evidence shows "the price is right.”

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Court Of Chancery Appraises Company Below Deal Price

In re Appraisal of SWS Group Inc., C.A. 10554-VCG (May 30, 2017)

Recent criticism of appraisal arbitrage argues that it comes without real risk to the petitioners.  This appraisal decision, which values the company below the deal price based on a discounted cash flow analysis, should be part of any reform discussion. The petitioners in SWS Group suffered a sizable loss after refusing to accept the deal price. SWS Group also comes right on the heels of the PetSmart decision, which found the deal price represented the company’s fair value. Hence, petitioners again lost, given all the expense involved in an appraisal proceeding. In short, appraisal litigation is not for the weak at heart. The key to this decision is the Court’s finding that synergies for the buyer drove the merger price past fair value. Of course, while based on precedent, a finding of synergies is always controversial. To petitioners, those possible benefits are what made the company worth buying and are thus part of its inherent appeal.

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Court Of Chancery Declines To Hold Unocal Claim Automatically Excuses Demand

Ryan v Armstrong, C.A. No. 12717-VCG (May 15, 2017)

A derivative plaintiff who fails to make a pre-suit demand on the board must show why demand is excused using particularized facts.  Here, the plaintiff argued that demand was automatically excused by sufficiently pleading a Unocal claim.  Some prior case law supports that argument, but the Court in this case rejected an automatic demand excused rule.  Instead, the Court used the more traditional analysis that required either allegations of self-interest or sufficiently egregious conduct that showed bad faith.  Allegations that the board was motivated by a desire to maintain their positions were not sufficient where the complaint lacked facts showing that keeping their jobs was material to each of them.  Similarly, a decision to adopt an entrenchment device is not alone bad faith.

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Court Of Chancery Rejects Novel Breach Of Appraisal Rights Claim

In re Cyan Inc. Stockholders Litigation, C.A. 1027-CB (May 11, 2017) 

This decision begins with a conventional analysis of a claim that disclosure violations and director self-interest have tainted a merger vote. That claim was rejected for want of factual support. More unusual, the decision also rejects the plaintiff’s argument of an alleged independent right to appraisal that, when infringed by disclosure violations, is outside the usual charter exculpation provision for duty of care breaches. As this decision explains, quasi-appraisal is simply a form of remedy, typically sought to address disclosure deficiencies that are the product of a breach of fiduciary duty. Where there is no failure to identify any material misrepresentation or omission, or any other viable claim for breach of fiduciary duty, there is no basis to impose a quasi-appraisal remedy.  

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Court Of Chancery Explains The “Known Looter” Theory For Controllers

Ford v. VMware Inc., C.A. No.11714-VCL (May 2, 2017)

This is an interesting decision because it examines an intriguing legal theory for holding a controlling stockholder liable in a sale: the “known looter” theory.  Generally speaking, controllers can sell their stock to whoever they want.  After all, why be a controller unless you have the right to exercise control free from liability for doing so. But, as this decision points out, there are limits, such as selling to a known looter who in fact ends up looting the company.  Along the same lines, directors may be liable for failing to protect the company against a controller’s sale to a known looter.  

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Court of Chancery Applies Ratification To Equity Grants Under Stockholder Approved Plan

In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (April 5, 2017)

Stockholder approval of an equity compensation plan may or may not constitute ratification over awards to the directors under the plan.  When it does, the Court of Chancery will review challenges under the business judgment rule.  There are Delaware decisions coming out both ways on the issue of ratification.  As this decision illustrates, whether or not ratification applies depends on how specific the plan is that the stockholders approved (and whether the vote was informed and uncoerced).  When it comes to the level of specificity required in the plan, generally speaking, a plan that sets specific and meaningful limits on the grants could constitute ratification of grants within those limits.  This decision, where the Court applied ratification, provides guidance on just how specific the plan must be.

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Where Is Delaware Corporate Litigation Going?

Litigation involving Delaware corporate law is undergoing major changes. Some commentators predict that Delaware will cease to be the favored forum for M&A litigation. While we disagree with that forecast, it is important to understand what is going on and how those changes may affect future litigation. There are two major evolutions and one more minor development that are worth considering. More ›

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Court Of Chancery Denies Corwin Defense

In re Saba Software Inc. Stockholder Litigation, C.A. 10697-VCS (March 31, 2017, revised April 11, 2017)

This is a significant decision because it is the first to find that a stockholder vote did not invoke business judgment review under Corwin because the vote was coerced and not fully informed. Under Corwin, a transaction approved by a majority of the disinterested stockholders in an informed, uncoerced vote is subject to business judgment rule protection. A Corwin-qualifying vote practically means an early dismissal. Thus, the key question on a motion to dismiss under Corwin is whether the stockholder vote was both informed and uncoerced. More ›

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Court Of Chancery Rejects Vague Demand Excusal Allegations

LVI Group Investment LLC v. NCM Group Holdings LLC, C.A. 12067-VCG (March 29, 2017)

This is an interesting decision because it applies the rules for determining when a derivative plaintiff, in the LLC context, has sufficiently alleged that pre-suit demand on the board would have been futile.   More ›

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Court Of Chancery Explains Effect Of Notice Bylaw Violation

Rainbow Mountain Inc. v. Begeman, C.A. No. 10221-VCMR (March 23, 2017)

This is an interesting decision even if only because it is so well written and deals with an unusual family corporation.  Its legal significance is that it explains that a vote taken in violation of a bylaw requiring notice is void, rather than voidable, where equitable defenses could apply.  The distinction between a void and voidable failure to give proper notice has not always been clear, but Vice Chancellor Laster attempted to reconcile prior cases in the Klaassen decision, and Vice Chancellor Montgomery-Reeves signs onto his approach in this case.

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Court of Chancery Enjoins Transaction Pending Clearer Disclosure of Banker’s Conflicts

Vento v. Curry, C.A. No. 2017-0157-AGB (March 22, 2017)

A board must disclose all information material to the stockholder vote for a transaction.  Moreover, disclosures may be inadequate when they are buried in various places in a lengthy proxy statement.  One piece of material information is conflicts involving the board’s advisors.  The Court of Chancery is prepared to preliminary enjoin a transaction where the proxy omits or fails to sufficiently disclose material details concerning, for instance, a banker’s conflict.  For example, the inadequately disclosed conflict warranting an injunction in this case involved the fees the buy-side banker expected to receive for its participation in debt financing for the deal.  

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Delaware Supreme Court Issues New Standards Governing Master Limited Partnership Cases

Brinckerhoff v. Enbridge Energy Company, Del. Sup. C.A. 273, 2016 (March 20, 2017, revised March 28, 2017)

Agreements for limited partnerships, in particular for publicly-traded master limited partnerships, are notoriously complicated and often hard to understand, so much so that two of the state’s judges co-wrote a detailed article calling for more standardization in this area.  One consequence is that general partners in the MLP context may expose themselves to potential liability for decisions they thought protected by the partnership agreement’s terms, which often purport to eliminate common law fiduciary duties, replace them with a contractual duty to act in “good faith,” and provide safe harbors for conflict transactions.  This is another case where that may happen.   More ›

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Court Of Chancery Explains Discovery Objections

In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (March 13, 2017)

For some time now, the Court of Chancery has told litigants that objections to documents requests should be specific, not generic and boilerplate. This decision thoroughly addresses the case law on this issue, with numerous citations to federal court precedent and detailed explanations of what objections are proper, including for claims of privilege. Oxbow should serve as a useful resource when it comes time to object to document requests in the Court of Chancery.

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The Court of Chancery Examines Indemnification Requirements

Horne v. Optimiscorp, C.A. No. 12268-VCS (Mar. 3, 2017) 

This officer indemnification case arises out of one of the more sordid tales to appear in a Court of Chancery opinion and a later Delaware Supreme Court affirmance.  This opinion, however, focuses on the less titillating but always intriguing question of whether the officer was sued by reason of the fact that he was an officer, as required to trigger indemnification rights.

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Court Of Chancery Sanctions Litigant For Fabricating Evidence And Violating Orders In LLC Dispute

Sara Ensing v. Hans Ensing, C.A. No. 12591-VCS (Mar. 6, 2017)

This case involves the unfortunate deterioration of a marriage, as well as the couple’s winery venture, carried on through various LLCs.  The decision illustrates the seriousness with which the Court of Chancery views the fabricating of evidence and the violations of its orders, including the status quo orders typically entered by the Court in control disputes. It also discusses interesting expert evidence on the subject of metadata used to prove the inauthenticity of certain electronic documents. In the end, the ill-behaving litigant was ordered to pay two-thirds of its adversary’s fees and expenses, as well as the expert witness fees and expenses.

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