Albert H. Manwaring, IV

Reliance on Extra-Contractual Statements in Fraud Claim

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 Court of Chancery has often addressed whether the language in a disclaimer of extra-contractual representations in a purchase agreement is sufficient to shield a seller from liability for fraud. In these decisions, the court has provided guidance for the language in disclaimers or anti-reliance clauses necessary to avoid claims of fraud based on extra-contractual representations.

To start in Abry Partners V. v. F&W Acquisition, 891 A.2d 1032, 1059 (Del. Ch. 2006), the court ruled that a standard integration clause, barring contract claims based on prior written agreements, and prior or contemporaneous oral agreements, but without explicit anti-reliance language disclaiming reliance on extra-contractual representations, will not shield the seller from liability for fraud.

Further, in FdG Logistics v. A&R Holdings, 131 A.3d 842, 860 (Del. Ch. 2016), the court ruled that a disclaimer must come from the aggrieved party, meaning the buyer who asserts the fraud. Thus, a seller's disclaimer of what it did or did not represent is insufficient by itself to bar a fraud claim based on extra-contractual representations. Lastly, in Praire Capital v. Double E Holding, 132 A.3d 35, 51 (Del. Ch. 2015), the court ruled that to disclaim reliance does not require any "magic words," or even that a disclaimer or anti-reliance clause be styled negatively to deny reliance on extra-contractual representations. More ›

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Challenge to a Squeeze-Out Merger Dismissed Under MFW Framework

In a stockholder challenge to a going-private merger by a controlling stockholder to buy out minority stockholders, the operative standard of review is ordinarily the most rigorous judicial review, entire fairness. To obtain the most deferential judicial review, business judgment, in a challenge to a squeeze-out merger, the controlling stockholder may, however, structure the merger to satisfy the MFW framework approved by the Delaware Supreme Court in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The MFW framework requires that the controlling stockholder condition the merger on both approval of an independent, adequately empowered special committee of the board that fulfills its duty of care in negotiating a fair merger price, and the uncoerced, informed vote of a majority of the minority disinterested, independent stockholders. If the MFW requirements are satisfied, the business judgment rule applies, and the Delaware Court of Chancery will dismiss the stockholder challenge to the squeeze-out merger unless the merger somehow constitutes waste—which is logically impossible to prove after the fully informed, uncoerced, independent stockholders ratify the merger by their vote. More ›

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Court Relies on DCF Valuation to Appraise Private Company

In an appraisal proceeding under Section 262 of the Delaware General Corporation Law, the Delaware Court of Chancery determines the "fair value" of a company's "shares exclusive of any element arising from the accomplishment or expectation of the merger." In determining fair value of a company's shares, the court values the company as a "going concern" based on the "operative reality" existing as of the date of the merger. The court has "significant discretion to use the valuation methods it deems appropriate, including the parties' proposed valuation frameworks, or one of the court's own making." Both the petitioner and the respondent share the burden of proof in an appraisal proceeding to establish fair value of a company's shares by a preponderance of the evidence. More ›

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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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Disregard of Speculative Financial Projections Was Not Bad Faith

In a stockholder challenge to a sale of the company, a plaintiff may rebut the business judgment rule by pleading facts that support a reasonable inference that at least half of the directors, who approved the sale, were not disinterested or independent in breach of their fiduciary duty of loyalty. While the prohibition against self-interested transactions by the board is the most fundamental obligation under the duty of loyalty, the good-faith corollary to the duty of loyalty under In re The Walt Disney Derivative Litigation, 907 A.2d 693, 754-55 (Del. Ch. 2005), is "something of a catch-all," providing a "fiduciary out from the business judgment rule." Good faith under the duty of loyalty prohibits "intentional dereliction of duty, [or] inaction in the face of a duty to act," which allegations support a claim for bad faith. In a bad-faith claim, the board's intentional action, or inaction in the face of a known duty to act, cannot be explained "as in the corporate interest: res ipsa loquitor." The Delaware Court of Chancery has emphasized that pleading facts to support a bad-faith claim is the "most difficult path to overcome dismissal" and that such facts are a "rara avis." More ›

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The Court of Chancery Declines to Disturb Company’s “Waiver” of its Forum Selection Bylaw to Settle Derivative Action in California

Many Delaware companies have adopted forum selection bylaws that prevent their stockholders from bringing internal corporate claims in courts outside of Delaware.  These bylaws are a valid and effective tool for limiting duplicative stockholder litigation filed in multiple jurisdictions.  The Delaware courts have authorized their use and the Delaware General Assembly validated them under Section 115 of the Delaware General Corporation Law.  Numerous other courts have also enforced Delaware forum selection bylaws.

Although these bylaws specify Delaware as the exclusive forum, they often permit the company to waive its right to Delaware as the exclusive forum and consent to a different venue.  While even the seminal Delaware decision on forum selection bylaws, Boilermakers 154 Retirement Fund v. Chevron, 73 A.3d 934 (Del. Ch. 2013), approved of bylaws that permitted such a waiver, to our knowledge no court has addressed whether a company may properly waive its right to Delaware as the exclusive forum under a forum selection bylaw and consent to venue elsewhere.  That is, until Niedermayer v. Kriegsman, C.A. No. 11800-VCMR (Del. Ch. May 2, 2016) (Montgomery-Reeves, V.C.). More ›

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Court of Chancery Targets “Deal Tax” Litigation By Increasing its Scrutiny of “Disclosure-Only” Settlements

            M&A lawsuits and so-called “disclosure-only” settlements – where stockholder plaintiffs drop their requests to enjoin a deal and grant defendants broad releases primarily in exchange for supplemental disclosures to stockholders, followed by requests for six-figure attorneys’ fee awards – have proliferated in recent years.  In turn, these lawsuits have faced increasing scrutiny from scholars, practitioners, and members of the judiciary, who assert that these ubiquitous settlements rarely yield genuine benefits for stockholders, threaten the loss of potentially valuable claims that have not been sufficiently investigated, and only serve the interests of opportunistic plaintiffs’ counsel and defendants happy to acquire a form of deal insurance through a broad release of class action claims challenging the merger. More ›

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Court of Chancery Explains When a Stockholder’s Right to Remove Directors May Be Limited to “For Cause” Only Removals

Section 141(k) of the Delaware General Corporation Law (DGCL) contains the default rule that a corporation’s stockholders have the right to vote to remove directors from the board “with or without cause.”  Section 141(k) contains two exceptions to the default rule where the removal of directors may be limited to “for cause” only removals: (1) where the board is “classified” under Section 141(d) (i.e., has multiple classes of directors with staggered terms of service, in contrast to the default “straight” board having a single class of directors), or (2) where the stockholders have cumulative voting rights for director elections under Section 214 (rather than the default plurality voting rights).  In accord with Court of Chancery precedent interpreting Section 141(k), Rohe v. Reliance Training Network, Inc., 2000 WL 1038190 (Del. Ch. July 21, 2000), a recent bench ruling by the Court of Chancery, In re Vaalco Energy Stockholder Litigation, C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015) (Laster, V.C.) (Transcript Opinion), invalidated a company’s charter and bylaw provisions that purported to limit the stockholders’ right to remove directors to “for cause” only removals where the company had an unclassified board consisting of a single class of directors and the stockholders had plurality voting rights for director elections. More ›

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The Delaware Supreme Court Upholds $76 Million Judgment Against RBC for Rural/Metro Sale

Investment bankers seeking to profit as both adviser to the seller and financier to the buyer in corporate sales processes have faced increased scrutiny by Delaware courts over the last few years.  In a highly-publicized 2011 decision, Vice Chancellor Laster criticized investment banker Barclays PLC for acting both as adviser to the seller and financier to the buyer in the Del Monte Foods Co. sale process.  The following year, now Chief Justice, then Chancellor Strine, criticized Goldman Sachs’ role in the El Paso Corp. sales process for allegedly steering the sale to its favored buyer Kinder Morgan Inc. 

In the latest Delaware decision criticizing bankers guiding corporate sales processes who seek to profit on both sides of a sale, In re Rural Metro Corp. Stockholders Litigation, the Supreme Court affirmed the Court of Chancery’s holding that investment banker RBC Capital Markets LLC (“RBC”) was liable for aiding and abetting the breach of fiduciary duties by the Board of Rural/Metro Corporation’s (“Rural” or the “Company”) in connection with its sale to private equity firm Warburg Pincus LLC (“Warburg”).  (No. 140, 2015, 2015 WL 7721882 (Del. Nov. 30, 2015)).  More ›

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