Posts in DGCL

Chancery Finds Challenge to Stockholders Agreement Both Timely and Ripe

West Palm Beach Firefighters' Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024)
Here, the Court of Chancery declined to apply equitable defenses to bar a challenge to a stockholders' agreement three years after it was disclosed and before any claims for breach of fiduciary duties arising from the agreement were asserted. The underlying dispute involved the plaintiff's challenge to governance terms of a stockholders' agreement under Section 141(a) of the Delaware General Corporation Law. The defendant company claimed that the plaintiff brought the suit both too late and too early. The defendant argued that the action was untimely because the plaintiff waited three years after the agreement was disclosed to sue. The Court explained that when analyzing timeliness, it must assume that the plaintiff’s claim is valid. If the plaintiff were proven correct and the challenged agreement held void, then equitable defenses, like laches, would not apply, as equitable defenses cannot validate a void act. Regardless, the Court found no unreasonable delay and no prejudice to the defendant, considering the facts of this case. The Court also analyzed the challenged acts as an ongoing violation, reviewed through either the continuing wrong method or the separate accrual method to determine when the violation occurred. Under both methods, the suit was timely. Further, the Court found no extraordinary circumstances that would justify applying laches. The defendant also claimed that the plaintiff should have to wait for a breach of fiduciary duty to occur before bringing the suit. The Court disagreed, reasoning that even though the plaintiff could bring a fiduciary duty claim in the future based on the conduct associated with the agreement’s challenged provisions, a facial challenge to the agreement’s legality presented a separate and ripe question of law.

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Chancery Invalidates Provisions of Stockholder Agreement Under Section 141 of the DGCL, Finding Agreement Impermissibly Granted Board-Level Decision-Making to Founder

West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024)
One day before a company’s shares began trading publicly, the founder and three affiliates entered into a stockholder agreement with the company. The agreement required the board to obtain pre-approval from the founder for eighteen categories of board action, to take various steps to ensure the founder could select a majority of the board even if he held less than a majority of the company’s outstanding voting power, and to form committees only if they contained designees of the founder proportionate to the number of his designees on the board. More ›

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Chancery Denies Motion to Dismiss Challenge to Microsoft-Activision Merger Where it Was Reasonably Conceivable that the Board Violated Section 251 of the DGCL

AP-Fonden v. Activision Blizzard Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024)
This case arose from a stockholder-plaintiff’s challenge to a merger whereby Microsoft acquired Activision Blizzard. Activision’s board met to approve the merger and approved a draft merger agreement. However, this draft agreement did not include (i) a disclosure letter, which was mentioned 45 times in the draft agreement; (ii) disclosure schedules, which were still being negotiated; (iii) the amount of consideration; or (iv) the surviving corporation’s certificate of incorporation. The agreement as-approved also did not address the issue of dividends that Activision would be permitted to pay while the deal was pending; when it approved the merger agreement, the board delegated the dividend issue to an ad hoc committee of the board. The full board did not review the merger agreement after this meeting, and the final version executed the next day included several changes from the draft agreement, including the dividend provision agreed to by Microsoft and the ad hoc committee. More ›

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Delaware Supreme Court Affirms That the Right to Sue Corporate Officers is Not a “Power” Within the Meaning of DGCL Section 242(b)(2)

In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. 2023-1007-LWW (Del. Ch. January 17, 2024)
DGCL Section 242(b)(2) requires approval by each class of stock to amend a corporate charter, where the amendment alters or changes – adversely – the powers, preferences, or special rights of a class of stock. Here, the Delaware Supreme Court was asked to determine whether a charter amendment affecting the right to sue implicated "powers" of a certain class of stockholders, such that the amendment required approval by all classes of stock. Affirming the Court of Chancery below, the Delaware Supreme Court held that the right to sue is not a “power” within the meaning of Section 242(b)(2), and, thus, the charter amendment did not require approval by all classes of stock. More ›

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Chancery Denies Motion Seeking Appointment of a Receiver

Bighorn Ventures Nevada LLC v. Solis, C.A. No. 2022-1116-LWW (Del. Ch. Dec. 23, 2022)
The Court of Chancery has the discretion to appoint a custodian or receiver under Section 226(a)(2) of the DGCL when the board of directors is deadlocked, the business is suffering or is threatened with irreparable injury because of the deadlock, and the shareholders are unable to terminate the deadlock. Under Section 291, the Court has the discretion to appoint a receiver when the corporation is insolvent and special circumstances indicate some beneficial purpose will be served. More ›

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Chancery Finds Stockholder Conferred a Substantial Corporate Benefit by Challenging the Joint Vote of Two Classes of Common Stock under Section 242(b)(2) of the DGCL

Garfield v. Boxed Inc., C.A. No. 2022-0132-MTZ (Del. Ch. Dec. 27, 2022).
Section 242(b)(2) of the DGCL requires the separate approval of different classes of stock for charter amendments that, inter alia, “increase or decrease the aggregate number of authorized shares of such class…” Section 242(b)(2) permits corporations to opt-out of this separate class approval requirement via a charter amendment – but any such amendment also must be approved by a separate class vote. This decision awards attorneys’ fees under the corporate benefit doctrine to a stockholder who questioned the validity of Class A and Class B common shares voting together on proposed amendments triggering these requirements, which then caused the corporation to provide separate class votes.  More ›

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Delaware Supreme Court Enforces Class Vote Requirement, Reasons There Is No Insolvency Exception to Section 271 Of The Delaware General Corporation Law

Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021 (Del. June 15, 2022)
Section 271 of the Delaware General Corporation Law provides, among other things, that a majority vote of stockholders is required to sell all or substantially all of a corporation’s assets. As an issue of first impression, the Delaware Supreme Court reasoned that there is no insolvency exception to Section 271’s requirement of a stockholder majority vote. More ›

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Chancery Orders Additional Information to Consider Dissolution Petition

In re Matter of Global Safety Labs, Inc., C.A. No. 2022-0309-JTL (Del. Ch. May 12, 2022)
This case concerned the dissolution procedures of the DGCL, specifically Section 280, which with Section 281 establishes an optional, court-supervised wind-up process that provides a safe harbor from post-dissolution liability. In this decision, the Court of Chancery faults the paucity of information the Court regularly sees in such actions, which often proceed ex parte. The Court explained that it requires more information to grant relief, including “about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.” The Court cited first-day declarations in a bankruptcy proceeding as a helpful model.

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Chancery Upholds Standalone Direct Claim Under DGCL Section 155 Regarding Fractional Interests

Samuels v. CCUR Holdings, Inc., C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022)
Under Section 155 of the DGCL, corporations may elect either to issue stockholders fractional shares or to pay a stockholder the fair value of the fractional interest. The plaintiff-stockholder alleged that the corporation failed to pay him fair value for his fractional interest after a reverse stock split. In allowing a standalone claim under the statute to proceed, the Court reasoned that stockholders generally are permitted to assert direct statutory claims, and previous decisions addressing Section 155 did not foreclose the plaintiff’s statutory cause of action.

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Chancery Declines to Grant Equitable Standing When Other Stockholders Had Standing to Enforce Corporate Rights

SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May 13, 2022)
Under Section 327 of the DGCL, a stockholder must hold stock at the time of the alleged wrong to have standing to pursue a derivative claim. Under the equitable standing doctrine, however, standing may be recognized in equity to prevent a “complete failure of justice.”  Here, the plaintiffs acquired the stock after some of the alleged wrongs in their complaint took place but argued that the equitable standing doctrine allowed one of them to raise these claims. The Court of Chancery observed that the doctrine has applied when alternative avenues of remedying the harm were foreclosed.  Importantly, however, the Delaware courts generally have declined to invoke it when other avenues theoretically exist, such as the existence of other potential plaintiffs with standing to pursue the claims at issue. Applying that reasoning here, the Court ruled that it would not grant equitable standing because other non-party stockholders would have standing to pursue these claims.

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Chancery Finds it Lacks Discretion to Decline Jurisdiction Over a Case Where Jurisdiction Exists Under Section 111 of the DGCL

S’holders Rep. Serv. LLC v. DC Capital Partners Fund II, L.P., C.A. No. 2021-0465-KSJM (Del. Ch. Feb. 14, 2022)
While the Court of Chancery has exclusive subject matter jurisdiction over claims and remedies sounding in equity, Section 111 of the DGCL grants the Court concurrent, non-exclusive jurisdiction in cases involving the interpretation of certain corporate instruments—regardless of whether those claims or the relief sought are equitable in nature. In DC Capital Partners, the plaintiff elected to bring legal (rather than equitable) claims involving the interpretation of stock purchase agreements in the Court of Chancery pursuant to Section 111’s concurrent subject matter jurisdiction. The defendants argued that because the claims did not otherwise fall within the Court’s subject matter jurisdiction, and because Section 111 provides for concurrent rather than exclusive jurisdiction, the Court had the discretion to decline to hear the case. Specifically, the defendants noted that Section 111 provides that certain claims “may” be brought in the Court of Chancery and argued that this permissive language provided the Court with the discretion not to hear such claims. The Court rejected the defendants’ contention, finding that the discretion to bring a claim in the Court of Chancery pursuant to Section 111 belongs to the plaintiff, not the Court. Therefore, the Court held that once a plaintiff elects to bring a claim in Chancery authorized under Section 111, the Court lacks the discretion to decline to hear the case based on subject matter jurisdiction.

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Chancery Sustains Claims for Controlling Stockholders’ Breach of Fiduciary Duties, But Dismisses Claim to Void Transaction under DGCL Section 205

Amgine Techs. (US), Inc. v. Miller, C.A. No. 2020-0537-JRS (Del. Ch. Nov. 29, 2021)
This case involves the Court of Chancery’s consideration of various Rule 12 arguments for dismissal advanced by defendants – alleged controlling stockholders who assigned certain of the corporation’s intellectual property to another entity they owned, and who allegedly caused the corporation to enter into a stockholders’ agreement that gave them preferential terms. More ›

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Chancery Dismisses Derivative Action Based On Alleged Liability Under DGCL § 174 For Stock Repurchases and Dividends

In re The Chemours Co. Deriv. Litig., C.A. 2020-0786-SG (Del. Ch. Nov. 1, 2021)
Broadly speaking, Sections 160 and 173 of the DGCL prohibit a corporation from repurchasing stock or issuing dividends if doing so would exceed the corporation’s surplus. Both Sections 160 and 173 are enforceable under Section 174, which provides that directors “under whose administration” a “willful or negligent” violation of Section 160 or 173 occurs are “jointly and severally liable” to the corporation. Here, the Court of Chancery rejected a challenge to dividend and stock repurchases premised upon directors’ alleged incorrect assessment of potential environmental liabilities.  More ›

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Chancery Declines to Apply Stockholder Approval Requirement of DGCL § 271 to Agreement to Transfer All Assets in Lieu of Foreclosure

Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020)

In this decision, the Delaware Court of Chancery reviews the history of requirements to approve transfers of all assets both at common law and under the Delaware General Corporation Law, and concludes that Delaware law does not require majority stockholder approval for an insolvent corporation’s transfer of assets to a secured creditor in lieu of a foreclosure. The Court thus rejected an attempt by the corporation’s founders, who owned a majority of its stock, to invalidate the corporation’s agreement in that regard.  More ›

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Delaware Supreme Court Affirms Decision Declining to Order Stockholder Meeting Under Section 211 of the DGCL

Spanakos v. Pate, C.A. No. 532, 2019 (Del. July 31, 2020)
The Court of Chancery may summarily order a stockholder meeting to be held to elect directors of a Delaware corporation, if one has not been held for more than thirteen months. 8 Del. C. § 211. The rule’s purpose is to ameliorate situations in which a Delaware corporation’s normal democratic functions are impaired, for example, if “by reason of death or resignation or other cause, a corporation should have no directors in office ….” 8 Del. C. § 223. The stockholder meeting to elect directors is a cornerstone of Delaware corporate law, and “stockholders’ entitlement to such a meeting is paramount.” Newcastle P’rs, L.P. v. Vesta Ins. Gp., Inc., 887 A.2d 975, 979 (Del. Ch. 2005).  More ›

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