Posts in Fiduciary Duty

Chancery Applies Entire Fairness Review to Executive Compensation Decision Benefiting Controller Despite Stockholder Approval, Declining to Dismiss Claims Involving Tesla’s Elon Musk

Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Sept. 20, 2019).

Under Delaware law, executive compensation decisions by a corporation’s board of directors generally are entitled to deferential judicial review, and even more so when approved by the stockholders.  On the other hand, Delaware law generally imposes heightened scrutiny in the form of entire fairness review for transactions uniquely benefiting a corporation’s controlling stockholder, relying on the inherent coercion that accompanies control.  So what standard of review applies when an executive compensation decision benefits the company’s controlling stockholder and the stockholders approve it? More ›

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Chancery Makes Post-Trial Award of $22K in Damages for $5.3 Million Fiduciary Breach Claim, and Orders an Accounting for Suspicious Expenses Totaling $235K Arising Out of Self-Dealing Transactions

Avande Inc. v. Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019).

A director of a Delaware corporation who stands on both sides of a challenged transaction must prove the entire fairness of the transaction. Such a defendant must show that the transaction was the product of both fair dealing and fair price. Where the dispute involves more than one transaction, the Court “may place on a fiduciary the burden to demonstrate the fairness of a series or group of expenditures, or may order an accounting of such expenditures.” However, the fiduciary will bear this burden only if the plaintiff, by substantial evidence, first makes a prima facie showing that the fiduciary stood on both sides of the transactions at issue. Applying Technicorp Int’L II Inc. v. Johnston, 2000 WL 713750 (Del. Ch. May 31, 2000) and its progeny, the Court in Avande ruled post-trial that plaintiff had failed to make a prima facie showing that the defendant, a former director and CEO, was self-interested in the challenged transactions. Plaintiff had challenged nearly $4.7 million dollars in transactions reported on the company’s ledger over five years (comprising roughly 45% of the company’s total expenses), asserting that the transactions were the result of the defendant’s self-dealing. However, the plaintiff was able specifically to identify only $30,500 of potentially problematic expenses (less than 1% of the disputed amounts), only one $3,500 transaction of which appeared to have personally benefitted the defendant-fiduciary, but sought to shift the burden to the defendant to prove the entire fairness of the remaining amounts. Among the factors that led the Court not to shift the burden was that Evans did not exercise exclusive control over Avande’s finances. The Court also found it was inconceivable that at least a substantial portion of the challenged amount was not the result of valid business expenses needed to operate the business over five years, and declined to shift the burden. However, the Court found that the plaintiff had demonstrated self-interest sufficient to shift the burden and that defendant had failed to prove the fairness of $235K in payments for services billed to Avande by the defendant’s wholly owned business. The Court ordered an accounting of these transactions to be conducted by a third-party chosen by the parties because it was unclear how much was paid for each service performed. Because the self-dealing transactions were subject to entire fairness, and because the defendant had not proved the fairness of the transactions at trial, the defendants were responsible for the costs of the accounting proceeding. 

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Chancery Examines Framework of Fiduciary Disclosure Obligations in Soliciting Private Investments

Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019). 

This opinion decides a motion to dismiss fraud and related tort claims arising out of various investments against a former director and CEO and an employee of a controlling stockholder.

When the investments turned out to be worthless, the plaintiff investor brought suit for breach of fiduciary duties and common law fraud arising from information that the investor received before investing in a company controlled by a business colleague and friend.  More ›

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Chancery Dismisses Oversight Claims Against J.C. Penney Board

Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019).

As this Court of Chancery decision explains, the Delaware standard for imposing oversight liability on a board of directors under a Caremark theory is “exacting” and requires evidence of bad faith.  Combined with the heightened “particularized” pleading requirements of Court of Chancery Rule 23.1, stockholders face an uphill battle when pursuing an oversight theory as the basis for liability and for excusing a pre-suit demand on the board. More ›

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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 Denies Corwin Defense Based on Proxy Omissions and Sustains Claims Against Financial Advisor

Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., C.A. No. 2017-0421-KSJM (Del. Ch. June 21, 2019).

Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), Delaware courts generally will dismiss post-closing fiduciary duty claims arising out of M&A deals when the challenged transaction was approved by a fully-informed and uncoerced majority of the company’s disinterested stockholders. Several decisions since Corwin, including this one, have denied motions to dismiss under Corwin, finding the doctrine’s prerequisites were not satisfied. This decision also is notable for sustaining a bad faith claim against directors and claims against the investment bank Jefferies.  More ›

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Delaware Supreme Court Revives Fiduciary Duty Claims in Derivative Lawsuit Concerning Blue Bell’s Listeria Outbreak

Marchand v. Barnhill, No. 533, 2018 (Del. June 19, 2019).

As this decision illustrates, while Delaware law imposes a high bar for pleading demand futility and fiduciary oversight claims under what is known as a Caremark theory, the standards are not insurmountable. After Blue Bell Creameries faced a deadly listeria outbreak, recall, and temporary shutdown a few years ago, a stockholder plaintiff sued in the Delaware Court of Chancery alleging breaches of fiduciary duties by two key executives and its board of directors. The stockholder’s derivative claims concerned management’s alleged failure to respond appropriately to food safety issues and the board’s alleged failure to implement any food safety reporting system or to inform itself about the company’s food safety compliance. More ›

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Chancery Finds Adequately Pled Breach of Fiduciary Duty Based on Course of Disruptive Conduct

Klein v. Wasserman, C. A. No. 2017-0643-KSJM (Del. Ch. May 29, 2019).

The typical claim for breach of fiduciary duty arises out of a single transaction or event, or several closely-related transactions or events.  Still, as the Klein decision illustrates, there are circumstances in which the Court of Chancery will find an adequately stated breach of fiduciary duty claim arising out of a course of disruptive conduct. More ›

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Chancery Finds Controlling Stockholder Impliedly Consented to Jurisdiction Through Board’s Adoption of Delaware Forum-Selection Bylaw

In re Pilgrim’s Pride Corp. Derivative Litigation, Consol. C.A. No. 2018-0058-JTL (Del. Ch. Mar. 15, 2019).

Stockholders that control Delaware corporations find themselves subject to fiduciary duties.  According to this Court of Chancery decision, in certain situations, they also might find themselves subject to personal jurisdiction in Delaware in connection with the controlled-corporation’s adoption of a Delaware forum-selection bylaw.  Past Delaware cases have found that, by expressly consenting to a Delaware forum for disputes, parties may also be deemed to have impliedly consented to personal jurisdiction here.  But this decision is the first to find implied consent by a controlling stockholder through the controlled-corporation’s adoption of a forum-selection bylaw.  More ›

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Chancery Enjoins Unfair Merger Pending Corrective Disclosures, But Declines to Order a “Go Shop”

FrontFour Capital Grp. LLC v. Taube, C.A. No. 2019-0100-KSJM (Del. Ch. Mar. 11, 2019)

This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger.  Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation.  The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%.  Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price.  By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value.   When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger.  More ›

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Chancery Applies the Corporate Opportunity Doctrine and Finds Duty of Loyalty Breach

Personal Touch Holding Corp. v. Felix Glaubach, D.D.S., C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019).

Under the corporate opportunity doctrine, one way for a fiduciary to breach her duty of loyalty is to take personal advantage of an opportunity presented to or rightfully belonging to the corporation. This case involved such a breach—a director and executive purchased a building that he knew the company was interested in acquiring in order to house its operations. The test for identifying corporate opportunities is a holistic one in which the Court examines whether: (1) the corporation can afford the opportunity; (2) it is within the corporation’s line of business; (3) the corporation has an interest or expectancy in it; and (4) by taking it, the fiduciary places himself in a position adverse to his corporate duties. The decision is a noteworthy read for its discussion of those factors, in particular, the line of business prong. In that regard, the Court focused on the corporation’s clear interest and expectancy in purchasing the building and the nature of the opportunity as concerning an “operational decision about how to manage or expand an existing line of business.”

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Chancery Addresses Earn-Out Dispute Involving Alleged Breaches of Fiduciary Duty and the Implied Covenant

Glidepath Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Feb. 21, 2019).

Contingent payments based on an acquired business’s future performance are a frequent feature in M&A transactions. In this case, after selling control, the seller remained a minority member for a time period. Two holdings are noteworthy. More ›

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Court of Chancery Addresses Fiduciary Insider Trading Claims Under Brophy in Fitbit Litigation

In re Fitbit Inc. Stockholder Derivative Litigation, C.A. No. 2017-0402-JRS (Del. Ch. Dec. 14, 2018)

Delaware law recognizes a claim for breach of fiduciary duty based on insider trading under the Brophy decision.  This is an important opinion because it recognizes an extension of potential liability under Brophy for trades made, not by the insider himself, but by an entity he or she controls.  It is a natural extension that furthers the important policy of preventing insiders from profiting based on non-public information.  The opinion also addresses demand futility principles under Braddock.  That decision deals with how to conduct a demand futility analysis on an amended complaint after changes in the board’s composition.

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Court of Chancery Addresses Overlapping Appraisal and Fiduciary Duty Action

In re Xura Stockholder Litigation, C.A. No. 12608-VCS (Del. Ch. Dec. 10, 2018)

Lately, the Delaware Supreme Court has given great weight to the deal price in appraisal cases.  As a result, plaintiffs have put a greater focus on showing that the process leading to the merger makes that price unreliable, potentially because of breaches of fiduciary duty.  One strategy for recovery is to file a breach of fiduciary case after obtaining valuable discovery in the appraisal case.  This decision explains when such a fiduciary duty case can go forward notwithstanding the appraisal proceeding seeking to recover for the same loss.  More ›

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