Delaware Business Litigation Report

Court Of Chancery Rejects Merger Price As Setting Fair Value

ACP Master Ltd. v. Sprint Corporation, C.A. 8508-VCL (July 21, 2017, corrected Aug. 8, 2017)

This another, albeit rare, decision that demonstrates there is real risk in petitioning for appraisal. The Court found that the fair value was LESS than the merger price, in part due to the synergies the buyer expected to receive by the acquisition. Admittedly, this case presented a rare set of facts. However, in almost every appraisal case the defendant argues the merger price was inflated by synergies that must be backed out in determining fair value. A party considering asking for appraisal needs to be mindful of that risk.

Share

Court Of Chancery Upholds Claim Based On Low-Ball Self Tender

Buttonwood Tree Value Partners L.P. v. R.L. Polk & Co. Inc., C.A. No. 9250-VCG (July 24, 2017)

This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.

Share

Court Of Chancery Protects Privilege In Books and Records Action And Addresses Corwin’s Effect On Mismanagement Investigation Claims

Salberg v. Genworth Financial Inc., C.A. No. 2017-0018-JRS (July 27, 2017)

This is an important decision for its analyses implicating the Garner and Corwin rules.  The Garner rule is that, under certain narrow circumstances where the plaintiff establishes good cause, the attorney-client privilege will be unavailable to corporate fiduciaries who are defending against claims brought by the stockholders who are the object of their fiduciary duties.  Here, the Court of Chancery declined to invoke the Garner rule and protected the attorney-client privilege in a books and records case where the same stockholders were already pursuing derivative litigation against the company on the same subject as the records demand but could not gain access under Garner in that earlier litigation. More ›

Share

Chancery Recommends Rule to Determine Preclusive Effect of Judgments in Prior Derivative Actions

The predominant approach in most jurisdictions to determine whether the dismissal of a derivative action based on the failure to adequately plead demand futility bars re-litigation of this issue in a subsequent derivative action brought by a different stockholder plaintiff is to apply the traditional legal test for issue preclusion. Generally in these jurisdictions, issue preclusion bars re-litigation of demand futility if: the demand-futility issue is the same; the issue is actually litigated and necessary to a final judgment; it involves the same parties in the prior derivative action or in privity with those parties; and there is adequate representation of counsel in the prior derivative action. More ›

Share

Delaware Supreme Court Reverses DFC Global And Clarifies The Deal Price’s Role In Appraisal Litigation

DFC Global Corporation v. Muirfield Value Partners L.P., No. 518, 2016 (Del. Aug. 1, 2017)

Delaware law has long made clear that the deal price for a company, while relevant, does not necessarily equate to the “fair value” that petitioners are entitled to receive in an appraisal proceeding.  A string of recent Court of Chancery decisions, however, adopted the deal price as fair value, reinforcing the view that the market price for an arm’s-length transaction achieved after a thorough sale process likely will be the best evidence of fair value. Two decisions in mid-2016 arguably departed from this line of cases in setting fair value above the deal price, although on different grounds: Dell and DFC Global.  Both decisions have been widely-reported, hotly-debated, and appealed. More ›

Share

Court of Chancery Decision Illustrates Flexibility In Rules Governing Trial

In Re Oxbow Carbon LLC Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. July 28, 2017)

This decision permits a rebuttal witness to testify in an unusual situation that illustrates the flexibility the Court of Chancery often employs when conducting a trial.  Among the issues addressed is the order of proof, belated identification of a witness, sequestration orders, the witness-as-advocate rule, and the tactical considerations in calling an adverse witness in support of your case.

Share

Court Of Chancery Declines To Enforce Agreement To Negotiate

Windsor I LLC v. CWCapital Asset Management LLC, C.A. No. 12977-CB (Del. Ch. July 31, 2017)

In this decision, the Court of Chancery declines to enforce an agreement to negotiate, applying Maryland law. The agreement set the rules of the road for any negotiations taking place between the parties, nothing more.

Share

Court Of Chancery Upholds Duty Of Care and Loyalty Claims

H&N Management Group Inc. v Couch, C.A. No. 12847-VCMR (Del. Ch. Aug. 1, 2017)

This is a rare case involving apparent lack of care in approving a conflicted transaction and a failure to employ almost any safeguards to ensure fairness. It is worth reading just to see what not to do, particularly when dealing with a very significant business decision to the particular company.

Share

Court Upholds Stockholder's Share Ownership and Books-and-Records Request

Companies often defend against stockholder requests to inspect books and records by contending that the plaintiff stockholder lacks a proper purpose or that his or her stated purpose is not the real purpose. Less common is a contention that the stockholder lacks standing because his or her shares were canceled due to misconduct harmful to the company, a remedy provided for in a stockholder agreement. Such a claim raises issues under Section 202 of the Delaware General Corporation Law as to the enforceability of the remedy where the restrictions set forth in the stockholder agreement were not conspicuously noted on the share certificate. The recent case of Henry v. Phixios Holdings, C.A. No. 12504-VCMR (July 10), provides guidance on the requirements to enforce a restriction on the ownership or alienability of shares of a Delaware corporation when the restriction is not conspicuously noted on the share certificate. As the Chancery Court held, such a restriction is not enforceable except upon proof that the stockholder had actual knowledge prior to purchase of the shares or subsequently agreed or voted to approve the restriction, proof that Phixios failed to provide. More ›

Share

Court of Chancery Advocates New Test Governing Preclusion in Derivative Litigation

In re Wal-Mart Stores Inc. Delaware Derivative Litig., C.A. No. 7455-CB (Del. Ch. July 25, 2017)

This is an important decision holding that just because one derivative litigation was dismissed for failure to overcome the requirement of pre-suit demand on the board, it does not mean a similar derivative suit must be dismissed on the same grounds. Instead, under the rule advocated for in this decision, an earlier dismissal only affects the second suit if the first suit was dismissed after the plaintiff survived a demand futility motion or the board conceded that demand is excused. It is at that point which the plaintiff in the first suit was acting on the company’s behalf and its actions may bind other plaintiffs. Originally stated as dicta in the EZCORP decision, this rule, among other things, prevents ill-prepared and typically rushed derivative complaints from cutting off better prepared complaints. Previously, before a remand in this action, the Court had applied a rule that examined the “adequacy of representation” provided by the plaintiffs in the first suit. This “grossly deficient” representation standard generally favored defendants and made dismissal likely in the second suit. It remains to be seen whether the Delaware Supreme Court will adopt the EZCORP rule as endorsed by Wal-Mart.

Share

How to Open the Door to Chancery

Sometimes more is not a good idea. That is the case when a complaint alleges multiple bases to invoke the jurisdiction of the Delaware Court of Chancery, but still fails to sustain that subject matter jurisdiction. The recent decision in Yu v. GSM Nation, Del. Ch. C.A. No. 12293-VCMR (July 7), shows why that can be a costly failure. For the plaintiff in the GSM case spent over a year trying to sustain the Court of Chancery's jurisdiction only to fail to do so. Had the plaintiff instead filed in the Delaware Superior Court's CCLD docket, he very well might have had a trial by the time his Court of Chancery complaint was dismissed. More ›

Share

Court Of Chancery Explains Stock Restriction Law

Henry v. Phixios Holdings Inc., C.A. No. 12504-VCMR (July 10, 2017)

This is the rare decision explaining when restrictions on stock transfers (permitted by Section 202 of the DGCL) can be enforced. While the statute seems clear enough, the real lesson from this decision is that it might be difficult to show a stockholder had advanced knowledge of restrictions that are not on the stock certificate when no other written notice exists. Without such advanced knowledge or later assent by the stockholder, the restrictions are not enforceable.

Share

High Court Resolves $2B 'True Up' Dispute Against Acquirer

The Delaware Supreme Court's recent decision in Chicago Bridge & Iron v. Westinghouse Electric, resolved a $2 billion post-closing dispute about the interplay between common features of acquisition agreements: sellers' representations of the accuracy of the target's financial statements, and so-called "true up" provisions for purchase price adjustments for working capital changes between signing and closing. The Supreme Court harmonized the provisions by addressing, among other things, the limited purpose of true up provisions. It accordingly rejected the acquirer's attempt to raise longstanding accounting issues to obtain a large price adjustment through the true up process, when the purchase agreement barred the acquirer from any post-closing relief for breach of a similar warranty. More ›

Share

Court Of Chancery Explains When Entire Fairness Applies To Option Grants And Voting Agreements

Williams v. Ji, C.A. No. 12729-VCMR (June 28, 2017)

While directors have the right to issue options, when the grant is to themselves and there are specific facts suggesting unfairness, those directors will have the burden of proving the grants were entirely fair in a stockholder challenge. The same is true when stock is issued conditioned on an agreement to vote that stock as the directors wish.

Share

Court Of Chancery Explains Interrelationship Of MLP Exculpation Clauses

Morris v. Spectra Energy Partners (DE) GP, LP, C.A. 12110-VCG (June 27, 2017)

Master limited partnership agreements typically provide protection for the general partner who engages in a self-dealing transaction with the MLP. This decision reviews the existing precedent on how to apply those provisions, especially when a conclusive presumption of good faith is available to the GP. It also explains what language should be used to invoke at least the subjective standard of good faith that is most helpful to a GP using a conflicts committee. Hence, the decision is required reading for drafters of MLP agreements.

Share