On July 19, 2022, in the Twitter v. Musk litigation, Chancellor Kathaleen McCormick presided over what was likely the most widely observed hearing on a motion to expedite in the Delaware Court of Chancery’s history. While deal bust-ups are front page fare for the financial press, the high profile of this case brought the Court of Chancery further into the national consciousness than usual (though who among us hasn’t asked “what is a chancery?”). On the day of the hearing, the public access telephone line was, indeed, “lit,” hitting its maximum capacity with merger arbs (and other interested … Read more
In 1996, the Delaware Court of Chancery issued its seminal decision in In re Caremark International Inc. Derivative Litigation,1 establishing the conditions for director oversight liability under Delaware law. Adopted a decade later by the Delaware Supreme Court in Stone v. Ritter,2 the Caremark test imposes liability under two “prongs”: where “(a) directors utterly failed to implement any reporting or information system or controls; or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.”3
In the 25 years since Caremark … Read more
In an important decision this week, the Delaware Court of Chancery permitted a Caremark duty-of-oversight claim to proceed against the directors of the Boeing Company. Stockholder plaintiffs sued Boeing’s board, seeking to recover costs and economic losses associated with the crash of two 737 MAX jetliners. The plaintiffs’ complaint alleged that the directors failed to monitor aircraft safety before the crashes and then failed to respond to known safety risks after the first crash. The lawsuit seeks to hold the directors liable for the resulting loss of “billions of dollars in value.”
The torrid pace of new securities class action filings over the last several years slowed a bit in the first half of 2021, a period in which there have been many notable developments in securities law. This mid-year update briefs you on major developments in federal and state securities law through June 2021:
- In Goldman Sachs, the Supreme Court found that lower courts should hear evidence regarding the impact of alleged misstatements on the price of securities to rebut any presumption of classwide reliance at the class-certification stage, and that defendants bear the burden of persuasion on this issue.
Delaware courts have recently had the opportunity to evaluate and discuss management of potential conflicts. That guidance may be particularly salient in the context of insider transactions and down-rounds, which may animate potential conflicts and lead to difficult litigation for corporate fiduciaries. This post focuses on guidance gleaned from Delaware cases regarding measures for conflict management at the stockholder level, including the effect of equal treatment or a rights offering, exercise of consent rights, and the use of a disinterested stockholder vote.
Equal Treatment and Rights Offerings
Significant stockholders or groups of stockholders, when alleged to have caused a company … Read more
Delaware’s success in attracting corporate formations is well known, but explanations for it vary. In a recent paper, I test these explanations as well as the reasons for Delaware’s success in attracting other types of business formation I find evidence consistent with Delaware’s making a credible commitment to creating quality corporate law, particularly through its judiciary, and this commitment extends to LLCs and other organizational forms. These results provide insight into why Delaware leads corporate formations, how that lead expands to related organizational forms, and how the future of state competition for organizational formations might unfold.
The Delaware saga of … Read more
During a four-month span in late 2018, two events occurred at opposite ends of the country that could dramatically reshape the regulation of corporations in America. First, in September 2018, California enacted the nation’s first law mandating board gender diversity for all public corporations that are physically headquartered in California. Second, in December 2018, the Delaware Court of Chancery in Sciabacucchi v. Salzberg ruled that a corporation may not in its governing documents regulate the rights of its shareholders arising under federal securities law. Although seemingly unrelated, I argue in a forthcoming article that both events share at … Read more
The following compilation is our fifth annual review of significant state court decisions relevant for private company M&A transactions and related governance matters and disputes. The summary includes the landmark Akorn v. Fresenius decision, which is the first Delaware M&A decision to uphold a buyer’s termination right on the basis of an MAE. A few of the decisions concern drafting points, a few concern overall deal process and planning points, and two of the decisions concerned fiduciary duty breaches in contested situations (one was a public company decision that has relevance to the private M&A context).
Akorn, Inc. v.
The recent Delaware Court of Chancery decision by Vice Chancellor Glasscock in Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc.1 is illustrative of the principle that merger partners should not assume that anything less than strict compliance with notice requirements (particularly when they relate to termination rights) and deadlines in a merger agreement will be enforced.
In Rent-A-Center, the merger partners had extensive negotiations over the “end date” in the merger agreement, and under what circumstances it could be extended. The deal involved the $1 billion-plus acquisition by Vintage Capital of Rent-A-Center, a publicly traded company. Because the parties … Read more
A recent decision of the Delaware Court of Chancery highlights the need for boards of directors of Delaware publicly traded companies to develop heightened awareness and vigilance in responding to shareholder activists, particularly those following a short-term agenda of putting the company up for sale. The failure of boards to do so may put all directors at risk of being found in breach of their fiduciary duties.
The factual background of the court’s decision in In re PLX Technology Inc. Stockholders Litigation may sound familiar to many public company directors. Following the December 2012 termination of a pending sale … Read more
On October 1, the Delaware Court of Chancery, in a record-breaking 246-page opinion, held that Fresenius Kabi AG (a German publicly listed healthcare company) did not have to consummate its proposed acquisition of Akorn, Inc. (a Nasdaq-listed generic pharmaceutical company) on the basis that Akorn had suffered a Material Adverse Effect, or MAE. The court also found that Akorn had breached certain representations in the parties’ merger agreement, and that the breach would reasonably be expected to result in an MAE. The decision represents the first time in memory that a Delaware court has allowed a buyer to walk away … Read more
Corporate Governance, Surveys, Policies and Reports
- Lazard Report Finds Increased Shareholder Activism in Q1 2018: Lazard’s Quarterly Review of Shareholder Activism for Q1 of 2018 found increased activism by shareholders in terms of number of campaigns initiated, board seats won and capital deployed. Seventy-three new campaigns were initiated in Q1 2018, compared to 67 in Q1 2017 and 62 in Q1 2016. Sixty-five board seats were won in Q1 2018, compared to 41 in Q1 2017 and 100 for the entirety of 2017. $25 billion in capital was deployed in new campaigns for Q1 2018, the most in any
Two recent decisions confirm that, in the wake of the Delaware Supreme Court’s landmark decisions in Dell and DFC, Delaware courts are taking an increasingly skeptical view of claims in appraisal actions that the “fair value” of a company’s shares exceeds the deal price. However, as demonstrated by each of these recent Delaware Court of Chancery decisions—In re Appraisal of AOL Inc. and Verition Partners Master Fund Limited v. Aruba Networks, Inc.—several key issues are continuing to evolve in the Delaware courts. In particular, Delaware courts are refining the criteria in appraisal actions for determining … Read more
In Miller v. HCP (Feb. 1, 2018), the Court of Chancery dismissed claims made against the members of a limited liability company board, a majority of whom had been appointed by the private equity firm that was the company’s controlling stockholder, for approving a sale of the company to an unaffiliated third party that was championed by the controller—without attempting to maximize the price.
Under the LLC operating agreement’s “waterfall” provisions governing the allocation of proceeds on a sale of the company, the controller was entitled to receive almost all of the proceeds of any sale up to $30 million … Read more
In recent years, shareholder plaintiffs have brought a series of claims before the Delaware Court of Chancery alleging that directors of Delaware companies have abused their discretion in granting themselves excessive equity compensation for their board service. These cases raised the threshold question of whether the plaintiffs’ challenges should be reviewed under the “entire fairness” standard, which requires the company to bear the burden of proving that the director awards were fair, or the more deferential “business judgment” standard, which grants considerable discretion to directors’ decisions, often resulting in dismissal of claims that fail to plead particularized facts indicating fiduciary … Read more
In NRG Yield v. Crane (Dec. 12, 2017), the Court of Chancery dismissed fiduciary duty claims against directors who approved a corporate recapitalization that was proposed by a controller and would perpetuate its control. The reclassification provided for the issuance of non-voting equity that could be used by the corporation as currency to make future acquisitions without diluting the controller’s voting control.
Chancellor Bouchard concluded that the recapitalization was a “conflicted controller transaction” to which “entire fairness” presumptively applied because the controller obtained a “unique benefit” from the transaction not shared with the other stockholders—namely, the ability to maintain its … Read more
On December 13, the Delaware Supreme Court reversed the Court of Chancery’s decision in In re Investors Bancorp, Inc. Stockholder Litigation, and held that entire fairness will apply to any board’s decision to award director compensation unless the award is either (1) specifically approved after the fact “by fully informed, uncoerced, and disinterested stockholders,” or (2) effectively pre-approved, in the form of a “self-executing” plan that leaves no room for discretion with respect to specific awards. This marks a change in Delaware law, and eliminates the discretion that boards previously could exercise safely under stockholder-approved compensation plans … Read more
An important feature of U.S. corporate law is regulatory competition among various states. Unlike firms in other industrialized countries, American corporations can choose to incorporate in any state, even if they do not do business there. A large body of academic literature has studied the merits and weaknesses of this approach to regulating corporations, focusing primarily on the value of state corporate laws. This debate has focused on two competing hypotheses. In the first, interstate competition in corporate laws promotes a “race to the top” by motivating states to enact laws that are optimal for shareholders and that minimize managerial … Read more
A peculiar appeal is currently before the Delaware Supreme Court. The case involves the judicial appraisal of DFC Global, a company acquired by a private equity firm in 2014. Approximately 12 percent of DFC stockholders dissented, and the Court of Chancery found that the fair value of the company was $10.30 per share, slightly higher than the $9.50 transaction price that the board had negotiated. On appeal, DFC Global has asked the Delaware Supreme Court for a rule of law that the Court of Chancery must defer to the merger price in an arm’s length transaction where there was a … Read more
Delaware has reigned as the preeminent corporate law jurisdiction in the United States for over a century, weathering the rivalry of eager state competitors (such as Maryland and Nevada) and the looming presence of – and occasional intervention by – the federal government. Various explanations have been provided as to why Delaware continues to dominate. And various assessments have been offered as to whether, overall, Delaware’s corporate law jurisprudence is beneficial or detrimental for investors. These explanations and assessments typically focus on what Delaware has done well over the years to retain its supremacy, not on what, deliberately or fortuitously, … Read more