Chen v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. April 8, 2014).
Why this Case is Noteworthy: This Delaware Court of Chancery opinion addresses the standard of review applicable in a merger that is challenged on Revlon grounds, and the exculpatory provisions that protect directors from some claims. It is 78-pages long and includes 22 substantive footnotes. A short blog post cannot “do justice” to all the nuances and salient features of this exemplary opinion, but several key points should be highlighted:
● The Court granted summary judgment to the directors in this challenged merger suit based on the exculpatory provisions of the corporate charter pursuant to DGCL Section 102(b)(7). However the Court allowed claims to proceed to trial regarding disclosure allegations.
● The Court noted however, that the officers were not able to invoke the exculpatory provision because Section 102(b)(7) only applies to directors.
● The Court discusses and distinguishes between the standard of conduct and the standard of review that applies to corporate fiduciaries when determining whether they have breached their duties. “The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.” (citing In Re Trados Inc. S’holder Litig.) (Trados II), 73 A.3d 17, 35-36 (Del. Ch. 2013).
● The Court reviewed the well known three tiers of review for evaluating director decision-making: “The business judgment rule, enhanced scrutiny, and entire fairness.”
● The Court observed when those standards of review would apply and acknowledged that the standard of review “is more forgiving of directors and more onerous for stockholder plaintiffs than a standard of conduct.”
● Rejecting the argument of the defendants, the Court explained that if the plaintiffs prove at trial that the defendants committed a non-exculpated breach of the fiduciary duty of disclosure, then damages can be awarded using a quasi-appraisal measure. The Court stated that it is not true that simply because the merger closed and because it was neither a short form merger or a merger involving a controlling stockholder, that it was no longer possible for the Court to award a remedy for the breach of the duty of disclosure.
● The Court explained that similar to duties under Revlon and its progeny, the duty of disclosure is not an independent duty but rather the application of the board’s fiduciary duties of care, good faith and loyalty. It was not clear at this stage of the proceedings whether the disclosure violations resulted from a breach of the duty of loyalty or the duty of care. Of course, the exculpation provision would only bar claims resulting from a breach of the duty of care.
For professorial commentary on this case, and the reasoning around the Court’s application of the enhanced standard of review, I refer the reader to the two scholarly commentaries by Professor Bainbridge regarding this decision, available here and here. [It is much easier for a tenured professor to be critical of a court decision than a lawyer who tries to make a living before the author of these opinions.]
Today I’m presenting on a panel at the ABA Business Law Section meeting in L.A. regarding recent Delaware cases on indemnification and advancement for officers and directors. Jim Wing of Holland and Knight will discuss how most other states have very different approaches. He has prepared a chart that compares how each of the 50 states treat the topic. Nancy Adams, Leslie Kurshan, and Kara Altenbaumer-Price will address the importance of having D&O insurance coverage as well. The consensus among our panel is that most D&Os pay far too little attention to what coverage or rights they may or may not have in this area until it’s too late (i.e., after they are sued.)
Yesterday I attended a panel presentation that included Vice Chancellor Parsons, Mike Pittenger and Jay Dubow, among others, who discussed issues related to multi-forum litigation in M&A deals. The statistics for 2013 they reported are that 94% of deals worth more than $100 million are the subject of litigation, often in more than one state.
In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Del. Ch. April 7, 2014).
Noteworthy aspects of this decision: On a substantive level, this case is about a dissolution pursuant to Section 18-802 of the Delaware LLC Act and this decision grants a motion to intervene pursuant to Court of Chancery Rule 24 by a union representing employees of the entity that is the subject of the dissolution proceedings. But on a less technical level, there is something inherently notable about a dispute among owners of the major newspapers serving Philadelphia, Pennsylvania, being litigated in the Delaware Court of Chancery–after a Philadelphia judge deferred the dispute to the Delaware forum. It’s the reverse irony of a recent decision by a federal court based in Philadelphia that found the arbitration rules of the Delaware Court of Chancery to be unconstitutional.
Andre Bouchard has been confirmed by the Delaware Senate as the new Chancellor for the Delaware Court of Chancery. Best wishes to the newest member of the Court.
Kevin Brady has written an article for the website of the Delaware Division of Corporations that provides an overview of Practice Guidelines for the Delaware Court of Chancery and best practices regarding discovery and related practice tips before Delaware’s equity court.
IMX Information Management Solutions, Inc. v. MultiPlan, Inc., et al. , C.A. No. 7786-VCP (Del. Ch. Mar. 27, 2014).
Why This Decision is Notable: This Court of Chancery decision enforced the notice deadline and related contractual prerequisites to perfecting a claim for indemnification in connection with a post-closing attempt to access escrow funds that were set aside for such purposes.
Newell Rubbermaid Ind. v. Storm, C.A. No. 9398-VCN (Del Ch. Mar. 27, 2014).
This decision is blogworthy for its recognition that a non-competition agreement can be enforced against an employee based on an online “click” to signify consent to the terms of the agreement (that was otherwise enforceable as if it were conventionally signed). Known as a clickwrap agreement when one clicks on an icon to express consent, this opinion will make it easier for employers to use “online consent” as a means of binding employees to otherwise valid covenants not to compete.
Vice Chancellor J. Travis Laster, continuing the tradition of prolific scholarship by members of the Court of Chancery, has authored two recent scholarly publications through which one might discern insights regarding his thought processes on the cutting edge legal issues addressed.
One of the articles by Vice Chancellor Laster is entitled: Revlon Is a Standard of Review: Why It’s True and What It Means, 19 Fordham J. Corp. & Fin. L. 5 (2013), and is based on his presentation of the Thirteenth Annual Albert DeStefano Lecture on Corporate, Securities and Financial Law at the Fordham Corporate Law Center. The article addresses the iconic Delaware Supreme Court decision in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 50 A.2d 173 (Del. 1986). His Honor suggests in the article the benefits that would flow from clarifying and simplifying an unnecessarily complex area of Delaware law.
His Honor’s second law review article bears the title of: Omnicare‘s Silver Lining, 38 J. Corp. L. 795 (2013). Referring to the Delaware Supreme Court decision in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003), the article begins with an acknowledgement that it remains fashionable in some circles to join the chorus of vigorous dissents that accompanied the majority decision in this case involving the review of provisions related to a merger agreement. The article concludes with the rather upbeat view that:
Reasonable minds can debate the policy implications and empirical consequences of allowing bidders and targets to readily lock up their deals, but for Delaware to take such a step would have run counter to our law’s traditional concern about conflicts in negotiated acquisitions. In my view, the Omnicare majority correctly ruled on the facts of the case that the NCS board lacked sufficient justification at the time of contracting to agree to a fully locked-up deal given the company’s strengthened financial position, Omnicare’s significantly higher offer, and the high likelihood of further bidding.
When the acorn fell on Henny Penny’s head, she feared the sky was falling. With Omnicare, the reaction was similar, with both the dissenters and practitioners predicting the end of the world for friendly deals. A decade later, we know better. M&A continued, even bubbled. Nor was its demise a rational prediction. At most, Omnicare affected only absolute majority lockups. It did not limit the ability of deal planners to agree to a range of other common protective measures, such as termination fees, no-shop provisions, match rights, or even voting agreements covering a lesser percentage of shares. These features give an initial bidder a significant leg up and provide ample reasons for a potential acquirer to want incumbent merger-party status.
No judicial decision is perfect (certainly none of mine are), and there are a number of valid criticisms that can be leveled at the Omnicare case. But the opinion was not all bad. It made several important contributions to Delaware law, most notably by applying enhanced scrutiny to defensive measures in negotiated acquisitions, regardless of the form of consideration. Instead of treating Omnicare as a punch line and greeting its mention with smugly knowing smiles, let’s recognize that the decision has a silver lining.
The above title adorns a recently published law review article by the new Delaware Chief Justice Leo Strine, Jr. in the Columbia Law Review. Highlights of the article are in a post on the Davis Polk Corporate Governance Blog.