Chancery Preliminary Approves Derivative Settlement but Gives Objectors Conditional Option to Proceed with Case
Forsythe v. ESC Fund Management Co. (U.S.), Inc., C.A. No. 1091-VCL (Del. Ch. May 9, 2012).
Issue Addressed
Whether the settlement of a derivative action that the Court considered fair should be approved despite the objections of the named plaintiffs.
Short Answer
The Court explained that the settlement could still be approved even if the named plaintiffs objected to it but in light of the potential merits of the objectors’ arguments, the Court would approve the settlement provisionally – - unless the objectors posted a secured bond or letter of credit in the full amount of the settlement consideration of $13.25 million, at which time they could apply to the Court for approval to take over the case.
Several prior opinions in this case have been highlighted on these pages here.
Brief Background
This is the 7th opinion by the Court of Chancery in this long running derivative action. The case involves a derivative claim against a fund that was formed for senior employees of the Canadian Imperial Bank of Commerce to co-invest with the bank in private equity opportunities. Shortly before trial in early 2011, a mediation resulted in a settlement that the named plaintiffs initially agreed to, but they subsequently joined with other objectors in opposing the settlement.
Legal Analysis
The Court reviewed the fundamentals of Delaware law applicable to this situation. Namely, settlements of a derivative action require Court approval, and also require the Court to determine the intrinsic fairness of the settlement. Although the Court does not perform its own evaluation of the case on the merits, it must apply its own business judgment in deciding whether the settlement is reasonable.
The Court emphasized that it was not necessary for the named plaintiffs to support the settlement in order for the Court to approve it. The Court explained that by suing a representative capacity, “the named plaintiffs gave up the right to dictate the outcome of the action unilaterally.” Moreover, the Court emphasized that “counsel in a derivative and/or class action may present a proposed settlement over the objections of the named plaintiffs. The mere fact that the counsel takes a different view on the advisability of a settlement than the named clients, does not, in itself, constitute grounds for disqualification.”
The Court recited the reasons why it believed that the settlement proposal was reasonable even if it was on the “low end” of reasonableness.
The Court, however, recognized that it “is not infallible,” and wanted to allow for the possibility that the objectors may be right in their analysis that the potential damages could exceed $200 million, far more than the approximately $13 million value of the settlement.
The Court recited several quotations from law review articles and other decisions of several federal courts to address the competing interests which raise the concern, in general, that the interests of counsel for the class may diverge from the interests of their clients, and that the requirement of judicial approval for settlements in representative litigation must take those factors into account. Moreover, the Court observed that there may be concern that the interests of the objectors to the settlement may also diverge from the interest of the company, or in this case the fund, against whom the claims were made.
Balancing of Risk
In order to balance the risk of losing the certainty of the settlement against the possibility that the settlement consideration may by inadequate, the Court fashioned a somewhat Solomonic remedy which provided that it would enter an order approving the settlement, as well as the counsel fees for the plaintiff – - unless the objectors or their counsel provided the Court within 60 days with a secured bond or letter of credit or similar security in the amount of the settlement consideration. If the objectors pursue the case and ultimately recover less than the current settlement, the fund will have the right to execute on the security to collect the difference. If however the objectors in the future were to receive more than the current cash settlement, they would be entitled to the benefits of the larger settlement.
The Court recognized that even though this approach addresses the agency costs and the inherent problems with representative actions, through an auctioning process, it was imperfect because the objectors and their counsel would not be entitled to the entire amount of any increased recovery even though they were providing a bond for the entire amount of the settlement.
The Court conducts a careful weighing of the public policy concerns that are at work due to the different interests and different perspectives of the parties that are presenting a settlement of this type to it for approval. The citations to various law review articles and federal court opinions provide a basis for deep thought about these issues that have a substantial impact on society.
Conclusion
In sum, the Court explained that it would approve the settlement and the fee request by the plaintiffs’ attorneys unless the objectors posted security and applied to take over the case within 60 days. The Court then went on to explain the basis for approving the amount of fees requested by the plaintiffs, as well as a request for payment to the named plaintiffs for their substantial contributions to the case over several years.
Facts Not Ripe and Similar Case Stayed in Massachusetts — Court Stays Delaware Action
The Court of Chancery in LightLab Imaging, Inc. v. Axsun Technologies, Inc. and Volcano Corp., C.A. No. 6517-CS (May 10, 2012) granted the defendants’ motion to stay the Delaware action until the facts ripened finding that there was no prejudice to the plaintiff and that there was substantial overlap between this Delaware action and an action filed in Massachusetts (currently on appeal).
LightLab Imaging, Inc. filed an action against the defendants relating to a technology dispute. In connection with a separate but substantially related action filed in Massachusetts, LightLab had filed in Delaware a motion to stay that Massachusetts action because the material facts in the dispute were not static.
The Court granted the motion to stay noting that:
[t]he court may exercise its discretion to grant a stay where ‘a controversy has not yet matured to a point where judicial action is appropriate.’ One factor indicating that a dispute is not ripe is where the ‘material facts’ of the dispute are not ‘static.’ Moreover, in deciding whether a claim is ripe for decision, Delaware courts look to ‘whether the interests of those who seek relief outweigh the interests of the court and of justice in postponing review until the question arises in some more concrete and final form.’
Noting that there was substantial overlap between the cases in Delaware and the Massachusetts litigation on appeal, the Court found that “LightLab sought to stay the [Massachusetts] litigation for substantially the same reasons that the defendants raise here – that is, that the material facts necessary to resolve the claims as to whether Axsun and Volcano have breached the Contract by supplying Volcano with a Laser are not yet static…. It was LightLab that desired the original stay, and at that time it knew of the issues that it now claims justify expedient action on the part of the defendants and the court.” The Court also noted that LightLab (i) sought a stay of its counterclaims because the facts were still fluid and that it did not make sense to have a trial on that basis, (ii) failed to move to expedite its appeal in Massachusetts, and (iii) now seeks to have serial trials on issues that LightLab selects without any exigent circumstances.
Recent Developments in Delaware Corporate and Alternative Entity Law
The Delaware State Bar Association’s Corporate Law Section is presenting its annual seminar entitled: “Recent Developments in Delaware Corporate and Alternative Entity Law.” Kevin F. Brady, Francis G.X. Pileggi and R. Montgomery Donaldson are the co-chairs again this year. The seminar is scheduled to be held on May 22, 2012 from 8:30 a.m. to 12:45 p.m. in Wilmington at the Doubletree Hotel. Members of the Delaware Supreme Court and the Delaware Court of Chancery, as well as leading corporate practitioners and law professors will be making presentations on recent developments, practice guidelines and legal ethics. Information about registering for the seminar can be obtained by contacting Alison Macindoe at the Delaware State Bar Association: amacindoe@dsba.org. The agenda and registration form are also available here.
Among the reasons to attend, is the chance to hear Chancellor Strine discuss the recently promulgated Practice Guidelines for the Court of Chancery. Justice Ridgely of the Delaware Supreme Court will be featured on a legal ethics panel. Another panel is entitled: Corporate Law Updates via Blogs. One of the panelists is Doug Batey of Stoel Rives, author of the LLC Law Monitor blog, who describes the seminar in a post.
Court of Chancery Dismisses Waste Claim against Trustees of a Statutory Trust
Protas v. Cavanagh, C.A. No. 6555-VCG (Del. Ch. May 4, 20120).
Issue Addressed
Whether the plaintiff satisfied the pre-suit demand requirements in her derivative claims against the trustees of the trust.
Short Answer
No, and therefore her complaint was dismissed.
Background
This case involved claims by a common stockholder of a Delaware statutory trust against the trustees of that trust, as well as claims against those entities that she alleges aided and abetted the breach. The Court determined that the claims were derivative and in order to survive a motion to dismiss under Section 3816 of the Delaware Statutory Trust Act (“DSTA”), the Court explained that a plaintiff must plead particularized facts raising a reasonable doubt that the actions of the trustees were taken honestly and in good faith. Because the Court determined that that standard was not met, the complaint was dismissed.
Analysis
The Court conducted the same analysis to determine whether a claim is direct or derivative as would be done in a case involving a corporation. Thus, the Court compared Court of Chancery Rule 23.1(a) with Section 3816(c) of Title 12 of the Delaware Code, which is the counterpart in the DSTA to the pre-suit demand requirement in Rule 23.1. See Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), in which the Delaware Supreme Court articulated the test for assessing whether a claim asserts a direct or derivative harm.
The Court explained that the standard used to determine demand futility when a plaintiff sues on behalf of a statutory trust are the same as those applied to derivative suits by corporate stockholders. Where a plaintiff challenges a conscious business decision by the board, the Aronson test applies. In order to survive a motion to dismiss, the plaintiff must successfully plead demand futility by alleging particularized facts that raise a reasonable doubt that: (1) “The directors are disinterested and independent [or] (2) The challenged transaction was otherwise the product of a valid exercise of business judgment.” See footnotes 76 through 80. The plaintiff in this case sought to rely on the second prong of Aronson which, as the Court explained, is a “heavy burden.”
As applied to the facts of this case, in order to succeed, the plaintiff in this case was required to plead facts amounting to corporate waste. As regular readers are aware, the valid waste claim must establish that: “A transfer of corporate assets that serves no corporate purpose or for which no consideration at all is received,” has taken place.
The Court provided citations to authority to explain how difficult it was to succeed on such a claim and, predictably perhaps, the Court held that the allegations in this case fell short.
The Court referred to a decision by former Chancellor Chandler in which he quipped that a waste claim in the context of the second prong of Aronson may be akin to a search for the Loch Ness monster, and: “like the cameras of many a tourist in Scotland, the allegations of the plaintiff here are not sufficiently focused to bring the fabled beast within our ken.” See footnotes 95 and 96. Footnote 100 refers to a case that underscores the point by explaining that it is not sufficient that a plaintiff regards a decision as “unwise, foolish or even stupid” because those descriptions are not legally significant nor are they legally sufficient to successfully plead a waste claim.
Chancery Enjoins Hostile Bid as Remedy for Violation of Confidentiality Agreement
Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. No. 7102-CS (Del. Ch. May 4, 2012).
Issue Addressed: Whether the Court should enjoin a hostile bid based on the disclosure of information in violation of the parties’ confidentiality agreement. Short Answer: Yes.
Background
This 138-page decision was issued after the close of the markets on Friday afternoon and generated several articles over the weekend in the trade press, business publications, mainstream media and by legal commentators. So much so, that a summary even now, on the next business day, would add little to what has already been said. Still more, Martin Marietta announced today that they would appeal to the Delaware Supreme Court. For a sample of the stories, see, e.g., here and here.
Nonetheless, in a nutshell, Vulcan and Martin Marietta had been flirting with each other regarding a possible combination for about a decade. Their most recent courtship was reignited in 2010. They signed a confidentiality agreement that contemplated an amicable business combination but at some point, Martin Marietta disclosed that information as part of a hostile bid.
Analysis
The Court emphasized that its decision was based entirely on contract law and its reasoning did not rely on any fiduciary principles. Professor Steven Davidoff provides an insightful analysis and encourages a reading of the tome for its perspective on the minutiae of how deals are made–or sought to be made. Professor Davidoff’s overview of the case does it justice. Perhaps we will provide a more comprehensive summary later, as well as noteworthy details regarding the embryonic appeal as it develops.
Supplement: Eduardo Gallardo of Gibson Dunn provides an overview of the case here.
Chancery Finds “Fair Value” Less than Merger Price in Appraisal Case
Gearreald v. Just Care, Inc., C.A. No. 5233-VCP (Del. Ch. April 30, 2012).
Issue Addressed
In this appraisal proceeding pursuant to 8 Del. C. § 262, the post-trial issue addressed by the Court was whether the “fair value” of the company was worth more than the $40 million acquisition price.
Short Answer
In an unusual twist, the Court found that the “fair value” of the company for appraisal purposes was only $34 million – - $6 million less than the cash acquisition price.
Background
This appraisal action was pursued by minority shareholders which included the founder and former CEO of the company, who voted in favor of the merger as a director, but later voted against it as a shareholder. The case was filed in January 2010 and the trial was held in July 2011, followed by extensive post-trial briefing and oral argument. Petitioners contended that the fair value of the company was $55 million. By comparison, the respondent company claimed that the company was only worth $33 million, even though the cash acquisition price was $40 million. The major difference between the valuations by the experts for each of the parties was twofold: (1) whether cash flow projections for new planned facilities should be included in the valuations; and (2) “the appropriate small company size premium to be applied to the Company’s cost of equity.” The Court explained that those two areas of dispute accounted for most of the differences between the parties’ respective valuations.
Analysis
The Court began its analysis with the basics, and described the fundamental purpose of an appraisal action as a limited legislative remedy intended to provide stockholders who dissent from a merger asserting the inadequacy of the offering price, with “an independent judicial determination of the fair value of their shares.” See footnote 10. The DGCL entitles petitioners to their pro rata share of the “fair value” of the companies in question as of the merger date. See 8 Del. C. § 262(h) (acknowledging that the fair value of the shares is “exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value”).
Determination of Fair Value
In connection with the broad discretion given to the Court to determine fair value, it takes into account all relevant factors known or ascertainable “as of the merger date that illuminates the future prospects of the company.” However, the Court must determine the fair value of the company as a going concern which requires the Court to “exclude any synergistic value, that is, the amount of any value that the selling company’s shareholders would receive because the buyer intends to operate the subject company, not as a stand-alone going concern, but as part of a larger enterprise, from which synergistic gains can be extracted.”
Both sides in an appraisal proceeding have the burden of proving their respective valuations by a preponderance of the evidence, and the Court may consider “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in Court.” Acceptable techniques that have been recognized in Delaware include “the DCF approach and the comparable transactions approach.” The Court will use its own independent judgment to determine the fair value of the shares if neither party satisfies its burden. See footnotes 15 through 19.
Relevance of Fiduciary Duty Claims
The Court noted in footnote 26 that where a company relies on the merger price as evidence of fair value, allegations of breach of fiduciary duty or other improper actions during the sales process are relevant to whether the merger price is credible evidence of fair value. However, where evidence of fair value is supplied by expert analyses, allegations of improper conduct by the Company’s fiduciaries are relevant only to the extent that they relate to some assumption or input to the expert’s valuation, affecting in turn the credibility of the challenged valuation. See also footnote 27 (citing Cede & Co. v. Technicolor, Inc., 2003 WL 23700218, at *7 (Del. Ch. Dec. 31, 2003) aff’d in part rev’d in part, 884 A.2d 26 (Del. 2005) (referring to Chancery decision holding that when management projections are made in the ordinary course of business, they are generally deemed reliable)).
Each of the parties’ experts relied primarily on their DCF analyses to value the Company and the Court spent considerable time focusing on the “disputed inputs and assumptions” regarding the projected cash flows, capital structure and costs of capital for the Company.
Value as of the Date of Merger
The Court determined that the projected new facility in Georgia was too speculative to be included in the valuation of the Company as of the merger date, based on Delaware appraisal law which provides that “the corporation must be valued as a going concern based on the “operative reality” of the Company as of “the time of the merger” and the Court is limited to factors known or knowable as of the merger date that relate to future prospects of the Company, but should avoid including speculative costs or revenues. See footnotes 35 and 36. The Court distinguished the decision in Delaware of Open MRI Radiology Associates, P.A. v. Kessler, 898 A.2d 290, 315 (Del. Ch. 2006), which included in an appraisal valuation certain proposed new facilities which the Court likened to a Starbucks or McDonald’s as part of a standardized business model – - which was substantially different from the business model involved in the instant case.
Capital Structure
The Court spent a substantial part of the opinion addressing the weighted average cost of capital (WACC), in order to discount the cash flow projections for the company.
The Court determined that the approach taken by the expert for the petitioner was inappropriate, in part, because the capital structure applied by the expert for the petitioner arose directly out of the expectation of the merger. The Court of Chancery has previously rejected the proposition that changes to a company’s capital structure in relation to a merger should be included in an appraisal. The Court cited to a case at footnote 54 in which it had previously refused to include debt incurred as part of the merger in the company’s capital structure because to do so would contravene the valuation statute’s command to appraise shares “exclusive of any element of value arising from the accomplishments or expectation of the merger.” Instead, in that cited case, the Court determined that because the Company had no debt before the merger and because the petitioner had introduced no evidence of non-speculative plans to incur significant debt, (that is not due to the accomplishment of the merger), it was inappropriate to include the actual additional debt for purposes of an appraisal. Thus, the Court determined in this case that the correct capital structure for an appraisal of Just Care is that “theoretical capital structure it would have maintained as a going concern.”
Beta
In discussing the cost of equity, the Court determined that neither side seriously contested the beta calculation of the other. The Court found that the relevant beta was equal to 0.82. Beta has been defined as follows:
“Beta (β) of a stock or portfolio is a number describing the volatility of an asset in relation to the volatility of the benchmark that said asset is being compared to. This benchmark is generally the overall financial market and is often estimated via the use of representative indices, such as the S&P 500.
An asset has a Beta of zero if its returns change independently of changes in the market’s returns. A positive beta means that the asset’s returns generally follow the market’s returns, in the sense that they both tend to be above their respective averages together, or both tend to be below their respective averages together. A negative beta means that the asset’s returns generally move opposite the market’s returns: one will tend to be above its average when the other is below its average.”
Equity Risk Premium
The Court’s discussion of this point also provides a practice tip regarding the Court’s current approach on this issue.
Regarding the equity risk premium, the Court determined that the supply side equity risk premium of 5.73% was the appropriate metric to be applied in valuing the Company. The Court explained that despite the historical equity risk premium applied by the Court, “the academic community in recent years has gravitated toward greater support for utilizing the supply side equity risk premium.” See Global GT L.P. v. Golden Telecom, Inc., 993 A.2d 497 (Del. Ch. 2010). The Chancery decision in Global v. Golden was highlighted here, and the Supreme Court’s affirmance was summarized here.
The Court explained that in smaller companies, “an equity size premium” generally is added to the company’s cost of equity for the higher rate of return demanded by investors to compensate for the greater risk associated with small company equity. Small company premiums are empirically estimated and both experts utilized the Ibbotson size premiums in performing their analysis.
No Liquidity Discount Allowed
The Court emphasized that: “Although a liquidity discount related to the marketability of a company’s shares is prohibited, that does not mean that the use of any input that is correlated with a company’s illiquidity is per se invalid.” (emphasis in original.) The reduced liquidity of smaller companies which results in their equity being riskier and investors demanding higher returns, increases the cost of capital and it is that type of liquidity circumstance that is captured in the Ibbotson size premium. See footnotes 77 and 78.
That is, the liquidity effect that arises in connection with transactions between a company and its providers of capital, which is part of the value of a company as a going concern, and which impacts its ability to obtain financing and influences the overall risk and return profile, needs to be distinguished from the liquidity effect that is prohibited under Delaware appraisal law and relates to transactions between shareholders and other market participants.
Therefore, the Court explained that where the effect of the company’s illiquidity relates only to the ability of an investor to exit his investment by selling his shares in the market, such a transaction relates more to the structure of the market than to the company’s ability to generate profits. As a result, such a discount rightly is excluded in an appraisal because it does not relate to the intrinsic value of the company.
By contrast, the liquidity effect at issue in this case relates to the ability of the company to obtain capital at a certain cost and this effect is related to the intrinsic value of the company as a going concern and should be included when calculating its cost of capital.
The Court rejected the adjustment by the expert for the petitioner because the Court explained that “small company size premiums regularly are applied in appraisal proceedings in Delaware” without the type of adjustment performed by the expert for the petitioner. See D.R.E. 702 (an expert’s report must be based on reliable principles and methods).
Compounded Interest
The Court addressed the general rule that an award of interest is routinely made unless the petitioner brought the action in bad faith. The Court rejected any argument of bad faith and awarded prejudgment interest to petitioners consistent with Section 262(h), on the value of the appraised shares.
Conclusion
The Court ordered the parties to “cooperate to determine the amount of the interest award” based on a valuation of about $34 million.
Postscript
Although the amount of interest awarded was not computed as a final, total number, it was not obvious whether the shareholders would have been better off accepting the $40 million acquisition valuation of the Company – - or if the prejudgment interest at the statutory rate of “5% over the Federal Reserve Discount Rate” would put them in a better position than if they had accepted the original merger consideration and generated a return that was less than the amount of statutorily mandated prejudgment interest.
Professor Bainbridge on a Corporation’s Essence
For those seeking a more profound understanding of the concept of a corporation’s essence on a somewhat philosophical–but still practical level, such as the relationship between the shareholder wealth maximization norm and the business judgment rule, an enlightening series of posts on the topic by Professor Stephen Bainbridge, in response to posts by other law professors, begins with the following post, which includes links to the rest of the series by Professor Bainbridge as well as the posts of other academics to which he refers.
The vacuity of corporate purpose
In a blog post over at Conglomerate, Haskell Murray observed that:
Some would argue that as a matter of positive Delaware corporate law (and the law of states that follow Delaware’s lead), that the primary purpose of the traditional corporation is to maximize shareholder wealth.
This prompted a number of prominent corporate law academics to take issue with that claim. Lyman Johnson, for example, opined that:
I must dissent from the view that it is clear as a matter of positive law that corporations in general must maximize shareholder wealth. What is clear is that such a seemingly foundational issue lacks the sort of clear resolution–outside narrow settings– in positive law one would expect in the year 2012. … The law remains ambivalent and for good reasons, leaving the “corporation” itself as the appropriate focus. …. And of course, constituency statutes in almost 30 states further complicate assertions about positive law.
And Joan Heminway chimed in with:
You make a nice point about the difference in judicial review between the business judgment rule setting and the Unocal takeover defense setting. But that’s a fiduciary duty issue, really. Understanding that purpose and fiduciary duty are linked, can we talk more about the corporate purpose piece?
Since Haskell cited yours truly as the “some” who would so argue, I’m going to take this as an opportunity to stake out my take on the issue.
In this post, I want to focus on Joan’s observation. Although I may have sometimes used loose language that suggests to the contrary, my own view is that any effort to talk about the law of corporate purpose is ultimately bootless.
As a matter of theory, the corporation is not a unitary person or even a thing capable of having a defined purpose. Hence, I must take issue with Lyman Johnson’s assertion that “Perhaps the the corporation, long recognized as a distinctive legal person, should play a meaningful role on this foundational issue of purpose as well, not ignored as a mere semantic stand-in for the shareholders.” Edward, First Baron Thurlow, put it best: “Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?” The corporation is simply a nexus of contracts between factors of production. (More precisely, it is a legal fiction that has a nexus of contracts. See my article The Board of Directors as Nexus of Contracts.)
Just as the corporation has no conscience, it has no purpose. At most, the people whose contractual relations are brought within the legal construct known as the corporation may have a common purpose. Yet, as we see so often, even when we focus on a single constituency group–say, shareholders–the members of that group may have differing purposes.
As a practical matter, now that we’ve put the old ultra vires doctrine to bed, when does corporate purpose ever arise as a matter of law?
The question corporate law asks is not “what is the purpose of the corporation,” but rather “whose interests prevail?” When the relevant decisionmaker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, which constituency wins?
That inquiry is operationalized mainly (if not entirely) via the law governing the fiduciary obligations of corporate directors and officers.
The relevant legal question thus is not “what is the corporate purpose” but rather “have the directors or officers violated their fiduciary duties by preferring the interests of one set of stakeholders over those of other sets?”
I’m going to elaborate on the debate in a series of posts:
Is Dodge v Ford Motor Company a close corporation/controlling shareholder case?
Case law on the fiduciary duty of directors to maximize the wealth of corporate shareholders
The shareholder wealth maximization principle versus non-shareholder constituency statutes
The shareholder wealth maximization norm
The relationship between the shareholder wealth maximization norm and the business judgment rule
Update: I continue the discussion started in this post, with a further explanation of why I think speaking of a corporate purpose leads one into the reification fallacy, in Is it useful to think about corporations as having a “purpose”?
Update on Delaware Forum Selection Bylaw Litigation
Lawsuits filed in Delaware challenging provisions in bylaws (as compared to charters) which require shareholder suits to be litigated exclusively in Delaware were previously highlighted on these pages. An update on the status of these lawsuits has been prepared by Bradley Voss on The Harvard Law School Forum on Corporate Governance and Financial Regulation.
Updated Statistics on M&A Litigation
Kevin LaCroix on The D&O Diary highlights an April 2012 report written by Stanford Business School Professor Robert Daines and Cornerstone Research Principal Olga Kourmian entitled “Recent Developments in Shareholder Litigation Involving Mergers and Acquisitions”.
Among the noteworthy, Delaware-related findings are the following:
- With respect to merger litigation involving Delaware corporations, the share of M&A lawsuits filed in Delaware was higher in 2011 as compared to 2007. However, challenges to the same deal in both Delaware and some other state(s) are now more common than in 2007.
- The report indicates that most M&A shareholder suits settle and often settle quickly, with the large majority only involving additional disclosures and not cash awards.
- In 2011, 96% of deals involving $500 million or more attracted litigation, but smaller deals also attracted litigation as well.
- The report also surveys the average fee awards in these suits.
Key Delaware Corporate and Commercial Decisions in First 4 Months of 2012
The following key Delaware corporate and commercial decisions from the first four months of 2012 are a follow-up to our summary of the key decisions that we featured from 2011. We highlight on these pages all the corporate and commercial opinions from Delaware’s Supreme Court and Court of Chancery, and we have chosen the following 2012 rulings as being especially noteworthy, as the month of April comes to a close. Comments are welcome if readers think we missed a decision that should be included in this list.
Supreme Court Decisions
EMAK Worldwide, Inc. v. Kurz, No. 512, 2011 (Del. Supr., April 17, 2012). Issue Addressed: Whether the Court of Chancery properly granted an interim fee award in a shareholders’ suit which did not produce an immediate monetary benefit. Short Answer: Yes. Summary available here. (The Supreme Court’s stately building in Dover is featured at right.)
Cambium Ltd. v. Trilantic Capital Partners, No. 363, 2011 (Del. Supr., Jan. 20, 2012. This Order of the Delaware Supreme Court applied the recent decision of Delaware’s High Court in the Central Mortgage case in which it clarified that Delaware has not adopted the federal standard for motions to dismiss under Rule of Civil Procedure 12(b)(6) as described in the U.S. Supreme Court’s Twombly and Iqbal decisions, despite the truism that the Delaware Rules of Civil Procedure are generally based on the Federal Rules of Civil Procedure. A fuller overview is available here. The recent Delaware Supreme Court decision in Central Mortgage taking this position was highlighted here.
Court of Chancery Rulings
Shocking Technologies, Inc. v. Michael, C. A. No. 7164-VCN (Del. Ch. April 10, 2012). Issue Addressed: Whether the Court of Chancery has the inherent authority to remove a director for breach of fiduciary duty, other than via DGCL Section 225? Short answer: The issue was not directly decided, but based on the facts of this case, the Court was not inclined to exercise such an inherent power, if such a power exists, prior to the expedited trial. Summary available here.
In Re K-Sea Transportation Partners LP Unitholders Litigation, C.A. No. 6301-VCP (Del. Ch. April 4, 2012). The prior Chancery decision in this case was highlighted on these pages here. Issues Addressed: The issues addressed by the Court of Chancery in this matter were whether the fiduciary duty claims and the contractual claims were barred by the provisions in the limited partnership agreement, including whether a provision in the agreement that established a presumption of good faith barred claims for breach of the implied covenant of good faith and fair dealing. Summary available here.
Manning v. Vellardita, C.A. No. 6812-VCG (Del. Ch. March 28, 2012), is an important decision of the Delaware Court of Chancery on legal ethics as applied to non-Delaware attorneys who appear before the Court pro hac vice. Issues Addressed: Whether lack of complete candor to the Court in a Motion for Admission Pro Hac Vice is a basis to either: (i) disqualify counsel, and/or (ii) revoke the admission pro hac vice. The Court also addressed standards (articulated in this context for the first time), of candor and full disclosure, regarding potential conflicts, that those seeking admission pro hac vice must now follow. Summary available here.
Badii v. Metropolitan Hospice Inc., C.A. No. 6192-VCP (March 12, 2012), involves a post-trial decision on an action under 8 Del. C. § 291 for the appointment of a receiver for an insolvent, closely held corporation, Metropolitan Hospice, Inc. (“MHI”) which owed, among other things, approximately $2 million to the IRS for back taxes, penalties, and interest. Summary available here.
In re Delphi Financial Group Shareholder Litigation, Cons. C.A. No. 7144 -VCG (Del. Ch. Mar. 6, 2012). This is the third Delaware Court of Chancery decision in as many weeks that denied injunctive relief, in an expedited opinion, in response to a challenged transaction–despite criticism in two of the cases, of the process and the players, but ultimately leaving it up to the shareholders to decide whether to accept offers of a substantial premium to sell their shares. Summary available here. See In Re El Paso, summarized here, and In Re Micromet, summarized here.
In Re El Paso Corporation Shareholder Litigation, Consol. C. A. No. 6949-CS (Del. Ch. Feb. 29, 2012). Chancellor Strine denied the stockholder plaintiffs request for a preliminary injunction to enjoin a merger between El Paso Corporation and Kinder Morgan, Inc. While the Court in a 33-page opinion, severely criticized the actions of a number of the players, in the end the Chancellor decided to give the shareholders of El Paso the opportunity to decide for themselves if they liked the price being offered to them. Summary available here. The Court’s opinion in this matter marks the second time in the span of only a few months that the Delaware Court of Chancery has strongly criticized Goldman Sachs for conflict of interest issues in multi-billion dollar transactions. The most recent high-profile criticism was in the Court of Chancery’s 100-plus page decision in the Southern Peru Copper case highlighted on these pages here. Our LexisNexis videocast on this opinion is available here.
Danenberg v. Fitracks, C.A. No. 6454-VCL (Del. Ch. Mar. 5, 2012), addressed important issues of advancement and indemnification and established a protocol for resolving the amount of fees payable pursuant to the grant of advancement rights. Summary available here.
Matthew v. Laudamiel, C.A. No. 5957-VCN (Del. Ch. Feb. 21, 2012). Apparently no prior Delaware law directly addressed the issue of whether the dissolution and cancellation of an LLC transformed derivative claims into direct claims held proportionately by the members of the LLC. The Court concluded that, after the filing of the certificate of cancellation, such claims must be brought in the name of the LLC by a trustee or a receiver appointed under 6 Del. C. Section 18-805, or directly by the LLC, or derivatively by its members after reviving the LLC by obtaining a revocation of its certificate of cancellation. Summary available here.
Hermelin v. K-V Pharmaceutical Company, C.A. No. 6936-VCG (Del. Ch., Feb. 7, 2012). Issues Addressed: The Court of Chancery addressed an issue of first impression in Delaware regarding: “what evidence is relevant to an inquiry into whether an indemnitee acted in good faith for the purposes of permissive indemnification” under DGCL §§145(a) and (b). The Court also addressed: (1) Whether the former CEO is entitled to mandatory indemnification as a matter of law; (2) Whether additional discovery is required to determine whether the former CEO acted in good faith (in which case he would be entitled to statutorily permissive indemnification pursuant to his rights under an indemnification agreement.) Summary available here.
Auriga Capital Corp. v. Gatz Properties LLC, C.A. No. 4390-CS (Del. Ch., Jan. 27, 2012). What this Case is About and Why it is Important: This case establishes a high-water mark in terms of providing the most comprehensive explanation, based on legislative history and a review of Delaware cases, to explain why the default standard in the LLC context is that fiduciary duty principles will apply to managers of an LLC unless those duties are expressly and clearly limited or eliminated in an LLC agreement. Summary available here.
Dweck v. Nasser, C. A. No. 1353-VCL (Del. Ch. Jan. 18, 2012), found that Dweck, the former CEO, a director and 30% stockholder in Kids International Corporation (“Kids”), and Kevin Taxin, Kids’ President, breached their fiduciary duties of loyalty to Kids by establishing competing companies that usurped Kids’ corporate opportunities and converted Kids’ resources. The Court also imposed liability on an officer of the company for approving the reimbursement with company funds of the personal expenses of his superior. Summary available here.
Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). Issue Addressed: This opinion addressed the issue of whether representative plaintiffs in a putative class action should be in sanctioned for trading on the basis of confidential information obtained in the litigation. The motion was granted. Summary available here.
Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch., Jan. 6, 2012). Issue Addressed: This decision speaks to the limitations imposed by 6 Del. C. § 17-1101 on Delaware courts to address sanctionable conduct by partners and members of alternate entities that have contracted away their fiduciary duties. Summary available here.
Paul v. China MediaExpress Holding, Inc., C.A. No. 6570-VCP (Del. Ch. Jan. 5, 2012). Issues Addressed: (1) Whether a Section 220 case should be stayed pending the outcome of a related federal securities suit; and (2) Whether the shareholder in this case established a proper purpose to inspect books and records under DGCL Section 220. Short Answer: (1) Based on a three-part test as applied to the facts of this case, the Court refused to stay this action in favor of a pending related federal securities suit, even though a motion to stay was also pending in the federal court. (2) In this post-trial opinion, the Court determined that the shareholder established a proper purpose and was entitled to the documents necessary to investigate that proper purpose. Summary available here.
Bonus
An important development during the first 4 months of 2012 was the promulgation by the Court of Chancery of its inaugural Practice Guidelines, highlighted here.
Supplement
Postscript: Professor Bainbridge kindly linked to this post on his blog.
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