Top Ten 2013 Delaware Corporate and Commercial Decisions
By: Francis G.X. Pileggi and Kevin F. Brady
This is our ninth annual review of key Delaware corporate and commercial decisions. During 2013, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. Among the decisions with the most far-reaching application and importance during 2013 are the “top ten” that we are highlighting in this short overview. Prior annual summaries are linked in the right margin of this blog. (The Supreme Court’s stately building in Dover is featured in the photo from the Court’s website.)
Whenever a “Top Ten” list is prepared, there remains a risk of omitting some opinions that also are noteworthy, so we encourage readers to send us suggestions for additions to this list. Hyperlinks below lead to both a synopsis and each slip opinion. Of course, all the opinions we reviewed in 2013 are available on this blog for those who would like to read all of them and make their own list. In chronological order, the winners are:
Supreme Court Determines that There is No Fiduciary Duty to Structure Executive Compensation to Take Advantage of Corporate Tax Deduction. Freedman v. Adams. This decision is another example of how difficult it remains to challenge compensation decisions on the basis of Delaware corporate law.
Supreme Court Enforces Duty to Negotiate in Good Faith. SIGA Technologies v. PharmAthene. Most lawyers will be surprised to know that an obligation to negotiate can be enforced in Delaware even when a term sheet is not complete or final.
Supreme Court Upholds Presumption of Good Faith in Agreement to Bar Claims. Norton v. K-Sea Transportation. This is one of many recent examples where an LP agreement waived all duties except the non-waivable implied duty of good faith, but the agreement also created a presumption of good faith that made it almost impossible to challenge wrongdoing. N.B. Waivers will be enforced. Read before signing to know what duties and rights are being waived.
Chancery Clarifies Fiduciary Duty of Disclosure Owed by Directors and Majority Shareholders when Purchasing Shares or Selling Shares to Existing Shareholders. In re: Wayport, Inc. Litigation. This opinion provides a textbook-style explanation of the duty of disclosure in general, as well as in the context of selling and buying shares among existing shareholders.
Supreme Court Establishes New Standard for Trial Courts to Determine Appropriate Penalty when Pretrial Deadlines are Not Met. Christian v. Counseling Resource Associates, Inc. This is a must-read for lawyers (and their clients) to understand when court approval is needed to extend pre-trial deadlines and the consequences of missing pre-trial filing deadlines.
Chancery Emphasizes Duty of Oversight Owed by Directors Includes Corporate Operations in Foreign Countries. Rich v. Chong and Puda Coal and In re: China Agritech, Inc. Shareholder Derivative Litigation. This trio of decisions, all involving operations in China of Delaware corporations, should worry directors of companies with far-flung operations in distant countries unless they make visits to those countries or otherwise make themselves sufficiently aware of those operations.
Business Judgement Rule Announced as Standard Applicable to Controlling Shareholder Transactions with Safeguards. In Re MFW Shareholders Litigation. This iconic Chancery decision provides a clear standard to practitioners who formerly had less definitive guidance (and multiple conflicting standards) to advise clients on the standard that would apply in Delaware to controlling shareholder freezeouts. This decision was appealed and on December 18, 2013, the Supreme Court heard oral argument en banc. When that decision is published, we will highlight it.
Chancery Addresses Whether Notice Required Before Board Ousts CEO/Controlling Shareholder. Klaassen v. Allegro Dev. Corp. et al.,. This Chancery decision is the subject of an expedited appeal to the Delaware Supreme Court. Among the issues to be addressed by Delaware’s high court is whether the actions of a board to dismiss the CEO, who also had voting power over a controlling percentage of shares, are void — as compared to voidable. The trial court opinion considering a motion for a stay pending appeal provides a mini-treatise on the Delaware law applicable to notice requirements for board meetings and the consequences of ineffective notice. The opinion is also must-reading for anyone interested in the proper approach to contests for control among warring factions of dissident directors and competing shareholder groups.
Supreme Court Addresses Business Combination Not Requiring Shareholder Vote. Activision Blizzard Inc. v. Hayes, et al., No. 497-2013, order issued (Del. Oct. 10, 2013). In a rare ruling from the bench, after oral argument, the Delaware Supreme Court reversed an injunction granted by the Court of Chancery in Hayes v. Activision Blizzard Inc., No. 8885, 2013 WL 5293536 (Del. Ch. Sept. 18, 2013). The formal written Supreme Court opinion was issued on Nov. 15, 2013. The issue addressed was whether the structure of the deal qualified as the type of business combination that required a vote by public shareholders. In a unanimous ruling, Delaware’s high court ruled that no vote was required. Notably, merely a month or so transpired between the date of the complaint being filed and the Supreme Court’s oral ruling after its review of an injunction that was issued by the trial court. Especially in a major case like this, that remains remarkable celerity.
Chancery Addresses State Insider Trading Claims Twice in Two Weeks (Two cases tied for the last spot in top ten list). In re Primedia, Inc. Shareholders Litigation. In connection with discussing the elements of the claim, this opinion addressed whether equitable tolling of the state insider trading claim applied to extend or suspend the statute of limitations. In Silverberg v. Gold, for the second time in as many weeks, a state insider trading claim, called a Brophy claim in Delaware, was analyzed in a Chancery opinion. This 40-page decision denied a motion to dismiss based on an alleged failure to make pre-suit demand on the board.