This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans
A recent article in Law 360 surveys three recent opinions in which the Court of Chancery rejected the Corwin cleansing doctrine in the merger context, in which the directors’ misconduct created various forms of coercion upon the stockholders. The article entitled When Delaware Courts May Reject Corwin Cleansing: Some Clarity (July 13, 2017) (sub. req.), reviews the Court of Chancery’s refusal to apply the Corwin cleansing doctrine through the lenses of situational coercion, structural coercion, and extraneous bad acts.
The article discusses cases that explicate when director misconduct cannot be cleansed by the affirmative majority vote of the fully informed, non-coerced stockholders in favor of a merger. In Saba Software Stockholder Litigation, C.A. No. 10697-VCS (April 11, 2017), Vice Chancellor Slights found inapplicable Corwin’s cleansing effect due to the board’s ongoing pattern of failing to restate financial statements to account for past fraudulent activity. As a result, the Court found that the stockholders had no choice but to approve a merger at a fire sale price. In Sciabacucchi v. Liberty Broadband Corp., C.A. No. 11418-VCG (May 31, 2017), Vice Chancellor Glasscock refused to apply Corwin to cleanse the directors’ linkage of the approved merger with an equity award to the corporation’s largest stockholder. Notably, the Court found that plaintiffs had adequately pled that alternative financing was available. Last, in In re Massey Energy Company Derivative and Class Action Litigation, C.A. No. 11418-CB (May 4, 2017), Chancellor Bouchard refused to apply Corwin because the directors’ misconduct was “unrelated” and “extraneous” to the merger at issue and therefore could not be cleansed by a majority vote of the stockholders.