Delaware Supreme Court Allows Federal Forum Clause in Charter

By Francis Pileggi on Posted in Delaware Supreme Court Updates

The Delaware Supreme Court recently issued a highly anticipated decision in Salzberg v. Sciabacucchi, No. 346-2019 (Del. Mar. 18, 2020).  Many law professors and other commentators have written much learned commentary and published extensive scholarly analysis of the issues raised in the Court of Chancery’s decision, and have opined on what the Supreme Court was likely to decide in this case–and how the commentators thought the appeal should be decided.  Moreover, I expect that there will be a flood of additional learned commentary and analysis about this decision in the near future.  See, e.g., recent analysis of the Supreme Court’s opinion in this case by Professor Bainbridge for the Washington Legal Foundation.

Therefore, I will only limit this post to a few highlights that should be an incentive to read all 53-pages of the court’s opinion, to which a full-length law review article could easily be devoted. The photo nearby features one of the oldest venues, the Roman Forum.

The highlights of the Chancery decision in this case can be found on these pages.

Federal Forum Clause at Issue:

Delaware’s High Court referred to the Federal Forum Selection Provisions in the certificate of incorporation of the several companies whose charter provisions were jointly challenged in this case.  In essence, the clauses purported to require that the U.S. Federal District Court would be the sole and exclusive forum for the resolution of any complaint arising under the Securities Act of 1933 and that any person purchasing shares of stock in the companies with those provisions consented to the forum selection provision.

Highlights of Court’s Analysis:

The court began its analysis with the text of Section 102 of the DGCL which governs matters contained in the certificate of incorporation.  The court emphasized that Section 102(b)(1) authorizes two broad types of provisions:  (i) Any provision for the management of the business and for the conduct of the affairs of the corporation; and (ii) Any provision creating, defining, limiting and regulating the powers of the corporation, the directors and the stockholders, or any class of the stockholders, . . . if such provisions are not contrary to the laws of this State.

The Delaware Supreme Court reviewed several key U.S. Supreme Court decisions and prior decisions of the Delaware Supreme Court, including the recent SCOTUS opinion in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138 S. Ct. 1061, which held that federal and state courts have concurrent jurisdiction over class actions based on the 1933 Securities Act and that such claims are not removable to federal court.

Highlights of Court’s Decision:

  • The court determined that DGCL Section 115 did no alter the scope of DGCL Section 102(b)(1). Section 115 was added as an amendment to the DGCL in 2015 and was intended to codify the Boilermakers Chancery decision to preclude a charter or bylaw provision from excluding Delaware as a forum for internal corporate claims.  Slip op. at 16-17.
  • The opinion employs general principles of statutory construction of widespread applicability and usefulness. See Slip op. at 18-24.
  • Readers will enjoy a “deep dive” into the internal affairs doctrine. The appellate analysis concluded that the Court of Chancery’s opinion defined “internal affairs” too narrowly. See Slip op. at 31-38.  See also footnote 124-126 and related text, referring to the internal affairs doctrine as a principle of “serious constitutional proportions; not just a conflict of laws matter.”
  • The decision features a thorough discussion of why Section 102(b)(1) is more expansive than Section 115–the latter focuses on internal corporate claims. See Slip op. at 38.
  • The court described the facial challenge of constitutionality in this matter and concluded that the provision at issue neither violated federal law nor federal policy. See Slip op. at 43.
  • Both Delaware case law and decisions of the U.S. Supreme Court were relied on for the well-established presumption of enforceability of forum selection clauses. See footnotes 136-139 and accompanying text.
  • Especially notable is footnote 169, which addressed a concern that many had during the appeal of this case: enforcing the federal forum provision in this matter would, perhaps by analogy, “open the flood gates” for arbitration clauses in charters. But the Supreme Court explained that at least in terms of forum selection clauses for claims involving Delaware corporate internal affairs, in part based on the synopsis of Section 115, such a concern was unfounded.

Issue of Equitable Dissolution of LLC Analyzed

By Francis Pileggi on Posted in Chancery Court Updates

There is a precious paucity of Delaware decisions that thoroughly and directly address the potential equitable dissolution of an LLC, as compared to a statutory dissolution of an LLC based on the LLC Act, but that situation has been ameliorated by the recent Delaware Court of Chancery decision in SolarReserve CSP Holdings LLC v. Tonopah Solar Energy LLC, C.A. No. 2019-0791-JRS (Del. Ch., Mar. 18, 2020).

This case is noteworthy, in part, because it is only the second decision to both thoroughly and directly address the somewhat esoteric issue of the equitable dissolution of an LLC–other than the Court of Chancery decision styled In re Carlisle Etcetera LLC, 114 A.3d 592 (Del. Ch. 2015). See also, Trusa v. Nepo Chancery decision highlighted on these pages.

Because this writer represents a party in the case, and the appeal period has not yet expired, the only point I want to publicly publish about this case at this time is that it is must reading for anyone interested in the latest iteration of Delaware law on those circumstances when the Court of Chancery, may, or may not, consider equitable dissolution of an LLC when the criteria of the LLC Act cannot be satisfied.

Delaware Supreme Court revives companies’ right to herd securities suits into federal courts

By Francis Pileggi on Posted in Delaware Supreme Court Updates

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

In a milestone opinion, the Delaware Supreme Court has ruled that the state’s corporation law permits Delaware chartered companies to designate the federal courts for all shareholder securities suits alleging disclosure violations in their initial and secondary public offerings in Salzberg et al. v. Sciabacucchi et al. No. 346-2019, opinion (Del. March 18, 2019).

The en banc court’s unanimous March 18 opinion reversed a Chancery Court decision that invalidated the exclusive forum selection clauses in Blue Apron Holdings Inc., Roku Inc. and Stitch Fix Inc.’s charters. 

Vice Chancellor Travis Laster’s ruling found that such bylaws wrongly barred stockholders from suing in state court over issues that were outside Delaware’s internal governance purview. Sciabacucchi v. Salzberg, 2018 WL 6719718, (Del. Ch. Dec. 19, 2018).

Herded into federal court

The widely-anticipated high court ruling effectively lets companies steer shareholder plaintiffs into federal court where charges under the federal Securities Act of 1933 must survive a procedural test of their substance.  The justices also said their decision would not interfere with federal law or the jurisdiction of other states because its effect was basically procedural.

The stakes in the defendant companies’ appeal of plaintiff Matthew Sciabacucchi’s victory in the Chancery Court were raised by the U.S. Supreme Court’s 2018 decision in Cyan v. Beaver County Employees’ Retirement Fund, in which the high court said 1933 Act securities claims could be filed in federal or state courts. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066 (2018).

That precipitated a surge of Section 11 disclosure actions in state courts, mandatory forum selection clauses in corporate charters and Sciabacucchi’s suit for a declaratory judgment invalidating the charter provisions of the three defendant companies in which he had invested.

Based on Boilermakers?

Vice Chancellor Travis Laster’s decision in the plaintiff’s favor was based on Boilermakers v. Chevron Corp. a ruling by former Chief Justice Leo E. Strine when he was on the Chancery Court bench.  Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)

Vice Chancellor Laster interpreted that ruling as holding that Delaware corporations could adopt a forum selection bylaw to regulate “internal affairs claims brought by stockholders qua stockholders,” but not “to regulate external relationships” such as securities law matters.

He held that Delaware General Corporation Law Section 102(b)(1) empowers companies to adopt bylaws only relating to the area of internal affairs, such as alleged violations of the duties of officers and directors, but not securities law claims.

The appeal

On appeal, the defendant companies led by William B. Chandler, of Wilson Sonsini Goodrich & Rosati — the former Delaware Chancellor — argued that Section 102(b)(1) has always been interpreted broadly to mean “for the management of the business”, even when that involves “intra-corporate” matters such as stock sales.

The defendant companies maintained that claims under Section 11 of the ’33 Act are indeed external an inappropriate for charter bylaws because they involve stockholders only in the role of purchaser or seller.

Definition too restrictive

However, the unanimous high court found the vice chancellor’s definition of internal governance to be too restrictive, noting that the U.S. Supreme Court had decided, in Matsushita Electric v. Epstein, that Delaware courts can settle claims subject to exclusive federal jurisdiction without violating federal law or policy. Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367, 377, 382 (1996).

Justice Valihura acknowledged that “intra-corporate” matters such as Section 11 disclosure claims are not at the heart of traditional corporate governance territory and might be close to the outer band of external matters in some respects.

She also noted the concern that Delaware’s endorsement of forum selection bylaws might be viewed by sister states as “an out-of-our-lane power grab,” but she said there is a strong argument that as a facial matter at least, it does not violate principles of “horizontal sovereignty” among states.

The high court reversed the declaratory judgment ruling and the $3 million fee award the plaintiff’s lawyers received for successfully invalidating the bylaws.

Delaware high court’s advice on state partnership law could block Sanofi whistleblower suit

By Francis Pileggi on Posted in Delaware Supreme Court Updates

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Supreme Court recently advised a federal appeals court that the state’s partnership law bars a limited liability partnership formed by three Sanofi-Aventis U.S. LLC employees from continuing a whistleblower action over allegedly false Plavix blood thinner marketing because one of them dropped out, in United States of America, et al. v. Sanofi-Aventis U.S. LLC, et al., No. 256-2019, certified questions answered (Del. March 17, 2020).

The March 17 opinion answered several certified questions of Delaware law posed by the United States Court of Appeal for the Third Circuit to help it decide whether to uphold the dismissal of an amended federal qui tam complaint against Sanofi, Bristol-Meyers Squibb Co. and Aventis, Inc. under the False Claims Act 31 U.S.C. § 3729.

A New Jersey District Court tossed the suit, agreeing with three defendant drug developers that the original plaintiff partnership died when a member left and that a revised partnership that filed a second amended complaint in the qui tam suit could not step into its shoes because it would be a “new party” in violation of the FCA’s “first-to-file” rule. In re: Plavix Marketing, Sales Practices and Products Liability Litigation (No. II) 315 F. Supp. 3d 817 (D.N.J. 2018), appeal docketed, No. 19-2472 (3d Cir. July 3, 2018)

The central appeal issue

A central appeal issue that the justices were asked to resolve was whether the state’s current partnership statute, the Delaware Revised Uniform Partnership Act, viewed the partnership as legally indistinct from its three members for all purposes because of its unique charter language.

Justice Karen Valihura’s opinion on behalf of the en banc high court ruled that:

·     The membership change caused the dissolution of the original partnership, which is not entitled to continue to prosecute the whistleblower action as part of a “winding up” process.

·     The second amended complaint was filed by a new plaintiff partnership, which appears to be now prosecuting the action.

·     It is not possible to determine, from the undisputed facts of the case, whether the new partnership inherited the litigation asset that might entitle it to file that second amended complaint in the underlying action.

If the Third Circuit adopts the position taken by the Delaware justices, the current qui tam plaintiffs could face an uphill battle to overturn the dismissal because the FCA’s first-to-file rule bars the “intervention” of a new private party to replace the original relator.

Blowing the whistle

Justice Valihura said two doctors and a Sanofi sales representative, acting as JKJ 2011 Partnership LLP, filed a November 2011 whistleblower complaint claiming the defendant pharmas hid key information about antiplatelet drug Plavix’s limited ability to prevent heart attacks and strokes.

A second amended complaint filed February 22, 2017 added new allegations of marketing misrepresentations, but by that time a new member had replaced one of the originals and the court asked the parties to brief the issue of whether JKJ was now a new partnership without standing.

The federal judge said although the DRUPA, under 6 Del. C. § 15-201, employed an “entity” approach that normally allowed membership changes without creating a new partnership, JKJ had expressly opted out of that provision and chose to be legally identical to its members under the “aggregate” form.

The District court therefore granted the defendants’ dismissal motion, reasoning that the new partnership that filed the second amended complaint was an intervenor.

Living with their choice

In their appeal, the plaintiffs argued that even if the new partnership had no standing, the original partnership’s members could continue the action as part of the winding up of its business, but in answer to the Third Circuit’s certified question on that issue, the high court said JKJ chose “not to be distinct from its members” and must live — or die — with that choice.

Besides, the underlying suit appears to have been taken over — validly or not — by the new partnership, the justices said.  But whether the right to litigate transferred to the new partnership “is a fact-based question that we cannot determine based on the undisputed facts” and “the dearth of case law in this area.”

More Closures in Delaware Due to Pandemic

By Francis Pileggi on Posted in Delaware Supreme Court Updates

Yesterday, on the same date as the announcement that the Governor of Delaware required the closure of “non-essential businesses” (that apparently is defined not to include law firms),  the Delaware Supreme Court ordered, in essence, all Delaware Courts closed to the public until April 15 (e.g., for in-person access) due to the pandemic that has nearly shutdown most of the U.S. and much of the world. This is a supplement to prior Standing Orders issued by Delaware Courts due to the Covid-19 coronavirus pandemic.

Today, the Chancellor of the Court of Chancery issued a “Statement” clarifying the impact on Chancery of the Supreme Court’s closure of in-person access to the Courts until April 15.

In sum, no trial dates beyond April 15 have been postponed and no existing filing deadlines or discovery deadlines have necessarily been suspended, though the Chancellor’s Statement today expressed that the Courts will be solicitous in extending deadlines, and the Court expects counsel and the parties to be cooperative–and to resolve any scheduling issues without Court involvement–in the tradition of professionalism that defines the Delaware Bar.

Delaware Supreme Court Declares Judicial Emergency Due to Coronavirus

By Francis Pileggi on Posted in Delaware Supreme Court Updates

By Delaware Supreme Court Order, effective March 16, 2020, Delaware’s high court declared a judicial emergency, following the Governor of Delaware declaring on Friday, March 13, a state of emergency due to the coronavirus, and also on the same day that President Trump proclaimed a National Emergency. The foregoing hyperlink provides the actual Court Order. One provision makes it easier for trial courts, in their discretion, to postpone trials and hearings at least for 30 days. This also follows Orders highlighted on these pages a few days ago in which each of the Delaware Courts announced policies to help those with symptoms of the virus address obligations to appear for court hearings, etc. Some of those have already been superseded by Orders effective on March 16, 2020, as noted below.

On March 16, 2020, the Court of Chancery issued “Standing Order No. 2” regarding the impact of the coronavirus on the court system, which supersedes Order No. 1 on the topic that was issued a few days ago. In sum, this latest Order provides for all Chancery hearings and trials to be help via telephonic or other electronic means, with exceptions allowable only upon demonstrably exigent need within the discretion of the presiding judicial officer. The Delaware Court system has devoted a specific page on their website to all its Orders relating to this National Emergency, including the Delaware Superior Court issuing an Order effective today, March 16, continuing all trials for 30 days.

Best wishes to my readers in these challenging times, and I hope you all stay healthy.

N.B. This post was updated and edited at about 2:25 p.m. EST

Delaware Courts’ Response to the Coronavirus

By Francis Pileggi on Posted in Chancery Court Updates, Delaware Supreme Court Updates

According to the World Health Organization this afternoon, and a televised announcement from the President of the United States this evening, a novel coronavirus (Covid-19) has now been declared to be a worldwide pandemic. Two other examples of how serious this situation is: The President announced a travel ban from most of Europe to the U.S. for the next 30 days, and the NBA just cancelled the rest of their season.

The Delaware Courts have responded by issuing Standing Orders addressing precautionary measures that direct litigants, their counsel, and others who participate in court proceedings about how to address requests for rescheduling, attendance at court hearings, etc., for those who have, or may have, the coronavirus.

In addition, a notice was distributed today that the public investiture ceremony for the newest Vice Chancellor for the Court of Chancery, The Honorable Paul Fioravanti, scheduled for next week, has been postponed due to this public health risk–although His Honor has been sworn in already and is “on the job”. Prior to his recent ascension to the bench, he was a well-respected corporate litigator for many years. Now he is a well-respected jurist. We wish him all the best, and many years of health and prosperity.

The Delaware Supreme Court issued a Standing Order this week regarding how to address the impact of the coronavirus on Court proceedings.

The Court of Chancery also issued a Standing Order on the topic, and the Delaware Superior Court likewise has published a Standing Order with precautionary measures and instructions for how to address obligations to the Court if you have the coronavirus, or have been exposed to it. [Editor’s Note: Both of the foregoing Orders were superseded by Orders effective on March 16 that were also highlighted on these pages.]

As an aside, last Thursday and Friday many members of the Delaware Bar who practice corporate litigation (including yours truly), as well as members of the Delaware Supreme Court and Delaware Court of Chancery, attended the 32nd Annual Tulane Law School Corporate Law Institute in New Orleans, as they have done since the seminar was started by a former Delaware Supreme Court justice. Occasional reports from the seminar over the last 15 years have appeared on these pages. Even though the seminar attracts lawyers from all over the U.S. and other countries, a large percentage of the 600-plus attendees are from Delaware. I only mention this as part of this short post because I hope that those of us who attended this public gathering as well as the several dinners and cocktails parties related to the seminar, did not spread any germs (myself included.) I didn’t notice anyone who had obvious symptoms.

Claims by Long-Term Close Friend Proceed Against Faithless Business Partner

By Francis Pileggi on Posted in Chancery Court Updates

A recent Delaware Court of Chancery opinion discussed the nuances of an unusual personal and business relationship, akin to a “familial intimacy”, that formed the basis for the court to conclude that a fiduciary relationship could be proven at trial.  See Bamford v. Penfold, L.P., C.A. No. 2019-0005-JTL (Del. Ch. Feb. 28, 2020).

Short Overview:

The court provides a detailed and scholarly legal analysis about the specific factual circumstances based on which the court may conclude that a fiduciary relationship might be found–beyond the more common fiduciary roles, such as a corporate director.  This 74-page opinion also provides eminently quotable citations to authority and quotable statements of the law in connection with a case involving claims against a former long-term close friend who turned out to be a beguiling business partner.  The court determined that at least some of the claims would not be dismissed at the motion to dismiss stage based on the standards of Rule 12(b)(6).

The court’s opinion provides a wealth of recitations of legal principles of great importance and widespread relevance to commercial litigators.  Among the more memorable and consequential nuggets of widespread application include the following:

Criteria to Find Existence of a Fiduciary Relationship:

The plaintiff in this case alleged that a fiduciary relationship existed based on:  (i) the role of the defendant as a trusted financial advisor; and (ii) the long-term, very close personal and business friendship that rose to the level of “familial closeness.”  For example, each of the two friends were godfathers to each other’s child.  See pages 16-17.

The court describes in detail the multiple factors and many factual details that support the court’s finding–for purposes of this motion to dismiss–at this early stage, that a fiduciary relationship creating a fiduciary duty could be proven at trial based on the allegations made. 

The court’s analysis at page 18-24 deserves careful reading on this point, and the court’s insights into Delaware law on this topic should be included in the toolbox of every litigator who may have occasion to analyze whether a particular relationship has the necessary attributes for a court to find that a fiduciary relationship exists.

Elements of a Claim for Common Law Fraud:

Although the elements of a common law fraud claim are well-known, the court’s description of the specificity required by Chancery Rule 9(b) are useful as a reminder of the nuances involved.  See pages 24 to 27.

Requirements of an Effective Anti-Reliance Clause:

Many cases have been highlighted on these pages that address the consequential legal principles that determine whether the exact wording of an anti-reliance clause will be sufficient to bar claims based on extra-contractual statements.  This opinion explains with copious citations to cases and learned commenwhat the prerequisites are for an effective anti-reliance clause that will be upheld when sophisticated parties negotiate those terms in an agreement.  See page 31 to 36.  See, e.g., Praire Capital case, highlighted on these pages, cited by the court as an anti-reliance clause that was upheld.  But cf. the Chancery decision in the Anvil case, highlighted on these pages, that did not meet the test of enforceability.  See also footnote 7 which refers to the court’s admonition that an anti-reliance clause cannot be used to take advantage of an unsophisticated party.  See pages 31 to 36.

Fiduciary Duty of Disclosure:

The court describes those situations when silence in the face of a duty of disclosure by a fiduciary could create liability.  See pages 41 to 48.

Double-Derivative Claim in LLC Context:

Delaware decisions addressing the nuances of a double-derivative claim are not numerous by comparison to cases that address the requirements for a single-derivative claim, but the court in this opinion explains why a double-derivative claim is permissible in the LLC context. 

The court also provides a journey into the dark history of the “continuous ownership requirement” for derivative suits, and its exceptions, and refers to many scholarly sources that provide support for its reasoning why, based on the facts of this case, the continuous ownership requirement was not a bar to the claims in this matter.

Supreme Court Provides Guidance on Amicus Briefs

By Francis Pileggi on Posted in Delaware Supreme Court Updates

Other than the relatively sparse wording of Rule 28 of the Delaware Supreme Court on the topic, there is a relative paucity of commentary or case law to provide practical, detailed guidance on the requirements for obtaining approval to file an amicus curiae brief before the Delaware Supreme Court, and related instructions for the permissible contents of the brief are.  A recent Order from the Delaware Supreme Court in the matter styled: In re Solera Insurance Coverage Appeals, Nos. 413-2019; 418-2019 (Del. Supr., Feb. 28, 2020), cites to the two leading Supreme Court opinions that provide some guidance, but this recent Order also provides additional guidance and explains why the motion to file an amicus curiae brief was denied.

For example:  A proposed amicus curiae  brief cannot: (i) raise an issue not included in the Opening Brief; (ii) duplicate arguments already made in the parties’ briefs; or (iii) fail to provide “unique supplemental assistance” in a case involving a question of “general public importance.”

Chancery: AmTrust squeeze-out must face stiff review after failing MFWcontrolling shareholder test

By Francis Pileggi on Posted in Chancery Court Updates

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently ruled that AmTrust, Inc.’s controlling shareholders’ go-private buyout of the insurer must be reviewed under the harsh light of the entire fairness standard because three of its four special committee directors who negotiated the deal may have had a material self-interest in the transaction, in the matter styled In re AmTrust Financial Services Inc. Litigation, No. 2018-0396-AGB (Del. Ch., Feb. 26, 2020).

Chancellor Andre G. Bouchard’s February 26 opinion denied motions by three controlling shareholders and three members of AmTrust’s special committee to dismiss consolidated shareholder suits that accused the directors of disloyally approving an underpriced squeeze-out because it would squelch a previous suit against them.

Five out of six won’t do

The Chancellor found that the possible conflict of interest prevented the 2018 buyout from getting the benefit of the doubt under the deferential business judgment rule because it could not pass the six-part MFW test the Delaware Supreme Court prescribed for controlling stockholder squeeze-outs in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014)(MFW case).

He allowed plaintiffs’ breach of duty claims against the three controlling shareholders and three directors who were on the negotiating committee to survive, but dismissed a fourth committee member director who faced no liability in a previous action, and tossed aiding and abetting charges against a private equity buyout partner.

The challenged transaction was the second step in a two-step squeeze-out merger in which the controlling shareholders and their private equity company backer initially proposed to acquire the remaining shares of AmTrust for $12.25 with the approval of a special director committee and a majority of the minority shareholders.

CEO and Chairman of the Board Barry D. Zyskind and directors George and Leah Karfunkel collectively controlled 55% of AmTrust’s shares, which meant the deal would be subject to increased scrutiny under Delaware General Corporation Law if it didn’t meet those two conditions.

Those two conditions could, under the right circumstances, cleanse the deal of the taint of controlling shareholder self-interest but the $13.50 a-share offer the special committee approved drew criticism from major shareholders such as financier Carl Icahn, and a scheduled shareholder vote was cancelled.

Icahn’s deal sparks suit

However, one day after the cancelled meeting, Icahn met with two of the controlling shareholders – but without the special committee –and he agreed to support a $14.75 per share bid, which the special committee and 67.4% of the minority shareholders approved, the court said.

Numerous stockholders who had been forced to give up their shares in the squeeze-out filed later-combined lawsuits; and the defendants, including special committee members Donald T. DeCarlo, Abraham Gulkowitz, Susan C. Fisch and Raul Rivera, moved to dismiss.

The court said DeCarlo, Gulkowitz and Fisch were also defendants in a previous shareholder action by AmTrust shareholder Cambridge Retirement System for allegedly usurping a corporate opportunity in dealing with Tower Group International, Ltd.   Cambridge Retirement System v. DeCarlo, et al., No. 10879 complaint (Del. Ch. April 2015).  He noted that the three did not move to dismiss that suit, which is still pending.

If the company that Cambridge sued was merged out of existence in the buyout, Cambridge would lack derivative standing and face a tough challenge to continue its litigation against the three directors in the previous action.

Six criteria for business judgment shield

In response to the controlling shareholders’ motion to dismiss, the Chancellor said to qualify for business judgment review, a controller buyout must meet six conditions:

  • Special committee of directors and majority of the minority shareholder approval
  • A fully-independent special committee
  • The special committee must be empowered to freely select its own advisors and to say “no” definitively
  • The special committee must meet its duty of care in negotiating a fair price
  • The minority vote must be fully informed
  • There is no coercion of the minority.

The Chancellor said he only needed to address a single condition to defeat reliance on the MFW standard because “plaintiffs have pled a reasonably conceivable set of facts that the second condition has not been satisfied based on the complaint’s allegations that three of the four members of the special committee had material self-interest in the transaction.”

Further, he said the MFW framework “was intended to ensure not only that members of a special committee must be independent in the sense of not being beholden to a controlling stockholder but also that the committee members must have no disabling personal interest in the transaction at issue.”

Liability on their minds?

Here the plaintiffs have pled that the three directors were aware that they faced the derivative claim when they were considering the transaction and that potential liability was material to them, the court said, because they faced a possible settlement claim of between $15 and $25 million.

Since the controlling shareholders – who collectively held 55% of AmTrust – would not be likely to take up the Cambridge action after the go-private move, the squeeze-out would likely end the director’s liability, the Chancellor concluded.

He dismissed aiding and abetting a breach of duty charges against Stone Point Capital LLC, finding it was not enough to allege that the private equity company knew the special committee directors faced liability if the buyout was not approved.

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