13th Annual List of Key Delaware Corporate and Commercial Decisions for 2017

This is the 13th year that I have created an annual list of the key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. I chose the following rulings from among the more than 100 corporate and commercial decisions that have been highlighted on this blog over the past 12 months. There were many more decisions of those two courts in 2017 that are not covered on these pages, but I have selected notable decisions that should be of widespread relevance to those who toil in the corporate and commercial litigation field, as well as others who follow the latest Delaware developments in this area of the law.

Well-versed readers could easily select different decisions for this annual review, and I invite suggestions for additions that might be added to the list, although the challenge is to avoid making the list too long. I have omitted some decisions, such as the Supreme Court’s important Dell appraisal ruling, and others that have already been widely written about in legal publications and other mass media outlets, so additional coverage of them in this list did not seem necessary. (Prior annual reviews are available at the link in the right margin of this blog.) Best wishes for a happy and healthy 2018.

Delaware Supreme Court Decisions

City of Birmingham Retirement and Relief System v. Good, No. 16-2017 (Del. Supr., Dec. 15, 2017).
This split decision of the Delaware Supreme Court is required reading for anyone who seeks to understand the nuanced standards for demand futility in the context of a Caremark claim. In light of the majority of the directors in this case being independent, the court determined that there was an insufficient showing of bad faith. A synopsis of this decision and a link to the full opinion is available at this hyperlink. Cf. Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017) (highlighted on these pages, addressing a nearly identical legal issue).

In re Investors Bancorp, Inc., Stockholder Litigation, No. 169, 2017 (Del. Supr. Dec. 13, 2017; revised Dec. 19, 2017).
The Delaware Supreme Court, for the first time in many decades, explicitly clarifies Delaware law on stockholder ratification of directors’ actions and the prerequisites that must be satisfied. This restatement was in the context of a challenge to the directors’ award to themselves of generous compensation packages pursuant to an Equity Incentive Plan. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Bridgeville Rifle and Pistol Club, Ltd. v. Small, No. 15, 2017 (Del. Supr., Dec. 7, 2017).
Although this decision does not fall within the category of corporate and commercial litigation, the superseding noteworthiness of this ruling is based on a bedrock principle of transcending relevance to any lawyer or student of the law. This 143-page opinion (including the dissent) involves the natural right to self-defense that every person is born with and includes a scholarly analysis of the inseparable right to bear arms under the Delaware Constitution. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Brinckerhoff v. Enbridge Energy Company, No. 273, 2016 (Del. Supr., Mar. 20, 2017; revised Mar. 28, 2017).
This decision of Delaware’s high court is necessary reading for anyone who seeks to understand the latest iteration of Delaware law on contractual fiduciary standards and the requirements for waiving fiduciary duties in the alternative entity context. This opinion also discusses equitable remedies that may be available for breach of contract, and it should also be read in conjunction with the Supreme Court’s 2017 Dieckman opinion, highlighted on these pages. I also wrote an article for Directorship magazine about the Brinckerhoff case. A synopsis of the Brinckerhoff decision and a link to the full opinion is available at this hyperlink.

The Williams Companies, Inc. v. Energy Transfer Equity, L.P., No. 330, 2016 (Del. Supr., Mar. 23, 2017).
The Supreme court explains in this opinion the concept of “commercially reasonable efforts,” sometimes compared to “reasonable best efforts,” and the challenging application of those phrases to various fact patterns. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dieckman v. Regency GP LP, No. 208, 2016 (Del. Supr., Jan. 20, 2017).
The Delaware Supreme Court in this opinion discusses the implied covenant of good faith and fair dealing in the context of a limited partnership agreement that waives all fiduciary duties. This decision should be read in conjunction with the 2017 Supreme Court decision in Brinckerhoff . A synopsis of the Dieckman decision and a link to the full opinion is available at this hyperlink.

Delaware Court of Chancery Decisions

Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017).
This Chancery decision provides a scholarly and practical explanation of the onerous prerequisites that must be satisfied before a Caremark claim will meet the rigors of the demand futility analysis. This decision should be read in conjunction with the 2017 Supreme Court decision, highlighted on these pages, in City of Birmingham Retirement and Relief System v. Good. A synopsis of the Oklahoma decision and a link to the full opinion is available at this hyperlink.

HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017).
This Delaware Court of Chancery opinion discusses the general enforceability of a “survival clause” which provides a contractually shortened period of time by which claims referenced in the contract must be made. The court also discusses the general enforceability of statutes of limitation shortened by contract. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dollar Tree Inc. v. Dollar Express LLC, C.A. No. 2017-0411-AGB (Del. Ch. Nov. 21, 2017).
This Chancery opinion discusses the important standards that apply to a motion to disqualify counsel due to an alleged conflict of interest and an alleged breach of the applicable Rules of Professional Conduct. Importantly, the court applies the well-settled Delaware law that a simple violation of a rule of legal ethics is not, in and of itself, sufficient to disqualify counsel. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

McKenna v. Singer, C.A. No. 11371-VCMR (Del. Ch. July 31, 2017).
This Chancery opinion addresses a not uncommon situation where a co-founder of a start-up entity claims that another co-founder stole the idea for the new company, and launched a separate venture with a different party. This opinion addresses the claim for an interest in the separate start-up venture and related fiduciary duty claims. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017).
This opinion addresses the statutory requirements for a valid stockholder voting agreement and what the limitations are on “selling a vote.” Standards by which director compensation packages will be reviewed is also analyzed. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017).
This Chancery decision clarifies the distinction between defective corporate acts and unauthorized corporate acts, as well as the sections of the Delaware General Corporation Law that allow for both a self-help provision in some circumstances, as well as a method to seek judicial imprimatur for certain corporate transactions that did not follow the proper corporate formalities for approval. See DGCL Sections 204 and 205. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. April 19, 2017).
This Court of Chancery opinion explains an important principle that corporate and commercial litigators need to remember: A derivative claim in the LLC context must satisfy the same requirement of pre-suit demand futility as required in the corporate context. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Doctors Pathology Servs., PA v. Gerges, C.A. No. 11457-CB, transcript (Del. Ch. Feb, 15, 2017).
This opinion provides practice tips for the most effective way to present a motion to compel discovery to the court, and the consequences for not following best practices in connection with discovery responses. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 13, 2017).
This Chancery opinion discusses the criteria that must be satisfied before the court will appoint a custodian of a company that is deadlocked due to stockholder and director dysfunction as provided in DGCL § 226(a). A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017).
This opinion addresses a situation where a director conceivably could be indemnified for fees incurred in pursuing an affirmative claim as compared to the more typical situation where indemnification is sought for reimbursement of fees incurred to defend a claim successfully. See DGCL § 145. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

UPDATE: Friend of the blog, Prof. Stephen Bainbridge, a prolific corporate law scholar often cited in Delaware opinions, has linked to this post.

Violations of Directors’ Fiduciary Duty of Disclosure May Require Nominal Damages

A recent decision from the Delaware Court of Chancery examines the liability that directors may face for failing to fulfill their fiduciary duty of disclosure to stockholders—including mandatory nominal damages when the violation causes “impairment of economic or voting rights.” In Chatham Asset Management, LLC v. Papanier, C.A. No. 2017-0088-AGB (Del. Ch. Dec. 22, 2017), the court addressed claims related to a Tender Offer by a casino company called Twin River Worldwide Holdings, Inc. to purchase up to 250,000 shares of its common stock.

Background: The claims related to certain officers and directors allegedly making materially false and misleading statements in the Offer to Purchase in connection with the sale of their shares related to the Tender Offer. The Offer to Purchase did not indicate that the insiders would be promptly selling their shares.

Key Principles of Law: The court explained the fiduciary duty of disclosure that all directors must comply with. Namely: “directors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board’s control when it seeks shareholder action.”  Relying on U.S. Supreme Court case law, prior Delaware decisions have held that a fact is material if “there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

The core of the disclosure claim in this case was that the purpose of the Tender Offer as stated in the Offer to Purchase was not accurate–to the extent that certain officers and directors intended to sell their shares immediately in connection with the Tender Offer but that was not clearly stated.

Compensatory v. Nominal Damages:

Compensatory damages for a disclosure claim are only available when a complaint pleads facts showing that “the damages are logically and reasonably related to the harm or injury for which compensation is being awarded. Put differently, a failure to disclose material information will not provide a basis for compensatory damages from defendant directors absent proof of:  (i) a culpable state of mind or non-exculpated gross negligence, (ii) reliance by the stockholders on the information that was not disclosed, and (iii) damages proximately caused by that failure.” See footnote 40.

Nominal damages, by comparison, are subject to a different analysis. The Delaware Supreme Court was cited in this decision for the statement of law that when there is a violation of a duty of disclosure of directors:  “. . . there must at least be an award of nominal damages where directors have breached their disclosure duties in a corporate transaction that has in turn caused impairment to the economic or voting rights of stockholders.” (emphasis added) See footnote 43.

Holding:

The court held that based on the facts presented, there was a reasonably conceivable claim for nominal damages, at the motion to dismiss stage, because it was adequately alleged by a stockholder that it was forced to tender its shares for stock prior to an increase in the stock price, thereby impairing its economic rights. If the stockholder prevailed on its disclosure claim after trial, an award of nominal damages would serve the “purpose of declaring an infraction” of the rights of the stockholder and the commission of a wrong. See footnote 45.

Postscript:

This decision is of practical importance because in the context of disclosure claims, establishing damages that were proximately caused by the disclosure is not often easy to do, and this decision explains that at least nominal damages are required if a disclosure claim is proven to have caused “impairment to the economic or voting rights of the stockholder.” See footnotes 42 and 43.

Chancery Partially Denies Books and Records Request

This post was prepared by Brian E. O’Neill, Esq. of Eckert Seamans.

The Court of Chancery recently granted, in part, a request for books and records–largely based on the LLC’s operating agreement with respect to items subject to mandatory production, but denied the request for most of the items subject to discretionary production. In Aloha Power Company, LLC v. Regenesis Power, LLC, C.A. No. 12697-VCMR (Del. Ch. Dec. 22, 2017), Vice Chancellor Montgomery-Reeves addressed a limited liability company member’s books and records request pursuant to a provision in the governing operating agreement.

Background: Aloha Power Company (“Aloha”), a member of Regenesis Power, LLC (“Regenesis”), sought records in connection with an ongoing dispute between the parties.  Aloha requested from Regenesis various financial statements, ranging from income and balance sheets to general ledgers and operating statements, as well as records related to each member of the company and records related to the internal affairs of the company for the previous four years.

Regenesis’s operating agreement contained a “books and records” provision that closely tracked the language contained in 6 Del. C. § 18-305 of the Delaware Limited liability Company Act.  The books and records provision contained a mandatory provision for inspection and production of certain records, including financial statements and records necessary for the members to prepare their tax returns.  The Court granted plaintiff’s requests with respect to these records.

The books and records provision also contained a discretionary category of documents “for purposes reasonably related to the interest” of Aloha as a member of the company. Similar to 6 Del. C. § 18-305(a), the discretionary provision required the demanding party to demonstrate a proper purpose for the request.

Aloha argued that its purpose for the operating statements and general ledgers related to its need to: (1) value its membership interest in Regenesis; (2) understand the dilution of its membership interest; and (3) investigate mismanagement. Regensis countered that the request was made solely to harass Regenesis.

Analysis: The Court noted that the burden to demonstrate a proper purpose rests with the plaintiff.  The Court found Aloha’s arguments for inspection of operating statements and general ledgers unpersuasive, and concluded that the production of income statements and balance sheets satisfied Aloha’s stated purposes.  Accordingly, the Court denied Aloha’s request for the operating statements and general ledgers.

The Court granted Aloha’s request to inspect records related to each member’s ownership interest, including capital contribution accounts, finding that such records relate to the valuation of Aloha’s membership interest.

The Court denied Aloha’s request for documents related to the internal affairs of the company. The Court found that such documents, though plausibly related to the investigation of mismanagement, do not overcome the familiar standard that “ a mere statement of a purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad books and records inspection relief.”

Lastly, the Court awarded Aloha its request for attorneys’ fees based on a contractual fee-shifting provision. The operating agreement stated that a prevailing party shall be entitled to “reasonable actual attorneys’ fees and expenses” with respect to disputes between the company and members.  The Court held that Aloha was the prevailing party because it was granted some of its requested relief.

Takeaway: The Delaware Court of Chancery continues to require more than a generalized and vague allegation of mismanagement when considering a broad books and records request to investigate corporate wrongdoing. Notably, in the LLC context, the Court of Chancery also continues to defer to the contractual terms of an operating agreement in assessing such a books and records request, as well as whether to award attorneys’ fees.

Chancery: Demand Futility Not Shown in Context of Caremark Claims

A recent decision of the Delaware Court of Chancery provides a scholarly and practical explanation of the onerous prerequisites that must be satisfied before a Caremark claim will meet the rigors of the demand futility analysis in order to justify the absence of pre-suit demand on the board.

The 82-page decision in Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017), deserves to be read in its entire glory for an understanding of the important factual nuances, but for purposes of this short blog post I will highlight several of the most important legal principles with the widest applicability.

Background Facts: This lengthy opinion describes in great detail the important and extensive facts that are a necessary part of the reasoning and conclusion of the court.  The court praised the plaintiffs for using Section 220 and producing “a ponderous omnibus of a complaint.”

But, unfortunately for the plaintiffs, notwithstanding the extensive details alleged and the incorporation of many documents by reference, the complaint failed to demonstrate that it was reasonably conceivable that the directors acted in bad faith.

Key Principles Explained: One of the most noteworthy aspects of this decision was the comprehensive explanation of the many shades and hues that are part of the challenging prerequisites that need to be met in order to plead a successful Caremark claim.  The court described the following key principles involved in a Caremark claim:

  • The essence of a Caremark claim is an attempt by the owners of the company, its stockholders, to force the directors to personally make the company whole for the losses suffered when the corporation violates laws or regulations and as a result is subject to fines or penalties.
  • Caremark claims often involve the following two situations: (1) When directors fail to install a system whereby they may be made aware of and oversee corporate compliance with law; or (2) Where the board has an oversight system in place, but nonetheless fails to act to promote compliance. In the latter situation, the directors may be liable only where their failure to act represents a non-exculpated breach of duty.
  • Where the directors are on notice of systemic wrongdoing but nonetheless act in a manner that demonstrates a reckless indifference towards the interests of the company, they may be liable for a breach of duty of care, but in order to be liable when an exculpation clause applies, the inaction of directors in the face of “red flags” putting them on notice of systemic wrongdoing must implicate the duty of loyalty. To imply director liability, the response of the directors must have been in bad faith. That is, the inaction must suggest not merely inattention, but actual scienter. In other words, the conduct must imply that the directors are knowingly acting for reasons other than the best interests of the corporation. The court describes this as the “essence of a Caremark claim.” See footnotes 2, 3 and 4.

Demand Futility in the Caremark Context: The court explained that the well-known pre-suit demand requirements of Rule 23.1 require particularized facts showing that demand would have been futile. These stringent requirements differ substantially from the permissive notice pleadings governed solely by Chancery Rule 8(a).

  • Because director inaction is involved in a Caremark claim alleging violation of oversight duties, the applicable test is found in Rales v. Blasband, 634 A.2d 927 (Del. 1993)–as compared to the Aronson test.
  • In the context of a Caremark claim, a plaintiff must allege facts “that allow a reasonable inference that the directors acted with scienter which, in turn, requires not only proof that a director acted inconsistently with his fiduciary duties, but also more importantly, that the director knew he was so acting. See footnote 251.
  • The court added that one way to establish a connection between the red flags ignored by the board and corporate trauma, is to allege facts suggesting that “the board knew of evidence of corporate misconduct—the proverbial red flag—yet acted in bad faith by consciously disregarding its duty to address that misconduct.” See footnotes 255 and 256 (emphasis added).
  • Moreover, the corporate trauma in question “must be sufficiently similar to the misconduct implied by the red flags such that the board’s bad faith, conscious inaction proximately caused that trauma. See footnote 258.
  • In a particularly quotable portion of the court’s reasoning, the court emphasized that when the duty of loyalty is at issue: “A board’s efforts can be ineffective, its action obtuse, its results harmful to the corporate weal, without implicating bad faith. Bad faith may be inferred where the directors knew or should have known that illegal conduct was taking place, yet took no steps in a good faith effort to prevent or remedy that situation.”
  • The court also reasoned that the pleadings fell short in this case because: (1) The court could not infer that the defendants consciously allowed Citigroup to violate the laws so as to sustain a finding that they acted in bad faith. (2) The second problem was that the purported red flags were not waved in front of the defendant directors.
  • Importantly, as stated in many other Delaware decisions, “Delaware law does not charter law breakers, and a fiduciary of a Delaware corporation cannot be loyal to a Delaware corporation by knowingly causing it to seek profit by violating the law.” In this case, however, there were no allegations supporting an inference that any of the directors decided to cause Citigroup to break the law and pursue the profits.
  • The court’s concluding reasoning was that the “directors may be faulted for lack of energy or for accepting incremental efforts of management advanced at a testudinal cadence, when decisive action was called for instead” [,] but that does not satisfy the prerequisites for a Caremark claim. If it did, and if simple gross negligence were enough, it would discourage able persons from serving on boards and would make it difficult for them to bring business judgment to bear on decisions involving risk.
  • In sum, the court concluded that because: (i) the pleadings did not imply scienter on the part of the director defendants; and (ii) the bad results that plaintiffs point to do not imply bad faith; and (iii) there is no substantial likelihood of liability, therefore, for any of the director defendants, based on the facts alleged, demand was not excused, and the motion to dismiss was granted.

Supplement: Large volumes of commentary exist on the many cases discussing the issues addressed in this case. A prolific, nationally prominent corporate law scholar often cited in decisions of the Delaware courts, and friend of this blog, Prof. Stephen Bainbridge, in one of his many writings on this issue, provides insights on some of the seminal decisions on Caremark claims, and also quoted from an article I wrote on an earlier Chancery decision on this topic, that captures the essence of the nuances involved in this challenging topic.

Supreme Court Rejects Earn-Out Claim

The recent Delaware Supreme Court decision in Exelon Generation Acquisitions, LLC v. Deere & Company, No. 28,2017 (Del. Supr., Dec. 18, 2017), reversed the trial court ruling and rejected an earn-out claim based on the application of well-settled contract interpretation principles.

The specific contract terms that were interpreted are fairly sui generis and not widely applicable, in terms of the factual aspects of the trigger for the earn-out payment, but several contract interpretation principles are noteworthy for their wide-spread applicability.

Background Facts: In this case, Excelon agreed to make earn-out payments to Deere if it reached certain milestones in the development of three wind farm projects that were underway at the time of sale.  One of the projects became impossible to develop due to local ordinances that were passed.  The issue arose about whether the development of another wind farm 100 miles away, that was not referenced in the applicable agreements, could satisfy one of the milestones that would trigger the earn-out payment.

Key Contract Interpretation Principles: Several basic contract interpretation principles in this decision have widespread applicability:

  • Delaware adheres to an objective theory of contracts. Contract construction should be that which is understood by an objective, reasonable third party.
  • If a contract is unambiguous, extrinsic evidence may not be used to interpret the intent of the parties, to vary the terms of the contract, or to create an ambiguity.
  • One contract may incorporate discrete parts or terms from another contract without necessarily incorporating the entire contract. See footnote 33 (citing 11 Richard A. Lord, Williston on Contracts § 30: 25, at 234, 238 (4th ed. 1999)).
  • Extrinsic evidence cannot be used to interpret the intent of the parties or to vary the terms of the contract unless the contract suffers from ambiguity.
  • In interpreting an earn-out provision, the parties’ post-closing conduct may be used to determine whether there is a breach, but post-closing evidence cannot be used as an aid to interpreting the meaning of the contract when the contract is unambiguous.

Divided Supreme Court Applies Demand Futility Analysis

In a split decision, the Delaware Supreme Court applied the nuanced standards for demand futility in the context of Caremark claims against Duke Energy Company.  In City of Birmingham Retirement and Relief System v. Good, No. 16-2017 (Del. Supr., Dec. 15, 2017), a clear majority of the Delaware Supreme Court, sitting en banc, found that demand futility was not adequately demonstrated in the context of Caremark claims, in light of the majority of the directors being independent.  That is, an insufficient showing of bad faith was pleaded. See footnotes 70 and 75.

Brief Background: The context of this decision was massive long-term environmental violations that resulted in multiple large fines.  The important facts in this decision were chronicled in detail in the 39-page decision, including the dissent.

Key Principles: The High Court’s majority opinion should be read by anyone who wants to fully understand the demand futility analysis under Delaware law.  A few of the key principles recited in the opinion include the following:

  • The fact that the board was aware of the circumstances resulting in environmental violations and fines “does not mean it consciously disregarded them—the presentations [to the board] show that the board was regularly informed of Duke Energy’s remedial actions—and the letters state that no governmental organization or agency addressed the issues, which does not show that the board disregarded them. See footnote 70.
  • The court also observed other cases that explain that Delaware courts routinely reject the conclusory allegations that because illegal behavior occurred, internal controls must have been deficient, and the board must have known so. Id.
  • A key distinguishing aspect between the majority opinion and the dissent in this case was explained in footnote 75: “. . . the question on appeal is not whether Duke Energy violated environmental laws. It did. Rather, the question is what the directors—a majority of whom were independent—knew about the violations and whether they ignored them. As we have shown, based on the specific arguments raised on appeal, the plaintiffs have not demonstrated a pleading stage reasonable inference that those directors knew Duke Energy: [(a)] was violating the law and [(b)] knew from the information presented to the board, that the Company ignored the violations.”

Dissent: The spirited dissent explained in great detail the facts which the Chief Justice viewed as  sufficiently supportive of a conclusion that the board had knowledge of long term environmental violations and that particularized allegations supported a non-exculpated Caremark claim. See, e.g., footnote 121.

Supreme Court Allows Challenge to Director Compensation Claims; Rejects Ratification Defense

In its first explicit clarification of Delaware law on stockholder ratification in many years, the Delaware Supreme Court provided a virtual restatement of the prerequisites for valid stockholder ratification of director actions. In doing so, Delaware’s High Court allowed a claim to proceed which challenged allegedly excessive director compensation.  In the case styled: In re Investors Bancorp, Inc., Stockholder Litigation, No. 169, 2017 (Del. Supr. Dec. 13, 2017; revised Dec. 19, 2017), the High Court also made important observations about demand futility standards.

Brief Background: The context of this decision involves an equity incentive plan that provides a compensation package for directors.  The stockholder approval of the plan in this case gave the directors ample discretion to determine their own compensation.  Some of the compensation that the directors awarded themselves amounted to several million dollars a year each, which reportedly was substantially higher than the comparable compensation paid to directors in similar companies.

The key factual aspect of the equity incentive plan involved in this case was that the plan approved by the stockholders did not provide meaningful limitations on the amount of compensation that the directors could award themselves. In particular, in the facts of this case, the directors had discretion to allocate up to 30% of all options or restricted stock available as awards to themselves.

Key Principles and Highlights of Decision:

  • Although a board is authorized to fix the compensation of directors based on Section 141(h) of the DGCL, when the board fixes its own compensation, it is a self-interested decision. If no other factors are involved, that decision will not be entitled to business judgment rule protection and when properly challenged will be subject to the entire fairness standard of review. See footnotes 34 to 36.
  • Stockholder ratification generally is allowable in three situations involving equity incentive plans: (1) When stockholders approve the specific director awards; (2) When the plan was self-executing, meaning the directors had no discretion when making the awards; or (3) When directors exercise discretion and determine the amounts in terms of the awards after stockholder approval.
  • Ratification cannot be used to foreclose the Court of Chancery from reviewing further discretionary actions when a breach of fiduciary duty claim has been properly alleged. This is so based on the truism that “director action is ‘twice-tested,’ first for legal authorization, and second by equity.” See footnote 81.
  • Another key principle with broad application is that “inequitable action does not become permissible simply because it is legally possible.” See footnote 83.Court’s Reasoning: In this case, the stockholders did not ratify the specific awards that directors made under the equity incentive plan, thereby requiring the directors to demonstrate the fairness of the awards to the company. Sufficient facts were alleged to support a reasonable inference in this case that the directors breached their fiduciary duties in making unfair and excessive discretionary awards to themselves.

Demand Futility Issue: The court also addressed a demand futility issue. As readers well know, based on Court of Chancery Rule 23.1, demand is excused as futile when reasonable doubt is pled that: (1) a majority of the board is disinterested and independent, or (2) the challenged transaction was otherwise the product of a valid exercise of business judgment. See footnote 100.

The court reasoned that because all of the directors were alleged to have awarded themselves compensation, not just the outside directors, the court explained that:

“It is implausible to us that non-employee directors could independently consider a demand when to do so would require those directors to call in to question the grants they made to themselves. In other words, it strains reason to argue that a defendant-director could act independently to evaluate the merits of bringing a legal action against any of the other defendants if the director participated in the identical challenged misconduct.”

See footnote 101.

Therefore the court concluded that demand was excused for the claims made against all the directors.

Chancery Upholds Shortened Statute of Limitations (“Survival Clauses”) by Contract

A recent Delaware Court of Chancery opinion is an important tool for the toolbox of corporate and commercial litigators for upholding what the court refers to as “a survival clause”–which provides a contractually shortened period by which claims must be made. HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017).

Brief Background:  The facts of this case involved indemnification claims that were based on a contract.  That contract provided that a notice of claims for indemnification needed to be made within 30 days of the matter giving rise to such a claim.  The court found that the notice of claim was not given within that 30-day period.

Key Principles:  The court explained that Delaware enforces shortened statute of limitations based on contracts if the period is considered reasonable.  See footnotes 53 and 54.  The court found that a provision in the contract in this case that notice of claims for indemnification needed to be made within 30 days was enforceable.

Referring to these types of contract provisions as “survival clauses,” the court explained that Delaware courts uphold unambiguous survival clauses that, in effect, serve as shortened statutes of limitations. The claim in this case was barred because the applicable 30-day period passed, and therefore the claim was barred. This decision and the explanation of the law it applies, has great relevance to many similar contractual provisions.

The court also addressed the perennial issue of substantive, as compared to procedural, arbitrability.  That analysis was applied in the context of an Earn Out dispute in which the agreement required the parties to submit certain issues to a neutral accountant.

Court Upholds Oral Agreement to Expand Board

A recent Delaware Court of Chancery opinion enforced an oral agreement which involved a settlement by a corporation of claims by a stockholder to expand the board. The terms of the oral deal included the expansion of the number of members of the board of directors to allow for an additional two seats to be appointed by the stockholder with whom the settlement agreement was entered into orally. In Sarissa Capital Domestic Fund LP v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Del. Ch. Dec. 8, 2017), the court granted a declaratory judgment based on a claim pursuant to Section 225 of the Delaware General Corporation Law.

This 72-page decision is must-reading for anyone who:  (1) seeks to enforce an oral agreement, especially regarding corporate governance issues; and/or (2) needs to find controlling legal authority and judicial reasoning to support the enforcement of oral settlements even when not formally documented in a fully executed written agreement.  Compare the recent Chancery decision in Zohar II 2005-1, Ltd. v. FSAR Holdings, Inc., C.A. No. 12946-VCS (Del. Ch. Nov. 30, 2017) (rejecting the request to enforce an unwritten understanding unsupported by contemporaneous documentation).

Advancement Granted Despite Final Resolution of Underlying Litigation

The most noteworthy point of this short letter ruling in which a former corporate officer is granted advancement pursuant to Section 145 of the Delaware General Corporation Law, in Kolokotrones v. Ninja Metrics, Inc., C.A. No. 12413-VCS (Del. Ch. Dec. 18, 2017), is that the court rejected an argument based on the fact that the underlying litigation for which advancement was sought had been concluded by the time that a formal order granting advancement was entered on the docket.  Although in theory, when the underlying claim that gave rise to any advancement right was dismissed or finally concluded, arguably that claim for advancement then became a claim for indemnification, assuming that the party seeking advancement prevailed, the court found that argument unpersuasive based on the procedural posture of this case.

The court explained that otherwise it would be placing form over substance and benefiting the defending party for its procedural “machinations.” In addition, the court did not want to reward the delay of the defending party to the detriment of the party seeking advancement.

Moreover, the original decision in this case was rendered as a bench ruling, and the letter ruling that denied a motion for reargument explained that the original decision had granted fees on fees. Thus, notwithstanding a prior final resolution of the underlying litigation that gave rise to the advancement claim, because fees on fees were granted for the advancement claim, simply because the underlying litigation concluded, does not, in the court’s words:  “under any view of the world, moot that claim.”

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