A recent decision from the Delaware Court of Chancery belongs in the pantheon of consequential court opinions addressing the nuances, first principles and practical challenges regarding Section 220 of the Delaware General Corporation Law. There are many decisions on this topic addressing the right of stockholders to demand inspection of corporate records, but few are as noteworthy or as “blogworthy” as this decision in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020). Compare another pantheon-worthy Chancery decision earlier this year in AmerisourceBergen highlighted on these pages. See Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020).

Weighing in at 69-pages, this opinion’s length is indicative of the complexities of Section 220 that are belied by the apparent simplicity of the statute. My favorite part of this decision is the acknowledgement that when pursuing the statutory rights that Section 220 appears to allow, one can easily be stymied by the gamesmanship of companies who can play a war of attrition, usually with impunity, in light of the asymmetrical economics involved. See Slip op. at 3-5 and footnote 6 (citing an article addressing the obstacles to pursuing Section 220 rights: James D. Cox, et al., The Paradox of Delaware’sTools at hand Doctrine: An Empirical Investigation,” 75 Bus. Law. 2123, 2150 (2020)).

Similar observations about the practical hindrances, economic and otherwise, to utilizing Section 220 have often been the topic of blog posts on these pages over the last 15 years. See, e.g., my recent blog post explaining that Section 220 cases are not for the fainthearted.

This Gilead case provides guidance on an important topic that warrants a very lengthy analysis, but as I am want to do on this blog, I provide highlights via bullet points, and then interested readers can click on the above link and read all 69-pages.

The bullet points that I find to have the most widespread applicability and importance are the following:

The court criticizes the trend in which companies often inappropriately litigate the underlying merits of a potential, future plenary suit as opposed to addressing whether the prerequisites have been met for a Section 220 demand, as well as the tendency of companies to otherwise prevent stockholders from using Section 220 as a “quick and easy pre-filing discovery tool.” Slip op. at 3-4.

• The court provides many quotable explanations of the “credible basis” standard that must be satisfied in order to rely on the proper purpose of investigating suspected wrongdoing. The court emphasizes that this “lowest possible burden of proof” does not require a stockholder to prove that any wrongdoing actually occurred; nor does it require a stockholder to show by a preponderance of the evidence that wrongdoing is even probable. Slip op. at 23, footnotes 103 and 104.

• Rather, the court instructed that the recognized proper purpose for using Section 220 to investigate suspected wrongdoing is satisfied when there is a credible basis to suspect merely the “possibility” of wrongdoing. Id. at 24, n. 106.

• The court addresses the common tactic used by companies challenging a proper purpose when they assert that the “stated proper purpose is not the actual proper purpose for the demand.” This opinion teaches that in order to succeed in such a defense, the company must prove that the “plaintiff pursued its claim under false pretenses. Such a showing is fact intensive and difficult to establish.” See footnote 153 and accompanying text.

• The court made quick work of dispensing with the issue of standing in Section 220 cases. The court reasoned that the standing argument in this case was in reality a Potemkin Village (my words) for the company’s challenge to the viability of derivative claims that the plaintiffs might pursue in the future. Although the court discussed standing under Section 220 in general, it also underscored that a Section 220 proceeding does not warrant a trial on the merits of underlying claims. Slip op. at 41–42.

• The court instructed that generally Section 220 plaintiffs need not specify the “end-uses” of the data requested for their investigation. Slip op. at 49.

• The court also provided helpful practical tips about the scope of production required once the preliminary prerequisites of Section 220 have been satisfied. The court noted that in some instances the company will be required to provide more than simply formal board materials. See Slip op. at 51-54.

• The opinion acknowledged that in some instances after limited discovery in a Section 220 action, plaintiffs can refine their requests with greater precision and that in some cases the court has asked the plaintiffs to streamline their requests. See Slip op. at 63.

• In response to the court being vexed by the overly aggressive tactics of the company, the court invited the plaintiff to “seek leave to move for fee shifting.” As one example of the court’s observation that the company was taking positions for no apparent purpose other than obstructing the exercise of the statutory rights of the plaintiff, the court noted that the company refused to produce even a single document before litigation commenced.

A recent Delaware Supreme Court opinion addressed the titular topic in the matter styled In Re Solera Insurance Coverage Appeals, Nos. 413, 418, 2019 (Del. Oct. 23, 2020).  I’m too busy to provide even pithy highlights, but it’s a consequential decision, so I refer you to the overview provided on the Harvard Corporate Law Blog. 

Kevin LaCroix also provides an insightful and comprehensive analysis of the case on his excellent blog called The D&O Diary.

Delaware’s High Court determined that the costs incurred to defend an appraisal action were not covered by the term “securities claim” in a D&O  policy.

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 decided it was not “reasonably conceivable” that General Electric Corp. aided and abetted breaches of fiduciary duty by oil field services provider Baker Hughes Inc.’s directors who allegedly ignored bad fiscal news about GE’s oil and gas unit in approving a bad merger deal in the matter of In re Baker Hughes Inc. Merger Litigation, C.A. No. 2019-0638-AGB opinion issued (Del. Ch. Oct. 27, 2020).

In his Oct. 27 opinion, Chancellor Andre Bouchard dismissed shareholder charges against General Electric but found that ex-Baker Hughes Chairman and President Martin S. Craighead must face disclosure duty claims for failing to include in the merger proxy the unaudited version of GE’s finances.

Claims against Baker Hughes’ non-employee directors had been dropped because they were protected by an exculpatory clause that barred ordinary negligence claims, but Craighead was sued solely as an officer.

No Revlon liability

Revlon’s enhanced scrutiny test involves:
(a) a judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and
(b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing

The Chancellor found that Baker Hughes Board knew there were risks in using the unaudited financials to negotiate a combination with GE O&G and made a business judgment to “address those risks in a nuanced way” in the merger agreement.

No informational vacuum

Plaintiffs claimed that by delaying the release of audited financials for the oil and gas segment, GE caused the Baker Hughes board to make a bad merger deal in an “informational vacuum,” but Chancellor Bouchard found that the cases plaintiffs cite where there were allegations of “informational vacuums”  all share a common theme. “They each involved a player—privy to the internal deliberations or process of a target board that had conflicting financial interests—who deliberately withheld material information from the board, thus casting doubt on the integrity of a sale process. That is not this case.”

Moreover, this case lacks the necessary element of “knowing participation in a board’s fiduciary breach  which requires that the third party act with the knowledge“ that the conduct advocated or assisted constitutes such a breach.” he said. This standard requires well-pled facts that the aider and abettor acted with “scienter,” or “knowingly, intentionally or with reckless indifference.”

The court said the plaintiffs’ argument about the cause of goodwill Impairments in the audited financials and its effect on valuation fails for several reasons:

First, plaintiffs’ criticism concerning the failure to disclose GE’s impairment analysis or its “effect on valuation” is illogical given the complaint’s allegations that Baker Hughes did not receive the impairment analysis and that financial advisor Goldman Sachs did not prepare a revised fairness opinion after receiving the audited financials, but “Delaware law does not require fiduciaries to disclose information they do not possess,” the court said.

Second, apart from focusing on GE’s impairment analysis, plaintiffs do not identify an undisclosed “fact” that would have significantly altered the “total mix” of information available to Baker Hughes’ stockholders in evaluating the fairness of the merger.

Third, the Baker Hughes board had the right to use its business judgment to decide that there were no differences between the unaudited and audited financials that were materially averse to the intrinsic value of GE O&G, and therefore there was no reason to terminate the merger.

Only the CEO faces claims

As to whether Craighead and former CFO Kimberly Ross face individual liability or damages for their roles in negotiating and disclosing the merger, the Chancellor began by finding the complaint is devoid of any allegations that Ross had any role in drafting or disseminating the proxy.
However, he said Craighead, in his roles as President, CEO and Chairman had sufficient involvement with respect to the preparation of the proxy he signed as Baker Hughes’ CEO and the decision not to include them in the merger proxy.  Given the importance of the unaudited financials there is enough to support a claim that he breached his duty of care.  All other claims were dismissed.

 

 

 

Regular readers are familiar with nationally-prominent corporate law scholar and friend of this blog, Professor Stephen Bainbridge, whose prolific scholarship is cited in Delaware corporate law decisions. His encyclopedic grasp of Delaware cases on corporate law rivals that of many experienced Delaware corporate law practitioners.

The good professor has penned a scholarly and insightful analysis of the well-known Delaware Blasius decision, as a supplement to commentary by Prof. Ann Lipton. He cites to many subsequent decisions in Delaware and elsewhere, as well as learned commentary, that allow for the observation that even if not expressly overruled, it is not quite respected as having continuing vitality–and may be fairly described as disregarded, or at a minimum not often followed as strong precedent.

Yours truly and my colleague Chauna Abner have published an article for the recent issue of The Delaware Business Court Insider on the titular topic. The analysis that determines when dual claims for breach of contract and breach of fiduciary duty based on substantially the same operative facts might survive a motion to dismiss, is often factually determinative, but for those who seek to “thread the needle”, our co-authored article based on Delaware decisions may be of practical usefulness. Though not based on a particular recently released Delaware Court of Chancery decision, the article addresses a perennial litigation issue that arises frequently, especially in the context of an LLC operating agreement that may modify fiduciary duties or not waive them at all.

Subsequent to the publication of our article, the Delaware Court of Chancery issued a decision that also covered this same issue. See In Re WeWork Litigation, Cons. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020).

Our article appears below with permission of The Delaware Business Court Insider:

The Exception to Pursuing Both Contract and Fiduciary Claims

Delaware courts have often thwarted plaintiffs’ pursuit of both a claim for breach of contract and a claim for breach of fiduciary duty when those claims arose out of the same facts.

By Francis G.X. Pileggi and Chauna A. Abner | October 28, 2020

Delaware courts have often thwarted plaintiffs’ pursuit of both a claim for breach of contract and a claim for breach of fiduciary duty when those claims arose out of the same facts. See, e.g., Edinburg Holdings v. Education Affiliates, 2018 Del. Ch. LEXIS 182, at *34 (Del. Ch. June 6, 2018).

More specifically, Delaware courts have held that “fiduciary duty claims may not proceed in tandem with breach of contract claims absent an independent basis for the fiduciary duty claims apart from the contractual claims.” See MHS Capital v. Goggin, 2018 Del. Ch. LEXIS 15, at *21 (Del. Ch. May 10, 2018) (emphasis added). This is a determining factor in deciding whether both claims may proceed to trial.

When both contract and fiduciary claims may not be tried together:

Under Delaware law, “‘where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim.’” Thus, “any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.”

In Triple H Family L.P. v. Neal, 2018 Del. Ch. LEXIS 262 (Del. Ch. July 31, 2018), the Court of Chancery held that a party could not pursue both a breach of contract claim and a claim for usurpation of corporate opportunities because the claims related to the same behavior by the accused wrongdoer and sought the same remedies. (“Hoops alleges both breach of contract and usurpation of corporate opportunities related to the same behavior by Neal: failing to roll Neal Insurance into Omni. Hoops also seeks the same remedy for the alleged breach of contract and breach of fiduciary duty: disgorgement of half of the profits made by Neal Insurance before Omni was dissolved. I address only the breach of contract claim because the usurpation of corporate opportunities claim is duplicative.”).

Similarly, in Stewart v. BF Bolthouse Holdco, 2013 Del. Ch. LEXIS 215 (Del. Ch. Aug. 30, 2013), the Court of Chancery held that the plaintiff could not pursue its breach of fiduciary duty claim and reasoned that “the fiduciary duty claim here arises from a dispute relating to the exercise of a contractual right” and “do[es] not implicate potentially different remedies.”

When both contract and fiduciary claims may procced:

On the other hand, a party may pursue both contract claims and fiduciary claims when “the fiduciary duty claims depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.” Thus, the relevant inquiry in determining whether a party may pursue both contract and fiduciary claims is “whether there is some harm to be remedied through the lens of fiduciary duty which cannot be adequately compensated through enforcement of the contract.” See MHS Capital, 2018 Del. Ch. LEXIS 151 at *23 (internal quotation marks omitted).

In summarizing a prior decision allowing both contract and fiduciary claims to proceed to trial, the Court of Chancery explained that:

In Schuss, the plaintiffs alleged that the defendants had breached their partnership agreement by failing to make distributions to the plaintiffs in accordance with the terms of the agreement. The plaintiff further alleged that the defendants breached their fiduciary duties by leaving the partnership in a position where it could not satisfy any damages owed to the plaintiffs because the defendants had engaged in self-dealing conduct that included depleting the partnership funds and improperly shifting losses to the plaintiffs. Based on these allegations, th[e] court found that the fiduciary duty claim was not foreclosed by the breach of contract claim because ‘[a]lthough these fiduciary duty claims share a common nucleus of operative facts with the plaintiff’s breach of contract claim, they depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.

Stewart, 2013 Del. Ch. LEXIS 215 at **47-48 (quoting Schuss v. Penfield Partners, 2008 Del. Ch. LEXIS 73, at **4, 10 (Del. Ch. June 13, 2008)) (emphasis added).

Key Takeaway:

The key takeaway is as follows: any party who wishes to pursue both contractual and fiduciary claims that arise out of the same facts may do so as long as those claims: “depend on additional facts as well, are broader in scope, and involve different considerations in terms of a potential remedy.”

 

Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith. His email address is Francis.Pileggi@LewisBrisbois.com. He comments on key corporate and commercial decisions, and legal ethics topics, at www.delawarelitigation.com, including the court’s holding in Edinburg Holdings, Inc., cited supra; the commentary of which is available here: https://www.delawarelitigation.com/2018/06/articles/chancery-court-updates/court-explains-when-dual-claims-for-breach-of-fiduciary-duty-and-breach-of-contract-can-be-pursued/

Chauna A. Abner is an associate with the firm.

 

 

The widely-acclaimed corporate law scholar, and friend of this blog, Prof. Stephen Bainbridge, whose prolific scholarship is cited in Delaware court decisions on corporate law, has penned a brief essay on the titular topic in light of a recent Delaware Court of Chancery opinion by Vice Chancellor Laster styled United Food & Comm. Workers Union v. Zuckerberg, C.A. No. 2018-0671-JTL at 18-19 (Del. Ch. Oct. 26, 2010). Must reading for anyone interested in refining and improving the law regarding this important issue in Delaware corporate litigation.

A recent Order of the Delaware Court of Chancery recited the truism reflected in prior Delaware decisions that, generally speaking, unlike in some other states, Delaware does not have a standalone, conventional cause of action for stockholder oppression, per se, as contrasted with a breach of fiduciary duty claim for not acting in the best interest of a minority stockholder.  See Verdancus Advisors, LLC v. Parker Infrastructure Partners, LLC, No. 2020-0194-KSJM, Order (Del. Ch. Oct. 8, 2020). See generally, Nixon v. Blackwell, 626 A.2d 1366, 1380–81 (Del. 1993)(“[T]he entire fairness standard … is the proper judicial approach” for claims of stockholder oppression.)

A short recent letter ruling from the Delaware Court of Chancery provides an explanation of practical application that explains why expert reports are frequently admitted into evidence in the Court of Chancery, as compared to the Delaware Superior Court, the trial court of general jurisdiction.

In the matter styled In re Comtech/Gilat Merger Litigation, Cons. No. 2020-0605-JRS (Del. Ch. Oct. 2, 2020), the court explained why, despite the basis of a technical hearsay objection under Delaware Rule of Evidence 801(c), in the Delaware Court of Chancery expert reports are frequently admitted into evidence especially when the expert is available for cross-examination during trial.

The court explained that one reason is based on DRE 807, which is something of a catch-all provision, but the court also provided 6 additional specific reasons based on the facts of this case why the expert report would be admitted.

The court contrasted this Chancery practice with the more common inadmissibility of expert reports in its sister court, the Delaware Superior Court (and on which the Vice Chancellor who wrote this opinion formerly sat.).  See footnote 5.

A useful tool for the toolbox of commercial litigators is a recent decision of the Delaware Superior Court which found that when a contract requiring payment does not specify a time for payment, a “reasonable time” may be implied.  See James Thomas v. Headlands Tech Principal Holdings, LP, No. N19C-11-041-EMD-CCLD, opinion (Del. Super. Sept. 22, 2020).