This is the sixth year that we are providing an annual review of key Delaware corporate and commercial decisions. Links to the prior five annual reviews are in the right margin. During 2010, Kevin Brady and I reviewed approximately 300 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. We already highlighted the key decisions from the first part of 2010 here. Among the decisions with the most far-reaching application and importance during the second half of 2010 include those that we are highlighting in this short overview. We are providing links to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below.
Key Takeover Cases from 2010
Airgas, Inc. v. Air Products and Chemicals, Inc., No. 649, 2010 (Del. Supr. Nov. 23, 2010). This decision was the latest in a series of decisions from the Delaware judiciary over the past year in connection with the hostile bid by Air Products to acquire Airgas. There are many issues that have been addressed by the Court of Chancery in this battle, and additional issues are still pending before that Court. This decision by the Delaware Supreme Court addressed the interpretation of a bylaw amendment by which Air Products attempted to shorten the number of months before the next “regularly scheduled” annual meeting of Airgas, as a means of circumventing the otherwise lengthy process of removing staggered board members. Delaware’s High Court ruled that such an effort was inconsistent with the charter of Airgas and the applicable statute. The Court also reasoned that it would amount to a de facto removal without cause of those directors without a super-majority vote also required by the Airgas Charter. The specific issue on appeal was whether the Airgas Charter requires that each class of directors serve three-year terms or whether it provides for a term that can expire at whatever time the annual meeting is scheduled in the third year following their election.
The Court acknowledged that no party argued that DGCL Section 141(d) or the Airgas Charter required that the three-year terms be measured with mathematical precision. Nor was it necessary for the Court to decide with exactitude the parameters of what deviation from 365 days satisfied the three-year durational requirement. Rather, the Court said that in this case “we may safely conclude that under any construction of ‘annual’ within the intended meaning of the Airgas Charter or Title 8, Section 141(d) of the Delaware Code, four months does not qualify. In substance, the Bylaw so extremely truncates the directors’ term as to constitute a de facto removal that is inconsistent with the Airgas Charter.” For a fuller summary of this important decision, and the actual decision itself, see here.
Versata Enterprises, Inc. v. Selectica, Inc., No. 193, 2010 (Del. Supr., Oct. 4, 2010). The Delaware Supreme Court upheld the trial court’s support for the adoption of a rights plan by the board with a 4.99% triggering threshold, which was designed to protect the corporation’s net operating losses (“NOLs”). The Court upheld the poison pill based on the standards set forth in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (1985), as a proper exercise of business judgment. The Court also rejected arguments that a different standard other than Unocal should be applied. The Court found that the actions by the hostile bidder posed a threat to the corporate enterprise and their protection was an important corporate objective, and that the board properly conducted an investigation to support that finding. Regarding the second prong of Unocal, citing Unitrin, Inc. v. American General Corp., 651 A.2d 1361, 1383 (Del. 1995), the Court determined that the defensive measures of the board were neither preclusive nor coercive. For a more detailed summary of this case, see here.
Yucaipa American Alliance Funds II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 12, 2010). The Court of Chancery rejected breach of fiduciary duty claims and upheld the poison pill defense that Barnes & Noble implemented as part of a plan to rebuff the hostile efforts of investor Ron Burkle to acquire Barnes & Noble, which is controlled by the Riggio family. Based on a detailed examination of the factual circumstances, the Court concluded that Unocal provided the appropriate standard of judicial review to examine the poison pill defense. The Court rejected both an application of the entire fairness standard and the Blasius compelling justification standard that would apply if the shareholder franchise were impinged.
The Court explained in detail why the board had a good faith basis for determining that Burkle’s Yucaipa entity was a threat and why they were justified in viewing Yucaipa cautiously. The Court did not view the pill as unreasonably restricting the ability of the stockholders to run a proxy contest. Rather, the Court viewed the pill as allowing the board to require Yucaipa to deal with the board in the first instance if it wished to obtain a control bloc, and to pay a price to the company’s investors that reflected the value of obtaining that power as opposed to creating a control bloc along with others but without paying a control premium. Thus, the Court concluded that the pill was proportionate in reply to the threat faced. Highlights are available here.
eBay Domestic Holdings, Inc. v. Newmark, C.A. No. 3705-CC (Del. Ch. Sept. 9, 2010). This Court of Chancery decision involved a dispute with eBay as a minority shareholder of the privately-held company craigslist (spelled with a small “c”). Based on the detailed description of the background in this case and thorough legal reasoning, the Court rescinded the poison pill that craigslist put in place based on a finding that it was a breach of the fiduciary duties of the directors that were owed to the minority shareholder; eBay, however, the Court upheld the staggered board amendment. The Court determined that the poison pill was subject to the Unocal enhanced scrutiny test, but that the staggered board amendments were subject to the business judgment standard. The right of first refusal provision at issue was analyzed pursuant to the entire fairness test.
Regarding the poison pill, the Court determined that the Unocal standard was not satisfied. The Court addressed two questions: (1) Did the majority shareholders properly and reasonably perceive a threat to their company’s corporate policy and effectiveness; and (2) If they did, was the poison pill a proportionate response to that threat? The Court found that the poison pill was inappropriately punitive and thus was not intended to protect or defend a legitimate corporate interest, nor was it a reasonable response to a perceived threat.
Applying the more lenient business judgment standard to the staggered board amendments, the Court determined that the enhanced scrutiny standard did not apply because there was no evidence that the board amendments were being used for entrenchment purposes nor did they function as a defensive measure because even without the staggered board amendment, the two majority shareholders would still control a majority of the board. For a discussion of the right of first refusal issue and a more complete summary of this case, see here.
Other Key Delaware Corporate and Commercial Cases of Interest in 2010
In Re Dollar Thrifty Shareholder Litigation, C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010). The Court of Chancery denied the request for preliminary injunction to block the merger by which Hertz would buy the shares of its smaller rental industry rival Dollar Thrifty Automotive Group. The Court determined that the record did not support the claim that the board of Dollar Thrifty breached its fiduciary duty to take reasonable steps to maximize the value that Dollar Thrifty stockholders would receive. Rather, based on an abbreviated record in an expedited procedural setting before the preliminary injunction hearing, the Court determined that the board of Dollar Thrifty and its CEO successfully managed Dollar Thrifty through a financial crisis that initially saw the company on the brink of insolvency but then improved to the point where it was profitable. The Court found that the company had been open to a sale over the last few years if a deal favorable to the stockholders could be achieved and to that end they engaged in lengthy discussions with both Hertz and Avis, each of which had initially walked away in the past under circumstances where they could have acquired the company at a bargain price. Highlights are available here.
City of Westland Police and Fire Retirement System v. Axcelis Technologies, Inc., No. 594, 2010 (Del. Supr. Aug. 11, 2010). This en banc decision of the Delaware Supreme Court rejected a request for records under Section 220 of the Delaware General Corporation Law (“DGCL”). Both the Supreme Court and the Delaware Court of Chancery rejected the two reasons for which the books and records were sought: (1) The decision of the Axcelis board to reject the tendered resignations of directors, frustrated the shareholder vote and was in violation of the principles announced in Blasius Indus. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1998); and (2) The rejection by the board of an acquisition proposal was a defensive measure that created a credible suspicion of wrongdoing. The background involved the plurality voting provisions of the DGCL which Axcelis followed. Under those provisions, a director may be elected without receiving a majority of votes cast. See DGCL Section 216(3). However, the Axcelis board adopted a “plurality plus” governance policy which provided that at a shareholder meeting at which a director is subject to an uncontested election, if any nominee for director received a greater number of votes “withheld” from his election than voted “for” such election, he or she would be required to submit to the board a letter of resignation. The board then has the option of accepting or rejecting the resignation. In this situation, the board rejected the resignation that was offered, and on that basis the shareholders unsuccessfully requested books and records. Although the Court rejected the Section 220 request, the Supreme Court described other situations where Section 220 could be used to obtain data about the qualifications of a director to serve on the board. A more complete summary of the case is available here.
CML V LLC v. Bax, C.A. No. 5373-VCL (Del. Ch. Nov. 3, 2010). This Court of Chancery decision explains in great detail the theoretical and practical underpinnings of the rights of creditors in connection with insolvent companies. Contrary to the rights of creditors to pursue derivative claims in the corporate context, this opinion concludes after careful reasoning that unless there is a right negotiated in an LLC Agreement, the LLC statute does not give creditors the right to file a derivative suit in the LLC context when a company is insolvent. The Court acknowledges that many courts and commentators assumed that creditors had such a right but this decision makes clear that the statute gives them no such basis for a claim. A more complete summary of this case is available here.
Shandler v. DLJ Merchant Banking, Inc., C.A. No. 4797-VCS (Del. Ch. July 26, 2010). This Court of Chancery decision analyzes the decision of a board of directors to obtain financing to “keep the company alive” for over a year instead of filing for bankruptcy when the company was on the brink of insolvency or arguably already insolvent. The importance of this decision is a confirmation of the law that directors will enjoy the benefit of the business judgment rule if they satisfy its prerequisites even if a decision in hindsight may not have turned out as planned. For directors of distressed companies who are concerned about whether a bankruptcy trustee will make claims against them for not filing bankruptcy sooner, this decision is must reading. Although the Court rejected the argument that “the company should have filed for bankruptcy sooner,” the Court did deny a motion to dismiss regarding a challenged transaction involving the sale of a subsidiary prior to the bankruptcy filing. The Court regarded the transaction to sell the subsidiary as involving terms that were not entirely fair. The deal suffered from the lack of procedural protections that would have provided additional defenses. For example, the investment bank for the deal lacked independence. The Court also reminded the directors that they could not establish the fairness of the transaction on a motion to dismiss.
Additional claims were pursued against the investment bank for aiding and abetting the breach of fiduciary duties in connection with certain transactions and the Court allowed those claims to proceed beyond the motion to dismiss stage. A more complete summary of this opinion is available here.
Related Westpac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010). This Court of Chancery decision refused to impose fiduciary duties in the LLC context that were at odds with the express provisions of an LLC Agreement. This case involved a suit between members of two LLCs that were formed to pursue a land development project in Colorado. When the funding needs of the project exceeded the agreed upon budget, and one member refused to meet a capital call, the argument was made that the refusal was unreasonable. The Court dismissed the complaint because the operating agreements allowed the defendant member to withhold its consent for any reason, including a self-serving reason. The Court refused to imply or impose a reasonableness requirement, especially when such requirements were present elsewhere in the agreement but not in the provision at issue.
The Court addressed in this case an area of Delaware LLC law that is, uncharacteristically for Delaware, not well-settled: namely, whether fiduciary duties can be used as “default gap-fillers” in LLC agreements when the agreement does not expressly disclaim them. Articles on this topic have been authored by the Chief Justice of the Delaware Supreme Court and other scholars such as Professor Larry Ribstein. Links to those articles and related Delaware decisions are available along with a more complete analysis of this case, here.
Ross Holding and Management Co. v. Advance Realty Group LLC, C.A. No. 4113-VCN (Del. Ch. Sept. 2, 2010). This Court of Chancery decision determined that the Court has the inherent equitable power to appoint a receiver for an insolvent LLC even if the LLC statute did not expressly provide such authority. The Court declined the invitation to apply by analogy Section 291 of the DGCL. The Court also reasoned that the General Assembly intentionally omitted from the LLC Act a provision analogous to Section 291 regarding the appointment of a receiver for an insolvent company. The Court, however, explained that its equitable powers for the appointment of a receiver will only be utilized “when fraud and gross mismanagement by corporate officers, causing real imminent danger of great loss, clearly appears, and cannot otherwise be prevented.” Moreover, the Court emphasized that a receiver would not be appointed “simply because of errors of judgment in business management.” For a more complete summary of this case, see here.
Hampshire Group, Limited v. Kuttner, C.A. No. 3607-VCS (Del. Ch. July 12, 2010). This Delaware Chancery Court decision is required reading for all officers of corporations who may need to be reminded that the same fiduciary duties that apply to directors are also imposed on corporate officers. In this decision the Court held an officer liable for approving the personal expenses of a CEO who sought reimbursement by the company. Naturally, this places officers in a precarious position in which, as a practical matter, they may need to deny requests from their superiors at the risk of losing their job or face the risk of subjecting themselves to personal liability. This decision also emphasizes the need for officers to secure both indemnification and advancement agreements that are more commonly provided to their director colleagues. A more complete summary of this case is available here.
Two additional developments during 2010 are deserving of special mention.
In January 2010, the Court of Chancery adopted expedited arbitration rules to go with its expedited mediation procedures. These new rules allow for a hearing before a member of the Court within 90 days of filing a complaint. See, 10 Del. C. Section 349. A more detailed discussion of the criteria for this new “rocket docket” is available here.
Also, the Delaware Superior Court established a business court in 2010 for significant commercial disputes. The President Judge’s Directive explaining the program is available here. The Directive that identifies the judges assigned to this new division is available here.
UPDATE: Professor Bainbridge has honored us by linking to our annual review here. It is noteworthy that even this nationally-recognized corporate law scholar, whose writings are often cited in Delaware decisions, has something to say about the routine length of some opinions.