By: Francis G.X. Pileggi, Sean M. Brennecke, Aimee M. Czachorowski, Rolando A. Diaz, Andrew A. Ralli, Andrew J. Czerkawski, Katherine R. Welch, and Fanta M. Toure
Reprinted courtesy of The Delaware Business Court Insider, ALM Media Properties, LLC, which published this on January 3, 2024.
This is the 19th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This year’s list does not attempt to include all important decisions of those courts that were rendered in 2023, and eschews some of the cases already extensively discussed by the mainstream press or legal trade publications. This list highlights some of the notable decisions that should be of widespread interest to those involved in corporate and commercial litigation or those who follow the latest developments in this area of Delaware law.
Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc.?
In Coster v. UIP Companies, Inc., 300 A.3d 656 (Del. 2023), the Delaware Supreme Court approved the Court of Chancery’s combination of Unocal’s nexus test with Blasius’s compelling justification requirement, affirming the holding that: “To satisfy the compelling justification standard, ‘the directors must show that their actions were reasonable in relation to their legitimate objective, and did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.” The Court of Chancery, noting the case’s “exceptionally unique circumstances,” articulated that “in this context, the shift from ‘reasonable’ to ‘compelling’ requires that the directors establish a close fit between means and ends.” The Delaware Supreme Court agreed, concluding that courts can apply Unocal “with the sensitivity Blasius review brings to protect the fundamental interests at stake—the free exercise of the stockholder vote as an essential element of corporate democracy.”
Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc. | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements
In Holifield v. XRI Investment Holdings LLC, 2023 Del. LEXIS 295 (Del. Sept. 7, 2023), the Delaware Supreme Court upheld an LLC agreement’s incurable voidness provision. The provision at issue rendered void—not just voidable—any transfers of interest that were in violation of the LLC agreement. The Court emphasized that Delaware law affords parties to alternative entity agreements maximum private ordering and contractual freedom. Though it rejected the notion that parties must use “talismanic magic words,” the Court concluded that the plain, unambiguous language of the LLC agreement indicated that sophisticated LLC members bargained for an enforceable clause voiding non-compliant interest transfers, incapable of being cured—even by a court of equity.
Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC
In In re Dissolution of T&S Hardwoods KD, LLC, 2023 Del. Ch. LEXIS 16 (Del. Ch. Jan. 20, 2023), the Delaware Court of Chancery clarified what kind of allegations seeking the dissolution of an LLC suffice to pass muster under the plaintiff-friendly Rule 12(b)(6) standard. The allegations reflected a “continuing breakdown” in the relationship of the managers. Moreover, despite the LLC agreement’s broad, general purpose clause (“engage in any lawful activities”), the Court determined the parties could not carry on their specifically contemplated business. Also, because the LLC agreement’s buy-sell provision failed to offer the parties an equitable exit mechanism, the action proceeded past the motion to dismiss stage.
Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Caremark Claims Allowed to Proceed Against Corporate Officer
The Court of Chancery denied a motion to dismiss a McDonald’s shareholders’ derivative complaint against a company officer, which alleged that the officer breached his fiduciary duty of oversight. The officer contended that Caremark fiduciary obligations do not extend to Delaware corporate officers and thus did not apply to him. But the Court disagreed. Mincing no words, the Court in In re McDonald’s Corp. Stockholder Derivative Litigation, 2023 Del. Ch. LEXIS 23 (Del. Ch. Jan. 25, 2023) wrote: “This decision clarifies that corporate officers owe a duty of oversight.”
Caremark Claims Against McDonald’s
Who Can Represent a Cancelled LLC in Response to a Petition Seeking a Receiver?
In In Re Reinz Wisconsin Gasket, LLC, 2023 Del. Ch. LEXIS 194 (Del. Ch. May 8, 2023), after a company’s counsel filed a notice of dissolution and cancellation, the Court of Chancery prohibited a cancelled LLC from “participat[ing] in the process of appointing its own receiver or retain[ing] counsel to do so.” The petitioner sought to appoint a receiver and nullify the cancellation. Opposing the petitioner’s requested relief, Delaware counsel entered appearances on behalf of the company. Though it granted the request, the Court nevertheless invited the parties “to address the puzzle of a dissolved and cancelled entity appearing to litigate the propriety of its cancellation before they submitted proposed receivers.”
The Court reflected on the lifespan of an LLC, observing that an LLC’s separate, statutory existence continues until the “cancellation” of its certificate of formation. Once an authorized person files a certificate of cancellation for the company, “its existence as a jural entity ceases.” Upon the filing of the certificate of cancellation, “a defunct entity may speak only through a receiver to manage litigation or any other outstanding business: the receiver is appointed because there are no other fiduciaries to make decisions for the entity.” Finding that a non-existent entity could not retain counsel, and considering it a “metaphysical wonder,” the Court determined: “Counsel’s purported representation of a defunct limited liability company is not only puzzling, but impossible.”
Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees
In the runup to a merger, a shareholder plaintiff challenged the “don’t, ask don’t waive” provisions in the company’s confidentiality agreements with the bidders by contending that the proxy statement contained materially deficient descriptions. In Anderson v. Magellan Health, Inc., 298 A.3d 734 (Del. Ch. July 6, 2023), following the suit’s commencement, the company (i) waived some of its confidentiality rights and (ii) supplemented its proxy statement, further detailing the “don’t ask, don’t waive” provisions. The supplemental disclosures mooted the shareholder litigation. In the wake of the merger, shareholder plaintiff’s counsel petitioned the Court of Chancery for a $1.1 million fee award. The company challenged the petition’s “eye-popping” size.
Thoroughly reviewing the jurisprudential shift in M&A strike suits, the Court opined that going forward, “unless a higher authority proclaims otherwise . . . I will award mootness fees based on supplemental disclosures only when the information is material.” Nevertheless, the Court found it “unjust” to immediately apply that standard: Delaware courts had yet to apply it and neither the company nor the petitioner briefed it. Using only the “helpful” standard, the Court found the supplemental proxy disclosures “marginally helpful” and, “[p]utting it all together,” awarded plaintiff’s counsel a $75,000 fee.
Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Fee-Shifting in Section 220 Case Provides Cautionary Tale
In Seidman v. Blue Foundry Bancorp, 2023 Del. Ch. LEXIS 178 (Del. Ch. July 10, 2023), concerned over a potentially excessive director and management equity incentive plan, a shareholder demanded to inspect the company’s consulting reports and formal board materials in connection with the equity plan pursuant to DGCL § 220. The shareholder asserted purposes of “investigating mismanagement and communicating with Plaintiff’s fellow stockholders regarding any proxy contest or other corrective measures.” Claiming the shareholder lacked a proper inspection purpose, the company rejected the demand and refused to produce a single document. The Court had a much different view of the matter.
Emphasizing the exception to the American Rule under which the Court may discretionarily shift fees “where equity requires,” the Court noted: “To capture the sorts of vexatious activities that the bad-faith exception is intended to address, this court employs the ‘glaringly egregiousness’ standard.” Decrying “overly aggressive litigation strategies” in the books and records context and highlighting the company’s less-than-scrupulous tactics, the Court concluded: “After [the company] declined to produce a single document to Plaintiff, forcing him to commence litigation, [the company] took a series of litigation positions that, when viewed collectively, were glaringly egregious.” Accordingly, “[j]ustice” required fee shifting to mitigate such “serious ‘vexatious behavior.’”
Recent Chancery Decisions Provide Cautionary Tales in Section 220 Matters | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out
In Cygnus Opportunity Fund, LLC v. Washington Prime Group, 302 A.3d 430 (Del. Ch. Aug. 9, 2023), after an LLC controller and board of managers squeezed-out the minority unitholders, a group of hedge fund plaintiffs challenged certain disclosures in connection with the merger and a preceding tender offer. The Court of Chancery dove deep into Delaware’s disclosure jurisprudence in the context of what the Court referred to as the “stockholder-action duty.” Because Delaware law “piggybacks on the federal [securities] disclosure regime,” the Court entertained the notion that “[i]f a controlling stockholder or third party makes a tender offer for the corporation’s shares, then depending on the circumstances, the directors might well have a duty to respond. To the extent officers owe the same duties as directors, the duty could apply to them as well.” Though the Court could not “hash these issues out at the pleading stage,” the plaintiffs stated a “conceivable” claim because the officers disclosed nothing in connection with “a severely underpriced” tender offer.
Moreover, examining the etymology of the word “fiduciary” and its trust law roots, the Court emphasized that “[t]he duty of disclosure is a context-specific duty, and no Delaware decision holds that fiduciaries do not owe any duty in the context of a transaction in which the fiduciaries unilaterally eliminate their investors from an enterprise.” Because a squeeze-out is such a transaction, “the duty of loyalty could manifest as an obligation to inform the beneficiary of the material facts surrounding the transaction, regardless of whether or not the beneficiary’s approval is required.”
Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive
Noting that “[c]lairvoyance plays no role,” the Court extensively reviewed the precedent detailing how Delaware measures pleadings-stage fiduciary bad faith. In sum: “Properly understood, the good faith inquiry is a holistic one.” A court of equity can allow a case to proceed past the pleading stage when the allegations as a whole support an inference of bad faith. The “constellation of factors”—including an almost $700 million disparity between what the company valued the settlement at and what the company actually paid for it—supported a pleading stage bad faith inference sufficient to pass demand futility review.
Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Chancery Rejects Request for Specific Performance to Close Deal
With a factual background that reads like a Hollywood thriller, in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., 2023 Del. Ch. LEXIS 364 (Del. Ch. Sept. 7, 2023), the Court of Chancery declined to compel an acquisition target to close a busted deal. The acquirer sought specific performance under a de-SPAC merger agreement. The Court meticulously weighed the factors supporting specific performance after criticizing the sponsor and its hedge fund majority shareholder’s duplicitous behavior. Refusing to specifically enforce the merger agreement’s reasonable best efforts clause, the Court concluded that the transaction’s troubling factual backdrop disfavored such a remedy.
The Court of Chancery Declines to Save Belly Up de-SPAC
Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO
In Colon v. Bumble, Inc., 2023 Del. Ch. LEXIS 367 (Del. Ch. Sep. 12, 2023), the Court of Chancery upheld the validity of a challenged capital arrangement that layered standard Up-C and dual class voting structures into a “bespoke” capital design. The share classes’ voting power differed depending on the holder’s identity. If a separately referenced and defined (outside the charter) “Principal Stockholder” held a class A share, then it carried ten votes per share; otherwise, it carried only one. And if a Principal Stockholder held a class B share, then it carried ten votes per each class A share into which it could convert; otherwise, it carried only one. Though the Court noted that its opinion did not consider whether such an identity-based governance regime would pass Delaware’s “twice tested” review of corporate action, it concluded the challenged charter provisions and capital structure complied with the Delaware General Corporation Law.
Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Section 225 Action Determines That Board Members Were Properly Removed
In Barbey v. Cerego, Inc., 2023 Del. Ch. LEXIS 379 (Del. Ch. Sept. 29, 2023), after a wholly owned foreign subsidiary launched a tender offer to the shareholders of its Delaware parent, resulting in an inversion, the Court of Chancery upheld as valid the removal of the entire parent board. A shareholder and ousted director challenged the removal under DGCL § 225, contending that the director’s failure to receive the required notice of the meeting at which the board approved the tender offer rendered the approval thereof and subsequent management change void. The Court agreed, but nevertheless determined that the plaintiffs failed to draw a sufficient connection between the void meeting and the effect of the tender offer. Noting that the internal affairs doctrine governed whether the foreign subsidiary enjoyed the authority to independently launch the tender offer without the parent’s approval, the Court concluded that the plaintiffs failed to timely meet their burden, and upheld the board’s removal.
Chancery Determines in Section 225 Action: Board Members Properly Removed | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)
Entire Fairness Test Applied, But No Damages
The Court of Chancery in In re Straight Path Communications Inc. Consolidated Stockholder Litigation, 2023 Del. Ch. LEXIS 387 (Del. Ch. Oct. 3, 2023),held that a controlling shareholder drove a not-entirely-fair transaction and breached fiduciary duties he owed to the minority. Yet, the Court found that the transaction, while unfair under Delaware’s “unified fairness review, considering both price and process,” caused the minority no actual damages. Nevertheless, finding the controller steered the transaction “in a manifestly unfair manner,” the transaction thus “was not entirely fair.” Pointing out that a claim for breach of fiduciary duties does not require proving actual damages, the Court awarded the minority class nominal damages.
Unfair Process Incurs Nominal Damages Under Entire Fairness Review
Chancellor “X”s out Twitter investor’s claim he spurred Musk’s social media mind change
In Crispo v. Musk, 2023 Del. Ch. LEXIS 466 (Del. Ch. Oct. 31, 2023), the Court of Chancery declined to award a mootness fee because the plaintiff shareholder filed an unmeritorious claim. The decision turned on whether a merger agreement’s lost premium carve-out to its general no third-party beneficiaries clause conferred standing on the shareholder seeking damages for the then-failed merger agreement. Examining the development of lost premium provisions in the M&A space, the Court detailed the unique relationship between Delaware’s board-centric governance paradigm, merger agreements, and shareholder interests. Invoking Delaware’s hesitance to confer third-party merger agreement standing on shareholders, the Court found the contractual scheme afforded the shareholder plaintiff no third-party beneficiary status, thus rendering his mooted claim unmeritorious.
Lead Plaintiff Forced to Elect Remedy
In litigation following a plenary Revlon action (in which the Delaware Court of Chancery awarded damages to a shareholder class after finding the CEO, with a private equity firm’s aiding and abetting, breached his fiduciary duty), in In re Mindbody, Inc., 2023 Del. Ch. LEXIS 575 (Del. Ch. Nov. 15, 2023), the Court concluded that Delaware law permitted the lead hedge fund class plaintiffs, who simultaneously petitioned for appraisal, to elect to receive the merger consideration and class damages remedy. Because the appraisal-seeking hedge funds shouldered no obligation to “make a binding election as to remedy” before the plenary action’s trial, and the shareholder class included the funds, Delaware precedent allowed them to choose either. But the Court prohibited a double recovery. If the funds elected to pursue their appraisal petition, they could not receive the class remedy. Conversely, if the funds elected to receive the class remedy, then the Court would not appraise their shares.
The Court of Chancery Permits Concurrent Plenary Fiduciary and Appraisal Claims
Restrictive Covenants Found Unenforceable
In Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023), the Court of Chancery denied a solar power system dealer’s application for a preliminary injunction to enforce restrictive covenants against a former minority member. The Court found that two of the members surreptitiously procured an amendment to the LLC agreement in breach of their fiduciary duties. The amendment rendered the resulting minority little more than mere employees and imposed onerous restrictive covenants. Because the purported majority members breached their fiduciary duties in connection with the amendment, the Court prevented them from enforcing the covenants. The Court further opined, assuming arguendo their threshold validity, the restrictive covenants failed to “pass muster” under Delaware law. Reviewing the primary and additional factors governing the enforceability of restrictive covenants, the Court evaluated “all of the dimensions” of the disputed provisions “holistically and in context.” The Court considered how they operated within the contract as a whole and declined to “tick through individual features of a restriction in insolation, because features work together synergistically.” With reasonableness as the touchstone, the Court found the “astonishingly broad” restrictions unreasonable and refused to enforce them.
Unreasonable Restrictive Covenants Fail Delaware’s Holistic Review
Rarely Invoked Provision of DGCL Examined
As one part of a vast, multi-jurisdictional saga between oil giants, in a decision concerning a DGCL provision that is rarely the subject of a judicial decision, the Court of Chancery in Venezuela v. PDC Holding, Inc., 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023),ordered a wholly-owned Delaware subsidiary to issue a replacement stock certificate to its Venezuelan parent. The Court detailed the three requirements under section 168 of the DGCL that a shareholder must satisfy to receive a judicially-ordered replacement of a “lost, stolen, or destroyed” stock certificate. Though the parties did not dispute the typically litigated elements, the subsidiary initially requested the parent post a bond in the neighborhood of $40 billion. Although the Court lacked power to waive the bond requirement altogether (if the issuer requested one), the Court nevertheless enjoyed discretion to set the amount “based on the circumstances presented in each case.” After examining the purpose for the bond-as-security requirement and the circumstances surrounding the potential ramifications of reissuing a certificate evincing ownership of the particular shares, the Court found a “nominal, unsecured” bond in the amount of $10,000 appropriate.Chancery Interprets DGCL Section 168 for Replacement Stock Certificate
this ruling made the candid observation that an application of the Hirt factors were not determinative and did not exorably lead to a selection that distinguished the many counsel competing for the title of lead counsel. The Harvard Law School Corporate Governance Blog has an insightful post