The 39th Annual F.G. Pileggi Distinguished Lecture in Law will be presented this year on March 20, 2025, at the Hotel DuPont. Named after my father, the Delaware Journal of Corporate Law at the Delaware Law School of Widener University continues to host and organize the event that brings leading corporate law scholars from around the country to share their insights. Prior Annual Pileggi Lectures have been highlighted on these pages.

This year’s lecturer will be Arthur E. Wilmarth, Jr. of the George Washington University Law School. His topic will be “The Looming Threat of Nonbank Stablecoins”.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article.

The Delaware Court of Chancery recently declined to dismiss claims that three venture capital firms disloyally caused the collapse of Get Together Inc. by hastily pulling out of the troubled social media start-up and allegedly abusing their preferred shareholder power to empty GTI’s $40 million cash reserve in Shafi v. Chien, et, al., C.A. No. 2023-1157-LWW (Del. Ch. March 3, 2025).

Vice Chancellor Lori Will allowed GTI’s founders and common shareholders to continue most of their derivative and direct claims after finding an adequate basis for claims that three directors representing the three venture capital firms on GTI’s six-director board put their interests ahead of GTI’s corporate survival.

She ruled that on a motion to dismiss for failure to make a pre-suit demand on the board, the plaintiffs have met their burden to control the suit for now because they may be able to show that a majority of the defendant directors could not make an objective decision on the suit’s merits.  

Competing histories

But the Vice Chancellor noted that while plaintiffs generally get the benefit of the doubt at this early stage of the litigation, there are two competing versions of GTI’s collapse and a more developed record could later reveal that the defendant’s is the accurate one. That version claims the founders sold three investors a large stake in the company by hiding significant development problems.

The litigation will likely be followed in boardrooms and corporate law offices because of its potential to clarify the power of venture capital and other activist investors to cause big changes in both the course and the wheelhouse of companies in which they have major stakes.  The final decision could affect the guidelines for conflicts that can arise for “dual fiduciaries” — who are officers, directors or controllers of both investor entities and their investment prospects.

Background

According to court records, plaintiffs Abraham Shafi, Krutal Desai and Genrikh “Henry” Khachatryan in 2016 founded Get Together Inc. based on a social media platform called In Real Life Inc. that purportedly enabled users to make “real life” connections.  Reports indicated major user growth. Meanwhile, RLI conducted three rounds of funding from three venture capital firms; Goodwater Capital LLC, Softbank Investment Advisers and Floodgate Fund V.

But then rumors began to circulate that much of the activity on the Get Together site was not of human origin but the work of “bots”—software that mimics human activity.  After a web trade journal published several stories looking into the rumor, the Securities and Exchange Commission launched an investigation. The VC-affiliated directors then commissioned a consultant report on the matter. 

While that investigation was getting underway, the VC directors replaced founder/CEO Shafi with an outsider who assumed the power to vote common shares in support of a move to shut down GTI/IRL. That enabled the venture capital investors to assert their preferred shareholder liquidation preference to the company’s $40 million in cash reserves—with nothing left for the common shareholders.

Who caused the collapse?

In litigation filed first in federal court in California—where the companies are located—and later in Delaware–where they are chartered—the VC directors charged that their investments were obtained by fraud and the founders claimed that although Silicon Valley startups must often navigate rough early-development seas, the VC investors panicked at the first sight of dark clouds in the future, feared for their investments and hastily seized control of the company and its assets.

Two coasts, two suits

The California action, filed by SoftBank, alleged securities fraud by Abraham Shafi who claimed they were intentionally misled by highly inflated reports of GTI’s early growth. .

In this Chancery suit, Shafi and co-founder Khachatryan on November 15, 2023, filed direct claims and derivative charges on behalf of IRL against Goodwater, SoftBank, Floodgate, their respective board representatives and Scott Kauffman, the replacement CEO they chose. 

The claims were for:

  • Count 1 – Removing Shafi, installing Kauffman, and shutting down IRL,violating IRL’s bylaws
  • Count 2 – Appointing Kauffman CEO
  • Count 3 – Against Kauffman for damaging IRL’s business
  • Count 4 – Breach of IRL’s Voting Agreement for Kauffman’s vote as a proxy for common stockholders;
  • Count 5 – Vicarious liability and respondeat superior against the VC firms;
  • Count 6 -Tortious interference with prospective economic advantage for impairing the value of stock options and;
  • Counts 7 & 8 – Defamation and false light invasion of privacy for making false statements about Shafi’s “pattern of misconduct”.

The court ruled that:

As to Count 1: The plaintiffs adequately plead that the VC Directors put their interests, and those of the VC Funds, ahead of common stockholders.

A PowerPoint with highlights of SB 21 at today’s beginning of the annual Tulane Corporate Law Institute, an event featured many times on these pages in prior years, was part of a panel presentation led William Lafferty of Morris Nichols. For the few people who have missed the tsunami of articles and commentary on the proposed changes to the Delaware General Corporation Law proposed on February 17 in the form of Senate Bill 21, which the Corporation Law Council proposed revisions to on March 3, the above PowerPoint provides an excellent overview.

Most of SB 21 amends DGCL Section 144 related to controlling shareholders and disinterested directors. The amendments to Section 220 were discussed recently on these pages. The revisions proposed on March 3 by the Corporation Law Council would make the changes to Sections 144 and 220 retroactive–except for pending litigation.

The status of SB 21 is in flux, but the Senate and the House are expected to consider it in committee and both chambers will likely vote on the bill before the end of the month. The new Delaware Governor requested the changes, so he is expected to sign it if it passes.

Another panel at the Tulane seminar today included a former Delaware Chancellor and Chief Justice who commented–and I’m only paraphrasing: there are many other factors that are part of the analysis about whether to stay in Delaware, beyond SB 21, e.g., other aspects of Delaware law that protect shareholders.

On another panel, Ned Weinberger observed that SB 21 would overrule a long list of major Delaware decisions (referring to a list of cases compiled by Prof. Eric Talley)–including, arguably, the iconic Revlon decision. His view is that SB 21 is not necessary for Delaware to maintain its preeminence in the corporate world.

I recently attended a seminar in New York on D&O litigation developments called the PLUS Symposium. The topics lean towards the concerns of those who defend D&O cases and provide D&O coverage.

I listened to a panel entitled: “Hot Topics in D&O 2025”. None of the panel members were Delaware lawyers or members of the Delaware judiciary or the Delaware legislative branch, but they litigate in Delaware or broker D&O insurance to Delaware companies.

Naturally, the status of SB 21 was the focus of much of the panel discussion. Since the introduction of SB 21, and amendments earlier this week, an avalanche of articles have been written about the proposed changes to the Delaware General Corporation Law. See, e.g., here and here.

Highlights:

  • Like most people, the panelists don’t know for sure what impact SB 21 will have if it passes–or if it doesn’t pass–but the assumption was that if SB 21 passes it would reduce litigation in Delaware at least related to some types of cases.
  • Apparently, Texas has recently introduced somewhat similar legislation.
  • One panelist suggested that the restrictions on Section 220 demands that SB 21 would impose will reduce many plenary cases. For example, one panel member suggested that the Boeing case would not likely have been possible without all the emails, etc., the plaintiffs obtained in a prior Section 220 demand.
  • Another panelist suggested that regardless of SB 21, other aspects of litigating in Delaware, such as the CCLD division of Superior Court, would still provide benefits from being able to litigate in Delaware.
  • Another panel member saw it as ironic that the legislature was attempting to use SB 21 to counteract decisions of the judiciary–but the judiciary is apparently one of the reasons why corporate entities are attracted to Delaware.
  • The prediction of at least one panel member was that the outcome of SB 21 will be the biggest topic in the D&O world for 2025.

In the few days since the Delaware Legislature proposed Senate Bill 21 to make major changes to Delaware corporate law, there has been a veritable avalanche of commentary by the professoriate, practitioners, and journalists with their predictions of the consequences of SB 21 being enacted into law. See, e.g., article on The CLS Blue Sky Blog.

Most of the observations by leading scholars and others focus on the more glitzy proposed changes to DGCL Section 144 via SB 21, which features new definitions for “controlling shareholder” and “disinterested director”.

The fusillade of reviews of SB 21 is easily found in a online search about the newly proposed changes in Delaware law that are arguably more dramatic than the revisions to the DGCL last year, which also broke anecdotal records for the high volume of opinions shared from all corners of the corporate commentariat.

But my focus in this short overview will be on the changes to DGCL Section 220, regarding the qualified rights of a shareholder to demand corporate books and records. Not quite as sexy as the proposed amendments to Section 144, but an issue more often encountered.

Having worked as a legislative counsel drafting legislation for the Delaware Legislature about 30 years ago, I realize that the synopsis at the end of a proposed Senate Bill cannot always be relied on for precision, but the part of the synopsis of SB 21 that pertains to the amendments to Section 220 is excerpted below:

… this Act amends § 220 of Title 8 to define the materials that a stockholder may demand to inspect pursuant to a request for books and records of the corporation. The amendments also set forth certain conditions that a stockholder must satisfy in order to make an inspection of books and records. The amendments make clear that information from books and records obtained by a stockholder from a production under § 220 will be deemed to be incorporated by reference into any complaint filed by or at the direction of a stockholder on the basis of information obtained through a demand for books and records. New § 220(b)(4) preserves whatever independent rights of inspection exist under the referenced sources and does not create any rights, either expressly or by implication. New § 220(f) provides that if the corporation does not have specified books and records, including minutes of board and committee meetings, actions of board or any committee, financial statements and director and officer independence questionnaires, the Court of Chancery may order the production of additional corporate records necessary and essential for the stockholder’s proper purpose.

In order to keep my commentary as pithy as possible, I’ll resort to my favorite format of bullet points:

  • I have written over 200 articles about Delaware court decisions on DGCL Section 220 and the analogous section of the Delaware LLC Act, and have litigated countless cases on this topic. See, e.g., selection of some of my articles on Section 220.
  • Although we all know that the sister provision in the LLC Act has important differences, many court decisions have instructed that the reasoning in cases applying Section 220 can often be applicable to the analogous provision in the LLC Act–which is another opening for more commentary about the impact of SB 21 if it is signed into law.
  • Over the nearly 40 years that I have highlighted cases involving Section 220 and its LLC counterpart in various publications, I have tried to provide a neutral overview of the court decisions without my own opinion. But today I will provide my own insights based on the hundreds of cases on this topic that I have written about and litigated:
  • First, some say indeterminacy in Delaware corporate law is a benefit, not a bug, to the extent that the outcome of a case is not predictable. Notwithstanding some measure of predictability that comes from over 2 centuries of Delaware court decisions, in my view, Section 220 cases that are litigated are often a “black hole”–in the astronomical sense of entering a zone that prevents one from predicting what happens after one enters. I acknowledge that to be less than an optimistic view, but it reflects my own experience of many years.
  • Thousands of reported decisions on Section 220 provide some guidance, but even, for example, when an expert report provides a list of documents needed for the purpose of valuation, the court can still determine that the list is too long, or that the purpose of the plaintiff is not “really” valuation–after a shareholder spends a small fortune on litigation costs. Maybe SB 21 will provide some relief from this state of affairs.
  • Some regard the proposed changes to Section 220 as “raising the bar” and imposing more prerequisites for employing the statute. Maybe so.
  • Nonetheless, in my view, a welcome clarification that SB 21 brings to the table is a concrete list of documents or data that a shareholder is entitled to if the prerequisites of the revised statute are satisfied–that is, less indeterminacy.
  • The highlights of the proposed changes include: (i) a specific list of documents as compared to the current “guess work” about which documents must be produced; (ii) a three-year period prior to the request for documents that also removes the guess work about the period during which documents can be requested; (iii) codification of some requirements that the courts have imposed for years, such as allowing the condition of a confidentiality agreement prior to production.
  • The net result of SB 21 would be to give the court less discretion, though as a court of equity, the Court of Chancery will still be entitled to exercise its equitable powers.
  • I realize that there a limits to the powers of a court of equity. I weigh more of the pros and cons in the supplement below.

Supplement: The DSBA Corporation Law Council on March 3 proposed revisions to the recently debuted SB 21. The revisions to SB 21 include new proposed changes to Section 220–which are not covered in the above blog post about the original SB 21.

An updated SS1 for SB21 was passed by the Delaware Senate. A House vote, and a proposed House Amendment is scheduled for a vote on March 25, 2025.

Notwithstanding the various iterations of the legislation since it was first introduced, the commentary in this post still applies.

Professor Stephen Bainbridge, who has written extensively about proposed SB 21 within the weeks since its introduction, recently penned a scholarly analysis regarding the proposed revisions to SB 21 relating to Section 220.

I readily acknowledge up front that even the revised SB 21 would impose additional hurdles on top of the existing formidable roadblocks to the quest of a shareholder to obtain corporate books and records— to say nothing of the LLC analog. No changes to that statute have been proposed yet.

The good professor refers to the Yahoo case which involved a demand for extensive records in compliance with the Supreme Court’s repeated entreaties to use Section 220 before filing a plenary complaint. The newly proposed Section 220 might make it more difficult or impossible to obtain the same array of documents that were obtained in the Yahoo case. 

But even under the existing regime, it can often cost substantial 6-figures to litigate a Section 220 claim, which is intended to be a summary proceeding. There are published examples, e.g., the Wal-Mart case, highlighted on these pages, where each side spent millions of dollars to litigate a Section 220 claim. For nearly every Yahoo case, there are countless examples—under the existing statute, where a shareholder came up empty due to somewhat amorphous, nuanced defenses currently available.

If SB 21 is passed, companies will have more defenses to a Section 220 demand, and even with a more definite, itemized list of available documents, which I describe above as an offset to the new obstacles, many shareholders will decide that they don’t want to spend, or cannot spend, substantial 6-figures to fight for documents about a company they are invested in.

For the last 20 years, I have highlighted selected decisions from the Delaware Supreme Court and the Delaware Court of Chancery on these pages, as well as related topics, including legal ethics. Recently, the National Law Review, a publication that is over 100 years old and boasts over 2 million readers, asked me to consider sharing my blog posts as part of a new newsletter that they would publish, along with other articles on Delaware corporate law from thought leaders around the country, called the Delaware Corporate and Commercial Law Monitor. This would be a natural extension and evolution of my blog, and an opportunity to expand my reach.

Well, the first edition of the National Law Review’s Delaware Corporate and Commercial Law Monitor has just been published. I’m the Editor-in-Chief. It will be published monthly and emailed to a select few from the mailing lists the NLR has for their 25 other newsletters, as well as the existing subscribers of this blog who read these pages from all 50 states and over 70 countries.

To be clear: this blog will continue unabated. Not sure when I will find time for this new venture in addition to my full-time practice, and while continuing to maintain this blog, but thus far I’ve been able to squeeze it into nights and weekends. Comments are welcomed.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 40 years, prepared this article


The Delaware Supreme Court recently reversed a Chancery decision to let shareholders of TripAdvisor Inc. and its parent continue their suit against their directors over their boards’ reincorporation of the world’s largest travel guidance purveyor  in Nevada—which  offers directors a higher level of protection from investor suits than Delaware, in Maffei et al.v. Palkon, et al., Del. Supr., No. 125, 2024 (Feb. 4, 2025).

Justice Karen Valihura, writing for the en banc high court, said the increased protection from breach-of-duty charges the directors and officers received through the conversion’s charter change did not give them a unique ’non-ratable’ benefit that could have  skewed their objective judgment and made the board’s decision reviewable under  the enhanced scrutiny of entre fairness — as the Chancery  Court had ruled in allowing the plaintiffs to press their suit. 

“Plaintiffs’ allegations have not satisfied the requirement of pleading a material benefit because they have not alleged anything more than speculation about what potential liabilities Defendants may face in the future,” the Justice wrote in explaining why Nevada’s more expansive business judgment rule was not a non-ratable benefit. ‘’If one focuses more broadly on the corporate governance regime beyond just litigation rights alone, then it becomes even more apparent that courts are ill-equipped to quantify the costs and benefits of one state’s corporate governance regime over another’s.”

Charter move roadmap

The high court’s ruling will be closely examined In corporate law offices and boardrooms nationwide—especially where directors are contemplating a charter change—because it effectively presents a  roadmap of how directors of a Delaware corporation could reincorporate in another state while staying under the protection of Delaware’s business judgment rule.

Background

TripAdvisor, headquartered in Massachusetts and parent Liberty TripAdvisor, headquartered in Colorado, which holds a 56 percent voting interest in TripAdvisor, in 2023 considered changing their charters from Delaware to Nevada for the increased liability protection it would provide for directors and officers.

In particular, they were attracted to the higher level of D&O liability protection that Nevada’s business judgment statute provided compared to Delaware’s version.  In addition they found research that indicated Nevada’s  business courts would “minimize the time, cost and risks of commercial litigation” and that Nevada has ”lower taxes and fees.”

The directors and officers of TripAdvisor and its parent approved the charter changes but stockholders were almost evenly divided on the issue and Justice Valihura noted that regarding the conversion of TripAdvisor the transactions designed to effectuate this change in June 2023 would have been voted down without the defendant-Controller/CEO Gregory Maffei’s votes.  The result was a shareholder suit claiming the charter change was a breach of duty because it gave the directors and officers a unique “non-ratable benefit” through the higher liability protection.

Not entirely fair?

On defendants’ motion to dismiss, the Court of Chancery held that Plaintiffs adequately alleged that Defendants will receive a non-ratable benefit in the form of reduced liability exposure and that the Complaint alleged facts supporting a reasonable inference that the Conversions were not entirely fair.

Chancery observed that “[u]nder Delaware law, a controller or other fiduciary obtains a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary’s risk of liability.”  It turned down the defendants’ move for an interlocutory appeal.

The appeal

On appeal, the defendants contended that the business judgment rule applies because there is no pending or contemplated lawsuit and, therefore, Defendants are not receiving a material, non-ratable benefit.  Defendants argued for a materiality requirement because “[t]he speculative benefits afforded to fiduciaries from risk mitigation do not constitute material benefits requiring entire fairness review.”

The State of Nevada filed an amicus brief generally supporting Defendants’ position. Nevada argued that the Conversions do not confer a non-ratable benefit that would trigger entire fairness.

The high court’s opinion

 “This Court has noted that “[t]he entire fairness standard applies only if the presumption of the business judgment rule is defeated,” Justice Valihura wrote.  In the director context, “in order to rebut the business judgment rule presumption, an interest must be subjectively material to the director. In other words, the alleged benefit must be significant enough as to make it improbable that the director could perform his fiduciary duties to the shareholders.”

She noted that entire fairness is not triggered solely because a company has a controlling stockholder like Maffei .  “We conclude that, based on the pleaded allegations, Defendants will not receive a non-ratable benefit from the Conversions and, accordingly, the entire fairness standard of review does not apply, she wrote.

“In the controller context, the plaintiffs must plead that [the controller] had a conflicting interest in the Merger in the sense that he derived a personal financial benefit ‘to the exclusion of, and detriment to, the minority stockholder,” the high court ruled.

The justices’ conclusion 

Finally, the Court of Chancery rejected the idea that Delaware precedent has a temporal distinction that distinguishes between cases based on existing versus future potential liability. But the justices ruled that: “Rather, our reading of Delaware precedent persuades us that temporality is a key factor because it weighs heavily in determining materiality in this context.  And there was no pending judgment against the defendants nor any “cloud of litigation’” on the horizon where a new, stronger level of liability protection could change the future.

Justice Valihura noted that the Court of Chancery cited several cases to support the principle that “[u]nder Delaware law, a controller or other fiduciary obtains a non-ratable benefit when a transaction materially reduces or eliminates the fiduciary’s risk”, but she wrote: “we note that these cases all involved existing potential liabilities from past conduct that the litigated transactions may have extinguished.”

“Delaware policy has long recognized the values of flexibility and private ordering,” the high court concluded.  “Allowing directors flexibility in determining an entity’s state of incorporation is consistent with this Delaware policy.”

A recent Delaware Court of Chancery decision provides useful guidance regarding the requirements to preserve evidence in litigation and the potential penalties for spoliation. In the matter styled: In re Facebook, Inc. Derivative Litigation, C.A. Cons. No. 2018-0307-JTL (Del. Ch. Jan. 21, 2025), the court addressed spoliation in litigation involving allegations that Facebook sold personal information in violation of applicable obligations it had to its social media users.

I. Factual Background

Although several million documents were produced in the litigation, this decision involved a motion alleging that the COO of Facebook and one of the members of the board of directors failed to preserve their personal email accounts which were used at least occasionally for business communications relevant to the lawsuit.

II. Legal Analysis

The legal definition for spoliation is the destruction or significant alteration of evidence, or the failure to preserve evidence properly, or the improper concealment of evidence. Slip op. at 11 (citing Goldstein v. Denner, 310 A.3d 548, 567 (Del. Ch. 2024)).

Court of Chancery Rule 37(b) authorizes spoliation sanctions for failure to preserve ESI and requires that before sanctions can be imposed, it must be shown that: (1) The responding party had a duty to preserve the ESI; (2) The ESI is lost; (3) The loss is attributable to the responding party’s failure to take reasonable steps to preserve the ESI; and (4) The requesting party suffered prejudice. Moreover, in order for an adverse inference or case dispositive sanctions, the plaintiff must show that the responding party recklessly or intentionally failed to preserve ESI. Slip op. at 12.

III. When Court Should Decide Spoliation Motion

The court recited factors it will consider to determine whether to address a spoliation motion before trial or after trial. Slip op. at 13-14.

IV. When a Duty to Preserve Exists

  1. The first question under Rule 37(e) is whether ESI should have been preserved.

    The court emphasized that: “A party is not obligated to preserve every shred of a paper, every e-mail or electronic document.” Slip op. at 14-15 and footnote 51. But the party must preserve what it reasonably should know is relevant to the action. The duty applies to key people likely to have relevant data.

  2. The second step in a Rule 37(e) analysis is whether the ESI is lost. For purposes of Rule 37(e), information is lost only if it is irretrievable from another source including other custodians. Slip op. at 17.

  3. The third step in the Rule 37(e) analysis is whether ESI was lost because of the failure of a party to take reasonable steps to preserve it.

    In order to understand preservation, we must understand the components of ESI discovery.

    The court reviewed the five steps involved in ESI discovery: (i) Identification; (ii) Preservation; (iii) Collection; (iv) Review; and (v) Production. In this case the issues were identification and preservation.

(i) Identification: Taking reasonable steps to identify ESI is the first step in preserving evidence or information which should be collected and preserved. This involves locating the relevant people that have custody of the relevant ESI or the ability to obtain it, as well as the location of types of ESI. Slip op. at 18. This may involve interviewing individuals that might have information about the location of relevant ESI.

(ii) Whether there was a failure to take reasonable steps to preserve: The next step is to preserve ESI, but a party “need not preserve all documents in its possession; it must preserve what it knows and reasonably ought to know is relevant to possible litigation and is in its possession, custody, or control.” Slip op. at 19.

Importantly, the court explained that it should be “sensitive to the parties’ sophistication with regard to litigation in evaluating preservation efforts; some litigants, particularly individual litigants, may be less familiar with preservation obligations than others who have considerable experience in litigation.” Slip op. at 19 (emphasis added).

(iii) Steps Necessary to Preserve

The court distinguished between the practical steps an organization must take to preserve compared to an individual, but both must suspend routine document destruction policies. Slip op. at 20. For example, individuals must disable auto-delete functions, and also backup data for personal devices. Failure to do so may suggest they acted unreasonably. An individual must self-educate in order to learn what is necessary to prevent automatic deletion or destruction.

Applying the standards to the Facebook case, the court found that the COO was highly sophisticated as the chief operating officer and she knew what was required. She should have consulted company counsel if she had any doubts. Her failure to take steps to avoid the auto-deletion of her email was not reasonable. Slip op. at 21-22.

The court also explained that the director of the company who failed to disable his auto-delete function for  his personal emails acted unreasonably, but in his case there was no prejudice.

V. Prejudice Required

If there was no prejudice from the loss of ESI, no sanctions are imposed. Slip op. at 23. The court explained what prejudice means in this context.

The prejudice analysis requires that the requesting party provide an explanation as to why the lost ESI could have been relevant, but “the mere fact that evidence is lost is not sufficient to demonstrate prejudice; the requested party must provide a plausible explanation as to why evidence could have been relevant such that the failure to preserve is prejudicial.” Slip op. at 24.

Once the party seeking sanctions meets the initial burden, the party who failed to preserve must convince the court that the lost ESI did not result in prejudice, such as: because the material could not have been relevant, or would not have been admissible, or could not have been used by the requesting party to its advantage. Slip op. at 24.

The court explained why the loss of the COO’s emails was prejudicial—but why there was no prejudice from the emails of the board member that were lost. Slip op. at 25-27.

VI. Sanctions

The court rejected most of the requests for sanctions, and only imposed an elevated requirement for the burden of proof, as well as an award of fees for bringing the motion for sanctions. Slip op. at 29.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article

The Delaware Supreme Court recently upheld the Court of Chancery decision that Oracle Corp. founder Larry Ellison did not disloyally cause the computer software company’s directors to significantly overpay for cloud-based business software purveyor NetSuite Inc. – which he allegedly also controlled, in In re Oracle Corp. Derivative Litig., Del. Supr., No. 139, 2024 (Jan. 21, 2025). 

Writing for the full high court, in what could be the last chapter of the long-litigated 2017 merger dispute, Chief Justice Collins J. Seitz Jr. said that Chancery correctly rejected the derivative plaintiffs’ claim that Ellison wrongly withheld from the Oracle board information that would have probably affected the merger price in Oracle’s favor.  

“We note with skepticism the argument that Ellison should have made his post-closing views known during the Special Committee’s process,” the Chief Justice wrote.  “On appeal, we will not overturn the court’s conclusion that Ellison’s undisclosed post-closing plans for operating NetSuite were immaterial to the Special Committee’s evaluation and negotiation of the transaction.”  He added that there was insufficient proof Ellison could have swayed Oracle’s acquisition committee directors even if they had known about his post-merger plans for NetSuite.

The decision reaffirmed the Delaware law parameters of what personal information about post-merger plans  a corporate officer must divulge to directors in negotiations.

Background

The 2017 merger talks sparked seven years of litigation, a half dozen Chancery Court decisions and finally a ten-day trial leading to a Court of Chancery May 12, 2023 judgment that was appealed to the state high court.

Oracle shareholder plaintiffs charged in the first of several 2017 Chancery derivative suits that when Oracle founder Larry Ellison and CEO Safra Catz proposed to acquire NetSuite — which Ellison also founded and controlled — he first verbally agreed with NetSuite executives to a per-share price in the $100-to-$125 range even though that was not in the Oracle investors’ best interests.

Charges that Ellison and Catz breached duties of loyalty and candor in the merger negotiations and disclosures withstood their motion to dismiss and, in an unusual turn for a derivative suit, Oracle’s directors waived their right as the corporation’s managers, to press the claims. In re Oracle Corp. Derivative Litig., 2018 WL 1381331 (Del. Ch. Mar. 19, 2018).

In its post-trial opinion, the Court of Chancery entered judgment for the remaining defendants after concluding that the special committee negotiated the NetSuite transaction untainted by Ellison’s or Oracle management’s influence.  In re Oracle Corp. Deriv. Litig., 2023 WL 3408772 (Del. Ch. May 12, 2023.) 

The appeal

In this appeal, the stockholders contend that the lower court erred by: 

(1) allowing the SLC to withhold its interview memos from the plaintiffs; 

(2) applying business judgment review to a transaction involving an alleged controlling stockholder;

3) employing the wrong legal standard when evaluating whether Ellison misled the special committee by allegedly concealing his future NetSuite plans; and 

(4) finding that Ellison’s alleged undisclosed future operational plans were immaterial to the special committee’s evaluation and negotiation of the transaction.

The high court ruling

The high court said, under Rule 26(b)(3), to gain access to non-opinion work product, the plaintiffs must show that they have a “substantial need of the materials in the preparation of their case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means.” The Court of Chancery did not exceed its discretion on that issue, the Justices said.

The justices said the Court of Chancery rightly applied defendant-friendly business judgment review — not the more stringent entire fairness — to the Oracle/NetSuite transaction. Although Ellison held a substantial block of Oracle stock and was its visionary co-founder, the court decided that the plaintiffs failed to prove Ellison wielded either general control over Oracle or transaction-specific control — or that fiduciaries misled the Special Committee while considering the transaction. “We affirm its decision to apply business judgment review to the transaction.”

The answer to the control question

The control question is “a judicial conclusion that is reached after a fact-specific analysis.” The Chief Justice said the Vice Chancellor rightly found the following unchallenged facts to conclude that Ellison, as a minority stockholder, did not exercise actual control over the Oracle board:

· the Oracle board and management were not afraid to disagree with Ellison;

· Ellison neither controlled Oracle’s day-to-day functions nor dictated Oracle’s operations to the Oracle board;

· Ellison “scrupulously avoided” discussing the transaction with the Special Committee.

· Ellison neither proposed the transaction nor indirectly controlled the merger negotiations through his January 27, 2016, phone call with director Goldberg; and

· although Ellison could have controlled the transaction, he did not interfere with or actually exercise control over the transaction

The conclusion

The high court concluded that: a fiduciary may not use superior information or knowledge to mislead others by withholding material information from the board, engage in deceptive conduct, or otherwise mislead the board. If so, he has failed to act in good faith and therefore would have acted disloyally–but that was not the case here.

A recent Court of Chancery decision determined that the sale of a company initiated by the controller, a private equity fund which was also the largest equity holder in the company, did not run afoul of the business judgment rule. The decision in Manti Holdings, LLC v. The Carlyle Group Inc., C.A. No. 2020-0657-SG (Del. Ch. Jan. 7, 2025), is noteworthy for several reasons.

First, it describes in detail the factual and legal reasons why the controller that initiated the sale of the company was only subject to the business judgment rule review, as opposed to the entire fairness standard. The opinion is also notable for its description of the typical timetable for exiting from investments that is common among private equity firms.

Aside 

As an aside, after 20 years of providing highlights on this blog of Delaware corporate and commercial decisions, I have found that the most useful service I can provide via blog posts regarding 68-page post-trial decisions like this one, is to list key bullet points with references to page numbers and footnotes of the decision for those who want to spend more time doing a deep-dive into specific parts of the court’s opinion. For those looking for more verbose commentary generally, there are plenty of other more time-consuming law review articles and subscription services to read that provide lengthy ruminations.

Short Overview

This case involved The Carlyle Group, the largest equity holder in a company called Authentix, and related entities. Carlyle’s private equity fund partnership agreement provided for a fund life of 10 years—although that did not impose a contractual obligation for Carlyle in this case to exit any particular investment at that time.

The minority stockholders claimed that Carlyle’s business model required it to sell Authentix regardless of price, and that it caused the board to force a sales process that was unfair to stockholders. After a 7-day trial, the court determined that the interest of Carlyle was the same as that of the minority stockholder’s—which was to maximize the value of its investment.

The court reasoned that: (i) there was no pressure for a quick exit, nor did Carlyle conduct a fire sale; (ii) Carlyle did not extract a non-ratable benefit; (iii) that the sale was arms-length; and (iv) moreover, the court determined that the business judgment rule applied to the sale–and not the entire fairness standard.

For more factual background details, the 2 prior Chancery decisions in this case should be consulted; the citations for those 2 prior Chancery decisions are found at footnotes 50 and 208.

Highlights

  • The court provides an extensive factual description of the important details found after a 7-day trial regarding, for example, the various investors in the company and the sales process. See Slip op. at 3 to 32.
  • As a practice tip, writers of pleadings and the like who file in Chancery should observe how the court structures its opinions in terms of: using Roman numerals (I, II, III) for initial sections, and denoting the next sub-sections with capital letters (A, B, C), and then using Arabic numbers (1, 2, 3) for the next sub-sections. Careful writers should also observe the court’s abbreviations for trial exhibits and trial transcripts, as well as how the court refers to the parties’ briefs and other factual sources. See Slip op. at 3.
  • Two key basics of corporate law are always useful to repeat as a refresher: (1) Even as a controller, Carlyle as a stockholder was “free to sell its stock for its own reasons and on its own timing,” and as a stockholder, it was “owed fiduciary duties by the directors.” Slip op. at 34 (emphasis in original); (2) The court emphasized, however, that: “when acting as a controller, Carlyle itself could owe fiduciary duties to the Company and its stockholders.” Id.
  • Although the court observed that Carlyle could be liable if it used its corporate control to compete with the majority for consideration, the facts did not support the view that they did so.
  • The court also rejected the argument that Carlyle extracted for itself a form of consideration that was uniquely valuable, and also rejected the argument that the entire fairness standard applied. Slip op. at 35.
  • A useful definition of a “controller” for the toolbox of corporate litigators is the following: when a stockholder: “(1) owns more than 50% of the voting power of a corporation, or (2) owns less than 50% of the voting power of the corporation but ‘exercises control over the business affairs of the corporation.’” Slip op. at 37 and footnote 223.
  • The court also instructed that “a group of stockholders may be deemed a ‘control group’ and considered a controlling stockholder such that ‘its members owe fiduciary duties to their fellow shareholders.’” Id. and footnote 224.
  • The thorough reasoning of the court applied the extensive facts to the law in order to support its conclusion that the entire fairness standard did not apply and Carlyle did not receive a non-ratable benefit, as well as explaining why the Company conducted a fair sales process—and was not contractually bound to sell by a certain deadline. See Slip op. 39 to 67.