Buyer’s Claims Fail Due to Lack of Express Representations by Seller in APA

A recent Delaware Court of Chancery decision provides an important lesson about the downside of imprecise drafting, and the need to express with precision how specific risks are to be allocated between the purchaser and seller of a business. In Julius v. Accurus Aerospace Corporation, C.A. No. 2017-0632-MTZ (Del. Ch. Oct. 31, 2019), the court rejected the claims of the buyer that the loss of substantial revenue from the most important customer of the seller was neither an express representation that was breached, nor were there any other reasons to refuse to release the escrow funds that were withheld post-closing.  (Notable in passing is that the court’s opinion did not address, and presumably neither did the parties, the potential lack of equitable jurisdiction despite the primary relief sought being the payment of escrow funds.)

Why this Opinion is Noteworthy:

As the court itself describes, this opinion can serve as a learning experience about the importance of a buyer expressly including representations in an agreement of sale for a business regarding specific material aspects of the deal that it seeks to enforce post-closing if those representations do not materialize.

This case also serves as an instructive example of how sellers of a business were careful not to include representations about aspects of business projections that they could not control–as well as the consequential protections provided by an integration clause.

Important Principles of Law Included in This Decision:

Although this 50-page opinion deserves careful reading of all of its pages, the following bullet points should be especially useful for the toolbox of a commercial litigator.

  • One aspect of the decision that deserves attention is the impact of the exact terms of the integration clause, see Slip op. at pages 15 to 16, and a comparison of the reasoning in the rest of the 50-page opinion about why there were no representations outside of the four-corners of the APA and other transaction documents that could form the basis of the breach of representation.
  • A key fact on which the court’s reasoning was based, in the context of cross-motions for summary judgment, was that both parties acknowledged that the APA did not include any explicit representations or warranties regarding the accuracy of the projections that the sellers shared prior to entering into the APA, notwithstanding the expression of the sellers’ “belief”–not warranty–about a substantial volume of revenue from a key customer, that never materialized, but which based on past history was likely to continue post-closing.
  • The court discussed several basic contract interpretation principles including the truism of Delaware law that the court will not provide a contract remedy to a party that did not obtain that right to a contractual remedy at the bargaining table–and that Delaware presumes the parties are bound by the language of the agreement they signed, especially when the parties are sophisticated entities engaged in arm’s length negotiations. See footnotes 124 through 128 and accompanying text.
  • The court explains a useful rule of contract interpretation used by the Delaware courts that allows the court to refer to dictionary definitions to discern the “usual and ordinary meaning of” words. That may require reliance on an “ordinary” dictionary as opposed to, by comparison, Black’s Law Dictionary–which would provide a special “term of art” or a meaning in the law for a word that might differ from the ordinary meaning of the word. See footnotes 132 through 135 and accompanying text.
  • Another useful aspect of this decision is the court’s observation that certain canons of interpretation, such as the guidance that words in an agreement should be interpreted in the context of words surrounding them, only apply to ambiguous agreements, and the agreement in this case was deemed unambiguous.
  • The court was also not restricted by the canon of construction that a contract should not be interpreted to render certain terms as being superfluous. The court explained that such a principle of construction “does not go so far as to counsel the creation of a contract meaning in which there is little or no support in order to avoid redundancy.”
  • Rather, the court explained that: “My interpretation reflects conservative verbosity, not improper redundancy.”
  • The court distinguished a prior Delaware decision that involved a finding of a breach of representations because in that case the misrepresentation occurred after the cut-off date for a balance sheet and before the purchase agreement. See footnote 166 (citing H-M Wexford LLC v. Encorp, Inc., 832 A.2d 129, 143 (Del. Ch. 2003)).
  • The court reasoned that if preserving an opportunity to bid on a material part of the business from a key customer was so valuable to the buyers, they should have bargained for explicit protections and express representations in the APA, but they failed to do so. See Slip op. at 40.
  • Although not announcing new law, this opinion features a helpful overview of basic principles regarding the elements of a claim for breach of the implied covenant of good faith and fair dealing, as well as the high threshold, not met in this case, regarding the shifting of attorneys’ fees based on allegations of bad faith litigation conduct.

Chancery orders 11th hour records for CBS Corp. investor’s probe of Viacom merger plan

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.

A recent Court of Chancery decision gave a CBS Corp. shareholder access to the broadcaster’s internal documents regarding an imminent merger with former corporate sibling Viacom Inc. after finding a “credible basis” for the investor’s suspicion that Shari Redstone abused her control of both companies in Bucks County Employees Retirement Plan Fund v. CBS Corp., No. 2019-0820-JRS, memorandum opinion (Del. Ch. Nov. 25, 2019).

Vice Chancellor Joseph Slights III’s Nov. 25 ruling in the books-and-records action orders the CBS directors to turn over materials they considered in reaching an about-face decision to reunite with Viacom after the board vehemently rejected similar mergers with the parent of Paramount movie studios in 2016 and 2018. This decision was based on Section 220 of the Delaware General Corporation Law (DGCL). Compare recent DGCL Section 220 rulings juxtaposed on these pages, among the many addressed on these pages over the last 15 years.

Pennsylvania-based Bucks County Employees Retirement Plan Fund says there is good reason to believe the CBS directors breached their fiduciary duty by caving in to pressure from the daughter of founder Sumner Redstone, whose National Amusements Inc. holding company controls both companies.

After intense court and boardroom battles over Redstone’s efforts to reunite CBS with what she worried was a “tanking” Viacom, CBS executives and directors signed a two-year truce in 2018, but most soon stepped down and were replaced by Redstone’s choices, the pension fund claims.

Vice Chancellor Slights found the complaint met the “low burden” to establish credible suspicion of actionable breaches of fiduciary duties because it provided some support for allegations that:

  • The CBS board declined to submit the merger to the unaffiliated stockholders, raising the specter of merger review under the exacting entire fairness standard;
  • The 2019 stock-for-stock merger did not appear to be a better deal for CBS shareholders than the ones the board had rejected in 2016 and 2018 as “presenting a significant threat”;
  • The 2019 deal could provide Redstone with benefits similar to those that “the CBS board found so offensive in 2018 that it sought to dilute Redstone’s stock and enjoin the 2018 merger”;
  • There is reason to suspect an improper transaction process because, although not a member, Redstone attended a Feb. 22 CBS director governance committee meeting to discuss “strategic planning”;
  • The CBS CEO who replaced Les Moonves, after he was ousted amid misconduct charges, had been a “fierce ally’ in opposing a Viacom merger, but he experienced a “change of heart” after meeting with Redstone and receiving a “substantially boosted compensation package”; and
  • Lawrence Tu abruptly resigned as Chief Legal Officer “for good reason” following the Feb. 22 meeting, probably because he saw a violation of the 2018 settlement agreement with Redstone.

“The totality of these proven facts,” coupled with the fact that the 2019 merger is a conflicted controller transaction that will likely be subject to entire fairness review if challenged, adequately supports the plaintiff’s purpose for inspection, the vice chancellor said.

He granted access to documents used in the nomination of directors to the governance committee but found no separate need for information about directors added in connection with the 2018 settlement agreement or documents that would shed light on all directors’ independence.

The pension fund also won access to financial advisor presentations from all three mergers in order to investigate “a continuing story of misconduct” and “whether the 2019 merger is the product of wrongdoing.”

The vice chancellor ordered CBS to produce board-level documents concerning Moonves-replacement Joseph Ianniello’s compensation arrangements but found no need to access the CEO’s electronic communications with Redstone to show he self-interestedly backed the deal.

He found the pension fund is entitled to see only a “narrow” set of electronic communications between Redstone and the nominations and governance committee concerning the February 22 meeting and the Tu resignation in order to investigate wrongdoing in those contexts.

He rejected plaintiff’s broad demand for all electronic communications between Redstone, CBS, Viacom and their directors and advisors because it “bears little resemblance to the ‘rifled precision’ required in a Section 220 demand,” and is more appropriate for plenary suit discovery. See Brehm v. Eisner, 746 A.2d 206 (Del. 2000).

Vice Chancellor Slights entered judgement for the pension fund in the action he had expedited because of the planned closing of the deal in the following week, but in a footnote, he cautioned that “I do not mean to endorse the plaintiff’s approach here as a ‘playbook’ that should be followed by other stockholders who may seek to challenge transactions preclosing.”


Chancery Grants a Section 220 Demand in One Case–Denies it in Two Others

This post juxtaposes two recent decisions from the Delaware Court of Chancery addressing a perennial favorite of Delaware corporate litigation: Stockholder demands for records under DGCL Section 220.

Although the Section 220 demand was successful in the matter of Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), by contrast:

Section 220 demands were denied in post-trial opinions in the matter of Southeastern Pennsylvania Transportation Authority v. Facebook, Inc., C.A. No. 2019-0228-JRS (Del. Ch. Oct. 29, 2019), and High River Limited Partnership v. Occidental Petroleum Corporation, C.A. No.  2019-0403-JRS (Del. Ch. Nov. 14, 2019).

The Donnelly case, is an example of a successful 220 demand based on the court’s finding of:

(1)       A credible basis to investigate claims of breach of the duty of loyalty; and,

(2)       The rejection of the argument that, contrary to the 2017 Chancery decision in Wilkinson v. A. Schulman, Inc. (highlighted on these pages here), the plaintiff in this matter was a mere proxy for plaintiff’s counsel who was a driving force behind the Section 220 demand, as was the case in Schulman.  The Schulman case was distinguished on its facts.

(3)       The Donnelly decision also provides an excellent overview of the necessary elements, and their “sub-parts”, that must be satisfied to prevail in a Section 220 claim. See Slip op. at 8.

By contrast, the decision in SEPTA v. Facebook, Inc., linked above, added to the long list of examples highlighted on these pages over the past 15 years that, at least in this author’s view, support the observation that Section 220 is a “blunt instrument at best” that requires substantial financial stamina and wherewithal to “go the distance” through trial and potential appeals. This SEPTA case is one of many cases that also support the observation that the results of a Section 220 demand, even when a post-trial ruling requires the production of documents, are often unsatisfying and do not provide an enticing ROI.

In the High River case, after describing Delaware law as “murky” at best, regarding whether the desire to communicate with other stockholders is a proper purpose under Section 220 in all circumstances, the Court of Chancery explained in a 22-page post-trial opinion why this was “not the right case” to announce a bright line rule endorsing such a purpose.

Delaware Supreme Court Defines ‘Securities Claim’

The Delaware Supreme Court recently issued an opinion that defined the words “securities claim” for purposes of determining coverage under a D&O policy. Kevin LaCroix, on his popular blog called The D&O Diary, provided recently a comprehensive overview and analysis of this decision styled In Re Verizon Insurance Coverage Appeals, Del. Supr., No. 558, 2018 (Oct. 31, 2019).  I provide the foregoing hyperlink to his helpful review of the ruling in lieu of my own adumbration of this noteworthy opinion from Delaware’s High Court.

Prof. Hamermesh recaps 40-plus years of Delaware corporate law trends at 35th Annual F.G. Pileggi Distinguished Lecture

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 law school professor widely regarded as the “dean” of Delaware corporate law told a gathering of the state’s bench and bar in Wilmington Nov. 8 that he was just fortunate to be in the right place at the dawn of the age of hostile takeover litigation.

At the 35th Annual Francis G. Pileggi Distinguished Lecture in Law at the Hotel duPont, Widener University Delaware Law School Professor Emeritus Lawrence A. Hamermesh presented his unique perspective on more than 40 years of legal trends in an interview with fellow Widener professor Paul L. Regan. The law school provided an excellent overview of the event on their website.

Hamermesh said in 1976, he was fresh out of Yale Law School and working for the law firm Morris Nichols Arsht & Tunnel in Wilmington when he was assigned to a minority shareholder’s appraisal suit over the value of the stock of Kirby Lumber Corp.

He said that low-profile case involved issues that were common to later high-stakes hostile acquisition litigation that dominated the docket of the Delaware Chancery Court for decades. Bell v. Kirby Lumber Corp. 413 A 2d 137 (Del. 1980).

Morris Nichols frequently defended companies and their officers and directors, who usually took the position that the company’s worth should be based on its revenue — in Kirby’s case, about $120 a-share — but the plaintiff said its assets were worth $770 a-share.

Kirby’s legacy

Hamermesh said as merger and acquisition battles heated up through the 1980’s, hostile bidders seeking control of a bare majority of a target company’s stock so they could profitably sell off its pieces were focused on asset value.

“The court struck a compromise and averaged Kirby’s stock value between those two value extremes but that was just the beginning” of a long, see-saw battle between corporate officers and directors on one side and hostile bidders and activist investors on the other, he said.

Often, he faced his interviewer, Prof. Regan, in those battles during Regan’s stint at firm Skadden Arps, before Hamermesh traded the courtroom for the Widener classroom in 1994, where the two have steered the corporate law department.

They said they have witnessed the evolving struggle between corporate operating value and break-up asset value proponents put takeover litigation and the Delaware business courts in the national spotlight.

Often, the threat of a takeover that would bust up a company and its business made strange bedfellows out of traditional adversaries, such as management and labor who would be forced to put aside their differences to present a united front against a hostile bidder, Hamermesh noted.

Spotlight shifts to Delaware

After the U.S. Supreme Court decided in Green v. Santa Fe that merger challenges were the province of  state law and not classic federal securities laws because they focused on fiduciary duty, not securities deceit and fraud, the Delaware state courts rose to prominence, the professors agreed. Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977)

They discussed the key Delaware decisions in the 1980’s that tried to balance the right of the directors to manage their companies, against the right of investors, as the owners, to decide the company’s ultimate fate.

Unocal and Revlon’s effect

The Delaware Supreme Court’s Unocal decision for the first time imposed an “enhanced duty” on directors to show that their takeover defense was a reasonable response to a threat to the corporation by a hostile bidder, they said. Unocal v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)

One year later, the high court’s Revlon ruling said in a sale-of-control battle the directors effectively become the auctioneers of the company and must take a hostile bidder’s higher offer, because the board’s defenses could be the product of conflicted interests. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986)

“The Supreme Court said the board has to take the highest offer in a sale situation if its the end of the line for the business, but what if it will live on in some other form?” Hamermesh asked.  In those cases, the board could consider other constituencies, including the interests of constituencies such as employees, creditors and suppliers. Compare generally, Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL, Slip op. at 30-31 and n.8 (Del. Ch. Oct. 7, 2019)(recent Chancery decision noting considerations that can be taken into account consistent with fiduciary’s obligation to act in best interests of stockholders.)

The takeover battles evolved into a struggle between long-term revenue proponents and the hedge funds, private equity companies and other activist investors who pushed for changes that would generate quick, short-term profits, he said.

Investing with grandchildren in mind

Today, the issue is still “shareholder primacy”, versus other interests – such as the environment — because “companies can benefit by dumping on the world, but what about my grandchildren — what kind of world will they inherit?” because of investor decisions, he asked.

The professor said like many investors, his stock holdings are through “investment intermediaries” whose short-or-long-term influence on the companies in their portfolio can be hard to gauge.

The iconic Delaware court rulings mainly address the fiduciary duties of corporate officers and directors, “but what duty do investment companies owe to shareholders?” he asked.  The focus has been on the agency costs directors and officers incur in running the company, “but what are the investment intermediaries’ agency costs?”

Responding to Regan’s “where is shareholder litigation going?” question, Hamermesh applauded the Chancery Court’s 2016 Trulia decision that effectively stopped what he called “merger tax” lawsuits in which plaintiff law firms reaped attorney fees for quick settlements that provided no benefit beyond unimportant added deal information.   In re Trulia, Inc. S’holder Litig., 129 A.3d 884, 894 (Del. Ch. 2016).

In hindsight, he said, whatever his contribution has been to his field, his choice of corporate over criminal law meant that, “I was basically representing people fighting about money, and no one was going to die.”

35th Annual F.G. Pileggi Distinguished Lecture in Law

The 35th Annual Francis G. Pileggi Distinguished Lecture in Law (named after the father of this blog’s primary author) will be held on:

Friday, November 8, 2019.

Registration and breakfast is at 8:00 a.m. at the Hotel du Pont in Wilmington, Delaware. The Annual Lecture begins at 8:45 a.m.

Download the brochure which also provides details for registration online.

Prior Annual Pileggi Lectures have been highlighted on these pages.

The Delaware Journal of Corporate Law at Delaware Law School, which handles the administrative aspects of this annual event, provides more information about prior speakers in the series on their website.

Chancery Applies Implied Covenant in Agreement that Waives Traditional Fiduciary Duties–and Affirms Shareholder Wealth Maximization Norm

A recent Chancery decision is notable for its application of the implied covenant of good faith and fair dealing in a partnership agreement that waives all conventional fiduciary duties, and replaces them with a contract-based standard of conduct. The decision in Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), is an exemplary exegesis of standards and nuances and subtleties that must be addressed before finding a breach of the implied covenant of good faith and fair dealing–especially when conventional default fiduciary duties in the alternative entity context are waived. See Slip op. at 46-48.

Why this case is notable: This case provides a cornucopia of “first principles” of Delaware corporate law in several footnotes. See, e.g., footnotes 5-9 and accompanying text.

For example, the court observes that in for-profit entities, fiduciary duties are owed to all stockholders–and the court describes those increasingly important instances where consideration of other constituencies and factors may be consistent with that primary focus of fiduciaries, i.e., the shareholder wealth maximization norm. See Slip op. at 30-31 and n.8.

This decision is also worthy of attention because it finds a difficult-to-prove breach of the implied covenant of good faith and fair dealing. The court explains why, based on the facts presented, it is “reasonably conceivable” that the implied covenant was breached. See Slip op. at 48-49.  The court also reasoned that it was not surprising that there was no express term that barred manipulation of a “call price.”

UPDATE: The venerable Professor Bainbridge, a nationally-prominent corporate law professor, often cited by Delaware courts, graciously linked to this post on his blog.

Chancery: investor’s stealth demand on biopharma can’t avoid Spiegel pre-suit demand choice

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.

A shareholder who made a veiled threat to take action against a biopharmaceutical company over its directors’ allegedly excessive compensation effectively made a pre-suit demand and cannot later sue and claim that a demand would have been futile, the Delaware Chancery Court has ruled in Solak v. Welch, et al., No. 2018-0810 KSJM, memorandum opinion (Del. Ch. Oct. 30, 2019).

 Vice Chancellor Kathaleen St. Jude McCormick’s October 30 opinion dismissed John Solak’s derivative suit against Ultragenyx Pharmaceutical Inc.’s directors, finding that his pre-suit letter requesting them to address non-employee board member compensation was not a harmless investor request.  Rather, it was a “proverbial wolf in sheep’s clothing” demand “with far more legal bite” that required the plaintiff to either prove the directors wrongfully refused to take action or suffer the court’s dismissal of his breach of duty and waste of assets charges, the vice chancellor said.

Only two choices

She said the Delaware Supreme Court’s Spiegel v. Buntrock decision gives investors seeking to sue in the name of the company two choices: either first demand that the directors, as managers of the company, take action to right a wrong or skip the demand and show that it would have been futile because the directors are too conflicted to give the charges a fair review. Spiegel v. Buntrock 571 A.2d 767, 772-73 (Del 1990).

The vice chancellor’s opinion says Spiegel does not allow a shareholder to demand an action under the guise of  seeking better corporate governance practices and then use the second Buntrock option and argue that his letter was not a pre-suit demand but rather “an informal, good faith attempt to educate the board and encourage it to make changes.”

According to Vice Chancellor McCormick’s opinion, Solak’s counsel sent a June 2018 letter to the Novato, Calif. company’s directors suggesting that they correct the excessive $400,000 a year average compensation the independent directors have been receiving since 2014.

The letter claimed that pay plan lacks meaningful limitations and renders the company “more susceptible than ever to shareholder challenges and that Solak would consider “all available shareholder remedies” unless Ultragenyx responded in thirty days.

When the board rejected the request the following October after an internal investigation of compensation policies, Solak sued in Chancery Court one month later and the directors moved to dismiss it in December for failure to show that plaintiff’s pre-suit demand was improperly refused.

The ‘steeper’ route

After hearing oral argument on the motion in August, the vice chancellor said the pivotal issue was whether Solak’s letter constituted a pre-suit demand.  That’s because of the two Spiegel options for a derivative plaintiff, successfully pleading that pre-suit demand would have been futile because of director conflict was a “steep” route, he said; but proving that his demand was wrongly refused was “steeper yet.”

In light of the Spiegel court’s holding that a plaintiff who makes a pre-suit demand “tacitly concedes” that the board is qualified to consider that demand under the protective business judgment rule, Solak argued that the letter was not a pre-suit demand.

The judge said under Delaware caselaw, a pre-suit letter is a demand if it provides, “(1) the identity of the alleged wrongdoing, (2) the wrongdoing allegedly perpetrated and the resultant injury to the corporation and (3) the legal action the shareholder wants the board to take.”

Demand disclaimer

She said the disclaimer in Solak’s letter that it could not be construed as a pre-suit demand does not shield it from the Delaware law prohibition against both making a pre-suit demand and pleading demand futility “to cover all the bases.”

The vice chancellor also rejected Solak’s argument that his letter was not a demand because it did not expressly demand that the directors commence litigation. She said previous Chancery Court decisions have found that clearly demanding corporate action is sufficient.

Moreover, Solak’s letter “reads like a complaint” and is “nearly a carbon copy” of his later-filed lawsuit in drawing comparisons with compensation levels at other companies and in the remedial measures it requests, the opinion says.

In addressing Solak’s argument that shareholders will be deterred from even ambiguous communications that might be considered a demand, making a subsequent derivative suit procedurally more difficult, the vice chancellor said normally, the investor’s ambiguity would get the benefit of the doubt.

Similar suit, same result

However, she noted a 2018 New York state court decision dismissing a suit by Solak after he made what constituted a pre-suit demand for action by another corporation’s board to correct alleged excessive director compensation. Solak v. Fundaro, Index No. 655205/2017, slip opinion (N.Y. Sup. Ct. Mar. 19, 2018).

She said in that New York case, Solak unsuccessfully attempted to “dress down” the pre-suit communication. “The product of this tactical wordsmithing is not the sort of “ambiguity” warranting a plaintiff-friendly presumption.”

Applying the business judgment rule, the vice chancellor found no reason to doubt the good faith of the directors’ decision to refuse the pre-suit demand and dismissed Solak’s suit.

Chancery Interprets Confusing LLC Agreement

A recent Delaware Court of Chancery decision interpreted an ambiguous LLC agreement that it described–at least “at first read”–as “confusing and internally inconsistent.” The decision in MKE Holdings Ltd. v. Schwartz, C.A. No. 2018-0729-SG (Del. Ch. Sept. 26, 2019), in addition to being a helpful analysis for purposes of providing an insight into how the court analyzes an agreement that is not self-explanatory, will remain noteworthy because its introductory paragraph should be required reading for any lawyer who drafts an LLC operating agreement.  The introduction to the referenced opinion provides as follows:

“This matter requires me to construe an LLC operating agreement. My father was an engineer.  He frequently remarked that machinery would not be so poorly designed if the designer were condemned personally to keep it operating.  I am a lawyer.  I am struck that LLC agreements would be better drafted if the drafters were compelled to litigate over them, or worse, construe them as judges.  In any event, such is the task I must undertake here.” (footnotes omitted.)

Chancery Explains Step-Transaction Doctrine and Defines “Affiliate

A recent Delaware Court of Chancery opinion is noteworthy for its discussion of many aspects of the law, but I intend to highlight only a few of them, including its description of the important concept known as the Step –Transaction Doctrine. In PWP XERION Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019), the court engaged in a thorough analysis of the issues related to the failure of a company to obtain prior written consent from a major stockholder before approving certain transactions.

Key Takeaways from this Decision

Step-Transaction Doctrine:

The doctrine “treats the steps in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked. Rather than viewing each step as an isolated incident, the steps are viewed together as components of an overall plan.” See pages 31-32.

The court explained that the step-transaction doctrine applies if the component transactions meet one of three tests. First, the “end result test” will allow the doctrine to be invoked if it appears that a series of separate transactions were pre-arranged parts of what was a single transaction, cast from the outset to achieve the ultimate result. Id.

Second, under the interdependence test, separate transactions will be treated as one if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series. The third and most restrictive test is the binding-commitment test under which a series of transactions are combined only if, at the time the first step is entered into, there is a binding commitment to undertake later steps. Id.

Analysis of the Terms “Affiliate” and “Business Plan.”

The court analyzed the term affiliate as it applied to a company director because consent was required for certain transactions with an affiliate of a director. See pages 17 to 21.

The court also analyzed the meaning of “business plan” because prior consent of a major stockholder was required before any changes could be made to the business plan. See pages 22 to 25.

Other Useful Statements of Delaware Principles of Law Regarding Tension between Board’s Fiduciary and Contractual Duties:

The court also discussed the concept that a board can fulfill its fiduciary duties while making a decision that (complying with those fiduciary duties) might call for engaging in “an efficient breach” of contract. See page 34.  Contrariwise, a board could comply with a contract which would result in a breach of fiduciary duty. Id.

The court also explained, in connection with a stockholder and its board-designee who took different positions on the same issue: that the rights of a stockholder, and what a stockholder might lawfully be permitted to do, are much different than the duties of a director-designee of that stockholder.  The court explained that a stockholder and its director-designee occupied:

(i) different roles;

(ii) are subject to different decisional frameworks; and

(iii) can legitimately have different views.

Other cases on these pages have addressed the duties of a “blockholder director”  who must act in the best interests of all stockholders–and not only the stockholder who appointed the director.