Andrew A. Ralli, an associate in the Wilmington office of Lewis Brisbois, prepared this blog post.

A recent Delaware Court of Chancery decision determined whether persons seeking advancement satisfied the undefined term “officer” under the Bylaws and the Delaware General Corporation Law (the “DGCL”).  In Gilbert v. Unisys Corp., No. 2023-0513-PAF (Del. Ch. Aug. 13, 2024), the Court was tasked with determining whether Plaintiffs, a former Senior Vice President and Vice President of a Delaware corporation, were “officers” entitled to advancement for fees incurred to defend themselves in a Pennsylvania action.

The Plaintiffs proffered three theories under which they believed they are entitled to advancement under the Bylaws: (i) they were officers of the corporation; (ii) the “Presidents” were officers, and became Presidents, after an acquisition; and (iii) Plaintiffs served an enterprise at the request of the Corporation. The court addresses each theory in turn and found that Plaintiffs were entitled to advancement under each theory.

Highlights:

The Court recognized that advancement is “purely permissive” and, under Section 145(f) of the DGCL, permits a corporation to grant advancement rights in its corporate documents or by separate contract.  As Vice Chancellor Fioravanti explained, Section 145 serves the dual policies of: “(a) allowing corporate officials to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation; and (b) encouraging capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity.” 

Many Delaware corporations “provide for mandatory advancement as an enticement to attract qualified individuals to serve as directors and officers.” This is because the corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification. Thus, the advancement decision is, effectively, a contingent loan. 

In this case, neither the Certificate nor the Bylaws explicitly define “officer.” However, the Bylaws do identify two categories of officers, which were “at a minimum”  ambiguous.  First, there are officers who are expressly identified by title. These are “a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, [and] a Controller.” Section 1 states that these “shall” be officers. The court labeled these as “mandatory officers.” The second category comprises of “other officers as may be elected … at the Board’s discretion.” The Court labeled these as “discretionary officers.” 

Due to the Bylaws’ ambiguity in “mandatory” and “discretionary” officers, Plaintiffs, unsurprisingly, contend that the ambiguity must be construed in their favor under the doctrine of contra proferentem.  Seeking guidance from Delaware precedent, the Court found that “[t]here is a tension between the transcript rulings in Pulier[1] and Centrella I,[2] which held that an election was a pre-requisite for officer status, and Aleynikov[3] and Kale,[4] which took a broader view and relied on contra proferentem.”  In resolving this tension, the Court stated:

Admittedly, some of the discussion in Aleynikov, despite its careful and detailed analysis, is dicta. But so are Pulier and Centrella I on the issue of whether a bylaw that denominates Vice Presidents as mandatory officers precludes persons with that title from receiving mandatory advancement unless the board of directors formally chooses them as officers or expressly designates another officer to do so, as both resolved whether discretionary officers were entitled to advancement.

One can easily imagine a prospective officer reading the Bylaws, seeing that vice presidents “shall” be officers, and concluding that they would be an officer entitled to advancement. . . . [C]onsistent with the persuasive reasoning in Aleynikov, the court finds that reasonable individuals who are hired as [] Vice Presidents by persons with authority to bestow the title can reasonably conclude under the Bylaws that they are officers of the Company.

In other words, the Court agreed with Plaintiffs that the president Plaintiffs are officers under the Bylaws’ advancement provision and, thereby, entitled to advancement of fees and expenses for the Pennsylvania action, further explaining that: “Delaware policy ‘supports the approach of resolving ambiguity in favor of indemnification and advancement.’”

Notable Takeaway:

When a corporation decides to utilize Section 145(f) of the DGCL, it should do so with specificity. In failing to do so, corporations, being the “drafters” or otherwise, potentially face the unwanted consequence of advancing fees and expenses to more persons than intended. The Court’s decision in Gilbert serves as a “caution” for others:

A reasonable person standing in the shoes of a prospective indemnitee … ought to be able to look at the advancement provisions in the … [corporate documents] and clearly determine whether they are entitled to advancement … rely[ing] on a reasonable interpretation thereof. … Plaintiffs are correct. That [the Corporation] doled out Vice President titles to dozens of employees is of its own doing. [The Corporation] “easily could have clarified whether or not the title of ‘Vice President’ was an officer title for purposes of advancement and indemnification.” [They] did not. Therefore, the ambiguity must be resolved in Plaintiffs’ favor.

With Delaware’s bedrock freedom of contract principle, parties have a right to enter into good and bad contracts. The law enforces both.

Footnotes

[1] Pulier v. Computer Scis. Corp., C.A. No. 12005-CB (Del. Ch. May 12, 2016) (TRANSCRIPT).

[2] Centrella v. Avantor, Inc. (Centrella I), C.A. No. 2022-0876-NAC (Del. Ch. Dec. 14, 2022) (TRANSCRIPT).

[3] Aleynikov v. Goldman Sachs Gp., Inc., C.A. No. 10636-VCL (Del. Ch. July 13, 2016) (ORDER).

[4] Kale v. Wellcare Health Plans, Inc., C.A. No. 6393-VCS (Del. Ch. June 13, 2011) (TRANSCRIPT).

The Delaware Supreme Court recently affirmed a Chancery decision that was highlighted on these pages, which described the limited scope of a summary proceeding under DGCL Section 225 to determine who properly holds a corporate office.

In Barby v. Young, No. 391-2023 Order (Del. June 11, 2024), the high court described that among the limited related topics that can be addressed in connection with determining who properly holds a corporate office, are: the validity of stock issuances, stock transfers, and stock acquisitions to determine which vote should be counted in ascertaining proper board composition. See footnote 2.

The court emphasized that the limited scope of a 225 proceeding cannot include the rescission of a transaction procured through unlawful behavior, which is the type of relief that can only be obtained in a plenary action in a court that has in personam jurisdiction over necessary parties as opposed to an in rem Section 225 proceeding. 

A recent Delaware Court of Chancery decision addressed issues with the receivership of a defunct corporation and the report of a Special Magistrate appointed to investigate claims against the court-appointed Receiver. In B.E. Capital Management Fund LP v. Fund.com Inc., C.A. No. 12843-VCL (Del. Ch. July 18, 2024), the court reviewed the report de novo of a Special Magistrate who chronicled the misdeeds of a Receiver appointed by the court for a defunct corporation.

Highlights

  • The court noted that DGCL Section 226(a)(3) limits the appointment of receivers for a defunct corporation in a manner that is an analogous to Chapter 7 in bankruptcy–not a Chapter 11 bankruptcy. See footnote 1. The court also observed that DGCL Section 226(a)(3) does not authorize a receiver to revive the defunct corporation, but rather a receiver can be appointed when the corporation “has abandoned its business and had failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.”  See DGCL Section 226(a)(3). The court also doubted that it would make the same appointment of a receiver today in this case if it knew then what it knows now about the undisclosed details.
  • A notable aspect of this decision, due to the paucity of case law addressing the standard of review of a Special Magistrate’s report regarding the determination of damages, is the court’s use of the summary judgment standard for reviewing the damages determination by the Special Magistrate. See Slip op. at 39-40.
  • More specifically, the court applied the Third Restatement of Restitution and Unjust Enrichment to analyze the damages recommended by the Special Magistrate, for example, in connection with deposits and withdrawals over a period of time, and profits received from embezzled funds.  See Slip op. at 41-47 and footnotes 11 and 13.
  • The court also explained the limits to the right to invoke the Fifth Amendment in a civil proceeding. See Slip op. 35-36.

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

The Delaware Court of Chancery recently ordered biotech firm InterMune Inc.’s former CEO to repay nearly $6 million in director and officer insurance funds he spent trying to overturn his felony wire fraud conviction for misleading investors about the effectiveness of a lung disease treatment in InterMune Inc. et al. v. Harkonen, No. 2021-0694-NAC (Del.Ch. Aug. 1, 2024)

Vice Chancellor Nathan Cook found that in nearly two decades of investigation, negotiation and litigation stemming from a false 2002 press release about the commercial prospects for his interferon gamma-1b treatment Harkonen never successfully appealed his convictions or proved that he should not be liable for all the defense funds advanced to him from various D&O insurers and InterMune’s coffers. 

He ruled that two D&O insurers that had advanced funds had been paid by InterMune in a settlement after Harkonen was convicted and that under Section 145 of the Delaware General Corporation Law the company had a right to sue its ex-officer to repayment since the litigation was found to be non-indemnifiable.  

In addition, the vice chancellor rejected Harkonen’s counterclaims seeking a declaration that the Company must reimburse him for various legal expenses he accrued in a related California Medical Board disciplinary proceeding, two insurance arbitrations, advancement negotiations with InterMune, and a presidential pardon. 

He found that then-President Donald Trump’s pardon of the wire fraud conviction came long after a final adjudication of the case and could not qualify as a “successful defense of the charges.”  And “In addition to being procedurally improper, each of Dr. Harkonnen’s claims is either untimely or fails to satisfy the requirements for indemnification under Section 145.” 

Background

Harkonen founded InterMune in 2000 and issued a press release two years later extolling his new product, Actimmune which he claimed was “a major breakthrough” with “results [that] will support the use of Actimmune and lead to peak sales in the range of $400–$500 million per year[.]” – even though the study’s results indicated a failure.  One year later, Harkonen and InterMune negotiated a mutual release of claims against each other, and he resigned, only to face a 2004 justice department investigation that led to a 2008 indictment and a 2009 conviction.

That conviction carried an up to 20-year prison sentence; meanwhile InterMune’s D&O insurers began to seek repayment after learning that the charges and advancement would not qualify for indemnification and Harkonen began a decade of appeals.

At the same time, InterMune and its insurers pressed objections to what they insisted was Harkonen’s continuing “profligate” spending on attorney fees in many appeals and other legal proceedings.

The indemnification ruling

The vice chancellor laid out the ground rules for this type of indemnification case, noting that:

*”The corporation, rather than the employee, bears the burden of proof in an advancement claw-back action.”

*“In the case of a mandatory indemnification provision, the burden rests on the party from whom indemnification is sought to prove that indemnification is not required.”

*The applicable evidentiary burden in this post-trial context is proof by a preponderance of the evidence. [P]roof by a preponderance of the evidence means proof that something is more likely than not.”

*”Bylaw[s] not only mandate indemnification; [they] also effectively place the burden on [the Company] to demonstrate that the indemnification mandated is not required.”

Fraud = bad faith conviction

“Dr. “Harkonen is precluded from establishing good faith under Section 145(a) because his [wire fraud] conviction is conclusive evidence that he acted in bad faith,” Vice   Chancellor Cook wrote. “Dr. Harkonen is therefore ineligible to be indemnified for the advanced amounts he spent defending his wire fraud charge and appealing his conviction.”

Therefore Dr. Harkonen must repay the Company for the $5,906,927.02 it paid to settle the insurance disputes and six defenses Harkonen presented fail to prevent that, the court ruled, noting why each argument fails:     .

  • The Company waived and released all claims under the Mutual Release. The Court said: “Nowhere in Dr. Harkonen’s affirmative defenses did he assert the Mutual Release as a defense to InterMune’s claims. “
  •  The Company is barred by hold harmless provisions in the Indemnity Agreement and the Mutual Release. The Court said, “This defense, like the Mutual Release defense, was raised for the first time in the pre-trial briefings, which was too late for InterMune to focus its discovery on the hold harmless provisions of the two agreements.”
  •  The settlement payment was voluntary. The Court said: “InterMune devoted not insignificant portions of its briefing to rebutting this defense. And Dr. Harkonen ultimately withdrew the defense of voluntary payment at trial. “
  •  The Company’s claims are time-barred, The Court said: “InterMune filed its Complaint on August 11, 2021, well within the 3-year window under either alternative.  Harkonen’s time-bar defense therefore fails.” 
  •  The Company is barred by the unclean hands doctrine. The Court said: “The Company’s efforts to win the insurance arbitrations, or at least minimize any award, are not unclean hands. If they were, companies would be confronted with conflicting and strange incentives.” 
  •  The settlements themselves are not advancement fees. The Court said, “By mentioning the defense for the first time in passing at the trial on a paper record, the defense is waived. The analysis ends there.” 

Additional indemnification requests

The vice chancellor said Dr. Harkonen now requests indemnification “under 8 Del. C. § 145(c) for expenses incurred in (1) litigating the MBC action, (2) seeking advancements from the Company, (3) litigating the D&O insurance arbitrations, and (4) seeking the Pardon.” 

No fees or fees-on-fees

The Court held that Dr. Harkonen is not entitled to indemnification for the costs incurred in the medical board proceeding either, because the claim is both untimely and he was unsuccessful in the respective proceeding. This advancement claim regarding any of the legal actions is brought too late for the three-year time limit, the court said.  Finally, Dr. Harkonen also requests an award of fees on fees for this action, but given that he did not prevail on any claim, Dr. Harkonen is not entitled to fees on fees, Vice Chancellor Cook concluded

The Delaware Court of Chancery recently explained that a charging lien is the exclusive remedy of a judgment creditor against a member’s interest in an LLC, in XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL (Del. Ch. July 24, 2024). See Slip op. at 7-8 and footnote 6 (citing Section 18-703(d) and other sources).

A Delaware Supreme Court opinion and a Chancery decision in this matter were previously highlighted on these pages.

Short Factual Overview

The abbreviated factual background of this case involved the parties structuring several special purpose vehicles in an effort to circumvent an existing lien on LLC membership units by designing the right of a subordinate creditor to receive proceeds from the sale of the membership units already encumbered—as opposed to a security interest in the membership units themselves. See Slip op. 9-14.

Highlights

A recent Delaware Court of Chancery decision is required reading for anyone who wants to know the requirements for validly transferring a member’s interest in an LLC, for example, upon death or bankruptcy of a member. 

In Gurney-Goldman v. Goldman, C.A. No. 2023-1124-JTL (Del. Ch. July 12, 2024), the court explained some aspects of the Delaware LLC Act in connection with the transfer of membership interests that, in the court’s words: “To put it mildly, [. . .] is not a well developed area of Delaware law.” Slip op. at 31. See Section 18-705.

As a bonus of sorts, the decision also features an exemplary overview of the dissolution process for both LLCs and corporations. See footnote 69.

Factual Background

The essential factual background involves four siblings who inherited a real estate empire in New York City involving “literally hundreds of entities.” Although the siblings hired one of the largest New York law firms to create the legal structure for their business, the court observed that entity formalities were not always observed and that some of the LLCs did not have any written operating agreements.

Moreover, there were no documents establishing the transfer of interest in key entities from the widow of the patriarch to the siblings. The management structure was not formalized. The 2 siblings who were the primary decision-makers did not have clear documentation to establish the basis of their authority.

After one of the two siblings who had historically been the decision-makers for the operation of the business passed away, his son sought to take over the role of his father in managing the business but the remaining sibling who historically managed the business did not agree that the son had a right to take over his father’s managerial role.

The LLC at the heart of this case, SG Windsor, did not have a written LLC agreement.

Issues Addressed

The litigation sought: (1) a declaration that SG Windsor is a member-managed entity; (2) that the estate of the sibling who historically was a co-manager of the LLC became a member of SG Windsor or, to the extent the estate is only an assignee, that the son is able to exercise governance rights in his capacity as an executor to the estate.

Key Takeaways

There are many principles in this epic decision of both well-settled and not well-traveled aspects of the Delaware LLC Act that should be of interest to anyone who either forms or litigates Delaware LLCs.

  • Under the LLC Act, the default rule is that an LLC is member-managed.  See 6 Del. C. § 18-402.

LLC Agreement Terms/Formation

  • Although SG Windsor did not have a written LLC agreement, the statute allows for an LLC agreement to be “oral or implied.”  See § 18-101(9).
  • The court explained that an implied agreement is one inferred from the conduct of the parties “though not expressed in words.”  See cases cited at footnote 16.
  • The court explained that to prove an implied agreement, the court must be able to infer “as a fact, from conduct of the parties showing, in light of the surrounding circumstances, their tacit understanding. The failure to object may be treated as acceptance.”  See Slip op. at 13-14 and footnotes 19-20.

Appointment of Manager

  • The court referred to “manager” as a term of art under the LLC Act, which defines it as a person who is either named as a manager in the LLC agreement or designated pursuant to a similar instrument.  This term of art should be distinguished from the colloquial use of the word manager where, as here, a person manages the company without the formal title or documentation giving him that title. See § 18-101(12).  See Slip op. at 16.

Transfer of Membership Interests in LLC

  • The default rule under the LLC Act when a member transfers its member interest is that the recipient of the interest does not automatically become a member.  See § 18-702. Rather, the recipient only holds the right of an assignee. Slip op. at 20-21.
  • The assignee does not receive any of the governance rights associated with the interest, nor does an assignee have the right to seek books and records or seek statutory dissolution.  Slip op. at 21 and footnotes 40-42.
  • The court explained the reasons for the default rules include the “pick-your partner principle” which underlies § 18-702(b)(3), and which essentially tries to avoid a situation where a new co-manager is imposed on a member as opposed to a new “passive co-investor.”  Slip at. 21-26.

How to Become a Member

  • To implement that principle, the LLC Act addresses: “(i) what a member is, and (ii) how an assignee becomes a member.  Slip op. at 23.
  • § 18-301 describes how an assignee becomes a member. After the formation of an LLC, the requirements for becoming a member are described in § 18-704(a). Those two ways include: (1) pursuant to provisions in the LLC Agreement; or (2) upon the affirmative vote or written consent of all the members of the LLC.

Death of Member

  • The court instructed that the death of a member who was a natural person terminates that person’s membership. See footnote 52 and accompanying text.
  • A member’s interest in an LLC, like other personal property, transfers by operation of law to the estate of the deceased member.

§ 18-705 – Rights of Personal Representative

  • § 18-705 authorizes the personal representative of a deceased or disabled member to exercise all the member’s rights only as provided in § 18-705, and those rights are limited as an assignee as compared to plenary rights.
  • The court was not persuaded by the Schedule K-1 forms that the parties used because those forms offer two options: (i) general partner or LLC member-manager, or (ii) limited partner or other LLC member. The second box was checked for the three living siblings and the estate, which is inconsistent with the positions taken by the parties in the lawsuit.

Can an Executor Exercise Member-Manager Powers under § 18-705

  • The court explained that this is not a well-developed area of Delaware law, but the court did a deep dive with extensive citations to treatises, case law and other learned commentary.
  • In the course of a short law review article  on § 18-705, the court elucidated several key points.
  • A consequential point for single-member LLCs is the court’s instruction that pursuant to § 18-801(a)(4), the general rule is that when the member of a single-member LLC who is a natural person dies, the default rule is that the LLC is dissolved.
  • Regarding dissolution, in connection with the deep dive into § 18-705, the court provided an illuminating footnote that spans over 4 pages and that provides a paradigmatic encapsulation of the stages of dissolution for both a corporation and an LLC. The court explained that the shuttering of an entity involves: “ … two distinct events that bracket an intermediate period of activity. The first event is dissolution, marking the point at which the entity enters the intermediate period called winding up.  The second event is termination, which takes place after the entity completes winding up.”  See footnote 69.

Stages of Dissolution for LLC and Corporation

  • The court went into further detail by comparing the stages for dissolution of a corporation and an LLC. Referring to DGCL § 278, the court described the Certificate of Dissolution as marking the start of the 3-year winding-up period that includes things such as marshalling assets and distributing any remaining assets after payment of liabilities. At the end of the winding-up period, the corporation’s existence terminates.
  • As for an LLC, dissolution marks the start of the winding-up period.  See § 18-801(a). The winding-up period is similar to that of a corporation. See § 18-803, § 18-804. At the end of the winding-up process an authorized person files a Certificate of Cancellation. See § 18-203.

§ 18-705 Needs Fixing

  • The court suggested that the language in § 18-705 referring to termination makes little sense based on the foregoing overview of termination ending the existence of an LLC, and that the legislature should consider a clarification and refinement of the language in the statute. See footnote 69.

History of § 18-705

  • The court provides an extensive historical overview of the origin of § 18-705 and the limits of the power of a personal representative of a deceased member.  See Slip op. 31-69.

A recent Delaware Court of Chancery decision provides a concise summary of the fiduciary duty of disclosure in the context of a proxy statement. In Stansell v. Rosensweig, C.A. No. 2023-0180-PAF (Del. Ch., June 12, 2024), the court rejected the claim that the proxy statement should have included a reference to reports that students are using the company’s online services to help them cheat on homework.

Highlights

  • The court restated established Delaware law that directors are not required to accept factual allegations prior to a formal adjudication.  This is sometimes referred to as directors having no duty to engage in self-flagellation. See Slip op. at 13.
  • The court reiterated that Delaware has adopted the federal standard for materiality in this context. Slip op. at 12.
  • The court provided a cogent analysis of the logical fallacies in the factual allegations for the claims that the proxy statement omitted material information. See Slip op. at 14 – 20.
  • The court noted the procedural issues involved with the decision by the plaintiff not to seek relief until after the annual meeting which the proxy statement related to.

A recent Court of Chancery decision allowed claims to proceed for the refusal to enable the seller of a business to exercise options in the new company.  In Osios LLC v. Tiptree, Inc., C.A. No. 2023-0589-NAC (Del. Ch. June 12, 2024), the court described a factual background in which the buyers of a business, to use a colloquial phrase, stiff-armed the buyer and did not provide, at least according to the allegations, a good-faith basis to refuse to allow the exercise of the options described in the LLC agreement.

Highlights

  • Form of Notice: The most noteworthy aspect of this decision is the court’s reasoning to support its rejection of the argument that the form of notice expressing an intent to exercise the options did not comply with the form of notice required under the agreement. The court determined that it need not decide whether “substantial compliance” with the notice provisions was satisfied due to the likelihood that the requirement was waived.  See footnote 54 and accompanying text (also collecting cases on substantial compliance with notice.)
  • This should be compared with the factually distinguishable notice issues in another recent Chancery decision, decided two days earlier, involving notice for an indemnification clause in an agreement that did not include a required form of notice.  See recent Chancery decision in Trifecta case, highlighted on these pages, that addressed adequate notice when no requirement for the form of notice was provided in the agreement.
  • Another noteworthy part of this decision involved a reference to the implied covenant of good faith and fair dealing as falling into two categories: (1) gap filling; and (2) protecting against arbitrary and bad faith exercise of discretion.  See Slip op. at 13 and footnote 61.
  • Lastly, always useful is a recitation of basic contract interpretation principles. See Slip op. at 8 – 9.

In a common fact pattern involving allegations that the buyer of a company intentionally derailed the attainment of milestones that would trigger additional payments, the Court of Chancery allowed several claims to survive a motion to dismiss. Trifecta Multi-Media Holdings, Inc. v. WCG Clinical Services LLC, C.A. No. 2023-0699-JTL (Del. Ch. June 10, 2024). The claims included fraud, breach of the implied covenant of good faith and fair dealing, breach of contract, and indemnification. 

As part of the factual background, the court provided detailed examples of the unabashedly disrespectful approach of the buyer when challenged regarding the multiple actions it took to allegedly prevent the milestone payments from being made.

Although the claims are not novel, it remains helpful to highlight some of the fundamentals of basic legal principles often involved in corporate and commercial litigation about post-closing disputes.

Highlights

  • The court recited the elements of fraud that must be pled to prevail on that claim, but also explained that in Delaware there is no difference between fraud and fraudulent inducement.  See page 20 and footnote 34.
  • Unlike fraud, the court also explained why some statements are mere puffery.  See Slip op. at 21 and 22.
  • The court described the scienter element of a fraud claim as requiring allegations with enough factual detail to support an inference that the speaker had no intent to perform when a promise was made.  Slip op. at 22 – 23.
  • Regarding the requirement of reliance, the court explained that this element is typically not suitable for a motion to dismiss unless a fully integrated contract has as an anti-reliance clause.  See Slip op. at 24 – 25 and footnote 47.

Required Reading

  • The court instructs on the interfacing between an integration clause and the requirements of an anti-reliance clause if someone seeks to prevent the use of statements outside the four corners of an agreement. See Slip op. at 24 – 28.

Indemnification

  • The court rejected the argument of ripeness as a basis to dismiss this claim because of the potential recovery for attorneys’ fees. Slip op. at 37-39.
  • Notice Requirement
    • Also noteworthy is the court’s observation that the agreement at issue did not require any specific form of notice and therefore the court found that filing the complaint sufficed for the notice requirement in the indemnification provisions.  See Slip op. at 37 -39 and footnote 93. 
  • Even though the elements for a breach of contract claims are well-known, this decision addressed two key points: (i) damages need not be alleged in a quantifiable amount because the court can award nominal damages; and (ii) liberal notice pleading rules do not require explicit allegations.  See Slip op. at 35 – 37. AS A SIDE NOTE, in my experience it may be dangerous to rely too much on liberal notice pleading rules when in Delaware, depending on the context and the claims, some members of the court can be quite willing to dismiss cases absent copious factual details.
  • The court provided an elucidation that although a claim for the breach of the implied covenant of good faith and fair dealing can be a gap filler—it does not fill all gaps, for example, where, as here, a term was expressly rejected during the drafting of the agreement.  See Slip op. at 28 – 32.

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

The Delaware Court of Chancery, citing the milestone Corwin decision, recently dismissed a suit by Anaplan Inc. shareholders who claimed post-merger pact equity grants for some officers and directors cheated them out of $400 million of the original $10.7 billion price pursuant to a merger agreement requiring Thoma Bravo (not a typo) to pay for the business planning software company in In re Anaplan Inc. Stockholders Litigation, C.A. No. 2022-1073-NAC (June 21, 2024).

Vice Chancellor Nathan Cook ruled that whether defendants breached fiduciary duties, giving rise to a derivative suit, or whether they violated direct contract duties by mismanaging the deal–justifying a direct action–the suit fails the Corwin test because there was no proof that the Anaplan deal was inadequately disclosed or that the shareholders were coerced. See Corwin v. KKR Fin. Holdings LLC (Del. 2015).

Under Corwin, the Delaware Supreme Court held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully-informed, uncoerced majority of the disinterested stockholders. 

The opinion’s comprehensive examination of Corwin’s requirements to prove structural or situational coercion and what disclosures fully inform investors, is worthwhile reading for corporate law specialists. 

The court ruled that although the final price the Anaplan investors got took a big cut when their officer and director grants gave the original offer a $400 million “haircut,” the investors were not forced to accept a deal that gave them “nothing” because even the reduced offer provided a substantial premium over market value for their shares.

Background

The dispute began shortly after Anaplan accepted private equity firm Thoma Bravo’s March 2022 acquisition offer, when a handful of Anaplan officers and directors gave themselves $400 million in equity grants—an amount that, Bravo charged, violated the merger agreement.  Anaplan and Bravo later negotiated an amended merger agreement that provided $63.78 rather than the original $68.00 a share.  That pact still provided Anaplan investors with a premium but Pentwater Capital Management LP and other Anaplan shareholders filed suit to recover the $400 million, charging that three ex-officers and three former directors breached the merger pact’s $105 million limit on grants to employees and reduced the worth of plaintiffs’ shares.

Defendants’ motion to dismiss the claims argued that the charges are derivative, not direct, as plaintiff contended, because the alleged conduct only affected Anaplan’s stock price, but plaintiffs responded that it was only their stock value that was directly affected.

Plaintiffs also argued that the officer defendants violated their continuing Revlon duty to get the best price for the company, but defendants countered that a majority of the directors were not implicated as Revlon requires. 

No need to resolve

The court noted that, “To put it mildly, the parties have raised very interesting questions. They are not, however, questions I need to answer to resolve the Motion.”  But under Corwin, the Vice Chancellor said, “Plaintiff’s claims must be dismissed because they do not survive the informed and uncoerced vote of Anaplan’s stockholders approving the Merger.”

 He said Corwin enables parties to “avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. And I do not read our Court’s Corwin decisions, or the policy rationale underlying Corwin, as intended to apply Corwin narrowly.”

A fully informed vote?

Under Delaware law, when directors solicit stockholder action, they must “disclose fully and fairly all material information within the board’s control,’ the vice chancellor said, but he noted that “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” However, that doesn’t mean the standard requires “proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote,” he added.

In this case, the shareholders got a proxy that acknowledged a dispute between Anaplan and Thoma Bravo over the grants, but the disclosure stated that the company believed no wrongs were committed, so investors could make up their own minds whether to take the offer or take the risk of losing it, the court said in ruling that disclosure was adequate.

Was there coercion?

Plaintiffs asserted that the approval vote was coerced because “stockholders had a metaphorical gun to their head” when asked to approve a merger that was ”either situationally or structurally coercive.”  

However, the court defined an uncoerced vote as one that simply gives stockholders a “free choice between maintaining their current status and taking advantage of the new status offered by” the proposed transaction,” adding that, “The status quo may be undesirable or unpleasant, but that fact does not render the transaction coercive.”

Situational coercion—”arises when the status quo is so unattractive that it prevents a stockholder vote from operating as a clear endorsement of a transaction. ”It is “[t]he situational backdrop of an unacceptable status quo [that] calls into question the meaning of a stockholder vote such that it should not be given cleansing effect.”

The vice chancellor ruled that there was no situational coercion because, ‘”Although at a discount to the Original Merger Agreement, the Revised Merger Agreement still reflected a substantial premium both to Anaplan’s unaffected share price and to its expected share price if stockholders voted not to approve the Merger.”

Structural coercion— is simply “a vote structured so that considerations extraneous to the transaction likely influenced the stockholder-voters, so that [the Court] cannot determine that the vote represents a stockholder decision that the challenged transaction is in the corporate interest.”

Vice Chancellor Cook ruled that ”Plaintiff does not allege self-dealing or other extraneous factors that might warrant calling upon the principle of structural coercion.”

Was there waste?

Corwin includes no cleansing provision for waste, the court said, but it noted that, in addition to numerous other benefits and concessions, the final merger offer provides 10.4 billion in cash.

No new D&O route

Perhaps with a different set of facts, plaintiffs’ claims might have survived a motion to dismiss, but “acquiree fiduciaries are already disincentivized from acting in ways that jeopardize a merger’s closing,” the Vice Chancellor concluded. “Although this case presents what some might view as hard facts, it is not at all clear to me that the correct response is to open a new route for director and officer liability. “