For the 14th year, we provide a list of key Delaware corporate and commercial decisions from the prior year. This year, our list is co-authored by Chauna Abner in addition to yours truly, and appeared in the following article published in the Delaware Business Court Insider on January 2, 2019:

For the 14th year, we have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list is not by any means a complete list of important decisions of the two courts that were rendered this year. Instead, this list includes notable decisions that should be of widespread relevance to those who work in the corporate and commercial litigation field or follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink. This list focuses on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.

Delaware Supreme Court Decisions

  • Aranda v. Phillip Morris USA, 183 A.3d 1245 (Del. 2018).

This Supreme Court decision should be required reading for anyone who has a forum non conveniens issue in Delaware. The opinion provides an overview of the Delaware law on forum non conveniens and clarifies that even if it is a minority view among the 50 states, Delaware only requires that the trial court “consider” whether an alternative forum is available as part of its analysis, and whether an alternative forum is available is not a deciding factor. In its analysis, the court explores three general categories of forum non conveniens cases. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Eagle Force Holdings v. Campbell, 187 A.3d 1209 (Del. 2018).

For the first time, the Delaware Supreme Court clarifies the test to determine whether a contract’s terms are sufficiently definite to create an enforceable contract. Before setting forth the test, this opinion discusses the intent necessary for parties to be bound. This opinion also explains the three basic requirements for a valid contract and addresses the ancillary issue of whether the Court of Chancery could impose sanctions for violation of a court order prior to establishing that it had personal jurisdiction over the person who violated the order. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Morrison v. Berry, 191 A.3d 268 (Del. 2018).

In this opinion, Delaware’s highest court limits the application of the Corwin doctrine and prohibits the cleansing effect of stockholder approval, in part due to inadequate disclosures. The opinion also explains the various nuances of the board’s duty of disclosure to stockholders, describes the duty of candor owed by directors to each other, and provides a definition of materiality as well as an explanation of when an omitted fact is material. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Flood v. Synutra International, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018).

In this opinion with a vigorous dissent, the Supreme Court clarifies the MFW standard that was announced in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The court explains whether the prerequisites that must be satisfied for the MFW standard to apply must be imposed as a condition of the deal at the absolute beginning of negotiations. The opinion also discusses whether due care violations were pleaded in the complaint. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

Delaware Court of Chancery Decisions

  • KT4 Partners v. Palantir Technologies, 2018 Del. Ch. LEXIS 59 (Del. Ch. Feb. 22, 2018).

The Court of Chancery determined that a stockholder satisfied the prerequisites of Section 220 in this case to obtain certain corporate records. This 50-page decision can serve as a primer for the requirements of Section 220, to which judicial opinions have added prerequisites that are not found in the text of the statute. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 75 (Del. Ch. Mar. 5, 2018).

In this opinion, the Court of Chancery adds to the relatively modest body of case law interpreting Section 273 of the DGCL. The court applies Section 273 to dissolve a joint venture with two 50/50 stockholders that was deadlocked. This is analogous to a “no fault business divorce” but the remedy is discretionary and the court will not always grant dissolution. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Shortly after the court issued its decision, the respondent moved for relief from the court’s entry of judgment and the court denied the motion. See Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 148 (Del. Ch. May 4, 2018).

  • PR Acquisitions v. Midland Funding, 2018 Del. Ch. LEXIS 137 (Del. Ch. Apr. 30, 2018).

This Chancery decision is notable for enforcing the provisions in an agreement that provided a procedure and a comparatively short deadline for making claims for funds held in escrow. This decision was in the context of notice being mistakenly sent to the escrow agent when the agreement required that notice be sent to the seller. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • CBS v. National Amusements, 2018 Del. Ch. LEXIS 157 (Del. Ch. May 17, 2018).

In this high profile case, the Court of Chancery denies the request of CBS, a minority shareholder, for a TRO that sought to prevent the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Basho Technologies Holdco B v. Georgetown Basho Investors, 2018 Del. Ch. LEXIS 222 (Del. Ch. July 6, 2018).

This 126-page Court of Chancery opinion is a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The opinion includes many key principles of Delaware corporate law and a description of different types of available remedies. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • In Re Oxbow Carbon Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018).

In this opinion, the Court of Chancery provides the most comprehensive description of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy in several decades. This decision should be treated as an indispensable reference for those involved in corporate or commercial litigation who might need to quote authoritative sources for the voluminous scope of the Court of Chancery’s flexible and customized equitable remedial powers. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Applied Energetics v. Farley, 2018 Del. Ch. LEXIS 277 (Del. Ch. Aug. 14, 2018).

This Court of Chancery opinion is a must read for litigators who need to know the finer points of how the amount for a requisite bond is determined for purposes of obtaining an injunction. The court found problems with both parties’ estimates and essentially engaged in an abbreviated analysis of the appropriate measure of potential damages based on the claims in the case. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Godden v. Franco, 2018 Del. Ch. LEXIS 283 (Del. Ch. Aug. 21, 2018).

In this opinion, the Court of Chancery explains several important principles that Delaware courts use to analyze issues in the LLC context, and interpretive rules involving LLC agreements. In doing so, the court provides a helpful analysis of the equitable powers of the court to fashion remedies in the context of an LLC—notwithstanding the often exaggerated explanation of LLCs as creatures of contract. In this vein, the court cites several exceptions to the concept of LLCs being purely a product of contract. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Akorn v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325 (Oct. 1, 2018), aff’d, 2018 Del. LEXIS 548 (Del. Dec. 7, 2018).

This epic 246-page Court of Chancery opinion serves as a mini-treatise on several topics of importance to corporate and commercial litigators, including: interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Notably, the Supreme Court affirmed the decision in a three-page order in December.

  • Lexington Services v. U.S. Patent No. 8019807 Delegate, 2018 Del. Ch. LEXIS 509 (Del. Ch. Oct. 26, 2018).

In this opinion, the Court of Chancery recognizes that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. In doing so, the court discusses two principles of well-established Delaware law: the general enforceability of forum-selection clauses in Delaware; and the ability of officers and directors of an entity subject to a forum-selection clause to invoke its benefits when they were closely involved in the creation of the entity and were being sued as a result of acts that directly implicated the negotiation of the agreement that led to the entity’s creation. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Decco U.S. Post-Harvest v. MirTech, 2018 Del. Ch. LEXIS 545 (Del. Ch. Nov. 28, 2018).

This Court of Chancery opinion adds to the modest body of Delaware case law that addresses whether an LLC should be dissolved based on the statutory standard that it is “not reasonably practicable” to carry on the LLC. The court explains that in determining the purpose for which an LLC was formed, it may not only look at the purpose-clause in the LLC’s operating agreement, but also to “other evidence … as long as the court is not asked to engage in speculation.” A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).

This recent seminal decision of the Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. The court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal-Forum Provisions”). A synopsis of this decision and a link to the full opinion are available at this hyperlink.

Francis G.X. Pileggi is a litigation partner and vice-chair of the commercial litigation practice group at Eckert Seamans Cherin & Mellott. Contact him at He comments on key corporate and commercial decisions and legal ethics rulings at

Chauna A. Abner is an associate in the firm’s commercial litigation practice group.

Supplement: Prof. Stephen Bainbridge, a nationally-prominent corporate law scholar, kindly linked to this post and described it as: “a must read for anybody working in corporate law.”

The above post originally was published as an article, and is reprinted with permission from the Jan. 2, 2019 edition of the Delaware Business Court Insider(c). 2019 ALM Media Properties, LLC. All rights reserved.

The Delaware Court of Chancery recently issued an epic decision that serves as a mini-treatise on several topics of importance to corporate and commercial litigators including: (1) interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and (2) the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements.

The opinion in Akorn, Inc. v. Fresenius Kabi AG, C.A. No. 2018-0300-JTL (Del. Ch. Oct. 1, 2018), will be firmly ensconced in the pantheon of the most notable decisions of Delaware courts and could easily be the subject of a full-length law review article.  But for purposes of a blog post that merely attempts to highlight the key issues addressed by the court, so that interested readers might review the entire opinion if relevant to their practice, I will focus on several key aspects of the decision only.

Procedural Background:

The procedural context in which this decision was written, was expedited proceedings in which two parties to a merger agreement sought competing rulings on the meaning of the agreement. On the one hand, the seller argued that the merger agreement should be specifically enforced.  The buyer, however, filed a counterclaim that sought a ruling that it properly terminated the merger agreement based in part on the occurrence of a material adverse effect or a material adverse change, as defined in the agreement.  The purchaser prevailed in its argument that it properly terminated the agreement.

Notably, a 5-day trial was held with nearly 2,000 exhibits. A total of 16 witnesses testified, and 54 depositions were lodged.  The trial was held less than 3 months after the complaint was filed.  This 246-page opinion was issued less than one week after the final post-trial briefs and oral argument were completed.

Factual Background:

The detailed facts on which the court’s reasoning and conclusion are based are described in the first 110 pages of this decision. It would be a challenge to do the facts justice in a brief overview, but for purposes of providing the highlights of the legal principles in the case, suffice it to say that the court provided exhaustive detail about each of the factual aspects of the parties’ dispute and why one party sought to enforce the merger agreement and one party successfully argued that it was justified in terminating the merger agreement prior to closing.

Highlights of Legal Principles and Analysis by the Court:

       Material Adverse Change Clauses:

  • In a comprehensive and scholarly analysis, the court surveys the law on Material Adverse Change (“MAC”) provisions or Material Adverse Effect (“MAE”) provisions in merger agreements, including prior cases that discuss them and copious footnotes are provided with reference to specific percentages, for example, that are necessary in determining whether a MAC clause or a MAE clause should be triggered. See pages 117 to 204. The court refers to a MAC clause and a MAE clause as synonymous.
  • This decision is thought to be the first Delaware opinion upholding the termination of a merger agreement due to the occurrence of a MAC/MAE.

       Key Treatise Cited:

  • Notable is the court’s reference in footnote 558 to the many Delaware decisions that cite to the Kling and Nugent treatise on M&A agreements and M&A practice as an authoritative source for issues relating to merger agreements, such as MAC/MAE clauses and post-closing indemnification provisions.

       Is Delaware Pro-Sandbagging—or Not?

  • Importantly, the court discusses whether Delaware should be considered a “pro-sandbagging” state as it relates to the enforcement of representations in contracts when one party might know prior to closing that the adverse party’s representations are not accurate. See footnote 756 to 767 and accompanying text. But cf. Eagle Force Holdings LLC v. Campbell, in which the Delaware Supreme Court declined to affirmatively decide the issue, but questioned whether Delaware was a pro-sandbagging state. 187 A.3d 1209, 1236, n. 185 (Del. 2018); id. at 1247 (Strine, C. J. & Vaughn, J., concurring in part, dissenting in part). This case was previously highlighted on these pages.
  • Also noteworthy is a robust explanation, with citations to many authorities, that describe the factors that must be considered to determine when the breach of a contract is material. See pages 208 to 211.

       Commercially Reasonable Efforts and Reasonable Best Efforts:

  • In what may be the most comprehensive analysis in a Delaware decision of the meaning of the phrase “commercially reasonable efforts” and similar phrases such as “reasonable best efforts,” the court discussed the meaning of these contractual standards and their variations, as well as how they should be interpreted and applied. See pages 212 to 220.
  • The court compares the differences, if any, between these similar standards, with citations to treatises, cases and articles that discuss them. See pages 213 and 214, as well as footnotes 788 to 800.
  • See generally Professor Bainbridge’s analysis of this topic with citations to many authorities. (The corporate law scholarship of Professor Stephen Bainbridge is often cited by Delaware courts.)  See also several Delaware decisions highlighted on these pages that also discuss the topic.
  • In its analysis of this topic, the Court of Chancery cites to the Delaware Supreme Court opinion in Williams Companies v. Energy Transfer Equity, L.P., highlighted on these pages. The Delaware high court explained in that decision that it: “did not distinguish between” the two phrases, “commercially reasonable efforts,” and “reasonable best efforts,” but rather the court described those phrases as both imposing “obligations to take all reasonable steps to solve problems and consummate the transaction.” (quoting Williams, 159 A.3d at 272). See also footnote 808, and accompanying text.

A recent Delaware Court of Chancery opinion explained the meaning of undefined terms in a limited partnership agreement which required the general partner in the Limited Partnership to use “best efforts” and “sound business practices.” In connection with claims that the general partner breached the agreement, the court in Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Del. Ch. July 6, 2018), explained that it would use dictionary definitions to help illustrate the meaning of those undefined terms. See page 25 and footnotes 91 to 93.

The court did not refer to the more common standard of “commercially reasonably efforts”, but that somewhat related contractual standard has been discussed in cases highlighted on these pages. Instead, the court’s application of dictionary definitions of the terms “best efforts” and “sound business practices” were applied to deny the motion to dismiss for breach of contract.The court also provided helpful contract interpretation principles in connection with how to define terms not defined in an agreement. See footnote 25.

Additional Noteworthy Principles Applicable to Commercial Litigation:

  • The court reiterated the well-known Delaware principle that unless expressly disclaimed, alternate entities such as limited partnerships will be subject to default fiduciary duties. See footnote 3.
  • The court explained that when fiduciary duties are disclaimed, and a new contractual standard is inserted to replace default fiduciary standards, the appropriate nomenclature for a claim for breach of that standard is a simple breach of contract, and not a breach of a “contractual fiduciary duty.” See pages 35 and 36.
  • The court observed in passing what the elements of a claim for piercing the corporate veil are, and even though the plaintiffs did not use that terminology, that is how the court interpreted their claim. The court described why the elements for such a claim were not met. See pages 37 and 38.
  • In connection with granting the motion to dismiss the claim for breach of fiduciary duties, the court discussed the well-recognized concept in Delaware that the controllers of a corporate general partner of a limited partnership may owe fiduciary duties to the limited partnership, if such persons exercise control over the limited partnership’s property—but that claim cannot be made if the limited partnership disclaims all fiduciary duties. See pages 42 and 43 and accompanying footnotes. The Delaware decision that articulated that cause of action against controllers of a corporate general partner of an known as In re USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991).

This is the 13th year that I have created an annual list of the key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. I chose the following rulings from among the more than 100 corporate and commercial decisions that have been highlighted on this blog over the past 12 months. There were many more decisions of those two courts in 2017 that are not covered on these pages, but I have selected notable decisions that should be of widespread relevance to those who toil in the corporate and commercial litigation field, as well as others who follow the latest Delaware developments in this area of the law.

Well-versed readers could easily select different decisions for this annual review, and I invite suggestions for additions that might be added to the list, although the challenge is to avoid making the list too long. I have omitted some decisions, such as the Supreme Court’s important Dell appraisal ruling, and others that have already been widely written about in legal publications and other mass media outlets, so additional coverage of them in this list did not seem necessary. (Prior annual reviews are available at the link in the right margin of this blog.) Best wishes for a happy and healthy 2018.

Delaware Supreme Court Decisions

City of Birmingham Retirement and Relief System v. Good, No. 16-2017 (Del. Supr., Dec. 15, 2017).
This split decision of the Delaware Supreme Court is required reading for anyone who seeks to understand the nuanced standards for demand futility in the context of a Caremark claim. In light of the majority of the directors in this case being independent, the court determined that there was an insufficient showing of bad faith. A synopsis of this decision and a link to the full opinion is available at this hyperlink. Cf. Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017) (highlighted on these pages, addressing a nearly identical legal issue).

In re Investors Bancorp, Inc., Stockholder Litigation, No. 169, 2017 (Del. Supr. Dec. 13, 2017; revised Dec. 19, 2017).
The Delaware Supreme Court, for the first time in many decades, explicitly clarifies Delaware law on stockholder ratification of directors’ actions and the prerequisites that must be satisfied. This restatement was in the context of a challenge to the directors’ award to themselves of generous compensation packages pursuant to an Equity Incentive Plan. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Bridgeville Rifle and Pistol Club, Ltd. v. Small, No. 15, 2017 (Del. Supr., Dec. 7, 2017).
Although this decision does not fall within the category of corporate and commercial litigation, the superseding noteworthiness of this ruling is based on a bedrock principle of transcending relevance to any lawyer or student of the law. This 143-page opinion (including the dissent) involves the natural right to self-defense that every person is born with and includes a scholarly analysis of the inseparable right to bear arms under the Delaware Constitution. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Brinckerhoff v. Enbridge Energy Company, No. 273, 2016 (Del. Supr., Mar. 20, 2017; revised Mar. 28, 2017).
This decision of Delaware’s high court is necessary reading for anyone who seeks to understand the latest iteration of Delaware law on contractual fiduciary standards and the requirements for waiving fiduciary duties in the alternative entity context. This opinion also discusses equitable remedies that may be available for breach of contract, and it should also be read in conjunction with the Supreme Court’s 2017 Dieckman opinion, highlighted on these pages. I also wrote an article for Directorship magazine about the Brinckerhoff case. A synopsis of the Brinckerhoff decision and a link to the full opinion is available at this hyperlink.

The Williams Companies, Inc. v. Energy Transfer Equity, L.P., No. 330, 2016 (Del. Supr., Mar. 23, 2017).
The Supreme court explains in this opinion the concept of “commercially reasonable efforts,” sometimes compared to “reasonable best efforts,” and the challenging application of those phrases to various fact patterns. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dieckman v. Regency GP LP, No. 208, 2016 (Del. Supr., Jan. 20, 2017).
The Delaware Supreme Court in this opinion discusses the implied covenant of good faith and fair dealing in the context of a limited partnership agreement that waives all fiduciary duties. This decision should be read in conjunction with the 2017 Supreme Court decision in Brinckerhoff . A synopsis of the Dieckman decision and a link to the full opinion is available at this hyperlink.

Delaware Court of Chancery Decisions

Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017).
This Chancery decision provides a scholarly and practical explanation of the onerous prerequisites that must be satisfied before a Caremark claim will meet the rigors of the demand futility analysis. This decision should be read in conjunction with the 2017 Supreme Court decision, highlighted on these pages, in City of Birmingham Retirement and Relief System v. Good. A synopsis of the Oklahoma decision and a link to the full opinion is available at this hyperlink.

HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017).
This Delaware Court of Chancery opinion discusses the general enforceability of a “survival clause” which provides a contractually shortened period of time by which claims referenced in the contract must be made. The court also discusses the general enforceability of statutes of limitation shortened by contract. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dollar Tree Inc. v. Dollar Express LLC, C.A. No. 2017-0411-AGB (Del. Ch. Nov. 21, 2017).
This Chancery opinion discusses the important standards that apply to a motion to disqualify counsel due to an alleged conflict of interest and an alleged breach of the applicable Rules of Professional Conduct. Importantly, the court applies the well-settled Delaware law that a simple violation of a rule of legal ethics is not, in and of itself, sufficient to disqualify counsel. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

McKenna v. Singer, C.A. No. 11371-VCMR (Del. Ch. July 31, 2017).
This Chancery opinion addresses a not uncommon situation where a co-founder of a start-up entity claims that another co-founder stole the idea for the new company, and launched a separate venture with a different party. This opinion addresses the claim for an interest in the separate start-up venture and related fiduciary duty claims. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017).
This opinion addresses the statutory requirements for a valid stockholder voting agreement and what the limitations are on “selling a vote.” Standards by which director compensation packages will be reviewed is also analyzed. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017).
This Chancery decision clarifies the distinction between defective corporate acts and unauthorized corporate acts, as well as the sections of the Delaware General Corporation Law that allow for both a self-help provision in some circumstances, as well as a method to seek judicial imprimatur for certain corporate transactions that did not follow the proper corporate formalities for approval. See DGCL Sections 204 and 205. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. April 19, 2017).
This Court of Chancery opinion explains an important principle that corporate and commercial litigators need to remember: A derivative claim in the LLC context must satisfy the same requirement of pre-suit demand futility as required in the corporate context. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Doctors Pathology Servs., PA v. Gerges, C.A. No. 11457-CB, transcript (Del. Ch. Feb, 15, 2017).
This opinion provides practice tips for the most effective way to present a motion to compel discovery to the court, and the consequences for not following best practices in connection with discovery responses. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 13, 2017).
This Chancery opinion discusses the criteria that must be satisfied before the court will appoint a custodian of a company that is deadlocked due to stockholder and director dysfunction as provided in DGCL § 226(a). A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017).
This opinion addresses a situation where a director conceivably could be indemnified for fees incurred in pursuing an affirmative claim as compared to the more typical situation where indemnification is sought for reimbursement of fees incurred to defend a claim successfully. See DGCL § 145. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

UPDATE: Friend of the blog, Prof. Stephen Bainbridge, a prolific corporate law scholar often cited in Delaware opinions, has linked to this post.

Gomes v. Karnell, C.A. No. 11814-VCMR (Nov. 30, 2016)

An Eckert Seamans associate prepared this overview.

A recent Chancery Court opinion enforced an agreement to arbitrate based on an email exchange.

Background: This matter involves a dispute between three members of an LLC over the validity of an arbitration agreement.  The parties owned multiple business ventures together, including Montex, LLC (“Montex”) and PTT Capital, LLC (“PTT”).  The Montex operating agreement contained a mediation and arbitration clause.  After disagreements arose, the parties’ counsel further memorialized an ADR agreement over email.  Plaintiff’s counsel wrote:

This will memorialize our agreement as to how to move this matter forward.

The parties…agree to mediate all disputes between the three of them related to PTT and Montext. The parties, through counsel, agrees [sic] to use their best efforts to select a mediator by September 11.

The parties further agree that if an impasse is declared by the mediator, the parties will immediately initiate the binding arbitration process in an effort to resolve these disputes.

Defendants’ counsel responded:

I am happy to call this an agreement on the core point of mediating/arbitrating in lieu of litigation. That said, let’s move on nailing down some particulars, including items already discussed such as location, at the same time we continue to discuss interim and final settlement terms.

Defendants’ counsel reiterated that the parties agreed to mediate and arbitrate in a later email.  Subsequently, Plaintiff’s counsel suggested possible mediators with respect to an ongoing dispute.  The parties selected a mediator, set a mediation date, agreed to the scope of mediation, and engaged in limited discovery.  Shortly thereafter, Plaintiff cancelled the mediation, and later filed suit.

Parties’ Allegations: Plaintiff alleged multiple equitable causes of action against Defendants.  Plaintiff also sought dissolution of PTT and the appointment of a liquidating trustee.  Defendants moved to dismiss the complaint for lack of subject matter jurisdiction due to the arbitration agreement.  Plaintiff responded that the “bare-boned” email agreement was missing essential terms, and was therefore unenforceable.  Specifically, the agreement was missing the: (1) arbitrator’s identity; (2) means of selecting an arbitrator; (3) location; (4) applicable procedures; (5) effect of arbitration; (6) governing law; (7) relief available; (8) scope of discovery; and (9) fee information.  Plaintiff also argued that the agreement was unenforceable because a PTT operating agreement did not contain an arbitration provision.

Court’s Analysis: The Court found that the parties’ arbitration agreement was enforceable because it contained all essential terms and the parties manifested assent to be bound.  Specifically, Defendants’ counsel responded to the initial email stating that he was “happy to call this an agreement on the core point of mediating/arbitrating in lieu of litigation.”  Even if issues like location were not final, the parties explicitly agreed to mediate and arbitrate disputes related to PTT and Montex.  They also agreed that arbitration was binding if mediation was not successful.  Plaintiff failed to convince the Court that other terms were required to create a valid agreement.  Moreover, the Court was persuaded by the parties’ overt actions in accordance with the agreement, as they initially selected a mediator and started the mediation process.

The Court further held that a draft PTT operating agreement did not control on the issue.  Even if the PTT draft were operative, it did not mention arbitration, and therefore did not foreclose arbitration in the Montex matter.

Conclusion: Therefore, the Court granted Defendants’ motion to dismiss and stayed issues regarding dissolution and appointment of a liquidating trustee until the completion of arbitration.

Zutrau v. Jansing and ICE Systems, Inc., C.A. No. 7457-VCP (Dec. 8, 2014). This blog post should be of interest to lawyers who want to be paid for their services. Even if the court harshly rejects a good faith argument, or the client is unhappy with the result, most lawyers still need to earn a living and need to be paid regardless if the client achieves the result she hoped for and even if the court belittles the best efforts of the lawyer based on the facts presented.

The Court of Chancery issued two letter rulings in this matter on the same date. The more interesting of the two December 8, 2014, letter rulings–for those lawyers who are not independently wealthy–was a decision addressing the charging lien of the attorney who withdrew shortly after the trial.

The court recognized that the Delaware Supreme Court recently held that a charging lien was well established in common law, and even though Delaware has no relevant statute, Delaware recognizes the right of an attorney to assert a charging lien.  The reasoning behind the charging lien rests on the theory that one should not be permitted to profit by the result of litigation without satisfying the monetary demand of his attorney.  In addition:  “An attorney’s special or charging lien is an equitable right to have costs advanced and attorney’s fees secured by the judgment entered in the suit wherein the costs were advanced and the fee earned.

In connection with deciding the charging lien, the court addressed the fee agreement between the client and the attorney seeking the entry of a charging lien, as well as the appropriate amount of the fees subject to the charging lien, and whether the costs of an expert retained on behalf of the plaintiff should be included in the amount of the lien.

The other decision was a 22-page ruling (which followed a post-trial opinion on July 31, 2014, as well as a damages order of the same date). That decision addressed a pro se motion which the court considered as a motion to amend the judgment under Chancery Rule 59(e) or in the alternative, a motion for a new trial under Rule 59(a), but also considered the plaintiff’s suggestion that the motion should be reviewed as one for reargument under Rule 59(f).  The court also interpreted the pro se motion as one under Rule 15(b) seeking to amend the pleadings, as well as a request for a stay pursuant to Rule 62(b).  Because the court decided the other motions, the request for a stay pending the disposition of the motion was considered moot.


On November 5, 2012, the Court of Chancery announced that it was replacing Rule 5(g) which for the past 20+ years has governed the designation of information as confidential or “under seal” with a new Rule 5.1 starting on January 1, 2013.  New Rule 5.1 is intended to reinforce the general rule that there is a public right of access to all Court filings including pleadings, motions, briefs, letters, affidavits, exhibits, discovery responses and hearing transcripts.  

This post provides some of the highlights of the new rule.  A copy of the new Rule 5.1 is [here] and a copy of the Court’s Memorandum explaining Rule 5.1 is [here].

Issues With Old Rule 5(g)

Rule 5(g) was enacted in 1992 as an attempt to balance the public’s right of access to information about judicial proceedings with the litigating parties need to keep some material confidential.  Over the past 20 years, the Court reports that it has seen increasing problems with respect to the designation of information as confidential which included, among other things:

(i)         confusion about what constituted “good cause”;

(ii)        over-designation of information for confidential treatment;

(iii)       parties not timely filing “public versions” of documents filed under seal;

(iv)       the absence of a simple procedure for filing a complaint under seal; and

(v)        the need for a simple process to challenge a designation of “confidentiality.”

New Rule 5.1

Rule 5.1 will streamline the procedures and at the same time make it more difficult to designate information for confidential treatment.  Rule 5.1 does not alter or limit the ability of the parties to enter into confidentiality agreements to govern discovery or the parties ability to designate information as confidential in discovery.  Indeed, with the significant increase in the volume of electronically stored information that is collected, reviewed and produced by parties in litigation, confidentiality agreements and orders will play a critical role in protecting the disclosure of confidential information, including privileged information, from public dissemination.  Rule 5.1 also reduces the categories of information that are entitled to protection and it clarifies the procedures that a party must follow when designating information confidential.  The penalty for not following the new procedures is severe – if the parties fail to timely file a public version of a document filed under seal, then the document automatically loses it confidential status.  

The Register in Chancery will maintain a docket system for civil actions that permits a CF to be viewed only by the Court, the party who filed the CF and the parties in that action who were served with the CF.  However, the title of the document, the identity of the party filing the CF and the identities of the parties who were served will be available to the public.

Timing Critical — Three Days Extra for Service by E-mail — Gone

 Another important change is shorter time periods, and note that Rule 5.1 contains a provision expressly excepting all time periods in Rule 5.1 from the additional time for responses provided for in Rule 6(e) if a pleading is served by mail or electronic service.  There is some confusion as to exactly what the Court means in the rules, which refer to “days” in some instances and “business days” in others.  It is presumed that all the days referenced in the rule are business days but that would be a good question to ask at the seminar that the Court is planning to hold sometime soon – probably in early December. 

Definition of “Good Cause”

While a party requesting confidential treatment of any document had to show “good cause,” Rule 5.1 expressly defines “good cause” to exist “only if the public interest in access to Court proceedings is outweighed by the harm that public disclosures of sensitive information would cause.”  The rule then provides some very helpful examples of confidential information – trade secrets, sensitive proprietary information, sensitive financial information, business or personal information such as medical records, financial records or information such as social security information, financial account information or the names of children. 

Procedures for Filing Confidential Documents


Old Rule 5(g)


New Rule 5.1

  • Referred to as “Under Seal”


  • Needed prior Court Order to file under seal


  • File public version only for letters and briefs filed under seal


  • Party has three days to file public version of document filed under seal


  • Now called “Confidential Filing” (“CF”) or “Confidential Treatment” (“CT”); no longer “under seal”
  • Still need prior Court Order to make CF


  • File public version for every CF filing unless exempted by rule (e.g., exhibits and deposition transcripts)


  • Not later than 3:00 p.m. on next business day after CF made, filing party must give notice of CF to all other parties who assert that CF contains confidential information with proposed public version attached
  • Parties asserting confidentiality have until 3:00 p.m. on the 5th [business?] day after CF made to tell filing party what additional information should be redacted
  • At end of five [business?] day period, filing party must file public version
  • If no public version filed within five [business?] day period, original CF released for public viewing

 Procedures for CT for Complaints

1)         File the complaint and any supporting documents as a CF with a cover letter to the Register in Chancery certifying compliance with Rule 5.1.

2)         Rule 3(a)(2) Cover Sheet with a summary of the claims asserted in complaint must be filed publicly.

3)         Counsel for the plaintiff must use “best efforts” to give actual notice to anyone who might have a legitimate interest in keeping information confidential along with proposed public version of CF.

4)         Notice must include a copy of Rule 5.1 and a proposed public version of the complaint and any related documents redacting only the information the plaintiff believes is confidential.

5)         If no one designates any additional information as confidential, public version must be filed by 3:00 pm on the third [business] day after initial complaint filed.    

Simplified Procedures for Challenging Confidential Designations

To challenge the designation of CT, the challenger must simply file a notice with the Register in Chancery.  The challenger need not provide any reasons.  The burden then falls to the designating party to show “good cause.”  If the notice challenges a document for which a public version exists, the designating party must file a motion to maintain CT within five [business?] days. The challenger then has five [business?] days to file an opposition.  If no motion is filed, the original version will be released to the public.  After an opposition is filed, the Court will determine whether CT is warranted or whether additional proceedings are warranted. 

Termination of Confidential Treatment

CF will expire three years after final disposition of the case.  The Register will give the parties 90 days notice of the end of the period and within 30 days of that notice, a party who wants to continue the CT must file a motion with supporting brief and affidavits identifying on a document by document basis the reason for the continued CT.   


WaveDivision Holdings LLC v. Highland Capital Management, L.P., et al., No. 649,2011 (Del. Supr., July 19, 2012). 

Issue Presented:

Whether the Superior Court properly granted summary judgment in favor of defendant note holders and senior lenders on the issue of whether defendants tortiously interfered with plaintiff WaveDivision Holdings’ contract with third-party Millennium Digital Media Systems, LLC (“Millennium”) to purchase cable television systems from Millennium.

Short Answer:  Yes.  Appeal affirmed.

Brief Overview:

Millennium obtained financing by selling $70 million of unsecured high-yield senior increasing rate notes (the “IRNs”).  Millennium also had first-tier senior secured creditors (the “Senior Lenders”), which gave the Senior Lenders a first priority lien on substantially all of Millennium’s assets.  Like the IRN Agreement, this credit agreement gave the Senior Lenders disclosure  and consent rights.  When Millennium faced financial problems, it sought covenant relief from the Senior Lenders in order to avoid defaults.  The parties executed an agreement which required Millennium to sell all or substantially all of its assets to repay the Senior Lenders.  In connection with that sale, Wave submitted an offer to purchase the Michigan and Northwest cable systems from Millennium for $157 million.  Despite the IRN Holders believing that the price was inadequate, Millennium and Wave entered into an Asset Purchase Agreement (the “APA”) for the Michigan system and a Unit Purchase Agreement (the “UPA”) for the Northwest System.  Both agreements required the consent of the IRN Holders and the Senior Lenders, unless Wave and Millennium reasonably believed that such consent was not necessary.  Around this time, Highland Capital purchased additional senior debt in order to protect its stake in Millennium.  At the same time, Highland Financial Corporation submitted a refinancing proposal to Millennium which called for a full debt-for-equity swap of the IRNs and was contingent on the termination of the agreements.

Wave subsequently informed Millennium that it had reviewed the IRN Agreement and had concluded that the IRN Holders’ consent to the APA and UPA was not required.  Highland Capital, however, sent a letter to Wave on behalf of seven Senior Lenders, informing Millennium that those Senior Lenders did not consent to the APA and UPA.  Millennium then notified Wave of its decision to terminate the agreements and at the same time, Millennium accepted the refinancing proposal from Highland Capital, Trimaran and the other IRN Holders, pursuant to which the IRN Holders’ interests were converted into equity interests.

Wave filed suit in the Superior Court against certain creditors of Millennium seeking damages for tortious interference with the Wave-Millennium contract.  The Superior Court granted summary judgment to defendants on this claim, concluding that any interference was justified under Delaware law.  Note, there is a companion decision from the Court of Chancery dated Sept. 17, 2010 awarding damages for breach of the “no solicitation” and “reasonable best efforts” clauses of the APA, which is available here.


On appeal, Wave argued that the Superior Court erred in determining that any interference was justified and that the Superior Court ignored evidence in the record of improper conduct, which raised at least a triable issue of fact on the tortious interference claim.  Wave argued that courts must evaluate any improper motive together with any proper motive, to determine which motive predominates for assessing a tortious interference claim.  Because Delaware courts follow Section 766 of the Restatement (Second) of Torts, Wave had to show that : “(1) there was a contract, (2) about which the particular defendant knew, (3) an intentional act that was a significant factor in causing the breach of contract, (4) the act was without justification, and (5) it caused injury.” Section 767 of the Restatement contains a number of factors to consider in determining if intentional interference with another’s contract is improper or without justification, such as: (i) the nature of the actor’s conduct; (ii) the actor’s motive; (iii) the interests sought to be advanced by the actor; and (iv) the relations between the parties.

In rejecting Wave’s argument, the Court stated that “[t]he defense of justification does not require that the defendant’s proper motive be its sole or even its predominate motive for interfering with the contract.  Only if the defendant’s sole motive was to interfere with the contract will this factor support a finding of improper interference.”  The Superior Court had recognized that the IRN Holders and Senior Lenders were motivated at least in part by a desire to protect their investment in Millennium, and not solely by a desire to interfere with a Wave-Millennium deal. Thus, the Supreme Court found that the Superior Court properly concluded that the motive factor weighed in favor of justification.

Wave also argued that the defendants used improper means to interfere with the Wave-Millennium deal by making false representations and that they used inside information and exerted economic pressure.  Under Delaware law, “[a] representation is fraudulent when, to the knowledge or belief of its utterer, it is false in the sense in which it is intended to be understood by its recipient.”  Here, however, the Court found that Wave produced no evidence that Highland Capital made any such representations.  Moreover, the Court found that Wave’s arguments regarding the use of inside information and economic pressure also lack adequate support in the record.  Finally, the Supreme Court stated that:

[t]he Superior Court concluded that four of the seven Restatement factors — the nature of the actor’s conduct; the actor’s motive; the interests sought to be advanced by the actor; and the relations between the parties — weighed against a finding of improper interference. We find no error in the Superior Court’s analysis….

Narrowstep, Inc. v. Onstream Media Corporation, C.A. No. 5114-VCP (Del. Ch. Dec. 22, 2010), read 45-page opinion here.   

Issue Addressed

The Court of Chancery in this 45-page opinion granted a motion to dismiss a claim that was asserted based on the implied covenant of good faith and fair dealing but the Court denied the motion to dismiss claims relating to unjust enrichment and fraudulent inducement to enter into an agreement. Also noteworthy is the standard used by the Court to review a motion to dismiss, as referenced in more detail below.

Brief Overview of  Factual and Procedural Background

This case is based on a failed merger between Narrowstep and Onstream Media. In 2008 the parties entered into a Merger Agreement that required them to use their reasonable best efforts to close the merger expeditiously. As the Court explained: “Curiously, and in retrospect perhaps unwisely, Narrowstep agreed to terms in a Merger Agreement that required it to cede all operational control to Onstream well before closing in order to expedite the integration of the two companies. . . . [D]espite the shift in operational control, the merger never closed. After a number of months and multiple amendments to the agreement, Onstream walked away from the transaction. Thereafter, Narrowstep filed its complaint in this action . . ..” This decision was based on a motion to dismiss the complaint based on Rule 12(b)(6).

Bullet Points on Key Rulings of Court

● This is the first Chancery decision that I personally recall which has specifically relied on the relatively new standard announced by the United States Supreme Court in the Twombly case, as the Delaware standard applicable to motions to dismiss under Rule 12(b)(6). The federal standard announced in the Twombly decision requires that in order to avoid dismissal, a complaint must offer “sufficient facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks.” See footnote 25 (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555-56 (2007) and Desimone v. Barrows, 924 A.2d 908-29 (Del. Ch. 2007)). There was much discussion on the federal level whether or not that applied to all federal complaints in all areas of the law. Though the Delaware rules of civil procedure are based on the federal rules, it has not yet been conclusively determined by the Delaware Supreme Court whether that federal standard will apply in all Delaware cases. In my reference above I carefully chose the words: "relied on", as opposed to merely "citing" the Twombly case.  I know that other Chancery cases have cited to Twombly. The federal standard is different than the more lenient and well-known "pre-Twombly" standard which provided that a motion to dismiss will not be granted unless there is no set of facts on which the plaintiff could prevail. The author of this opinion also cited to Twombly a few days later in an opinion available here. Although the Chancery decision in Desimone, supra, cited Twombly, there is no clear, controlling authority that definitely resolves the issue of whether Twombly represents the standard that will be used in Delaware on all Rule 12(b)(6) motions in all cases, as opposed to the "pre-Twombly" standard. Desimone was highlighted here on this blog. Compare, LeCrenier v. Central Oil Asphalt Corp., here at n. 33, a Chancery opinion issued on the same day as the instant opinion, but by a different vice chancellor, appearing to rely on the pre-Twombly standard. To paraphrase a popular media outlet: "We report, you decide".

● The Court also discusses the criteria by which it may consider the facts beyond the complaint; and that if a motion to dismiss is treated as a motion for summary judgment under Rule 56 then the Court must give the parties a reasonable opportunity to take discovery and to present material relevant to the summary judgment motion. See footnotes 29 and 32.

● A helpful discussion is provided for the claim based on the implied covenant of good faith and fair dealing, with an analysis of why the motion to dismiss that count alone was granted. The opinion includes an excellent summary of Delaware law on this important but amorphous and elusive concept. See page 26.

● The Court noted the instant case was similar in many respects to the Chancery decision in AQSR India Private, Ltd. v. Bureau Veritas Holdings, Inc., 2009 WL 1707910 (Del. Ch. June 16, 2009) (which was summarized on this blog here).

● The opinion explains the elements for common law fraud and equitable fraud, as well as the rule that detailed averments of fraud must be included with particularity as required by Court of Chancery Rule 9(b). See pages 31 and 32. The Court also explains why it rejected an argument under Rule 12(e) which sought a more definite statement of the claim.

● The Court explains the prohibition in Delaware law that prevents a party from “bootstrapping” a claim of breach of contract into a claim of fraud merely by alleging that a contracting party never intended to perform its obligations. See page 39. In this case, the Court reasoned that the complaint alleged sufficient facts which allowed the Court to infer that Onstream repeatedly lied to Narrowstep at many stages in the process in order to strip Narrowstep of its valuable assets with no intention of closing the merger. This is different than the unallowed attempt to simply add the words “fraudulently induced” to a complaint alleging that the defendant never intended to comply with an agreement when the parties entered into it. However, the facts of this case cannot fit into the category of a simple allegation that failure to comply with a contract equates with failure to disclose an intention to take actions inconsistent with that contract. That is, the agreement is not the source of the fraud claim but rather an instrument by which Onstream perpetrated its fraud and its broader scheme to loot Narrowstep.

● The last part of the opinion explains the elements of an unjust enrichment claim and why that claim was allowed to proceed.

In a corporate battle involving three of the top four largest rental car companies, the Court of Chancery, in an 82-page opinion in the case of In Re Dollar Thrifty Shareholder Litigation, C.A. No. 5458 (Del. Ch., Sept. 8, 2010), read opinion here, denied a motion for a preliminary injunction filed by the plaintiffs who were stockholders of Dollar Thrifty, to enjoin the consummation of a merger between Hertz Global Holdings, Inc. and Dollar Thrifty Automotive Group, Inc.

Pursuant to a merger agreement, Hertz agreed to buy all the shares of Dollar Thrifty for $32.80 per share in cash (including a $200 million special dividend that will only be paid in the event of the merger) and 0.6366 shares of Hertz stock for each share of Dollar Thrifty stock (the deal was valued at $41 per share). Three months after the Hertz offer, Avis Budget Group made a bid to top the Hertz offer but the Dollar Thrifty Board chose to go forward with the Hertz offer. Since that time, Hertz and Avis have gone back and forth raising their offers to the point of the latest offer by Hertz, its "best and final" offer, for $50.25-a-share, or a total value of $1.45 billion. A vote on the merger was scheduled for September 16, 2010, but that vote was moved to September 30, 2010 to allow the stockholders to consider the bidding war that was taking place during that period.

This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP

Background – Merger Talks but a “Failure to Launch”

Since 2007, Dollar Thrifty has been engaged in merger talks with both Avis and Hertz on an “on again off again” basis. Also during this time, due primarily to the financial market turmoil, the price of Dollar Thrifty’s stock had been on a roller coaster ride going from over $60 a share in 2007 down to below $1 per share in late 2008 and then back to around $39 per share in the spring of 2010. While both Hertz and Avis made offers to purchase Dollar Thrifty during this period, for various reasons a deal was never closed. One common problem existed for each potential combination involving Dollar Thrifty and either Hertz or Avis, and that was the potential for antitrust problems which might prevent any deal from closing. In the spring 2010 merger discussions that Dollar Thrifty had with Hertz and Avis, Hertz addressed that concern by telling Dollar Thrifty that Hertz was prepared to use its “reasonable best efforts” to obtain regulatory clearance and that included divesting between $100 -150 million in assets to achieve regulatory approval. Avis would not give the same assurance.

Hertz Offer Results in Signed Merger Agreement

In the spring of 2010, talks between Hertz and Dollar Thrifty finally resulted in an offer from Hertz to purchase Dollar Thrifty for $41 per share plus a $200 million special dividend to be paid by Dollar Thrifty to its shareholders immediately before closing but only if the merger was consummated. The merger agreement provided for a $44.6 million termination and reverse termination fee, with an additional reimbursement of up to $5 million in expenses if the termination fee was paid, a no-shop clause, a fiduciary out, matching rights and a commitment that Hertz would divest up to $175 million in revenue of necessary to obtain antitrust approval.

Subsequent Avis Offer is Rejected

Within days, Avis stated that it would make a substantially higher bid and on July 28, 2010, Avis made an offer for $46.50 per share with a $200 million special dividend and a commitment to divest assets generating up to $325 million in revenue to obtain antitrust approval. The offer did not include a financing contingency, a termination fee or reverse termination fee or any matching rights. The Dollar Thrifty board responded that the Avis offer was not superior and in order for it to be considered superior the Avis deal must be reasonably expected to be consummated on a timely basis, and “that given the lack of a reverse termination fee and the antitrust concerns, the Board was unable to establish that Avis’s offer would meet this requirement.”

Dollar Thrifty Stockholders File Suit

On May 5, 2010, only two days after the May 3 letter from Avis stating its intent to make a superior offer and three months before Avis made its offer, stockholders from Dollar Thrifty filed suit alleging that the board breached its fiduciary duties by agreeing to the merger agreement with Hertz without a pre-signing market check and that Hertz aided and abetted that breach. In particular, the plaintiffs criticized the Dollar Thrifty board’s decision-making process with respect to a number of issues, including but not limited to the board’s decision to not seek other bids and especially the board’s failure to reach out to Avis before signing the merger agreement with Hertz, for failing to conduct a pre-signing auction and for including a termination fee and matching rights that had a quelling effect on any topping bidder.

At this point, the Dollar Thrifty board had already determined that Avis’s bid would be superior to Hertz’s if the board could be assured that Avis would actually close the deal. But Avis, unlike Hertz, refused to promise to pay any reverse termination fee in the event that antitrust approval for an Avis-Dollar Thrifty merger could not be attained.

Court’s Revlon Analysis – Reasonableness of the Process

The Court began its Revlon analysis with a simple statement about what the standard of review involved and did not involve. Under Revlon, when the Dollar Thrifty board decided to engage in a transaction that involved the sale of the company in a change of control transaction the question became whether the board acted reasonably in undertaking a sound process to get the best deal available. More importantly for the facts in this case, the standard was not, as the Court noted, whether another choice, that the Board chose not to pursue, was a better deal. As the Court noted:

Revlon does not require that a board, in determining the value-maximizing transaction, follow any specific plan or roadmap in meeting its duty to take reasonable steps to secure — i.e., actually attain — the best immediate value. Instead, Revlon commands that directors, consistent with their traditional fiduciary duties, act reasonably, “by undertaking a sound process to get the best deal available.” Indeed, the question posed by a board’s action (or inaction) in a sales context is “whether the directors made a reasonable decision, not a perfect decision.” Thus, although the level of judicial scrutiny under Revlon is more exacting than the deferential rationality standard applicable to run-of-the-mill decisions governed by the business judgment rule, at bottom Revlon is a test of reasonableness; directors are generally free to select the path to value maximization, so long as they choose a reasonable route to get there. Specifically, this form of enhanced judicial scrutiny involves two “key features”:

(a) A judicial determination regarding the adequacy of the decision-making process employed by the directors, including the information on which the directors based their decision; and

(b) a judicial examination of the reasonableness of the directors’ action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably.
(citations omitted)

The Court noted at the outset that “the strategy of value maximization that the plaintiffs now advocate was one that a properly motivated board could have reasonably chosen to adopt” but that is not the question under Revlon. Instead, the Court had to determine if “the alternative approach that the Dollar Thrifty board adopted was itself a reasonable choice that a loyal and careful board could adopt in the circumstances.”

Following the Supreme Court’s Unocal and Revlon decisions, the Court “has leeway to examine the reasonableness of the board’s actions under a standard that is more stringent that business judgment review and yet less severe than the entire fairness standard.” As a result, the Court was required to look at the motivations of the board and take “a nuanced and realistic look at the possibility that personal interests short of pure self-dealing have influenced the board to block a bid or steer a deal to one bidder rather than another.”

If “the record reveals no basis to question the board’s good faith desire to attain a proper end, the court will be more likely to defer to the board’s judgment about the means to get there.”

The Court found that the six person Dollar Thrifty board (five of whom were independent directors) was not only properly motivated and willing to talk to anyone who wanted to make serious offer but as stockholders, the directors were highly motivated to get a deal at the highest price. The Court found no evidence that “the Board preferred to do a deal with Hertz at some lower value if a better deal was actually attainable from Avis or another source.” In response to the plaintiffs’ claims that the board failed to stimulate an immediate auction, it failed to do a pre-signing market check and in particular the board failed to engage Avis in any discussions before it signed the merger agreement, the Court sided with the Dollar Thrifty board noting that:

“[t]he Board was genuinely concerned with upsetting their employees and causing a diminution in productivity by going through a public sales process. The Board was not committed to selling in early 2010, and believed that the company had attained a position of relative strength and stability. Thus, the fear with having a process spill out into public was that the company could again come up without a buyer, risk the market viewing it as damaged, and suffer a decline in productivity and a loss of key employees distracted by and anxious over a possible sale. Adding to this fear was Hertz’s prior history. Hertz had been given two clear looks at the company and each time had walked away without making a serious binding offer. In deciding how to proceed, the Board also received advice about Avis and considered its own experience with Avis. In 2007, Avis made an overture at $44 per share, and then dropped that price off a cliff, ultimately resulting in a breakdown of negotiations. And in 2008, Avis had a clear chance to buy Dollar Thrifty at a much more attractive price in the $15-20 range, but walked away from the opportunity without making a firm bid and without addressing legitimate antitrust concerns. Before proceeding to deal just with Hertz in early 2010, the Board explicitly considered the utility of reaching out to Avis. The Board received advice that Avis was not well positioned to make a cash bid for Dollar Thrifty because it was heavily leveraged already and subject to severe covenants that could only be amended with creditor approval. Given the state of financing markets in early 2010, the Board’s advisors believed Avis could not make a bid not conditioned on financing, and was perhaps not financially strong enough to make a bid at all.

With respect to the plaintiffs’ claims regarding deal protections, the Court noted that after the Dollar Thrifty board rejected the Avis bid, it informed Avis what was wrong with their offer and as the Court stated “[a]t this point, the only thing apparently standing between Avis and a deal with Dollar Thrifty [was] its willingness to address Dollar Thrifty’s concern over closing certainty by offering to pay a reverse termination fee that compensates Dollar Thrifty for the risk of non-consummation.” The deal protections in the merger agreement did not prevent Avis from presenting a competing bid, and the termination fee represented a very small percentage cost (3.5% of a $1.275 billion deal value) to Avis of its topping bid. As a result, the Court found that the deal protections were neither coercive nor preclusive in that the termination fee did not constitute a material impediment for any topping bidder who wished to make a materially superior offer to the one from Hertz.” Moreover, it is important to note that in the bid that Avis made after the Hertz merger agreement was signed, Avis refused to offer to pay any reverse termination fee if it failed to secure the antitrust approval.

In the end, the Court noted that while reasonable minds might have taken a different approach, the Dollar Thrifty board engaged in a reasoned consideration of the relevant factors and selected a reasonable course of action.


Continue Reading Chancery Rejects Request to Enjoin Hertz Takeover of Car Rental Rival Dollar Thrifty