The recent Delaware Court of Chancery decision styled In re Columbia Pipeline Group, Inc. Merger Litigation, Cons. C.A. No. 2018-0484-JTL (Del. Ch. May 15, 2024), provides a mini-treatise on the titular topic, and a scholarly deep dive that includes a tour of nearly 40 years of Delaware corporate law on the tension between the contractual obligations of directors—as compared to the fiduciary duties of board members, and the general primacy of contract law.  The court also addresses how those competing principles interface with the theory of efficient breach. See Slip op. at 37-64 and footnote 124.

This 86-page opinion could qualify as a law review article in its own right. A law review article could also be written with commentary on the cornucopia of case law, scholarship and statutory authority cited in the footnotes, as well as insightful analysis of the most important Delaware decisions on the titular topic over the last four decades.

It may be audacious, and it risks treating a serious topic too casually, but for purposes of busy readers who might be interested primarily in the highlights, I provide a few bullet points.

Takeaways and Gems of Delaware Law

  • The court observes that “Delaware law does not regard a contractual breach as less culpable than a fiduciary breach.”  See Slip at 39. The court begins the opinion with a quote from the Shakespeare play Measure for Measure:  “The tempter, or the tempted, who sins most?”  The court in the first sentence of the opinion describes that quote as a summary of the primary dispute addressed in the opinion, which is the final chapter of a case which includes the liability decision styled In re Columbia Pipeline Gp., Inc. Merger Litig., 299 A.3d 393 (Del. Ch. 2023). 
  • The court’s thorough discussion of the issue of whether a breach of contract or a breach of fiduciary duty is a greater sin, and whether one warrants graver consequences, reminds me of the iconic description of the many circles of hell in Dante’s Inferno, which assigns descending levels (or concentric circles) of eternal torment in the afterlife depending on the types of transgressions for which people were condemned to hell. [Applying the reasoning in this opinion to the circles of hell in Dante’s Inferno, if someone suffered damnation for breach of fiduciary duty or breach of contract, they would find themselves in the same circle of hell forever.]
  • The court describes why, under Delaware law, fiduciary duties do not trump contracts—but rather, the opposite is true. The court discussed the rationale of the key Delaware cases on this topic over nearly 40 years:  Van Gorkom; QVC; Omnicare; post-Omincare cases such as, e.g., C&J Energy Servs., Inc. v. Miami Gen. Empls.’, 107 A.3d 1049, 1072 (Del. 2014). Slip op. at 39 to 64.
  • The court emphasized that Delaware law does not regard the fiduciary duties imposed by equity as more important than voluntarily assumed contractual commitments.  Slip Op. at 61.  Rather, the court instructed that:

The cases overwhelmingly demonstrate that a court cannot invoke the fiduciary duties of directors to override a counterparty’s contract rights.  That is true even when a heightened standard of review applies. To argue that case law empowers a court to set aside a contract when reviewing director actions under an enhanced form of judicial scrutiny, embraces the much-ridiculed position that the Omnicare majority was perceived to take.  As consistently interpreted by courts and commentators, QVC does not support that assertion, and post-Omnicare case law soundly rejects it.

See footnote 122 and accompanying text.

  • The court noted that in some situations both claims for breach of fiduciary duty and breach of contract can proceed in the same case. In the present case, however, contractual pre-emption “has the upper hand.”  See footnote 122 at page 63.
  • In connection with explaining that the fiduciary duties of directors did not enable the corporation to escape a contract, the court recognized the concept of “efficient breach,” and that a corporation can engage in efficient breach just like any other contracting party.  See footnote 124.
  • For students and fans of philosophy, it is always enlightening to see a quote about metaphysical insights in a judicial opinion from a famous philosopher.  See footnote 140 quoting from Jean-Paul Sartre, Existentialism Is a Humanism 44 (Carol Macomber Trans., Yale Univ. Press 2007) (“[W]hat is impossible is not to choose.  I can always choose, but I must also realize that, if I decide not to choose, that still constitutes a choice.”)  This quote was in connection with the reference to several Delaware decisions in which the court referred to a conscious decision to refrain from acting as being nonetheless a valid exercise of business judgment.  See Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984) (subsequent history omitted).
  • The court also engaged in an extensive discussion of the Delaware Uniform Contribution Among Tortfeasors Act (DUCATA), and how to allocate damages when a plaintiff releases some, but not all tortfeasors, and later recovers damages in a higher amount.  See Slip op. at 31-32. The court also discussed the interfacing of the unclean hands doctrine with DUCATA.  See Slip op. at 33.

A recent Delaware Court of Chancery decision addressed many Delaware legal precepts of importance in connection with claims by members in a web of related alternative entities, that have broad application for those involved in commercial and business litigation.

In the case styled Kuramo Capital Management, LLC v. Seruma, C.A. No.  2021-0323-KSJM (Del. Ch. April 30, 2024), the court issued a 94-page decision, with the first 51-pages or so providing a detailed factual background that describes the multiple layers of interrelated entities and the shifting relationships among the parties as well as the multiple changes of ownership which impacted the duties and liabilities that gave rise to a panoply of claims. The court provides two charts to diagram the evolving relationships among the many entities involved and how their interrelated ownership changed over time.  Those charts filled the better part of two pages.  See Slip op. at 13 and 17.

With that backdrop, it may seem bold and unrealistic to provide a short overview of such a lengthy decision with so many complicated factual details and intricate legal issues and analyses.

Nonetheless, for the benefit of those readers who are primarily interested in the essential takeaways from the decision, and the irreducible kernels of wisdom that might be generally applicable, as well as insights that might lead one to decide that it would be helpful to read the whole opinion, I provide the following bullet points:

Highlights

  • The fiduciary duties of LLC managers, and the prerequisites for limiting or eliminating those duties is a perennial issue that the court addresses at page 53. See also footnotes 282 and 283.
  • The court also describes the contractual standard requiring actions to be “fair and reasonable,” to be akin to, “if not equivalent to, entire fairness review.”  See cases cited at footnote 283.
  • The always important recitation of the well-known three standards of review when analyzing claims for breach of fiduciary duty, is addressed at page 55.
  • The well-worn entire fairness standard is discussed and applied at pages 57 through 62.
  • The court also noted that the plaintiff repackaged its claim for breach of fiduciary duty as a claim for fraud, but the fraud claims appeared largely duplicative.
  • However familiar and pedestrian the elements for a breach of contract claim are, it’s always useful to be reminded of them.  See Slip op. at 63.
  • A helpful discussion explains why, based on the facts of this case, the court granted a D.J. that there was no right to indemnification due to the findings of a lack of good faith and breach of fiduciary duty, resulting in a claw back of funds previously advanced.
  • A comparison of the elements for a tortious interference with contractual relations claim, with a claim for tortious interference with prospective business relations, was discussed at page 68 through 71.  This analysis included the seven factors to determine if interference with the contract is justified, and the tension between some unavoidable interference as an allowable consequence of fair competition in the marketplace.  Also discussed was the distinction between interference and free speech as described in Section 768 of the Restatement, Second, of Torts.
  • The court noted the truism that a party to a contract cannot be liable for interfering with its own contract.

The Court of Chancery recently explained in the case styled In Re Harris FRC Corporation Merger and Appraisal Litigation, No. 2019-0736-JTL (Del. Ch. Feb. 19, 2024), the difference between the attorney/client privilege and a lawyer’s duty of confidentiality under Rule of Professional Conduct 1.6.

The titular topic was the subject of my latest ethics column for The Bencher, the publication of the American Inns of Court. I have been writing the ethics column for 25 years.

The titular topic is addressed in the recent Chancery decision of McRitchie v. Zuckerberg, and corporate law scholar Professor Bainbridge provides scholarly insights about the topic and the decision on his blog, which includes the following money quote from the opinion:

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.

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

The full Delaware Supreme Court recently revived part of an investor challenge to IAC/InterActive Corp’s spinoff of its internet dating subsidiary after finding that the deal that controller IAC imposed on minority shareholders did not meet the exacting standards of the high court’s seminal MFW ruling, in In re Match Group Inc. Derivative Litigation, Del. Supr., No. 368, 2022 (April 4, 2024).

The en banc high court partially reversed a Court of Chancery decision that the derivative suit must be dismissed because IAC met the requirements of independence set by the milestone opinion in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).  The asset reshuffle allegedly dealt less value and more debt to pension fund investors compared to IAC insiders.  MFW famously said a controller-engineered deal could get business judgment protection if the negotiating committee was independent and disinterested–and the properly-disclosed transaction was endorsed by a majority of the minority shareholders.

The ruling’s importance

But the pivotal issue in this high court appeal concerned the proper standard to determine whether this unique corporate transaction was the product of fully independent, disinterested fiduciaries.  At one extreme, in the case of a freeze-out merger–where the corporate machinery is allegedly used to deprive investors of their shares and/or voting rights–all deal negotiators must be completely independent and disinterested. The high court said the key question in the appeal was: since the Match spinoff did not involve a freeze-out, could the IAC defendants qualify for the protection of the deferential business judgement standard even though one of three deal negotiators was not independent? 

The Court of Chancery said “yes”, agreeing with defendants that a majority of independent directors was enough to trigger the business judgment standard.  The high court said, ‘no“  and reversed. “If the controlling stockholder wants to secure the benefits of business judgment review, it must follow all MFW’s requirements,” the justices said.  In the MFW setting, to replicate arm’s length bargaining, all separation committee members must be independent of the controlling stockholder.

 Background

 The challenged 2020 transaction involved the creation of two new corporations out of the former IAC and Match.com businesses and a reshuffling of the assets and liabilities of those two entities that was engineered by a “separation committee” composed of three IAC directors.  The old Match was later dissolved into the new ICA.

Three pension funds that owned that eliminated stock sued alleging that the separation was a conflicted transaction in which Old IAC, as Old Match’s controlling stockholder, stood on both sides of the transaction. The plaintiffs claimed that Old IAC obtained significant “non-ratable” benefits in the Separation to the detriment of Match and its minority stockholders, and argued that the Separation Committee was conflicted and the proxy disclosures misled the Old Match minority stockholders.

The trial court ruling

Although the Court of Chancery found that the plaintiffs successfully pleaded facts creating a reasonable inference that one director was not independent of Old IAC, it ruled that a plaintiff must nonetheless show that “either (i) 50% or more of the special committee was not disinterested and independent,” or “(ii) the minority of the special committee ‘somehow infect[ed]’ or ‘dominate[ed]’ the special committee’s decision-making process.“  Finding that plaintiffs failed to do that, the vice chancellor dismissed.

The appellate ruling

Defendants argued that the vice chancellor correctly applied a less exacting standard than the one used in MFW and other freeze-out merger cases.  But the Supreme Court  said, in those key cases, “the common thread running through our decisions: a heightened concern for self- dealing when a controlling stockholder stands on both sides of a transaction.’”

In addition, the high court noted that, longstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence. Directors who owe their success to another will conceivably feel as though they owe a “debt of gratitude” to the individual. The plaintiffs have adequately pleaded that Director Thomas McInerney may have such a relationship with IAC.

The justices said, a controlling stockholder’s influence is not “disabled” when the special committee is staffed with members loyal to the controlling stockholder. “We stated in MFW that the special committee must be independent, not that only a majority of the committee must be independent,” the high court said’,  “A special committee created to secure the protections of MFW should function “in a manner which indicates that the controlling stockholder did not dictate the terms of the transaction and that the committee exercised real bargaining power at an arm’s length.

The unanimous Supreme Court reversed the dismissal, finding the plaintiffs’ claims of an unfair deal by non-independent directors are supported by the facts that:

1) the minority stockholders received a slightly higher percentage of ownership of New Match;

(2) Old Match was capitalized in a vastly different way, with limited cash, much higher debt, and restrictive governance provisions; and

(3) the boards were different

Supplement: One of Delaware’s favorite corporate law scholars, Professor Stephen Bainbridge, provides additional insights about this case on his eponymous blog here and here.

One of the nation’s leading corporate law professors, Stephen Bainbridge, addresses on his eponymous blog, whether a board meeting may be conducted by text messaging alone, and concludes that DGCL section 141(i) requires that board members participating in a meeting must be able to hear each other. The good professor cites to his own law review articles on the topic to support his reasoning.


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

Vice Chancellor Travis Laster recently denied the TripAdvisor Inc. directors’ request for a quick appeal of his decision one month earlier to let shareholders press their charge that the board’s charter change move to Nevada robs them of litigation rights in a self-interested transaction that fails the exacting entire fairness standard. Palkon et. al. v. Maffei  et. al., No. 2023-0449-JTL  opinion issued (Del. Ch. Mar. 21, 2024).

The Chancery Court’s interlocutory appeal decision found no motive for the reincorporation move other than insulation of directors and officers and no attempt at bargaining or investor compensation for Nevada’s increased litigation shielding.  He said trial could reveal whether post-move changes in stock price support the plaintiffs’ claim that their shares would lose value while insiders benefited.

The appeal opinion is recommended reading for corporate law specialists in that it applies the Supreme Court Rule 42 interlocutory appeal certification requirements to the novel issue of fiduciary duties in a reincorporation into any entity with different shareholder rights.  Vice Chancellor Laster explained in detail why he rebuffed each of the grounds the defendants submitted as justifications for immediate review.

Background

Gregory B. Maffei, the CEO, Chairman and controlling shareholder of TripAdvisor which operates the world’s largest travel guidance platform, consulted his directors and lawyers  to produce a plan to reincorporate in Nevada to better protect the officers and directors under that state’s corporate law.  Shareholders sued, charging breach of fiduciary duty and defendants moved to dismiss.


The Feb.20 dismissal denial

Vice Chancellor Laster found that the unaffiliated stockholders’ voting pattern “supports an inference of unfairness”. Just as an informed vote by unaffiliated stockholders in favor of a conflicted transaction is evidence of fairness, an informed vote by unaffiliated stockholders against a conflicted transaction suggests unfairness, he said, noting that, “Here, the unaffiliated stockholders resoundingly rejected the conversions.” Palkon et. al. v. Maffei  et. al., No. 2023-0449-JTL  opinion issued (Del. Ch. Feb. 20, 2024).

The appeal

Vice Chancellor Laster examined the defendant’s grounds and found none sufficient.

Does the opinion involve an issue of first impression?

Defendants assert that “no other Delaware court has addressed whether and under what circumstances a company’s move to a state affording some greater litigation protection for potential future cases based on hypothetical future facts constitutes a non-ratable benefit material enough to trigger entire fairness review.”

But the vice chancellor said, “The application of entire fairness to an interested merger is not a novel issue. Nor is the application of entire fairness to a merger that confers litigation protections on the fiduciary defendants who approved it.”  He added that, “The Opinion also did not address a new issue by focusing on the materiality of a reduction in the litigation risk. Using a materiality standard to evaluate interestedness is not novel.”

Would a high court review resolve a conflict among the courts?

Defendants argued that “[t]he decisions of the trial courts are conflicting upon the question of law.” But the vice chancellor said, “Whether the  cases conflict depends how one interprets prior cases. On balance, this factor does not support interlocutory review.

Would review end the case and serve justice?

As their final basis for interlocutory appeal, the defendants invoke two factors

together: factor (G), which asks whether “[r]eview of the interlocutory order may

terminate the litigation,” and factor (H), which asks whether “[r]eview of the

interlocutory order may serve considerations of justice.” That combination does not

support interlocutory review.

The possibility that a reversal could save litigation costs “is not unique to [this] application and would otherwise warrant certification after nearly every trial court decision even in cases lacking ‘exceptional’ circumstance,”  the Vice Chancellor ruled, “Moreover, for reasons discussed previously, this matter is likely to require relatively less extensive litigation efforts than other entire fairness cases.”

“Not invited” to weigh Musk influence?

However, as to the appellants’ assertion that the Opinion decided a substantial issue thereby subtly alluding to the disproportionate media attention given to the Opinion because  “thousands of other Delaware corporations . . . need certainty as to the rules that apply to a decision to reincorporate in another jurisdiction,” the vice chancellor said that alluded to the attention the Feb. 20 opinion received after Elon Musk’s high-profile comments about “forsaking Delaware” following his loss in an unrelated decision in the Chancery Court.

“Rule 42 does not invite a trial court to consider the level of media attention that a decision has received. That does not mean that the Delaware Supreme Court could not consider it.” he said.

Not about Nevada
Finally, the vice chancellor noted that “ nothing about the ruling turns on anything about Nevada as a state. ” If the Company was converting into a Delaware LLC and paralleled Nevada law, then the outcome would be the same, he said. “The allegations about the substance of the post-conversion legal framework generate the result, not whether it was created by Nevada legislators or Delaware lawyers.”

“This is not a case where the interests of justice require early stage intervention

by the Delaware Supreme Court,” the vice chancellor concluded. It is a case where the differences between Delaware law and Nevada law have been explored. However, he noted that this certification review ruling is only a recommendation to the Delaware Supreme Court—which makes up its own mind about whether to grant an appeal.

This year’s Lecturer is Professor Lisa Fairfax from the University of Pennsylvania Law School. Details of the event on April 19 at the Hotel duPont in Wilmington, Delaware, are available at this link.

Hard to believe that when I started this idea while on the law review, it would still be going strong almost four decades later. Named after my father, the Delaware Journal of Corporate Law at the Delaware Law School of Widener University continues to host and organize the event that brings leading corporate law scholars from around the country to share their insights. Prior Annual Lectures have been highlighted on these pages.

Key Delaware decisions on advancement under DGCL Section 145 for directors and officers were highlighted in a just-published book chapter in an ABA publication that I co-authored with 5 of my colleagues in the Delaware office of Lewis Brisbois. This is the 8th year that I have highlighted key advancement cases for a book chapter for the ABA.

Links to other advancement decisions highlighted over the last 19 years on this blog, as well as prior ABA book chapters on this topic are available on these pages.

A recent gem of a short letter ruling from the Delaware Court of Chancery in Goldman v. LBG Real Estate Company LLC, C.A. No. 2023-0426-KSJM (Del. Ch., Feb. 26, 2024), provides important insights, with citations to authority, on three noteworthy topics of widespread relevance to corporate litigators:

  • California courts find “Delaware law on advancement particularly persuasive because of the depth of its experience with corporate governance issues.”  Slip op. at 2 and footnote 6 which cites to several cases (other citations omitted).
  • Like Delaware, California allows fees on fees proportionate to the degree of success of a claimant.  See Slip op. at 2 and footnote 7 (citing cases).
  • This letter ruling was in the context of a motion for reargument under Rule 59(f), and the fact that the court made quick work of the motion in a 3-page decision is an indication of how much of an uphill battle such motions usually are.