Lawrence Cunningham is the new Director of the Weinberg Center for Corporate Governance at the University of Delaware. He is a prolific corporate law scholar and provides thought leadership on the perennial issue of Delaware’s role in the nation’s corporate law in a new article entitled: Delaware Corporate Law Still Gold Standard Amid ESG Blowback.

In a masterpiece of contract interpretation and statutory analysis, the Delaware Court of Chancery recently reconciled juxtaposed provisions in the Delaware General Corporation Law and a Certificate of Incorporation to allow a reincorporation of a Delaware company in Nevada with a majority vote—as compared to requiring a supermajority vote. Gunderson v. The Trade Desk, Inc., C.A. No. 2024-1029-PAF (Del. Ch., Nov. 6, 2024).

Brief Overview

Naturally, the detailed facts of this case are important but, in essence, the company involved proposed to effect its reincorporation pursuant to a conversion under Section 266 of the Delaware General Corporation Law. Section 266 allows a conversion by a majority of the outstanding shares of stock of the corporation entitled to vote upon the proposal. Article X of the corporation’s Certificate of Incorporation, however, requires the approval of 66 2/3rds of the outstanding voting power of the corporation’s stock, voting as a single class, to “amend or repeal, or adopt any provision” of the certificate inconsistent with certain enumerated articles of the certificate.

A stockholder alleged that the conversion resulted in an amendment of the Certificate of Incorporation and, therefore, triggered the supermajority requirement. The court disagreed.

Key Holding

Relying on the doctrine of independent legal significance, and a long line of cases upholding that doctrine, the court reasoned that the conversion was not subject to the supermajority vote requirement in the charter or certificate of incorporation.

In order for that supermajority provision to have applied, among other reasons, the charter would have needed to include additional language required to specify that the provisions of the charter applied outside of Section 242 of the DGCL, which governs amendments to a charter.

Highlights of the Court’s Analysis and Decision

  • A key principle that is a bedrock of Delaware corporate jurisprudence is that actions of a director are “twice-tested”: first for legal authorization, and second by equity. See footnote 23.
  • A keystone of the court’s analysis was the well-established doctrine of independent legal significance which holds that “legal action authorized under one section of the corporation law is not invalid because it causes a result that would not be achievable if pursued through other action under other provisions of the statute.” Slip op. at 16.
  • The court discussed at length a multitude of cases discussing the doctrine of independent legal significance, beginning with a case that was decided about 90 years ago. Slip op. at 16-26.
  • A few eminently quotable statements of law buttress the court’s reasoning, including the following:

“General language alone granting preferred stockholders a class vote on certain changes to the corporate charter (such as authorization of a senior series of stock) will not be read to require a class vote on a merger and its integral and accompanying modifications to the corporate charter and the corporation’s capital structure.”

Slip op. at 24 -25 (citations omitted).

  • Delaware has long adhered to: “application of the doctrine of independent legal significance and refused to extend charter-based voting requirements to mergers and consolidations absent clear language . . ..” Slip op. at 25 (citations omitted).
  • The court underscored that: “. . . it is well-established that, like the preferences of preferred stock, ‘high vote requirements’ ‘must be clear and unambiguous,’ leaving ‘no doubt that the shareholders intended that a supermajority would be required.”’ (citations omitted). Slip op. at 27.
  • “Delaware decisions have made clear that: if a party wants a consent right that applies to mergers generally, or which applies to mergers that have the effect of altering, amending or eliminating the special right that the party possesses, then the consent right must refer specifically to a merger.” Footnote 31.
  • In addition to the basic contract interpretation principles that apply to interpretation of a certificate of incorporation, the court emphasized a consequential principle of interpreting a charter that is an essential tool for the toolbox of corporate litigators: “When it comes to the construction and interpretation of a certificate of incorporation, ‘the agreement as a whole’ includes the DGCL and all of its amendments, which the Delaware legislature has determined ‘shall be a part of the charter, or certificate of incorporation of every corporation except so far as the same are inapplicable and inappropriate to the objects of the corporation….’” Slip op. at 28-29. See 8 Del. C. § 394. Also included are cases interpreting the DGCL.
  • The court noted that the doctrine of contra proferentem was not applicable when a contract was not ambiguous. Slip op. at 42.
  • In closing, the court explained that it would enter a partial final judgment pursuant to Rule 54(b) to allow an expedited appeal if any of the parties so chose.

The current issue of Delaware Today magazine published this month a list of “Top Lawyers” in Delaware for various areas of the law. Yours truly was included in the list under the category of “corporate law”. (There was no separate category for corporate litigation.) Congrats to my fellow Delaware lawyers who were included in the list, including my Delaware partners, Scott Cousins for business bankruptcy and Ciro Poppiti for hospitality law.

This post was prepared by Aimee Czachorowski, an attorney in the Delaware office of Lewis Brisbois.

Specific costs recoverable by a prevailing party is an oft-asked question in the Delaware courts. The Superior Court’s Complex Commercial Litigation Division recently addressed what expert fees and trial technology costs can be recovered by the prevailing party in NewWave Telecom and Technologies, Inc. v. Ze Jiang, et al., C.A. No. N-20C-09-215 VLM CCLD (Del. Super., Oct. 24, 2024).

Although the Court discussed an award of attorneys’ fees pursuant to the applicable SPA, the Court’s discussion of allowable costs is of more widespread interest to practitioners. The Court indicated that expert witness fees were recoverable, but only for the portion of the expert’s time that was “necessarily spent in attendance upon the court for the purpose of testifying.” Slip op. at 9.

The Court also explained that: Time spent by the expert traveling to and from the courthouse, and time spent waiting to be called to the witness stand was recoverable. The Court also addressed what trial technology support costs could be recoverable.

Specifically, the Court allowed for: 1) Travel, lodging, and meals incurred while the expert was waiting to be called to testify (even while waiting to be called in rebuttal); 2) Time the expert actually spent waiting upon the Court—defined to mean the actual trial time plus an hour for travel to and from the courthouse; and 3) trial technology support for the actual trial time, not including preparation time.

A recent Delaware Court of Chancery opinion addressed the not infrequent situation where a distressed company is sold or merged but only the preferred stockholders receive consideration—and the common stockholders receive nothing. In Jacobs v. Akademos, Inc., Del. Ch., C.A. No. 2021-0346-JTL (Del. Ch. Oct. 30, 2024), a scholarly work of art, the court conducts an analysis of the fiduciary duties of the directors who approved the deal.

Brief Factual Background

The first 3-pages of the decision provide a pithy overview of the key factual circumstances including that the challenged transaction was not conditioned on the twin MFW requirements—approval from both an independent special committee and a majority of the unaffiliated stockholders—because the company was in such a distressed financial situation that it lacked the funds to support a full-blown MFW process.

A group of common stockholders led by the company’s founder sought appraisal rights and also asserted plenary claims for breach of fiduciary duty against the directors, challenging the deal on the basis that the common stockholders did not receive any consideration. The first 33-pages or so of the decision provide an exhaustive recitation of the factual details and credibility determinations.

The company involved had not made a profit in its 20-year history. An investor continued to provide necessary working capital and in exchange received preferred stock and other preferential rights upon sale or liquidation.

Summary of Holding

The court determined that the plaintiffs did not present a credible valuation, and the defendants at trial presented a convincing case that the fair value of the common shares at the time of the merger was zero. Regarding the plenary claims, the defendants bore the burden of proving that the challenged transactions were entirely fair, and they carried that burden. The court also noted, as an aside, that the net loss from the transaction to the primary investor with the preferred stock was $18 million.

Highlights

  • The court provides a primer on principles of Delaware appraisal law, as well as a critique of competing reports of valuation experts. The court explained: (i) why the court gave no weight to a Rule 409A valuation, and (ii) why it did not rely on deal price. Slip op. at 35 to 56.
  • The court addressed the analysis of the fair value of the minority interest by assessing the value attributable to the shares as a going-concern. Slip op. at 56 to 66. Notably, the court observed that in appraisal actions in Delaware, there is no minority discount imposed. Slip op. at 58 to 59.
  • The court described the two elements of a breach of fiduciary duty as: first, establishing that a fiduciary duty existed, and then, establishing that the defendant breached that duty. Slip op. at 67. The court observed that establishing the first element was easily satisfied in this matter, but the second element in this case was more complex.
  • The court distinguished between the standard of conduct and the standard of review when determining whether corporate fiduciaries breached their duties when approving a transaction.
  • The standard of conduct describes what those with fiduciary duties are expected to do, and is defined by the content of the duties of loyalty and care. Slip op. at 68.
  • The standard of review arises in the context of litigation when instead of using the standard of conduct, the courts in Delaware use three tiers of review for evaluating director decision-making: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness. Slip op. at 68.
  • The entire fairness standard of review applied in this case and the two dimensions include: (1) substantive fairness (fair price); and (2) procedural fairness (fair dealing). Id.
  • The court underscored the distinction between “fair price” for purposes of appraisal, as compared to satisfying the entire fairness standard in connection with a breach of fiduciary duty claim: (i) the appraisal statute requires that the court determine an estimate for fair value using the special valuation standards in the statute. (ii) by contrast the fair price aspect of the entire fairness test is the standard of review to identify a fiduciary breach, and instead of picking a single number, the task of the court is to determine whether the transaction price falls within a range of fairness. Slip op. at 69 to 70 and 72 to 73.
  • The court elaborated on the fair price and fair dealing components of the entire fairness test. Slip op. at 69 to 72.
  • My favorite quote from the case is the following:
    • “Ultimately, fairness is not a technical concept. ‘No litmus paper can be found or Geiger-counter invented that will make determinations of fairness objective.’ A judgment concerning fairness ‘will inevitably constitute a judicial judgment that in some respects is reflective of subjective reactions to the facts of a case.’” Slip op. at 72.
  • The court also observed that in an appraisal proceeding the going-concern standard looks to the value of the corporation without considering issues of control, by contrast a claim for breach of fiduciary duty that challenges the fairness of a squeeze-out transaction must account for the implications of control. Slip op. at 72-73.
  • The court provided a detailed analysis to apply the standards of fair price and fair dealing to the facts of this case. Slip op. at 72-85.
  • The court concluded that the preferred stockholders proved that the fair value of the common stock for purposes of appraisal was zero, and they proved that the other challenges to the transaction satisfy the entire fairness test, and therefore, did not breach any fiduciary duty.

In a recent decision, the Delaware Court of Chancery determined that an agreement that required a release to be signed as a condition precedent to receiving severance benefits was enforceable, and that the failure to sign the release was a defense to the payment of severance benefits. An important aspect of this decision was that the requirement of a release was an explicit provision in the agreement between the parties, as compared to a situation where a release might be requested but when it was not a condition precedent in any pre-existing agreement.

In Roth v. Sotera Health Company, C.A. No. 2022-1192-LWW (Del.Ch. Sept. 23, 2024), the court also declined to rule before trial on a material issue of fact about whether the vesting conditions for the restricted stock under the same agreement were satisfied.

The following selected highlights of this decision may be useful to those who litigate these types of cases:

Highlights

  • The Court explained why the signing of a release that was a condition precedent in the agreement of the parties, was not satisfied—thereby serving as a defense to payment of the severance benefit. Slip op. at 8, as well as pages 25-26 and footnotes 111 to 113.
  • Recitation of the truism that contract interpretation is appropriate for a motion for summary judgment. Slip op. at 17-18 and footnotes 79-81.
  • Basic contract interpretation principles focus on the four-corners of an agreement to determine if ambiguity exists. Slip op. at 19-20 and footnotes 83-89.
  • The court observed the principle that when one agreement incorporates another agreement, under certain circumstances they will be interpreted together. Slip op. at 22-23 and footnotes 97-98.
  • The validity of restrictions on shares pursuant to Section 202 of the Delaware General Corporation Law was addressed. Slip op. at 24-25.

The Delaware Court of Chancery recently clarified the requirements of Rule 88 which refers to an affidavit that must be submitted when attorneys’ fees are requested from the Court. The short 2-page letter-ruling provides citations to authority and an explanation why the amount of time charged and the rates sought were not in proportion to the work for which the Court would award fees. See Fortis Advisors LLC v. Johnson & Johnson, et al., C.A. No. 2020-0881-LWW (Del. Ch. Sept. 4, 2024).

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

The Delaware Court of Chancery recently reconsidered most of its earlier dismissal of an investor challenge to IAC/InterActive Corp’s spinoff of its Match.com internet dating subsidiary after the state high court ruled that dual-position Match/IAC fiduciaries may have been too conflicted to get the protection of the business judgment rule in In re Match Group, Inc. Derivative Litigation, No. 2020-0505-MTZ (Del. Ch. Oct, 2, 2024).

Vice Chancellor Morgan Zurn’s September 1, 2022 opinion had dismissed investors’ derivative breach of duty charges over the Match separation for failure to show that the defendant directors lacked the independence to fairly decide whether the suit had enough merit to go forward.  In re Match Gp., Inc. Deriv. Litig. (“Match I”), 2022 WL 3970159 (Del.  Ch. Sept. 1, 2022).

But the Delaware Supreme Court partially reversed, finding that under its seminal MFW decision, no matter what procedure the defendant board used to ensure that the deal was fair in price and method, it would still be questionable if the directors who negotiated and approved it were conflicted. In re Match Gp., Inc. Deriv. Litig. (“Match II”), 315 A.3d 446 (Del. 2024).

Then, the vice chancellor’s Oct 2 opinion deciding that director independence question on remand from the state Supreme Court applied the requirements of the high court’s seminal MFW decision to the actions of the Match/IAC directors and officers and decided the shareholder plaintiffs have grounds to continue their charges against the defendants—except parent company controller Barry Diller.  Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).

That Chancery opinion will be closely examined by corporate law specialists nationwide because it applies the state high court’s September 1 interpretation of MFW to the question of when and why allegedly disloyal inside directors and officers must face derivative charges if they purportedly manipulate transactions for their advantage in a non-freeze-out situation.

 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 IAC directors who also held positions at the Old Match.  Old Match was later dissolved into the new IAC.

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 initial trial court ruling

Although the Court of Chancery initially found that the plaintiffs successfully pleaded facts creating a reasonable inference that one deal approving 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.

Diller different than directors

But after the state high court’s reversal, on remand, Vice Chancellor Zurn then examined the independence of Diller and each defendant in turn.  First she found, that just because Old IAC held a controlling interest in Old Match and Diller owned a majority of Match through multiple- vote stock, that doesn’t mean he personally controlled Match’s merger decisions directly.  Therefore he should be dismissed for lack of proof that he suffered from a conflict of interest regarding the separation, the court ruled.

The remaining directors argued that they are exculpated from all of the fiduciary charges that the plaintiffs say disables them from deciding whether the suit has enough merit to continue. But the vice chancellor said they all fail the key rule in this area because, “Where a corporate charter contains an exculpatory provision, claims against a director will survive a motion to dismiss if the plaintiff pleads that the director

(1)“harbored self-interest adverse to the stockholders’ interests”;

(2) “acted to advance the self-interest of an interested party from whom they could not be presumed to act independently”; or

(3) “acted in bad faith

The vice chancellor held that the motion to dismiss failed because “The Dual Fiduciary Defendants each face such a conflict, so the claims against them are not exculpated.”

I should have posted this earlier, but I wanted to make some of the materials available that we presented at our annual seminar on the latest developments in Delaware on Second Amendment-related cases and the counterpart to the Second Amendment in the Delaware Constitution: Article I, Section 20.

The materials for my presentation that I compiled on Delaware decisions and recent U.S. Supreme Court decisions are available at this hyperlink. As in the past, we also had the leading scholars in the country presenting on their latest books and recent court decisions. Their materials are available upon request.

The brochure for the seminar is available at this hyperlink.

The Delaware Association of Second Amendment Lawyers has sponsored the seminar for the last 11 years, and this year we were fortunate to have the Delaware Lawyers’ Chapter of the Federalist Society co-sponsor the event.

Much has been written regarding Elon Musk’s criticism of the State of Delaware and the decisions of its courts about him and his many successful business enterprises–and by extension the large number of other businesses impacted by Delaware law. In a broader sense, Musk’s criticism, and that of others, has generated discussion about the perennial question of: whether Delaware’s prominence in the corporate law world is at risk. See, e.g., the scholarship of this blog’s favorite corporate law scholar, Professor Stephen Bainbridge, on whether the impact of Musk and others will have an effect on Delaware as the leading choice for formation of corporations and other business entities (“DExit”). Relatedly, there has been an enormous amount of commentary on recent changes to the Delaware General Corporation Law that arose out of a protest of sorts to recent decisions by the Delaware Court of Chancery. See, e.g, one of many articles on those recent changes to Delaware corporate statutes.

Though I have published more than a thousand articles in various publications, which includes the commentaries and highlights about Delaware law on these pages over the last several decades, if I made my living in the halls of academia instead of needing to serve paying clients, I could devote more time to a detailed analysis of the titular topic.

Although some of my articles have been cited by the Delaware Supreme Court, the Delaware Court of Chancery, and the Delaware Superior Court, my purpose in this short blog post is simply to raise the question for discussion about the titular topic. It may be difficult or impossible to measure what impact, if any, on the decisions of Delaware Courts, and Delaware public policy in general, the criticism of Elon Musk, with over 200 million followers on X, formerly Twitter, will have on a long-term basis, even if only in a nuanced manner.

By comparison, many articles have been written, quite a while ago, about the “Greenhouse Effect” on decisions of the U.S. Supreme Court based on criticism of the High Court by a New York Times reporter of that name. But Elon Musk, one of the most influential and productive geniuses of our time, and maybe the most impactful person in history–from building rockets in a quest to colonize Mars, to self-driving cars, and autonomous robots, to advances in artificial intelligence, and brain implants–likely has an effect far greater than a New York Times reporter. Food for thought.