A recent Delaware Court of Chancery opinion decided a contested mootness fee request in connection with benefits that resulted from stockholder litigation. Instead of the thorough analysis concerning the appropriate amount of the fee award, what one reader thinks is more interesting about the decision, from a historical perspective, is the introduction  which defines the word “wedge” as a term with meaning in corporate governance–as well as a term that relates to a part of the boundary of the State of Delaware with its neighboring states.

The first page of the Court’s Memorandum Opinion, in Hollywood Firefighters Pension Fund v. Malone, C.A. No. 2020-0880-SG (Del. Ch. Nov 9, 2021), deserves to be quoted in its entirety:

To historically-minded Delawareans, the Wedge brings to mind a political
delta of land at the state’s northwestern corner. Delaware’s western boundary is the
Transpeninsular line, separating the state from Maryland. Its northern boundary
with Pennsylvania, uniquely, is formed by an arc with a radius of twelve miles—the
Twelve Mile Circle line—measured (originally at least) from the cupola of the Court
House in New Castle. The line separating Maryland and Pennsylvania, of course, is
the Mason-Dixon line. If these three lines were intended to meet at a point, that
intention was frustrated. The tangent of the Twelve Mile Circle missed the
intersection of Mason-Dixon and Transpeninsular lines, passing to its east, and
intersecting the Transpeninsular to the south. The rough square-mile triangle
resulting was the subject of a boundary dispute between Pennsylvania and Delaware
not settled until the 1920s.

Corporate finance academics have another delta in mind when they speak of
“the Wedge.” That delta represents the difference between the percentage of
corporate ownership held by a stockholder, and the percentage of voting power
represented by her stock; that differential results where various classes of stock have
distinct voting rights. Where voting power is concentrated in stockholders owning
a minority of corporate equity, misalignments of interest arise, and the greater such
disparity (the larger the Wedge, in other words) the more the misalignment decreases
the value of the company, theoretically at least.

Recent scholarship on the increasingly important topic of SPACs has been published by Michael Klausner and Michael Ohlrogge, entitled: SPAC Governance: In Need of Judicial Review.

The article is available on SSRN, which also includes the following synopsis:

This paper analyzes the relationship between the economic structure of a SPAC, its corporate governance, and judicial review of SPAC mergers (or “deSPACs”). The core challenge for SPAC governance is to address the inherently conflicting interest of a sponsor and public shareholders. SPACs respond to this conflict by holding proceeds of their IPOs in trust and by granting public shareholders a right to redeem their shares for a pro-rata portion of that trust. For the redemption right to be effective, however, a SPAC’s board must provide shareholders with accurate and complete information regarding the merger. Doing so may conflict with the interests of the SPAC’s sponsor, which will profit substantially even in a deal that is bad for SPAC investors. The independence of a SPAC’s board is thus necessary for a SPAC to be governed in the interest of shareholders. Unfortunately, SPAC directors often have financial ties to a sponsor and are compensated in ways that align their interests with those of the sponsor. Where this is true, and where SPAC shareholders file suits alleging a breach of the duties of loyalty and candor, a court should affirm that the board has a duty to provide shareholders with the information they need to exercise their redemption right, and review the conduct of the sponsor and the board under an entire fairness standard.

The Delaware Court of Chancery published a magnum opus a few days ago that should be required reading for all lawyers who prepare formal legal opinion letters for clients–and whose behavior is subject to review by the Delaware courts.

In Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-VCL (Del. Ch. Nov. 12, 2021), Delaware’s court of equity reviewed in extensive detail the factual background and multi-faceted context within which a large non-Delaware firm provided a formal legal opinion letter on a complex, substantive issue of Delaware law, relating to the existence of a “material adverse effect” (MAE). Importantly, the largest Delaware-based law firm and the Delaware office of one of the nation’s largest law firms refused to provide the requested opinion (with one firm refusing to do so based on a policy of not providing any formal MAE opinion letters.) The Court contrasted the opinion given on a nuanced topic of evolving Delaware law, which depends on a fact-intensive analysis, with a “third-party closing opinion on a routine issue….” Slip op. at 146.

The Court’s thorough analysis in a book-length 194-page opinion referred to the formal legal opinion as “contrived”, unexplained, and a “simulacrum” of a legal opinion. It was given at the request of a major public-company client even though the opinion–which was a condition, based on a limited partnership agreement, to effect a transaction with a controlling party–should not have been given. The result of the Court’s decision was a judgment of over $690 million in favor of the minority unitholders of the master limited partnership involved.

For purposes of this short blog post, I’ll just provide a few bullet points that I hope will entice readers to review carefully the entire opinion hyperlinked above:

  • When parties to a contract provide that a legal opinion letter is necessary to satisfy a condition precedent, that opinion must be given in good faith. See Slip op. at 112-113 and n.16.
  • An opinion giver cannot render an opinion in good faith if the opinion does not “fulfill its basic function.” Id. at 113.
  • That requirement includes the premise that the “opinion giver must have competence in the particular area of law.” Id.
  • The Court explained that an opinion giver “cannot act in good faith by relying on information known to be untrue or which has been provided under circumstances that would make reliance unreasonable.” Id. at 115 and n 19.
  • Notably, the court reasoned that an opinion giver could not establish good faith by relying: “… on factual representations that effectively establish the legal conclusion being expressed.” Id. (citation omitted.)
  • The Court amplified its reasoning by observing that: “If the factual representations are ‘tantamount to the legal conclusions being expressed,’ then the opinion giver is regurgitating facts, not giving an opinion in good faith.” Id. (citation omitted.)
  • Although an opinion giver may establish the factual predicate for an opinion by making assumptions that certain facts are true, the Court cautioned that: “If an assumption or a set of assumptions effectively establishes the legal conclusion being expressed, then the opinion giver cannot properly rely on those assumptions , as doing so vitiates the opinion.” Id. (citations omitted.)

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently decided Zhongpin Inc. shareholders’ battle to force the food processor’s director and officer insurer to pay the $41.3 million Chancery Court judgment they won by challenging an unfairly-priced buyout must be fought in the Delaware Superior Court. Rodriguez et al. v. Great American Insurance Co., No. 2020-0387-JRS letter opinion issued (Del. Ch. Oct. 20, 2021).

Vice Chancellor Joseph Slights’ Oct. 20 decision dismissed the plaintiff shareholders’ insurance action from the Chancery Court, but not because they lacked standing or that there was no coverage for the default judgment he had awarded them in an underlying breach-of-duty action, as defendant Great American Insurance Company contended. He said he never reached those issues because Delaware law required him to first make a sua sponte ruling as to whether the insurance action was essentially a damages recovery suit that did not belong in a court of equity such as Chancery–but rather belonged in Delaware’s trial court of general jurisdiction: the Superior Court. Notably, Vice Chancellor Slights previously served as a judge on the Superior Court in its Complex Commercial Litigation Division.

Corporate and insurance law specialists will find the letter opinion of interest since it appears to shut the Chancery Court door on additional exceptions to the long-standing rule that has kept D&O disputes in the state’s Superior Court.

Rejected Arguments

After supplementary briefing, Vice Chancellor Slights rejected arguments from both parties that he could retain subject matter jurisdiction based on:

(a) Statutory authority and 8 Del. C. § 145(g) empowering corporations to procure insurance and Section 145(k)’s grant of plenary authority with respect to indemnification. The vice chancellor said a similar statutory argument was squarely addressed and rejected in Massachusetts Mutual Life Insurance Co. v. Certain Underwriters at Lloyd’s of London, 2010 WL 2929552, at (Del. Ch. July 23, 2010), where the plaintiffs sought to compel coverage and the payment of a claim under a D&O policy directly against the insurer. That court found “This is precisely the type of dispute that fits squarely within the jurisdiction of our Superior Court.”

(b) The clean-up doctrine — invoked where the court that exercised jurisdiction over an underlying action is empowered to adjudicate a dispute arising from the plaintiff shareholders attempt to enforce their underlying judgment. The vice chancellor said in order to exercise that power, he would have to be able to answer “yes” to questions as to whether jurisdiction over the claims would:

1) resolve a factual issue which must be determined in the proceedings;
2) avoid a multiplicity of suits;
3) promote judicial efficiency;
4) do full justice;
5) avoid great expense;
6) afford complete relief in one action; or
7) overcome insufficient modes of procedure at law.

The litigation sprang from a 2012 squeeze-out of Zhongpin investors by Xianfu Zhu, the company’s de facto controlling stockholder. Zhu caused Zhongpin to enter a transaction with two of his wholly owned entities whereby the minority stockholders of Zhongpin were cashed out for inadequate consideration. That transaction prompted breach-of-duty claims against the Class Action Defendants that resulted in Slight’s default judgment after Zhu and his directors and offices stopped paying their defense firm, failed to hire a replacement and stopped defending the action, the court said.

The insurance action
Following the default judgment, the plaintiff shareholders tried to collect from the D&O insurer on behalf of the company because it came in a derivative action and because Zhu, the directors and officers and company and its assets were in China and allegedly could not be located, let alone reached.

Plaintiffs argued that the GAIC policy covered losses incurred during the time frame of the wrongdoing alleged in the underlying action and that the losses are not excluded, but the insurer countered that the plaintiffs had no standing to seek coverage under the D&O Policy, the claims arose outside the coverage period, and the claims are governed by several exceptions or failures of conditions in the policy. GAIC refers to the D&O Policy’s No Action Clause, which says:

“No action shall be taken against the Insurer unless, as a condition precedent thereto, there shall have been full compliance with all the terms of this Policy” and
“The Insureds shall not incur Costs of Defense, or admit liability, offer to settle, or agree to any settlement in connection with any Claim without the express prior written consent of the Insurer”.

A court of limited jurisdiction
The vice chancellor noted that the Court of Chancery is a court of “limited jurisdiction;” and maintains subject matter jurisdiction only when:
(1) the complaint states a claim for relief that is equitable in character,
(2) the complaint requests an equitable remedy when there is no adequate remedy at law or
(3) Chancery is vested with jurisdiction by statute.

He concluded that none of those conditions are present here because, “At heart, the [Plaintiffs] assert that [GAIC] . . . [has] not fulfilled [its] obligations under [its] [] policies. This is fundamentally a breach of contract action for money damages, which is the traditional province of the Superior Court.” Transfer to Superior Court will not involve delay while another judge is forced to become familiar with a complex case, he said, because the insurance action is separate and new and plays to the experience and strength of the Superior Court.
Finally, the vice chancellor volunteered to finish the case if needed as a temporary Superior Court judge—using his pre-Chancery experience in that court.

The Oct. 20 opinion only decided what court would try to resolve a number of novel and interesting issues in a unique insurance case – complicated by the fact that Zhongpin had merged into a Delaware shell corporation but had few corporate ties to the U.S. In addition to the standing, coverage and other questions to be answered:

Even if the plaintiffs could access the insurance proceeds, how would the court resolve the GAIC policy requirements that Zhongpin defend the underlying shareholder suit and get permission to settle it — considering that the company’s owners, officers and directors had apparently abandoned the litigation?

If the plaintiffs won a coverage decision for the underlying derivative suit, would they contest a decision to send the funds to Zhongpin management somewhere in China on behalf of the shareholders?

The recent Delaware Court of Chancery opinion in Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. Sept. 23, 2021), provided much needed clarification for the rather unsettled nuance of indemnification under Section 145 of the Delaware General Corporation Law regarding when indemnification can be proportionate to the extent that the party seeking indemnification was not 100% successful in the underlying litigation.

Brief Background:
This case involved a request for mandatory indemnification under DGCL Section 145 based on what the court described as a “novel theory of proportional indemnification.” The plaintiff argued that he should be indemnified for his “partial success” on fiduciary duty claims against him because the damages awarded to his former company were much less than the company originally sought.

Basic Principles:
The court provided a very helpful primer on the basics of indemnification under DGCL Section 145. In particular, the court explained that Section 145 grants corporations the discretion under subsections (a) and (b) to indemnify officers or directors where a minimum standard of conduct is met. The permissive language of Section 145(a) and Section 145(b) provides that indemnification may be available to an officer or a director if she is found to have acted in good faith.

By contrast, Section 145(c) contains mandatory language providing for an entitlement to indemnification. Under Section 145(c), whether an individual acted in good faith, or what she perceived to be in the best interest of the corporation, is irrelevant. The court explained that: “Section 145(c) is triggered when a covered person prevails in a proceeding that is covered by Section 145(a) or 145(b).”

The court further clarified that indemnification is compulsory where: “a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding” (citing Section 145(c), and where that person was made a party to such action “by reason of the fact that the person is or was a director or officer . . . of the corporation.” (citing Section 145(a) – (b)).

The court emphasized that to satisfy the statutory prerequisite for mandatory indemnification “success” does not mean exoneration, and a corporate official “need not have been adjudged innocent in some ethical or moral sense.” See footnotes 39 and 40 and related text.

Highlights of Decision:
The most noteworthy aspects of this decision are the parts where the court addresses the standard for “proportionate indemnification” based on “partial success.”

The court observed that it was not aware of any authority where “partial success” was analyzed based on the percentages of damages the prevailing party recovered against an indemnitee. The court held that such an approach was “unworkable” in addition to being unprecedented; that is: to define partial success for indemnification purposes based on the proportion of damages recovered on a single claim. Such an approach would be untethered from the policy at the root of Section 145 because the overarching purpose of Section 145 is to encourage capable persons to serve as corporate directors knowing that expenses incurred by them will be borne by the corporation they serve. The court added that a director adjudged to have acted in bad faith in breach of his duty of loyalty can hardly assert that he is entitled to indemnification for a claim where the director’s integrity that the policy is intended to uphold while serving as a director, was found lacking.

Moreover, the court cited to other cases for the prevailing view that Delaware courts have made a determination on whether a person was successful for purposes of being entitled to indemnification “on a claim by claim basis,” as opposed to determining the percentage of damages that was awarded compared to the amount of damages that was initially sought. See footnotes 48 – 52 and accompanying text.


The current issue of the Delaware Business Court Insider includes an article on the titular topic by yours truly and my colleague Cheneise Wright. Courtesy of the good folks at the Delaware Business Court Insider, and with their permission, it appears below.

Chancery Declines to Follow First-Filed Rule in Advancement Case

By: Francis G.X. Pileggi*
Cheneise V. Wright**

A recent Delaware Court of Chancery opinion applied an exception to the general rule that Delaware courts will often exercise their discretion to dismiss or stay a Delaware action in favor of a first-filed action between the parties that is pending in another jurisdiction. In Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021), the court analyzed the nuances of the first-filed rule regarding an advancement case under Section 145 of the Delaware General Corporation Law.

The first-filed rule, often referred to as the McWane doctrine, based on the Delaware Supreme Court decision in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281, 283 (Del. 1970), provides that a Delaware court’s “discretion should be exercised freely in favor of the stay when there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and the same issues.”

The background of the Lay case involves a demand letter sent in early June of 2021 seeking indemnification and advancement of fees and expenses incurred in defending an action the defendant had filed against the plaintiffs in the Superior Court of California. Instead of responding, five days after that letter was sent, the defendant amended their complaint in California to add a claim for declaratory relief, asking the California court to make a ruling on the indemnification and advancement issues. About a month later, the plaintiffs filed the Delaware suit seeking advancement for fees and costs incurred in the California Action.

In early August, the defendant filed a motion seeking a stay or dismissal of the Delaware advancement case in light of the California Action. Briefing was completed on the motion to stay or dismiss by Sept. 27, 2021. The court distinguished prior Delaware decisions that stayed advancement actions in favor of a first-filed action in which the same indemnitee had already asserted advancement rights. See Johnston v. Caremark RX, Inc., 2000 WL 354381, at * 2-5 (Del. Ch. Mar. 28, 2000). In contrast, the court cited to its decision in Fuisz v. Biovail Technologies, Ltd., 2000 WL 1277369, at * 4 (Del. Ch. Sept. 6, 2000), in which the court denied a stay of an advancement action where the prior action was not filed by the indemnitee.

The Court of Chancery also applied the reasoning in the Fuisz case in which the plaintiffs sought advancement under Section 145(k) for a Virginia action in which they had already asserted their advancement rights as an affirmative defense, but notably did nothing to obtain any relief from the Virginia court on the basis of that defense. The court explained in Fuisz that “unless the person having such an entitlement first actively invokes the jurisdiction of a foreign tribunal and seeks an adjudication of that issue from it . . . this court will not regard the foreign action as ‘first-filed’ for purposes of McWane’s comity-based analysis.” Id. at * 1.

The court in the instant case supported its decision not to apply McWane by noting that the plaintiffs in this case did not select California as the forum and they made no effort to obtain an adjudication from the California court of any of the issues presented in this action. Rather, “it was the defendant in this action who sought a declaratory judgment in the California action concerning the plaintiff’s advancement and indemnification rights.”

The court emphasized the importance to its holding of the fact that the defendant amended the California Action to add a declaratory relief claim after the plaintiffs sent a demand for advancement and indemnification. The court underscored that it would be inequitable to allow any plaintiff that receives an advancement demand from a defendant to circumvent the right to a summary advancement proceeding in Delaware under Section 145(k) by simply amending its complaint in the other forum to add a declaratory relief claim on the advancement issue upon receiving a demand. Instead, the court ruled: “that is not our law.”

The court explained that the first-filed rule under the McWane doctrine does not apply because in this instance the California Action should not be considered a first-filed action.

The court also distinguished a very recent Chancery decision which stayed an advancement action in favor of a federal action even though the plaintiff in the federal action had not claimed advancement. See Harmon 1999 Descendants’ Trust v. CGH Investment Management, LLC, 2021 WL 4270220 at * 3 & n.12 (Del. Ch. Sept. 21, 2021). The court explained why the Harmon case was inapplicable. In Harmon, the court reasoned that the federal action was “in its penultimate phase” and an issue before the federal court was whether the person seeking advancement was a limited partner. That issue was a “material, factually rife, and disputed issue” in the advancement action. Therefore, the Court of Chancery held in that case that because the federal court was likely to resolve the factual issue before the Court of Chancery could, efficiencies would be gained by staying the Delaware suit in favor of the federal action.

In contrast, the pending motion to stay or dismiss did not identify any “material, factually rife and disputed issue” that had to be decided in the California Action before the question of advancement could be resolved in the Court of Chancery, nor does the motion to dismiss in Delaware argue that the California Action is in its “penultimate phase.”

In sum, the Court of Chancery held that the motion to stay or dismiss did “not present exceptional circumstances warranting a departure from the rule that claims under Section 145(k) for advancement of expenses should not be stayed or dismissed in favor of the prior pending foreign litigation that gave rise to them.” Thus, the Court of Chancery declined to stay the Delaware Action in favor of the California Action.

In a concluding footnote the court regaled readers with the entertaining linguistic observation that in addition to not being in its penultimate phase, the California Action did not appear to be in an antepenultimate or even a pre-antepenultimate phase.

*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Chenesie V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Chancery Court recently nixed a shareholder group’s bid to replace CytoDyn Inc.’s directors, finding that the COVID-19 drug developer’s incumbent board rightly rejected the dissidents’ fatally flawed notice of their candidates’ proxy intentions for failure to comply with CytoDyn’s advance notice bylaw. Rosenbaum, et al. v. CytoDyn Inc., et al., No. 2021-0728-JRS, opinion issued (Del. Ch. Oct. 13, 2021).

In his October 13 opinion after a paper record trial, Vice Chancellor Joseph Slights denied the plaintiff shareholder group’s motion for an injunction that would compel the company to place the dissident director candidates on the ballot at CytoDyn’s Oct. 28 annual meeting. The ruling is noteworthy because it clarifies the standards for disclosure required to comply with an advance notice bylaw and for proof of wrongful manipulative conduct by the company that rejects a notice.

Blackrock, not Blasius
The court rejected the plaintiffs’ contention that the incumbent board’s alleged self-serving conduct and mismanagement triggers review under former Chancellor William Allen’s seminal Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 660 (Del. Ch. 1988) decision that subjects the defendant directors’ actions to enhanced scrutiny as to whether they “act[ed] for the primary purpose of preventing the effectiveness of a shareholder vote” and requires them to prove a “compelling justification for [their] action[s].”

Instead, the vice chancellor said, the case should be reviewed according to the standards set in BlackRock Credit Allocation Income Tr. v. Saba Cap. Master Fund, Ltd., 224 A.3d 964, 980 (Del. 2020), where the Delaware Supreme Court made clear that “advance notice bylaws are commonplace and are interpreted using contractual principles.” The high court explained that Delaware law will protect shareholders “in instances where there is manipulative conduct or where the electoral machinery is applied inequitably,” but found no justification to apply heightened scrutiny in that situation.

Vice Chancellor Slights said although the incumbent directors in the contest-for-control that sparked the litigation allegedly exhibited some mismanagement and conflicts of interest , they did not use manipulative action and the plaintiff faction went wrong “by playing fast and loose in their responses to key inquiries embedded in the advance notice bylaw, and then submitting their Nomination Notice on the eve of the deadline, leaving no time to fix the deficient disclosures when the incumbent Board exposed the problem.”

CytoDyn’s best hope for a profitable product when it reincorporated in Delaware in 2015 and adopted new bylaws three years later was Leronlimab, a monoclonal antibody intended as a treatment for  HIV and cancer. But when government regulatory approval had not yet appeared on the horizon by March 2021, some of its officers and shareholders began to organize support for a new slate of directors at the next annual meeting in October.

The incumbent directors rejected the dissidents’ advance notice of their intent to nominate rival candidates, claiming it intentionally failed to disclose:

1. Certain information in their Nomination Notice to hide the central role that rival company IncellDx and its shareholders – some of whom overlap CytoDyn — are playing in support of plaintiffs’ nominees,
2. The prior proposal that CytoDyn acquire IncellDx,
3. The existence (much less the identity) of any supporters of the nominations

Not nitpicking
The vice chancellor said plaintiffs fall far short of fulfilling their contractual duty regarding the advance notice bylaw and they seek to excuse that failure by extending Blasius beyond its intended limits. “Blasius does not apply in all cases where a board of directors has interfered with a shareholder vote,” he wrote. Rather, “courts will apply the plaintiffs exacting Blasius standard sparingly, and only in circumstances in which self-interested or faithless fiduciaries act to deprive stockholders of a full and fair opportunity to participate in the matter,” and that isn’t the case here.

Plaintiffs cannot escape the fact that they were obliged to identify their supporters, the vice chancellor ruled. “This was vitally important information; the Board was not nitpicking when it flagged the omission as material and ultimately disqualifying.”

Moreover, “the Board rejected the Nomination Notice, in part, because it did not disclose the possibility that Plaintiffs’ Nominees would propose that CytoDyn revisit its decision to pass on the acquisition of IncellDx,” he said. “The failures with respect to disclosing support for the nominations cut across the entire Nomination Notice and justified the Board’s rejection of the notice in its entirety.”

A recent Delaware decision addressed the request for a claw-back of legal expenses that a company was ordered to advance to an LLC manager in a prior Court of Chancery decision. In the case styled: New Wood Resources, LLC v. Baldwin, C.A. No. N20C-10-231-AML-CCLD, Order (Del. Super. Aug. 23, 2021), the Complex Commercial Litigation Division of the Delaware Superior Court determined that pursuant to the terms of an LLC Agreement (for which the Delaware LLC Act allows much greater latitude than Section 145 of the Delaware General Corporation Law on this issue), the court determined that some of the amounts advanced were required to be returned.

Most noteworthy, however, about this decision, is that the court determined that the undertaking to repay the amounts advanced did not apply to the “fees on fees” that the Court of Chancery had also required that the company pay in the prior advancement action. The court explained that the undertaking only applied to “funds advanced,” but that undertaking did not apply to the repayment of “fees on fees” because the court reasoned that “such sums constitute indemnification, rather than advancement.” Order at 12. [Readers should be aware that in Delaware, court decisions issued by Order may also be cited in briefs, even if the decision is not a formal opinion.] See footnote 43 (judge explains that even though the parties did not raise the distinction between advancement and indemnification in connection with the claw-back arguments, the court determined that: it was “compelled by principles of comity to raise the issue sua sponte about the “fees on fees” that the Court of Chancery ordered the company to pay which should be considered differently from the advancement ordered by the court and governed by the undertaking.”)

The Delaware LLC Act, and related alternative entity acts, were amended effective August 1, 2021. There are three particular amendments, in response to three separate court decisions, that are especially noteworthy:

Anyone who needs to know the latest iterations of Delaware law regarding the intricacies and nuances of the dissolution of a corporation and the related winding-up process–needs to read the recent Delaware Court of Chancery decision styled: In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021). This scholarly and extensive analysis of statutory dissolution of corporations and the related winding-up process, weighing in at 66 pages, could easily qualify as a law review article.

Selected Background Facts:
The context of this decision involved a company that dissolved in October 2019, and elected to pursue the optional court-approved process to wind-up its affairs. In May 2020, the company filed proceedings to ask the court to determine the appropriate amount and form of security for various claims. The company also requested court approval to make interim distributions.

The company was previously known as Yahoo, Inc., and was purchased in 2016 by Verizon. Shortly after the agreement to sell to Verizon, a major attack by hackers resulted in monumental data breaches. As a result, the company agreed to indemnify Verizon for 50% of the financial responsibility for class actions filed in connection with the data breach. A settlement of the class actions was reached and approved by a federal district court, but that decision is on appeal.

Key Issue Addressed

One of the issues for Chancery to decide was the appropriate amount and form of the security for the dissolved company to maintain in the event that the settlement was reversed or overturned on appeal. The company wanted to only maintain security for the 50% of the settlement that the district court approved, but Verizon wanted a much larger number to cover the risk that the court of appeals would not approve the settlement of the class action, and if then the case went to trial.

• The court engaged in a deep dive into the doctrinal underpinning, public policy and statutory procedures required in the winding-up process for a dissolved corporation. The codification of the “absolute priority rule” to make stockholders wait until creditors are paid also was explored. See Slip op. at 22-27.
• The court explained that a dissolved corporation can pursue one of two paths to wind-up its affairs based on the statutory scheme in Sections 280, 281 and 282 of the Delaware General Corporation Law.
• The Court referred to one as the “default path” in which the board decides the amount of security for any claims by creditors of the dissolved corporation. But this approach leaves open the risk that unhappy creditors will challenge the amount or form of security and pursue claims against board members and possibly stockholders as well.
• The court called the second option under the statutory dissolution scheme the “elective path.” Under this statutory option, the dissolved company can seek court approval for the amount and form of security for claims. This approach gives the board and stockholders the protection of court approval against any claims by creditors that the amount of security was not sufficient. See Slip op. at 27-31.
• The court explained that there are three general categories of claims, and three different corresponding standards that apply to each category of claims. The court discussed at length the applicable standard for each category in order to determine if sufficient provisions are made to cover claims against the dissolved corporation. See Slip op. at 38-39.
• The court applied the applicable standard to determine the appropriate form and amount of security for the claim by Verizon in this matter. Id. at  49-60.
• The court discussed the public policy considerations in connection with allowing claims against a dissolved corporation and the need for dissolved corporations to deal fairly with the creditors who have those claims.
• The statute provides for an initial three-year winding-up period, but the statute allows also for automatic extensions of that initial three-year period. See Slip op. 60-64 and footnote 22.
• In this scholarly and thoughtful analysis of the statutory winding-up process for dissolved corporations, the court explains the reasons for its determination of the amount of security for Verizon, including its perception of the expert testimony presented in this matter. See Slip op. 64-66.