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.

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.

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

Alliance Data Systems Corp. v. Blackstone Capital Partners V  L.P. and Aladdin Solutions, Inc. , (Del. Ch., Jan. 15, 2009), read opinion here.

We are fortunate to have another guest post by Delaware lawyer Kevin Brady  who provided the following summary of this important decision.

This Chancery Court decision is another example of merger partners after the “deal is signed,” trying to use extrinsic evidence to extract contractual obligations that were not expressly stated in a merger agreement. The Court dismissed the complaint filed by Alliance Data Systems Corporation (“ADS”) because it failed to plead a viable claim for breach of the Merger Agreement. ADS brought this action to recover a $170 million termination fee that ADS claimed Blackstone Capital Partners V L.P. (“BCP V”) owed it after the potential purchaser, Aladdin, failed to complete the acquisition of ADS.

A merger agreement was entered into on May 17, 2007, between ADS, Aladdin Solutions, Inc. and Aladdin Merger Sub, Inc. (Aladdin”), two companies formed by BCP V and its affiliates for the purpose of acquiring ADS. One of the conditions to Aladdin’s obligation to close the deal was regulatory approval from, among others, the Office of the Comptroller of the Currency (“OCC”) because ADS owned World Financial Network National Bank. The Merger Agreement contained a provision that if all of the necessary regulatory approvals were not obtained, neither party had to consummate the merger.

The Merger Agreement also contained specific language that Aladdin would use its “reasonable best efforts” to obtain the OCC’s approval. When the OCC’s approval was sought for the merger, the OCC refused to give approval unless Blackstone Group, L.P. (“Blackstone”) would “promise to provide any financial support necessary to make sure that World Financial complied with its minimum liquidity and capital requirements.” While BCP V was controlled by Blackstone, neither BCP V nor Blackstone signed the Merger Agreement (only Aladdin did). Moreover, the merger agreement imposed no direct contractual obligations on either Blackstone or BCP V to act to obtain OCC approval.

Blackstone rejected the OCC’s condition because it was not interested in putting up its own assets or the assets of its investment funds. Blackstone had formed BCP V, a $20 billion acquisition fund and a Delaware limited partnership, specifically for the purpose of acquiring ADS. After months of negotiations, Aladdin and OCC were at an impasse. The OCC refused to grant approval without Blackstone’s pledge of support for World Financial and a signed acknowledgement of “World Financial’s regulatory requirements.” The Court noted that “[a]s a bottomline, the OCC made it clear that ‘Blackstone must provide some type and measure of financial support for [World Financial].’” Blackstone ultimately refused to be responsible for ensuring that World Financial met its capital and liquidity requirements. As a result, the merger did not close on time prompting Aladdin to purport to terminate the Agreement and seek damages. In the Merger Agreement, specific performance was not an available remedy except in certain, defined circumstances. ADS accepted a cap on its ability to recover monetary damages for breach a — “Business Interruption Fee” — in the amount of $170 million from Aladdin.

ADS claimed that under the terms of the Merger Agreement, Aladdin was responsible for forcing Blackstone and its affiliated funds to agree to the OCC proposal and because Blackstone did not agree to what ACS considered to be a fair proposal, there was a breach of the merger agreement by Aladdin. Indeed, ADS characterized the demands from the OCC as “virtually costless” to Blackstone and as support for its claim, ADS referred to three provisions of the Merger Agreement: (i) §6.5.1, a covenant by Aladdin to use its reasonable best efforts to secure necessary regulatory approval, including OCC approval; (ii) § 6.5.6, a covenant by Aladdin to keep Blackstone from preventing the completion of the Merger; and (iii) §5.2, a representation by Aladdin that it had the power to fulfill its commitments under the Merger Agreement.

Unfortunately for ADS, as the Court noted, all three of the provisions ADS cited related to obligations of Aladdin and not Blackstone. While Aladdin did make certain promises in the Merger Agreement about Blackstone, those promises were “carefully cabined.” For example, in conjunction with the merger, BCP V entered into a “Limited Guarantee“ with ADS under which it promised ADS that it would guarantee Aladdin’s payment of the $170 million “Business Interruption Fee,” as well as up to $3 million in ADS costs related to the financing and debt tender offers. In addition, the Merger Agreement contained a negative covenant about what Blackstone would not do — Aladdin agreed to a negative covenant for assurance that Blackstone would not thwart the Merger by taking action to impede its closing. There was no obligation on the part of Aladdin to ensure that Blackstone took affirmative steps to get the regulatory approvals or assent to OCC’s demands. In short, when Aladdin was contractually obligated for “causing Blackstone to do or not to do something, the parties made that explicit.”

Moreover, Vice Chancellor Strine found that as a preliminary matter “any contractual claim against the defendants must be predicated on a breach by Aladdin because it is the only party, aside from ADS, that signed the Merger Agreement.” The Court also noted that the “complaint only faults Aladdin because Blackstone, a non-party to the Merger Agreement, would not enter into arrangements with the OCC. But, Blackstone had no contractual obligation to enter into such arrangements, and Aladdin made no contractual promise that it would get Blackstone to do so.”
ADS tried to salvage the complaint by referencing extrinsic evidence in terms of what the parties discussed around the time the merger agreement was signed but the Court rejected that argument. ADS claimed that during “detailed due diligence and negotiations,” Blackstone knew that the OCC would require that Blackstone submit to some form of liability. The Court dismissed this argument stating that:

[i]f, as ADS alleges, it was obvious that the OCC would require not just Aladdin, but Blackstone itself, to enter into certain regulatory agreements, then ADS should have insisted that Aladdin be held responsible in the event that Blackstone failed to use best efforts to obtain regulatory approval.

* * * *

The time for ADS to have protected itself from the risk that the OCC would make demands that Blackstone would not accept was when negotiating the words of the Merger Agreement.

* * * *

Having struck a clear bargain, ADS cannot resort to extrinsic evidence to manufacture contractual obligations that are clearly foreclosed by an unambiguous Merger Agreement.

ADS also argued that “the implied covenant of good faith and fair dealing holds Aladdin responsible for the failure of Blackstone, a non-party, to enter into a regulatory agreement that Blackstone had no duty to accept is without force.” The Court rejected that argument on the basis that the expressed terms of the merger agreement were “inconsistent with any implied duty on Aladdin of this kind.”

Based upon the failure to state a claim under the Merger Agreement for breach, the Court dismissed the complaint.


In Hexion Specialty Chemicals, Inc. v. Huntsman Corp.,  (Del. Ch., Sept. 29, 2008), read opinion here, the Delaware Chancery Court rejected the arguments of Hexion, which is 92% owned by private equity group Apollo, that it should be relieved of its contractual obligations to buy 100% of Huntsman’s stock based on a July 2007 agreement that was valued at $10.6 billion. Hexion/Apollo argued that the "material adverse effect" clause  in the parties’ agreement was triggered, and in light of a report (that the court found to be unreliable), that the combined companies would together be insolvent, it should not be required to complete the merger. (Wrong.)

A prior decision in this case was summarized on this blog here.

In this 91-page post-trial opinion, the court found that:

"the seller [Huntsman] has not suffered a material adverse effect, as defined in the merger agreement, and further concludes that the buyer has knowingly and intentionally breached numerous of it covenants under that contract. Thus, the court will grant the seller’s request for an order specificaly enforcing the buyer’s contractual obligations to the extent permitted by the merger agreement itself."

The court clarified its holding at page 86 and 87 of the opinion as follows:

"… the agreement does not allow Huntsman to specifically enforce Hexion’s duty to consummate the merger. Instead, if all other conditions precedent to closing are met, Hexion will remain free to choose to refuse to close. Of course, if Hexion’s refusal to close results in a breach of contract, it will remain liable to Huntsman for damages."

Moreover, the court held that:

"Hexion’s utter failure to make any attempt to confer with Huntsman when Hexion first became concerned with the potential issue of insolvency, both constitutes a failure to use reasonable best efforts to consummate the merger and shows a lack of good faith." (see  page 74.  Is "lack of good faith" here tantamount to "bad faith"?)

 As I did for the 100-page Chancery decision I summarized a few days ago on this blog, the only practical way to highlight this 91-page decision in an appropriate length for a blog post, is to use bullet points for selected key parts of the decision and then encourage readers to download the whole opinion at the link above if the issues addressed are of interest to them.

  • Procedurally, it is notable that the Amended Complaint was filed on July 7, 2008 and expedited proceedings on limited issues were allowed on July 9, 2008, and a six-day trial started less than two months later, on September 8, 2008. That is what I call lightening speed, especially for a case of this magnitude.
  • Hexion beat out Basell as a bidder for Huntsman even after Basell had signed an agreement at $25.25 per share, and Basell refused to raise its offer based on its assertion (almost ironic now) that it (Basell) was "more certain to close." Less than three weeks after Basell signed an agreement, Hexion signed an all cash deal to buy Huntsman for $28 per share.

         The MAE  Discussion

  • The court’s analysis and reasoning about why it did not find a trigger of the MAE clause can be found at pages 39 to 56 of the opinion. Footnotes 52 to 64 discuss some of the cases that the court relies on. For example, the logic of the Chancery Court’s 2001 decision in IBP, although based on New York law, was still found applicable.
  • The court observed that: "Many commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement. This is not a coincidence."
  • The burden of proof was placed on Hexion, as the party who first sought the declaratory judgment.

         The Breach of Contract Discussion

  • Both parties claimed a right to a declaratory judgment that the other party committed a "knowing and intentional" breach. The court was critical of both parties’ sloppy language and explained that such a phrase does not appear either in the Williston treatise on contracts nor in the Restatement of Contracts, and is more at home in criminal law.  The court noted at the end of footnote 87 by analogy that a "director need not know that his action breaches a fiduciary duty for liability for that breach to lie: gross negligence is sufficient for breach of a duty of care, and no showing of knowledge is required."
  • As used in the agreement, a "knowing and intentional breach" was found by the court to include, as here, a deliberate commission of an act that constitutes a breach of a covenant in the merger agreement.
  • The court emphasized the "fundamental proposition of contract law that damages in contract are solely to give the non-breaching party the "benefit of the bargain" and not to punish the breaching party". (see footnotes 89 to 92)(emphasis mine).
  • The court found that Hexion failed to use its best efforts to consummate the financing and also failed to give Huntsman notice of its concerns. (The first time that Huntsman became aware of the insolvency opinion is when Hexion attached it to the complaint they filed–and publicized it at the same time to the bankers. Of course, this had a negative impact on the financiers’ desire to finance the deal.)
  • Footnote 99 refers to the section of the Williston treatise that describes the need for a breach by one party to be material before it can excuse performance by another party.

The court did not address the issue of whether the combined entity would be insolvent or not as it was not currently ripe. Of course, there is much more to be written on this case, but for a meager blog post, this is already longer than the average blog entry.

UPDATE:  The AmLaw Daily picked up this post here. picked it up here.

UPDATE II:  Professor Bainbridge kindly links to this post here and provides his views from the hallowed halls of academia.

UPDATE III: The Wall Street Journal’s  "Law Page" has picked up the post here.

16th Annual Review of Key Delaware Corporate and Commercial Decisions

By: Francis G.X. Pileggi and Chauna A. Abner

This is the 16th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list does not attempt to include all important decisions of those two courts that were rendered in 2020. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

The Delaware Business Court Insider again published this year’s Annual Review though it appeared in two parts due to its length, in last week’s edition and in this week’s edition. Part I and Part II are reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. For example, the Sciabacucchi; Solera; and AB Stable (Anbang) cases have already been the subject of extensive commentary by others. Links are also provided below to the actual court decisions and longer summaries.


Supreme Court Instructs on Nuances of Fiduciary Duties of Disclosure and Loyalty

A Delaware Supreme Court decision from 2020 that deserves to be read by anyone interested in the nuances of Delaware law on the fiduciary duties of disclosure and loyalty of a manager or a director in connection with communications with stockholders or others to whom a fiduciary duty is owed, is Dohmen v. Goodman, No. 403, 2019 (Del. June 23, 2020), in which Delaware’s High Court answered a question on this topic certified from the U.S. Court of Appeals for the Ninth Circuit.

Key Takeaways:

There is a “per se damages rule” in Delaware that covers only those breaches of the fiduciary duty of disclosure involving requests for stockholder action that impair the economic or voting rights of investors. Importantly, this per se damages rule only covers nominal damages. Again, for emphasis: the per se damages rule does not apply to damages other than nominal damages. Therefore, in order to recover compensatory damages, one who proves a breach of the fiduciary duty of disclosure must also prove reliance, causation and damages. See Slip op. at 24.

The Court in its en banc opinion provides a useful overview of fiduciary duties in general, and addresses the many nuances–that change depending on the situation presented–of the duty of disclosure in particular as it relates to requests for action by stockholders or others to whom a fiduciary duty is owed.  See Slip op. at 9-10.

Brief Overview of the Case:

The procedural background of the case involved an issue of Delaware law that the U.S. Court of Appeals for the Ninth Circuit certified to the Delaware Supreme Court. In other words, the Ninth Circuit asked the Delaware Supreme Court to decide an issue of Delaware law that was originally presented to the Ninth Circuit.

This gem of a 24-page opinion, which is relatively short for many Delaware opinions, was decided based on stipulated facts, which in a very simplified way, decided a claim by a limited partner in a hedge fund, who as limited partner in a limited partnership was owed a duty by the fund manager, which was structured as an LLC. Among the claims by the limited partner was that the general partner of the limited partnership, the LLC manager, breached fiduciary duties by failing to disclose that the general partner was the only investor in the fund other than the suing limited partner, and related omissions or misrepresentations.

Delaware Fiduciary Duty Law:

In connection with its decision, the Delaware Supreme Court recited several useful truisms of Delaware law. For example, the agreements at issue did not disclaim the fiduciary duty of loyalty, and therefore, the general partner owed fiduciary duties to the limited partners, similar to those owed by directors of Delaware corporations. See footnotes 15 through 16.

The Court recited the very nuanced and multifaceted aspects of the fiduciary duties of care and loyalty that applied to communications with stockholders or limited partners. Those duties depend on the context of the communication, and whether the communication is to an individual stockholder or to a group of stockholders. See footnotes 18 through 32 and accompanying text.

The Court described several different types of factual situations which impact the application of the duty owed in connection with communications that involve a request for stockholder action, as compared to those that might involve merely periodic financial disclosures. The per se damages rule does not apply to the latter.

The Court discussed the most important Delaware decisions involving the duty of disclosure and how it is applied in various factual circumstances.

Bottom Line:

The Court explained that the per se damages rule only applies when a director seeks stockholder action and breaches their fiduciary duty of disclosure, in which case a stockholder may seek equitable relief or damages. That is, when directors seek stockholder action, and the directors fail to disclosure material facts bearing on that decision, a beneficiary need not demonstrate other elements of proof, such as reliance, causation or damages. This rule only applies to nominal damages and does not extend to compensatory damages. See Slip op. at 10 through 11.

Link to original post on these pages about this case.


Supreme Court Interprets Key Words in Agreement

A Delaware Supreme Court decision from May 2020 is noteworthy for the approach it takes in determining the meaning of a word in an agreement, for example, by parsing the syntax and sentence structure where the word at issue appears in the agreement. In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., No. 68, 2020 (Del. May 22, 2020), the Delaware Supreme Court provides useful guidance about how to determine the meaning of a key word in an agreement. In this matter, despite a lengthy definition in the agreement of the word “transfer”, the parties still disputed its meaning.


The underlying dispute involved a complex constellation of interrelated entities which the Court provided a graphic description of by way of a chart. The essential facts on which the dispute was based involved the interpretation of an LLC agreement which imposed restrictions on the transfer of LLC units and provided for the right of first refusal and other provisions triggered by a “transfer.” Several terms were defined in the agreement–with rather lengthy definitions–but the definitions did not provide sufficient clarity. The most consequential definition that was disputed was the meaning in the context of the agreement of the word “transfer.”

The problem presented to the Court of Chancery was whether the sale of an interest triggered either a right of first refusal and/or a right of first offer, and if both applied, which was to be given priority.

The Court of Chancery concluded that a sale by Hunt of its shares to Borealis would be a “transfer.” The Supreme Court had a different view.

The finding by the Court of Chancery that the purchase of Hunt’s shares constituted a transfer, triggered the requirement to offer the shares to Sempra. As a result of other consequences of that holding, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares, and entered judgment in favor of Sempra. This expedited appeal followed an expedited trial. It remains noteworthy that this opinion came only 30 days after the final submission of the appeal to the Supreme Court.

Analysis by the Supreme Court:

The Supreme Court held that the right of first refusal in Section 3.9 of the agreement at issue is only triggered by transfers by the Minority Member and its Permitted Transferees, and that Hunt is neither. Put another way, Delaware’s High Court held that the fact that the right of first refusal is only triggered by transfers by the Minority Member is dispositive in favor of Borealis, regardless of whether the Hunt Sale could be said to effect an indirect transfer.

One of the agreements involved was governed by New York law and one was governed by Delaware law–but the Court noted that the law of both states as it relates to contract interpretation in this case is the same. See footnote 22.

Two other footnotes contain important observations of Delaware law that are especially worth remembering:

(1) The management of an LLC is vested in proportion to the then-current percentage or other interest of members in the profits of the LLC owned by all the members, and “the decision of members owning more than 50% of the said percentage or other interest in the profits [is] controlling.” Footnote 27; see Section 18-402 of the Delaware LLC Act.

(2) Also noteworthy is the observation by the Court that an argument that was only raised in a footnote would justify “passing over it” because footnotes, according to Delaware Supreme Court Rules, “shall not be used for argument ordinarily included in the body of a brief.” Footnote 28. See Del. Sup. Ct. R. 14 (d)(iv).

The most noteworthy parts of this pithy 21-page decision are found in the last few pages which include the core of the Court’s reasoning.

In particular, the most memorable part of the Court’s reasoning is the parsing by the Court of the syntax and sentence structure of the agreement in order to interpret the meaning of a particular word in the agreement. The Court focuses on the “subject of the operative sentence” in Section 3.1, of which “the verb phrase ‘may only transfer’ serves as the predicate.” The Court further explains that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in section 3.9.

The Court added that the subject, which is stated conjunctively, does not include Hunt. Therefore, the Court reasoned that it was unnecessary and inappropriate to parse the definition of transfer, as defined in the agreement, to determine the scope of Section 3.1 and Section 3.9, because: “the subjects of the opening sentences in both of those sections do that for us.” See Slip Op. at 20 – 21.

In sum:

Although the detailed factual background needs to be reviewed more closely in order to fully understand the Court’s reasoning, for anyone who wants to understand Delaware law regarding proper contract interpretation, and interpretation of the meaning of a word, even when it is defined in an agreement, this opinion is must-reading.

Link to original post.


Delaware Supreme Clarifies Contract-Based Right to Corporate Records

A Delaware Supreme Court opinion issued in July 2020 should be required reading for anyone interested in the latest iteration of Delaware law on the contract-based right to demand “books and records” in the alternative entity context. Delaware’s High Court ruled in Murfey v. WHC Ventures, LLC, No. 294, 2019 (Del. July 13, 2020), that the Court of Chancery erred by interjecting into a limited partnership agreement a statutory requirement from Section 17-805 of the Delaware LLC Act that did not appear in the parties’ agreement.

The great importance of this ruling can best be appreciated by emphasizing that the Court did not opine in any manner on the statutory requirements for demanding books and records of a business entity–about which we recently provided an overview of key decisions on this topic, with the title of: Demands for Corporate Documents Not for the Fainthearted.

We will add to that characterization of Delaware decisions interpreting statutory provisions for demanding corporate documents, a general observation based on the instant decision: Contract-based demands for books and records of business entities are not for the fainthearted either. A few reasons that support our observation include the following:

  • This Supreme Court decision features the en banc Justices split 3-2, along with a less-than-common reversal of a Chancery decision. So, that procedural note underscores that 6 of the best legal minds in Delaware (5 jurists on the high court and 1 in Chancery rendering opinions in this case) cannot find unanimity on this issue.
  • The original demand in this case was made on January 10, 2018. The Chancery complaint was filed in September 2018. Through no fault of the court system, this final decision on appeal came down on July 13, 2020. About 2 years is still lightening-fast for the period from filing a complaint to a final decision by a state’s highest court, but that still implies substantial legal fees and the need for financial and other types of stamina for someone who is serious about seeking corporate records.
  • Although this decision provides authoritative guidance on this nuance of Delaware business litigation, a careful parsing of the opinion still reveals a fertile field for indeterminacy–which makes it a challenge for the lawyers toiling in this vineyard who are trying to predict the outcome of this type of contract interpretation dispute–even if one need not be concerned with applying the multitude of court decisions applying the statutory provisions for inspection rights in this context.
  • We will end our introductory observations on a positive note: despite the plethora of case law interpreting the various statutory provisions for demanding books and records, such as Section 220 and Section 18-305, this decision is a welcome addition to the relatively few published Delaware opinions that address the purely contract-based right to books and records of an alternative entity.

Basic Factual Background:

Based on the assumption that readers of this post are familiar with the basics of Delaware law in this area, we are only highlighting the irreducible minimum amount of facts to provide context for the key legal principles announced.

This case followed a typical pattern. The company provided some documents initially, and at the time of trial the only issue was the very limited documents the company refused to produce.

Somewhat unusual was that only one specific type of document was the subject of the trial court decision and the appeal: the K-1 of the other limited partners in the limited partnership. Although the company allowed counsel for the plaintiff and the plaintiff’s valuation expert to review those K-1s, they refused to let the plaintiffs themselves review the K-1s of other limited partners–even subject to the common confidentiality agreement.

The limited partnership agreements involved allowed for a rather broad scope of documents to be demanded, including tax returns which were specifically listed as being subject to production. The company took the curious position that a K-1 (of other limited partners) was not part of the tax returns of the company–or at least not within the scope of documents they need to produce.

Primary Issue Addressed on Appeal:

Whether the Court of Chancery erred by injecting into the terms of the agreement that provided for a right to books and records–additional statutory prerequisites. Short answer: yes.

High Court’s Reasoning–Key Takeaways:

The majority opinion made quick work of dispensing with the defense that valuation was not a valid basis for requesting the disputed documents or that tax returns were not needed to complete a valuation. See, e.g., footnotes 65 and 66 as well as related text. More notably, the Court found that the statutory notion of a “proper purpose” was not applicable to contract-based demands. See, e.g., footnote 53 and accompanying text (quoting with approval prior decisions so holding.)

Also noteworthy is the Court’s reference to dictionary definitions of words, including prepositions, at issue in this case. See footnotes 32 and 33.

The Court reviewed many prior Delaware decisions that addressed when, if ever, it would be appropriate to infer words or conditions that do not appear in the terms of an agreement, such as statutory prerequisites. Slip op. at 18-25.

A key part of the Court’s reasoning was that: because the partnership agreements involved

… do not expressly condition the limited partner’s inspection rights on satisfying a “necessary and essential” condition [a statutory concept], and given the obvious importance of tax return and partnership capital contribution information to the Partnerships’ investors, as evidenced by the agreements, we are not persuaded that such a condition should be implied. Slip op. at 25.

The majority opinion’s “rebuttal” of the dissenting opinion deserves to be read in its entirety. Slip op. at 32 to 37. Two especially notable excerpts:

  • “The words ‘necessary and essential’ do not appear in the written agreements”. Slip op. at 35.
  • “… we also do not agree that the parties to a limited partnership agreement have to expressly disclaim any conditions applied in the Section 220 context (or the Section 17-305 context….)” Footnote 85.

Link to original post.


Supreme Court Rejects Two Common Defenses to Section 220 Demands

A recent decision from the Delaware Supreme Court provides hope to stockholders who seek to obtain corporate documents pursuant to Section 220 of the Delaware General Corporation Law to the extent that Delaware’s High Court removed two common defenses that companies use to oppose the production of corporate records to stockholders. In AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Dec. 10, 2020), the two most important aspects of the ruling are that:

(i) A stockholder making a Section 220 demand need not demonstrate that the wrongdoing being investigated is “actionable;” and

(ii) When the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to “specify the ends to which it might use” the corporate records requested (i.e., exactly what it will do with the documents it receives).

Over the last 15 years we have highlighted many of the frustrating aspects of decisions construing Section 220 to the extent that one needs stamina and economic fortitude to pursue what oftentimes is an unsatisfying result. See, e.g.,recent overview on this topic.

This decision should be in the toolbox of every corporate litigator not only because it announces a new path for Section 220 cases and reminds us of the basic prerequisites of the statute, but also in light of it partially overruling and distinguishing some prior cases. This opinion also confirms that several Chancery decisions that were not in harmony with this decision should no longer be followed.

Key Takeaways:

       One of the most important takeaways from this decision is that the Court clarified that when the purpose of a Section 220 demand is to investigate potential mismanagement, the stockholder is “not required to specify the ends to which it might use” the corporate documents requested.  See page 22.

       The second most important takeaway from this case is the Court’s holding that a stockholder pursuing a Section 220 demand need not demonstrate that the alleged wrongdoing is “actionable.” See page 25.

       The three prerequisites (not including the many nuances) for successfully pursuing a Section 220 demand to inspect a corporation’s books and records requires a stockholder to establish that: (1) such stockholder is actually a stockholder; (2) such stockholder has complied with Section 220 respecting the form and manner of making demand for inspection of such documents; and (3) the inspection such stockholder seeks is for a proper purpose. See pages 12-13.

       The Court recited the many examples of proper purposes that have been recognized to be reasonably related to the interest of the requesting stockholder. See footnote 30 for a lengthy list, which includes “to communicate with other stockholders in order to effectuate changes in management policies.”

       The Court reiterated the well-known requirement that when the proper purpose of a stockholder making a Section 220 demand is to investigate potential mismanagement, a stockholder needs to demonstrate “a credible basis” from which the court may infer that “there is possible mismanagement that would warrant more investigation.” See page 15.

       Although a credible basis of wrongdoing needs to be presented by a preponderance of the evidence to pursue the proper purpose of investigating potential wrongdoing, a company will not be permitted to mount a merits-based defense of such potential wrongdoing. See page 37.

       Moreover, while trying to harmonize prior decisions on these nuances, the Court observed that some of the decisions struck a discordant note. See footnote 109.

       The Court also affirmed the following two aspects of the Court of Chancery’s ruling: (1) regarding the scope of documents, the Court found that it was appropriate to include a requirement that the company produce officer-level materials and (2) the high Court found it was not an abuse of discretion to order a Rule 30(b)(6) deposition–because the company refused to describe the types and custodians of corporate records that it had in response to discovery requests. See pages 39 and 43.

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Chancery Provides Refreshing Section 220 Guidance

The Delaware Court of Chancery rendered a decision in November 2020 that belongs in the pantheon of noteworthy Court opinions addressing the nuances, first principles and practical challenges regarding Section 220 of the Delaware General Corporation Law. There are many decisions on this topic addressing the right of stockholders to demand inspection of corporate records, but few are as “blogworthy” as this decision in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020). Compare another pantheon-worthy Chancery decision earlier this year in AmerisourceBergen. See Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020), which was affirmed by the Delaware Supreme Court.

Weighing in at 69-pages, this opinion’s length is indicative of the complexities of Section 220 that are belied by the apparent simplicity of the statute. Our favorite part of this decision is the acknowledgement that when pursuing the statutory rights that Section 220 appears to allow, one can easily be stymied by the gamesmanship of companies who can play a war of attrition, usually with impunity, in light of the asymmetrical economics involved. See Slip op. at 3-5 and footnote 6 (citing an article addressing the obstacles to pursuing Section 220 rights: James D. Cox, et al., The Paradox of Delaware’sTools at Hand Doctrine: An Empirical Investigation,” 75 Bus. Law. 2123, 2150 (2020)).

Similar observations about the practical hindrances, economic and otherwise, to utilizing Section 220 have often been the topic of blog posts over the last 15 years. See, e.g., recent blog post explaining that Section 220 cases are not for the fainthearted.

This Gilead case provides guidance on an important topic that warrants a very lengthy analysis. We provide highlights via bullet points, and then interested readers can click on the above link and read all 69-pages.

The bullet points that we find to have the most widespread applicability and importance are the following:

• The Court criticizes the trend in which companies often inappropriately litigate the underlying merits of a potential, future plenary suit as opposed to addressing whether the prerequisites have been met for a Section 220 demand, as well as the tendency of companies to otherwise prevent stockholders from using Section 220 as a “quick and easy pre-filing discovery tool.” Slip op. at 3-4.

• The Court provides many quotable explanations of the “credible basis” standard that must be satisfied in order to rely on the proper purpose of investigating suspected wrongdoing. The Court emphasizes that this “lowest possible burden of proof” does not require a stockholder to prove that any wrongdoing actually occurred; nor does it require a stockholder to show by a preponderance of the evidence that wrongdoing is even probable. Slip op. at 23, footnotes 103 and 104.

• Rather, the Court instructed that the recognized proper purpose for using Section 220 to investigate suspected wrongdoing is satisfied when there is a credible basis to suspect merely the “possibility” of wrongdoing. Id. at 24, n.106.

• The Court addresses the common tactic used by companies challenging a proper purpose when they assert that the “stated proper purpose is not the actual proper purpose for the demand.” This opinion teaches that in order to succeed in such a defense, the company must prove that the “plaintiff pursued its claim under false pretenses. Such a showing is fact intensive and difficult to establish.” See footnote 153 and accompanying text.

• The Court made quick work of dispensing with the issue of standing in Section 220 cases. The Court reasoned that the standing argument in this case was in reality a Potemkin Village (our words) for the company’s challenge to the viability of derivative claims that the plaintiffs might pursue in the future. Although the Court discussed standing under Section 220 in general, it also underscored that a Section 220 proceeding does not warrant a trial on the merits of underlying claims. Slip op. at 41–42.

• The Court instructed that generally Section 220 plaintiffs need not specify the “end-uses” of the data requested for their investigation. Slip op. at 49.

• The Court also provided helpful practical tips about the scope of production required once the preliminary prerequisites of Section 220 have been satisfied. The Court noted that in some instances the company will be required to provide more than simply formal board materials. See Slip op. at 51-54.

• The opinion acknowledged that in some instances after limited discovery in a Section 220 action, plaintiffs can refine their requests with greater precision and that in some cases the Court has asked the plaintiffs to streamline their requests. See Slip op. at 63.

• In response to the Court being vexed by the overly aggressive tactics of the company, the Court invited the plaintiff to “seek leave to move for fee shifting.” As one example of the Court’s observation that the company was taking positions for no apparent purpose other than obstructing the exercise of the statutory rights of the plaintiff, the Court noted that the company refused to produce even a single document before litigation commenced.

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Must-Read Chancery Decision for Buyers of Businesses Whose Value Depends on Retaining Customer Relationships

The Delaware Court of Chancery in August 2020 addressed the issue of whether a seller was liable for not disclosing the notification it received prior to closing that one or more key customers were terminating their relationship with the seller’s business. Swipe Acquisition Corporation v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Aug. 25, 2020). The Court’s decision and other decisions cited below must be read by anyone who seeks a deep understanding of Delaware law on this topic.

Key Issue Addressed:

When will a fraud claim survive in connection with a purchase agreement that restricts claims for misrepresentations and limits claims for indemnification? In this case, most of the motion to dismiss was denied, but one of the reasons this decision is noteworthy is because it exposes the lack of a bright-line-rule on this issue when compared to other decisions addressing the same or similar issues–depending on the specific terms of the anti-reliance clause involved and the specific claims of fraudulent misrepresentations or omissions.

As an indication of how common this issue is, a few days before this ruling the Court of Chancery issued another decision that addressed the issue: Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-VCS (Del. Ch. Sept. 18, 2020).

Key Facts of Swipe case:

This case involves a dispute over the lack of disclosure by the seller prior to closing when the seller learned that a key customer was claiming to terminate its business relationship even though the sales price was impacted by the existence of key customers. The sellers knew that if the buyers learned of the termination by the key customer involved that the deal might not close. See Slip op. at 8. Nonetheless, the sellers did not inform the buyers of the termination of the key customer at issue. Moreover, the sellers did not amend any of the financial information provided to the buyers, which had then become stale. Id. at 9. Based on weaker-than-expected performance before the closing, the buyers and the sellers did agree to reduce the purchase price even though the loss of the key customer was not disclosed.

Key Principles of Law with Widespread Applicability:

  • The Court cited to multiple cases to explain when an anti-reliance clause will not bar a fraud claim. See Slip op. at 28-29.
  • The Court also elucidates when a fraud claim and a contract claim will not be considered duplicative; when both can proceed at the preliminary stage of a case; and when a contract claim and a fraud claim will not be considered boot-strapped. See id. at 31-33.
  • The Court explained why duplicative claims may often survive at the motion to dismiss stage. See footnote 61 and accompanying text.
  • The Court explained the primacy of contract law in Delaware, and when parallel contract claims and breach of fiduciary duty claims may not proceed in tandem. See footnote 58 and accompanying text.

In addition to the cases cited above on the topic at hand, this decision should be compared with the Delaware Superior Court’s Infomedia decision that was issued just a few short weeks before this Chancery ruling. Of course, the exact terms of the applicable agreements and the detailed circumstances are often determinative, but in the unrelated Delaware Superior Court decision about a month earlier, the Court concluded that the failure to inform the sellers shortly before the execution of an asset purchase agreement that key customers intended to terminate their service contracts, even though written notice had not yet been received, would not be a sufficient basis for fraudulent misrepresentation claims due to anti-reliance provisions in an asset purchase agreement, thereby resulting in a grant of the motion to dismiss, based on the terms of the agreement involved in that case. See Infomedia Group Inc. v. Orange Health Solutions, Inc. (Del. Super. July 31, 2020).

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Chancery Determines Standard Applicable to Contested Transaction

The recent Delaware Court of Chancery decision in Salladay v. Lev, No. 2019-0048-SG (Del. Ch. Feb. 27, 2020), addressed the standards the Court may apply to review the conduct of directors in a contested transaction, and determined that the entire fairness standard applied, based on the facts of this case, resulting in a denial of a motion to dismiss.

Key Points:

This decision provides the latest iteration of Delaware law regarding the analyses the Court employs to review a challenged transaction to determine whether fiduciary duties were fulfilled.

In this case, the Court determined that the business judgment rule did not apply. The Court provides a practical, educational elucidation of why the efforts to “cleanse” the transaction did not revive the business judgment rule, in light of the failure to satisfy the prerequisites discussed in Corwin v. KKR Holdings, LLC, 125 A.3d 304 (Del. 2015); Kahn v. M & F Worldwide (MFW), 88 A.3d 635 (Del. 2014); and In re Trados, Inc. Shareholders Litigation (Trados II) 73 A.3d 17 (Del. Ch. 2013).

The Court also discusses the recent Delaware Supreme Court cases which clarified “where or when the line is drawn” for the “cleansing” criteria to be considered as being imposed “ab initio,” such that a deal will earn the deferential BJR review standard, in Flood v. Synutra International, Inc., 195 A.3d 754 (Del. 2018), as well as Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019).

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Chancery Explains Proper Methods to Expand Board Size and to Fill Board Vacancies

A recent Delaware Court of Chancery decision provides a primer on the proper way to expand the size of a board of directors and the proper way to fill board vacancies, as well as explaining the difference between a de facto and a de jure director. See Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020).

This opinion should be at the fingertips of every corporate litigator who is called upon to address whether:

(1) the size of a board of directors was properly expanded;

(2) director vacancies were properly filled; or

(3) whether the actions of a de facto board member were binding even if because of technical mistakes that director was not properly appointed such that she would qualify as a de jure director.

Many additional consequential statements of Delaware law with widespread utility are included in this consequential 52-page decision.


       The Court describes the well-known prerequisites for obtaining a preliminary objection. See page 16.

       The Court provides a tutorial, with copious citations to statutory and caselaw authority, to explain: (i) how to expand the size of the board of directors; (ii) who has the authority to expand the size of the board; (iii) how to fill vacancies on the board; and (iv) who is authorized to fill vacant board seats. See pages 17 to 20.

       This opinion features a maxim of equity that would be useful to have available when the situation calls for it: equity regards as done what ought to have been done. See page 20.

       The Court explained that only the charter or the bylaws can impose director qualifications, and in any event those qualifications must be reasonable. See page 21.

       The Court explained that a director could not agree to conditions of service as a board member that would be contrary to the exercise of the fiduciary duties of a director. See page 22.

       An always useful reminder of the three tiers of review of director decision-making are provided. Those three tiers are: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness. See pages 50 to 51.

       In addition to explaining when those three tiers apply, the opinion also regales us with a classic recitation of the business judgment rule as the default standard:

” . . . the default standard of review is the business judgment rule, which presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” See page 50.

      This decision teaches that unless one of the rule’s elements is rebutted, the Court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objective.

       The Court explains the difference between a de facto director and a de jure director, and which actions of a de facto director are binding.  See pages 23 to 25.

       Another extremely important aspect of this decision (which takes up the majority of the 50-plus pages) is a deep dive into the historical foundations of Section 271 of the Delaware General Corporation Law which applies generally to the sale of most or all of the assets of a corporation, and which would typically require stockholder approval. See page 27 through 48.

       The Court supports with detailed reasoning and extensive footnote support its conclusion that Section 271 does not apply to an insolvent corporation that transfers assets to a secured creditor. Compare DGCL Section 272 (allows directors to mortgage corporate assets).

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Delaware Court of Chancery Provides Rule 11 Insights

There are relatively few Chancery decisions on Rule 11 compared with more common corporate and commercial litigation issues that are the subject of Chancery opinions, and an October 2020 letter decision provides insights into why there are not more rulings on Rule 11. In POSCO Energy Co., Ltd. v. FuelCell Energy, Inc., Civil Action No. 2020-0713-MTZ (Del. Ch. Oct. 22, 2020), in which a motion for leave to amend under Rule 15 was granted without awarding fees, while distinguishing both the Lillis and Franklin Balance cases, the Court explained that Rule 11 should not be casually raised, but that in any event a requirement for invoking it is to provide separate written notice and an opportunity to cure, as opposed to including it as part of a motion addressing other issues as well.

The Court explained that:

FuelCell has invoked Court of Chancery Rule 11 casually and repeatedly in this matter.21 The Court may only determine if Rule 11(b) was violated “after notice and a reasonable opportunity to respond,” and a litigant may only initiate those proceedings by “[a] motion for sanctions . . . made separately from other motions or requests.”22  Under that plain language, if FuelCell seeks sanctions for conduct it believes violates Rule 11, it must do so in an independent motion, not in argument opposing unconditional leave to amend. And, in my view, it is distracting, detrimental to the famed collegiality of the Delaware bar, and counterproductive to the “just, speedy and inexpensive determination” of judicial proceedings to summon Rule 11 in rhetoric.23

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Chancery Declines to Order Reserve for Fraud Claims Against Dissolving Corporation Under DGCL Section 280

There remains a relative paucity of opinions addressing the nuances of the dissolution statute under DGCL Section 280, compared to the Delaware decisions addressing other sections of the DGCL, so we refer to a September 2020 Court of Chancery decision that denies a Motion for Reargument under Rule 59(f) of a ruling that rejected a request to set aside a reserve for a fraud claim–even though the letter ruling was barely three-pages long–in the matter styled In re Swisher Hygiene, Inc., 2018-0080-SG (Del. Ch. Sept. 4, 2020). The prior decision was highlighted here.

The Court explained that the allegations did not state a “creditor claim”, though the ruling expressly did not prejudice the right to “bring litigation to determine” the fraud claim, which related to disputed ownership of stock in the company being dissolved.

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Chancery Enforces Forum Selection Clause in Charter for Inspection Demand

One of our selected Court of Chancery decisions is almost as noteworthy for what it did not decide as for what was decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s Court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the Court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The Court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the Court carefully analyzes. But, we only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

  • The Court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
  • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
  • The Court compares DGCL section 220 with its counterpart in the California statutory regime.
  • The exclusive forum selection clause in the charter was addressed, and the Court explained that but for this provision, the California court would be able to apply DGCL section 220.
  • Importantly, the Court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the Court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the Court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
  • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the Court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.

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Chancery Clarifies Nuances of Section 220 Stockholder Demand for Inspection Rights

A July 2020 Delaware Court of Chancery opinion provides insights into nuances of DGCL Section 220 as it relates to the rights of stockholders to inspect corporate books and records, and deserves to be in included in the pantheon of Delaware decisions on this topic. It must be read by anyone seeking a complete understanding of Delaware law on Section 220. In Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), the Court provided warmly welcomed clarity about important nuances of DGCL Section 220 with eminently quotable passages for practitioners who need to brief these issues. See generally overview of takeaways from 15 years of highlighting Section 220 cases, and compare a recent Delaware Supreme Court decision about contract-based rights to inspect corporate books and records.

This short overview will only provide several of those worthy passages in the format of bullet points.

Among the more noteworthy aspects of this notable decision are the following.

  • A consequential aspect of this jewel of a decision is the instruction by the Court that there is no basis in Delaware law to require a stockholder demanding corporate records under Section 220 to explain why the stockholder wants to value her interest in the company–in order to satisfy the recognized proper purpose of valuation. See Slip op. at 11; and 14-15.
  • The Court provided an extremely helpful list of many recognized “proper purposes” needed to be shown to satisfy Section 220. See Slip op. at 8-9.
  • The Court also recited several examples of what showing is recognized as sufficient to satisfy the “credible basis requirement” to investigate mismanagement pursuant to Section 220. See Slip op. 18-19.
  • An always useful recitation of the basic elements of the fiduciary duty of directors of a Delaware corporation and the subsidiary components of the duty of loyalty and care, are also featured. See Slip op. at 20.
  • The Court categorized the specific requests for documents in this case as follows: (i) formal board materials; (ii) informal board materials; and (iii) officer-level materials. Then the Court expounds on the different focus applicable to each category.
  • Notably, after quoting the actual document requests, the Court found that some of them were overly broad–but the Court edited and narrowed some of the requests before concluding that the company was required to produce the Court-narrowed scope of documents.

Bonus supplement: Prof. Bainbridge, a nationally prominent corporate law scholar, provides learned commentary on this case and Section 220 jurisprudence generally. Readers should recognize the good professor as the prolific author who scholarship has been cited in Delaware Court opinions.

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*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

**Chauna A. Abner 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 Court of Chancery recently ruled, on an issue of first impression, that The We Company’s management did not have the authority to unilaterally preclude a director faction from accessing the office space provider’s privileged information in a dispute over a Japanese investment group with a controlling interest in the matter of In re WeWork Litigation, C.A. No. 2020-0258-AGB, opinion issued (Del. Ch. Aug. 21, 2020).

Chancellor Andre Bouchard’s Aug. 21 opinion ordered We Co. to quickly produce privileged information relating to the circumstances under which management abruptly replaced a specially-appointed two-director committee that had sued investor SoftBank Group Corp. and its ally, SoftBank Vision Fund with a new committee that had agreed to drop the suit.

Delaware law on its head

“It is the board of directors of a corporation—not management—that has the ultimate responsibility for overseeing the affairs of the corporation under 8 Del. C. § 141(a)” but in claiming the right to shield company privileged information from a warring board of directors, “management turns these bedrock principles of Delaware law on their head,” the Chancellor wrote.

He said a special committee of the We Company’s board of directors formed in October 2019 had investigated the circumstances of SoftBank’s proposal to help stave off the company’s liquidity crisis by instituting corporate reforms and investing $3 billion in a stock buy that never transpired.

The special committee, on behalf of We Company, charged in its April Chancery suit, that investors SoftBank and SoftBank Vision Fund breached a contract to use their best efforts to consummate the $3 billion stock buy tender offer; but one month later the company recruited two new temporary directors to form a new special committee to undo the original committee’s work.

New vs. Old Committee

The original committee’s members opposed a motion by the new committee to dismiss their suit and sought information on how the new committee was established and how it may have been influenced by the company’s management, the Chief Executive Officer of which was chosen by SoftBank, he said.  Their suit did not seek access to the new committee’s legal advice.

The Chancellor said in Kalisman v. Friedman, Vice Chancellor J. Travis Laster elaborated on the fundamental principle of Delaware law that a director’s right to information is essentially unfettered in nature,” and “directors of Delaware corporations are generally entitled to share in legal advice the corporation receives.”  Kalisman v. Friedman WL 1668205 (Del. Ch. Apr. 17, 2013).

Kalisman said one exception to that principle is that “a board or a committee can withhold privileged information once sufficient adversity exists between the director and the corporation such that the director could no longer have a reasonable expectation that he was a client of the board’s counsel.”

No exceptions here

But in this case, the board made no decision to withhold privileged information from the special committee after analyzing whether those directors had a “reasonable expectation that [they were] a client of the board’s counsel.”  Instead, “management made that decision unilaterally” he said.

“Directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation” he said in ordering production, “and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.”