Search viacom

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.

A recent Court of Chancery decision gave a CBS Corp. shareholder access to the broadcaster’s internal documents regarding an imminent merger with former corporate sibling Viacom Inc. after finding a “credible basis” for the investor’s suspicion that Shari Redstone abused her control of both companies in Bucks County Employees Retirement Plan Fund v. CBS Corp., No. 2019-0820-JRS, memorandum opinion (Del. Ch. Nov. 25, 2019).

Vice Chancellor Joseph Slights III’s Nov. 25 ruling in the books-and-records action orders the CBS directors to turn over materials they considered in reaching an about-face decision to reunite with Viacom after the board vehemently rejected similar mergers with the parent of Paramount movie studios in 2016 and 2018. This decision was based on Section 220 of the Delaware General Corporation Law (DGCL). Compare recent DGCL Section 220 rulings juxtaposed on these pages, among the many addressed on these pages over the last 15 years.

Pennsylvania-based Bucks County Employees Retirement Plan Fund says there is good reason to believe the CBS directors breached their fiduciary duty by caving in to pressure from the daughter of founder Sumner Redstone, whose National Amusements Inc. holding company controls both companies.

After intense court and boardroom battles over Redstone’s efforts to reunite CBS with what she worried was a “tanking” Viacom, CBS executives and directors signed a two-year truce in 2018, but most soon stepped down and were replaced by Redstone’s choices, the pension fund claims.

Vice Chancellor Slights found the complaint met the “low burden” to establish credible suspicion of actionable breaches of fiduciary duties because it provided some support for allegations that:

  • The CBS board declined to submit the merger to the unaffiliated stockholders, raising the specter of merger review under the exacting entire fairness standard;
  • The 2019 stock-for-stock merger did not appear to be a better deal for CBS shareholders than the ones the board had rejected in 2016 and 2018 as “presenting a significant threat”;
  • The 2019 deal could provide Redstone with benefits similar to those that “the CBS board found so offensive in 2018 that it sought to dilute Redstone’s stock and enjoin the 2018 merger”;
  • There is reason to suspect an improper transaction process because, although not a member, Redstone attended a Feb. 22 CBS director governance committee meeting to discuss “strategic planning”;
  • The CBS CEO who replaced Les Moonves, after he was ousted amid misconduct charges, had been a “fierce ally’ in opposing a Viacom merger, but he experienced a “change of heart” after meeting with Redstone and receiving a “substantially boosted compensation package”; and
  • Lawrence Tu abruptly resigned as Chief Legal Officer “for good reason” following the Feb. 22 meeting, probably because he saw a violation of the 2018 settlement agreement with Redstone.

“The totality of these proven facts,” coupled with the fact that the 2019 merger is a conflicted controller transaction that will likely be subject to entire fairness review if challenged, adequately supports the plaintiff’s purpose for inspection, the vice chancellor said.

He granted access to documents used in the nomination of directors to the governance committee but found no separate need for information about directors added in connection with the 2018 settlement agreement or documents that would shed light on all directors’ independence.

The pension fund also won access to financial advisor presentations from all three mergers in order to investigate “a continuing story of misconduct” and “whether the 2019 merger is the product of wrongdoing.”

The vice chancellor ordered CBS to produce board-level documents concerning Moonves-replacement Joseph Ianniello’s compensation arrangements but found no need to access the CEO’s electronic communications with Redstone to show he self-interestedly backed the deal.

He found the pension fund is entitled to see only a “narrow” set of electronic communications between Redstone and the nominations and governance committee concerning the February 22 meeting and the Tu resignation in order to investigate wrongdoing in those contexts.

He rejected plaintiff’s broad demand for all electronic communications between Redstone, CBS, Viacom and their directors and advisors because it “bears little resemblance to the ‘rifled precision’ required in a Section 220 demand,” and is more appropriate for plenary suit discovery. See Brehm v. Eisner, 746 A.2d 206 (Del. 2000).

Vice Chancellor Slights entered judgement for the pension fund in the action he had expedited because of the planned closing of the deal in the following week, but in a footnote, he cautioned that “I do not mean to endorse the plaintiff’s approach here as a ‘playbook’ that should be followed by other stockholders who may seek to challenge transactions preclosing.”

 

Winshall v. Viacom International, Inc., C.A. No. 6074-CS (Del. Ch. Dec. 12, 2012).

Key Issue Addressed: Whether an indemnification clause in the merger agreement covered $28 million in legal fees incurred to defend post-merger claims.  Short Answer:  No.

Brief Factual Background

Viacom bought Harmonix in Sept. 2006 for $175 million in cash and an earn-out payment based on 2007 and 2008 revenues.  $12 million of the $175 million purchase price was placed into escrow and would be used to indemnify Viacom if Viacom suffered losses arising out of breaches of representations and warranties made by Harmonix.  This case arose out of claims made by Viacom for the escrow funds related to lawsuits that arose concerning the use of intellectual property for a video game by the name of Rock Band.

The Court of Chancery granted the motion for summary judgment filed by the shareholders of Harmonix who will now receive the $12 million that was held in escrow.  Prior Chancery decisions in this case were highlighted on these pages here and here.

Summary of Court’s Reasoning

The Court reasoned that all the claims related to alleged infringements of intellectual property made after the deal closed.  In addition, all of the claims were either dismissed or settled and therefore there was no evidence presented that the alleged misrepresentations on which the indemnification claims were based, were ever made.  Nor was there any evidence that any of the senior officers knew of any of the infringements.  Moreover, the Court found that at least some of the claims were time-barred.

Useful principles of Delaware law restated in this opinion include the following:

●          The well-settled elements of Court of Chancery Rule 56 regarding the standard for summary judgment were reviewed.  See footnotes 32 through 37 and accompanying text.

●          Viacom failed to successfully employ the two basic tactics available to defeat a summary judgment motion:  (1) Under Rule 56(e) it is not enough to rely on “mere allegations or denials” but rather one must provide affidavits or other means to establish that there is a genuine issue of material fact for trial; or (2) One may file an affidavit under Rule 56(f) showing why one needs discovery to address the pending summary judgment motion.  Viacom failed to successfully employ either of these two defenses to a summary judgment motion.

●          The Court reiterated that indemnity provisions are construed strictly, rather than expansively, under Delaware law.  See footnote 53.

●          Other useful principles of Delaware contract interpretation were applied, including the need to review the contract as a whole.

Supplement: For an article that discusses the aspect of this opinion dealing with the standard of review for post-closing adjustment decisions made by accountants, see this link.

Viacom International, Inc. v. Winshall, C.A. No. 7149-CS (Del. Ch. Aug. 9, 2012).

Issue: Whether the decision of an expert (as opposed to a conventional arbitrator) chosen in the merger agreement to decide earn-out dispute should be treated as an arbitration award, and vacated based on the Federal Arbitration Act?  Short Answer: No.

Background

This Court of Chancery opinion involved an earn-out dispute resulting from an acquisition by Viacom.  The parties provided in their merger agreement that the amount of the earn-out would be determined pursuant to an alternative dispute resolution procedure that submitted the issue to a binding decision by an accountant (as opposed to a law-trained arbitrator).  Viacom challenged the determination of the accountant.  Even though the decision of the accountant was binding, Viacom challenged it based on the standards outlined in the Federal Arbitration Act (“FAA”). Moreover, a related issue is whether the Court could even consider the matter or whether it was a dispute that needed to be decided by the person chosen to make the initial decision pursuant to the agreement.  That person determined that Viacom owed approximately $300 million pursuant to the earn-out provisions of the merger agreement.  This Court of Chancery decision upheld that determination or, in other words, refused to vacate the $300 million award of the accountant.

Legal Analysis

The Court discussed first the sub-issues of “substantive arbitrability” and “procedural arbitrability”, and whether or not the Court should even address the issue presented to it.  See footnotes 91 to 94.  Another formulation of the issues was whether the determination, pursuant to the merger agreement by the selected accountant, was within the authority granted by the merger agreement to the accountant for determination of those issues.  Secondly, the Court turned to whether or not there was a sufficient basis under the FAA to vacate that determination. In essence, the Court rejected all of Viacom’s arguments.

The Court observed that the standard of review under the FAA when a Court reviews an arbitration award is “one of the narrowest standards of review in all of American jurisprudence.”  See footnotes 81 to 86. The limited scope of review only allows for a successful challenged when arbitration awards have been procured by fraud, or when the arbitrators were clearly guilty of misconduct, or when the arbitrators exceeded their powers.  See slip op. at 25. See also 9 U.S.C. Sections 10(a)(3), (4).

Also useful to note is the citation to a U.S. Supreme Court decision for the statement of law that:  “The scope of judicial review of an arbitration award under the FAA cannot be expanded by contract.”  See footnote 80.

The Court flatly rejected the argument that “experts” who serve the role of arbitrators pursuant to a private resolution agreement should be treated differently for purposes of review than a law-trained arbitrator. The Court cited to cases acknowledging that when a private resolution procedure is provided for by agreement, even when those disputes are referred to a “expert” as opposed to an “arbitrator” as a decision maker, (such as an accountant), those proceedings will be treated as an arbitration for purposes of judicial review.  See footnote 78 and federal as well as Delaware cases cited therein.

The opinion provides cites to several decisions of the Court of Chancery that address whether post-closing earn-out procedural issues should be decided by a Court or by an arbitrator, but acknowledged that those decisions regarding arbitrability issues are not easily reconciled.  See footnotes 107 and 108 and accompanying text.

Also useful for practitioners is the opinion’s notable reference to the applicability of the FAA to arbitration agreements in Delaware unless the agreements specifically require or seek the application of the Delaware Uniform Arbitration Act (“DUAA”).  See footnote 109 (referring to recent amendment of 10 Del. C. Section 5702(a), (c) (2009) which provides that the FAA  applies to arbitration agreements that do not specifically state that the parties desire the DUAA to govern.)  This recent DUAA amendment reflects the desire of the state to promote certainty and efficiency for parties choosing arbitration.

The Court also observed that:  “The game of arbitrator-judicial badminton that Viacom’s argument would promote is, in practical effect, inconsistent with the pro-efficiency objective of Delaware statutory law.”

The final footnote of the opinion contains a citation to a practical decision that may be of relevance to those who toil in the fields of commercial litigation.  See footnote 131 (citing to Court of Chancery decision for the position of Delaware law that:  “There is no right to set-off of a possible, unliquidated liability against a liquidated claim that is due and payable.”)

 Pfeffer v. Redstone, (Del. Supr., Jan. 23, 2009), read opinion here. We are fortunate to have a review of this recent Supreme Court decision by nationally-prominent Delaware lawyer Kevin Brady.

The Delaware Supreme Court in this decision affirmed the Chancery Court’s dismissal of claims pursuant to Rule 12(b)(6) against Sumner Redstone and others, in connection with a transaction involving Viacom and Blockbuster, based on duties of disclosure, loyalty and care. The trial court’s  opinion was summarized here.

 Plaintiff Beverly Pfeffer had filed a class action against the directors of Viacom (including Sumner Redstone, Chairman and CEO of Viacom), Blockbuster, National Amusements, Inc. (“NAI”) (the controlling stockholder of Viacom) and CBS Corporation in alleging that, in connection with two transactions (a special dividend and an exchange offer), the Viacom Board had breached their fiduciary duties of disclosure, loyalty, and care and that NAI had breached its duty of loyalty by making false statements or material omissions in documents distributed before an October 2004 exchange offer. Chief Justice Steele, writing for the Court, affirmed Vice Chancellor Lamb’s February 1, 2008 decision that the plaintiff had failed to show that the alleged disclosure violations were material.

By way of background, Sumner Redstone owned a controlling interest in NAI, which owned a controlling interest in Viacom, which in turn owned a controlling interest in Blockbuster. In February 2004, Viacom announced that it intended to spin off 81.5% of its interest in Blockbuster and as part of its divestiture plans it proposed two transactions: (i) a special $5 dividend paid to Blockbuster (the Special Dividend); and (ii) a offer to Viacom stockholders to exchange their Viacom stock for Blockbuster stock (the Exchange Offer).

In September 2004, Viacom issued a press release disclosing the terms of the voluntary Exchange Offer. A Prospectus later released disclosed that: (i) NAI would not participate in the Exchange Offer; (ii) there were several potential risks associated with the acquiring Blockbuster stock, including Blockbuster’s potential ability to operate with increased debt imposed by the Special Dividend; (iii) a special committee comprised of three independent directors had recommended that the entire Blockbuster Board approve the Special Dividend and the Exchange Offer; (iv) the special committee had approved the final terms of the divestiture; and (v) neither Viacom nor Blockbuster made a recommendation to stockholders about the Exchange Offer. After the Exchange Offer, Blockbuster struggled to remain profitable and eventually it had to restate its reported cash flows for years 2003 through 2005. Thereafter, plaintiff brought a class action on behalf of all former Viacom shareholders who tendered their shares in the exchange offer.

Plaintiff alleged that the Special Dividend and the Exchange Offer should be subject to entire fairness scrutiny because NAI, as the controlling stockholder of Viacom, put its interests over those of the minority shareholders and it stood on both sides of the transaction. The Supreme Court agreed with the Chancery Court in finding that the Viacom Directors had structured the deal noncoercively and had disclosed all material facts. While the Exchange Offer was made to the minority shareholders, the Board did not recommend in the Prospectus that those stockholders exchange their shares. Moreover, the Exchange Offer was voluntary and the Prospectus disclosed that NAI was not going to participate.

Plaintiff also claimed that the Viacom Directors breached their duty of disclosure in a several instances regarding: (i) Blockbuster’s operational cash flow problems: (ii) that the Viacom Board “knew or should have known” of the Blockbuster operational cash flow problems and that the divestiture would leave Blockbuster unable to meet its financial obligations: and (iii) the exchange ratio methodology and the composition of the special committee. The Supreme Court agreed with the Chancery Court that the plaintiff had failed to meet her burden.

The Supreme Court found that the Plaintiff failed to allege: (i) any basis by which the alleged reclassification of Blockbuster’s cash flow affected Blockbuster’s “earnings, total cash flow, net income or any other accounting measure;” (ii) that anyone relied on the cash flow analysis that led to the reclassification or that the announced restatement caused a market price decline for Blockbuster’s stock; (iii) that the cash flow analysis performed by a midlevel treasury manager of a subsidiary corporation would be routinely available to the Viacom directors.

With respect to the issue about disclosure of the exchange ratio, the Supreme Court agreed with Vice Chancellor Lamb’s analysis that Viacom’s method for deriving the ratio was not material because the Viacom directors did not represent that the price was fair nor recommended that the minority shareholders participate. Finally with respect to the issue of the disclosure of the composition of the special committee, the Supreme Court determined that a single reference to the special committee in the Prospectus was not material because the Prospectus did not suggest that the committee had decided anything more significant than what the full board could have decided. As the result, the dismissal of the disclosure claims was affirmed.  

Lastly, notable for its likelihood to be of broad interest, is concluding footnote 52 that refers to the duties of majority shareholders, depending on whether they use their majority ownership to direct the actions of the corporation.

In Pfeffer v. Redstone, 2008 WL 308450 (Del. Ch., Feb. 1, 2008), read opinion here, the Chancery Court provides a treasure trove of the applicable standards used to review the conduct of directors in connection with claims for breach of fiduciary duty related to failure to make full disclosure in documents sent to shareholders. The transaction at issue was an exchange of shares between Viacom and Blockbuster when Viacom spun-off Blockbuster (and first declaring a special dividend which benefited Viacom the most as the majority shareholder). The 15-page opinion, in the Westlaw format, examines the detailed factual background that deserves to be read in order to fully appreciate the case, but I will just touch on a few highlights.

The court rejected an effort to have the "entire fairness" standard applied. Despite the fact that Viacom owned a majority of the shares of Blockbuster, the court did not find any special scrutiny "triggers" for a few reasons. First, the transaction at issue was a voluntary, non-coercive tender offer.  Thus, the duty was to disclose all material facts. That is, the directors must not do any of the following: (i) make materially false statements; (ii) omit a material fact; or (iii) make a partial disclosure that is materially misleading. The plaintiff asserted all 3 claims and the court rejected all three types of disclosure claims. The centerpiece of the claimed omissions related to Blockbuster’s cash flow and future profitability.

The opinion picks apart with surgical precision (and similar painful recovery) the allegations that the directors knew about the alleged cash flow projections (that plaintiff’s counsel admitted at oral argument he had not seen). After a discussion about what members of a board are reasonably presumed to have knowledge of (without evidence that they were actually presented with certain data), the court described the allegations that the directors knew about certain projections and failed to disclose them, as : "… a daisy chain of surmise and illogic…."

Under the different standard of the Private Securities Litigation Reform Act, a federal court in Texas also rejected the claims of plaintiff in this case based on substantially the same facts. See Congregation of Ezrasholom v. Blockbuster, 504 F. Supp.2d 151 (E.D. Tex. 2007).

A majority shareholder does not have duties in this context unless they are controlling the whole transaction (e.g., compare a freeze-out merger). Here, the majority owner of Viacom did not even participate in the transaction. In addition, the court found nothing to suggest that the directors who approved the exchange offer structured the transaction to put their own interests above those of Viacom or a specific group of Viacom shareholders. These facts distinguished this case from the (first) Chancery decision in Feldman v. Cutaia, summarized here.

Claims made under DGCL Section 144 were also analyzed and dismissed.

This post was authored by R. Montgomery (“Monty”) Donaldson, a Delaware business and commercial litigator for many years, a friend and colleague of Francis Pileggi, and a follower of this blog.

The implied covenant of good faith and fair dealing has received considerable play in Delaware in recent years. In fact, over the last half-decade, the Delaware Supreme Court has weighed in on the issue in at least three noteworthy decisions, reported previously on this blog here, here, and here. As the matrix of Delaware decisional law has evolved, at least some academicians  have questioned whether it offers a uniformly reliable predictive tool in terms of how the covenant may be applied under a given set of circumstances.

Against this backdrop, a recent Delaware Court of Chancery opinion evaluating an implied covenant claim (and other contract-based claims) through the forgiving lens of a Rule 12(b)(6) challenge, In re CVR Refining, LP Unitholder Litigation, C.A. No. 2019-0062-KSJM (Del. Ch. Jan. 31, 2020), provides another useful illustration of where the implied covenant of good faith and fair dealing likely will be found to have traction, at least at the pleading stage.

Broad Contours of the Implied Covenant.

In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), the Delaware Supreme Court described essentially two scenarios in which the implied covenant may come to bear. The first, broadly speaking, is where a contingency arises that was not anticipated by the parties, and therefore was not addressed in the explicit terms of the underlying contract. Here, the implied covenant may serve as a gap-filler. The second scenario, again broadly speaking, is where a party to the contract is given discretion to act with respect to a certain subject matter, but exercises that discretion in a manner that frustrates the purpose of the contract – that is, in a manner implicitly proscribed by the contract’s express terms.

The cases likewise delineate what cannot be accomplished by way of the implied covenant, and the list of prohibited applications is lengthy. Among them, the covenant cannot be used to:

  • rebalance economic interests after events that could have been anticipated but were not cause harm to one of the parties (see, e.g., Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, 2019 WL 4927053, *22 (Del. Ch. Oct. 7, 2019));
  • “fill a gap” where the contract in fact addresses the conduct at issue (see, e.g., Oxbow Carbon & Minerals Hldgs. V. Crestview-Oxbow Acq., LLC, 202 A.3d 482, 507 (Del. 2010)); or
  • effectively re-write the parties’ agreement (or, as famously written by former Chancellor Strine, “[t]he implied covenant of good faith and fair dealing is not a license for a court to make stuff up . . .” Winshall v. Viacom Int’l, Inc., 55 A.2d 629, 631 (Del. Ch. 2011), aff’d, 76 A.3d 808 (Del. 2013)).

Of course, these and other proscribed applications have been analyzed in detail far beyond the general scope of this post

The CVR Refining Decision

The claims in CVR Refining alleged that entities controlled by Carl Icahn engaged in a multi-step scheme (patterned after the one challenged in the Boardwalk Pipeline decision cited above) culminating in the exercise of a call right to buy out the minority unitholders of CVR Refining, L.P. at an unfair price. In particular, the minority unitholders alleged that CVR Energy (the indirect owner of CVR Refining’s general partner) launched a partial exchange offer to achieve the contractually-designated ownership threshold for exercising the call right. The general partner’s board, besprinkled with individuals closely affiliated with Icahn, did not make a recommendation concerning the exchange offer, and publicly disclosed its non-recommendation (this, in the face of a reasonably conceivable possibility that the exchange offer would trigger speculation in the market about the call right, thereby depressing the unit price). In filings made contemporaneously with the launch of the exchange offer, Icahn entities disclaimed any intention to exercise the call right after consummating the exchange offer – the predictable consequence of which (along with the exchange offer itself) was to cause analysts to speculate that the opposite was true, thereby driving down the price of CVR Refining.

As predicted, CVR later announced publicly that it was contemplating exercising its call right, causing the trading price to drop precipitously. When the call right was exercised, CVR Energy paid $393 million less than it would have had the unit price remained unaffected. Aside from breaches of the express terms of the partnership agreement, the minority unitholders alleged that the implied covenant of good faith and fair dealing prohibited the defendants from taking actions to depress the trading price of the units and undermine the price-setting mechanisms contained in the call right.

In denying the defendants’ motion to dismiss the implied covenant claim, the Court of Chancery observed:

  • that the claim implicated two partnership agreement provisions designed to protect minority shareholders – a 90-day provision and a 20-day formula. The former was designed to prevent minority unitholders from having their units called at a price below what the General Partner of its affiliates paid to purchase units in the 90 days preceding the exercise date. The latter was designed to ensure that the exercise price was unaffected by any announcement of the exercise by requiring that the price be determined with reference to the average of the daily closing prices for the 20 days immediately prior;
  • that it was reasonably conceivable that implicit in the language of the call right provision is a requirement that the defendants not act to undermine the protections afforded to unitholders by the price-protection mechanisms; and
  • that it would be “obvious” and “provocative” to demand the inclusion of an express condition that a general partner and its affiliates not subvert price-protection mechanisms through a multi-step scheme designed to manipulate the unit price (see Diekman v. Regency GP LP, 155 A.3d 358, 368 (Del. 2017) (“Partnership agreement drafters, whether drafting on their own, or sitting across the table in a competitive begotiation, do not include obvious and provocative conditions in an agreement . . .”).

Postscript

  • While narrowly construed and cautiously applied, the implied covenant of good faith and fair dealing, where properly invoked, has teeth. CVR Refining drives home the point (once again) that claims predicated on the implied covenant may survive dismissal where well-pled factual allegations support a reasonable inference that a contracting party has, in exercising otherwise-legitimate contractual rights, taken actions to undermine express contractual rights of the other party. This is especially so where the offending actions were such that explicitly proscribing them in the contract would have been too obvious or provocative. And so, the implied covenant marches on.

 

A recent decision by the Complex Commercial Litigation Division of the Delaware Superior Court in Winshall, et al. v. Viacom International, Inc., C.A. No. N15C-06-137 EMD CCLD (Del. Super., Feb. 25, 2019), ruled that a claim for indemnification was not ripe until a final adjudication, after appeal, was decided.  In a matter involving a claim for indemnification for attorneys’ fees based on a finding of a breach of a merger agreement by the Court of Chancery, which was affirmed by the Delaware Supreme Court, the Superior Court held that a subsequently filed indemnification claim was not barred by the statute of limitations because the claim did not become ripe until the affirmance by the Delaware Supreme Court. See Slip op. at 17-19.

The indemnification claim for “losses” which was defined in the agreement to include attorneys’ fees, was based on the Court of Chancery’s prior finding of a breach of agreement. The court also discussed several rebuttals to a statute of limitations argument and how they applied to the facts of this case. Id. at 22.

Compare a recent decision highlighted on these pages which held that the statute of limitations of three-years for a breach of contract claim for indemnification did not begin to accrue until the claim for indemnification was rejected.

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

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

Delaware Supreme Court Decisions

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

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

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

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

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

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

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

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

Delaware Court of Chancery Decisions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In a high-profile expedited control contest covered on the front page of The Wall Street Journal and most of the major media outlets covering business, law or Hollywood, the Court of Chancery denied the request for a TRO by a minority stockholder that sought to thwart the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom, in an opinion styled CBS Corp. v. National Amusements, Inc., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018).

The issues in this opinion and the detailed facts could be the topic of a law review article. The intent of this short blog post is more modest and will rely on bullet points for busy readers, but a careful reading of the short decision of the court linked above is necessary for anyone who seeks to be current on the latest rulings impacting Delaware corporate litigation.

Key Facts

  • Shari Redstone and her family have voting control of CBS even though they own a small percentage of the stock. A Special Committee of the CBS board was concerned that Ms. Redstone would use her voting power to replace the CBS directors who were not in favor of a merger with Viacom.
  • The Special Committee planned a dividend of voting stock that would dilute the voting power of Ms. Redstone but purportedly would not impact the economic interests of her or any other stockholders.
  • On Monday, May 14, the Special Committee sought a TRO. On May 16 a hearing was held on the TRO. On May 17, the above linked opinion denied the TRO.
  • One hour before the May 16 hearing, Ms. Redstone, by written consent, amended the bylaws to require a vote of 90% of board members before any dividends could be issued (which would prevent the dividend of voting stock that the directors had planned–unless Ms. Redstone consented.)

Key Aspects of Court’s Legal Analysis 

  • The court recited the familiar requirements for a TRO. Slip Op. at 7. But, the defendants argued for the slightly higher standard applicable to a preliminary injunction which requires a likelihood of success on the merits.
  • The key legal issue arose in connection with the right of a controller to be a “first mover” to protect its control position and the right of independent directors to manage the company pursuant to DGCL Section 141(a).
  • Although there was one case arguably suggesting a contrary position, the court relied on two cases that more directly support the rights of a controller to be a “first mover” to protect its control position: Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985), and Adlerstein v. Wertheimer, 2002 WL 205684, at *9 (Del. Ch. Jan. 25, 2002). Compare Hollinger Int’l Inc. v. Black, 844 A.2d 1022, 1029 (Del. Ch. 2004), aff’d 872 A.2d 559 (Del. 2005)(granting injunction to prevent a controller, Lord Black, from reneging on a prior agreement to grant authority to independent directors in connection with the sale of a company he controlled.)
  • The court also referred to relief available under DGCL Section 225 which the directors could use in the future to contest their removal as directors if they allege their removal was improper. In addition, relief would be available if a merger with Viacom is alleged to be the result of a breach of fiduciary duties by a controller. Thus, the irreparable harm component and the balancing of the equities requirement for injunctive relief were not met at this juncture–though one can be fairly certain that the parties will be back in court again in the near future as this drama unfolds.

SUPPLEMENT: I was quoted in an article about this case. As predicted, amended complaints and new complaints have been filed in this case since the date of the above opinion.

 

 

A recent Chancery decision dismissed a claim for excessive compensation based on a prior release that covered such claims. The ruling in Feuer v. Dauman, C.A. No. 12579-CB (Del. Ch. Oct. 25, 2017), may be useful in those instances where an analysis is necessary to determine whether a settlement encompasses subsequent claims based on events that pre-dated the settlement.  Unfortunately, the court did not have an opportunity to directly address the propriety of paying compensation of several million dollars during a period when the recipient was physically absent from board meetings and allegedly incapacitated due to mental and physical health issues.

Background: This letter decision granted a motion to dismiss claims for breach of fiduciary duty, waste, and unjust enrichment in connection with a challenge to the payment of approximately $13 million of compensation to Sumner Redstone from July 2014 to May 2016, when the directors of Viacom allegedly knew that he was incapacitated and incapable of doing his job.  The court found that the claims asserted were released as part of a settlement agreement Viacom entered into in August 2016.

The court recounted the procedural history of multiple other lawsuits filed during the relevant period of time involved. Some of those lawsuits involved a contest for the control of Viacom. Those lawsuits were settled in August 2016.

The court quoted from the relevant portions of the settlement agreement and the relevant release language. The instant action was filed approximately one month prior to the settlement agreement being entered into.  The defendant-directors moved to dismiss based on failure to state a claim for relief, as well as failure to plead demand futility.

Holding: The court explained that the plain language of the release in the settlement agreement provides that Viacom released each of the individual defendants from any claims that would clearly encompass those in the instant lawsuit. The court explained that the plaintiff only devoted a single paragraph to address the release issue in its briefing.

The argument was made that the release purported to prospectively limit any exercise of fiduciary duty owed by the directors of Viacom, but the court did not read the release as prospectively limiting any exercise of fiduciary duty. Rather, by its terms, the court explained that the release extinguished potential liability arising from acts that included those in the instant complaint.

Takeaway: The plaintiff chose to rely on its original complaint instead of amending it pursuant to Rule 15(aaa).  In retrospect, the plaintiff might have considered presenting facts in an amended complaint that would have created a record with facts and circumstances under which the release was negotiated and executed, in order to adequately raise issues about its validity, such as the possibility that it was part of a self-interested transaction – – because the directors sued in this case are the same persons who authorized the prior controlling release.

Delaware courts recognize the validity of general releases, and there was no basis in the complaint in this matter to challenge the presumptively valid release. Thus, the instant complaint was dismissed, as to the named plaintiff only, but the court expressed no opinion on the issue on the possibility of additional challenges to the release.  The court stressed that this opinion is not intended to have preclusive effect on potential claims of any other stockholder of Viacom.