On Wednesday, March 18, 2020, the Delaware Supreme Court overturned a Chancery Court decision that had prohibited Delaware corporations from adopting federal forum selection provisions for actions arising under the federal Securities Act of 1933 (Securities Act). In its opinion in Salzberg v. Sciabacucchi, the Court held that allowing federal forum selection provisions in a corporation’s governing documents advanced the goals of achieving judicial efficiency in resolving claims and offering flexibility to engage in private ordering. (more…)
Delaware Chancery Court Holds That a Transaction Involving a Conflicted Board Majority Can Be Cleansed If Appropriate Safeguards Are Implemented
In a legal challenge to a corporate transaction, the applicable standard of review is often outcome determinative. The deferential business judgment rule applies where the board is not majority conflicted. The burden is on the challenger to show bad faith sufficient to overcome the board’s business judgment – a high standard that almost always results in dismissal of the challenge. On the other hand, the more onerous entire fairness review applies to conflicted transactions. Where entire fairness applies, the burden is on the board to prove that the price and approval process were fair. This is a fact-intensive analysis that does not lend itself to dismissal at the pleadings stage. (more…)
Delaware Court Of Chancery Extends MFW Framework to Board Decisions on Controlling Party Compensation
It is a basic precept of Delaware corporate law that a corporation is managed by its board of directors. One of the board’s key managerial functions is the determination of executive compensation levels – a decision typically entitled to great judicial deference. When the board’s decision as to executive incentive compensation is submitted to stockholders for approval, and such stockholder approval is given, the decision is entitled to even greater deference. However, in Tornetta v. Musk, et al., C.A. No. 2018-0408-JRS, decided September 20, 2019, The Court of Chancery highlights an important exception to the general rule when the recipient of the compensation package is also a controlling stockholder.
Delaware Supreme Court Clarifies That a Response to a Books and Records Demand Is Not Presumptively Confidential
By: Marc Casarino
Section 220 of the Delaware General Corporation Law permits stockholders to request inspection of a corporation’s books and records. This access is not unlimited. For example, the stockholder must demonstrate a proper purpose, such as valuing its investment or investigating mismanagement. Further, Section 220(c) provides that “the Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other or further relief as the Court may deem just and proper.” Therefore, beyond the statutory access restrictions, corporations often seek limitations on the disclosure and use to which the stockholder may put the information learned from the inspection. The most frequent limitation is a confidentiality order. Indeed, confidentiality orders have become so ubiquitous that a presumption of confidentiality pervades Section 220 inspections. (more…)
Summer is usually the best time of year for ice cream companies, but the season is off to a rough start for Blue Bell Creameries, USA, Inc. The Delaware Supreme Court, in Marchand v. Barnhill, held on June 18 that a suit brought by a stockholder of Blue Bell, in part accusing the company’s directors of violating their duty of loyalty to stockholders in their handling of a listeria outbreak in 2015, could continue based on adequate pleading of facts demonstrating bad faith. The ruling was a reversal of a Court of Chancery decision. (more…)
Preserving privilege with respect to pre-closing communications between a selling corporation’s counsel and its management is an important negotiation point in many transactions, so that the seller can prevent the buyer from using such communications against the seller in disputes between the buyer and the seller, but the buyer can continue to assert that privilege in disputes with third parties. The default rule under Delaware law is that the privilege passes to the buyer post-closing. More specifically, section 259 of the Delaware General Corporation Law provides, in part, that “all property, rights, privileges, powers and franchises” shall pass to the surviving corporation. However, the parties may negotiate around this provision in the transaction documents according to the Delaware Court of Chancery’s decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP.
Shareholder agreements and operating agreements contain a variety of knobs and levers, many of which a company’s founders hope never to invoke. Chief among them are the provisions for resolving disputes or deadlocks in decision-making on fundamental matters and the dissolution provisions. The former sets forth the roadmap for dealing with situations where there is disagreement among the decision-makers regarding actions fundamental to the business and operations of the company, and the latter sets forth the means and methods for disbanding the company and winding up its affairs (generally based on a vote of the stakeholders). Under ordinary circumstances, when a company’s end is near, its constituents amicably initiate the dissolution process without court intervention. However, on rare occasions, they may find themselves in an intractable deadlock as to whether dissolution is necessary or appropriate. Thus, one faction may ask a court to dissolve the company by judicial decree, while another faction may oppose that request. The Delaware Chancery Court visited upon one such occasion in the case of Acela Investments, LLC v. DiFalco. On May 17, 2019, the court issued its Acela decision, which offers a rare example of the circumstances under which the court may invoke its judicial dissolution powers.
The Dangers of Copy and Paste: Using Corporate Statutory Language in an LLC May Result in Unintended Consequences
Limited liability companies (LLCs) are famously referred to as “creatures of contract”, whereas the governance of a corporation is comparatively fixed by statute. When forming an LLC, the members have broad discretion to determine the substance and scope of fundamental features including management, tax and indemnification matters. Parties are largely free to draft an LLC’s operating agreement as they desire, and Delaware law will “give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”
By: Adam Chelminiak
The Corporation Law Section of the Delaware State Bar Association recently published its proposed amendments to the Delaware General Corporation Law (DGCL) for 2019.1
The amendments reflect a broad effort to modernize the DGCL’s provisions addressing electronic documentation of actions and electronic transmissions of items such as notices and consents. The most significant changes contemplated by the proposed amendments are: (i) the introduction of safe harbor procedures for electronic documentation, execution and delivery of various acts and transactions; (ii) revisions to the default provisions for the delivery of stockholder notices; and (iii) revisions to the provisions governing delivery of stockholder consents by electronic submission. The proposed amendments also include important clarifying changes to the provisions of Section 141(f) with concern to board actions by written consent.
In an April 16, 2019 rejection of the trial court’s analysis in Aruba Networks, the Delaware Supreme Court further clarified its recent pronouncements regarding the use of deal pricing as a measure of fair value in statutory appraisals under section 262 of the Delaware General Corporation Law. When a tender offer is made for a target company’s stock, section 262 provides a mechanism for dissenting stockholders to seek judicial appraisal of their stock rather than accepting the deal pricing. The court is charged with valuing the target company as an ongoing business at the time of the transaction, without regard to post-transaction events or any other business combination. In short, a section 262 appraisal should value the target company as a going concern and not as would be valued by a third party in an acquisition. (more…)
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