By: Carl Koerner
My colleague, John McCarrick, an expert on director and officer responsibility, recently gave a talk about emerging issues in D&O liability and discussed the impact of the ESG movement. ESG is an acronym for Environmental, Social and (Corporate) Governance. The movement asks business enterprises to extend their purview beyond financial success to address issues of public concern, such as global warming or racial injustice. John was asked by a program participant whether the ESG movement might force more companies to reorganize as public benefit corporations (PBCs). (more…)
By: Marc S. Casarino, Lori S. Smith and Jeremy M. Miller
The Delaware Court of Chancery recently made news when it ruled that Delaware law, not California law, applied to a minority shareholder’s request to inspect the books and records of a Delaware corporation with its principal place of business in California. In Juul Labs, Inc. v. Daniel Grove [1], the principal substantive issue was whether Daniel Grove (Grove) waived his inspection rights concerning Juul Labs, Inc., a Delaware corporation (Juul Labs), with its principal place of business in San Francisco, California. Grove contended, among other things, that California Corporations Code Section 1601 applied, which expressly permits inspection rights of a corporation with its principal place of business in California, irrespective of the corporation’s domicile. [2] Juul Labs argued that Grove allegedly waived his inspection rights under certain private option and investor agreements, the California law is not applicable and Section 220 of the Delaware General Corporation Law applies,[3] and the exclusive forum selection clause in Juul Labs’ certificate of incorporation must be enforced.
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By: Marc Casarino and Lori Smith
In our August 2017 alert, we cautioned that Delaware choice-of-law provisions standing alone will not confer jurisdiction in Delaware. To best support an argument for litigating in Delaware, we advised that a combination of contractual provisions distinctly establishing consent to Delaware law, forum and jurisdiction should be incorporated into the parties’ agreement. A pair of recent decisions ratify this advice, and serve as further reminder that failure to expressly cover selection of venue and consent to jurisdiction, in addition to choice of governing law, could frustrate a party’s ability to litigate in Delaware. (more…)
By: Marc Casarino, Lori Smith and Adam Chelminiak
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[1], 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…)
By: Marc Casarino and Ryan Udell
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…)
By: Marc Casarino, Lori Smith and Ryan Udell
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.
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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…)
By: Michael Mentzel and Gwenn Barney
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…)
By: Marc Casarino and Ryan Udell
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.[1]
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By: Lori Smith and Patrick Devine
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.
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