Morgan v. Cash, C.A. No. 5053-VCS (Del. Ch. July 16, 2010)
Document: Morgan v. Cash, C.A. No. 5053-VCS (Del. Ch. July 16, 2010)
Morgan, a former common shareholder of Voyence, Inc., filed a claim against EMC Corporation, the acquirer of Voyence, for aiding and abetting alleged breaches of fiduciary duties by the former Voyence board. Specifically, Morgan alleged that EMC used promises of continued employment and exploited conflicts of interest between the Voyence directors and common stockholders to gain Voyence management’s support for a low cash merger price. Because none of the consideration from the sale was distributed to Voyence’s common shareholders, Morgan believed that EMC was complicit in the board’s failure to maximize stockholder value in the sale of the Voyence. The Chancery Court granted EMC’s motion to dismiss the company from the shareholder litigation. Vice Chancellor Strine determined that allegations of modest employment packages offered to two directors, standing alone, did not suggest that the Voyence board accepted a low merger price in exchange for improper personal benefits. Additionally, the fact that Voyence directors received consideration from the sale of the corporation, and common shareholders did not, was not enough to sustain a claim of collusion between EMC and the Voyence directors. Vice Chancellor Strine stressed that “[i]t is not a status crime under Delaware law to buy an entity for a price that does not result in a payment to the selling entity’s common stockholders.”
Potential derivative claims of stockholders plaintiffs do not in and of themselves produce grounds for enjoining a merger
Shareholder plaintiffs sought to enjoin the merger of Massey Energy Company (“Massey”) and Alpha Natural Resources Inc. (“Alpha’), contending that the merger consideration failed to adequately compensate plaintiffs for derivative claims against Massey stemming from management’s failure to make a good faith attempt to comply with mining regulations and damages from an explosion that killed 29 miners. The Court held that the record did not support the issuance of a preliminary injunction because there was no indication that the derivative claims “are material in comparison to the overall value of Massey as an entity.” The Court found the merger procedurally sound, that the Massey board “exerted reasonable effort to get the highest price it could from Alpha,” and that the board was not improperly motivated by a desire to avoid liability.
Vice chancellor rules that Revlon duties attach to 50/50 cash and stock merger deal
The Court of Chancery held that the Revlon standard applies when a merger consideration is split evenly between cash and stock, but nonetheless declined to enjoin a merger between Smurfit Stone Container Corp. (“Smurfit”) and Rock-Tenn Co. Stockholders of Smurfit had contended that the price, the equivalent of roughly $35 per share, was unreasonable and that the Smurfit board had violated its Revlon duty to maximize shareholder value by failing to adequately value or shop the company, and by agreeing to preclusive deal protection measures, such as a $120 million termination fee. The Court refused to grant the preliminary injunction, holding that (1) there was not a “strong showing” of likelihood of success on the merits because the Board’s decision to sell the company was not unreasonable, (2) plaintiffs failed to establish irreparable harm, and (3) the balance of equities favored the defendants.
Chancery Court says no advisory opinion absent a litigable controversy
Document: In re Native American Energy Group, Inc., C.A. No. 6358-VCL (Del. Ch. May 19, 2011)
The Court of Chancery denied a petition from Native American Energy Group, Inc. for a declaration to cure a flaw in its capital structure, stating that the court lacked jurisdiction because there was no litigable controversy. Pursuant to Section 225(b) of the General Corporation Law of the State of Delaware (the “GCL”), the company sought a declaration that it had cured the flaw through the written consent of a majority of stockholders. Though Section 225(b) of the GCL was amended in 2008 to authorize a corporation to file petitions in the court to determine the result of certain stockholder votes, the court found that this amendment was limited in scope and not intended to enable parties to manufacture grounds for an advisory opinion.
If you want access to corporate records, you’d better be a shareholder (and it doesn’t hurt to know applicable statutes of limitations and the status of any related legal settlements)!
Document: Graulich v. Dell Inc., C.A. No. 5846-CC (Del.Ch. May 16, 2011)
The Court of Chancery entered a judgment on the pleadings in favor of defendant Dell Inc., after determining that the plaintiff had failed to state a proper purpose for a books and records action under Section 220 of the General Corporation Law of the State of Delaware. The Court held that the plaintiff lacked standing because (i) he was not a stockholder of defendant until 2 years after the time period for which he sought records, and (ii) even if he had standing to pursue either a derivative or direct action, it would have been time-barred by the applicable statute of limitations, or precluded by a settlement release in a derivative action relating to the products.
Fair price plus fair process still the law in Delaware mergers
Document: In re Orchid Cellmark Inc. S’holder Litig., C.A. No. 6373-VCN (Del.Ch. May 12, 2011)
The Court of Chancery declined to preliminarily enjoin a merger transaction that plaintiffs claimed was “the result of a flawed and inadequate process” and involved “materially misleading and incomplete” securities filings. The Court, applying the Revlon doctrine, concluded that the Board and the Special Committee thereof did not act unreasonably in their determination to engage in a merger which, despite several deal protection mechanisms, yielded the shareholders of the target an approximate 40% premium over the trading price of the shares. Further, it determined that the plaintiffs failed to demonstrate a reasonable probability of success on the merits of their disclosure claims, and concluded that there was not a significant likelihood of irreparable harm to the plaintiffs if the merger were to be consummated.
Chancery Court reduces attorney’s fees granted to plaintiff in derivative action based on the quality of the disclosures
In re Saur-Danfoss Inc. S’holders Litig., C.A. No. 5162-VCL (Del. Ch. May 3, 2011)
Minority stockholders sought $750,000 in attorney’s fees where their negotiation and subsequent litigation caused a controlling stockholder to make certain disclosures and eventually withdraw its tender offer. The Court, evaluating the qualitative importance of the disclosures obtained, awarded $75,000 in fees, refusing to award fees related to pre-litigation disclosures and substantially reducing the fees awarded based on the quality of the disclosures.
Chancery Court holds that you need to tell the other side that documents exist, but you don’t have to sort your opponent’s documents
In a letter opinion, the Court of Chancery addressed an LLC books and records action by a member of a Delaware LLC. The Court granted plaintiff’s demand that defendant provide information as to whether certain records of its wholly-owned subsidiary exist, and if so, where they are located holding that, without resolving the substantive merits of the dispute, requiring the defendant to provide such information would “facilitate trial.” The Court, however, denied plaintiff’s request that defendant be required to identify certain documents (originally produced by plaintiff) produced by defendant in discovery by the specific discovery request to which they pertain, holding that “[e]fficiency must – or perhaps, should – be the measure of discovery in summary proceeding,” and that, while typically “responding to discovery requests with a blanket reference to a substantial set of documents is insufficient,” the fact that the documents were originally produced by plaintiff would result in an “unwarranted burden” on defendant.
Chancery Court holds that split off was not a violation of the Company’s Indenture
Liberty Media Corp. v. The Bank of N.Y. Mellon, C. A. No. 5702-VCL (Del. Ch. Apr. 6, 2011)
Plaintiff, Liberty Media Corp (“Liberty”), sought a declaratory judgment that the distribution of two divisions of its company to its stockholders, in order to split off new publicly traded company, did not violate the terms of an indenture pursuant to which Liberty issued certain bonds. Bondholder defendants sought to aggregate the split-off at issue with several other distributions that Liberty made to stockholders, claiming that, taken together, they amounted to a violation of a provision of the indenture prohibiting Liberty from selling, transferring or disposing of substantially all of its assets. The Court, after trial, granted the declaration, holding that the distribution itself was not a violation of the indenture and that the distributions could not be aggregated.
TR Investors, LLC v. Genger, C.A. No. 3994-VCS (Del. Ch. July 23, 2010)
Document: TR Investors, LLC v. Genger, C.A. No. 3994-VCS (Del. Ch. July 23, 2010)
TR Investors, LLC and other capital investors of Trans-Resources, Inc. brought an action to have the Chancery Court determine control of the Trans-Resources board pursuant to 8 Del. C. § 225. In 2004, Genger, the former founder and CEO of Trans-Resources, improperly transferred shares of Trans-Resources to trusts for his children in violation of a stockholders agreement with the capital investors. After discovering the transfer in 2008, the capital investors reached an agreement with the Genger and the trusts to buy back all of the wrongfully transferred shares, giving the capital investors a majority of the Trans-Resources stock. When the capital investors reconstituted the Trans-Resources board of directors, Genger challenged the reconstitution claiming that proper notice of the wrongful transfer was given in accordance with the stockholders agreement and that the capital investors nonetheless ratified the 2004 transfers when it acquired the shares in 2008. The Chancery Court rejected the Genger’s claims and found that the capital investors controlled the Trans-Resources board. Interpreting the stockholders agreement, the Court found that Genger had failed to comply with the notice requirement under the terms of the stockholders agreement. Furthermore, Vice Chancellor Strine found the capital investors clearly reserved their position that the 2004 transfers were void and therefore did not ratify the transfers when it acquired the shares in 2008. Accordingly, the capital investors retained the shares and control of the board.
Related Westpac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010)
Document: Related Westpac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010)
JER Snowmass LLC, a funding member of two LLCs formed to pursue a land development project, filed a motion to dismiss a complaint filed by Related Westpac LLC, operating member of the project LLCs. Related Westpac claimed that JER Snowmass breached its contractual duties under the project LLCs’ operating agreements by unreasonably refusing to give consent to various major decisions and meet calls for further capital funding of the development project. The Chancery Court dismissed the complaint because the claims made by Related Westpac were inconsistent with the project LLCs’ operating agreements. While JER Snowmass could not unreasonably withhold its consent to certain decisions under the operating agreements, the “material actions” involved in the complaint were not subject to such constraints. JER Snowmass contractually bargained for the right to deny consent to material actions if it was in its own commercial self-interest. The Court refused to impose a reasonableness condition with respect to material actions that the operating member had freely given up during formation of the operating agreement. Furthermore, the Court would not imply a reasonableness requirement when it appeared in other sections of the operating agreement but not in the provision at issue. The Chancery Court also dismissed Related Westpac’s request for damages and payment of capital calls because this remedy was in conflict with the plain terms outlined in the operating agreement.
In Re CNX Gas Corp. S’holder Litig., C.A. No. 5377-VCL (Del. Ch. July 5, 2010)
Document: In Re CNX Gas Corp. S’holder Litig., C.A. No. 5377-VCL (Del. Ch. July 5, 2010)
Controlling shareholders of CNX Gas Corporation sought to certify for interlocutory appeal a decision of the Chancery Court denying a preliminary injunction by a class of minority shareholders against a unilateral two-step freeze-out merger. In the decision denying the preliminary injunction, the Court rejected the controlling shareholders’ position on the standard of review and held that the transaction would be reviewed for entire fairness under In re Cox Communications, Inc. Shareholders Litigation. The application sought interlocutory appellate review to clarify the appropriate standard of review for a unilateral two-step freeze-out by a controlling shareholder. The Chancery Court granted the application and found that review was warranted because attempts to apply Supreme Court precedent produced different conclusions regarding the appropriate standard for review, confusion regarding the inherent coercion in a two-step freeze-out merger, and conflict as to the degree to which a target board has a role in responding to a controller’s tender offer. In addition, the court determined that the issue presented a question not directly addressed by the Supreme Court, implicated fundamental issues of Delaware public policy, and determined a substantial legal issue for purposes of Rule 42(b). Update: On July 8th, the interlocutory appeal was denied by the Supreme Court of Delaware.
MCG Capital Corp. v. Maginn, C.A. No. 4521-CC (Del. Ch. May 5, 2010)
Document: MCG Capital Corp. v. Maginn, C.A. No. 4521-CC (Del. Ch. May 5, 2010)
This case was the first time that the Court of Chancery was presented with the question of whether preferred stockholders have the same standing to due derivatively on behalf of the corporation as common stockholders. The Court held that until a series of preferred shares are given attributes that differ from other classes of stock by virtue of its designation in the corporation’s charter, all stock is created equal. It therefore follows, that unless and until a corporation expressly denies preferred stockholders the right to due derivatively, they have the same right to do so (and must meet the same standards) as holders of common stock. The Court also reiterated the previously-established rule that directors do not owe any fiduciary duties to holders of common stock warrants, and warrant holders therefore lack the standing to sue either directly or derivatively for breaches of fiduciary duty.
Sutherland v. Sutherland, C.A. No. 2399-VCN (Del. Ch. May 3, 2010)
Document: Sutherland v. Sutherland, C.A. No. 2399-VCN (Del. Ch. May 3, 2010)
This opinion, which is the latest installment in a series of opinions arising from a dispute among siblings in a family-run corporation, involved allegations of waste and breaches of the fiduciary duties of care and loyalty. In electing to partially grant and partially deny the defendants’ motion for summary judgment, the Court of Chancery held that 1) the decision to appoint a special litigation committee does not constitute an admission of self-dealing as a substantive matter – in other words it may be an admission of an appearance or possibility of impropriety, but not of actual impropriety – but the matter could not be decided at summary judgment; 2) a claim regarding alleged misuse of a private jet was barred by the statute of limitations, but importantly, the Court noted that it would have otherwise been dismissed on the basis of the plaintiff’s failure to rebut the presumptions of the business judgment rule; 3) in fulfilling its obligations under the duty of care, a board would generally be deemed to fulfill its obligations by considering material facts that are reasonably available and would generally not be held liable unless the conduct rises to the level of gross negligence; 4) it was not improper for the corporation to pay the costs to defend a prior lawsuit demanding access to certain books and records of the corporation as it is generally customary for the corporation to pay such expenses absent a finding of bad faith in refusing access to such books and records; 5) it is a well-settled proposition of Delaware law that the adoption of a charter provision immunizing directors for personal monetary liability for breach of the duty of care, as authorized by § 102(b)(7) of the General Corporation Law, does not constitute self dealing – even when the provision is adopted under the threat of imminent litigation; and 6) absent some reason to suspect improper and unaccounted-for payment of company funds, the Court usually will not mandate an accounting from fiduciaries.
Binks v. DSL.net, Inc., C.A. No. 2823-VCN (Del. Ch. Apr. 29, 2010)
Document: Binks v. DSL.net, Inc., C.A. No. 2823-VCN (Del. Ch. Apr. 29, 2010)
This case explores several fundamental concepts of Delaware corporate law, including the business judgment rule and the applicability of Revlon duties in the context of a determination by an independent and well-advised board of directors to borrow funds in lieu of filing for bankruptcy. Although it did not reach the issue of whether the board had Revlon duties, the Court cited the board’s independence, good faith conduct and use of competent advisors in concluding that any such obligations were fully satisfied. After addressing the Revlon issue and concluding that the board was entitled to the presumptions of the business judgment rule, the defendants’ motion to dismiss was granted based on the Court’s finding that the board’s decision was attributable to a rational business purpose.
Ross Holding and Management Company v. Advance Realty Group LLC, C.A. No. 4113-VCN (Del. Ch. Apr. 28, 2010)
This opinion highlights the fact that Delaware’s Limited Liability Company Act and related case law do not provide much guidance with respect to the issue of what constitutes “material participation in the management of a limited liability company” for purposes of giving implied consent to jurisdiction pursuant to Section 18-109 of the LLC Act. The Court noted that the current case law indicates that activities such as forming a limited liability company, executing documents on its behalf and occasionally conferring with management and/or occasionally being involved in an single issue before the board of directors would not generally constitute material participation. On the other hand, the opposite conclusion was reached where a defendant was one of the founders of an LLC, maintained a large equity stake, and had once claimed to be its president and CEO. In this case, the Court determined that additional discovery on the jurisdictional issue would be necessary prior to rendering a decision on the defendant’s motion to dismiss.
Global GT LP v. Golden Telecom, Inc., C.A. No. 3698-VCS (Del. Ch. Apr. 23, 2010)
Document: Global GT LP v. Golden Telecom, Inc., C.A. No. 3698-VCS (Del. Ch. Apr. 23, 2010)
In this appraisal action, the Court of Chancery was tasked with the fairly challenging job of valuing a Russian-based telecommunications company that was listed on NASDAQ. As with many appraisal actions, the Court engaged in its own valuation analysis after receiving what it deemed to be somewhat faulty valuations from both parties. While a detailed discussion of all of the factors involved in the Court’s use of the discounted cash flow (DCF) methodology and all of the bases for its ultimate conclusion and critiques of the analysis presented by the respective experts for each party is beyond the scope of this summary, the following findings are particularly noteworthy:
The defendant’s argument that weight should be given to the merger price itself on the grounds that the merger reflected a market-tested price was rejected for two reason:
The special committee that negotiated the merger did not engage in an active market check either before or after the signing of the merger agreement.
Although a passive market check was performed, it was based on the disingenuous assumption that entities which were the two largest stockholders of both parties to the proposed merger would both sell their shares of the target corporation’s stock to another bidder if a superior proposal was received – particularly in light of the fact that one of these stockholders (which owned 26% of the target corporation) made a public announcement that it would not do so.
The Court ultimately concluded that the plaintiffs were entitled to receive $125.49 per share (to be supplemented with an award of interest at the applicable statutory rate), which was much closer to the plaintiffs’ proposed valuation of $138.37 per share than the $88.14 per share valuation proposed by the defendants’ experts, or the $105 per share merger consideration.
The Court relied exclusively on the DCF analysis because the experts themselves gave little weight to the comparable companies and transactions analyses and also because it was not satisfied with the experts’ level of knowledge with respect to the Russian economy and telecommunications industry.
Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010)
Document: Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010)
This opinion affirms the validity of forum selection and choice of law clauses in the agreements entered into between the corporation and its stockholders which provided that disputes between the parties be litigated in the Courts of the United Kingdom and be governed by the laws of England. The agreements at issue involved a proposed three-step plan, whereby the plaintiffs would invest in a U.K. entity and then exchange their shares in the U.K. entity for shares of an Oklahoma corporation, which would then reincorporate in Delaware. Notably, the central issue of the underlying dispute related to the question of whether the shares of the Delaware corporation that the plaintiffs would be entitled to receive would be restricted or unrestricted, which is not an issue that would implicate the application of Delaware law pursuant to the internal affairs doctrine – otherwise, the Court may have reached a different conclusion with respect to the choice of law issue.
Crown EMAK Partners, LLC v. Kurz, Consol. Nos. 64, 2010 and 85, 2010 (Del. Supr. April 21, 2010)
Document: Crown EMAK Partners, LLC v. Kurz, Consol. Nos. 64, 2010 and 85, 2010 (Del. Supr. April 21, 2010)
In this opinion, the Delaware Supreme Court affirms in part and reverses in part the recent decision of the Court of Chancery addressing various issues arising out of a battle for control of the corporation’s board of directors. A summary of the Court of Chancery’s opinion is available in our February 2010 case updates. The Supreme Court upheld the Court of Chancery’s decision with respect to the proper procedure for reducing the size of a board of directors below the number of directors currently in office, but disagreed with the Court of Chancery’s holding with respect to the ability of a stockholder circumvent the terms of the applicable Restricted Stock Grant Agreement and invalidated the Purchase Agreement on the grounds that it was not permissible to effectively convey all voting and economic interest in the shares subject to the Restricted Stock Grant Agreement, as that would be the functional equivalent of transferring full ownership of the shares, which would have constituted a breach of the Restricted Stock Agreement.
Coughlan v. NXP B.V., No. 5110-CC (Del. Ch. Apr. 15, 2010)
Document: Coughlan v. NXP B.V., No. 5110-CC (Del. Ch. Apr. 15, 2010)
In a case involving a lawsuit filed by an appointed stockholders’ representative on behalf of former stockholders, the Court of Chancery held that the stockholders’ representative had standing to pursue litigation for breach of a provision of a merger agreement which required that the surviving corporation make a contingent payment to the former stockholders. In reaching this conclusion, the Court stated that the scope of the stockholders’ representative was governed by the merger agreement and principles contract interpretation lead to the unambiguous conclusion that the stockholders’ representative had the right to pursue claims against the surviving corporation for any express obligation that the surviving corporation assumed under the merger agreement.