Delaware Transactional Law Updates

Marino v. Patriot Rail Company LLC, C.A. No. 11605 (Del. Ch. Feb. 29, 2016)

The Court of Chancery addressed a company’s attempt to avoid advancing expenses to a former director based on language found in the company’s Certificate of Incorporation. The company contended that the following provision required advancement be provided only to current officers and directors: “This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent permitted by law in existence either now or hereafter.” The Court disagreed with this argument and found that the language noted above mandated advancement to both present and former fiduciaries.

BOTTOM LINE: If you wish to avoid advancement obligations to former fiduciaries, the certificate of incorporation must include explicit language to the effect that (a) the advancement/indemnification provision can be amended retroactively or (b) directors and officers lose the right to advancement upon resignation, retirement, or removal, even if the claim at issue arose before their resignation, retirement, or removal.

Hazout v. Ting, No. 353, 2015 (February 26, 2016)

The Delaware Supreme Court determined that the statutory basis for finding jurisdiction over Delaware directors and officers was more expansive than it has been interpreted to be by Delaware courts for over thirty years. The governing statute at issue in this case, 10 Del. C. § 3114, provides that non-resident officers and directors of Delaware corporations are deemed to have consented to personal jurisdiction in: (1) all civil actions brought in Delaware, by or on behalf, or against a Delaware corporation, in which such director or officer “is a necessary or proper party” or (2) in any action against such director or officer for violation of a duty in such capacity. However, the Court of Chancery determined in 1980 that only subpart (2) was an applicable means of finding jurisdiction, effectively reading the language of subpart (1) out of the statute.

The Court noted that it had never had occasion to consider the precise issue before it, but found that the General Assembly clearly intended there to be two sets of categories in which directors and officers consented to jurisdiction based on the plain language of Section 3114.  The Court also addressed the argument that the “necessary and proper” category of cases was unconstitutionally broad by determining that the threat could be resolved by applying the “minimum contacts” analysis set forth in International Shoe.

Bottom Line: Non-resident directors and officers of Delaware corporations will be subject to personal jurisdiction in actions brought in Delaware where the corporation is properly before the Court and the fiduciaries are alleged to have used their corporate position to commit wrongs on behalf of the company.

FdG Logistics LLC v. A&R Logistics Holdings, Inc. C.A. No. 9706-CB (February 23, 2016)

The Court of Chancery denied the Sellers’ motion to dismiss the Buyer’s claim of fraud based on statements made outside the terms of a merger agreement. The Court also granted the Sellers’ motion to dismiss Buyer’s claim that the Sellers violated the Delaware Securities Act.

1. Fraud Claims Based on Statements Made Outside the Terms of a Contract Can Only Be Foreclosed by an Affirmative Disclaimer of Reliance by the Party Alleging Fraud

Although fraud claims based on a contract can be foreclosed by an affirmative disclaimer of reliance by the party alleging fraud, the merger agreement contained no such disclaimer.

The Court cited the following example of an effective disclaimer:

[THE] REPRESENTATIONS AND WARRANTIES [FOUND WITHIN THIS AGREEMENT] CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES . . . TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL . . . REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS [OF SELLER]) [NOT EXPRESSLY SET FORTH HEREIN] ARE SPECIFICALLY DISCLAIMED BY THE [SELLER] PARTIES.

If, in contrast to the above, a disclaimer fails to include (i) what the party claiming fraud is relying upon when it decides to enter into the agreement or (ii) that the party claiming fraud was not relying on any representations made outside of the agreement, it is insufficient to foreclose fraud claims based on statements or omissions made outside the terms of the contract. In this case, the following provision was held to be insufficient because it did not contain the language highlighted above:

EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 5, THE [SELLER] MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING TO THE CONTRARY, (A) THE [SELLER] SHALL NOT BE DEEMED TO MAKE TO BUYER ANY REPRESENTATION OR WARRANTY OTHER THAN AS EXPRESSLY MADE BY THE [SELLER] IN THIS AGREEMENT. . . .

Bottom Line: In order to foreclose claims of fraud based on statements or omissions made outside the terms of a contract, the contract must contain an affirmative disclaimer that either: (1) specifically includes what the party claiming fraud is relying upon when it decides to enter into the agreement or (2) that the party claiming fraud was not relying on any representations made outside of the agreement.

2. 6 Del. C. § 2708 Cannot Be Used to Trump Inherent Jurisdictional Limitations Found in Delaware Statutes

The Court in FdG Logistics LLC also addressed whether the Delaware Securities Act applied automatically to the merger agreement because the merger agreement included an election under 6 Del. C. § 2708. Section 2708 permits parties to agree in writing that a contract will be governed by Delaware law without regard to principles of conflict of law, as long as the contract at issue involves $100,000 or more. In contrast, the Delaware Securities Act applies only where there is a sufficient nexus between Delaware and the transaction at issue.

The plaintiffs argued that the nexus requirement of the Delaware Securities Act did not apply due to the Section 2708 Delaware choice-of-law provision in the merger agreement. The Court disagreed and found that Section 2708 cannot be used to automatically satisfy jurisdictional requirements found in Delaware statutes.

Bonanno v. VTB Holdings, Inc. C.A. No. 10681-VCN (February 8, 2016)

The Court of Chancery performed an extensive analysis of the application and scope of a forum selection provision found in a Stock Purchase Agreement (“SPA”) governed by New York law.

The forum selection provision provided:

Each of the parties hereto hereby irrevocably submit[s] to the jurisdiction of the courts of the State of New York and the . . . United States District Court for the Southern District of New York solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby and thereby. Each of the parties hereto irrevocably agrees that all claims in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby and thereby, or with respect to any such action or proceeding, shall be heard and determined in such a New York State or federal court, and that such jurisdiction of such courts with respect thereto shall be exclusive, except solely to the extent that all such courts shall lawfully decline to exercise such jurisdiction.

The Court determined that this forum selection provision was “clearly mandatory” under both Delaware and New York law. In addition, the Court found that the provision applied not only to the SPA but also to other agreements referred to in the SPA.

Significantly, the Court rejected the plaintiff’s argument that enforcing the forum selection clause in documents such as a right of first refusal would undermine Delaware’s interest in regulating the relationships between a corporation and its directors, officers, and shareholders.  For support, the Court relied upon DGCL Section 115, which was adopted in August 2015.  The Court determined that Section 115 precludes the use of certain types of exclusive forum selection provisions in a corporation’s certificate of incorporation or bylaws only; it does not impose the same restriction on forum selection provisions in other documents.

Bottom Line:  In transactions involving several related documents, it is important to ensure consistency among the forum selection provisions in each document.  This concern is heightened when one forum selection provision purports to apply not only to the document in which it appears, but also documents referred to therein.  Additionally, in order to guarantee that internal corporate claims of a Delaware company are not decided by courts in foreign jurisdictions, a forum selection clause should expressly choose Delaware as the exclusive forum for such actions.

Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN (January 29, 2016)

The Court of Chancery examined the broad scope of recently amended Sections 204 and 205 of the Delaware General Corporation Law.  In Knoll Capital, the plaintiff company (“KCM”) brought suit seeking to enforce an oral agreement pursuant to which the defendant company (“Advaxis”) offered to sell 1.66 million shares of its unregistered common stock to KCM.  In dismissing Advaxis’s motion to dismiss the claim, the Court determined that the lack of a written instrument evidencing the share purchase and Advaxis’s failure to obtain board approval to issue stock was a “defective corporate act” under Section 204.  Thus, it could be ratified by the Court under Section 205.

Bottom Line: Although DGCL Sections 204 and 205 provide the Delaware courts with broad authority to ratify a corporate defective act, including invalid oral agreements to issue corporate stock, no purchaser should rely upon an oral stock-purchase agreement.

Avaya, Inc. v. Charter Communications Holding Company, LLC, C.A. No. 10568-VCN (January 29, 2016)

The Court of Chancery interpreted a fee-shifting provision found in a Master Purchase/Service Agreement (the “MPSA”).  The provision provided:

“In the event that either party commences any action or proceeding to enforce it’s [sic] rights under this Agreement, the prevailing party shall be entitled to recover its costs and reasonable attorneys’ fees.”

The Court determined that this language required payment of the prevailing party’s attorneys’ fees in each separate action brought by any prevailing party.  This included early disputes regarding proper venue to actions resulting in final resolution of the merits of the case. The Court noted that in complicated litigation such as the case before it, it made sense to wait until a decision on the merits of the case was issued before shifting attorney’s fees.  However, such a decision could not be reconciled with the plain language of the MPSA.

Bottom Line: Fee-shifting provisions that mandate legal fees be paid to the “Prevailing Party” in “any Action” taken to enforce contractual rights apply to each and every action related to the enforcement of such rights.  Parties who want to use a fee-shifting provision in business agreements, but want it to apply only upon the final resolution of the merits of the case, must include a “more encompassing reference to substantive dispute conclusion (or the final merit-based litigation outcome).”

In In re Vaalco Energy Shareholder Litigation., a bench ruling, the Court of Chancery invalidated provisions found in the certificate of incorporation and bylaws of a Delaware corporation that permitted directors to be removed only “for cause”.  Generally, the Delaware General Corporation Law (“DGCL”) allows directors to be removed “with or without cause”.  However, if the board of directors is classified or shareholders are given cumulative voting rights in director elections, the directors’ removal may be conditioned upon “cause”. In this case, neither exception was present.  Relying on the plain language of the DGCL, the Court invalidated the “for cause” only provisions, despite the defendant corporation’s argument that many other companies utilized similar provisions.

Bottom Line: Unless a Delaware corporation has a classified board or provides shareholders with cumulative voting rights, it may not contractually require that directors be removed only “for cause”.  Companies should review their organizational documents and modify them accordingly. 

PECO Logistics, LLC v. Walnut Investment Partners, L.P., C.A. No. 9978-CB (December 30, 2015)

The Court of Chancery was asked to interpret a “Put Right” provision (the “Put Right”) in an LLC Operating Agreement, which provided:

“During the period that is between 30 days and 60 days following March 14, 2014, each Rollover Investor may elect to deliver a written notice . . . to the Company and the Investor of its desire to require the Company (and the Investor as contemplated by Section 9.2(d)) to purchase all (but not less than all) of the Preferred Units held by such Rollover Investor . . . .”

Upon exercise of the Put Right, the Company was required to engage “a nationally recognized valuation firm . . . to determine the Fair Market Value of the Put Units as determined by the Valuation Firm in accordance with [the LLC Operating] Agreement” (the ‘Put Price’) . . . .” The LLC Operating Agreement also stated that the Company and the Rollover Investors “shall be bound by the determination of the Valuation Firm . . . with respect to the Put Price as established by the Valuation Firm . . . .”

The Rollover Investors exercised the Put Option within the applicable window, but after the Put Price was determined, they challenged the Valuation Firm’s results.  The court rejected the Rollover Investors’ arguments, finding that the LLC Operating Agreement foreclosed any possibility of an appeal, and that they were contractually bound to accept the valuation.

Bottom Line: LLC members seeking a put right should require that the put right provision include an option to seek judicial review if they disagree with the agreed upon valuation firm’s decision.  Stating that both parties “shall be bound” by the valuation firm’s determination, without any mention of judicial review, will moot any challenge of the reasonableness of the valuations firm’s judgment calls.

Tulum Management USA LLC v. Casten, C.A. No. 11321-VCN (December 23, 2015)

The Court of Chancery examined the following indemnification language in an LLC Operating Agreement: The Company shall “indemnify each Manager for all costs, losses, liabilities and damages paid or incurred by such Person in connection with the business of [the Company] to the fullest extent provided or permitted by the [Delaware Limited Liability Company] Act and the other laws of the State of Delaware.”  The court interpreted this language broadly, and found that if the company wished to narrow the scope of the term “business” to include only “those matters that directly generate income,” it should have defined the term as such in the LLC Operating Agreement.  The Court thus granted indemnification and advancement to the claimant manager.

Bottom Line: Undefined terms in advancement and indemnification provisions will be left to the discretion of the courts.  A party that wishes to narrow the scope of its “business” for the purposes of indemnification and advancement must do so expressly within the provision, or the “Definitions” section of the LLC Operating Agreement.

Rexam v. Berry Plastics Corporation, C. A. No. 10596-VCN (December 3, 2015)

The Court of Chancery examined a closing condition that there be “no pending or threatened legal or administrative action” related to an Equity Purchase Agreement pursuant to which the buyer agreed to purchase the seller.  Immediately before closing, the Pension Benefit Guaranty Corporation (the “PBGC”) wrote a letter to the seller noting its concern regarding the seller’s transfer to the buyer of certain pension plan obligations.  After the transaction closed, the PBGC sent another letter advising the seller that it was “extremely disappointed” that is had closed the transaction and that, while it did “not plan to initiate legal action against [the seller], [it had] not yet decided whether [it would] pursue [the] matter through the IRS and/or professional actuarial organizations.”  The Court found that this language was not a “threatened legal or administrative action,” but rather “merely an identification or a reservation of options . . . .”

Bottom Line: “Potential Litigation” is not the equivalent of Threatened Litigation.” When potential litigation exists pre-closing, buyers should condition closing on receipt of a no-action letter from each potential claimant.

Prairie Capital III, L.P. v. Double E Holding Corp., C.A. No. 10127-VCL (November 24, 2015)

The Court of Chancery dismissed claims of fraud in connection with the sale of a portfolio company from one private equity firm to another.  The buyer claimed that the seller made extra-contractual false representations in both oral and written communications. The court determined that, notwithstanding the validity of the fraud claims, such claims were foreclosed by the exclusive representations clause found in the Stock Purchase Agreement.  The provision read, in pertinent part:

“[THE] REPRESENTATIONS AND WARRANTIES [FOUND WITHIN THIS AGREEMENT] CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES . . . TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL . . .  REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS [OF SELLER]) [NOT EXPRESSLY SET FORTH HEREIN] ARE SPECIFICALLY DISCLAIMED BY THE [SELLER] PARTIES.”

Bottom Line: Contractual freedom trumps misrepresentations.  Parties can foreclose extra-contractual fraud claims by negotiating for an exclusive representations clause.  Delaware courts will uphold an unambiguous exclusive representations clause accompanied by an integration clause, even if fraudulent misrepresentations are sufficiently alleged.

Tulum Management USA LLC v. Casten, C.A. No. 11321-VCN (November 20, 2015)

The Delaware Court of Chancery weighed the policy of resolving all claims related to a dispute in the court in which an action is first filed against Delaware’s policy of summarily resolving advancement claims. The Court denied a request for a stay because it found no “particularly compelling explanation as to why” the advancement claim, which derived from advancement rights set forth in a limited liability company agreement, should be delayed.

Bottom Line: Delaware’s strong policy favoring the prompt resolution of advancement proceedings applies to rights provided in alternative entity organizational documents as well as rights available under corporate statute.

Swomley v. Schlecht, et. al., C.A. No. 9355-VCL (November 19, 2015)

The Delaware Supreme Court confirmed that a minority-shareholder’s challenge to a “going private” transaction will be reviewed under the business judgment standard rather than the more demanding entire fairness standard of review if the following six factors are satisfied:the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;

1. the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;
2. the Special Committee is independent;
3. the Special Committee is empowered to freely select its own advisors and to say no definitively;
4. the Special Committee meets its duty of care in negotiating a fair price;
5. the vote of the minority is informed; and
6. there is no coercion of the minority.

Bottom Line: Utilization of these protections will likely result in dismissal on the pleadings of a minority shareholder’s claims against a controlling shareholder in both the public and private company context.  To avoid the discovery costs associated with defending against a minority shareholder’s claims, the transaction should always be conditioned upon the vote of a special committee and a majority of the minority stockholders.

In Re Numoda Corporation Consol., C.A. No. 9163-VCN (October 22, 2015)

The Delaware Supreme Court recently upheld an order of the Court of Chancery that clarified the capital structure of the corporation at issue.  The decision is the result of “one of the first uses by litigants of new” Sections 204 and 205 adopted in 2014 and amended in 2015.  These sections provide viable options to ratify defective acts. Section 204 authorizes ratification by the board of directors and, if applicable, the stockholders of a corporation. Section 205 authorizes the court to consider the validity of corporate acts of questionable validity.  However, as illustrated in In Re Numoda Corporation, proceedings in the Court of Chancery with respect to ratification can be time consuming and expensive.

Bottom Line: Although Sections 204 and 205 are tremendous tools, it would be wise to avoid having to rely on ratification in lieu of adhering to corporate formalities through the life of the company.  If a court is asked to act under Section 205, there will be more at issue than whether the “defective act” was meant to be taken.

Corwin et. al. v. KKR Financial Holdings LLC Consol., C.A. No. 9210-CB (October 2, 2015)

The Delaware Supreme Court recently clarified several points of Delaware law when it affirmed the dismissal of a lawsuit challenging the entire fairness of an acquisition. The court found that:

• A stockholder cannot be deemed to have “effective control” of the company if (a) the stockholder owns less than 1% of a corporation’s shares of stock and (b) has limited contractual control over the management of the corporation.
• When a transaction is not subject to the entire fairness standard and is approved by a fully informed, uncoerced vote of the disinterested shareholders, the business judgment rule applies.
• In a post-closing money damages claim, it is the Court’s analysis of the informed and uncoerced shareholder vote that controls, regardless of whether or not Revlon applied to the transaction.
• Delaware courts will not presume the validity of a shareholder vote, but will perform a thorough analysis to determine the vote was informed and uncoerced.

Bottom Line: When a closed transaction is challenged, the business judgment standard of review will apply unless the shareholder vote was tainted by coercion or the shareholders were uninformed.  

Charney v. American Apparel, Inc., C.A. No. 11098-CB (September 11, 2015)

Lieberman v. Electrolytic Ozone Inc., C.A. No. 10152-VCN (August 31, 2015)

The Court of Chancery denied advancement to former officers and directors of two Delaware corporations.  These cases make clear that in order to provide advancement both during and after a person’s corporate role has ended, the Certificate of Incorporation or the Bylaws of the corporation must explicitly provide such right.  Further, a corporation may not eliminate the requirement that a person must be entitled to indemnification and/or advancement only if the claim brought is “by reason of” the fact that the person was a corporate official.

In Re Zhongpin Inc. Consolidated Stockholders Litigation, C.A. No. 7393-VCN (Novemeber 26, 2014)

The Court denied a motion to dismiss brought against the individual members of the board of a Chinese company. Plaintiffs, the public stockholders, alleged that the process by which the CEO purchased all the outstanding shares was unfair, and that they did not received an adequate price for their stock. The case survived the motion despite the fact that the going-private merger was negotiated by an independent special committee of the board and was approved by a slim majority of unaffiliated stockholders. Delaware evaluates motions to dismiss under a “reasonably conceivable” pleading standard that draws all inference in favor of the plaintiff. Under this standard, the Court found that the plaintiffs had sufficiently alleged that the CEO was a de facto controlling shareholder despite his holding a mere 17.3 percent of the company’s stock. Among other facts in the complaint, the Court noted 10-K filings that disclosed the CEO’s influence over major company decisions, as well his insistence on an allegedly low price early in the process, from which he refused to deviate. The stockholders claimed that this price was below the even the low end of ranges arrived at using various valuation methodologies. In addition, the CEO refused to cooperate with any third-party bidders. The Court found it reasonably conceivable that this had chilled the special committee’s ability to secure a higher per-share price. All these factors led the Court to conclude that the plaintiffs had sufficiently pleaded that the CEO was a controlling stockholder, which shifted the standard of review of the transaction to entire fairness, which precluded dismissing the case at such an early stage.

Cigna Health and Life Insurance Company v. Audax Health Solutions, Inc., C.A. No. 9405-VCP (November 26, 2014)

The plaintiff’s motion for judgment on the pleadings was granted in part and denied in part. The plaintiff challenged a number of conditions imposed on their receipt of consideration for a merger: 1) to release all claims against the merged corporation; 2) an indemnification obligation; and 3) the use of a certain stockholders’ representative. The Court found the release obligation invalid because this condition was found only in the letter of transmittal to be executed upon transfer of the merger consideration. The release was not included in the merger agreement. The Court found therefore that the release was a condition imposed without consideration, because the merger price had already been set by the merger agreement. If it was found valid, “buyers could impose almost any post-closing condition or obligation on the target company‘s stockholders after the fact by including it as a requirement in the letter of transmittal.” The indemnification obligation was also found invalid, even though it was detailed in the merger agreement, because it violated Delaware General Corporation Law §251(b). No amount was set aside to satisfy the obligation, as it would be with an escrow structure, and no time limit was placed on potential claims. This left it impossible for stockholders to know what they would ultimately receive as consideration for the merger, and the Court stated that §251 “requires a merger agreement to set forth determinable merger consideration.” The Court imposed the requirement of a monetary cap and a time limit of 36 months or less, but it also stressed the limits of the holding, stating that it “does not concern escrow agreements, nor does it rule on the general validity of post-closing price adjustments requiring direct repayment from the stockholders.” As for the third challenged obligation, the Court held that the plaintiff failed to address adequately the question regarding the stockholder representative.

Reid v. Siniscalchi, C.A. No. 2874-VCN (November 20, 2014)

The Court denied a motion to dismiss a suit against an Italian company and two Italian citizens. The dispute involved a Delaware limited liability company formed to take commercial advantage of Russian satellite orbital slots. The plaintiff alleged that the Italian company and the two individual defendants conspired to misappropriate the business opportunities of the LLC. The Court held the plaintiff pleaded sufficient facts to satisfy the five-part test required to establish personal jurisdiction based on conspiracy theory. The opinion noted, however, that at the motion to dismiss stage, all inferences must be drawn in favor of the plaintiff. The five-part test was taken from Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 222 (Del. 1982). The Court found the plaintiff sufficiently alleged, first, that a conspiracy to defraud existed because he presented circumstantial evidence that two or more people had a meeting of the minds in pursuit of a goal, and that their actions included an unlawful act that damaged the plaintiff. In this case the unlawful act was the formation of the Delaware holding company that acquired the LLC and thereby took control of it. The plaintiff also sufficiently alleged that: Second, all defendants were members of that conspiracy because it could be inferred that the conspiracy served their interests; third, that the formation of the holding company was a substantial act in furtherance of the conspiracy that occurred in the forum state; fourth, the Italian entity knew or had reason to know about the formation of the holding company; and fifth, the act in the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy because the formation of the holding company was an intentional act.

Biolase, Inc. v. Oracle Partners, L.P., No. 270, 2014 (June 12, 2014)

The Delaware Supreme Court affirmed a Court of Chancery decision that held a corporate director’s oral resignation to be valid under 8 Del. C. § 141(b).  8 Del. C. § 141(b) provides that “[a]ny director may resign at any time upon notice given in writing or by electronic transmission to the corporation.”  The appellant in this action argued for a strict interpretation of this language and urged the Supreme Court to adopt a special standard of review when evaluating whether a director resigned by oral statement or by other conduct.

The Supreme Court, however, found that the plaintiff’s claim lacked merit.  The Court pointed out that the Court of Chancery has long-held that the word “may” in 8 Del. C. § 141(b) is permissive and authorizes a director to resign by oral statement.  In reaffirming this sound interpretation, the Supreme Court recognized that since the Court of Chancery’s reading of the statute was announced in 1984, the General Assembly had amended the statute numerous times without ever signaling any disagreement with the interpretation.  The Court also found that the Court of Chancery was well equipped and clearly qualified to resolve complex corporate cases involving the composition of a board of directors.  Accordingly, the Supreme Court held that a special standard of review was unnecessary and that the director’s oral resignation was valid.