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Delaware Chancery Law Blog

Corporate and Commercial Practice in the Delaware Court of Chancery

Chancery Discusses Valuation Methods

Posted in Appraisal Actions, Mergers and Acquisitions, Shareholder Disputes

John O’Toole writes:

In In re Appraisal of DFC Global Corp., the Court of Chancery conducted an in-depth analysis of three common valuation methodologies—discounted cash flow analysis, multiples-based comparable company analysis, and deal price.  After discussing how each methodology was and should be applied, Chancellor Bouchard ultimately determined that although “all three metrics suffer from various limitations” the fair value of the merger in question was best ascertained by weighting all three methods equally.

The Court’s opinion serves a number of useful purposes.  First, it provides a comprehensive overview of each the methodologies discussed.  Second, given the context in which the Court’s analysis was done, it offers guidance on how to best determine the fair value of a company following a deal consummated in a “tumultuous environment” where a company’s “future profitability and…viability” are at issue.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

Chancery: § 251(h) Tender Offers Get Irrebuttable Business Judgment Review

Posted in Case Summaries, Mergers and Acquisitions, Shareholder Disputes

John O’Toole writes:

In In re Volcano Corporation Stockholder Litigation, the Court of Chancery held that stockholders’ acceptance of tender offers as part of mergers accomplished under  § 251(h) of the Delaware General Corporation Law (“DGCL”) “has the same cleansing effect as a stockholder vote in favor of a transaction.” C.A. No. 10485-VCMR, 2016 WL 3583704, at *11 (Del. Ch. June 30, 2016).  Thus, as “the business judgment rule irrebuttably applies” to a transaction approved by the “fully informed vote [of] a majority of a company’s disinterested, uncoerced stockholders,” the same result obtains upon “the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation’s outstanding shares in a two-step merger under section 251(h)….”

The Court’s decision in Volcano is particularly noteworthy for two reasons.  First, Vice Chancellor Montgomery-Reeves determined that the fully informed, disinterested, uncoerced acceptance of a tender offer done pursuant to § 251(h) is functionally identical to a fully informed, disinterested, uncoerced stockholder vote.  Second, the Court’s determination that the  acceptance of tender offers and stockholder votes are, at least in this context, the same, extends the irrebuttable application of the business judgment rule as discussed in the line of Supreme Court cases from Corwin to Attenborough, to § 251(h) tender offers and mergers.

In equating § 251(h) tender offers to stockholder votes, the Vice Chancellor determined that § 251(h) sufficiently protects stockholder interests and that the policy analysis undertaken by the Supreme Court in Corwin as to stockholder votes applies equally to § 251(h) tender offers.  The Court held that because § 251(h) requires merger agreements, which in turn activate directors’ disclosure obligations and fiduciary duties, and prohibits structural coercion, stockholder interests are no less protected than if a vote were required.  Further, where the Supreme Court in Corwin held that, in the context of a vote, “stockholders [should] have…the free and informed chance to decide on the economic merits of a transaction for themselves” and “that judges are poorly positioned to evaluate the wisdom of business decisions,” the Court here found such policy “equally applicable to a tender offer in a Section 251(h) merger.”  Vice Chancellor Montgomery-Reeves held that “a stockholder is no less exercising her ‘free and informed chance to decide on the economic merits of a transaction’ simply by virtue of accepting a tender offer rather than casting a vote.”  Thus, the Court held that because of such statutory protections and policy considerations, there is no “basis for distinguishing between a stockholder vote and a [§ 251(h)] tender offer.”

It follows then, and the Court held, that mergers approved by the acceptance of § 251(h) tender offers should be afforded the same “cleansing effect” as mergers approved by stockholder votes.  Thus, for both § 251(h) mergers and mergers approved by stockholder votes, the business judgment standard of review irrebuttably applies.  In so holding, the Court clarified and expanded upon the recent line of Chancery and Supreme Court opinions discussing the effect of fully informed, disinterested, uncoerced stockholder votes.  Vice Chancellor Montgomery-Reeves explained that “[i]n this context, if the business judgment rule is ‘irrebuttable,’ then a plaintiff only can challenge a transaction on the basis of waste….If, by contrast, the business judgment rule is ‘rebuttable,’ then a board’s violation of either the duty of care or duty of loyalty…would render the business judgment rule inapplicable.”  By expanding the irrebuttable application of the business judgment rule, the Court necessarily expanded the types and number of mergers that will now be, at least practically speaking, insulated from stockholder challenges.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

Special Litigation Committee Must be Comprised of Board Members

Posted in Case Summaries

John O’Toole writes:

In Obeid v. Hogan, C.A. No. 11900-VCL, 2016 WL 3356851 (Del. Ch. June 10, 2016), the Court of Chancery was confronted with the issue of whether a non-manager/non-director could function “as the sole member of…parallel special litigation committees” created by two Delaware LLC’s.  Writing for the Court, Vice Chancellor Laster ultimately held that the LLC’s in question, Gemini Equity Partners (the “Corporate LLC”) and Gemini Real Estate Advisors (the “Manager-Managed LLC”), were not empowered to delegate power to special litigation committees not composed of directors or managers, respectively.

Both the Corporate LLC and the Manager-Managed LLC are engaged in the real estate management business, “jointly manag[ing] over $1 billion in real estate assets.”  William T. Obeid, Christopher S. La Mack, and Dante A. Massaro (the “Members”), each hold one-third membership interests in both the Corporate LLC and the Manager-Managed LLC.  The Members serve as the directors of the Corporate LLC and as the managers of the Manager-Managed LLC.

The controversy in question arose when Obeid, the Plaintiff here, was “removed [by La Mack and Massaro] as President and Operating Manager of the Manager-Managed LLC” and sued in North Carolina state court.    Obeid then sued La Mack and Massaro in New York state and federal courts, both directly and derivatively on behalf of both entities, alleging a number of subversive business dealings.

After multiple unsuccessful attempts to resolve the derivative claims brought by Obeid, La Mack and Massaro purported to designate a retired federal district court judge as the sole member of special litigations committees for both the Corporate LLC and the Manager-Managed LLC.  The judge was not a member of either LLC, nor was he a manager or director of either LLC. Obeid, quite predictably, objected.   La Mack and Massaro then voted to remove Obeid as a director of the Corporate LLC.

Obeid brought this action in January 2016, seeking a declaration that a non-manager/non-director cannot serve as the special litigation committee for either the Corporate LLC or the Manager-Managed LLC.  He also sought a declaration invalidating his removal as a director of the Corporate LLC.

The Court’s analysis began with a threshold determination that relevant corporate law applies to the Corporate LLC.  As “virtually any management structure may be implemented through [an LLC’s] governing instrument,” the Members elected to manage the Corporate LLC as if it were a corporation.  In drafting the Corporate LLC’s operating agreement, the Members created a manager-managed LLC, the manager of which is a board of directors.  The Members also included language allowing for board action by committees of directors.  As such, the Corporate LLC’s governance structure reflects the board centric governance model embodied by §§ 141 (a) and 141(c) of the Delaware General Corporation Law (“DGCL”).

After determining that the “corporate traits in the Corporate LLC Agreement call[] for applying corporate law precedents,” Vice Chancellor Laster looked to “corporate law analogies” in determining whether the Corporate LLC could “empower a special litigation committee comprising a single non‑director.”  The Court found Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) particularly relevant in discussing boards’ roles in managing derivative claims and the extent to which such management might be done by special litigation committees.  In Zapata, the Delaware Supreme Court held that directors’ power to manage derivative claims on behalf of corporations is a product of § 141(a) of the DGCL, which provides that “[t]he business and affairs of every corporation…shall be managed by…a board of directors.”  The Court then held that committees of directors created pursuant to § 141(c) of the DGCL necessarily must be comprised entirely of directors, as “[a] committee of directors is the only vessel that is capable of receiving and exercising the full authority of the board….”

Here, Vice Chancellor Laster held that “Zapata applies fully to the special litigation committee that the Corporate [LLC] purported to establish.”  Despite the Corporate LLC’s argument that § 18-407 of the Delaware LLC Act condones the delegation of power to manage derivative claims to a non-director, Vice Chancellor Laster faithfully applied the rule of Zapata to the actions of the Corporate LLC.  The Court supplemented its application of Zapata by looking to §§ 18-1001 and 18-1003 of the Delaware LLC Act, which together “indicate that only the duly authorized decision-making body of the entity, be it the members or the managers, can make the necessary decision[s]…[to] control…derivative litigation.”

Thus, the Court granted summary judgment to Obeid, holding that given the governance structure defined in the Corporate LLC’s operating agreement, a non-director cannot “function as a one-man special litigation committee on behalf of the Corporate LLC.”

The Court then turned its attention to the issue of whether a non-manager can serve as the special litigation committee of the Manager-Managed LLC.  Vice Chancellor Laster stated that “the governance structure of the Manager-Managed LLC…exhibits corporate features, albeit not so pervasively as the Corporate LLC.”  Thus “the reasoning that governed the Corporate LLC [could] apply equally to the Manager-Managed LLC.”  The Court, however, ultimately felt it unnecessary to undertake a Zapata analysis as to the Manager-Managed LLC, as certain “sections of the Manager-Managed LLC Agreement, read as a whole, evidence a distinction between matters relating to the ordinary course of business of the LLC and more significant matters that must be handled by the managers.”

Reading the Manager-Manager LLC’s operating agreement against § 18-407 of the Delaware LLC Act, which “validates…ordinary course of business delegations,” Vice Chancellor Laster determined that the operating agreement “intended to limit the ability of managers to delegate their core governance functions.”  Given such limitation, the Court held that the Manager-Managed LLC’s operating agreement “do[es] not permit an issue as serious as the exercise of authority over derivative claims to be delegated to a non-manager.”  In so holding, the Court declared that a non-manager cannot serve as a one-man special litigation committee on behalf of the Manager-Managed LLC.

The Court ended its opinion with an easily-reached finding that the Plaintiff was validly removed as a director of the Corporate LLC.  The Court determined that his removal was effected in a manner consistent with the requirements of the Delaware LLC Act, the DGCL, and the Corporate LLC’s operating agreement.

 


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

 

“Commercially Reasonable Efforts” Addressed by Court of Chancery

Posted in Case Summaries

In the recent opinion by Vice Chancellor Glasscock, The Williams Companies, Inc. v. Energy Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Court of Chancery considered a request by plaintiff to enjoin defendant, Energy Equity, L.P. (“ETE” or the “Partnership”) from attempting to terminate a Merger Agreement as a result of its inability to obtain a tax opinion that was a condition precedent to closing the deal with plaintiff, The Williams Companies, Inc. (“Williams”).

As a condition precedent to consummation of the Merger Agreement was the issuance of an opinion by ETE’s tax attorneys, Latham & Watkins LLP (“Latham”), that a specific transaction between Energy Transfer Corp LP (a corporation into which Williams would merge) and the Partnership “should” be treated by the tax authorities as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “721 Opinion”).

The Court noted that “commercially reasonably efforts” was not defined in the Merger Agreement, and is “not addressed with particular coherence in [Delaware] case law.”  The Court noted that In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008), the term “reasonable best efforts”—a similar term also used in the Merger Agreement—was equated with “good faith in the context of the contract at issue.”

In clarifying what is meant by “commercially reasonable efforts”, Vice Chancellor Glasscock provided:

I find that, by agreeing to make “commercially reasonable efforts” to achieve the 721 Opinion, the Partnership necessarily submitted itself to an objective standard—that is, it bound itself to do those things objectively reasonable to produce the desired 721 Opinion, in the context of the agreement reached by the parties.

In denying plaintiff’s request, the Court found that ETE did not materially breach its contractual obligations by failing to use “commercially reasonable efforts” to secure the required 721 Opinion.  Rather, the Court concluded that Latham, at the time of trial, could not in good faith opine that tax authorities should treat the specific exchange in question as tax free under Section 721(a).  Further, the Court found that no evidence was provided that ETE failed to use commercially reasonable efforts to obtain the 721 Opinion. Accordingly, the Court found that ETE was contractually entitled to terminate the deal.

Notably, the Court found that ETE had significant motivation to avoid the deal based on the drastic fall in energy prices along with the drop in value of the assets contemplated by the deal.  However, although this motivation was clear, the Court stated:  “Just as motive alone cannot establish criminal guilt, however, motive to avoid a deal does not demonstrate lack of a contractual right to do so.”

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Chancery OKs Modified Auction of TransPerfect Global, Inc.

Posted in Case Summaries

John O’Toole writes:

On June 20, 2016, the Court of Chancery released another opinion in the nationally controversial saga of TransPerfect Global, Inc. (the “Company”). In re: TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Jun. 20, 2016); Etling v. Shawe, C.A. No. 10449-CB (Del. Ch. Jun. 20, 2016); see also In re Shawe & Elting, LLC, C.A. No. 9661-CB, 2015 WL 4874733 (Del. Ch. Aug. 13, 2015)  Here, having previously ordered the sale of the Company by a designated custodian (the Custodian”), Chancellor Bouchard approved a modified auction of the Company (the “Modified Auction”), as recommended in the Custodian’s sale report (the “Sale Report”).  The Custodian recommended, and the Court agreed, that of the options provided in the Sale Report, the sale of the Company would be accomplished most effectively through:

[a] modified auction where each stockholder could solicit third-party investors as partners in an acquisition of [the Company], and where the Custodian could work with outside bidders who are interested in partnering with an existing stockholder in connection with any acquisition.

Despite objections from Philip Shawe, a 49% stockholder of the Company, the Court held that the Modified Auction was the “alternative most likely to maximize shareholder value while continuing the business as a going concern….”

In addition to providing the terms of the Modified Auction, the Sale Report included the Custodian’s requests for additional authority and discretion to oversee the Modified Auction.  The Custodian’s requests included “complete control over the auction process…; retention of financial advisors and other consultants to assist…with execution of the auction process; implementation of management and key employee incentive retention plans…; expansion of each selling stockholder’s existing non-compete and non-solicit arrangements…; [and] execution and delivery of agreements and other documents of each selling stockholder and [the Company].”  The Court accepted all of the Custodian’s requests, except for the expansion of the selling stockholders’ non-compete and non-solicit arrangements (the “Non-Compete Provision”).

The Court sustained Philip Shawe’s objection to the Non-Compete Provision, holding that “it would be inappropriate to impose non-competition or non-solicitation restrictions on a selling stockholder as a condition of the sale of the Company absent evidence of wrongdoing….[T]he purpose of the sale process is to maximize the value of the Company as it is and not to derive a hypothetically higher value based on contractual protections the Company many not currently possess.”

The Court ultimately requested that the Custodian submit an order that will effectively begin the Modified Auction process.  The order is to include the Custodian’s requests for additional authority and discretion (but not the Non-Compete Provision), a reservation of the right to seek non-competition or non-solicitation agreements upon a showing of wrongdoing by the selling stockholders, a provision that the sale of the Company is conditioned on approval by the Court, and any other provision necessary to effect the Modified Auction.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

Failure to File Section 220 Demand Prior to Derivative Litigation Does Not Render Representation Inadequate

Posted in Books and Records Demand

In the recent decision of Laborers’ District Council Construction Industry Pension Fund v. Bensoussan, C.A. No. 1123-CB (Del. Ch. June 14, 2016), the Court of Chancery was confronted with a motion to dismiss a derivative complaint on the basis of issue and claim preclusion.  Dismissal was sought under these grounds due to the dismissal of a prior filed Brophy action in the Southern District of New York, due to plaintiffs’ failure to adequately allege demand futility.

The issue boiled down to whether, as a result of failing to first file a Section 220 action, the plaintiffs in the derivative case were inadequate representatives for that litigation, such that the NY dismissal would not have a binding effect upon the Delaware action.

Chancellor Bouchard noted that in Pyott, the Delaware Supreme Court rejected a “‘fast-filer’ irrebuttable presumption of inadequacy” for “derivative plaintiffs who file their complaints without seeking books and records, very shortly after the announcement of a ‘corporate trauma.’”  In other words, “a plaintiff must point to facts of record under the circumstances of a particular case to support a finding of inadequacy.”  (Slip op. at 31) (citing Pyott, 74 A.3d at 618).

Accordingly, the Court found simply because the NY plaintiffs failed to first make a Section 220 books and demand did not preclude the Court from finding that issue and claim preclusion applied given the dismissal of the NY action.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Andrikopoulos Affirmed – Advancement Claims Not Afforded Priority in Receivership

Posted in Advancement, Case Summaries

In 2015, the Court of Chancery ruled upon the then novel issue under Delaware law as to what priority level advancement claims should be afforded in a receivership action.  Then Vice Chancellor Parsons held that claims for advancement are not entitled to administrative priority, and instead are considered to be pre-petition, non-priority unsecured claims.  For a link to a summary of the Court of Chancery decision, click here.  The Court of Chancery’s opinion can be found here: Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015).

On June 8, 2016, the Delaware Supreme Court, en banc, rendered an order affirming the Court of Chancery’s holding based upon the well-reasoned opinion issued by that Court.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Chancery Grants Advancement on Summary Judgment – Fees on Fees Granted

Posted in Advancement

In the recent decision of James R. Thompson, et al. v. ORIX USA Corporation, et al., C.A. No. 11746-CB (Del. Ch. June 3, 2016), the Court of Chancery ruled on cross summary judgment motions in connection with an advancement action.  Notably, and consistent with the established practice in this jurisdiction, the Court granted fees on fees for the portion of the case upon which plaintiff prevailed.

See below links to review summaries of other advancement decisions as they pertain to fees on fees:

Advancement: “Fees on Fees” Do Not Accrue Until Required Undertaking Submitted

Chancery Grants Advancement in Tulum, Along with Fees on Fees

Advancement – Court Rejects Contractual Requirement that Fees on Fees be Paid Even if Claim is Unsuccessful

Court of Chancery Rejects Defenses to Advancement – Fees on Fees Granted

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

New Board of Directors Allowed to Review Derivative Complaint

Posted in Derivative Actions

The recent decision of Park Employees and Retirement Board Employees’ Annuity and Benefit Fund of Chicago v. Smith, C.A. No. 11000-VCG (May 31, 2016) presents an interesting question: when a plaintiff files a derivative complaint knowing that the composition of the board is about to change, will the Court consider the independence of the old board or the new board in determining whether plaintiff adequately pled demand futility?

In Park Employees, plaintiff’s complaint alleges, among other things, claims for breach of fiduciary duties of loyalty and care by failing to oversee operations and compliance with various federal and state laws, alleged securities law disclosure violations, and insider trading.

Plaintiff did not submit a demand upon the board, which at the time consisted of 3 non-defendant directors, and seven defendant directors, but instead plead demand futility.  However, weeks before the complaint was filed, the company announced in its proxy that it would be holding uncontested elections just days after plaintiff’s complaint was filed.  The complaint was served three weeks after the new board was installed.

In a matter of first impression, Vice Chancellor Glasscock found that the May 2011 board was the proper board for purposes of evaluating demand futility under Rule 23.1. While the general rule, as noted by the Court, is that demand should be assessed as of the date a complaint is filed, the Vice Chancellor found that, “under the unique facts presented by this case, a departure from the general rule is both equitable and in keeping with the policy behind Rule 23.1.”  In dismissing the complaint, Vice Chancellor Glasscock allowed plaintiff leave to amend the complaint to plead demand futility against the new board of directors.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Section 220 Books and Records Demand Dismissed Due to Issue Preclusion

Posted in Books and Records Demand, Derivative Actions

Often times, a Section 220 books and records action precedes derivative litigation.  However, it is not uncommon for one faction of stockholder plaintiffs to dive right into derivative litigation in another litigation, while another faction first seeks inspection of books and records before the Delaware Court of Chancery.  When that happens, and the non-Delaware case is dismissed for failure to state a claim (without the benefit of corporate books and records), such dismissal may serve to dismiss the Delaware plaintiffs’ pending books and records claims under the grounds of collateral estoppel.

This precise situation was addressed in the recent decision of In Re Wal-Mart Stores, Inc. Delaware Derivative Litigation, C.A. No. 7455-CB (Del. Ch. May 13, 2016).  In this decision, the Court held that a failure to seek corporate records alone prior to filing a derivative action in another jurisdiction could not be deemed “grossly deficient” such that issue preclusion would not apply. Issue preclusion warranted dismissal of the stockholders books and records petition.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.