By order dated April 16, 2018, the Delaware Supreme Court has amended Delaware Supreme Court Rule 14(g)(i).  The amendments allow parties to cite to cases in Fastcase, a legal research system that members of the Delaware State Bar Association can access for free.  This is in addition to Westlaw and Lexis, which were already contemplated under Rule 14(g)(i).

A copy of the Delaware Supreme Court’s order adopting the rule change can be found here, and the announcement by the Court can be found here.

Carl D. Neff is a lawyer 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 223 of the Delaware General Corporation Law (the “DGCL”) provides an invaluable remedy to stockholders when there are no directors in office, or when, due to vacancies or newly created directorships, the directors in office constitute less than a majority of the board.

Under Section 223(a) of the DGCL, when there are no directors in office, any officer or stockholder (of fiduciary of a stockholder) “may apply to the Court of Chancery for a decree summarily ordering an election as provided in § 211 or § 215 of this title.”

In addition, under Section 223(c) of the DGCL, if, due to vacancies or newly created directorships, the directors in office constitute less than a majority of the whole board, any stockholder holding at least 10% of the voting stock may apply to the Court of Chancery to “summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office as aforesaid, which election shall be governed by § 211 or § 215 of this title as far as applicable.”

Subsequent posts will address Section 223 election actions in greater detail.

Carl D. Neff is a lawyer 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.

It is not uncommon for the Court of Chancery to find that a fiduciary duty was breached, but to award only nominal damages or no damages as a result of such breach.  This is so because damages are not an element of a claim for breach of fiduciary duty under Delaware law.  Rather, the elements are that 1) a fiduciary duty exists, and 2) such duty was breached.  This was demonstrated in the recent decision of The Ravenswood Investment Company LP v. The Estate of Bassett S. Winmill, C.A. No. 3730-VCS (Del. Ch. Mar. 21, 2018).

In this case, plaintiff brought derivative claims on behalf of Winmill & Co., Incorporated (“Company”) against its board, alleging they breached their fiduciary duties by 1) granting overly generous stock options to themselves, and 2) causing the Company both to forgo audits of the Company’s financials and to stop disseminating information to the Company’s stockholders in retaliation for Plaintiff’s assertion of its inspection rights pursuant to 8 Del. C. § 220.

Because the defendant directors stood on both sides of the disputed transaction, the Court found that it was subject to the entire fairness test.  Under the entire fairness test, a defendant must establish both fair dealing and fair price in connection with the challenged transaction. The court found that the board failed the entire fairness test, and the individual defendants breached their fiduciary duty of loyalty.

Despite finding breaches, however, the Court only awarded nominal damages.  Although a breach of fiduciary duty occurred, the burden remains upon plaintiff to prove actual damages or that an equitable remedy would be appropriate.  Vice Chancellor Laster noted that although the Court has broad discretion in fashioning such remedies, it “cannot create what does not exist in the evidentiary record, and cannot reach beyond that record when it finds the evidence lacking.”  (Slip op. at 3.)  Accordingly, the Court awarded nominal damages to plaintiff, although leaving the door open for attorneys’ fees to be recovered, which would be considered separately.

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.

The recent decision of In re Appraisal of AOL Inc., C.A. No. 11204-VCG (Del. Ch. Feb. 23, 2018) constitutes yet another Delaware Court of Chancery appraisal decision in which fair value of the corporation fell below the deal price of the merger.  Petitioners beware.

Here, the Court relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc.  This resulted in fair value below the deal price paid in its acquisition by Verizon Communications Inc.

Vice Chancellor Glasscock did indicate that deal price is the best evidence of fair value when appraising “Dell‑compliant” transactions, where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself.”  (Slip op., at 20).

However, the Court held this was not such a transaction.  The Court found that certain of the deal protections, combined with informational disparities between potential bidders, and actions of the parties were preclusive to other bidders.  Thus, Vice Chancellor Glasscock assigned no weight to the deal price in the Court’s fair value determination.  Applying its own DCF analysis, the Court ultimately determined fair value to be approximately 3% lower than the deal price.

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.

In the recent decision of In re UnitedHealth Group, Inc. Section 220 Litig., C.A. No. 2017-0681-TMR (Del. Ch. Feb. 28, 2018), the Court of Chancery granted plaintiff’s Section 220 demand.  The Court found that allegations raised in a complaint filed by the U.S. Department of Justice (“DOJ”) against the Defendant corporation, UnitedHealth Group, Inc. (“UnitedHealth”) established a credible basis to infer wrongdoing or mismanagement based on the allegations in the qui tam action, when such allegations were sufficiently supported by documentation and testimony.

In 2017, a qui tam action was filed against UnitedHealth under the False Claims Act for alleged pervasive practice of defrauding Medicare. In the complaint, UnitedHealth was accused of “up-coding” patient risk data and failing to delete incorrect diagnoses, resulting in overpayments from Medicare.  The DOJ intervened in the action, alleging that since at least 2005, despite repeat warnings, UnitedHealth has violated both Medicare regulations and the False Claims Act.

Several stockholders of UnitedHealth filed an action under Section 220 of the DGCL in the Court of Chancery to investigate: (i) mismanagement by the D&Os of UnitedHealth, (ii) possible breaches of fiduciary duties by the D&Os, and (iii) the independence of the board of directors, including whether pre-suit demand would be futile.

The Court of Chancery granted the plaintiffs’ books and records request, based upon the extensive allegations raised by the DOJ in the qui tam action against UnitedHealth.  The Court distinguished this from Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011), which held that a plaintiff cannot rely exclusively on a complaint that has not been found to state a viable claim as evidence
of a credible basis of wrongdoing.  Here, the Court found that the complaint filed by the DOJ was heavily supported by documents and testimony, including depositions from twenty of Defendant’s employees and Defendant’s production of over 600,000 documents after the DOJ conducted a five-year investigation.

While Vice Chancellor Montgomery-Reeves generally ruled in favor of the plaintiff stockholders, their request for email communications from certain high-level executives of the company was denied.  The Court found that “email communications are more the exception than the rule” in a Section 220 action.

Key Takeaway: This decisions demonstrates that the Court may take into account allegations raised in a separate complaint to determine whether there is a credible basis to infer wrongdoing or mismanagement, when such complaint is supported by sufficient and extensive supporting documents and testimony.

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.

The implied covenant of good faith and fair dealing was recently addressed by Vice Chancellor Glasscock in the decision of Miller v. HCP & Co., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018).  The implied covenant applies only when one party “proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected.  (Slip op., at 22.)

In this decision, a minority member of an LLC alleged that the controller breached the implied covenant in an LLC operating agreement by selling the company for $43 million to a third party in a private sale, as opposed to conducting an open-market sale or auction to ensure maximum value for members under the operating agreement’s waterfall.  The waterfall provided the controller with the majority of the first $30 million before sale proceeds would be provided to holders of other classes of membership units. The operating agreement also gave the majority-controlled board sole discretion as to the manner of any sale to an unaffiliated third party, waived all fiduciary duties owed by the managers, and required that each member consent to such board-approved sale.

Plaintiffs argued that defendants breached the implied covenant and “pushed through a below-market sale” that “allowed them to achieve a quick exit and a 200% return on their capital investment” but left the plaintiffs and other investors “with little to nothing.”

Vice Chancellor Glasscock disagreed.  The Court held that the operating agreement was not silent as to how the company could be marketed and sold. Taking note of the parties’ waiver of fiduciary duties, the Court found that the operating agreement vested the board with sole discretion as to the type and manner of the sale process subject only to the condition that the LLC be sold to an independent third party. “[I]f the scope of the discretion is specified, there is no gap in the contract as to the scope of the discretion, and there is no reason for the court to look to the implied covenant to determine how the discretion should be exercised.”

Here, the operating agreement only required that sales be made to unaffiliated third parties. Had the plaintiffs “wanted protection from self-interested conduct by the Defendants, they could easily have drafted language requiring the Board to implement a sales process designed to achieve the highest value reasonably available for all of [the LLC’s] members.”

Key Takeaway:

This decision demonstrates the difficulty in asserting a claim for breach of the implied covenant of good faith and fair dealing, a doctrine that is “rarely invoked successfully.”  (Slip op. at 22.)  Parties to a contract in which fiduciary duties are waived should ensure that all reasonable safeguards are contained in the contract itself, rather than assuming that they will be protected through the implied covenant.

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.

The Delaware Court of Chancery recently approved a plan to sell TransPerfect Global, Inc. (“TransPerfect” or the “Company”) to co-owner Philip Shawe. In the Court’s most recent opinion issued earlier on February 15, 2018, In re TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Feb. 15, 2018), Chancellor Bouchard  approved a sale agreement that permitted Shawe to acquire shares of the company owned by Elting.  Specifically, the Court accepted the recommendation of the court-appointed Custodian to approve a transaction in which one of the co-founders of TransPerfect Global, Inc. (Philip Shawe) will acquire the shares held by the other co-founder (Elizabeth Elting) to resolve the pending litigation.

From March through November 2017, the Custodian conducted an extensive sales process to follow the Court’s mandate “to sell the Company with a view toward maintaining the business as a going concern and maximizing value for the stockholders.”  After three formal rounds of bidding and an informal fourth round to elicit “final” bids, two leading bidders emerged: Shawe and H.I.G. Middle Market, LLC (“H.I.G.”), the owner of TransPerfect’s leading competitor. The Custodian believed that Shawe would offer greater consideration
than H.I.G. with fewer closing conditions, while retaining virtually all of the Company’s employees, and thus negotiated with Shawe to finalize a transaction.

Co-owner Elizabeth Elting objected to the Custodian’s recommendation that the court approve the Sale Agreement, asking the Court to reject the Sale Agreement and to direct the Custodian to negotiate a transaction with H.I.G.  The Court rejected each of Elting’s objections, while providing guidance on the discretion of a Court-appointed custodian in selling a deadlocked corporation.

By way of background, in November 2017, Chancellor Bouchard approved a modified auction of the Company, over the objections of Shawe.  For a link to a prior post discussing the November 2017 opinion, click here.   Prior to that, in September 2017, the Court denied an application for interlocutory appeal filed by Philip Shawe’s mother, who is a 1% stockholder of the Company.  The appeal request was filed in response to the Court’s denial of Ms. Shawe’s request to hold an election under Section 211 of the DGCL.  Click here for a post discussing the September 2017 opinion.

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.

In the recent decision of Reid v. Siniscalchi, C.A. No. 2874-VCS (Del. Ch. Jan. 30, 2018), the Court of Chancery analyzed the “conspiracy theory” of personal jurisdiction.

According to the Court:

Under the conspiracy theory of personal jurisdiction, the parties to a conspiracy are treated as each other’s agents with respect to acts in furtherance of the conspiracy. Thus, a substantial Delaware act by a conspirator in furtherance of the conspiracy may be attributed to nonresident co-conspirators if the co-conspirators knew or had reason to know of that act and the act “in [Delaware] was a direct and foreseeable result of the conduct in furtherance of the conspiracy.” In turn, if a conspirator’s conduct in furtherance of the conspiracy subjects him to the jurisdiction of Delaware’s courts, then the attribution of that conduct to nonresident co-conspirators will subject all of the conspirators to the jurisdiction of the Delaware courts.

Slip op., at 37 (internal citations omitted).

The case had spanned for over a decade to allow plaintiff to take jurisdictional discovery to support such theory of jurisdiction.  On a motion for summary judgment, the Court determined that the plaintiff “misled the Court by crying ‘victim’ of a Delaware based conspiracy, when, in fact, he was an architect of the very wrongdoing that he claimed provided a basis for the Court to exercise long-arm jurisdiction over [defendant].”  Slip op., at 42.  As such, Vice Chancellor Slights declined to exercise jurisdiction over such non-resident defendant, and granted summary judgment in its favor based on lack of personal jurisdiction.

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.

In a long awaited and highly anticipated ruling, the Delaware Supreme Court overturned the Court of Chancery’s decision in the Dell appraisal action, Dell v. Magnetar Global Event Driven Master Fund, No. 565, 2016 (Del. Supr. Dec. 14, 2017).

By way of background, in the 2016 Court of Chancery opinion, In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016), Vice Chancellor Laster found fair value of the Dell merger to be 22% greater than the deal price, holding that deal price is not a fair value indicator in the context of a management-led buyout.  For a review of the Court of Chancery’s decision, click here.

On appeal, the High Court reversed and remanded the Chancery’s decision in an unanimous en banc decision.  Of significance, the Supreme Court found that where a company is sold in a clean M&A auction process, the Court of Chancery must give the merger price significant weight in its ruling, leaving it to the trial court to decide just how much weight that should be in this case.  Accordingly, the Supreme Court ruled that the Court of Chancery abused its discretion in placing no weight upon the transaction price when valuing the Dell shares at the time of its going-private merger in 2013, and instead relying exclusively on its own discounted cash flow analysis.

This Dell opinion is consistent with the Delaware Supreme Court’s August 2017 decision in DFC Global v. Muirfield Value Partners, No. 518, 2016 (Del. Supr. Aug. 1, 2017), whereby the High Court held that a deal price should represent strong evidence of fair value.  To review a prior post highlighting the DFC Global decision, click here.

Key Takeaway:

The Delaware Supreme Court’s decisions in DFC Global and now Dell make clear that significant weight to the deal price must be afforded when analyzing fair value of a company that is merged or consolidated in a clean, arm’s-length transaction.  Appraisal petitioners therefore will need to demonstrate flaws in the merger process to overcome the “heavy weight” afforded to the deal price.

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.

In the recent decision of Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017), the Delaware Court of Chancery provided a scholarly review of Caremark claims.  In sum, the decision stands for the proposition that in order to survive a motion to dismiss, a plaintiff must plead sufficient facts demonstrating a deliberate violation of the law or a conscious indifference to wrongdoing.

It is worth noting that Caremark claims are notoriously difficult to prove.  The Court of Chancery has previously explained that a “Caremark claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, and bad faith on the part of the corporation’s directors is a necessary condition to liability.”  Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR, slip op. at 19, (Del. Ch. Aug. 1, 2016) (citing  In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).

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.