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.

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)….”

Copyright: bbourdages / 123RF Stock Photo
Copyright: bbourdages / 123RF Stock Photo

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.

On October 22, 2015, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s ruling in the action Boris v. Schaheen, No. 121, 2015 (Del. Oct. 22, 2015).  As described by the High Court, this action was a “factually complicated case involv[ing] one of the first uses by litigants of new provisions of the Delaware General Corporation Law (“DGCL”) that authorize the Court of Chancery to issue final orders cleaning up important issues involving the governance of a Delaware corporation that were dealt with in a manner that did not meet the statutory requirements for validity.”  See Delaware Court of Chancery’s opinion here.

In its recent opinion, the Supreme Court stated:

Sections 204 and 205 were adopted in part to address situations that had arisen in prior cases, which are analogous to this one, where parties who are complicit in failing to comply with the DGCL’s requirements refuse to participate in the validation of their own past intended actions because they have come to have personal reasons to wish to disclaim their prior promises and actions. Because John and Ann are themselves responsible for not adhering to corporate formalities and because they acquiesced in the stock grants they now dispute, they are poorly positioned here to argue that past informal grants and returns of Numoda Corp.‘s stock were invalid. The Court of Chancery thoroughly explained the basis for its conclusions as to Numoda Corp.‘s capital structure in its detailed opinion. Given that reality, there is no basis for us to overturn its judgment.

Accordingly, Sections 204 and 205, along with the Delaware Supreme Court’s ruling in this opinion, make clear that parties will be unable to disclaim their prior promises and actions pertaining to the issuance of stock which did not adhere to corporate formalities when they stand to benefit from the invalidation of such grants of stock.

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.

Under Delaware law, it is well established that in order to bring a derivative suit, a stockholder of a corporation must either (i) make a demand upon the board to take action; or (ii) plead demand futility.  Ct. Ch. R. 23.1.  Derivative lawsuits are often brought against corporate directors and management for claims of breach of fiduciary duty, corporate mismanagement, self-dealing, etc.

Does the demand requirement apply to a stockholder’s claim for breach of contract of a stockholder approved plan?

The answer, under Delaware case law, is presently unclear.  In the recent Delaware Supreme Court decision of Friedman, et al. v. Khosrowshahi, et al., No. 442, 2014 (Del. Mar. 6, 2015), the Court affirmed the Court of Chancery’s decision to dismiss the complaint for failure to properly make a demand upon the board or to plead demand futility.  However, Chief Justice Leo E. Strine, Jr. noted:

What was not before the Chancellor was the question of whether a stockholder plaintiff must plead demand excusal if her claim for relief is a breach of a stockholder approved plan as a contract, and she seeks recovery under contract law. That question is one that this Court has not decided and on which Court of Chancery decisions arguably conflict. (Slip op. at 3).

The Delaware Supreme Court cited to the conflicting decisions of Allen v. El Paso Pipeline GP Co., 90 A.3d 1097, 1108 n.6 (Del. Ch. 2014) and Pfeiffer v. Leedle, 2013 WL 5988416, at *5 (Del. Ch. Nov. 8, 2013).  The Court of Chancery in Allen stated:

[W]hen a board violates contractual limits on its authority, that decision is not a business judgment to which deferential fiduciary duty review applies, rendering demand futile under the second prong of Aronson. In my view, the same reasoning demonstrates that the claim is not derivative at all.”)

See also Ryan v. Gifford, 918 A.2d 341, 354 (Del. Ch. 2007) (holding that demand was excused because the board lacked discretion to “contravene the terms of” stockholder-approved stock option plans).

On the other hand, Pfeiffer provides that: “The business judgment rule will not be rebutted, and thus demand will not be excused, when a plaintiff alleges only that a board of directors failed to follow the terms of a stock incentive plan. Such allegations pertain to the substance of the board’s decision and fail to address the critical question of how the board reached the result that it did.”

Stay tuned for further developments in Delaware case law addressing whether a stockholder must make a demand upon a board or plead demand excusal under Court of Chancery Rule 23.1 for breach of a stockholder approved plan under contract law.

Carl D. Neff is an attorney 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.

What remedy do you have if you or your company is a creditor or shareholder of an insolvent Delaware corporation to recover amounts owed to you?  Section 291 of the Delaware General Corporation Law (“DGCL”) provides a statutory basis to seek the appointment of a receiver over such company in order to pay outstanding debts of the company.

What Is the Process for Appointment of a Receiver of an Insolvent Corporation Under Section 291 of the DGCL?

Under Section 291, whenever a corporation is insolvent, any creditor or stockholder of a corporation may petition the Court of Chancery to appoint one or more persons to be receivers of the corporation.

What are the Functions of a Receiver of an Insolvent Corporation Under Section 291 of the DGCL?

• Take charge of the corporation’s assets, estate, effects, business and affairs;

• Collect the outstanding debts, claims and property due and belonging to the corporation;

• Prosecute and defend, in the name of the corporation or otherwise, all claims or suits, to appoint an agent or agents under them; and

• Do all other acts that might be done by the corporation and be necessary or proper.

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.

In certain instances, a member of a Delaware LLC may not find it desirable to continue doing business with the other members of the company.  This can be the result of divergent views of how the business should be run, feuds between members, or simply because the member may believe that they can start up a competing business and make more money.

If a member of a Delaware LLC withdraws and forms a competing business, the issue becomes what liability would that member owe to the LLC or other members of the LLC.  Would the withdrawing member owe fiduciary duties to the other members which would prevent he, she or it from withdrawing and competing?

A very significant decision on this issue was recently handed down by the Delaware Court of Chancery.  In the case of Touch of Italy v. Salumeria and Pasticceria, LLC v. Bascio, C.A.No.8602-VCG (Del. Ch. Jan. 13, 2014), the Court addressed whether a member of a Delaware LLC who withdraws and forms a competing business would face liability to other members of the LLC.  Based upon that company’s LLC agreement, the Court found that the withdrawing member could compete without penalty.

Of note, the operating agreement of the LLC did not contain a non-competition clause or otherwise prohibit a withdrawing member from competing with the company.  Recognizing that LLCs are “creatures of contract”, the Court interpreted the LLC agreement as written.  The Court found that “there are undoubtedly sound business reasons to include … covenants not to compete in or in connection with LLC agreements.”  The parties could not replicate these provisions post hoc through alleging breaches of contract, or violations of the covenant of good faith and fair dealing.

Key Takeaway

Touch of Italy makes it clear that members of an LLC should take care to contain explicit non-compete clauses in the operating agreement as to withdrawing members; otherwise, nothing will preclude such a member from withdrawing and forming a competing business.  Moreover, in the event that a member of a Delaware LLC wishes to withdraw and compete, this case shows the necessity to carefully examine the LLC’s operating agreement to determine whether forming a competing business would be in violation of such agreement, and hence subject the withdrawing member to potential liability.

Carl D. Neff is an attorney 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.

Shareholders of a Delaware corporation have at their disposal the ability to demand inspection of the books and records of a Delaware corporation pursuant to Section 220 of the Delaware General Corporation Law.  This blog post will briefly discuss the proper scope of a Section 220 action to inspect the books and records of a Delaware corporation.

Once a proper purpose has been established for a books and records action, and assuming that other procedural requirements of the Section 220 demand have been met, the Court will examine whether the scope of the inspection is appropriate.  The general rule is that a Section 220 demand is not a license for wide ranging discovery.  See Saito v. McKesson HBOC, Inc., 806 A.2d 113, 114 (Del. 2002).  Instead, a stockholder seeking inspection of books and records pursuant to this section must “make specific and discrete identification, with rifled precision, of the documents sought,” and those documents must relate to the purpose of the demand.  Brehm v. Eisner, 746 A.2d 244, 266 (Del. 2000).  Generally speaking, a stockholder will be allowed to inspect only those documents that it proves to be “essential and sufficient” to the accomplishment of its stated purpose(s).  Tactron, Inc. v. KDI Corp., 1985 WL 44694, at *1 (Del. Ch. Jan. 10, 1985).

Ultimately, Section 220 provides stockholders of record with the tools to obtain access to a corporation’s books and records, and can serve as an important tool in forming a basis for a derivative action if corporate wrongdoing is found to have existed.

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.

The Delaware Court of Chancery has jurisdiction to determine whether an election of a director of a Delaware corporation is proper, and frequently adjudicates disputed elections pursuant to Section 225 of the Delaware General Corporation Law.

If an election of a board member is deemed improper, the Court of Chancery may order a prompt special meeting for the new election of directors—and the management slate may be ordered to pay for the costs associated with such a meeting.  This was the case in Portnoy v. Cryo-Cell International, Inc., No 3142-VCS (Del. Ch. Jan. 15, 2008), wherein the Court of Chancery addressed a challenge to the election of directors under Section 225, based upon claims that the management engaged in inequitable behavior to entrench themselves, both in proxy battles leading up to the annual meeting as well as improprieties during the annual meeting itself.

In Portnoy, management engaged in improprieties at an annual meeting, including a three-hour “lupper” break at 2:00 p.m., which allowed the CEO to lobby for more votes for management, and ultimately allowed such management to prevail by a slim margin.  The court found that it was a breach of the CEO’s fiduciary duty to use corporate machinery to coerce and to threaten economic penalties with commercial partners who did not vote in favor of management.  In addition to ordering a new special meeting to allow a re-election to occur, the Court also ordered the removal of the new director who was elected at the tainted meeting.

In sum, there are many rights afforded to shareholders, directors, officers and the corporation itself through a Section 225 action, but recent Delaware decisions, such as Portnoy, should be consulted by anyone asserting a Section 225 action, and also by corporations that desire to act within the relevant boundaries imposed by the Delaware General Corporation Law.

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.

This post will continue the discussion of the dissolution and winding-up procedure of a Delaware corporation.

Can the Court Judicially Supervise the Winding-Up Procedure?

Yes. Under Sections 280 and 281(a) of the DGCL, the Court may oversee the winding-up process of a corporation. This is a complex procedure, but it affords directors and stockholders with a greater overall level of protection by obtaining the Court of Chancery’s “stamp of approval.”

Can a Corporation Be Wound Up Without Court Supervision?

Yes, pursuant to Section 281(b) of the DGCL. While this non-courtsupervised procedure is less rigorous than the one posed under Sections 280 and 281(a) of the DGCL, it opens a director or stockholder up to potential liability if the distribution to the corporation’s creditors is not done properly, and a director may be deemed to have breached his or herfiduciary duty to creditors if he or she fails to cause the corporation to properly make distributions.

Does a Stockholder of a Dissolved Corporation Have Liability for Claims Against It?

If a dissolved corporation’s assets were wound up properly, a stockholderis not liable for any claim against the corporation in an amount in excess of such stockholder’s pro rata share of the claim or the amount so distributed to such stockholder, whichever is less.

Will Directors Be Liable for Claims Against a Dissolved Corporation?

The directors of a dissolved corporation will not be liable to the claimants of the dissolved corporation if the corporation’s assets were wound up properly under the DGCL.

How Are Creditors Notified of a Dissolved Corporation?

A corporation must notify all of its creditors by mail and by publication that the company is dissolving and must state the procedures by which a creditor can make a claim against the corporation.

How Long Can a Corporation Sue or Be Sued After It Has Dissolved?

Pursuant to Section 278 of the DGCL, once a corporation has dissolved, either voluntarily or by operation of court order, it may prosecute and defend suits for a period of three years (unless the period is extended by the Court). After this time period, the corporation can no longer sue or be sued in its corporate capacity.

Does a Corporation Have To Set Aside Funds for Contingent, Pending or Future Claims?

Yes. If the wind-up procedure is done judicially pursuant to Sections 280 and 281(a), then the Court will determine the adequacy of such security set aside by the corporation for certain types of contingent

or pending claims. In the event of an extra-judicial winding-up of the corporation, the directors shall make provision as will be reasonably likely to be sufficient to pay certain types of contingent or pending claims, with the exception that funds must be set aside forthe third category of claims that are likely to arise or become known within 10 years of the date of dissolution.

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.

 

If you are a shareholder or director of a Delaware corporation, you may one day find it advantageous to dissolve your company.  This post will generally discuss the dissolution and winding-up process of a Delaware corporation, and important considerations to be kept in mind when so doing, including the potential liability of shareholders and directors to creditors of the company, and the ability of a dissolved corporation to sue or be sued after its dissolution.

How Does the Dissolution Process Work in a Corporation That Is Not a Joint Venture?

To dissolve a corporation in the state of Delaware, a majority of the corporation’s directors must make a resolution that states the intent of the corporation to dissolve. This resolution must then gain approval by a majority vote from the shareholders. After the shareholders approve the decision, a certificate of dissolution must be filed with the Secretary of State.

Dissolution of a corporation may also be authorized without action of the directors if all the stockholders entitled to vote consent in writing. A certificate of dissolution is then required to be filed with the Secretary of State.

What Are the Requirements To Petition the Court To Dissolve a Joint Venture Corporation?

• The corporation only has two stockholders, each owning 50% of the corporation.

• The stockholders cannot agree on whether to continue to the joint venture.

• A stockholder petitions the Court stating that it desires to discontinue the joint venture and dispose of its assets in a plan to be agreed upon by both stockholders, or, if no plan can be agreed upon, then to dissolve the corporation.

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.