Today, Vice Chancellor Laster issued a lengthy 114 page opinion in connection with the appraisal of shares of Dell Inc.  The Court of Chancery found that Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell by approximately 22%, such that the fair value of Dell’s stock at the time of the buyout was $17.62 per share, not the original price of $13.75.  The decision can be found here: In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016).

Notably, the opinion is largely dedicated to explaining why deal price is not a fair value indicator, especially in a management-led buyout.  The Court opined that the Dell buyout took advantage of a fall in the company’s stock price, and its board failed to determine the intrinsic value before negotiating. According to the Vice Chancellor:

Taken as a whole, the foregoing evidence, along with other evidence in the record, establishes that the Original Merger Consideration was dictated by what a financial sponsor could pay and still generate outsized returns. This fact is a strong indication that the Original Merger Consideration undervalued the Company as a going concern.

As explained by the Vice Chancellor, the optimal time to take a company private is “after it has made significant long-term investments, but before those investments have started to pay off and market participants have begun to incorporate those benefits into the price of the Company‘s stock.” An appraisal proceeding “can and should address the problem of opportunistic timing”.

The opinion also discussed the “valuation gap between the market‘s perception and the Company‘s operative reality.”  Described as a so-called “anti-bubble”, such gap is driven by “(i) analysts’ focus on short-term, quarter-by-quarter results and (ii) the Company‘s nearly $14 billion investment in its transformation, which had not yet begun to generate the anticipated results.”

In sum, the In re: Appraisal of Dell Inc. opinion highlights the fact that the Court did not give weight to the final merger consideration, but rather relied exclusively on the discounted cash flow methodology to determine the fair value of the Company.

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 opinion of In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 11, 2016), the Delaware Court of Chancery issued an opinion finding that certain record holders of Dell Inc. stock were barred from seeking appraisal of their shares as a result of inadvertently voting in favor of the Dell going-private merger.  As a result, such shareholders failed to adhere to the “dissenting stockholder” requirement of 8 Del. C. Section 262.

In the opinion, the court considered appraisal demands of mutual funds sponsored by T. Rowe Price & Associates Inc. and institutions that relied upon T. Rowe to direct the voting of their shares. The T. Rowe petitioners held their shares through custodial banks, who in turn held the shares in the name of its nominee, Cede & Co., the record holder.  Although T. Rowe publicly opposed the merger, its voting system generated instructions for Cede to vote the T. Rowe petitioners’ shares in favor of the merger.

Because petitioners’ shares voted in favor of the merger, the court dismissed the appraisal claim of the T. Rowe petitioners, and they will receive the merger consideration without interest.

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 225 of the Delaware General Corporation Law (“DGCL”) provides a mechanism through which shareholders, directors or officers of a corporation can challenge the appointment, removal or resignation of any director or officer of a corporation.

The recent decision of Martin v. Med-Dev Corp, C.A. No. 10525-VCP (Del. Ch. Oct. 27, 2015), demonstrates the importance of this provision of the DGCL.  In Martin, a director petitioned the Court to invalidate his resignation which was obtained through misrepresentation by the board.

The petitioning director, Martin, had agreed to resign with conditions, if two stockholders of his choosing were appointed to the board.  Paperwork was prepared to this effect.  However without his knowledge, the board secretly changed the terms of his resignation letter to make it unconditional, while representing to Martin that no changes had been made.

The Court found that the transaction was voidable because it was obtained through material misrepresentation.  Pursuant to Section 225, the Court ordered that the director be reinstated as the chairman of the board.

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 205 of the DGCL provides the Court of Chancery with broad powers to fashion declaratory and other appropriate remedies, and specifies considerations to be weighed by the Court of Chancery in fashioning these remedies.

In the recent case of In re Genelux Corp., C.A. No. 10042-VCP (Del. Ch. Oct. 22, 2015), the Court of Chancery held (in a matter of first impression) that Section 205 cannot be used to declare an action void, but rather can only be used to validate defective corporate actions. While a similar claim might be made in a Section 225 case, there are restrictions on who has standing to bring such a claim under these statutes.

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.

Very recently, we wrote on the Andrikopoulos decision of Vice Chancellor Parsons (Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), which held that, in a matter of first impression under Delaware law, claims for advancement by directors or officers against a company in receivership should be treated as non-priority unsecured claims against the receivership estate.

In a letter opinion dated August 4, 2015 in Henson, et al. v. Sousa, C.A. No. 8057-VCG (Del. Ch. Aug. 4, 2015), Vice Chancellor Glasscock similarly denied a claim for advancement against an entity in receivership based upon, among other things, the ruling of Andrikopoulos.  Adopting the recent ruling of Andrikopoulos, the Court found that advancement claims against an entity in receivership should not be afforded priority status over claims of other creditors.

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 Andrikopolous v. Silicon Valley Innovation Company, LLC, C.A. No. 9899-VCP (Del. Ch. July 30, 2015), Vice Chancellor Parsons addressed the novel issue under Delaware law as to what priority level advancement claims are afforded in a receivership action.

This case is an important read for any director or officer seeking advancement of their fees and costs from an entity that is in a receivership proceeding before the Delaware Court of Chancery.  The Court ruled that claims for advancement are not entitled to administrative priority, and instead are considered to be pre-petition, non-priority unsecured claims.

Background

The case had an unusual procedural posture.  In January 2013, the Court appointed a receiver over Defendant Silicon Valley Innovation Company, LLC (“SVIC”).  The only assets of SVIC are contingent claims against its former directors and officers.  The Receiver filed several cases in California, which were consolidated before the Superior Court for Los Angeles County.  The plaintiffs in this case, Shaun Andrikopolous and Michael Santer, are named defendants in the case commenced by the Receiver in California.  The parties to this advancement action stipulated to Plaintiffs’ entitlement to advancement, subject to the Court determining whether Plaintiffs’ advancement claims are entitled to priority.

Analysis

The Court found that a) there is no controlling Delaware authority, b) the Delaware statutes of receivership provide minimal guidance, c) Delaware has a strong public policy in favor of advancement, but d) the strong analogy between receiverships and bankruptcy weigh in favor of non-priority status of the advancement claim.

The Court found that Plaintiffs’ advancement claims should not be afforded priority status.  This was because (i) the successful winding up of a Delaware corporation has significance, (ii) a pre-receivership and post-receivership entities are “meaningfully different”, (iii) balancing the existence of advancement rights against the realities of insolvent entities lends to a non-priority determination, and (iv) “the reality of practical administration weighs in favor of treating advancement claims the same as the claims of other unsecured creditors.”

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.

Delaware companies should “tread carefully” in denying a present or former executive’s demand for advancement, because as reflected by the recent decision of Blankenship v. Alpha Appalachia Holdings, Inc., C.A. No. 10610-CB (Del. Ch. May 28, 2015), the Court of Chancery has commonly granted such executive his or her attorneys’ fees, or a portion thereof, in bringing an advancement claim before the Court.  While an advancement action is considered a “summary proceeding” and moves at a quicker pace than normal litigation, litigation fees are frequently not insubstantial.

In the recent Blankenship opinion, the Delaware Court of Chancery considered various defenses provided by a Delaware corporation to a claim for advancement by a former CEO of the company.  The Court rejected the corporation’s defenses to advancement based on purported conditions precedent in the underlying agreement, finding such asserted conditions (at most) ambiguous.

While the Court did not find Blankenship to be successful in obtaining 100% of the advancement fees that he seeks, the Court nonetheless granted the entirety of Plaintiff’s fees, including legal fees in commencing this action, given that Blankenship was “successful in whole” in obtaining the relief sought in the Complaint.

Delaware corporations and alternative entities with standard advancement clauses should therefore carefully consider to what extent is it worth fighting a clear claim to advancement, given the potential to be “on the hook” for the executive’s legal fees in bringing the advancement claim.

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 Supreme Court and the Court of Chancery have each amended their Rules to implement the Delaware Rapid Arbitration Act.  The announcement of these amendments provides,

Amendments to the Delaware Supreme Court Rules and the Court of Chancery Rules Related to the Delaware Rapid Arbitration Act

To implement aspects of the recently-enacted Delaware Rapid Arbitration Act, 10 Del. C. § 5801 et seq. (“DRAA”), the Delaware Supreme Court and the Court of Chancery have amended their rules. These amendments are effective June 1, 2015.

The Supreme Court has amended Supreme Court Rules 6, 7, 9, and 32. Rule 6 has been amended to include the time for an appeal or cross-appeal of a final award under the DRAA. Rule 7 has been amended to include the procedures for an appeal of a final award under the DRAA. Rule 9 has been amended to clarify the record on appeal of a final award under the DRAA. Rule 32 has been amended to include the procedure for a stay or injunction pending appeal of a final award under the DRAA.

Court of Chancery Rules 96-98 also have been amended. Rule 96 establishes the process for commencing a summary proceeding to appoint an arbitrator under the DRAA in certain circumstances, such as when the parties cannot agree on an arbitrator. Rule 97 governs proceedings under the DRAA to enforce subpoenas, determine an arbitrator’s fees and enter judgment after arbitration. Rule 98 was removed in its entirety and is reserved for future use.

The Supreme Court and Court of Chancery amendments are available on the  Rules of the Delaware State Courts website.

 

Are corporate officials entitled to interest on advancement and indemnification obligations owed by the company?

While the statute, 8 Del. C. § 145, does not address the recovery of interest directly, the answer is yes.  Delaware Courts have awarded pre-judgment interest on amounts owed by a corporation to its corporate officials.  Zaman v. Amedeo Holdings Inc., 2008 Del. Ch. LEXIS 60, at *139 (May 23, 2008).

According to Merritt-Chapman * Scott Corp. v. Wolfson, 321 A.2d 138, 144 (Del. Super. 1974), “without interest on expenses actually paid [by an indemnitee], indemnification would be incomplete.”  As such, the Court has found that interest begins to accrue when the claim for indemnification is made.  May v. Bigmar, Inc., 838 A.2d 285, 292 (Del. Ch. 2003).

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.

Often times, a corporate official seeking advancement or indemnification will demand “fees on fees” – i.e. recovery of the costs associated with making a demand for advancement or indemnification.

As a general matter, a party otherwise entitled to advancement of defense costs is not entitled as well to the routine costs of claiming such entitlement and thereafter cooperating with the corporation in connection with the advancement process.  See Fasciana v. Electronic Data Systems Corp.(Fasciana I), 829 A.2d 160, 175 (Del. Ch. 2003) (the Delaware Supreme Court “does not hold that a plaintiff seeking advancement is entitled to have all of his expenses advanced if he merely proves that some portion of the case against him is subject to a contractual right of advancement”).

Rather, such a party may be entitled to fees, in the discretion of the Court, upon a showing that the corporation has unreasonably refused to advance properly requested fees to which he or she is clearly entitled.  See Xu Hong Bin v. Heckmann Corp., No. 4802-CC, 2010 WL 187018, at *5 (Del. Ch., Jan. 8, 2010) (holding that the plaintiff “[was] not entitled to be reimbursed for any fees incurred seeking indemnification rights . . . because [the corporation] has not disputed [his] right to indemnification or refused to pay reasonable expenses”).

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.