The Delaware Senate recently confirmed Governor John Carney’s nominees to serve as the Chief Justice and Associate Justice of the Delaware Supreme Court. In October of 2019, former Associate Justice Collins Seitz, Jr. was nominated by the Governor to replace Leo. E. Strine, Jr. as the Chief Justice, in light of the latter’s retirement. Tamika Montgomery-Reeves, who previously served as a Vice Chancellor of the Delaware Court of Chancery since 2015, was nominated to replace Seitz’s seat as an Associate Justice, making her the first African American to serve on the Delaware Supreme Court. The State Senate voted unanimously to confirm the two nominees to the High Court.
In the recent decision of Kosinski v. GGP, Inc., C.A. No. 2018-0540-KSJM (Del. Ch. Aug. 29, 2019), the Delaware Court of Chancery granted a stockholder’s books and records demand under Section 220 of the Delaware General Corporation Law (“DGCL”) to inspect the books and records of defendant GGP Inc. (“GGP”) in order to investigate potential mismanagement in connection with the merger of defendant corporation.
Through the merger, GGP, a real estate company, was acquired by another real estate company owning roughly one-third of GGP’s common stock. Plaintiff asserted the buyer was GGP’s de facto controlling shareholder, and that the procedural protections required pursuant to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) for deferential review of a merger process involving a controller had not been adequately implemented.
GGP argued that plaintiff’s stated purposes were generated by his lawyer, and were not his own, because plaintiff originally retained counsel in order to challenge the merger, not to inspect the company’s books and records. The Court rejected this argument (distinguishing Wilkinson v. A. Schulman Inc., 2017 WL 5289553 (Del. Ch. Nov. 13, 2017), summarized here), and held that plaintiff’s deposition demonstrated that he was motivated to inspect the documents, and was apprised of the demand contents along with the circumstances of the merger.
GGP also argued that plaintiff’s stated purposes for inspection were improper. Plaintiff sought books and records: (i) to investigate potential breaches of fiduciary duty and director disinterestedness in connection with the merger and (ii) to obtain corporate records to value his shares. As to the former purpose, although GGP had established a special committee to negotiate the merger, the Court found that plaintiff pointed to facts suggesting that the special committee failed to obtain a fair price and that its members potentially were interested or lacked independence. As to the latter, the Court held that plaintiff may seek corporate records to further inform his valuation of his stock at the time of the merger, even though plaintiff already had some information concerning value.
The Court granted plaintiff’s Section 220 demand, holding that where procedural protections are absent, the transaction may not have been at arm’s length, and finding that plaintiff had demonstrated facts that established a “credible basis” to investigate potential breaches of fiduciary duty.
In granting the Section 220 demand, the Court nonetheless noted that it was making an “exceptionally modest point” and not announcing a rule that noncompliance with MFW procedural protections “automatically supplies a credible basis.” Slip op. at 17. In other words, plaintiff stockholders seeking inspection of corporate books and records may need to do more than simply show the company’s failure to comply with the procedural protections under Kahn v. M&F Worldwide Corp.
In the recent decision of Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Aug. 7, 2019), the Delaware Supreme Court held that conditioning the inspection of documents pursuant to a demand under 8 Del. C. § 220 on the demanding party entering into a confidentiality agreement should be viewed as the exception, not the rule, and that the corporation must provide justification for confidentiality in order for such a condition to be upheld by the Court.
As stated by the Delaware High Court:
We hold that, although the Court of Chancery may—and typically does— condition Section 220 inspections on the entry of a reasonable confidentiality order, such inspections are not subject to a presumption of confidentiality. We further hold that when the court, in the exercise of its discretion, enters a confidentiality order, the order’s temporal duration is not dependent on a showing of the absence of exigent circumstances by the stockholder. Rather, the Court of Chancery should weigh the stockholder’s legitimate interests in free communication against the corporation’s legitimate interests in confidentiality.
Slip op., at 2-3.
Given the importance that the Delaware Supreme Court has placed on making Section 220 demands prior to asserting a shareholder derivative action, parties to Section 220 actions should take note of this decision and consider carefully the necessity of imposing a confidentiality agreement in connection with a Section 220 inspection.
On May 31, 2019, the Court of Chancery issued a 57-page memorandum opinion ordering Facebook Inc. to provide certain corporate books and records to various plaintiff investors, in the case of In re Facebook Inc. Section 220 Litigation, Consol. C.A. No. 2018-0661-JRS (Del. Ch. May 31, 2019), in a dispute filed under Section 220 of the Delaware General Corporation Law (“DGCL”).
Plaintiffs’ books and records demand was brought following “one of the sharpest single-day market value declines in history when [Facebook’s] stock price dropped 19%, wiping out approximately $120 billion of shareholder wealth.” Slip op. at 1. Such drop in value occurred following news reports that in 2015, the private data of 50 million Facebook users had been poached by Cambridge Analytica, a British political consulting firm. The Court noted that Facebook did not disclose this security breach to its users upon discovery or at any time thereafter, leaving users to first learn of the breach in the news.
Vice Chancellor Slights also noted that the Cambridge Analytica breach occurred at a time when Facebook was subject to a Consent Decree entered by the Federal Trade Commission (“FTC”) in 2011, “after the FTC found that Facebook’s data privacy measures were not protecting users’ private information.” Id. The Consent Decree required Facebook to implement “more robust and verifiable data security protocols.” Id. Per the memorandum opinion, at the time of the news reports of the breach, additional news reports indicated that Facebook’s business model included incentives to monetize user data without their consent.
Following the above-referenced news reports, multiple investors served Section 220 books and records demands upon Facebook. Among other things, the investors sought inspection to investigate mismanagement and wrongdoing of the Facebook board. In response, the company produced approximately 1,700 heavily redacted pages covering a portion of the requested time period. Vice Chancellor Slights consolidated the demands and held a one-day trial on March 7, 2019.
Facebook defended on the grounds that the requests lacked the requisite precision as they are not limited to documents “necessary, essential and sufficient to the stockholder’s purpose.” Id. at 37. Facebook also asserted that if plaintiffs sought to investigate a potential Caremark claim, the Demand Letter failed to provide any evidence that Facebook “utterly failed to implement a reporting system or ignored red flags”, citing Beatrice Corwin Living Irrevocable Tr. v. Pfizer, Inc., 2016 WL 4548101, at *5 (Del. Ch. Sept. 1, 2016). In addition, Facebook complained that the demands were a moving target and that plaintiffs’ counsel demanded more documents in a larger time period than originally listed in their demand letters.
While acknowledging that plaintiffs had “reshaped” their demands, Vice Chancellor Slights found that plaintiffs satisfied their low burden, noting that the “credible basis” standard in Section 220 actions “imposes the lowest burden of proof known in our law[.]” Id. at 4. Moreover, while the Court noted that a Caremark claim “’is possibly the most difficult theory upon which a plaintiff might hope to win a judgment,’ that admonition does not license this court to alter the minimum burden of proof governing a stockholder’s qualified right to inspect books and records.” Id. (citing In re Caremark Int’l Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).
Further, the Court found of significance the fact that the FTC Consent Order was in place at the time of the purported breach, noting that Delaware Courts “are more inclined to find Caremark oversight liability at the board level when the company operates in the midst of obligations imposed upon it by positive law yet fails to implement compliance systems, or fails to monitor existing compliance systems, such that a violation of law and resulting liability occurs.” Slip op. at 41.
Given that plaintiffs met their low burden to establish a credible basis to infer mismanagement and wrongdoing, the Court ordered inspection of certain of the demanded categories of documents, while finding that plaintiffs did not act in bad faith by expanding or contracting their demands during the Section 220 litigation, and expanding the time period of requested documents first from February 2017 to the present, to 2011 to the present.
However, the Court found that many of plaintiffs’ document demands “landed with the precision of buckshot”, and thus Vice Chancellor Slights tailored the inspection award to the purposes articulated in their demand. In addition, the Court found that documents dating back to 2011 would be too broad, while noting that claims dating back to 2011 would likely be time-barred. Accordingly, the Court limited the time period from February 2017 to the present, consistent with the time period of requested documents set forth in plaintiffs’ original demand letter made upon Facebook.
In the recent Delaware Supreme Court decision of Leaf Invenergy Co. v. Invenergy Renewables, LLC, No. 308, 2018 (Del. May 3, 2019), the High Court found that a nominal damages award of $1 by the Court of Chancery in a suit over a multi-billion dollar sale of a portion of defendant/appellee Invenergy Wind LLC (“Invenergy”), a wind farm developer, should be reversed because the sale violated the consent rights of the plaintiff/appellant investor, Leaf Invenergy Co. (“Leaf”), warranting $126 million in damages.
The High Court found that Leaf had previously negotiated consent rights when investing $30 million into Invenergy, which required the investor’s permission in advance of any material sale. Per the opinion, the relevant contract provision reflected each side’s intention to either move forward with a such a sale only with Leaf’s consent, or to require Invenergy to buy out Leaf if it did not consent to the transaction. When the Court of Chancery determined that those rights had been breached, it should have upheld contractual provisions calling for a damages multiplier, per the Supreme Court.
Instead, Vice Chancellor Laster held that an “efficient breach” had occurred, because even though Invenergy did not seek Leaf’s consent prior to the sale, the trial court found that Leaf received more in the sale than it would have under the contract terms. Vice Chancellor Laster thus decided on the $1 nominal damages award because he determined that Leaf was left no worse off despite the breaches, in light of the efficient breach doctrine.
When assessing damages, the High Court found that the Court of Chancery erred by limiting its focus on the harm to Leaf in the context of the results of the sale, rather than considering the full effect of Invenergy’s contractual breach in failing to seek Leaf’s consent and then failing to pay the target multiple. The Supreme Court stated held the trial court should have taken a broader approach that “considered the combination of [all aspects of the contractual breaches] when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages would return Leaf to the position it would have been in had Invenergy not breached [the contract]”. Slip op. at 28.
Accordingly, the Delaware Supreme Court found that Leaf was entitled to a payment of the contractual multiple given that it never provided its consent to the sale. As a result, it reversed Chancery’s award of nominal damages and awarded Leaf $126 million in damages.
In a recent opinion issued by the Delaware Court of Chancery, Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), Vice Chancellor Montgomery-Reeves granted advancement to a member of a Delaware LLC. In the case, plaintiff Freeman Family LLC (“Plaintiff”), a member of defendant Park Avenue Landing LLC (“LLC” or “Defendant”), requested advancement under the terms of the LLC’s operating agreement. The operating agreement provides that members shall receive advancement if they are made party to an action by reason of their status as a member. Plaintiff, a member of the LLC, is defending a federal lawsuit in New Jersey brought by the LLC’s managing member, relating to the Plaintiff’s call right under the operating agreement.
After Defendant answered the complaint, Plaintiff filed a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c), and Defendant followed with its own cross-motion for judgment on the pleadings. As a preliminary note, the Court observed that “[a]dvancement cases are particularly appropriate for resolution on a paper record, as they principally involve the question of whether claims pled in a complaint against a party . . . trigger a right to advancement under the terms of a corporate instrument.” Slip op. at 7 (citing DeLucca v. KKAT Mgmt., LLC, 2006 WL 224058, at *6 (Del. Ch. Jan. 23, 2006)).
Turning to the substance of the dispute, the Court noted that the cross-motions at issue center on the interpretation of the LLC’s operating agreement. In addition, the Court also found that corporate case law, interpreting D&O’s rights to advancement from a Delaware corporation under Section 145 of the Delaware General Corporation Law (“DGCL”), applied to the Court’s analysis. This is because the language in the advancement provision of the LLC’s operating agreement was substantially similar to the language of 8 Del. C. § 145.
Under Section 145 of the DGCL, claims for indemnification or advancement by a director or officer of a corporation must relate to lawsuits or proceedings “by reason of the fact” that such person was or is serving in such capacity. The Court examined Delaware case law in the corporate context addressing whether suit is brought against a party “by reason of the fact” that the party was acting in an official capacity on behalf of the company. Vice Chancellor Montgomery-Reeves noted that under Delaware case law, the “by reason of the fact” standard is broadly interpreted, “requir[ing] a causal relationship between the official capacity and the lawsuit.” Slip op. at 18.
In this action, the Court held that the underlying action implicated Plaintiff’s performance of its official duties under the operating agreement. Accordingly, the Court granted Plaintiff’s motion for judgment on the pleadings granting Plaintiff advancement, and denied Defendant’s cross-motion.
On April 17, 2019, the Delaware Supreme Court reversed a significant appraisal decision from the Delaware Court of Chancery in Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Del. Apr. 17, 2019). In Aruba, the Supreme Court reversed the trial court’s fair value award of $17.13 a share, directing the Court of Chancery to enter judgment at the deal price (minus synergies value) of $19.10 per share.
In so doing, the High Court found that the Court of Chancery improperly concluded that the fair value of Aruba’s stock was equal to the unaffected market price of Aruba’s shares, which was thirty percent lower than the deal price. The Supreme Court ruled that the Vice Chancellor’s “decision to use the trading price as his sole basis for determining fair value was his alone, and in no way dictated by a rational reading of Dell”. (Slip op. at 20).
That said, the Supreme Court agreed with the Court’s conclusion that, on this record, “‘the deal price . . . operates as a ceiling for value.’” Slip op. at 25. After excluding synergy values “or other value the buyer expects from changes it plans to make to the company’s ‘going concern’ business plan” (Slip op. at 9), the Supreme Court accepted Aruba’s calculation of its fair value at $19.10 per share, which was below the $24.67/share deal price, but higher than the trial court’s $17.13 market price valuation.
Key Takeaway: The Aruba decision reinforces the recent string of Delaware decisions, such as Dell and DFC Global, in which the Delaware Supreme Court has found that the deal price should represent strong evidence of fair value (assuming an arm’s length transaction and robust sales process), subject to reduction for synergies. Appraisal practitioners should continue to take notice.
In the recent decision of Otto Candies, LLC v. KPMG, LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Apr. 25, 2019), the Delaware Court of Chancery found that Rule 15(aaa) applied to a case transferred from the Superior Court when plaintiffs, faced with a motion to dismiss for failure to state a claim under Rule 12(b)(6), declined to amend their complaint in lieu of filing an answering brief. Court of Chancery Rule 15(aaa) provides that if a party declines to either amend their complaint or file a motion to amend in response to a motion to dismiss filed under Rules 12(b)(6) or 23.1, and the court concludes that the complaint should be dismissed under either of these rules, then “such dismissal shall be with prejudice … unless the Court, for good cause shown, shall find that dismissal with prejudice would not be just under all the circumstances.”
The significance of Otto Candies is that the action was initially filed in the Delaware Superior Court, which is not subject to Court of Chancery Rule 15(aaa). Following briefing on the motion to dismiss, the action was transferred to the Court of Chancery under 10 Del. C. § 1902 because the Superior Court lacked subject matter jurisdiction over the action. The Court of Chancery then issued a memorandum opinion dismissing the action for lack of personal jurisdiction and failure to state a claim. To inform whether the dismissals should be with or without prejudice, the Court’s opinion requested supplemental briefing on the applicability of Rule 15(aaa) to fully briefed dispositive motions transferred under Section 1902.
Following supplemental briefing, and in a matter of first impression, the Court of Chancery “conclude[d] that Rule 15(aaa), or the policies that motivate it, apply when a complaint is transferred to this Court subject to a fully briefed motion seeking dismissal under Rules 12(b)(6) or 23.1. Transferring plaintiffs must either seek leave to amend or stand firm on their complaint and risk dismissal with prejudice under Rule 15(aaa).”
In other words, if a party files a complaint in the Delaware Superior Court (which does not have a Rule 15(aaa) analogue), and the case is transferred to the Court of Chancery following briefing before the Superior Court, the party’s failure to amend the complaint in lieu of filing an answering brief to a motion to dismiss may cause dismissal to be with prejudice under the Court of Chancery Rules. Because this was a matter of first impression, however, the Court found in the interests of justice that plaintiff be permitted a “mulligan” to amend their complaint.
In the recent decision of CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Mar. 27, 2019), the Delaware Court of Chancery addressed whether certain named defendants were subject to jurisdiction in Delaware under the implied consent statute of 6 Del. C. § 18-109(a). That statute provides a statutory basis for “managers” (as defined in the LLC Act), and those who otherwise participate materially in the management of the LLC, to be subject to personal jurisdiction in Delaware, provided that due process would not be offended.
According to the Court, “Due process would not be offended if Plaintiffs can show that (1) the allegations against the defendant-manager focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of the matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for the resolution of the dispute relating to the manager’s ability to discharge his managerial functions.” Slip op. at 51, citing Hartsel v. Vanguard Grp., Inc., 2011 WL 2421003, at *9 (Del. Ch. June 15, 2011).
The complaint alleged that one defendant was a former manager and the other served as President and CEO of the company. However, the Court found that these allegations were insufficient to exercise personal jurisdiction over such defendants where the complaint alleged that another defendant, named as the “manager” in the operating agreement of the LLC, exercised “absolute control an discretion” over the LLC. As a result, the Court found that the two defendant officers did not “participate materially” in the management of the LLC under the implied consent statute of the Delaware LLC Act, and thus declined to exercise jurisdiction over such individuals under that statute.
In the recent Delaware Supreme Court decision of Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., No. 185,2018 (Del. Mar. 7, 2019), at issue between the parties to two related contracts was the computation of the termination date. The parties had contracted for defendant/appellee CITGO to ship oil using the trucking company of the plaintiff/appellant Sunline. The Delaware Superior Court granted summary judgment in favor of CITGO, finding dispositive a provision in one of the agreements that specified a one year term.
On appeal, the High Court found that ambiguity existed because the same agreement also contemplated renewals, required notice to terminate, and contemplated a review of pricing terms prior to the one-year period. To add to the confusion, the same contract stated that it would remain effective until a second related contract, with a later default termination date, was terminated.
Accordingly, the High Court found that the agreement “is ambiguous, and the parties are entitled to a trial where they can attempt to prove, using parol evidence, their interpretation of the contract.” Slip op. at 17 (citing GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del. 2012) (“But, where reasonable minds could differ as to the contract’s meaning, a factual dispute results and the factfinder must consider admissible extrinsic evidence.”). As such, the case was remanded for trial which permitted extrinsic evidence of the interpretation of the relevant terms of the contracts, in light of the ambiguity.