Tag: Derivative suits


Delaware Court Faults Committee Process & Advisory Work in Finding Lack of Good Faith

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Jonathan M. Moses, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Jonathan M. Moses, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On April 20, 2015, the Delaware Court of Chancery entered a $171 million post-trial judgment after finding a master limited partnership overpaid for assets from its parent. In re El Paso Pipeline Partners L.P. Derivative Litig., C.A. No. 7141-VCL (Del. Ch. Apr. 20, 2015).

The case concerned a 2010 “dropdown” transaction in which El Paso Pipeline Partners L.P. purchased assets from its controlling parent entity, El Paso Corporation. The limited partnership agreement governing the MLP permitted such transactions so long as they were approved by a conflicts committee whose members believed in good faith that the transaction was in the best interests of the MLP. After the parent proposed a dropdown transaction, the MLP’s committee retained legal and financial advisors and negotiated revised terms. Although the committee members initially expressed reservations about aspects of the proposed transaction in light of an earlier dropdown deal, each testified that he ultimately concluded that the transaction was in the best interests of the MLP, stressing that it was immediately accretive to the holders of the MLP’s common units. After receiving a fairness opinion from its financial advisor, the committee approved the transaction and litigation ensued.

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Delaware Court Curtails Books & Records, Validates Board-Adopted Forum Selection Bylaws

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Ryan A. McLeod, and A.J. Martinez. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Ryan A. McLeod, and A.J. Martinez. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A unanimous Delaware Supreme Court yesterday reaffirmed the ability of Delaware companies to organize corporate litigation in the Delaware courts. United Technologies Corp. v. Treppel, No. 127, 2014 (Del. Dec. 23, 2014) (en banc).

The case involved an action to produce corporate books and records under Section 220 of the Delaware General Corporation Law, an increasingly frequent preliminary battleground in derivative litigation. Following a familiar pattern, stockholder plaintiffs demanded access to certain books and records of United Technologies Corporation, allegedly to assist in their consideration of potential derivative litigation. UTC asked that all demanding stockholders agree to restrict use of the materials obtained in the inspection to cases filed only in Delaware, pointing out that litigation had already been filed relating to the same matters in the Delaware courts and that any derivative lawsuit would be governed by Delaware law. Then, further evincing its concern to organize corporate governance litigation in the courts of Delaware, UTC’s board adopted a forum selection bylaw during the pendency of the Section 220 lawsuit.

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Minority Shareholders and Board Domination

The following post comes to us from Daniel J. Dunne, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Dunne and Peter J. Rooney. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Daniel J. Dunne, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Dunne and Peter J. Rooney. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Emphasizing the demanding pleading standards a shareholder must meet to show that a minority shareholder controls a board of directors, on November 25, Vice Chancellor Glasscock dismissed claims for breach of fiduciary duties against the directors of Sanchez Energy Corporation in connection with a corporate acquisition of assets. The decision in In Re Sanchez Energy Derivative Litigation, C.A. No. 9132 VEG, reinforces the Chancery Court’s insistence that shareholder plaintiffs plead specific facts to raise reasonable doubts whether directors lack independence, especially when it comes to longstanding personal and business relationships. To sustain a claim that minority shareholders exercised domination and control over a board of directors, plaintiffs must plead specific facts demonstrating actual control of the board in the transaction at issue in the lawsuit.

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The Duty to Maximize Value of an Insolvent Enterprise

The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), Vice Chancellor Laster clarified the Delaware Chancery Court’s approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Vice Chancellor applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

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Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions

The following post comes to us from S. Michael Sirkin, an attorney at Seitz Ross Aronstam & Moritz LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The following post comes to us from S. Michael Sirkin, an attorney at Seitz Ross Aronstam & Moritz LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

My article, Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions, examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. The settled rules of direct and derivative standing break down at the “singularity of the effective time” of a merger, yielding to conflicting principles of standing, corporation law and policy, and basic equity. The path-dependent network of rules and exceptions that has developed is an outgrowth of case-by-case adjudication that now begs for a one-time, wholesale reconfiguration.

The article takes on that task, proposing three straightforward rules that need no exceptions:

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Institutional Investor Lead Plaintiffs in Mergers and Acquisitions Litigation

This post comes to us from David H. Webber, an Associate Professor of Law at Boston University. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

This post comes to us from David H. Webber, an Associate Professor of Law at Boston University. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Transactional class and derivative actions have long been controversial in both the popular and the academic literatures. Some commentators have argued that every deal faces litigation, that the overwhelming majority of such cases are frivolous, that the only people who benefit from them are the lawyers, and that the costs of these suits outweigh their benefits to shareholders. Others have taken the opposite view, that the litigation costs are overblown and that shareholders benefit from such suits. Yet, the debate over this litigation has so far neglected to consider a change in legal technology, adopted in Delaware a decade ago, favoring selection of institutional investors as lead plaintiffs. My article, “Private Policing of Mergers and Acquisitions: An Empirical Assessment of Institutional Lead Plaintiffs in Transactional Class and Derivative Actions,” fills the gap, offering new insights into the utility of mergers and acquisitions litigation. The most significant findings in the paper are that public pension funds and labor union funds have become the dominant institutional players in these cases, and that public pension fund lead plaintiffs correlate with the outcomes of most interest to shareholders: an increase from the offer to the final price, and lower attorneys’ fees.

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Delaware Court Limits Non-Delaware Dismissal

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here. Further reading about the Delaware Supreme Court decision discussed below is available here.

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here. Further reading about the Delaware Supreme Court decision discussed below is available here.

The Delaware Supreme Court held that the Court of Chancery erred by failing to give preclusive effect to an earlier with-prejudice dismissal of a parallel derivative suit in another state, and by creating a presumption that all plaintiffs who file derivative suits without first conducting books-and-records inspections are inadequate representatives. Pyott v. La. Mun. Police Emps.’ Ret. Sys., No. 380, 2012 (Del. Apr. 4, 2013). The decision stresses the importance of interstate comity and the need to give full faith and credit to the decisions of other courts.

Allergan is a drug company that incurred losses in resolving civil and criminal investigations of off-label drug marketing. Derivative suits were filed in both federal court in California and the Court of Chancery alleging that Allergan’s directors were liable for the losses because they failed to properly monitor the company’s marketing practices. The Delaware shareholder plaintiff obtained documents through a books-and-records inspection under 8 Del. C. § 220 before filing suit. The California plaintiffs did not, but later amended their complaints when the Delaware plaintiff shared the documents. Defendants moved to dismiss in both jurisdictions. The California federal court ruled first, dismissing with prejudice for failure to establish demand futility. The Court of Chancery refused to give preclusive effect to that ruling, applying Delaware law to the preclusion question. Turning to the merits, Chancery disagreed with the federal court, holding that demand was futile and that the case should proceed.

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Putting Stockholders First, Not the First-Filed Complaint

The following post comes to us from Leo E. Strine, Jr., Senior Fellow for the Harvard Program on Corporate Governance and Austin Wakeman Scott Lecturer at Harvard Law School, Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, and Matthew Jennejohn, an associate at Shearman & Sterling, LLP.

The following post comes to us from Leo E. Strine, Jr., Senior Fellow for the Harvard Program on Corporate Governance and Austin Wakeman Scott Lecturer at Harvard Law School, Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law at Widener University School of Law, and Matthew Jennejohn, an associate at Shearman & Sterling, LLP.

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs’ attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction, and the historical development of doctrines limiting parallel state court litigation — the doctrine of forum non conveniens and the “first-filed” doctrine — this paper suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The “first-filed” rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties’ interests and judicial efficiency.

Putting Stockholders First responds to the observation that in 2011, only 5% of settlements of shareholder litigation challenging mergers and acquisitions involved an additional payout to stockholders, 84% of such settlements were based on additional disclosure only, but all of such settlements involved payment of fees for plaintiffs’ attorneys. These figures reflect a significant change from 1999 to 2000, when 52% of suits filed on behalf of shareholders produced a financial benefit for the class, and only 10% of settlements were “disclosure-only.”

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Delaware Court of Chancery Dismisses Hastily Filed Caremark Action

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Gallardo, Brian Lutz, James Hallowell, and Jefferson Bell. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Mr. Gallardo, Brian Lutz, James Hallowell, and Jefferson Bell. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On September 25, 2012, Vice Chancellor Travis Laster of the Court of Chancery of the State of Delaware dismissed the derivative complaint in South v. Baker, C.A. No. 7294-VCL, with prejudice. This decision reaffirms the Chancery Court’s low tolerance for hastily filed shareholder derivative lawsuits brought under the In re Caremark International Inc. Derivative Litigation, 698 A.2d 959 (Del. Ch. 1996), line of cases where the plaintiff makes little effort to plead any connection between a “corporate trauma” and the conduct of a board of directors. At the same time, the South decision also finds that shareholders are entitled to, and should seek, books and records from Delaware corporations before bringing derivative lawsuits in Delaware. Accordingly, Delaware corporations should anticipate an increase in shareholder demands for books and records under Section 220 of the Delaware General Corporation Law in the wake of any “corporate trauma.” In addition, the South decision found that dismissal of the South complaint did not preclude other Hecla shareholders from filing future derivative suits because the South plaintiffs did not use Section 220 and, therefore, did not adequately represent Hecla’s interests.

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Avoiding Shareholder Suits Challenging Executive Compensation

Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein and Jeannemarie O’Brien.

Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein and Jeannemarie O’Brien.

A number of derivative suits have been filed in recent months alleging that the senior executive compensation plans at public companies do not comply with Section 162(m) of the Internal Revenue Code. Section 162(m) provides that any compensation paid to the CEO and next three highest compensated proxy officers (other than the CFO) in excess of $1 million per year is not tax deductible unless, among other things, the compensation is subject to objective performance metrics that have been disclosed to and approved by shareholders. The complaints generally allege that the performance goals established by the plans are not sufficiently objective to comply with Section 162(m) and that the purported failure of the plans to comply with Section 162(m) renders the required proxy disclosure false and misleading in violation of Section 14(a) of the Securities Exchange Act. In addition, the complaints allege that the provision of non-deductible compensation to senior executives constitutes waste, unjust enrichment of the executives and a breach of the directors’ duty of loyalty.

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