Delaware Update

This post is based on a Fried Frank publication by Andrea Gede-LangeRandi LallyMark H. LucasDavid L. ShawMatthew V. Soran, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

Court held claims asserted against directors before the company was acquired by a third party were extinguished in the acquisition—Massey Energy Co. Litigation (May 4, 2017)

The former stockholder-plaintiffs asserted “Caremark-type” claims that the Massey Energy directors had failed to exert proper oversight over the company’s operations, resulting in a mining explosion that claimed numerous lives, which then led to the company’s sale. The court found, consistent with long-established law, that these “otherwise valid” Caremark-type claims of breach of the directors’ oversight duty, made before Massey merged with a third party acquiror, “passed” to the acquiror in the merger. The plaintiffs therefore could no longer satisfy the requirement that they had “continuously owned” the claims and, thus, they could no longer bring them. The court rejected the plaintiffs’ contentions that they qualified for an exception to the continuous ownership rule based on the merger having been effected (a) for the purpose of depriving stockholders of standing to bring a derivative action or (b) as a mere reorganization which did not affect the plaintiffs’ ownership interest in the business. The court also rejected the plaintiffs’ argument that they could bring “inseparable fraud” claims.

Court held stockholder approval of director compensation with specific sub-limits resulted in business judgment review—In re Investors Bancorp, Inc. Stockholder Litigation (April 5, 2017).

The Court of Chancery dismissed the plaintiffs’ claims challenging large equity incentive awards to the company’s non-employee directors. Due to directors’ self-interest in director compensation awards, if such awards are challenged, they are generally subject to the stringent entire fairness standard of judicial review; however, if such awards are ratified by stockholders in an informed, disinterested vote, then business judgment review should apply. In the 2015 Calma v Templeton decision, the court held that stockholder ratification of an equity incentive plan with only “generic limits” would not constitute ratification sufficient to invoke business judgment review of the challenged grants by directors to themselves under the plan. By contrast, in Investors Bancorp, the stockholders’ approval of the equity incentive plan was sufficient to invoke business judgment review because the plan included meaningful, specific sub-limits for non-employee directors. The court upheld the awards, finding that, although they were large in relation to the company’s peer group, they were within the plans specified sub-limits and the plaintiffs had not established that they were so exorbitant as to constitute waste.

Court held that bylaws requiring supermajority stockholder approval to remove directors (of non-classified boards) are invalid—Frechter v. Zier (Jan. 24, 2017, Transcript).

The Court of Chancery held that DGCL Section 141(k) “unambiguously” confers a right of a majority of the outstanding shares to remove directors and that any provision to the contrary in a company’s bylaws is unlawful. Vice Chancellor Glasscock noted that a supermajority vote requirement to remove directors is valid if included in a certificate of incorporation (as DGCL Section 102(b)(4) permits such a requirement in a charter). The court noted the 2015 Vaalco decision, where the court invalidated provisions of Vaalco’s charter and bylaws that provided that directors could be removed only for cause because, under Section 141(k), it is only when there is a classified board (which Vaalco’s was not) that a charter may provide for removal of directors only for cause.

Court enjoined stockholder meeting due to required additional disclosure relating to banker’s fees—Vento v. Currey (March 22, 2017).

The Court of Chancery enjoined for five days the company’s stockholder meeting on a proposed acquisition and required that the acquiring company make additional disclosure relating to fees payable to its financial advisor for participating in the acquisition financing. The acquiror had disclosed in its registration statement the advisory fees that were payable to the banker and had disclosed that “additional fees” would be payable relating to the banker’s participation in the acquisition financing. The court found that additional disclosure was required relating to the “additional fees.” Given that the court recently, as a general matter, has not exhibited a strict attitude toward disclosure of details relating to banker fees, it should be kept in mind that some detail may be required when the banker is receiving “additional fees” separate from the primary fees described.

Delaware State Bar approved a proposed amendment the DGCL relating to the dating of stockholder written consents.

Among the proposed amendments to the Delaware General Corporation Law—that, in March 2017, were approved and recommended by the Corporate Council of the Corporation Law Section of the Delaware State Bar Association and introduced to the Delaware General Assembly—is an amendment to DGCL Section 228 (which permits action to be taken by stockholders by written consent in lieu of a meeting). The amendment is intended to remove any uncertainty as to whether a written stockholder consent must bear the date of signature of the stockholder executing the consent to be effective. Section 228(c) currently provides that a written consent will not be 60 days of the earliest dated consent” (emphasis added) to take such action. Based on this provision, a number of Delaware judicial decisions have called into question the validity of consents that were not individually dated by the stockholders when executed. Under the proposed amendment, Section 228(c) will continue to provide a 60-day period for the delivery of consents representing a sufficient number of shares for action to be taken, but will provide that the 60-day period is measured based on the first date that a consent is delivered to the corporation. The amendment, if enacted, will be effective for written consents as to which the record date for determining which stockholders are entitled to vote is on or after August 1, 2017.

The complete publication, including appendix, is available here.

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