In Captain Phillips, a pirate hijacks a ship and turns to the captain and says (in what is an amazing improvised line) “Look at me, I’m the captain now.” [1] While the comparisons between piracy and M&A will take us only so far, let us start with an observation: boards and special committees overseeing M&A transactions—much like ship captains in treacherous waters—need to be wary of other constituencies attempting to overtake their role not only once the transaction has been signed, but through the twists and turns of the entire deal.

Section 141(a) of the Delaware General Corporation Law imbues boards with the unique authority to manage or direct the affairs of a corporation. An important corollary to that statutory authority is the bedrock principle under Delaware law that directors are fiduciaries to the corporation and its stockholders. Two recent Delaware cases [2] serve as reminders that fiduciaries must continue to exercise care in discharging their duties throughout the life of a deal—that is, as it is often put, directors’ and officers’ fiduciary duties are unremitting. In the M&A context, most breach of fiduciary duty cases assert claims that arise at the time the board approves the entry into the definitive transaction document. In that setting, it is well understood that such decisions require the directors to act with the utmost care, on an informed basis and in the best interests of the corporation and its stockholders. However, the decisions in Fort Myers v. Haley and the Dell Stockholders Litigation involved breach of fiduciary duty claims stemming from actions taken after the initial announcement of the proposed transactions. These opinions show that, in situations where parties renegotiate deal terms in response to stockholder opposition of the original terms, plaintiffs (and thereby the court) will scrutinize the process that led to the board’s decision to approve the revised deal terms. If anything, these cases underscore how critical it is for officers and directors to keep the full board (or the special committee in charge of negotiating the transaction) informed of material developments, engaged in the negotiation of any material deal terms after signing, and ultimately in control of the sales process throughout the pendency of a deal.

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In late February as the COVID-19 pandemic was accelerating, the Delaware Chancery Court issued an important decision that is likely to impact transactions during the expected recession. In Salladay v. Lev, C.A. No. 2019-0048-SG (Del. Ch. Feb. 27, 2020) (“Salladay”), the court held that a conflicted transaction—not involving a controlling shareholder—could only be cleansed through the use of a special committee under Trados II [1] if the special committee was constituted ab initio (i.e., from the outset). Salladay is the first time that a Delaware court has held that the ab initio requirement established by Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) and its progeny applies in a non-MFW scenario (i.e., in a transaction without a conflicted controlling shareholder). Accordingly, a conflicted transaction without a controlling stockholder, can be “cleansed” under Trados II and become eligible for review under the business judgment rule if an empowered special committee of independent directors is constituted at the outset before any substantive economic discussions occur and the other MFW standards relating to special committees are met. [2] However, if the special committee is not established ab initio, and there are disputed questions of fact about whether the conflicted transaction was properly cleansed under Corwin [3], then the director defendants will have the burden to prove that the transaction was entirely fair.

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[On January 8, 2020], the Delaware Supreme Court heard the appeal in Sciabacucchi v. Salzberg (pronounced Shabacookie!) in which the Chancery Court held invalid exclusive federal forum provisions for ’33 Act litigation in the charters of three Delaware companies. Few of the justices revealed their inclinations, so it’s difficult to predict the outcome. We’ll have to wait for the Court’s final decision.

You might recall that this case took on a heightened significance when, in March 2018, SCOTUS held, in Cyan Inc. v. Beaver County Employees Retirement Fund, that state courts continue to have concurrent jurisdiction over class actions alleging only ’33 Act violations and that defendants cannot remove these actions filed in state court to federal court. (See this PubCo post.) Both before and especially after Cyan, to avoid state court litigation of ’33 Act claims (and forum shopping by plaintiffs for the most favorable state court forum), many companies adopted “exclusive federal forum” provisions in their charters or bylaws that designated the federal courts as the exclusive forum for litigation under the ’33 Act (FFPs). Delaware law expressly permits the adoption of charter or bylaw provisions that designate Delaware as the exclusive forum for adjudicating “internal corporate claims,” defined as claims, including derivative claims, that are based on a violation of a duty by a current or former director or officer or stockholder or as to which the corporation law confers jurisdiction on the Court of Chancery. However, federal securities class actions are not expressly included. (See this PubCo post.)

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