The Delaware Law Series

Shareholder Litigation Involving Acquisition of Public Companies: Review of 2017 M&A Litigation

John Gould is Senior Vice President of Cornerstone Research. This post is based on a Cornerstone Research memorandum authored by Ravi Sinha.

This post examines litigation challenging M&A deals valued over $100 million announced from 2008 through 2017, filed on behalf of shareholders of publicly traded target companies.

These lawsuits usually take the form of class actions filed in either federal or state court. Plaintiffs typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common allegations include:


The Preclusive Effect of Demand Futility

Sarah Runnells Martin is counsel and Bonnie David and Juliana van Hoeven are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Runnells Martin, Ms. David, and Ms. van Hoeven. This post is part of the Delaware law series; links to other posts in the series are available here.

In the recent opinion California State Teachers’ Retirement System v. Alvarez (Walmart), the Delaware Supreme Court addressed the preclusive effect of demand futility decisions rendered by one court on derivative litigation pending in another forum. After careful consideration of applicable Arkansas and federal law, the court determined that the Arkansas district court’s ruling—which failed to find that demand had been excused—would preclude plaintiffs in the Delaware Court of Chancery from relitigating demand futility, and dismissed the suit.

Issue Preclusion in Derivative Actions

Issue preclusion prohibits a party that litigated an issue in one forum from later relitigating the same issue in another forum. While the law governing issue preclusion differs somewhat by jurisdiction, the factors are similar, and a key inquiry is usually whether the prior action was between the same parties or others in “privity” with those parties.


M&A Litigation Developments: Where Do We Go From Here?

Edward Micheletti is partner, Jenness Parker is counsel, and Bonnie David is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Micheletti, Ms. Parker, and Ms. David and is part of the Delaware law series; links to other posts in the series are available here.

Over the last few years, three notable Delaware cases—C&J Energy, Corwin and Trulia—have paved the way for a dramatic shift in the deal litigation landscape. In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust (2014), the Delaware Supreme Court indicated (and the Court of Chancery has generally construed the decision to hold) that an injunction should not be issued where there is no alternative bidder and stockholders therefore risk losing the current deal if enjoined. In Corwin v. KKR Financial Holdings LLC (2015), the Delaware Supreme Court clarified that, absent a conflicted controller, a fully informed vote of disinterested, uncoerced stockholders will extinguish breach of fiduciary duty claims, leaving only claims for waste. And finally, in In re Trulia, Inc. Stockholder Litigation (2016), the Court of Chancery decided that it will no longer approve disclosure-based settle­ments unless the disclosures are “plainly material,” the release is narrowly tailored to the claims brought in the litigation and the claims are sufficiently investigated.


Delaware’s Voluntary Sustainability Certification Law

John Mark Zeberkiewicz is a Director at Richards, Layton & Finger, P.A. This post is based on a Richards, Layton & Finger publication by Mr. Zeberkiewicz and is part of the Delaware law series; links to other posts in the series are available here.

Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

On June 27, 2018, Delaware Governor John Carney signed legislation enacting the Delaware Certification of Adoption of Transparency and Sustainability Standards Act (the “Act”), which will become effective on October 1, 2018. The Act, which is the first of its kind, represents Delaware’s initiative to support sustainability practices by providing Delaware-governed entities a platform for demonstrating their commitment to corporate and social responsibility and sustainability. It reflects Delaware’s recognition that sustainability and responsibility are not merely buzzwords that companies deploy to appeal to a broader range of consumers. Rather, those terms embody business practices and systems that are designed to foster innovation and long-term growth while promoting business practices intended to provide societal benefits.


Further Thoughts on Elon Musk’s Compensation

Joseph Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder, Howard Berkower, and Andy Tsang originally published in the New York Law Journal.

Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here), by Lucian Bebchuk and Jesse Fried, and Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Our previous post reported on the $2.6 billion stock option granted earlier this year by Tesla, Inc. (Tesla) to its Chairman and CEO, Elon Musk, representing 12 percent of Tesla shares outstanding on the option grant date (the “Musk Option”). Mr. Musk is one of the founders of Tesla, as described in Tesla’s proxy statements.

This post compares Mr. Musk’s ownership and certain of his arrangements at Tesla with those of “Founder CEOs” at 10 other high-tech companies. “Founder CEOs” are CEOs (or, in two cases, Executive Chairmen who had previously served as CEO) who founded or co-founded the enterprise. The post also comments on legal aspects of the award under Delaware law. Finally, it discusses briefly the stockholder class action derivative complaint regarding the Musk Option filed under seal on June 5 (a redacted version was made public on June 7) in the Delaware Chancery Court against Tesla directors including Mr. Musk and Tesla as nominal defendant. Tornetta v. Musk et al, No. 2018-0408.


The Inapplicability of Corwin and Section 220

Sarah T. Runnells Martin is counsel and Michelle Davis is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Since the Delaware Supreme Court decided Corwin v. KKR Financial Holdings LLC more than two years ago, there has been an open question as to whether and to what extent the principles affirmed in that decision apply in the context of a Section 220 demand to inspect books and records. In our November 2017 issue of Insights: The Delaware Edition, we discussed Salberg v. Genworth Financial, Inc., a case in which the Delaware Court of Chancery appeared to suggest, but did not explicitly hold, that the Corwin doctrine would not prevent a stockholder from obtaining books and records pursuant to Section 220 if the stockholder has stated a proper purpose. In Lavin v. West Corporation, the Court of Chancery addressed the question directly and held that it would not consider the Corwin doctrine when evaluating whether a stockholder seeking to obtain corporate documents to investigate possible wrongdoing in connection with a merger has met the proper purpose requirement of Section 220.


Stock Option Grants and Fiduciary Duties in Ratification

Amy Simmerman and Julia Reigel are partners and Nate Emeritz is of counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Ms. Reigel, Mr. Emeritz, John Aguirre and Ryan Greecher, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery issued a post-trial decision determining that a director who refused to cooperate in remediating flaws in the company’s capital structure breached his fiduciary duty of loyalty and owed damages to the corporation. The opinion is particularly important because of that holding. However, the opinion is equally important because of the court’s emphasis on the importance of complying with technical rules under Delaware law when issuing equity and the need to document the board’s decision to issue equity. Finally, the case highlights the ongoing use of provisions of the Delaware corporate statute that allow for the ratification and validation of defective corporate acts—and the reality that some of the most fraught uses of those provisions can occur in the context of disputes among founders and board members.


Legal and Practical Limits on Indemnification and Advancement in Delaware Corporate Entities

Paul J. Lockwood is a partner and Arthur Bookout is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is a version of Legal and Practical Limits on Indemnification and Advancement in Delaware Corporate Entities, a whitepaper Mr. Lockwood and Mr. Bookout published in partnership with AIG Financial Lines. Skadden, Arps, Slate, Meagher & Flom LLP is a member of AIG Financial Lines’ Management Liability Panel Counsel Program. This post is part of the Delaware law series; links to other posts in the series are available here.

Directors and officers of Delaware corporations generally expect that the company will provide them with indemnification and advancement in corporate lawsuits.

Indemnification is where the company reimburses the director or officer for the attorneys’ fees and costs, and potentially judgments, incurred in connection with claims arising out of the director’s or officer’s service to the company. Advancement is where the company pays the director’s or officer’s attorneys’ fees and costs prior to the final disposition of the litigation, and is sometimes subject to an undertaking to repay the company if it is ultimately determined that indemnification is unwarranted.


Fiduciary Duties of Buy-Side Directors: Recent Lessons Learned

Steven Haas is a partner and Richard Massony is an associate at Hunton Andrews Kurth LLP. This post is based on a Hunton Andrews Kurth memorandum by Mr. Haas and Mr. Massony, and is part of the Delaware law series; links to other posts in the series are available here.

Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders, by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Significant acquisitions always present risks to the acquiring entity and its stockholders. These risks may arise from, among other things, integration challenges or failing to identify operational problems or liabilities during due diligence that adversely affect the price paid to the sellers. Nevertheless, in the context of an acquisition—even a significant, “bet the company” transaction—the directors of the
acquiring company are almost always protected by the business judgment rule. Two recent cases, however, show potential pitfalls when the buyer’s board of directors may have conflicts of interest. When a majority of the directors is conflicted or there is a controlling stockholder on both sides of the transaction, courts will not apply the business judgment rule unless certain procedural safeguards are in place.


The Federalization of Corporate Governance

Marc I. Steinberg is the Radford Professor of Law at Southern Methodist University Dedman School of Law. This post relates to a recently published book by Professor Steinberg. Related research from the Program on Corporate Governance includes Federal Corporate Law: Lessons From History, by Lucian Bebchuk and Assaf Hamdani.

In my recently published book, The Federalization of Corporate Governance (Oxford University Press 2018) (ISBN 978-0-19-993454-6), I explore this process of federalization in the United States from 1903 to the present. Clearly, the states, particularly Delaware, traditionally have been and continue as principal regulators of the sphere of corporate governance. Nonetheless, to an increasing degree, the federal government, the SEC, and the national stock exchanges impact corporate governance standards. The book views this federalization as an evolutionary process that commenced at the beginning of the twentieth century. Going through periods of activism, gradual transition, and stagnation, the process intensified with the enactment of the Sarbanes-Oxley and Dodd-Frank Acts.

To view these Acts as representing a revolutionary transformation with respect to federal oversight of corporate governance is an exaggeration. Rather, they symbolize a period of enhanced activism whereby this federalization process was accentuated. From a historical perspective, between 1903 and 1914, 24 bills were introduced in Congress which sought to require federal chartering and/or the implementation of federal minimum substantive standards. During that era, both Presidents Roosevelt and Taft favored federal incorporation. Between 1914 and 1930, another seven bills were introduced in Congress seeking to effectuate similar objectives—with one such bill requiring that the Federal Trade Commission approve executive officer remuneration. Interestingly, the next significant legislative effort occurred 50 years thereafter with the Metzenbaum Bill of 1980 which prescribed federal minimum standards that largely focused on adherence to fiduciary duties, including with respect to related-party transactions. Although hearings were held through the years, none of these bills were enacted.


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