The Delaware Law Series


Lessons from the Chancery Court Decision in P3 Health Group

Gail Weinstein is Senior Counsel, Steven J. Steinman and Brian T. Mangino are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Mr. Mangino, Andrew J. Colosimo, Randi Lally, and Erica Jaffe 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernán Restrepo and Guhan Subramanian.

In P3 Health Group, private equity firm Hudson Vegas Investments SVP LLC, which was the second-largest unitholder of P3 Health Group Holdings, LLC (the “Company”), challenged the Company’s de-SPAC merger. The Company’s sponsor, private equity firm Chicago Pacific Founders Fund, L.P., controlled the Company (a Delaware LLC) by virtue of its majority equity ownership, board designees, and contractual rights. Hudson claimed that the merger, which stripped it of $100 million of stock options and its contractual rights with respect to the Company and was effected over its objection, violated its contractual veto right over affiliated transactions.

The Delaware Court of Chancery recently issued five important decisions in the case (dated November 3, October 31, October 28, October 26, and September 12, 2022), rejecting dismissal of most of Hudson’s claims.

Background. Chicago Pacific provided the start-up capital for the Company and soon thereafter, Hudson invested $50 million in the Company. Soon thereafter, a de-SPAC merger was structured with Foresight Acquisition Corp. (a SPAC formed by an unaffiliated businessperson), which contemplated a three-way merger that included another Chicago Pacific portfolio company (known as “MyCare”). Hudson objected to the transaction. Chicago Pacific and the Company then restructured it to exclude MyCare (but allegedly contemplated including MyCare later in a follow-on transaction). Hudson unsuccessfully sued to enjoin the merger. Following the closing, Hudson asserted claims against Chicago Pacific and certain of its and the Company’s key managers and officers for their roles in arranging the merger. Hudson also added a claim that its initial investment in the Company was fraudulently induced. In a series of recent pleading-stage decisions, Vice Chancellor Laster rejected dismissal of most of the plaintiff’s claims.

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Chancery Court Addresses Board Responsibility Under Caremark for Cybersecurity Risk

Gail Weinstein is Senior Counsel, and Philip Richter and Steven Epstein are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Brian T. Mangino, Erica Jaffe, and Shant P. Manoukian. This post 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.

In Construction Industry Laborers Pension Fund v. Bingle (Sept. 6, 2022) (SolarWinds), the Delaware Court of Chancery dismissed a derivative suit asserting Caremark claims against the directors of SolarWinds Corporation for their alleged failure to oversee the company’s cybersecurity risk. SolarWinds, which developed software for businesses to help them manage their information technology infrastructure, was attacked by cyber hackers, resulting in the massive leaking of its customers’ personal information. When the attack (known as “Sunburst”) was disclosed, SolarWinds’ stock price dropped by 40%. Stockholders brought suit and argued that demand on the board to bring the suit was futile as a majority of the directors faced a likelihood of personal liability under Caremark for breach of the duty of loyalty in having failed to oversee the company’s cybersecurity risk. The case was dismissed at the pleading stage.

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Fair Value as Process: A Retrospective Reconsideration of Delaware Appraisal

William W. Bratton is Nicholas F. Gallicchio Professor of Law Emeritus at the University of Pennsylvania Carey Law School. This post is based on his recent paper. This post 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Section 262(h) of Delaware’s General Corporation Law (DCL) bids the Chancery Court in an appraisal proceeding to “determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger.”  It provides no further instructions regarding the means to the end, other than an admonition to “take into account all relevant factors.”   For additional guidance on the meaning of fair value, we must consult a caselaw that stretches back in time almost a century.

There have been two intervals of disruption in this history—disruptions incident to unexpected revisions of the methodology of fair value ascertainment by the Delaware Supreme Court.  The first was the 1983 decision of Weinberger v. UOP, 457 A.2d 701 (Del. 1983), which withdrew a longstanding and constraining valuation mandate and much expanded appraisal’s menu of acceptable methodologies, inviting reference to state-of-the-art valuation technologies.  The intent and result were to facilitate liberality in the treatment of appraisal petitioners.  The second disruptive intervention occurred more recently, with the decision of three cases–DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), and Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (2019).  This trio of cases brings back mandatory methodology, imposing the merger price as the basis for fair value ascertainment in appraisals arising from a high-profile subset of arm’s length mergers.  The rulings substantially modify Weinberger without overruling it, lurching away from liberality of treatment.  Controversy and confusion have resulted.

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The Corporate Contract and Shareholder Arbitration

Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School and Mohsen Manesh is Professor at University of Oregon School of Law. This post is based on their recent paper. This post is part of the Delaware law series; links to other posts in the series are available here.

Longstanding decisions of the U.S. Supreme Court coupled with more recent developments in the corporate law of Delaware have sparked renewed concerns that publicly traded corporations may adopt arbitration provisions precluding shareholder lawsuits, particularly securities fraud class actions. In particular, in a line of decisions spanning decades, the U.S. Supreme Court has steadily expanded the reach of the Federal Arbitration Act (“FAA”). Section 2 of that statute mandates

“[a] written provision in any … contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable…..”

Applying the FAA, the Court has upheld contractual agreements compelling arbitration of claims made under both the Securities Act of 1933 and the Securities Exchange Act of 1934. Indeed, the Court has gone further, ruling that an agreement to arbitrate is enforceable even when made as part of an unnegotiated contract of adhesion, even if pursuing claims through individualized, bilateral arbitration (rather than in a class proceeding) would make it uneconomical to vindicate those claims, and even if applicable state law would otherwise hold the agreement to arbitrate to be unconscionable.

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Governance and the Decoupling of Debt and Equity: The SEC Moves

Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School.  This post is based on his recent paper, forthcoming in Capital Markets Law Journal, and is part of the Delaware law series; links to other posts in the series are available here.

“Decoupling”—the unbundling of the rights and obligations of equity and debt through derivatives and other means—has posed unique challenges for corporate and debt governance. Corporate governance mechanisms, such as shareholder voting and blockholder disclosure, have faced “empty voting with negative economic ownership” and “hidden (morphable) ownership” issues. Debtor-creditor contract-based interactions have faced “empty crediting with negative economic interest,” “hidden interest,” and “hidden non-interest” issues. In 2006, the initial version of an analytical framework for decoupling was introduced. In that decade, foreign regulators, Delaware and other substantive law authorities, and private ordering started responding.

In 2021 and 2022, the Securities and Exchange Commission (SEC) voted out proposals directed at decoupling, as well as other proposals that may affect decoupling. My article, Governance and the Decoupling of Debt and Equity: The SEC Moves (forthcoming in Capital Markets Law Journal, 2022), is the first work to: (1) analyze the SEC proposals as a whole, propose significant changes, and offer ideas for enhancing the proffered cost-benefit analysis (CBA); and (2) situate the prospective SEC role with the roles that substantive law authorities and private ordering are already playing.

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Seven Key Considerations for a Reverse Stock Split by a Delaware Corporation

Jeremy Barr is Counsel, Valerie Ford Jacob is Global Co-head of Capital Markets & Partner, and Pamela Marcogliese is a Partner at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Given recent stock market declines, many listed companies currently trade at substantially reduced share prices relative to earlier in 2022. Reduced share prices can cause many challenges for a listed company, one of which is that if a company listed on the NYSE or Nasdaq trades below $1.00 per share over 30 consecutive trading days, the company may be delisted by the applicable exchange. One of the principal ways companies seek to increase their share price and, if applicable, maintain their listing eligibility is by implementing a reverse stock split (sometimes referred to as a share consolidation). Below, we discuss some of the key issues for a board of directors and management team to consider when weighing the costs and benefits of a reverse stock split.

What is a reverse stock split?

In a reverse stock split, a company reclassifies its issued and outstanding shares into a smaller number of shares (for instance, every five outstanding shares are reclassified into one share). When the reverse stock split becomes effective, outstanding shares are exchanged for a lower quantity of shares based on the designated ratio, and these “post-split” shares trade under a new CUSIP number. At least at the outset, the company’s stock price increases in the same proportion as the number of shares decreases.

What triggers delisting on the NYSE or Nasdaq?

Both the NYSE and Nasdaq require listed companies to maintain a share price above $1.00.

  • The NYSE will issue a deficiency letter to a listed company if the average closing price of its shares is less than $1.00 over a 30 consecutive trading-day period. NYSE listed companies must notify the NYSE within 10 business days of receipt of the deficiency notice of either their intent to cure or to be subject to the exchange’s suspension and delisting procedures. NYSE listed companies have six months to cure the deficiency following receipt of the deficiency letter. The cure period can be extended to the company’s next annual meeting if a shareholder vote is required to approve the reverse stock split (even if beyond six months from receipt of the deficiency letter).
  • Nasdaq will issue a deficiency letter to a listed company if its shares fail to satisfy the $1.00 minimum closing bid price requirement for 30 consecutive business days. Like companies listed on the NYSE, Nasdaq listed companies have a 180-day period to cure the deficiency following receipt of the deficiency letter. However, unlike the NYSE, a second 180-day period is available for companies listed on the Nasdaq Capital Market tier if the company satisfies the $1 million market value of publicly held shares requirement and meets all other initial inclusion requirements of the Nasdaq Capital Market (other than the $1.00 closing bid). Companies listed on the Nasdaq Global Select Market or Nasdaq Global Market tiers that are unable to comply with the initial 180-day compliance period may transfer to the Nasdaq Capital Market to take advantage of the additional 180-day compliance period offered by that tier.

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Lawsuit Against Meta Invokes Modern Portfolio Theory To Protect Diversified Shareholders

Frederick Alexander is the CEO of The Shareholder Commons. This post is based on the class action filed against the directors of Meta Platforms (formerly Facebook, Inc.), and is part of the Delaware law series; links to other posts in the series are available here.

New Lawsuit Argues that Directors Failed to Consider Portfolio Impacts of Corporate Decisions

On Monday, October 3, a class action was filed in the Delaware Court of Chancery against the directors of Meta Platforms (formerly Facebook, Inc.), alleging that they breached their fiduciary duties by ignoring the impact of the company’s operations on the diversified portfolios of its shareholders. Among other matters, the McRitchie v Zuckerberg complaint challenges (1) the conduct revealed by Frances Haugen, the “Facebook Whistleblower,” (2) the large distributions of cash made to shareholders through stock repurchases, and (3) the board’s rejection of shareholder proposals that would have helped discern the broader impact of the company’s business model.

The complaint is based on the traditional shareholder primacy model, which provides that directors have fiduciary duties to the holders of a company’s residual equity–generally its common shareholders. It does not seek to expand those duties to encompass other stakeholders. However, the complaint does drill down on an issue that courts have yet to fully address: the fiduciary implication of the fact that modern investors are generally diversified, so that their interests extend beyond (and may be in opposition to) the maximization of the value of future cash flows to be received from owning a company’s shares.

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Lessons from Twitter v. Musk on Access to Directors’ and Executives’ Emails

Gail Weinstein is Senior Counsel, and Scott B. Luftglass and Philip Richter are Partners at  Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Luftglass, Mr. Richter, Mr. Steven Epstein, Mr. Brian T. Mangino, and Ms. Erica Jaffe and is part of the Delaware law series; links to other posts in the series are available here.

In a letter opinion issued in connection with discovery matters in Twitter v. Musk (Sept. 13, 2022), the Delaware Court of Chancery ruled that Twitter is not entitled to obtain Elon Musk’s communications on his email accounts at two other (i.e., non-Twitter-affiliated) companies about the deal and his intention to terminate it. The court held that the emails were protected by the attorney-client privilege and that the companies’ policies allowing company access to personal communications on the company email accounts did not defeat the privilege given that the policies were not applied to Musk.

Twitter has claimed that Musk’s termination of the merger agreement pursuant to which he agreed to acquire Twitter is invalid as his alleged reasons for terminating the agreement are a pretext for a change of heart about proceeding with the deal after a steep decline in the stock price of technology companies, including Twitter, that occurred after the agreement was signed. Musk communicated about the termination of the Twitter merger agreement on his email accounts at Space Exploration Technology Corp. (SpaceX) and Tesla, Inc.—both of which are companies that Musk controls. Musk refused to produce the emails, asserting that they were protected from disclosure under the attorney-client privilege. Chancellor Kathaleen St. J. McCormick explained that, to support a claim of attorney-client privilege, Musk had to demonstrate that he had “an objectively reasonable expectation of confidentiality in the SpaceX and Tesla emails.” The court held that, based on the expectation of privacy that Musk had with respect to his SpaceX and Tesla email accounts, his personal emails on those accounts are not discoverable by Twitter.

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Chancery Court Upholds Amendment Prolonging Company’s Dual-Class Structure

Gail Weinstein is senior counsel, and Steven Epstein and Andrea Gede-Lange are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Ms. Gede-Lange, Mr. Soran, Mr. Colosimo, and Mr. Chrisope, 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 The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here)  and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

In City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc. (July 29, 2022), stockholders of The Trade Desk (“TTD”) challenged an amendment to the certificate of incorporation of TTD that effectively extended the duration of the company’s dual-class stock structure—which, in turn, effectively extended the duration of the voting control held by TTD’s co-founder/CEO/chairman of the board, who owned 98% of TTD’s high-vote Class B common stock, representing control over 55% of the combined vote of the stockholders. The plaintiff alleged that the controller, TTD’s board of directors, and certain officers breached their fiduciary duties in approving the charter amendment and recommending it to the stockholders (who voted to approve it).

The TTD board was comprised of the controller and seven outside directors. The amendment was approved by a special committee of the board comprised of three of the outside directors. The transaction, involving a conflicted controller, was subject to the entire fairness standard of review unless the prerequisites for business judgment review as set forth in MFW had been met. Vice Chancellor Fiorvanti concluded, at the pleading stage of litigation, that the MFW prerequisites were satisfied; and the case thus was dismissed.

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Chancery Court Finds Conflicted Controller Spinoff Met MFW Prerequisites

Gail Weinstein is Senior Counsel, and Steven J. Steinman and Randi Lally are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Steinman, Ms. Lally, David L. Shaw, Mark H. Lucas, and Maxwell Yim, 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 (discussed on the Forum here) by Lucian Bebchuk and Assaf Hamdani. 

In In re Match Group, Inc. Derivative Litigation (Sept. 1, 2022), a stockholder of IAC/InterActiveCorp (“Old IAC”) challenged the multi-step reverse spin-off that was initiated by the company’s controller, a company allegedly indirectly controlled by Barry Diller. Vice Chancellor Morgan T. Zurn, at the pleading stage of litigation, found that the transaction met the MFW prerequisites for business judgment review and dismissed the case.

Background. While the transaction shifted some voting power from the controller to the minority stockholders, certain minority stockholders were dissatisfied with the transaction’s diversion of cash to the post-spin company and the allocation of assets as between the controller and the post-spin company. The reverse spinoff, which concededly was a conflicted controller transaction with the controller standing on both sides of the transaction, was approved by a special committee of the pre-spin company’s board and by the pre-spin company’s minority stockholders. The plaintiffs claimed breaches of fiduciary duties by the pre-spin company’s board, the controller, and the controller’s alleged controller—alleging that the transaction had been orchestrated by the controller to benefit the post-spin company but to the detriment of the minority stockholders. The court disagreed with the plaintiff’s contentions that the special committee was not independent, was not empowered to choose its own advisors and definitively “say no,” and did not meet its duty of care, and that the minority shareholder vote was not fully informed.

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