The Delaware Law Series


Performing Equity: Why Court of Chancery Transcript Rulings Are Law

Joel Friedlander is partner at Friedlander & Gorris, P.A. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Lawyers practicing in the Delaware Court of Chancery or advising Delaware corporations about Delaware corporate law read, inquire about, cite, and disseminate transcript rulings, which are also known as bench rulings. To the practitioner, they are an indispensable tool. They influence our behavior and those of our adversaries. They help predict future litigation outcomes. In that Holmesian sense, they constitute law: “The prophecies of what the courts will do in fact, and nothing more pretentious, are what I mean by the law.”

In the Delaware Court of Chancery, leadership applications, expedition motions, scheduling disputes, discovery motions, settlement hearings, and fee applications are regularly adjudicated orally or by entry of short minute orders. Merits rulings, such as motions to dismiss, preliminary injunction applications, advancement of legal fees, and summary judgment motions may also be adjudicated orally. A large corpus of unpublished rulings address all aspects of corporate law litigation.

Court of Chancery practitioners have long collected for future reference transcript rulings, letter opinions, orders, and other unpublished decisions. It was not until the 1990s that unpublished memorandum opinions and letter opinions became widely available on Lexis. Upon the publication a generation ago of a treatise on Delaware Court of Chancery practice, a book review attested to the treatise’s utility in light of practitioners’ prior need to collect unpublished rulings.

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Directors Using Their Employer’s Email Account

Daniel E. Wolf, Peter Martelli, and Stefan Atkinson are partners at Kirkland & Ellis LLP. This post is based on their Kirkland & Ellis memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware decision on a document production issue in the WeWork litigation highlights potential risks from outside directors using external work email accounts in a way that could jeopardize attorney-client privilege on documents they send or receive.

In the case, two Softbank insiders had dual roles at WeWork and Sprint, another Softbank portfolio company. The Softbank insiders asserted privilege on certain WeWork-related documents that were sent to or from their Sprint email accounts (Sprint was not at all involved in this matter). The court—recognizing that issues of privilege must be decided on a case-by-case basis—found that the insiders’ use of Sprint email accounts, rather than Softbank or personal email accounts, resulted in a
waiver of privilege that otherwise may have applied. Because of Sprint’s generally applicable email use policy for employees, among other facts, the Softbank insiders had no “reasonable expectation of privacy” (a prerequisite to assert privilege over “confidential communications”) when using their Sprint accounts for Softbank matters.

The court applied the four-factor test from an earlier Federal case to determine whether there was a reasonable expectation of privacy with respect to a work email account:

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A New Caremark Era: Causes and Consequences

Roy Shapira is Associate Professor at IDC Herzliya Radzyner Law School. This post is based on his recent paper, forthcoming in the Washington University Law Review, 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Compliance has become a key corporate governance issue across the globe. Yet until recently, corporate law played a seemingly very limited role. The prevalent standard for director oversight duties (Caremark duties) was set high, effectively demanding that plaintiffs show scienter without having access to discovery. As a result, derivative actions over directors’ failure of oversight were routinely dismissed at the pleading stage, and many commentators considered Caremark duties largely irrelevant.

Against this background, it was noteworthy when, starting in June 2019, four Caremark claims succeeded in surviving the motion to dismiss (Marchand, Clovis, Hughes, and Chou). Practitioners immediately took notice, and started debating the meaning of the string of successful cases—including on this blog. Does it signify a meaningful trend of a “stricter Caremark era,” or is it merely a coincidence of cases with extremely egregious facts? And if there is, indeed, a resurgence in director oversight duties, why now? What changed around 2019 that sparked the resurgence?

In my recent paper, titled “A New Caremark Era: Causes and Consequences” (forthcoming in Washington University Law Review), I suggest that the answers, are (1) “yes,” and (2) “section 220.” Yes, there is a trend of revamped director oversight duties. And this trend is here to stay, partly because it is driven by a seemingly disparate development in shareholders’ rights to information from the company, nestled in DGCL §220.

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COVID-19’s Impact on Buyer’s Obligation to Close

Mark Limardo and Michael Neidell are partners and Zachary Freedman is a law clerk at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum, 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? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

Seller’s COVID-related actions breached an “ordinary course” covenant, even though the COVID-19 pandemic did not give rise to a “material adverse effect.”

On November 30, 2020, in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC et al., the Delaware Court of Chancery held that a seller’s response to the COVID-19 pandemic breached the seller’s obligation to conduct the target company’s operations between signing and closing “only in the ordinary course of business consistent with past practice in all material respects.” As a result, the buyer was not obligated to close on the sale and was entitled to the return of its deposit and costs.

In reaching this conclusion, the Court also examined the impact of the COVID-19 pandemic under several other contract provisions. Although the buyer ultimately prevailed, the Court rejected the buyer’s argument that the COVID-19 pandemic resulted in a “material adverse effect” (or MAE), because the COVID-19 pandemic fell within an MAE exclusion for “natural disasters or calamities.” In addition, the Court noted that the seller did not help its case by implementing COVID-related operational changes before any legal requirement to do so and by refusing to seek the buyer’s formal consent to such changes.

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Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock

Leo E. Strine, Jr., the former Chief Justice of the Delaware Supreme Court, is a Senior Fellow at the Harvard Law School Program on Corporate Governance; Ira M. Millstein Distinguished Senior Fellow at the Ira M. Millstein Center for Global Markets and Corporate Governance at Columbia Law School; Michael L. Wachter Distinguished Fellow in Law and Policy at the University of Pennsylvania Carey Law School; and Of Counsel at Wachtell, Lipton, Rosen & Katz. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr. (discussed on the Forum here); Purpose With Meaning: A Practical Way Forward by Robert Eccles, Leo E. Strine, Jr., and Timothy Youmans (discussed on the Forum here)The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here).

In his excellent article, For Whom is the Corporation Managed in 2020?: The Debate Over Corporate Purpose, Professor Edward Rock articulates his understanding of the debate over corporate purpose and surfaces four separate, but related, questions that views as central to that debate:

First, what is the best theory of the legal form we call “the corporation”? Second, how should academic finance understand the properties of the legal form when building models or engaging in empirical research? Third, what are good management strategies for building valuable firms? And, finally, what are the social roles and obligations of large publicly traded firms?

Professor Rock argues that “populist pressures” have led contestants to the debate to confuse the separate questions he highlights. He finishes by fearing that these populist pressures could bring about changes to long-standing principles of American corporate governance that would result in more harm than benefit.

In Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy, I reply to and echo Professor Rock’s depiction of the current state of corporate law in the United States, applauding his willingness to be accurate about the actual state of affairs in a debate where all too many obscure the state of the law. I also accept Professor Rock’s contention that finance and law and economics professors tend to equate the value of corporations to society solely with the value of their equity. But, I employ a less academic lens on the current debate about corporate purpose, and am more optimistic about proposals to change our corporate governance system so that it better supports a fair and sustainable economy.

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Appraisal Waivers

Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. This post is based on her recent paper, 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Appraisal has long been a controversial topic. The courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on vary based on case-specific factors. The Delaware Supreme Court continues to face an active docket of appraisal cases and to resolve them through opinions that are highly context-dependent. For example, in Brigade Leveraged Capital Structures Fund Ltd. v. Stillwater Mining Co., C.A., 2020 Del. LEXIS 335 (Del. Oct. 12, 2020) the court upheld the use of deal price as a reliable indicator of fair value despite significant flaws that were identified in the deal process. In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019), the Supreme Court reversed the Chancery court’s valuation based on unaffected market price in favor of deal price minus synergies, and, at the same time, adjusted the lower court’s calculation employing that methodology. Yet in Fir Tree Value Master Fund, L.P. v. Jarden Corp., 236 A.3d 313 (Del. July 9, 2020) the court affirmed the use of unaffected trading price despite warning that “it is not often that a corporation’s unaffected market price alone could support fair value.” Variation in both the valuation method that the courts will employ and the implementation of that method create substantial uncertainty. The challenges are magnified by the heavy dependence on expert testimony and the potential for opportunistic litigation pejoratively described as appraisal arbitrage.

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A General Defense of Information Fiduciaries

Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent paper.

Countless high-profile abuses of user data have put Facebook, Google, and other digital companies within the sights of lawmakers. Across the political spectrum, legislators condemn these firms’ conduct, accusing them of undermining user privacy and data security. Scholars and other commentators seek greater oversight of digital enterprises. In this environment, one especially influential reform proposal has emerged: making digital companies “information fiduciaries” of their users. The information fiduciary model, most prominently proposed by Jack Balkin, enjoys bipartisan support and is being considered in proposed privacy laws at the federal and state levels.

But while there is enthusiasm behind the information fiduciary model, it also faces powerful opposition from critics who regard it as incompatible with Delaware corporate law and at odds with firms’ powerful self-interests. The most forceful criticism comes from David Pozen and Lina Khan, who argue in the Harvard Law Review that the information fiduciary model “could cure at most a small fraction of the problems associated with online platforms—and to the extent it does, only by undercutting directors’ duties to shareholders, undermining foundational principles of fiduciary law, or both.” Summarizing their critique, Professor Pozen describes Balkin’s information fiduciary model as “flawed—likely beyond repair—on conceptual, legal and normative grounds.

In A General Defense of Information Fiduciaries, I argue that neither criticism of the information fiduciary model holds water. The first criticism rests on a mischaracterization of corporate law, while the second fails to account for the adaptability fiduciary law has shown in other settings, such as the asset management industry. These criticisms warrant close attention because they have proved influential among commentators and industry participants and because, if accepted, they undermine commonly used regulatory techniques in other industries, especially financial services.

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First COVID-19 M&A Decision

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 their Fried Frank memorandum, 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? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

A number of cases are currently pending in various courts relating to whether, under an acquisition agreement signed prior to the COVID-19 pandemic, the effects of the pandemic and the target company’s responses to it constituted a “material adverse effect” and/or a breach of the covenant requiring the company to operate in the ordinary course of business between signing and closing. In AB Stable VIII LLC v. Maps Hotels and Resorts One LLC (Nov. 30, 2020), the Delaware Court of Chancery has reached the first decision, on the merits, that we know of on these issues. Vice Chancellor Laster ruled that the pandemic was not an MAE (because the MAE definition in the agreement excluded “calamities”), but that the target company’s responses to the pandemic constituted a breach of the ordinary course covenant. Therefore, the buyer was not obligated to close.

As a result of the decision, the focus on ordinary course covenants as a possible basis for not consummating deals is likely to intensify, both in the context of the COVID-19 pandemic and with respect to the potential for the occurrence of other kinds of extraordinary events (including those that are less extreme and occur more commonly). We note that ordinary course covenants appear in many types of agreements outside the M&A context (such as financing and operating agreements) and, thus, there is the potential that the decision could have broad impact.

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Section 220 as Pre-Complaint Discovery—Recent Developments

William Savitt and Sarah K. Eddy are partners and Cynthia Fernandez Lumermann is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Two recent decisions of the Delaware courts confirm that Section 220 of the Delaware General Corporation Law will be consistently interpreted to grant pre-complaint discovery to stockholders seeking to prepare fiduciary-breach litigation.

In Pettry v. Gilead Sciences, Inc., a group of Gilead stockholders sought to inspect corporate documents for the purpose of investigating wrongdoing in the development and marketing of HIV drugs. C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020). Gilead opposed the demand, principally on the ground that the stockholders’ basis to suspect such wrongdoing—unproven allegations in other lawsuits—was inadequate to justify inspection. The court disagreed, finding that allegations forming the basis of other lawsuits may well constitute a credible basis for inspection. The court went on to criticize the defendant for an “overly aggressive defense strategy” which the court found “epitomizes a trend” to “obstruct [demanding stockholders] from employing [Section 220] as a quick and easy pre-filing discovery tool.” To disincentivize such conduct, the court granted the plaintiffs leave to file a motion to recover their litigation fees and costs.

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Risks of Back-Channel Communications with a Controller

Gail Weinstein is senior counsel and Steven Epstein and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. de Wied, Andrew J. Colosimo, Erica Jaffe, and Bret T. 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In United Food v. Mark Zuckerberg and Facebook (Oct. 26, 2020), a stockholder of Facebook, Inc. brought suit seeking damages, on behalf of the corporation, for losses Facebook incurred by pursuing and then abandoning a reclassification of its capital structure (the “Reclassification”). The Reclassification had been proposed by, and would have primarily benefitted, the company’s controlling stockholder, Mark Zuckerberg. The Reclassification was later abandoned at Zuckerberg’s request. The Delaware Court of Chancery dismissed the suit, holding that, because a majority of the directors were independent and disinterested with respect to the Reclassification, the plaintiff was not excused from first having made a demand on the board to bring the derivative litigation.

Although the suit was dismissed, and the focus of Vice Chancellor Laster’s opinion is on the issue of “demand futility,” the case nonetheless provides a reminder of the potential risks from flaws in a board process. These include the possibility of reputational damage, as well as the potential for personal liability for directors who (without disclosure to and supervision by the board) share information with a controlling stockholder about the board’s process while the board is considering a transaction in which the controller is personally interested.

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