The Delaware Law Series


Expulsion of LLC Member

Jason M. Halper and Nathan Bull are partners and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, and Mr. Fee and is part of the Delaware law series; links to other posts in the series are available here.

On August 13, 2018, Vice Chancellor Travis Laster of the Delaware Court of Chancery ordered Domain Associates, LLC (“Plaintiffs,” “Domain,” or the “Firm”), a venture capital firm, to pay its former member, Nimesh Shah (“Defendant” or “Shah”), the fair value of his 12.1% member interest as of the date he was forced to withdraw from the LLC, potentially worth millions of dollars. Domain had contended that Shah was entitled only to the amount of his capital account balance, or approximately $438,000. In his post-trial opinion, Vice Chancellor Laster also found the individual members of Domain jointly and severally liable for breaching the Domain LLC Agreement when they voted to force him to withdraw on April 18, 2016 but did not pay him his share of the fair value of the business. Significantly, after concluding that the LLC Agreement was silent as to the payout for a forced-out member, the Court looked not only to the Delaware Limited Liability Company Act (the “LLC Act”) but also to the Delaware Revised Uniform Partnership Act (the “Partnership Act”) for guidance because Domain operated in a manner akin to a general partnership, as distinct from other governance structures. The decision provides important guidance for drafting operating agreements governing Delaware entities, understanding the potential sources of law that may guide a court adjudicating intra-entity disputes, and in litigating disputes involving these agreements.

READ MORE »

The MFW Framework and Extensive Preliminary Discussions

Gail Weinstein is senior counsel, and Andrew J. Colosimo 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. Colosimo, Mr. de Wied, Randi LallyMark H. Lucas, and Maxwell Yim. 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

MFW provides for judicial review of a merger between a controller and the controlled company under the deferential business judgment rule standard (rather than “entire fairness”) if, among other things, “from the outset of negotiations” (the so-called “ab initio requirement”), the controller conditioned the transaction on approval by both an independent special committee and a majority of the minority stockholders. Olenik v. Lodzinski (July 20, 2018) is notable for providing a substantial discussion of the difference between “negotiations” and “preliminary discussions” for purposes of determining whether this requirement has been met. The factual context involved an all-stock merger between two companies (one of them, a financially troubled company) that had a common purported controller; a lead negotiator for the acquiring company who was the CEO and had a financial interest in the controller; and an equity split that provided the acquiring company with a smaller equity interest in the resulting entity than was supported by the contribution analysis prepared by the special committee’s banker.

READ MORE »

The Appraisal Landscape

Gail Weinstein is senior counsel, and David L. Shaw and Scott B. Luftglass are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Shaw, Mr. Luftglass, Robert C. SchwenkelBrian T. Mangino, and Andrea Gede-Lange, 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.

Two new Delaware appraisal decisions—Blueblade Capital Opportunities, L.P. v. Norcraft Inc. (July 27, 2018) and In re Appraisal of Solera, Inc. (July 30, 2018)—should further discourage appraisal claims in the context of arm’s-length mergers. In Norcraft, the Court of Chancery relied on a DCF analysis, while looking to the deal price as a “reality check,” and found fair value to be 2.5% above the deal price. In Solera, the Court of Chancery relied on the deal-price-less-synergies and found fair value to be 3.4% below the deal price. Notably, while the court in neither case determined fair value to be equal to the deal price (the approach strongly embraced by the Delaware Supreme Court in its seminal Dell decision issued in late 2017), in both cases the result was close to the deal price (in our view, reflecting the impact of Dell).

READ MORE »

Supreme Court Nominee and the Derivative Suit

Justin T. Kelton is a Partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP. This post is based on an Abrams Fensterman memorandum by Mr. Kelton.

In an opinion from 2008, Judge Kavanaugh, writing for the U.S. Court of Appeals for the District of Columbia, offered a rare glimpse into his views on the demand requirement in derivative litigation under Delaware law, and hinted in dicta that he may be open to reevaluating the legal standard for reviewing a dismissal of derivative claims based on a lack of demand. Given Judge Kavanaugh’s nomination to the Supreme Court, this post summarizes his analysis on this critical issue.

Judge Kavanaugh Affirms Dismissal Based on Lack of Demand, and Confirms Substantial Hurdles Faced by Plaintiffs In Derivative Actions.

In Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. ex rel. Fed. Nat. Mortg. Ass’n v. Raines, 534 F.3d 779, 782 (D.C. Cir. 2008), abrogated by Lightfoot v. Cendant Mortg. Corp., 137 S. Ct. 553, 196 L. Ed. 2d 493 (2017), [1] plaintiffs, who were shareholders of Fannie Mae, brought a derivative action against the company’s directors arising out of the company’s misapplication of accounting standards, and the board’s approval of certain executives’ severance compensation.

READ MORE »

High-Quality Sales Processes and Appraisal Proceedings

Jason M. Halper, Ellen Holloman, and Joshua Apfelroth are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, Mr. Apfelroth, William Mills, James Fee, and William Simpson, and is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here).

Two recent decisions by the Delaware Court of Chancery underscore that the outcome of an appraisal proceeding often will turn on the quality of a company’s sale process. While recent Delaware Supreme Court appraisal jurisprudence supports relying on the negotiated merger transaction price as the most reliable evidence of a seller’s fair value, flaws in the sales process, even if not rising to the level of a breach of fiduciary duty by the seller’s board, can lead the court to reject reliance on merger consideration. As a result, appraisal decisions likely will continue to focus on many of the same issues that courts examine when considering breach of fiduciary duty claims in the merger context as well as assessing whether the seller’s stock trades in an efficient market.

READ MORE »

New Amendments to Delaware General Corporation Law

Matthew M. Greenberg is partner and Christopher B. Chuff and Taylor B. Bartholomew are associates at Pepper Hamilton LLP. This post is based on their Pepper Hamilton memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On August 1, several amendments to the Delaware General Corporation Law, 8 Del. C. § 1-101 et seq. (the DGCL), became effective. The most notable amendments alter (1) the availability of statutory appraisal rights and (2) the availability of, and procedures for, ratifying defective corporate acts.

Statutory Appraisal Rights

The 2018 amendments to section 262 extend the applicability of the “market out” exception to appraisal rights in a so-called “intermediate form” merger, in which there is an exchange offer followed by a back-end merger consummated without the vote of stockholders pursuant to section 251(h). Section 262(b)(1) of the DGCL provides a market-out exception to stockholders’ appraisal rights when stock of the target corporation is (1) listed on a national securities exchange or (2) held of record by more than 2,000 holders. Section 262(b)(2) of the DGCL provides an exception to the market-out exception, under which appraisal rights remain available to target stockholders (even if the target corporation’s stock was listed on a national exchange or held by more than 2,000 holders), when the target stockholders receive consideration of any form other than stock, depository receipts in respect thereof, cash in lieu of fractional shares, or any combination thereof.

READ MORE »

Self-Dealing Without a Controller

Jason M. Halper and Ellen V. Holloman are partners and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, and Mr. Fee 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).

On July 26, 2018, Vice Chancellor Glasscock of the Delaware Court of Chancery denied in part and granted in part Defendants’ motion to dismiss in Sciabacucchi v. Charter Communications Corporation et al. We discussed the Court’s prior ruling in this action here. In brief, the action challenged certain transactions between Charter Communications, Inc. and its largest stockholder, Liberty Broadband Corporation, which owned approximately 26% of Charter’s outstanding common stock and had the right to designate four of ten directors on Charter’s Board. In particular, a Charter stockholder challenged a voting proxy agreement between Charter and Liberty and two stock issuances worth $5 billion made by Charter to Liberty, allegedly as a part of the “financing” of Charter’s $78.7 billion merger with Time Warner Cable and its purchase of Bright House Networks, LLC. Ultimately, 86% of Charter stock not affiliated with Liberty voted, in a single vote, to approve (i) the share issuances and the voting agreement, (ii) the merger with Time Warner Cable and (iii) the purchase of Bright House. Both third-party transactions were conditioned on Charter stockholders’ approval of the share issuances to and voting agreement with Charter.

READ MORE »

What Directors Need to Include in Effective Appraisal Notices

Christopher B. Chuff is an associate and M. Duncan Grant, and Joanna J. Cline are partners at Pepper Hamilton LLP. This post is based on a Law360 article published by Mr. Chuff, Mr. Grant, and Ms. Cline 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.

A recent Delaware Court of Chancery opinion serves as a stark reminder of the information that must be included in appraisal notices delivered pursuant to Section 262 of the Delaware General Corporation Law. As explained in the opinion, merely providing notice of a merger and the existence of appraisal rights is not sufficient. Rather, appraisal notices must provide stockholders with the information they need to determine whether to accept the merger consideration or to seek appraisal. More specifically, appraisal notices should include information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.

READ MORE »

The Insignificance of NRG Yield

Itai Fiegenbaum is a Fellow at the Harvard Law School Program on Corporate Governance. 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.

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).

The pathologies of influential corporate insiders with a significant equity stake were on full display during Oracle’s 2016 acquisition of industry rival NetSuite. Larry Ellison, Oracle’s long-time Chief Executive Officer and dominant figure, played a major role in choosing the acquisition target. Normally, Ellison’s involvement should lay to rest any doubts entertained by Oracle shareholders regarding the deal’s wisdom.

Unfortunately for Oracle’s shareholders, one noteworthy detail portrays the acquisition in a different light. At the time the deal was proposed, Ellison owned 45% of NetSuite’s stock. The conflicting ownership stakes questions Ellison’s singular devotion to maximizing Oracle’s value. Although Ellison’s Oracle stock would depreciate if the transaction was skewered in NetSuite’s favor, the concurrent rise of value in his NetSuite stock would more than make up for it. Oracle’s minority shareholders do not enjoy a similar opportunity to offset their losses.

READ MORE »

Recent Developments Relating to Corporate Governance

Joseph A. Hall, Marcel Fausten, and Sarah Solum are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Hall, Mr. Fausten, and Ms. Solum.

Despite a political agenda packed with important issues like tariffs, immigration and a Supreme Court nomination, there have been a number of recent federal and state legislative developments relating to public company corporate governance topics that are of interest. In particular, the Senate Banking Committee has recently considered bills relating to the role of proxy advisory firms and disclosure of cybersecurity experience at the board level; there have been calls by lawmakers for regulation of executive sales following announcement of stock buybacks; the Senate Committee on Appropriations is proposing to direct the SEC to report on the decline in public companies; a bill implementing gender quotas on boards progressed through the California State Senate; and Delaware adopted a voluntary sustainability certification and reporting regime. While a number of these topics have received the attention of lawmakers over the past few years, it remains to be seen whether they will gain traction in the current political environment.

READ MORE »

  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows