The Delaware Law Series

Recent Application of Caremark: Oversight Liability

Jason J. Mendro and Andrew S. Tulumello are partners and Jason H. Hilborn is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Hilborn, Mr. Mendro, Mr. Tulumello, Elizabeth A. IsingGillian McPhee and Ronald O. Mueller. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision applying the famous Caremark doctrine, the Delaware Supreme Court confirmed several important legal principles that we expect will play a central role in the future of derivative litigation and that serve as important reminders for boards of directors in performing their oversight responsibilities. In particular, the Delaware Supreme Court held that a claim for breach of the duty of loyalty is stated where the allegations plead that “a board has undertaken no efforts to make sure it is informed of a compliance issue intrinsically critical to the company’s business operation.”

Although the case addressed extreme facts that will have no application to most mature corporations, the plaintiffs’ bar can be expected to attempt to weaponize the decision. With all the benefits that hindsight provides, derivative plaintiffs will more frequently contend that a board lacked procedures to monitor “central compliance risks” that were “essential and mission critical.” The Supreme Court’s decision reinforces that directors need to implement controls that enable them to monitor the most serious sources of risk, and may even caution in favor of a special discussion each year around critical risks.


Female Board Power and Delaware Law

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy SimmermanRyan Greecher, Lisa Stimmell, and Jose Macias. This post is part of the Delaware law series; links to other posts in the series are available here.

Gender diversity in the corporate boardroom is receiving significant belated attention. Much of that attention has revolved around prescriptive legislation, academic research, and business results—and one point of focus is an increase in the number of female directors. This article, however, outlines options under Delaware corporate law for jumpstarting an increase in the influence of female directors on board decision making—i.e., female board power. [1] That is, while female board perspectives may remain outnumbered at least in the near term, these corporate mechanisms may leverage existing female board power to prevent the female board perspective from being outweighed. In footnotes to this article, there are illustrative form provisions related to these concepts of Delaware corporate law. [2]


Appraisal Update: Unaffected Market Price Makes a Comeback

Roger A. Cooper and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

After the Delaware Supreme Court’s recent Aruba decision, [1] many commentators predicted that, going forward, the Court of Chancery would not rely on the target’s unaffected market trading price to determine fair value in appraisal cases, other than as a “check” on other valuation methodologies. It may therefore come as a surprise that in a decision issued last Friday, the Court of Chancery determined fair value to be equal to the target’s unaffected trading price. See In re: Appraisal of Jarden Corporation, Consolidated C.A. No. 12456-VCS (Del. Ch. July 19, 2019). Although still subject to appeal, this decision is also notable because the fair value determination came out 18% below the deal price despite the petitioners having some success in attacking the target board’s sale process, which involved no pre- or post-signing market check.

The Decision

This case involves the acquisition of Jarden Corporation (“Jarden”), a consumer products company holding a diversified portfolio of over 120 brands, by Newell Rubbermaid, Inc. (“Newell”) on April 15, 2016. At closing, the non-dissenting stockholders of Jarden received cash and Newell stock worth $59.21. Petitioners, who acquired almost 2.5 million shares of Jarden stock after the deal was announced, instead elected to seek statutory appraisal of their shares.


Upcoming Amendments to the DGCL

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

Governor John Carney recently signed legislation that will put into effect a variety of amendments to the Delaware General Corporation Law (DGCL), the Delaware Limited Liability Company Act (DLLCA), the Delaware Revised Uniform Limited Partnership Act (DRULPA), and the Delaware Revised Uniform Partnership Act, effective August 1, 2019. While the amendments make several changes to the statutes, the primary change is to expressly permit transactions (such as merger agreements, voting agreements, stockholder agreements, limited liability company agreements and partnership agreements) to be documented, signed and delivered electronically, including through the use of “DocuSign.”

The Safe Harbor Provisions

As noted above, the primary change to the statutes is the adoption of nonexclusive safe harbors that permit transactions to be documented through electronic means. Importantly, the governing documents of a Delaware entity (such as the certificate of incorporation or bylaws of a corporation, or the limited liability agreement of a limited liability company) can override the application of the safe harbor provisions, but the prohibition must be expressly stated. A provision that merely specifies that an act or transaction will be documented in writing, or that a document will be signed or delivered manually, will not prohibit application of the safe harbor provisions. Unless otherwise provided in the governing documents of a Delaware entity or as agreed upon by the sender and recipient, an electronic transmission is deemed delivered to a person when it enters an information processing system that the person has designated for the purpose of receiving the electronic transmission. An electronic transmission is deemed delivered even if no person is aware of its receipt. For instance, if sent by email, a document will be deemed delivered under the safe harbors at the time the email is sent.


Oversight and Compliance Reminder

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal, and is part of the Delaware law series; links to other posts in the series are available here.

Two recent developments in civil and criminal law highlight the importance of active, engaged board oversight in the areas of risk and compliance. The first is a Delaware Supreme Court decision allowing plaintiffs to proceed with a Caremark claim, and the second is a memorandum released by the Criminal Division of the U.S. Department of Justice noting the role of the board in ensuring that compliance programs are implemented effectively. While the Delaware case sends a warning message to directors, the DOJ memorandum provides guidance for directors as they work to fulfill their oversight responsibilities.


The Importance of Contractual Precision: “Void” vs. “Voidable”

Gail Weinstein is senior counsel, and Warren S. de Wied and Andrew J. Colosimo are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Mr. Colosimo, Mark H. Lucas, Matthew V. Soran, and Maxwell Yim, and is part of the Delaware law series; links to other posts in the series are available here.

In Absalom Absalom Trust v. Saint Gervais LLC (June 27, 2019), the Court of Chancery held that the transfer of an LLC interest that was prohibited under the LLC Agreement would have been subject to equitable defenses if the transfer restriction provision had stated that a prohibited transfer would be “voidable”—but that, in this case, no equitable defenses are available because the LLC Agreement provides that a prohibited transfer would be “void.” The LLC Agreement provides that any disposition of an interest in the LLC without the written consent of the managers is “null and void.” An LLC member had assigned her interest to the plaintiff without the managers’ written consent. In this action, the plaintiff sought to inspect books and records of the LLC to investigate possible mismanagement by the managers. The managers argued that the plaintiff has no inspection right as he is not a member given that the transfer to him is void. The plaintiff argued that the LLC is estopped from asserting that the transfer is void given that the LLC had provided him with some books and records, had issued Schedule K-1 tax forms to him, and had referred to him as a member in some trial papers, all without reserving the right to contest his status as a member. READ MORE »

Corporate Control and the Limits of Judicial Review

Zohar Goshen is the Jerome L. Greene Professor of Transactional Law at Columbia Law School and Assaf Hamdani is Professor of Law at Tel Aviv University. This post is based on their 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 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 2012, Google’s board approved a proposal amending Google’s charter to authorize the issuance of a new class of nonvoting Class C stock. Prior to this proposed recapitalization, Google’s capital structure was comprised of one-vote-per-share Class A shares, primarily held by public shareholders, and ten-votes-per-share Class B shares, primarily held by Google’s founders, Larry Page and Sergei Brin. Under this dual-class structure, Google had the ability to raise capital, incentivize employees, and acquire other corporations, by issuing Class A shares, while preserving control over the company in the hands of Class B shareholders. However, this strategy faced an upper limit–––if enough Class A shares were issued, eventually the voting power of Class B shares would be diluted to the point of the founders losing control. The recapitalization allowed Google to issue as many Class C nonvoting shares as it deemed necessary, without ever threatening to dilute the founders’ control. This move, therefore, reallocated control rights from the public shareholders to the company founders, and enabled the founders to keep their control over the company even as it continues to issue new shares.


Blurring the Lines: “Boilerplate” Provisions in Merger Agreement Interpretation

Jason M. Halper is partner, Jared Stanisci is special counsel, and Nunu Luo is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on their Cadwalader memorandum, 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 M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV.

In a recent decision arising out of the sale of Cablevision, [1] the Delaware Court of Chancery issued important guidance regarding the interplay between what are commonly regarded as boilerplate merger agreement provisions and “bespoke” provisions that are drafted specifically for the transaction at issue. Here, Vice Chancellor Slights found that extrinsic evidence was necessary to determine whether a provision in the merger agreement (Section 6.4(f)) was still enforceable despite agreement from all parties that: (i) Section 6.4(f) was not listed in the agreement’s provision listing clauses that survived post-closing and (ii) the Dolan family, the beneficiaries of Section 6.4(f), were not identified as third-party beneficiaries of the merger agreement, nor was Section 6.4(f) carved out of the no-third-party-beneficiaries clause. The decision underscores that contracting parties need to be careful when considering future interpretive minefields not to assume that a boilerplate provision will take second seat to a bespoke provision.


Caremark Claim for Positive Violation of Law

Gail Weinstein is senior counsel, 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, Brian T. Mangino, David L. Shaw, and Shant P. Manoukian, and is part of the Delaware law series; links to other posts in the series are available here.

In In re Facebook, Inc. Section 220 Litigation (May 30, 2019), the Delaware Court of Chancery held in favor of Facebook, Inc. shareholders who were seeking to review certain books and records of the company in connection with the 2016 Cambridge Analytica data breach. The shareholders were seeking inspection of the books and records to bolster breach of fiduciary duty claims that they made in pending derivative shareholder litigation. According to the court, the company knew as early as 2015 that Cambridge Analytica, a British political consulting firm, had misappropriated potentially millions of Facebook users’ data, but the company “did not disclose this security breach to its users upon discovery or at any time thereafter” and users “first learned of the breach when they read or heard about it in the news” in 2018. The company’s stock price then dropped 19% (“wiping out” $120 billion of shareholder wealth)—“one of the sharpest single-day market value declines in history,” the court noted. Vice Chancellor Slights found that the shareholders had met their burden of proof of demonstrating a “credible basis” from which the court could infer that “mismanagement, waste or wrongdoing” occurred at the board level that permitted the data breaches to occur. The court observed that the “credible basis” standard applicable in a Section 220 action “imposes the lowest burden of proof known in our law,” while a Caremark claim implicates a high burden of proof (including evidence of bad faith) and “is possibly the most difficult theory upon which a plaintiff might hope to win a judgment.” The court emphasized that the decision in this Section 220 action involved no “merits assessment” of the Caremark claim.


The Development of Statutes for Ratification and Validation of Defective Corporate Acts

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy Simmerman, Ryan Greecher, James Griffin-Stanco, and Brian Currie. This post is part of the Delaware law series; links to other posts in the series are available here.

Over the past five years, a growing number of states have adopted statutes authorizing ratification and validation of void or voidable corporate acts. These statutes have become important tools for the corporate technician and corporations pursuing financing, significant transactions, and greater certainty in the capital structure. Delaware provided the first model for ratification and validation statutes, and two other statutory models have since been promulgated by Nevada and the American Bar Association, with other states largely conforming to one of those models. The differences in legislative choices for these statutes are noteworthy for practitioners and states considering adoption of their own version of a ratification and validation statutory scheme. This post is not a comprehensive overview of any statute but rather a comparison of key elements of analogous statutes adopted in several jurisdictions, including the background, provisions, and application of these statutes.

Background of Ratification and Validation Statutes

In 2013, the Delaware General Assembly amended the Delaware General Corporation Law (the “DGCL”) to include new Sections 204 and 205 (together, the “Delaware Statutes”) which permit a Delaware corporation to restore certainty to the corporate foundation and capital structure as they were understood to have already existed. Section 204 provides for self-help in the form of corporate ratification, while Section 205 provides for judicial recourse, particularly when the corporation cannot take advantage of Section 204 or Section 204 is alleged to have been improperly used. Under the Delaware Statutes, corporate acts and shares of stock may be ratified, while certificates filed (or that should have been filed) with the Office of the Secretary of State (the “Delaware State Office”) may be validated.


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