The Delaware Law Series


Corporate Opportunity Doctrine: Litigation Continues into 2020

Nate Emeritz is Of Counsel and Brian Currie is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In a short order from the Delaware Court of Chancery, Vice Chancellor Kathaleen McCormick held that a former director may have usurped a corporate opportunity by successfully bidding against his company for a contract to operate a local public access television channel. Leased Access Preservation Assoc. v. Thomas, C.A. No. 2019-0310-KSJM (Del. Ch. Jan 8, 2020) (ORDER). This decision addressed the scope of what constitutes a corporate opportunity and when a director is acting in a fiduciary capacity, each for purposes of the corporate opportunity doctrine. In doing so, this litigation picked up on issues also addressed in several cases in 2019 and suggests that the corporate opportunity doctrine may continue to be an important topic in Delaware corporate law in 2020.

Leased Access case

Leased Access, a case about a Delaware non-profit, non-stock corporation (Leased Access Preservation Association or “LAPA”) that had operated a local public access television channel on a yearly basis for five years, marks the first foray by the Court of Chancery into the corporate opportunity doctrine in 2020. In that case, when proposals were solicited for a new contract on the television channel, one of LAPA’s directors (who later claimed to have already resigned) secretly submitted a competing bid and allegedly disseminated negative information about LAPA’s operational practices, based on information he had learned as a director. An entity controlled by the director was ultimately awarded the contract. As described by the Delaware Supreme Court, the corporate opportunity doctrine “holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation.” Broz v. Cellular Info. Sys., 673 A.2d 148 (Del. 1996).

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Delaware’s Position on Director Independence: a Change in Approach?

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, Brian T. Mangino,  Andrew J. Colosimo, and David L. Shaw, 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 McElrath v. Kalanick (Jan. 13, 2020), the Delaware Supreme Court upheld the Court of Chancery’s decision that dismissed a derivative suit brought by a stockholder of Uber Technologies, Inc. (“Uber”) for damages arising from Uber’s 2016 acquisition of Ottomotto LLC (“Otto”). The Supreme Court agreed with the Court of Chancery’s determination that a majority of the Uber directors in office at the time the complaint was filed were independent and had not acted in bad faith–and, therefore, that pre-suit demand on the board to bring the litigation would not have been “futile” and so was not excused.
Key Point

  • The decision, in our view, does not necessarily suggest a change in the Delaware courts’ recent approach in determining director independence in the demand futility context. Delaware has consistently applied long-established principles for determining director independence. In recent years, however, when applying those principles in the demand futility context, the courts have appeared to more readily find non-independence than they had previously. Some commentators have suggested that the decision signals a return to the seemingly stronger presumption of independence of the past. While that is possible, we do not read the decision that way (as discussed below).
  • Separately, the decision reinforces that there continues to be a high bar to a finding of bad faith by directors–and that this, in combination with exculpation provisions, continues to make it highly unlikely that independent directors would have personal liability for alleged fiduciary breaches except in the most egregious cases.

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Actionable Claim to Inspect Books and Records

Jason M. Halper and Ellen Holloman are partners, and Sara Bussiere 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 here.

In Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation, the Delaware Court of Chancery ordered the inspection of the books and records of AmerisourceBergen Corporation, one of the leading opioid distributors in the country, for the purpose of investigating potential mismanagement or breaches of fiduciary duty in connection with the company’s distribution of opioids. In his decision, Vice Chancellor J. Travis Laster confirmed that stockholders are not required to show that the misconduct central to the investigation supports an actionable claim in order to meet their low burden to enforce inspection rights under Section 220 of the Delaware General Corporation Law. The decision also reinforced that, in appropriate circumstances, the Court will allow stockholders to inspect both board-level documents reflecting the directors’ decisions at formal board meetings and less formal communications by and among directors, officers, and senior-level managers. This decision is notable because the Court rejected the company’s efforts to impose heightened burdens on stockholders seeking to discover additional information about the types of books and records a company may or may not have, and in what formats those records exist. This decision also serves as a reminder to boards considering inspection demands that stockholders bear a low burden to show they are entitled to enforce their inspection rights under Delaware law, and if stockholders meet clear this threshold—which is seemingly easier in the context of publicly scrutinized events—Delaware courts are increasingly likely to find that stockholders are entitled to inspect minutes and other sources of information. Companies confronted with inspection demands should be strategic in what demands to oppose, and consider whether negotiation with the stockholder ultimately may produce a more favorable outcome than litigating the issue in court.

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Core Principles of Exculpation and Director Independence

William SavittRyan A. McLeod and Anitha Reddy are partners 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. 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); and Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

The Delaware Supreme Court recently reaffirmed important principles defining the scope of director liability for derivative claims. McElrath v. Kalanick, No 181, 2019 (Del. Jan. 13, 2020).

In 2016, to jumpstart its self-driving car program, Uber purchased Ottomotto LLC and hired employees with relevant technical expertise away from Google. When it later came to light that the new hires had misappropriated proprietary Google information, Uber fired the key new employee and paid $245 million in stock to settle Google’s claims. A stockholder plaintiff then sued Uber’s board, alleging that the directors breached their duties by approving the Ottomotto transaction. In a carefully reasoned opinion upholding the dismissal of the suit, the Supreme Court reaffirmed two important pleading requirements that shield directors from unsubstantiated derivative litigation:

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Trends in Books and Records Litigation

Ed Micheletti is partner and Bonnie David and Alexis Wiseley are associates 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.

Recently, the frequency of stockholder demands to inspect corporate books and records pursuant to Section 220 of the Delaware General Corporation Law has increased. In turn, the case law concerning Section 220 demands is rapidly developing. Section 220 demands were once conceived as the primary “tools at hand” available to stockholder plaintiffs to draft and file detailed derivative complaints. Now, given the marked decrease in M&A injunction requests and the corresponding decrease in discovery records created for that purpose, stockholder plaintiffs have increasingly turned to Section 220—particularly in the merger context—for access to documents in advance of filing post-closing class action complaints for money damages.

One practical result of decisions permitting plaintiffs to obtain merger-related documents under Section 220—which imposes the lowest possible burden under Delaware law—is a departure from long-standing precedent that required plaintiffs to withstand a motion to dismiss before obtaining discovery relating to a deal. Another general development is that books-and-records demands now frequently seek not only formal board materials, such as minutes and presentations, but also electronic communications, such as emails and text messages from personal accounts and devices. As a result, in a number of recent cases, Delaware courts have been forced to grapple with the types of electronic documents, including communications, that constitute corporate records and are required to be produced in response to a Section 220 demand. Recent decisions have addressed other issues as well, such as whether stockholders are entitled to books and records to aid in proxy contests, and the confidential status of documents produced in response to books-and-records requests.

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Amending the Delaware Corporate Code by Going to Court: Some Thoughts on Sciabacucchi v. Salzberg

Zachary Gubler is the Marie Selig Professor of Law at Arizona State University Sandra Day O’Connor College of Law. This post is based on his recent paper, forthcoming in the Georgetown Law Journal Online, 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 Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill; and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

With the oral arguments now behind us, it’s anybody’s guess how the Delaware Supreme Court will rule in Sciabacucchi v. Salzberg. Personally, I think the Court should reverse the Chancery Court’s decision to invalidate charter provisions making federal court the exclusive forum for ’33 Act litigation. In a recent essay, I highlight two arguments that I think have flown under the radar but strongly favor this outcome. The arguments are related and have to do with how the Chancery Court went about interpreting Section 102(b)(1) of the DGCL, the provision establishing the permissible scope of the corporate charter.

The first argument is that the Chancery Court should never have interpreted the statute in light of the internal affairs doctrine. That doctrine is a choice of law provision, which says that all “internal affairs” of the corporation shall be decided by Delaware law. The Chancery Court took this to mean that whatever the scope of Section 102(b)(1), it must be limited to internal affairs. Thus, they were able to read a statutory provision that permits “any [charter] provision creating, defining, limiting and regulating the powers of . . . stockholders” to be limited to “the powers of . . . stockholders that are exclusive to stockholders and that arise exclusively under Delaware law.”

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Year in Review: Delaware Corporate Law and Litigation

Amy Simmerman, Brad Sorrels, and Lori Will are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Mr. Sorrels, Ms. Will, Ryan Greecher, Katherine Henderson, and David Berger, and is part of the Delaware law series; links to other posts in the series are available here.

Introduction

In 2019, the Delaware courts issued a broad range of important decisions addressing various corporate law and governance issues—including board compensation, controlling stockholder conflicts, board oversight obligations, M&A structuring issues, director liability for unlawful dividends, and advance notice bylaws. The case law from 2019 is relevant for both public and private companies—particularly because Delaware law generally does not distinguish between the two—and will help shape decision-making by boards, members of management, and investors in 2020. We provide an overview of these decisions—and related themes and issues that we are observing in practice—in our 2019 Delaware Corporate Law and Litigation Year in Review.

Alongside of the ever-evolving body of Delaware law, the Delaware judiciary has also continued to undergo transformation. The Chief Justice of the Delaware Supreme Court, Leo E. Strine, Jr., retired in October 2019.

Justice Collins J. Seitz, Jr. took his place as Chief Justice, and former Wilson Sonsini partner Tamika Montgomery- Reeves was appointed and confirmed as a Justice to the Supreme Court from the Delaware Court of Chancery, replacing Justice Seitz. In early January 2020, Delaware Governor John Carney announced the nomination of practitioner Paul A. Fioravanti, Jr. to the resulting open seat on the Delaware Court of Chancery, which consists of one Chancellor and six Vice Chancellors following an expansion of the Court in 2018. We will continue to monitor developments in the Delaware courts in the year ahead.

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Delaware Year-End Review: M&A and Shareholder Litigation

Sameer Advani, Shaimaa Hussein, and Tariq Mundiya are partners at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Mr. Advani, Ms. Hussein, Mr. Mundiya, Alexander Cheney, Charles Cording, and Vanessa Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.

It has been another busy year for the Delaware courts, with opinions issued in a number of key areas. The Delaware Supreme Court confirmed that Caremark claims, although generally very difficult to maintain, can survive a motion to dismiss. Meanwhile, the Court of Chancery showed that there is still a high bar to establishing a material adverse effect that will permit termination of a merger agreement, and that justifications by buyers to walk away from binding contracts will be heavily scrutinized. The courts’ decisions continued to clarify what information boards must disclose in order to ratify a third-party transaction under Corwin, what it means to be a “controlling stockholder,” and when the MFW standard of review will apply to transactions with a controller. The courts also re-emphasized the importance of deal price in determining fair value in an appraisal action, and expanded the types of documents that may be available to stockholders in a books and records action. Finally, the courts addressed the enforceability of advance notice bylaws and analyzed several recurring issues in the context of post-closing disputes.

Chief Justice Strine’s retirement in 2019 also marked the end of an era and resulted in some reshuffling on the Delaware courts. Justice Seitz was selected to replace Chief Justice Strine, and Vice Chancellor Montgomery-Reeves was elevated to become the first person of color and the third woman to serve on the Delaware Supreme Court. Earlier this month, her replacement, Paul Fioravanti Jr., was confirmed by the Delaware Senate as the newest Vice Chancellor of the Court of Chancery.

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Advance Notice Bylaw and Activists Board Nominees

Steven M. Haas is partner at Hunton Andrews Kurth LLP. This post is based on a Hunton Andrews Kurth memorandum by Mr. Haas, 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 Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The Delaware Supreme Court recently held that a stockholder activist failed to comply with an advance notice bylaw. The Supreme Court ruled that the bylaw was clear and unambiguous and the activist’s failure to comply rendered its nominees ineligible. In doing so, the Supreme Court reversed the Court of Chancery’s determination that the board of directors had acted outside the scope of the advance notice bylaw by demanding supplemental information from the activist stockholder.

Background

BlackRock Credit Allocation Income Trust v. Saba Capital Master Fund, Ltd., involved two closed-end investment funds structured as Delaware statutory trusts. Under the funds’ bylaws, a stockholder was required to provide advance notice of its intent to nominate directors at the funds’ annual meetings.

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Tectonic Forces to Watch in Corporate Litigation

William Savitt is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Savitt and is part of the Delaware law series; links to other posts in the series are available here.

Corporate litigation in Delaware continues to reflect the judicial trend toward honoring the decisions of informed stockholders and independent directors, thus limiting those decisions from costly after-the-fact legal attack. While the boundaries of stockholder ratification and director independence continue to be refined on a case-by-case basis, the broader conceptual trend—to give the last word on corporate action to independent directors and the stockholders who elect them—has taken firm root. Novel issues now rumbling under and through the judicial system implicate a different set of relationships—not between stockholders and directors, but between corporations and society at large. To meet these challenges, directors should assess new risks and opportunities from multiple perspectives—operations, strategy, corporate governance, litigation, finance, tax and compensation policy, and investor relations.

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