The Delaware Law Series

2018 Year-End Securities Litigation Update

Brian Lutz, Monica Loseman, and Jefferson Bell are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Lutz, Ms. Loseman, Mr. Bell, Mark Perry, Shireen Barday, and Michael Kahn.

2018 witnessed even more securities litigation filings than 2017, in which we saw a dramatic uptick in securities litigation as compared to previous years. This post highlights what you most need to know in securities litigation developments and trends for the latter half of 2018, including:

  • The Supreme Court heard oral argument in Lorenzo v. Securities and Exchange Commission, and is set to answer the question of whether a securities fraud claim premised on a false statement that was not “made” by the defendant can be pursued as a “fraudulent scheme” claim even though it would not be actionable as a Rule 10b-5(b) claim under Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011).
  • The Supreme Court granted the petition for writ of certiorari in Emulex Corp. v. Varjabedian to consider whether Section 14(e) of the Exchange Act supports an inferred private right of action based on negligent (as opposed to knowing or reckless) misstatements or omissions made in connection with a tender offer.
  • We discuss recent developments in Delaware law, including case law exploring, among other things, (1) appraisal rights, (2) the standard of review in controller transactions, (3) application of the Corwin doctrine, and (4) when a “Material Adverse Effect” permits termination of a merger agreement.
  • We review case law implementing the Supreme Court’s decisions in Omnicare and Halliburton II.
  • We review a decision from the Third Circuit regarding the obligation to disclose risk factors, and a decision from the Ninth Circuit regarding the utilization of judicial notice and the incorporation by reference doctrine at the motion to dismiss stage.


Farewell to Fairness: Towards Retiring Delaware’s Entire Fairness Review

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on a recent paper by Professor Licht 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 Fixing Freezeouts by Guhan Subramanian.

The entire fairness doctrine occupies a central place in Delaware’s accountability tools for corporate directors. In a standard formulation, it calls on directors to establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price” (Cinerama, Inc. v. Technicolor, Inc.). As Professor Lawrence Hamermesh and Chief Justice Leo Strine, Jr. recently pointed out, this doctrine undergoes constant transformation:

Like all common law doctrines, the Delaware law defining the fiduciary duties of corporate directors has evolved, often rapidly, in the face of commercial change and experience. It will continue to do so…, while reserving a role for active judicial scrutiny in situations in which such objective decision makers are either absent or impaired, through lack of pertinent information or otherwise, from making a truly voluntary decision (emphasis added).


Pre-Litigation Demand and Director Committees

Richard S. Horvath, Jr, is partner at Allen Matkins Leck Gamble Mallory & Natsis LLP. This post is based on his Allen Matkins memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On February 12, 2019, in the matter captioned City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et al., C.A. No. 2017-0341-KSJM, Vice Chancellor McCormick of the Delaware Court of Chancery provided further guidance on the pre-litigation demand requirement. This decision reaffirms and applies the principle under Delaware law that, while a pre-litigation demand “tacitly concedes” a board of directors is disinterested and independent for purposes of responding to the demand that concession only goes so far. As such, the board, or a subcommittee designated with the task of investigating and responding to the demand, must still in fact act independently, disinterestedly, in good faith, and with due care. While the derivative claims in Corvi were ultimately dismissed, the Court’s decision provides a helpful outline of the steps a board of directors should take in responding to a pre-litigation demand.


Corporate Opportunity Waivers in Private Equity and Venture Capital Investments

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 memorandum. This post is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware Supreme Court order affirming the Court of Chancery’s ruling in Holdings, Inc. v. ABS Capital Partners, Inc. provides important guidance for private equity and venture capital firms that seek to invest in competing businesses. Among other things, the decision stresses the importance of adopting provisions in governing investment documents, including the target’s certificate of incorporation, that permit the PE or VC firms to invest in competing businesses. The decision also cautions that broad corporate opportunity waivers may not be enforceable and that these waivers should be carefully drafted to avoid being declared invalid. Other notable takeaways from the decision are discussed below.


Oral History Documentary Videos on Landmark Developments in Delaware Corporate Law

Michael Wachter is the William B. and Mary Barb Johnson Professor of Law and Economics and Co-Director of the Institute for Law and Economics, at the University of Pennsylvania Law School; Lawrence A. Hamermesh is Executive Director, Institute for Law and Economics at the University of Pennsylvania Law School; and Nadia Jannetta is Managing Director at the Institute for Law and Economics at the University of Pennsylvania Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

The Institute for Law and Economics (ILE) at the University of Pennsylvania Law School has released two new oral history documentary videos that offer unprecedented insight into some of the most pivotal developments in corporate law. One of the new videos tells the story of the famous Walt Disney shareholder derivative litigation challenging Michael Ovitz’s massive severance compensation. The other video details the gestation and birth of Section 102(b)(7) of the Delaware General Corporation Law, permitting corporations to eliminate monetary liability of directors for certain breaches of fiduciary duties.


Appraisal Litigation in Delaware: Trends in Petitions and Opinions (2006-2018)

David F. Marcus is Senior Vice President and Frank Schneider is Vice President at Cornerstone Research. This post is based on their Cornerstone 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 Appraisal After Dell by Guhan Subramanian and Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here).

Last year saw a drop in the number of appraisal petitions filed in the Delaware Court of Chancery. After steadily rising since 2009 and peaking at 76 in 2016, the number of appraisal petitions filed by shareholders declined to only 26 in 2018.

For the 34 appraisal cases that ultimately went to trial between 2006 and 2018, the data show substantial variation in the awards granted by the Delaware Courts. Several recent decisions, including Dell and Aruba, have highlighted judicial concerns about the quality of the sales process and the appropriate methodologies used to determine fair value.


The Division of Corporation Finance’s Response to Mandatory Arbitration Proposal

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

The issue of mandatory arbitration bylaws is a hot potato—and a partisan one at that (with Rs tending to favor and Ds tending to oppose). And in this no-action letter issued yesterday to Johnson & Johnson—granting relief to the company if it relied on Rule 14a-8(i)(2) (violation of law) to exclude a shareholder proposal requesting adoption of mandatory arbitration bylaws—Corp Fin successfully passed the potato off to the State of New Jersey. Crisis averted. However, the issue was so fraught that SEC Chair Jay Clayton felt the need to issue a statement supporting the staff’s hands-off position:

The issue of mandatory arbitration provisions in the bylaws of U.S. publicly-listed companies has garnered a great deal of attention. As I have previously stated, the ability of domestic, publicly-listed companies to require shareholders to arbitrate claims against them arising under the federal securities laws is a complex matter that requires careful consideration,

consideration that would be more appropriate at the Commissioner level than at the staff level. However, as Clayton has previously indicated, mandatory arbitration is not an issue that he is anxious to have the SEC wade into at this time. To be sure, if the parties really want a binding answer on the merits, he suggested, they might be well advised to seek a judicial determination.


Social Responsibility and Enlightened Shareholder Primacy: Views from the Courtroom and Boardroom

Peter AtkinsMarc Gerber and Edward Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

There is an ongoing debate about the role that publicly traded for-profit business corporations should play in addressing a broad range of problems confronting our world today. Many issues fall under the ESG label—meaning they are environmental, social and/or governance-related in nature. Investors, as well as interest groups with varying agendas, have joined in this debate.

Although the motivations of ESG proponents may vary, many ESG proponents are investors and asset managers that believe appropriate company consideration of ESG matters, and the attendant board oversight, improve the long-term performance of the companies in which they are invested and reduce the risk in those investments.


Text Messages and Personal Emails in Corporate Litigation

Daniel Wolf and Matthew Solum are partners at Kirkland & Ellis LLP. The following post is based on their Kirkland memorandum and is part of the Delaware law series; links to other posts in the series are available here.

A number of recent Delaware decisions highlight the potential risk to directors, officers and bankers of using text messaging or personal email accounts to communicate about corporate matters on the assumption that those communications will remain private in the event of subsequent M&A or other corporate litigation. In some recent high-profile cases (including litigation relating to Facebook, Uber, Xerox, Aruba Networks and Viacom) precisely these types of messages among directors, officers and bankers have featured prominently, resulting in negative attention and potential adverse impact on the outcome of the litigation.


Books and Records Access for Terminated Directors

Gail Weinstein is senior counsel and Brian T. Mangino 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. Mangino, Ms. Lally, Maxwell YimDavid L. Shaw, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

In Schnatter v. Papa John’s (Jan. 15, 2019), the Delaware Court of Chancery ruled that a director had the right, under DGCL Section 220, to inspect the corporate books and records that related to the board’s determination to seek to sever ties with him. The board of Papa John’s International, Inc. (the “Company”) had terminated contractual arrangements with the director (“JS”) and sought his resignation based on his allegedly offensive misconduct involving the use of racial slurs. JS was the founder, largest stockholder, and longtime “public face” of the Company. JS’s stated purpose for his Section 220 demand was to determine whether, in severing ties with him, the directors had breached their fiduciary duties to act in the best interests of the stockholders. According to JS, the board’s actions had a significant negative impact on the Company and were undertaken without the board having interviewed him or investigated his conduct. The court ruled that JS was entitled to the access he sought.


  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows