The Delaware Law Series


Delaware Supreme Court’s Response to Chancery for Turning Away Stockholder’s Claims

Jason M. Halper and Jared Stanisci are partners and Victor Bieger is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Mr. Bieger, and Annika Conrad, and is part of the Delaware law series; links to other posts in the series are available here.

Despite being one of the more well-known doctrines in corporate law, the rule articulated in Blasius [1]—that directors who act with the primary purpose of interfering with a stockholder vote must have a compelling justification for their conduct—has received little attention from the Delaware Supreme Court. Delaware’s highest court has not mentioned the Blasius test in over a decade [2] and has not held that a board’s conduct triggered the Blasius test since 2003. [3]

During those intervening years, Blasius has been questioned, diluted, and declared all but subsumed by other doctrines. As one vice chancellor put it, a consensus has taken root that “Blasius ‘ main role, to the extent it has one, is as a specific iteration of the intermediate standard of review laid out in Unocal.” [4]

That view of Blasius may change with the Delaware Supreme Court’s recent decision in Coster v. UIP Companies, [5] which sent a case back to the Court of Chancery for giving Blasius short shrift. Coster arose out of a dispute between the two 50% owners of a real estate investment company. After the two stockholders deadlocked on a director election, one of the stockholders—who was already on the board—proposed a dilutive stock sale to one of his fellow incumbent directors, which the board ultimately approved. The stock sale diluted the outside stockholder’s shares below 50%, breaking the deadlock.

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Presidio Shines Light on Key Delaware Deal Litigation Trends and Topics

Edward B. Micheletti is partner, Bonnie W. David is counsel, and Ryan Lindsay is an associate 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.

In Firefighters’ Pension System of the City of Kansas City, Missouri Trust v. Presidio, Inc., Vice Chancellor Laster of the Delaware Court of Chancery dismissed claims against directors of Presidio, Inc. (Presidio) and Presidio’s controlling stockholder arising out of the sale of Presidio, while sustaining claims against Presidio’s Chairman/CEO, the buyer (Buyer) and Presidio’s financial advisor. The case is notable for the stockholder plaintiff’s allegation of an undisclosed “tip” from the financial advisor to the buyer that purportedly allowed the buyer to strategically increase and structure its offer and close the deal.

The decision—which the court labeled as an “Opinion,” indicating it was intended to cover significant or novel issues—addresses several deal litigation topics and is worthy of analysis by M&A practitioners. The court discusses (i) the applicable standard of review for the sale of a controlled company to a third party, and the applicability of the “Synthes safe harbor”; (ii) potential liability for financial advisors premised on a “fraud-on-the-board” theory; and (iii) the continuing trend of breach of fiduciary duty claims against officers, who are not protected by exculpation provisions in a corporation’s certificate of incorporation.

Background

The case arose from the acquisition of Presidio in December 2019. Approximately seven months earlier, in May 2019, Presidio’s controlling stockholder began exploring a sale of the company, assisted by financial advisor LionTree Advisors, LLC (LionTree). The controller and LionTree held early exploratory meetings with a potential financial buyer, and Clayton Dubilier & Rice, LLC (CD&R), a potential strategic buyer. In June 2019, LionTree and Presidio’s chairman/CEO met with CD&R about a possible transaction with Presidio. CD&R allegedly suggested to the chairman/CEO that it desired a merger of equals with a portfolio company, in which his continued employment would not be guaranteed.

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Delaware Supreme Court Provides Guidance Regarding D&O Liability Insurance Coverage

Nicole A. DiSalvo and Daniel S. Atlas 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.

The Delaware Supreme Court has issued two decisions over the past year that provide important guidance about directors’ and officers’ (D&O) liability insurance coverage. In RSUI Indemnity Company v. Murdock, the Supreme Court affirmed decisions holding that losses due to the fraudulent actions of an officer or director of a Delaware corporation are insurable under Delaware law. As part of its analysis, the Supreme Court conducted and affirmed a choice-of-law analysis to determine that Delaware law applied even though the D&O policy was negotiated and issued in another state. In In re Solera Insurance Coverage Appeals, the Supreme Court reversed a lower court ruling, holding instead that an appraisal action was not a “Securities Claim”—and therefore, not a covered claim—under the at-issue D&O policy.

RSUI Indemnity Company

In November 2013, David Murdock—Dole Food Company, Inc.’s CEO, director and 40% stockholder at the time—engaged in a going-private transaction, resulting in class action litigation and an appraisal action in the Court of Chancery in which former Dole stockholders challenged the fairness of the transaction and alleged breaches of fiduciary duty by Mr. Murdock and Dole’s president, COO and general counsel, Michael Carter. The court held in its post-trial opinion that Mr. Murdock and Mr. Carter breached their fiduciary duty of loyalty and “engaged in fraud” by, among other things, intentionally depressing Dole’s premerger stock price. [1]

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Chancery Denies Corwin Cleansing In Light of Process Concerns

Matthew J. Dolan is partner at Sidley Austin LLP. This post is based on his Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Last month Vice Chancellor Zurn issued a significant, 200+ page decision on a motion to dismiss filed by defendants in the ongoing Pattern Energy transaction litigation, captioned In re Pattern Energy Group Inc. Stockholders Litigation, C.A. No. 2020-0357-MTZ. As we previously reported, class actions had been filed in Chancery Court and Delaware Federal District Court following the $6.1 billion going-private sale of Pattern Energy Group, Inc. to Canada Pension Plan Investment Board (“Canada Pension”). Both cases present overlapping breach of fiduciary duty claims. The Chancery Court case has moved forward faster, with that Court now issuing a decision denying defendants’ motion to dismiss. The decision is a reminder to directors and their advisers that without careful adherence to an independent sales process and transaction structure, directors risk losing the liability protections that Delaware law otherwise provides.

The Sales Process

Pattern Energy was formed nine years ago by Riverstone Pattern Energy Holdings, L.P.(“Riverstone”), a private equity fund, for the purpose of operating renewable energy facilities developed by another Riverstone affiliate. (The summary of pertinent background facts is taken from the Chancery Court’s lengthy recitation of transaction found in its Order from pages 4 to 81.) Riverstone is not a Pattern Energy stockholder. Instead, plaintiffs alleged that Riverstone exercised control through Pattern Energy’s primary upstream supplier of energy projects (“Supplier”), which provided most of Pattern Energy’s business. Pattern Energy was itself a limited partner in Supplier, and Riverstone controlled Supplier. Importantly, the applicable partnership agreement prohibited Pattern Energy from selling its stake in Supplier without Supplier’s consent, although a transaction could potentially be structured to avoid triggering this consent right. This effectively gave Riverstone (through Supplier) a veto right on a sale of Pattern Energy’s stake in Supplier.

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Rights Offers and Delaware Law

Jesse M. Fried is Dane Professor of Law at Harvard Law School. 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.

Under Delaware law, a securities issuance by a public or private firm in which all investors may participate pro rata (a “rights offer”) is generally seen as treating corporate insiders and existing outside investors alike. This view makes it difficult for nonparticipating outsiders to prevail on a “cheap-issuance” claim: that the insiders sold themselves cheap securities via the rights offer.

In a paper recently posted on SSRN, Rights Offers and Delaware Law, I explain how insiders can use rights offers to sell themselves cheap securities at outsiders’ expense, and suggest how courts applying Delaware law should probe the fairness of rights offers.

Under Delaware law, any transaction (including a securities issuance) allegedly benefitting insiders at outsiders’ expense can give rise to “entire fairness” review, under which insiders must prove that both price and process were fair. However, by structuring an issuance as a rights offer, which appears to protect outsiders, insiders have gained substantial legal insulation from outsiders’ claims. Certain cases (e.g., WatchMark v. ARGO (Del. Ch. 2004)) suggest that the use of a rights offer could lead to review under the much more lenient business judgment rule. When a rights offer is followed by a merger, other cases (e.g., Feldman v. Cutaia (Del. Ch. 2007)) suggest that insiders may well be able to avoid any judicial review whatsoever. And, even if fairness review cannot be avoided, the use of a rights offer may well go far to help satisfy entire fairness.

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Alarm.com and the Open Questions Regarding Trade Secret Claims Related To Usurpation of Corporate Opportunities

Robert S. Velevis is partner and Lora Chowdhury is an associate at Sidley Austin LLP. This post is based on their Sidley memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

In a previous memorandum, we discussed a recent Texas Court of Appeals case which held that members of a Delaware LLC can contract around (i.e., waive) the general principle protecting against usurpation of corporate opportunities. See Patterson v. Five Point Midstream Funds I and II, L.P., Case No. 01-19-00-643-CV (Tex. App. Dec. 8, 2020). We discussed that the Patterson decision followed a trend in Delaware that permits parties to contract around the traditional rules prohibiting usurpation of corporate opportunities. See Alarm.com Holdings, Inc. v. ABS Capital Partners Inc., No. CV 2017-0583-JTL, 2018 WL 3006118 (Del. Ch. June 15, 2018), aff’d, 204 A.3d 113 (Del. 2019). In December 2019, the Delaware Supreme Court in Alarm.com, affirmed a decision penned by Vice Chancellor Laster out of the Court of Chancery dismissing a claim under the Delaware Uniform Trade Secret Act (DUTSA).

In this post, we will take a deeper dive into Alarm.com, the open questions it left, and potential new developments to keep an eye out for concerning waiver of usurpation of corporate opportunities in the private equity realm. This decision — and the open questions that have not yet been addressed by subsequent cases — is of particular importance to private equity owners that hold investment in companies governed by Delaware law.

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Recent Claims SPAC Board Structures are a “Conflict-Laden” Invitation to Fiduciary Misconduct

Frank M. Placenti is senior partner at Squire Patton Boggs LLP. This post is based on his Squire Patton Boggs memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Without a doubt, the trendiest transactions on Wall Street during 2020 and the first half of 2021 were the formation of special purpose acquisition corporations (SPACs) and the follow-on mergers (known as “De-SPAC” transactions) that enable private companies to achieve public company status without the rigors, risks and expenses associated with traditional IPOs.

Standard & Poor’s Capital IQ reported that there were 294 SPACs formed in 2020, up from 51 in the prior year, and more than double the number of SPACs formed in the prior three years. Equally impressive was the long list of prominent individuals associated with SPACs. Their credentials (or at least notoriety) conferred an aura of respectability upon this asset class which it had not previously enjoyed.

The sheer volume of recent SPAC transactions, coupled with the impressive pedigrees of some SPAC sponsors, suggest that they have made real progress toward overcoming the taint associated with their ancestors—the much-maligned reverse shell mergers of the early 2000’s and discredited “blank check” public companies of the 1980’s—and have moved more into the mainstream of the U.S. capital markets.

Yet, amidst this swelling acceptance, a recently-filed Delaware class action complaint contends that the typical SPAC governance structure is so “conflict-laden” that it “practically invites fiduciary misconduct.”

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Delaware Court of Chancery Green Lights Claims Alleging Loyalty Breaches Tainting Company Sales Process

Jason Halper and Jared Stanisci are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Ms. Bussiere, Matthew Karlan, and Audrey Curtis, and is part of the Delaware law series; links to other posts in the series are available here.

On May 6, 2021, Vice Chancellor Zurn of the Delaware Court of Chancery issued a 200-page decision denying a motion to dismiss in In re Pattern Energy Group Inc. Stockholders Litigation, a class action challenging the $6.1 billion go-private, all-cash sale of Pattern Energy Group Inc. (“Pattern Energy” or the “Company”) to Canada Pension Plan Investment Board (“Canada Pension”) [1]. The transaction was narrowly approved by 52% of the Pattern Energy stockholders on March 10, 2020, with both ISS and Glass Lewis recommending stockholders vote against the sale. The sale closed on March 16, 2020.

Despite having many of the traditional hallmarks of a sound sales process—a disinterested and independent special committee authorized to conduct the process, non-conflicted legal and financial advisors counseling the special committee, and multiple viable potential buyers submitting offers—the Court denied a motion to dismiss in light of allegations that the special committee and certain officers running the sales process improperly tilted the playing field in favor of Canada Pension as the preferred choice of Riverstone Pattern Energy Holdings, L.P. (“Riverstone”), a private equity fund that formed Pattern Energy and controlled its upstream supplier of energy projects (“Supplier”). Specifically, Plaintiff alleged that the special committee, Riverstone, Supplier, and certain conflicted Pattern Energy directors and officers breached their fiduciary duties (or aided and abetted such breaches) by prioritizing Riverstone’s interests over the stockholders’, tortiously interfered with stockholders’ prospective economic advantage, and conspired to favor a deal beneficial to Riverstone at the expense of the stockholders. Additionally, the Court found that Corwin cleansing was not available because majority shareholder approval was obtained in part through the affirmative vote of a significant shareholder that was contractually bound, pre-disclosure, to vote in favor of the transaction.

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Corwin Doctrine Remains Powerful Antidote to Post-Closing Stockholder Deal Litigation

William Savitt, Ryan 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.

The Delaware Court of Chancery this week dismissed post-closing merger litigation in deference to an informed and uncoerced stockholder vote. In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267-JRS (Del. Ch. May 25, 2021).

In 2018, Brookfield Property Partners acquired the 65% of shares of GGP, Inc. that it did not already own. Before opening merger talks, Brookfield made clear its intention that any transaction should be conditioned on approval by unaffiliated stockholders. Holders of 94% of the unaffiliated shares ultimately approved the deal reached by Brookfield and a special committee of the GGP board.

Following what the Court of Chancery called a “familiar rhythm,” stockholder plaintiffs demanded inspection of GGP’s books and records related to the transaction and then sued, claiming that Brookfield should be held liable for fiduciary breach as a controlling stockholder.

The Court of Chancery dismissed the action. In determining whether Brookfield was a controlling stockholder, the Court reemphasized the importance of voting power. While “mindful of the practical reality of an alleged controller’s voting power,” the Court found that “a 35.3% equity stake does not transmogrify a minority blockholder into a controlling stockholder (with the accompanying fiduciary duties to match).” Because plaintiffs had not alleged facts showing Brookfield’s ability to “dictate any action by the board” or “managerial supremacy” over GGP, the Court rejected the claim of control.

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Delaware Court Orders Up Prevention Doctrine to Require Reluctant Buyer to Close

Matthew Salerno, Mark McDonald, and James Langston are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Salerno, Mr. McDonald, Mr. Langston, Roger Cooper, and Pascale Bibi, 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 New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In Snow Phipps v. KCAKE Acquisition, [1] the Delaware Court of Chancery ordered the buyer (Kohlberg) to close on its $550 million agreement to purchase DecoPac, a cake decorations supplier. In doing so, the court easily rejected the buyer’s claims that the COVID-19 pandemic resulted in a material adverse effect (“MAE”) and that the steps taken by the company to respond to the pandemic breached the ordinary course covenant. More novel was the way in which the court sidestepped the near-universal construct in leveraged buyouts that the seller will be entitled to a specific performance remedy requiring the buyer to close only if the buyer’s debt financing is also available. The court—pointing to the “prevention doctrine”—concluded that the buyer’s failure to use reasonable best efforts to obtain the debt financing was a breach of the agreement and, therefore, the buyer could not rely on the unavailability of debt financing to avoid being required to specifically perform its obligations under the contract. While alternative financing for the DecoPac transaction proved to be available and Snow Phipps and Kohlberg have agreed to close later this week, financial sponsor buyers will need to continue to be vigilant in ensuring that the prevention doctrine does not erode the remedies architecture that has become ubiquitous in leveraged buyouts.

Background

The plaintiffs in the litigation were Snow Phipps Group, LLC, a private equity firm, and DecoPac Holdings Inc., the parent company of a supplier and marketer of cake decorating products to supermarkets for use in their in-store bakeries (together “DecoPac” or the “sellers”). [2] In the early months of 2020, as the COVID-19 pandemic began to worsen, DecoPac negotiated a sale of its cake decoration supply business to private equity firm Kohlberg & Company (“Kohlberg”). [3] The negotiations culminated in a $550 million stock purchase agreement (“SPA”) signed by DecoPac and Kohlberg’s acquisition vehicle KCAKE Acquisition, Inc. on March 6, 2020. [4] The $550 million purchase price reflected a $50 million reduction obtained by Kohlberg in the 48 hours prior to signing, reflecting Kohlberg’s estimates of the anticipated impact of the COVID-19 pandemic and market volatility on the DecoPac business and Kohlberg’s cost of financing the acquisition. [5]

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