The Delaware Law Series


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.

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Guidance on Books-and-Records Inspection Rights

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

The Delaware Supreme Court this week offered important guidance on stockholders’ rights to inspect corporate books and records. KT4 Partners LLC v. Palantir Techs., Inc., No. 281, 2018 (Del. Jan. 29, 2019).

The case involved a stockholder’s demand under Section 220 of the Delaware General Corporation Law to obtain documents to investigate suspected wrongdoing by Palantir’s board. The trial court permitted Palantir to exclude email from its production and limited the stockholder’s ability to use the documents in litigation outside of Delaware. On appeal, the Supreme Court reversed on both issues.

As to the proper scope of inspection, the Court confirmed that a Section 220 petitioner is generally entitled to “everything that is ‘essential’” but no more than “what is ‘sufficient’” for its purpose. For that reason, the Court noted, inspections are often properly limited to formal board-level materials such as meeting minutes, resolutions, and presentations. Nevertheless, “§ 220 must be interpreted in light of companies’ actual and evolving record-keeping and communications practices.” In this case, the corporation had “a history of not complying with required corporate formalities” and had admitted that “there are no board-level documents” responsive to the request. In such circumstances, the Court held, an email production was required: “If a respondent in a § 220 action conducts formal corporate business without documenting its actions in minutes and board resolutions or other formal means, but maintains its records of the key communications only in emails, the respondent has no one to blame but itself for making the production of those emails necessary.”

With respect to the forum use restriction, the Court reaffirmed that courts may impose such restrictions on inspection demands to protect legitimate corporate interests (such as avoiding wasteful multiforum litigation) but stressed that the inquiry is case-specific. Here, a forum restriction would have the effect of multiplying, rather than consolidating, intracorporate disputes, because the corporation did not have a Delaware forum-selection bylaw and was already embroiled in related litigation in California.

The decision supplies corporations with yet another reason to take two prudent governance steps: (1) to document board actions with care (to avoid intrusive inspection requests from stockholders), and (2) to consider adopting forum-selection bylaws (to avoid the obligation to produce documents for use in foreign tribunals).

Good Faith, Fair Dealing, and Exit Provisions

Robert B. Little is a partner and Eric B. Pacifici is an associate at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently overruled a Court of Chancery opinion that had relied on the covenant of good faith and fair dealing to allow the minority owners in a joint venture to force an exit transaction. In its opinion, the Delaware Supreme Court offered useful guidance for parties seeking to draft joint venture exit provisions and indicated that parties should not expect to rely on the implied covenant of good faith and fair dealing to deliver them from a harsh outcome dictated by clear contractual language.

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Amicus Brief of Law and Finance Professors in Verition Partners v. Aruba Networks

Brian Broughman is Professor of Law at Indiana University. This post relates to an Amicus Brief submitted by Law and Finance Professors, led by Professor Broughman, in the case of Verition Partners v. Aruba Networks, available here. This post is part of the Delaware law series; links to other posts in the series are available here.

In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., the Delaware Court of Chancery appraised the “fair value” of Aruba’s shares as their average market price during the 30 days prior to the announcement of Aruba’s merger with HP. The Court’s fair-value determination was not only 31% below the merger price, but also below the fair-value estimate of defendant’s own expert. Aruba appears to be the first Delaware decision to “hold that the unaffected market price was the best evidence of fair value and award that figure.” Not surprisingly, the decision attracted considerable attention (including here, here, here, here, and here on this blog). The case is now on appeal before the Delaware Supreme Court.

We filed an amicus brief in connection with the appeal. The brief makes two simple points. First, even if a target’s stock traded in an efficient market, its pre-announcement market price will often be an unreliable measure of fair value at the close of the merger. Second, the available evidence suggests that Delaware stockholders have benefitted from the protection provided by fair-value appraisal, and consequently could be hurt if Aruba’s approach is sustained and appraisal valuations collapse down to unaffected market price.

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Post-Closing Merger Litigation—The Road Ahead

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.

In a recent series of landmark decisions, the Delaware Supreme Court has constructed an orderly doctrinal framework designed to reduce wasteful post-closing merger litigation. These cases recognize that the market’s judgment is usually sound and that the costs of intensive litigation regarding transactions approved by informed and self-interested stockholders generally outweigh the benefits. A compelling corporate law question for 2019—and a practical challenge for transaction planners—is how that doctrinal framework will be implemented in the face of sustained attack by the class action plaintiffs’ bar.

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Mergers and Acquisitions—2019

Andrew Brownstein, Steven Rosenblum and Victor Goldfeld are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

As a whole, 2018 proved to be another strong year for M&A. Total deal volume reached almost $4.2 trillion globally, higher than the $3.7 trillion volume of 2017, but still less than the record of over $5 trillion set in 2015. Deals involving U.S. targets totaled over $1.7 trillion, compared to approximately $1.5 trillion in 2017. The number of large deals significantly increased in 2018, with 60 deals over $10 billion announced globally (compared to 46 deals in 2017). The technology sector saw the largest deal volume, followed by healthcare, oil and gas, and real estate. Private equity firms also had a banner year. As of late December, private equity buyout volume had reached almost $384 billion, the highest since the PE boom before the financial crisis. Although hostile and unsolicited M&A remained prevalent, the volume of these deals fell globally both in absolute terms, from $575 billion in 2017 to $522 billion in 2018, and in terms of share of overall deal volume, from 15% in 2017 to less than 13% in 2018.

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Key 4Q 2018 Delaware Decisions

Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Christopher EwanSteven J. Steinman, and Warren S. de Wied. This post is part of the Delaware law series; links to other posts in the series are available here.

The major themes of the Delaware decisions issued in 2018 were (a) the continued rejection of fiduciary claims (with many fewer fiduciary cases filed than in the past), and (b) the continued emphasis on judicial interpretation of agreement provisions based on the “contractarian” approach (with more contract dispute cases filed than in the past). Notably, in the last quarter of the year, the Court of Chancery made a number of rulings of a type seen only infrequently—but these decisions at the same time reaffirmed the highly fact-specific nature of such rulings and the high bar to a plaintiff’s obtaining them.

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Corwin’s Nuance

Meredith E. KotlerRoger A. Cooper, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler, Mr. Cooper, Mr. McDonald, and April Collaku, and is part of the Delaware law series; links to other posts in the series are available here.

In In re Xura, Inc. Stockholder Litigation, [1] decided earlier this week, the Delaware Court of Chancery denied the target CEO’s motion to dismiss claims that he breached his fiduciary duties by “steer[ing]” the company into an allegedly unfair acquisition by a private equity firm that promised to retain him post-acquisition, while knowing that his job was in jeopardy if the target remained independent. This case is yet another example of why disclosures are so important in the post-Corwin [2] era: Vice Chancellor Slights rejected the CEO’s argument that the claims against him were extinguished by the stockholder vote approving the transaction, finding that a number of material omissions precluded a finding that the stockholders’ vote was fully informed. The vote was thus ineffective to invoke the business judgment rule at the pleading stage.

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California Courts and Forum Selection Bylaws

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Savitt, Mr. McLeod, and Ms. Reddy. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill.

[On December 21, 2018], the California Court of Appeal became the second appellate court outside of Delaware to recognize the enforceability of forum-selection bylaws adopted by Delaware corporations designating the Delaware Court of Chancery as the exclusive forum for the litigation of intracorporate and fiduciary disputes. Drulias v. 1st Century Bancshares, Inc., No. H045049 (Cal. Ct. App. 6th Dist. Dec. 21, 2018).

The appeal arose from Midland Financial’s acquisition of 1st Century Bancshares, a Delaware-chartered bank holding company. When 1st Century’s board approved the merger, it also adopted a bylaw establishing Delaware as “the sole and exclusive forum” for intracorporate disputes, including any action asserting a claim for breach of fiduciary duty. A 1st Century stockholder sued, alleging that the board had breached its duties in approving the merger and that the company’s financial advisor had aided and abetted the breach.

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Fighting the Rising Tide of Federal Disclosure Suits

Alexandra C. Boudreau is counsel and Daniel W. Halston is partner at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on their WilmerHale memorandum.

In the past few years, there has been a dramatic rise in the number of M&A disclosure lawsuits filed in federal court. Recently, courts have begun to fight back against this nuisance litigation using different approaches. This post summarizes those developments.

Recently, many have reported on the increase in the number of lawsuits in Federal Court challenging public company mergers brought by shareholders alleging violations of Section 14(a), which prohibits false and misleading statements in proxy materials. It appears that after the Delaware Court of Chancery cracked down on reflexively filed M&A suits in In re Trulia Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016), the plaintiffs’ bar diverted its flood of litigation following the public announcement of a merger into this previously quiet rivulet. The rush of 14(a) suits continues unabated this year.

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