The Delaware Law Series


ISS Supports Delaware Choice of Forum Provisions

Theodore N. Mirvis, William Savitt, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Mirvis, Mr. Savitt, Mr. Niles, S. Christopher Szczerban and Anitha Reddy, and is part of the Delaware law series; links to other posts in the series are available here. The post discusses the growing acceptance of exclusive forum bylaws, which were put forward by Wachtell Lipton partner Theodore N. Mirvis and discussed on the Forum by him herehere and here.

Institutional Shareholder Services (ISS) has released its proposed 2021 voting policy updates and, for the first time, proposes expressly recognizing the benefits of Delaware choice of forum provisions for Delaware corporations and generally recommending in favor of management-sponsored proposals seeking shareholder approval of such charter or bylaw provisions. Under the new ISS policy, ISS would:

  1. generally vote for charter or bylaw provisions that specify Delaware, or the Delaware Court of Chancery, as the exclusive forum for corporate law matters for Delaware corporations, “in the absence of serious concerns about corporate governance or board responsiveness to shareholders” (and continue to decline to vote against the directors of Delaware companies who adopt such bylaw provisions “unilaterally”);
  2. continue to take a case-by-case approach with respect to votes regarding exclusive forum provisions specifying states other than Delaware; and
  3. generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters or a specific local court within the state (and apply withhold vote recommendations to a board’s “unilateral” adoption of such a provision).

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Acquisition of Majority Ownership May Constitute a “Benefit”

Gail Weinstein is senior counsel and Steven Epstein and Mark H. Lucas are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Lucas, Matthew V. Soran, Andrea Gede-Lange, and Bret T. Chrisope, and is part of the Delaware law series; links to other posts in the series are available here.

In re Coty Stockholder Litigation (Aug. 17, 2020) involved the acquisition, by JAB Holding Company S.a.r.l., of shares in Coty, Inc. through a partial tender offer. Prior to the tender offer, JAB owned 40% of Coty’s outstanding shares and had effective control of the company. After the tender offer, JAB owned 60% of Coty’s outstanding shares and continued to control the company. Minority stockholders of Coty remaining after the offer was completed (the ”Remaining Stockholders”) brought suit in the Court of Chancery, alleging that JAB and the Coty directors had breached their fiduciary duties by effecting the tender offer at an unfair price and through an unfair process. Many of the claims were resolved prior to the defendants bringing their motion to dismiss before the court. Thus, in this decision, the claims the court addressed related only to the shares still held by the Remaining Stockholders after the tender offer closed (either because the shares were not tendered or due to proration because the shares tendered exceed the cap on shares that would be purchased in the offer). The defendants conceded that the entire fairness standard of review applied to the offer. However, they argued that, even if the offer had not been entirely fair, with respect to the shares the Remaining Stockholders continued to hold after the offer closed, they had not been harmed by JAB’s acquisition of majority control in the tender offer because JAB controlled Coty both before and after the tender offer. Chancellor Bouchard denied the defendants’ motions to dismiss the case at the pleading stage.

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Stockholder Claims Dismissed Even After Corwin Defense Fails

is an associate 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing” [1] did not apply. Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision. See In re USG Corp. S’holder Litig., Consol. C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020).

This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement. It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage. In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.” [2]

Background

USG Corporation (“USG”) was a public building materials company best known for manufacturing and selling Sheetrock brand drywall and wall products. Gebr. Knauf KG and certain of its affiliates (“Knauf”) owned 10.6% of USG’s common stock. In March 2017, Knauf (through its financial advisor) reached out to Berkshire Hathaway Inc. (“Berkshire Hathaway”), which owned 31.1% of USG’s common stock, regarding a potential acquisition of USG. Following discussions, Knauf and Berkshire Hathaway agreed in principle to a price of $40 per share.

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No Damages in Dispute Over Failed Anthem/Cigna Merger

Mark Metts is partner and Katy Lukaszewski and Stephen Chang are associates at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Metts, Ms. Lukaszewski, Mr. Chang, Paul L. Choi, Jim Ducayet, and Jennifer F. Fitchen, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here), and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

On August 31, 2020, Vice Chancellor J. Travis Laster of the Delaware Chancery Court issued his long-awaited resolution of the prolonged litigation involving the failed merger of Anthem, Inc. and Cigna Corporation—two of the nation’s largest health insurance companies. As Vice Chancellor Laster found and detailed in the 311-page opinion, no party won this protracted battle, no merger was consummated, and no damages were awarded to either side. [1]  See In re Anthem-Cigna Merger Litigation, Case No. 2017-0114-JTL, at 305-06 (Del. Ch. 2020).

The Merger. On July 23, 2015, Anthem and Cigna entered into a merger agreement, with Anthem agreeing to pay over $54 billion, a 38.4% premium over Cigna’s market capitalization. The proposed business combination would have created the nation’s largest healthcare insurer, combining the second- and third-largest insurance companies in the country. The merger agreement included certain “Efforts Covenants,” which included (1) the Reasonable Best Efforts Covenant obligating the parties to use their reasonable best efforts to satisfy all conditions of closing to consummate the merger and (2) the stricter Regulatory Efforts Covenant requiring the parties to take any and all actions necessary to avoid any legal impediments to the merger that a governmental entity might raise.

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The Withdrawal of the Boulder Letter

Phillip Goldstein is the co-founder of Bulldog Investors. This post is based on his comment letter to the SEC Division of Investment Management.

I. Any Limitation on Voting Rights of a Shareholder of a CEF Violates Sections 16 and 18 and the ICA.

The May 27, 2020 Statement did not disavow the Boulder Letter’s reasoning or its conclusion that a CEF would violate Section 18(i) of the Investment Company Act of 1940 (the “ICA”) by opting into a state control share statute (“CSS”). The May 27th Statement solicited comments on, among other things, the following point:

Apart from 18(i), which turns on the meaning of “equal voting rights,” please explain whether the ability to opt-in to and trigger a control share statute would have a practical or functional impact on a fund’s compliance with other provisions of the federal securities laws, such as section 12(d)(l)(E) of the Act, which requires pass-through or mirror voting for certain fund of funds arrangements, or rule 13d-l under the Securities Exchange Act of 1934, which places a limitation on the ability of certain shareholders from voting based on the size of their holding. If relevant, please provide an analysis of any practical or functional differences between how the principle of equal voting rights may apply in those different regulatory contexts.

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A Brief Response Regarding Stakeholder Governance

Peter A. Atkins, Marc S. Gerber, and Kenton J. King are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Atkins, Mr. Gerber, Mr. King, and Edward B. Micheletti. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr (discussed on the Forum here).

The recently published Forum post “The Friedman Essay and the True Purpose of the Business Corporation” defends a view of stakeholder governance that reflects the following two basic flaws:

  1. It misstates to whom the fiduciary duties of directors of Delaware corporations (and of corporations organized in other states that follow Delaware law) are owed and, accordingly, the assured scope of protection of the business judgment rule for directors.
  2. It ignores the reality that the interests of nonshareholder stakeholders can be—and increasingly are being—taken into account by corporations governed by Delaware law.

We have addressed each of these points at length in our prior Forum posts on the subject. (See our posts “Stockholders Versus Stakeholders—Cutting the Gordian Knot” (Aug. 2020); “An Alternative Paradigm to ‘On the Purpose of the Corporation’” (June 2020); “Directors’ Fiduciary Duties: Back to Delaware Law Basics” (Feb. 2020); and “Putting to Rest the Debate Between CSR and Current Corporate Law” (Sept. 2019). Our focus in this and prior posts on stating what Delaware director fiduciary duty law is currently for business corporations, rather than on alternative approaches, is necessary for purposes of advising directors today.) And we have offered in those posts guidance to directors regarding how to navigate legitimate and permissible efforts to consider nonshareholder stakeholder interests. We will not repeat that.

However, because of its central importance to the fiduciary duty and protection of directors, we address the following statement in the post to which we are responding:

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Directors’ Right to Access Privileged Communication

James Langston, and Mark McDonald are partners and Christopher Austin is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Langston, Mr. McDonald, Mr. Austin, Rahul Mukhi and Elizabeth Carlson. This post is part of the Delaware law series; links to other posts in the series are available here.

A recent decision of the Delaware Court of Chancery in the ongoing WeWork/SoftBank litigation addressed a previously unresolved question: can management withhold its communications with company counsel from members of the board of directors on the basis that such communications are privileged? Building on past Delaware decisions concerning directors’ rights to communications with company counsel, including in the CBS case we previously discussed here, the court clarified that directors are always entitled to communications between management and company counsel unless there is a formal board process to wall off such directors (such as the formation of a special committee) or other actions at the board level demonstrating “manifest adversity” between the company and those directors. See In re WeWork Litigation, C.A. No. 0258-AGB (Del. Ch. August 21, 2020). In other words, management cannot unilaterally decide to withhold its communications with company counsel from the board (or specified directors management deems to have a conflict).

Background

This case concerns a series of transactions involving The We Company (“WeWork”) and SoftBank and its affiliate (collectively referred to here as “SoftBank”) that resulted in SoftBank acquiring effective control of WeWork from Adam Neumann, one of the company’s founders. As part of the transactions, SoftBank also agreed to commence a tender offer to acquire additional WeWork shares from existing stockholders. Due to control of the company shifting from Neumann to SoftBank, a Special Committee of WeWork’s board of directors was empaneled and negotiated the transactions with SoftBank and Neumann. In April of this year, however, Softbank terminated the tender offer, claiming that certain closing conditions were incapable of being satisfied. Shortly thereafter, the Special Committee brought an action on behalf of WeWork against SoftBank for breach of contract and breach of fiduciary duty. Neumann separately commenced litigation against SoftBank based on similar allegations.

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Delaware Chancery Court Clarifies the “Ab Initio” Requirement

Jason Halper and Nathan Bull are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on Cadwalader memorandum by Mr. Halper, Mr. Bull, Ms. Bussiere, Jared Stanisci, Victor Bieger, and Victor Celis. This post 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 In re HomeFed Corp. Stockholder Litigation (“HomeFed”), the Delaware Court of Chancery considered on a motion to dismiss whether a squeeze-out merger by a controlling stockholder complied with the procedural framework set forth in Kahn v. M&F Worldwide Corp. (“MFW”). In MFW, the Delaware Supreme Court held that the business judgment rule—rather than the entire fairness standard—applies to a controlling stockholder transaction if the transaction is conditioned “ab initio,” or at the beginning, upon approval of both an independent special committee of directors and the informed vote of a majority of the minority stockholders.

In HomeFed, however, the court denied a motion to dismiss by the defendants, the directors of HomeFed Corporation (“HomeFed”) and its controller Jeffries Financial Group, Inc. (“Jeffries”), crediting allegations that Jeffries did not commit to the dual MFW protections before commencing discussions with HomeFed’s largest minority stockholder. In addition, the court found that a one-year “pause” in negotiations between Jeffries and HomeFed’s special committee did not “reset” the ab initio requirement of MFW.

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Private Ordering and the Role of Shareholder Agreements

Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. This post is based on her recent paper. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

On August 13, 2020, the Delaware Chancery Court issued its decision in Juul Labs, Inc. v. Daniel Grove, 2020 Del. Ch. LEXIS 264, holding that Grove’s statutory right to inspect the books and records of Juul, a Delaware corporation, were limited to those provided by Del. Gen. Corp. L. § 220. The court rejected Grove’s effort, based on the fact that Juul is headquartered in California, to exercise inspection rights pursuant to §1601 of the California statute., holding that stockholder inspection rights are a “core matter of internal corporate affairs” and that, as a result, only Delaware law could apply. The court further held that, pursuant to Juul’s exclusive forum charter provision, any effort by Grove to pursue inspection rights must be litigated in the Delaware Chancery court.

The decision arose from an unusual procedural posture. Grove, a former Juul employee, had acquired his stock pursuant to an option agreement in which he agreed to waive his inspection rights under §220. In an effort to avoid the terms of the agreement, Grove asserted inspection rights under the California statute. Juul then filed an action in Delaware Chancery seeking a declaratory judgment that Delaware and not California law governed Grove’s rights, if any, to inspect Juul’s books and records.

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PE Seller May Have Liability for Portfolio Company Concealing Steep Earnings Decline Post-Signing

Gail Weinstein is senior counsel, and Robert C. Schwenkel and Andrea Gede-Lange are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Agspring v. NGP (July 30, 2020) involved the sale of a portfolio company, Agspring LLC, by one PE fund (the “Seller”) to another (the “Buyer”). At the pleading stage of litigation, the Delaware Court of Chancery found it reasonably conceivable that: (i) the Agspring officers deliberately concealed from the Buyer a steep decline in earnings that occurred before and after the signing and closing; and (ii) as a result of the decline, certain of the representations and warranties in the sale agreement and a related financing agreement were false when made. The court concluded that not only the Agspring officers but also the Seller may have known or been in a position to know that the representations were false when made; and that therefore they faced potential liability for fraud.

Key Points. The decision serves as a reminder that:

  • A PE-seller may have liability for its portfolio company’s fraudulent representations. When a PE fund sells a portfolio company, the fund can be liable for fraudulent representations made in the sale (or a related) agreement–even if the fund is not a party to the agreement.
  • A decline in earnings may implicate the accuracy of representations. A steep decline in earnings can support a reasonable inference that certain representations in a sale agreement (or related agreements) may have been false when made. In this case, at the pleading stage, the court found it reasonably conceivable that Agspring’s officers and the Seller were in a position to know that the steep decline in its earnings that began just before the sale agreement was signed may have (i) constituted a Material Adverse Effect and (ii) put the company on a course that would lead to a default under a Material Contract that occurred three years later.

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