The Delaware Law Series


Chancery Subjects Reincorporation to Entire Fairness, Delaware Supreme Court Says Not So Fast

Mark Thierfelder, Eric Siegel, and Richard Horvath are Partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Thierfelder, Mr. Siegel, Mr. Horvath, Michael Darby, Steve Leitzell, and Matthew Williams, and is part of the Delaware law series; links to other posts in the series are available here.

Key Takeaways

  • Delaware Court of Chancery holds decision to reincorporate from Delaware to Nevada provided a non-ratable benefit to a controlling stockholder and directors due to potential reduction in future legal liability.
  • Due to that non-ratable benefit, the Court of Chancery applied entire fairness review and denied Defendants’ motion to dismiss.
  • Delaware Supreme Court granted an immediate appeal of the Court of Chancery’s order.

The Delaware Court of Chancery issued an order in Palkon v. Maffei[1] on February 20, 2024, holding that a decision by the boards of directors and the controller of TripAdvisor, Inc. (“TripAdvisor”) and Liberty TripAdvisor Holdings, Inc. (“Liberty”) to convert each entity from a Delaware corporation to a Nevada corporation was subject to review under entire fairness. Vice Chancellor Laster explained that the Nevada conversions amounted to an interested transaction whereby the directors and the controller would receive a non-ratable benefit—i.e., a potential reduction of future legal liability due to Nevada being potentially more protective of fiduciary defendants than Delaware. The Court of Chancery further hypothesized potential damages calculations in lieu of enjoining the conversions.[2]

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The Perils of Governance by Stockholder Agreements

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware State Bar Association (“DSBA”) and the Council of the DSBA’s Corporation Law Section recently approved a proposal (“the proposal”) to make an amendment (“the proposed amendment” or “the proposed legislation”) to Section 122 of the Delaware General Corporation Law (“DGCL”). The proposed amendment would permit expansive use of stockholder agreements—agreements between a board and a stockholder (or group of stockholders)—to opt out of the governance arrangements set by the company’s charter.

The proposal was sent to the Delaware legislature, and it is contemplated that the legislature would adopt it in the current session of the legislature, which ends in several weeks. As explained below, however, the proposal raises serious concerns. Adopting it would have a wide range of detrimental consequences for institutional investors, and other public investors, as well as for the quality of governance in Delaware companies.

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Proposed DGCL § 122(18), Long-term Investors, and the Hollowing Out of DGCL § 141(a)

Marcel Kahan is the George T. Lowy Professor of Law and Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law. This post is part of the Delaware law series; links to other posts in the series are available here.

Delaware is on the verge of gutting DGCL § 141(a)’s iconic principle of board-centricity: “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.” If the proposed DGCL § 122(18) is adopted by the Delaware legislature, § 141(a) will no longer impose meaningful limits on a board’s ability to delegate key governance functions and responsibilities. If such a change is to be made, it should only occur after the Delaware Supreme Court has had a chance to review the Moelis opinion on appeal, only after extensive deliberation among key stakeholders, and only after all of its implications are sorted out. To make such a major change in response to a group of transactional lawyers frustrated by a recent Court of Chancery opinion threatens Delaware’s legitimacy as the de facto promulgator of U.S. corporate law.

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Controller’s Ability to Appoint and Remove Directors Insufficient to Establish Demand Futility

Robin E. Wechkin is Counsel at Sidley Austin LLP. This post is based on her Sidley memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In Harrison Metal Capital, an investment fund with an 18% stake in a privately held company called MixMax, Inc. believed the CEO was committing financial improprieties, but found no legal recourse for its complaint.  Although certain features of the case are unusual as a factual matter, the Court of Chancery’s analysis of demand futility in a company with a controlling stockholder will be applicable in more conventional derivative actions as well.

The claims of the investment fund, Harrison Metal Capital, arose during the first twelve months of the pandemic.  During that period, the company received a federal Payroll Protection Plan loan but slashed its workforce.  At the same time, the CEO nearly doubled his own salary.  In soliciting investments under SAFE (Simple Agreement for Future Equity) contracts, the CEO made representations the Fund believed were false.  The Fund also believed the company was recognizing revenue improperly during this period.

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2024 Caremark Developments: Has the Court’s Approach Shifted?

Gail Weinstein is Senior Counsel, Philip Richter is a Partner, and Steven Epstein is Managing Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, and M&A and Private Equity partners Steven Steinman, Maxwell Yim and Liza Andrews and is part of the Delaware law series; links to other posts in the series are available here.

Historically, Caremark claims—that is, claims of breach of directors’ duties of oversight over key risks facing the company—were among the least likely types of claims to lead to director liability; and the Court of Chancery almost always dismissed such claims at the pleading stage. However, in the past few years, the Caremark cases brought by the plaintiffs’ bar have been met with increased receptivity, and the court has found in several cases, at the pleading stage, that it was reasonably conceivable (the Delaware standard to survive a motion to dismiss) that directors or officers may have breached their Caremark duties. Notably, in the most recent Caremark cases, decided in late 2023 and early 2024—WalgreensSkechersProAssurance and Segway (discussed below)—the court has re-emphasized a very high bar to success on Caremark claims.

In our view, however, the facts in these most recent cases arguably were not so egregious as to present a real test of the court’s overall approach to Caremark cases—and, as such, there is no indication that the court would be unlikely to find potential Caremark liability in cases involving egregious facts following the occurrence of an extreme corporate trauma. Indeed, in that very context, recently, the Delaware Supreme Court, in AmerisourceBergen (discussed below), overturned the Court of Chancery’s pleading-stage dismissal of Caremark claims in connection with that company’s role in the national opioid crisis.

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Delaware Courts Are Asking Just When a Stockholder Vote Is ‘Fully Informed’

Jenness E. Parker is a Partner and Amanda L. Day 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.

Key Points

  • Delaware courts are scrutinizing disclosures made to obtain stockholder approvals, particularly where there is an alleged conflict of interest in the decision-making.
  • If disclosures for a vote are incomplete or misleading, directors may not enjoy the benefit of the business judgment rule if their decisions are later challenged in court.
  • Some alleged conflicts have involved directors’ relationships with the counterparty or management, or financial or legal advisors’ work for the counterparty.
  • Courts have allowed suits to go forward where a controlling person allegedly steered the board to a particular bidder in ways that were not disclosed.

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The Limits on Sharing Confidential Information with Activists

Gail Weinstein is Senior Counsel, and Philip Richter and Warren de Wied are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. de Wied, Steven Steinman, Randi Lally and Bret T. Chrisope and is part of the Delaware law series; links to other posts in the series are available here.

In connection with a stockholder activist campaign by certain Icahn-affiliated funds (the “Icahn Funds”) against Illumina, Inc., the Icahn Funds (which collectively owned less than 2% of Illumina’s stock) launched a proxy contest for three seats on Illumina’s board. One of the Icahn Funds’ nominees, who was also an employee of a different Icahn-affiliated entity, was elected to the board (the “Icahn-Affiliated Director”). The Icahn-Affiliated Director then obtained and shared confidential and privileged company information with the Icahn Funds, which the Icahn Funds used in crafting a derivative complaint against certain current and former Illumina directors.

In Icahn Partners v. deSouza, the Court of Chancery, in a letter opinion (Jan. 16, 2024), ruled that the Icahn-Affiliated Director was not entitled to share the information with the Icahn Funds. The Delaware Supreme Court, in a letter ruling (Apr. 11, 2024), rejected interlocutory appeal of the issue.

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Delaware Supreme Court Holds MFW Inapplicable Based on Banker Conflict Disclosure Deficiencies

Gregory V. GoodingMaeve O’Connor, and William D. Regner are Partners at Debevoise & Plimpton LLP. This post is based on a Debevoise memorandum by Mr. Gooding, Ms. O’Connor, Mr. Regner, Andrew L. Bab, Matthew E. Kaplan, and Jonathan E. Levitsky, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court has reversed a Court of Chancery decision dismissing challenges to the acquisition of Inovalon Holdings, Inc. by a consortium led by Swedish private equity firm Nordic Capital[1] in a decision demonstrating the importance of disclosure of financial advisor conflicts in order to obtain the benefit of business judgment rule review under Kahn v. M&F Worldwide Corp. – the MFW decision. The Supreme Court held that the majority-of-the-minority stockholder vote approving the transaction was not fully informed, based on inadequate disclosure of conflicts of interest on the part of financial advisors to the special committee of Inovalon’s board.

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Delaware’s Status as the Favored Corporate Home: Reflections and Considerations

Amy Simmerman, William B. Chandler III, and David Berger are Partners at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Ms. Simmerman, Mr. Chandler, Mr. Berger, Brad Sorrels, and Ryan Greecher and is part of the Delaware Law series; links to other posts in the series are available here.

In recent months, a conversation has emerged as to whether Delaware should remain the favored state of incorporation for business entities. Indeed, many of our clients have asked us whether they should remain in Delaware or choose Delaware as the state of incorporation for their new ventures. In this discussion, we provide our reflections on that question and various factors that entrepreneurs, investors, and companies should consider when weighing incorporation in Delaware against incorporation in another state.

The Reliance on Delaware Compared to Other States

The sheer number of entities formed in Delaware reflects its dominance in this area. In 2022, more than 313,650 entities were formed in the state of Delaware, resulting in more than 1.9 million entities total in Delaware.[1] Delaware also continues to be the state of incorporation for nearly 68.2 percent of the Fortune 500, 65 percent of the S&P 500,[2] and approximately 79 percent of all U.S. initial public offerings in calendar-year 2022.[3] Of course, those numbers reflect that a substantial portion of entities are incorporated elsewhere, both within and outside of the United States. The Chief Justice of Delaware’s Supreme Court has noted that business entities indirectly or directly generate about a third of the state’s revenue.[4]

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Proposed Amendments to DGCL on Stockholder Contracting Would Create More Problems Than They Purportedly Solve

Sarath Sanga is a Professor of Law and Co-Director of the Center for the Study of Corporate Law at Yale Law School and Gabriel Rauterberg is a Professor of Law at the University of Michigan Law School. Related research from the Program on Corporate Governance includes Letting Shareholders Set the Rules by Lucian A. Bebchuk.

A new frontier of corporate law jurisprudence has emerged. At issue are the limits of corporate contractual freedom and stockholders’ power to change the rules of Delaware corporate law. Recent key cases include the Delaware Supreme Court’s decision in Manti v. Authentix (on waiving appraisal rights) and last year’s decision in New Enterprise Associates v. Rich (on waiving the right to sue for breach of fiduciary duty). Both decisions affirmed stockholders’ power to contract around the rules of corporate law.

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