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Program on Corporate Governance Advisory Board
- William Ackman
- Peter Atkins
- David Bell
- Kerry E. Berchem
- Richard Brand
- Daniel Burch
- Paul Choi
- Jesse Cohn
- Creighton Condon
- Arthur B. Crozier
- Renata J. Ferrari
- John Finley
- Carolyn Frantz
- Bruce H. Goldfarb
- Joseph Hall
- Jason M. Halper
- Paul Hilal
- Carl Icahn
- David Millstone
- Theodore Mirvis
- Maria Moats
- Erika Moore
- Carey Oven
- Morton Pierce
- Philip Richter
- Paul K. Rowe
- Marc Trevino
- Steven J. Williams
- Daniel Wolf
HLS Faculty & Senior Fellows
The Delaware Law Series
Beware of Post-Closing Unjust Enrichment Claims
Rory K. Schneider is a Partner and Colin O. Lubelczyk is an Associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Schneider, Mr. Lubelczyk, Martha E. McGarry, Andrew J. Noreuil, and Camila Panama 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? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) by John C. Coates, IV.
There are several contractual provisions that sellers often use to limit their liability for post-closing claims brought by a buyer in the context of a private company purchase agreement. Reliance disclaimers, non- survival of representations and warranties, exclusive remedy, and no-recourse provisions in their typical forms, however, only go so far in court. Even where there is no explicit carve-out for fraud claims, as a matter of “public policy,” Delaware courts have generally not enforced contract provisions that prevent a buyer from asserting fraud claims against sellers and/or their affiliates for making false representations and warranties or knowing that representations and warranties made by other seller parties were false.
A consequence of this judicial approach is that it has exposed limited partners and selling shareholders to derivative unjust enrichment claims, of which there have been an increasing number of cases over the last several years. These unjust enrichment claims have proven difficult to dismiss at the pleading stage, thereby exposing affiliates to precisely the type of protracted litigation that, in many cases, the contracting parties agreed that seller affiliates should not have to face. In light of this, sellers and their counsel should consider adding contractual language to specifically preclude unjust enrichment claims that are not dependent upon any proof of wrongdoing. The law in Delaware remains unsettled on the extent to which explicit protections against such claims would result in their prompt dismissal, but at the least, their inclusion may make buyers less apt to file the claims in the first place and make courts more willing to reject them.
Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary Duties
John A. Kupiec and Mark E. McDonald are Partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Kupiec, Mr. McDonald, Julie Bontems, and Ayah Al-Sharari and is part of the Delaware law series; links to other posts in the series are available here.
In a recent decision, the Delaware Court of Chancery grappled with the question whether—and to what extent—claims for breach of fiduciary duty can be waived ex ante in a corporate shareholder agreement. Specifically, in New Enterprise Associates 14 LP v. Rich, the court denied a motion to dismiss claims for breach of fiduciary duties brought against directors and controlling stockholders of Fugue, Inc. (the “Company”) by sophisticated private fund investors who had agreed to an express waiver of the right to bring such claims. [1] Importantly, the court found that fiduciary duties in a corporation can be tailored by parties to a shareholders agreement who are sophisticated, and were validly waived by the voting agreement in this case (which specifically addressed the type of transaction at issue). The court, however, held that public policy prohibits contracts from insulating directors or controlling stockholders from tort or fiduciary liability in a case of intentional wrongdoing, which the court found was plausibly alleged in this case. The court’s opinion has implications for sophisticated investors in venture capital and other private transactions involving Delaware corporations. The opinion cautions against overreliance on express contractual waivers, on the one hand, while also serves as a reminder that at least in some circumstances sophisticated parties can contract around default legal principles (including fiduciary duties), even with respect to corporations.
Officer Exculpation Under Delaware Law—Encouraging Results in Year One
Brian V. Breheny, and Allison L. Land are Partners and Ryan J. Adams is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is by Mr. Breheny, Ms. Land, Mr. Adams, Alexander J. Vargas and Melanie Yeames, and is part of the Delaware law series; links to other posts in the series are available here.
Effective August 1, 2022, Section 102(b)(7) of the Delaware General Corporation Law (the “DGCL”) was amended to permit Delaware corporations to exculpate certain senior officers, to provide them with protection from liability for monetary damages that is similar to the protection that has been available for directors under the DGCL for nearly 40 years. To provide for officer exculpation, however, a Delaware corporation must amend its certificate of incorporation, which requires stockholder approval. Heading into the 2023 proxy season, it was unclear how many Delaware corporations would seek to take advantage of this new officer exculpation provision and, if so, whether their stockholders and the proxy advisory firms would support proposed amendments to certificates of incorporation to effect this change. With many annual meetings completed, initial results have been very encouraging. To date, over 260 publicly traded Delaware corporations have proposed amendments to their certificates of incorporation to provide for officer exculpation, and have submitted such proposed amendments to their stockholders for approval at their 2023 annual meeting. With nearly half of those annual meetings completed, the vast majority of such proposals have received stockholder approval, often by an overwhelming majority of the votes cast.
Background
Section 102(b)(7) of the DGCL was amended less than a year ago to authorize exculpation of certain senior officers of Delaware corporations from personal liability for monetary damages in connection with breaches of their fiduciary duty of care (the “Officer Exculpation Amendment”). This was viewed by many as a welcome and necessary change, putting such senior corporate officers on similar footing with directors, who have long been afforded protection from personal liability, [1] although the officer exculpation provisions are more limited than the protection available to directors.[2] In recent years, the frequency with which officers of public corporations have been targets of stockholder lawsuits has increased significantly, emphasizing the need to provide them with protection from personal liability.
Importance of Special Litigation Committees in Maintaining Board Control Over Derivative Litigation
Gail Weinstein is Senior Counsel, and Scott B. Luftglass and Peter L. Simmons are Partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Luftglass, Mr. Simmons, Philip Richter, Steven Epstein and Warren S. de Wied and is part of the Delaware law series; links to other posts in the series are available here.
There has been strong focus on derivative suits in recent years in the context of M&A-related fiduciary claims, as well as Caremark oversight claims and COVID-19-related claims, being asserted by stockholders against corporate directors and officers on behalf of the corporation. In In re Baker Hughes, a GE Company, Deriv. Litig. (April 17, 2023), the Delaware Court of Chancery granted a motion to terminate a derivative suit brought against the former directors of Baker Hughes Incorporated that challenged the fairness of the company’s merger with an affiliate of its controller. The decision serves as an important reminder to boards that a properly formed and functioning special litigation committee (“SLC”)—comprised of independent and disinterested members, which acts in good faith and reaches reasonable conclusions—is a potent tool for a corporation to retain control over derivative claims, even when the plaintiffs have excused demand on the board to bring the litigation based on the board’s non-independence or conflicts.
Chancery Rejects Dismissal of Caremark Claims Against Walmart’s Officers and Directors
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 Mr. Weinstein, Mr. Richter, Mr. Epstein, Andrew J. Colosimo, Brian T. Mangino and Adam B. Cohen 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 Monetary Liability for Breach of the Duty of Care? (discussed on the Forum here) by Holger Spamann.
In Ontario Provincial Council of Carpenters’ Pension Trust Fund v. Walton (Apr. 12, 2023), the
Delaware Court of Chancery, at the pleading stage of litigation, rejected dismissal of Caremark
claims brought against Walmart Inc.’s officers and directors in connection with the company’s role in the national opioid epidemic. The decision is a narrow one in that the court, at this early
stage of the litigation, addressed only the issue whether the claims were timely made. Notably,
however, the decision is another in a recent trend of decisions indicating increased judicial
receptivity to Caremark claims at the early pleading stage of litigation—although in most cases the court has continued ultimately to dismiss Caremark claims at the pleading stage, even in the context of arguably egregious factual situations.
Key Points
- Although this and other recent decisions have indicated increased judicial receptivity to Caremark claims, it remains very difficult for plaintiffs ultimately to achieve success on such claims. The court has moved away from its historical trend of almost invariable dismissal of Caremark claims at the early pleading stage; and recent decisions, including Walton, have expanded the parameters for potential liability under Caremark. Nonetheless, it remains very difficult for plaintiffs to achieve ultimate success on Caremark claims—primarily because they must demonstrate that the defendants acted knowingly and intentionally in violating their oversight duties, and must establish that it would have been futile to bring demand on the board to bring the derivative litigation. However, the court’s increased receptivity to Caremark claims over the past few years has provided plaintiffs with more leverage to negotiate settlement of such claims.
Delaware M&A: Spring 2023
Andre Bouchard, Kyle Seifried, and Laura C. Turano are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on their Paul Weiss 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? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.
Claims That SPAC Directors, Sponsors Breached Fiduciary Duties Survive Motions to Dismiss in Pair of Opinions
In two opinions by Vice Chancellor Will, Delman v. GigAcquisitions3, LLC and Laidlaw v. GigAcquistions2, LLC., the Delaware Court of Chancery held on motions to dismiss that it was reasonably conceivable that the directors of the respective special purpose acquisition company (SPAC) and their sponsors breached their fiduciary duties by disloyally depriving the SPAC public stockholders of information material to their decision on whether to redeem their shares in connection with the applicable deSPAC transaction. In both opinions, the court evaluated the claims under the stringent entire fairness standard. The SPAC’s sponsor qualified as a controlling stockholder due to its control and influence over the SPAC, even though it held a minority interest, and, in both opinions, the court concluded that the SPAC directors lacked independence from the sponsor. In addition, in both opinions, entire fairness review was warranted based on the divergent interests between the sponsor and public stockholders that are inherent in the SPAC structure, including the sponsor’s unique incentive to take a “bad deal” over a liquidation of the SPAC and returning the public stockholders’ investment. The opinions provide important key takeaways for sponsors, directors and investors in Delaware SPACs. For more on the Delman opinion, see here.
The New Unocal
Robert B. Thompson is the Peter P. Weidenbruch, Jr. Professor of Business Law at Georgetown University Law Center. 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. Related research from the Program on Corporate Governance includes The Case against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian Bebchuk, and Robert J. Jackson Jr.
American corporate law has remained remarkably stable for decades. The stakeholder movement of recent years has unleashed extensive discussions about ESG, corporate purpose, diversity, and benefit corporations. Yet change in actual legal rules has been slow to appear. Against that backdrop, the decisions by the Delaware courts in the Williams Companies Stockholder Litigation suggest a significant adaptation. (In re the Williams Cos. S’holder Litig., 2021 WL 754593, (Del. Ch. Feb. 26, 2021) aff’d The Williams Companies, Inc. v. Wolosky, (Del. Nov. 3, 2021)). The Williams decisions reinterpret parts of Unocal Corp. Inc. v. Mesa Petroleum Co., a key case in the current corporate law paradigm. In doing so, they shifted Delaware law as to several key Unocal elements as developed over the last four decades in ways that increase the likelihood of some director governance decisions, such as a poison pill, failing judicial review. The ideological underpinning for this change is not, however, the reasoning of the stakeholder movement, which likewise has sought to alter the exercise of director power. Rather, this shift reflects Delaware’s embrace of technological innovations and market changes, particularly those reshaping the role of shareholders.
This article makes three contributions to understanding this evolution. First, it resets the frame for viewing the current Delaware governance paradigm that arose in response to the tight spot in which corporate management found themselves in the 1980s as hostile takeovers accelerated. Unocal (and two other Delaware decisions shortly thereafter—Revlon and Blasius) are at the core of what was a fundamental change. In those decisions Delaware judges expressed dissatisfaction with the capacity of their traditional frame for judicial review to adequately deal with director decisions in takeovers: “Our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs” the Court said as it inserted a third, enhanced, level of scrutiny between the two existing standards of business judgement deference and entire fairness. The focus in each of these new cases was on giving room for shareholders to check the extensive power that corporate law traditionally has provided to directors. Blasius explicitly sets out the ideological foundation for this change—the shareholder franchise is “critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own.”
Flawed sale process places directors, executives and acquirers in harm’s way
George Bason is partner and Chair of the Mergers and Acquisitions practice, and Andrew Ditchfield and Paul S. Scrivano are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Bason, Mr. Ditchfield, Mr. Scrivano, James P. Dougherty, Louis L. Goldberg, and William H. Aaronson 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? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu; and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.
The recent Mindbody decision provides a useful refresher on the pitfalls to avoid when selling or buying a Delaware publicly traded company.
The recent Delaware Chancery Court decision in In re Mindbody, Inc. Stockholder Litigation is noteworthy as one of the few instances in recent years of plaintiff stockholders prevailing on a Revlon claim (and being awarded damages of $1 per share or approximately $44 million against the target’s CEO, for the Revlon claim and disclosure claims, and against the acquirer (a private equity sponsor), for aiding and abetting the disclosure claims). However, given the alleged conduct of the parties, the decision is unsurprising both as a ruling for the plaintiff stockholders on a “paradigmatic Revlon claim” and on disclosure claims.
Revlon
When a Delaware corporation is in Revlon mode (as the target in Mindbody was, because it was selling itself for all cash), the directors must act reasonably to obtain the highest price reasonably available to the stockholders under the circumstances. As the Revlon line of cases have held, there is “no single blueprint” for maximizing stockholder value, so long as the directors chose a reasonable route to arrive at that outcome. As a result, the Delaware courts have traditionally been focused on board process and take a dim view of actions by directors or officers that fail to satisfy their Revlon duties.
Extending Dual Class Stock: A Proposal
David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati, Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School and Steven Davidoff Solomon is Alexander F. and May T. Morrison Professor of Law, U.C. Berkeley School of Law. This post is based on their recent paper, forthcoming in Theoretical Inquiries in Law, 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 Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), The Perils of Small-Minority Controllers (discussed on the Forum here), Keynote Presentation on The Lifecycle Theory of Dual-Class Structures (discussed on the Forum here) all by Lucian Bebchuk and Kobi Kastiel.
Dual class stock has become common and ubiquitous in U.S. capital markets. Dual class structures, which have evolved over the last decade, now often include a variety of sunset mechanisms. These come in various flavors, including term-based sunsets, dilution thresholds, and life cycle events. As companies that adopted dual-class stock structures with sunsets at the time of their IPOs age, some sunset mechanisms, particularly term-based sunsets, are beginning to take effect. As early-adopters consider whether to follow their initial sunset mechanisms, boards, investors, their advisors and courts need to assess when and how dual class stock should be extended.
In some cases, companies have allowed sunsets to take effect, resulting in the collapse of the company’s dual class structure. In other cases, companies have attempted to extend or revise the length of existing dual class structures. Alphabet, for example, succeeded in such an extension by issuing nonvoting Class C shares, but Facebook withdrew a similar proposal in order to settle litigation challenging its proposed adoption. Despite Facebook’s failure, courts have upheld such extensions even when they are litigated to a judgment. In the recent case of City Pension Fund for Firefighters and Police Officers in Miami v. The Trade Desk, Inc., No. CV 2021-0560-PAF, 2022 WL 3009959 (Del. Ch. July 29, 2022), the Delaware Chancery Court, applying the MFW standard, Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), found that an arrangement to extend the life of dual class stock was appropriate.
Chancery Court Provides Roadmap for Retroactive Validation of Shareholder Votes
Perrie Weiner and Aaron Goodman are Partners and Paul Chander is an Associate at Baker McKenzie. This post is based on a Baker McKenzie memorandum by Mr. Weiner, Mr. Goodman, Mr. Chander, and Alexandra Stackhouse and is part of the Delaware law series; links to other posts in the series are available here.
In brief
In December 2022, the Delaware Chancery Court sent shockwaves throughout the SPAC world when it ruled that single class votes on charter amendments were invalid under Delaware law. This is the process utilized by many, if not most, SPACs seeking approval of their merger with the target company.
In Garfield v. Boxed, Inc., [1] the Delaware Court of Chancery held that a stockholder vote was invalid under Section 242 of Delaware General Corporation Law (“DGCL”) where a special purpose acquisition company (SPAC) had a multi-class stock structure and Class A and Class B stockholders voted together as a single class on charter amendments to increase the number of shares. Plaintiff, a Class A common stockholder, argued that the vote was invalid because holders of Class A shares had a right to vote on the amendments as a standalone class. The Chancery Court agreed. By invalidating these votes, the Boxed decision cast doubt on the capital structure for dozens of post de-SPAC companies with billions worth of securities. The Chancery Court explained that where the de-SPAC M & A transaction closed in reliance on the challenged amendments, the validity of the merger could be attacked.
Boxed resulted in the immediate creation of a new brand of securities claims and a potential tsunami of SPAC litigation. Recognizing the widespread harm this would cause, on February 20, 2023, searching for a way to reconcile belated challenges to the very reverse merger by which hundreds of SPAC targets were taken public and where such companies had long since been operating as public companies, the Chancery Court held that affected companies could retroactively validate these “pooled” stockholder votes under Section 205 of the DGCL. The Court’s first written decision regarding Lordstown Motors Corp. illustrates how affected companies may seek retroactive validation of stockholder votes taken in contravention of Section 242.
Accordingly, post-de-SPAC companies should follow the Court’s guidance to seek retroactive validation of pooled shareholder votes under Section 205 to resolve any concerns about their capital structure stemming from the Boxed decision and avoid related securities litigation.