Senate Bill 313, effective August 1, 2024, amends the General Corporation Law regarding specific powers; director authorization of agreements and other instruments; delivery of notice; remedies and appointment of stockholder representatives in relation to mergers; and certificate of incorporation amendments and disclosure schedules in relation to mergers.
House Bill 339, effective August 1, 2024, amends the partnership law regarding merger.
House Bill 338, effective August 1, 2024, amends the statutory trust law regarding definitions, management, execution of documents, merger and consolidation, conversion, domestication and statutory title and construction.
House Bill 337, effective August 1, 2024, amends the LP law regarding execution of documents, merger and dissolution of LPs, termination of protected series, and dissolution and merger of registered series.
House Bill 336, effective August 1, 2024, amends the LLC law regarding merger and dissolution of LLCs, termination of protected series, and dissolution and merger of registered series.
Senate Bill 157, effective August 18, 2023, amends the Uniform Commercial Code (UCC) regarding controllable electronic money, controllable electronic records, controllable accounts and controllable payment intangibles, including electronic copies of records evidencing chattel paper, and the rights thereto and the perfection and priority of security interests therein.
Senate Bill 110, effective August 1, 2023, amends the corporation and LLC laws by increasing the courthouse municipality fee from $20 to $40.
Senate Bill 112, effective August 1, 2023, amends the LP law regarding execution of documents; merger and consolidation; LP protected and registered series; LP division; partnership interest subscriptions; fees; and the annual tax.
Senate Bill 113, effective August 1, 2023, amends the LLC law regarding execution of documents; merger and consolidation; LLC protected and registered series; LLC division; LLC interest subscriptions; fees; and the annual tax.
Senate Bill 114, generally effective August 1, 2023 except as noted in the bill, amends the General Corporation Law regarding issuance of stock; consideration for stock; stock rights and options; corporation powers respecting stock; ratification of defective corporate acts; stockholder or member consent to action without a meeting; domestic amendment; powers of corporations after merger, consolidation, conversion or domestication; appraisal rights; conversion; mortgage or pledge of assets; and transfer, domestication or continuance.
Senate Bill 115, effective August 1, 2023, amends the partnership (LLP) law regarding definitions, partnership subscriptions, merger and consolidation, and Annual Reports.
Senate Bill 284 (Laws of 2022), effective August 1, 2023, amends the Delaware Statutory Trust Act to provide for the filing of a single certificate by a trustee who has succeeded the predecessor trustee of one or more statutory trusts in order to amend the name and address of such trustee in each affected certificate of trust.
Senate Bill 273, generally effective August 1, 2022, amends the General Corporation Law regarding certificates of incorporation, officers liability, execution of instruments, county assessment fees, issuance of stock, consideration for stock, treasury shares, rights and options respecting stock, list of stockholders, notice of stockholder meetings, consent of stockholders and members without a meeting, stockholder appraisal rights, conversion, dissolution, revival, domestication, franchise tax reports and franchise tax calculation.
Senate Bill 274, effective August 1, 2022, amends the LP law regarding partnership agreements, document execution, domestication, conversion, administrative cancellation and revival.
Senate Bill 275, effective August 1, 2022, amends the LLC law regarding LLC agreements, service of process, execution of documents, domestication, conversion, cancellation and revival.
Senate Bill 276, effective August 1, 2022, amends the partnership (LLP) law regarding partnership agreements, execution of documents, conversion and domestication.
Senate Bill 284, effective August 1, 2022 except as noted in the bill, would amend the statutory trust law regarding definitions, legal proceedings, rights of beneficial owners and trustees in trust property, management, resident trustees and registered agents, document execution, fees, merger and consolidation, confidentiality of information and records, conversion, transfer or continuance, division and control beneficial interest acquisitions.
House Bill 295, effective February 16, 2022, amends the General Corporation Law regarding corporate powers in regards to the ownership and voting of the corporation’s own stock. Senate Bill No. 113 (151st General Assembly) incorrectly repealed language in Sec. 160(c) that provides an important reference for the requirements for voting and quorum. This Section restores that phrase.
Senate Bill 203, effective February 7, 2022, amends the General Corporation Law regarding insurance obtained by a corporation for its directors, officers, employees and others.
Senate Bill 113, effective August 1, 2021, amends the General Corporation Law regarding corporate stock ownership.
Senate Bill 114, effective August 1, 2021, amends the LLC law regarding ratification of defective LLC acts; member access to LLC information and records; member or manager delegation of rights, powers and duties; and statutory public benefit LLCs.
Senate Bill 115, effective August 1, 2021, amends the Partnership Law (including LLPs) regarding the effect of partnership agreements; ratification of defective partnership acts; partner delegation of rights, powers and duties; and partner access to partnership information.
Senate Bill 116, effective August 1, 2021, amends the LP law regarding ratification of defective LP acts; limited partner access to LP information and records; general partner delegation of rights, powers and duties; and statutory public benefit LPs.
Senate Bill 244, effective August 1, 2020, amends the Statutory Trust Act regarding, other among things, electronic transmissions, transactions, and signatures; registered agents; conversions; divisions; mergers; certifications from the Secretary of State and judicial cancellation.
House Bill 341, effective July 16, 2020 except as noted therein, amends the General Corporation Law regarding name; limitation or elimination of director liability; organization meetings; emergency Bylaws; document form, signature and delivery; registered agent; director and stockholder consents to action; indemnification of officers, directors, employees and agents; stockholder proxies; record date of stockholders; notices to stockholders; merger and consolidation; stockholder appraisal rights; conversion; public benefit corporations; and the report of record search fee.
House Bill 342, effective July 16, 2020, amends the Partnership Law regarding name, registered agent, partnership interest appraisal rights, document execution, record-keeping, conversion, and transfer or continuance.
House Bill 343, effective July 16, 2020, amends the LP law regarding name; registered agent; document form, signature and delivery; partnership interest appraisal rights; transfer or continuance; conversion; division; registered series; admission of limited partners; and record-keeping.
House Bill 344, effective July 16, 2020, amends the LLC law regarding name; registered agent; document form, signature and delivery; LLC interest appraisal rights, transfer or continuance; conversion; division; registered series; admission of members; and record-keeping.
Senate Bill 88, generally effective August 1, 2019, (i) amends the General Corporation Law regarding a variety of topics including organization meetings; electronic documentation, signatures and transmission of documents, notices, consents and demands; registered agent resignations; exceptions to notice to stockholders or members; agreements of merger; revival of exempt corporations; and document ordering fees; and (ii) effective for tax year beginning on January 1, 2019, amends the Corporation Franchise Tax law regarding regulated investment company franchise tax rates.
Senate Bill 89, effective August 1, 2019, amends the LP law regarding a variety of topics including names; name reservation; registered agent resignations; voluntary and judicial cancellation; electronic documentation, signatures and transmission of documents; liability for false statement; protected series of limited partners, general partners, partnership interests or assets; registered series thereof; division of LPs; creation of public benefit LPs; filing and document ordering fees; and administrative cancellation.
Senate Bill 90, effective August 1, 2019, amends the partnership law (including LLPs) regarding definitions; names; registered agent resignations; electronic documentation, signatures and transmission of documents; records maintenance and document ordering fees.
Senate Bill 91, effective August 1, 2019, amends the LLC law regarding a variety of topics including definitions; names; registered agent resignations; electronic documentation, signatures and transmission of documents; protected series of members, managers, limited liability company interests or assets; registered series thereof; division of LLCs; and document ordering fees.
Case summaries
Reincorporation by Conversion
Gunderson v. The Trade Desk, C.A. No. 2024-1029, decided November 8, 2024. The Delaware Chancery Court held that a majority vote was required to approve a conversion under Sec. 266 that would reincorporate a corporation from Delaware to Nevada and not a supermajority vote that was required by a provision of the corporation’s certificate of incorporation for amendments that would be inconsistent with certain provisions of the certificate of incorporation. The court applied the doctrine of independent legal significance and also noted that previous cases detailed how to draft charter provisions altering statutory default voting that the corporation failed to follow.
Advance Notice Bylaws
Kellner v. AIM Immunotech Inc., No. 3, 2024, decided July 11, 2024. The Delaware Supreme Court held that in a challenge to the adoption, amendment, or enforcement of a Delaware corporation’s advance notice bylaws that is ripe for judicial review, the court should consider the following: first, if contested, whether the advance notice bylaws are valid as consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter; and second, whether the board’s adoption, amendment, or application of the advance notice bylaws were equitable under the circumstances of the case.
Derivative Suit
In re Cognizant Technology Solutions Corporation Derivative Litigation, No. 22-3027, decided May 3, 2024. The U.S. Court of Appeals, Third Circuit, held that a district court’s decision to dismiss a derivative action for failure to plead demand futility is to be reviewed de novo. The court therefore overruled previous Third Circuit precedent, including Blasband v. Rales and its progeny, that provided that the court must review such dismissals for an abuse of discretion.
Disclosure Violations
City of Dearborn Police and Fire Revised Retirement System v. Brookfield Asset Management Inc., No. 241, 2023, decided March 25, 2024. The Delaware Supreme Court reversed the Chancery Court’s dismissal of plaintiffs’ suit challenging a squeeze-out merger that had been approved by a special committee, finding that the defendants’ failure to disclose in the proxy statement certain conflict of interests involving the special committee’s advisers resulted in the minority stockholders not being adequately informed, and that therefore the transaction was not eligible for analysis under the business judgement rule. The Chancery Court had resolved the disclosure issues by applying the gross negligence standard in determining whether the special committee breached its duty of care. However, according to the Supreme Court, it should have resolved the issue by asking whether a reasonable stockholder would consider the information regarding the conflicts of interest important in deciding how to vote. And it was reasonably conceivable that from the viewpoint of a stockholder the conflicts would be material in deciding how to vote.
Limited Partnership
Cantor Fitzgerald, L.P. v. Ainslie, No. 162, 2023, decided January 29, 2024. The Delaware Supreme Court upheld the “forfeiture for competition” provisions of a limited partnership agreement that authorize the LP to withhold distributions otherwise owed to a partner who withdraws from the LP if he engages in specified activities in competition with the partnership. The court stated that the common law’s disfavor of forfeitures does not extend to limited partnership agreements. In addition, Sec. 17-306 of the LP law permits partnership agreements to contain consequences that would be unavailable in a standard commercial contract, most notably penalties and forfeitures. Thus the court disagreed with the Court of Chancery’s conclusion that the forfeiture-for-competition provisions at issue here were restraints of trade subject to review for reasonableness. When sophisticated parties agree in a limited partnership agreement that a partner, who voluntarily withdraws from, and then competes with, the partnership, will forfeit contingent post-withdrawal financial benefits, public-policy considerations weigh in favor of enforcing that agreement.
Stockholder Voting Rights
In re Fox Corporation/Snap Inc. Section 242 Litigation, Nos. 120 & 121 (Consolidated), decided January 17, 2024. The Delaware Supreme Court held that Sec. 242(b)(2) of the GCL did not provide the members of classes of stock without voting rights with the right to vote on an amendment to the corporations’ charters to exculpate the corporations’ officers. Sec. 242(b)(2) requires a separate class stockholder vote to amend a corporate charter if the amendment would “alter or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.” The powers, preferences, or special rights of class shares referred to in Sec. 242(b)(2) are those authorized for a class by Section 151(a) and expressed in the charter as required by Sections 102(a)(4) and 151(a). The ability to sue directors or officers for duty of care violations is an attribute of the companies’ stock, but not a power, preference, or special right of the classes’ common stock under Section 242(b)(2) and was not a power expressed in the corporations’ charters.
Officer’s Duty of Oversight
Segway, Inc. v. Hong Cai, C.A. No. 2022-1110, decided December 14, 2023. The Delaware Chancery Court held that the high bar to plead a Caremark claim of breach of the oversight duty is not lowered when the claim is brought against an officer instead of a director. In this case the plaintiff failed to meet the pleading standard where it attempted to hold the officer accountable for unexceptional financial struggles and failed to show bad faith.
Indemnification
Intermune, Inc. v. Harkonen, CA 2021-0694, decided May 10, 2023. The Delaware Chancery Court held that the defendant, the founder and former CEO of a Delaware corporation who was convicted of wire fraud, was not entitled to indemnification because he received a pardon from then president Trump. The court stated that under Sec. 145 of the General Corporation Law a presidential pardon does not render a corporate officer successful on the merits. Success in a criminal action is anything other than a conviction. The defendant was convicted, so he was not successful.
Attachment of Stock Certificate
Long Deng v. HK XU Ding Co., Limited, C.A. No. N21J-04630, decided May 8, 2023. The Delaware Superior Court held that Sec. 324(a) of the General Corporation Law, which authorizes attachment and sale of corporate stock, requires that to attach certificated shares and obtain an order to sell the security to satisfy a judgment, the officer making the attachment must actually seize the certificate. In this case, where the certificate for 8 million shares of a Delaware corporation was in Chinese police custody and could not be physically seized by the person charged with conducting the sale, the Superior Court commissioner erred in ordering the sale of the stock and the order was vacated.
Breach of Revlon Duties
In re Mindbody, Inc. Stockholder Litigation, CA No. 2019-0442, decided March 15, 2023. The Delaware Chancery Court held that the CEO of a corporation that was acquired by a PE buyer was liable for breaching his duties under Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. The court held the plaintiffs adequately pled that the CEO was conflicted because he had an interest in near-term liquidity and an expectation that he would receive post-merger employment and equity-based incentives; that he skewed the process in the PE buyer’s favor by driving down the stock price and providing the PE buyer with informational and timing advantages; and that he withheld material information from the board of directors. The court also found that the Corwin v. KKR Financial Holding LLC cleansing defense did not apply because the plaintiffs sufficiently pled that the stockholder vote was not fully informed.
Validation of SPAC Charter Amendment
In re Lordstown Motors Corp., C.A. No. 2023-0083, decided February 21, 2023. The Delaware Chancery Court granted a petition from a corporation under Sec. 205 of the General Corporation Law validating an amendment to the corporation’s certificate of incorporation increasing the number of its Class A authorized shares and the stock issued in reliance on that amendment. In connection with a de-SPAC merger, the corporation proposed the amendment, which was approved by a vote of all common shares, voting as a single class. However, a Chancery Court decision issued in December 2022 held, under similar circumstances, that the SPAC was required to receive the approval of the Class A shares voting as a separate class. Following that decision, numerous SPACs filed similar petitions to the one in this case.
Officer’s Duty of Oversight
In re McDonald’s Corporation Stockholder Derivative Litigation, C.A. No. 2021-0324, decided January 26, 2023. The Delaware Chancery Court held that corporate officers owe a duty of oversight. According to the court, the same policies that motivated the recognition of the duty of oversight for directors apply equally, if not to a greater degree, to officers. The Delaware Supreme Court has held that under Delaware law, corporate officers owe the same fiduciary duties as corporate directors, which logically include a duty of oversight.
The case involved a stockholder derivative suit brought against an executive officer of a Delaware corporation, alleging he breached his fiduciary duties, including his duty of oversight, by allowing a corporate culture to develop that condoned sexual harassment and misconduct. The defendant moved to dismiss, contending that Delaware does not impose a duty of disclosure on officers. The court denied the motion, holding he owed a duty of oversight. He had an obligation to make a good faith effort to put in place reasonable information systems so that he obtained the information necessary to do his job and report to the CEO and the board, and he could not consciously ignore red flags indicating that the corporation was going to suffer harm.
Personal Jurisdiction
In re P3 Health Group Holdings, LLC, C.A. No. 2021-0518, decided October 14, 2022. The Chancery Court denied the defendant’s motion to dismiss on the grounds that he was not subject to personal jurisdiction in Delaware. The defendant formed a Delaware corporation that went public as a SPAC and a Delaware LLC that was the SPAC’s subsidiary. The subsidiary entered into a triangular merger with the target. The plaintiff sued the defendant based on actions he took in connection with the merger. The court noted that a proper exercise of personal jurisdiction requires a valid method of serving the defendant with process and the exercise of personal jurisdiction must comply with the minimum standards of due process. The court further noted that the formation of Delaware entities constituted the transaction of business sufficient to support service of process for purposes of claims that have a nexus with the formation of the entities. In addition, due process was satisfied because the choice to form a Delaware entity for the purpose of engaging in a transaction creates a significant contact with the state and an individual forming a Delaware entity must expect to be subject to suit in Delaware for claims based on the transaction.
Personal Jurisdiction over LLC’s CLO
In re P3 Health Group Holdings LLC, C.A. No. 2021-0518, decided September 12, 2022. A suit was filed in Delaware asserting that the defendant, the general counsel and chief legal officer of a Delaware LLC, breached her fiduciary duty of loyalty in her capacity as an officer. The defendant moved to dismiss for lack of personal jurisdiction. The Delaware Chancery Court denied the motion, holding that the court had personal jurisdiction under the implied consent provision in the Delaware LLC Act, Sec. 18-109, which establishes a mechanism for serving process on a manager of an LLC. Sec. 18-109 classifies two categories of managers – formal managers, who are named in the LLC agreement, and acting managers – who participated materially in the LLC’s management. According to the court, the pleading stage record supported a reasonable inference that by acting as general counsel and CLO the defendant participated materially in the LLC’s management and was an acting manager. In addition, the exercise of personal jurisdiction over the defendant comports with minimum standards of due process. Individuals who take positions as senior officers of Delaware entities do so with the understanding that personal jurisdiction exists in Delaware courts to adjudicate disputes over compliance with their contractual or fiduciary obligations. Just as the corporate consent to jurisdiction statute reaches C-suite executives including the CLO, the LLC Act’s consent to jurisdiction reaches C-suite executives and CLOs.
Member Withdrawal
5High LLC v. Feiler, CA No. 2022-0108, decided August 5, 2022. In a dispute over the membership of an LLC, the Chancery Court held that the defendant member resigned and withdrew from the LLC and that the plaintiff was therefore the sole member. The members did not have a written LLC agreement or a written agreement in which the member resigned. However his conduct indicated that he resigned and that the plaintiff accepted his resignation. Therefore there was an implied agreement that he resigned that modified the LLC Act’s default provision, which provides that members cannot resign.
Inspection of Books and Records
NVIDIA Corporation v. City of Westland Police and Fire Retirement System, No. 259, 2021, decided July 19, 2022. The Delaware Supreme Court held that in an action under Sec. 220 where the stockholder seeks to inspect books and records (1) a determination of the appropriateness of the scope of a stockholder’s requests, or any change to the stockholder’s requests, has no bearing on whether the plaintiff has satisfied Sec. 220’s form and manner requirements, (2) there is no blanket rule that requires the Court of Chancery to outright deny those demands that it finds to be overbroad, (3) Sec. 220 plaintiffs may narrow their requests during litigation if they do so in good faith and such narrowing is not prejudicial to the company, and (4) hearsay is admissible in a Sec. 220 proceeding when that hearsay is sufficiently reliable.
Stockholder Approval of Asset Transfer
Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021, decided June 15, 2022. The Delaware Supreme Court reversed the Chancery Court and held that a provision of a corporation’s certificate of incorporation that required stockholder approval of certain transfers of all or substantially all of the corporation’s assets unambiguously applied to an omnibus agreement under which all of the corporation’s assets were assigned to the corporation’s secured creditors. The charter provision defined an asset transfer to include dispositions of all the corporation’s assets and the transaction contemplated by the omnibus agreement was a disposition. The court also held the Chancery Court erred in analyzing the agreement under Sec. 271 of the General Corporation Law, which requires stockholder approval for the sale, lease or exchange of the corporation’s assets. The court noted that Sec. 271 did not include approval of other dispositions and was therefore materially different from the charter provision. The court also held that there is no “board only insolvency” exception to Sec. 271’s stockholder approval requirement.
Director’s Fiduciary Duties
Coster v. UIP Industries, Inc., C.A. No. 2018-0440, decided May 2, 2022. The Delaware Chancery Court upheld a stock sale to a corporate executive that reduced the plaintiff stockholder’s percentage ownership and eliminated her ability to maintain her suit seeking to appoint a custodian to break a deadlock. The court held that there was no breach of fiduciary duty under either Schnell v. Chris-Craft Industries or Blasius Industries v. Atlas Corporation. Although motivated to block stockholder action, the board also acted in the corporation’s best interests and had a good faith basis for stock sale in that it rewarded a valued executive and the appointment of the custodian posed a risk to the corporation.
SPAC Litigation
In re Lordstown Motors Corp. Shareholders Litigation, C.A. No. 2021-1066, decided March 7, 2022. The Delaware Chancery Court denied the defendants’ motion to stay a putative class action challenging a de-SPAC transaction pending the resolution of a federal securities class action. The court noted that although the federal action was first-filed and concerned the same de-SPAC business combination, the parties, claims, and remedy sought were different. And perhaps more importantly, the case raised emerging issues of Delaware law. The court noted that it had occasion to apply the doctrines of fiduciary duty in the context of SPACs only once. The court’s essential role of providing guidance in developing areas of law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.
Appraisal Action
MPM Holdings Inc. v. Federal Insurance Co., CA No. N20C-07-014, decided March 15, 2022. The Delaware Superior Court held that a corporation’s D&O insurer did not have to reimburse or advance the corporation’s attorney’s fees or costs incurred in defending stockholders’ appraisal actions. The insurance policy covers actions arising out of wrongful acts and an appraisal action does not allege a wrongful act.
Duties of SPAC Directors
In re MultiPlan Stockholders Litigation, No. 2021-0300, decided January 3, 2022. The Delaware Chancery Court denied the motion to dismiss a suit brought by the public stockholders of a SPAC against the SPAC’s directors and alleged controlling stockholder, claiming they breached their fiduciary duties by failing to disclose in the proxy that the SPAC’s target’s largest customer was planning on ceasing being its customer and competing with it instead. A majority of the stockholders approved the merger and chose not to exercise their redemption rights. The court held that the suit was direct and not derivative because the stockholders claimed that the defendants impaired the informed exercise of their redemption rights. The court also held that the entire fairness standard had to be applied because there was a conflicted controller and a majority of the board was self-interested or conflicted and that the stockholders sufficiently pled that the defendants’ disclosure violations rose to the level of overall unfairness.
Ordinary Course Covenant
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, No. 71, 2021, decided December 8, 2021. The Delaware Supreme Court affirmed the Chancery Court’s decision holding that a seller violated a covenant to conduct business “only in the ordinary course of business consistent with past practice” and that the buyer was therefore not obligated to close. The agreement involved the sale of 15 hotel properties. In response to the pandemic and without securing the buyer’s consent the seller made drastic changes to its hotel operations and the buyer eventually called off the deal, relying on the seller’s failure to comply with the sales agreement. The court held that although the seller’s actions might have been reasonable in response to the pandemic they were inconsistent with past practice and far from ordinary and required the buyer’s approval.
Director’s Right to Information
SerVaas v. Ford Smart Mobility LLC, C.A. No. 2020-0909, decided November 9, 2021. The Delaware Chancery Court denied a motion to compel a corporation to produce certain privileged documents created while the plaintiffs were directors. The plaintiffs maintained that they were entitled to the documents regardless of whether they sought them in their individual—rather than fiduciary—capacities. However, as the court noted, directors of Delaware corporations possess broad information rights but those rights spring from a board's duty to manage and oversee a company. Because the plaintiffs' request was unrelated to the principles underlying directors' information rights and in furtherance of personal money damages claims against the corporation, their motion was denied.
Reliance on Legal Opinion
Bandera Master Fund, LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372, decided November 12, 2021. The Chancery Court awarded plaintiffs, former limited partners, $690 million in damages in connection with the defendant corporation’s taking a Master Limited Partnership it controlled private. The court found that the corporation breached the partnership agreement which required a legal opinion before call rights could be exercised. The court found that the legal opinion the corporation relied on was a contrived effort to reach the desired result and did not reflect a good faith effort to discern the actual facts and apply professional judgment. In addition the conduct was not exculpated because the corporation’s actions constituted willful misconduct.
Advance Notice Bylaw
Rosenbaum v. CytoDyn Inc., No. 2021-0728, decided October 13, 2021. The Delaware Chancery Court held that the plaintiff dissident stockholder was not entitled to an injunction requiring the board to place the plaintiff’s nominees for directors on the ballot for the annual meeting where the notice of nomination was submitted one day before the deadline set forth in the advance notice bylaw and was rejected for being deficient. The board rejected the plaintiff’s attempt to fix the deficiencies after the deadline. The court noted that there was no challenge to the advance notice bylaw itself and no evidence of manipulative or inequitable conduct by the board in rejecting a deficient notice of nomination.
Demand Futility
United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020, decided September 23, 2021. The Delaware Supreme Court held that courts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility: (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile. It is no longer necessary to determine whether the Aronson v. Lewis test or the Rales v. Blasband test governs a complaint’s demand-futility allegations. The court further noted that the three-part test is consistent with and enhances Aronson, Rales, and their progeny. Therefore, the court need not overrule Aronson to adopt this refined test, and cases properly construing Aronson, Rales, and their progeny remain good law.
The court also held that exculpated claims do not satisfy the second Aronson test because they do not expose directors to a substantial likelihood of liability which is what the second Aronson test focuses on.
Stockholder Suit
Brookfield Assets Management, Inc. v. Rosson, No. 406, 2020, decided September 20, 2021. The Delaware Supreme Court held that equity overpayment/dilution claims, absent more, are exclusively derivative and overruled Gentile v. Rossette, 906 A.2d 91 (Del. 2006), a decision holding that an overpayment transaction may be both derivative and direct where a stockholder having a majority or effective control causes the corporation to issue excessive shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and the exchange causes an increase in the percentage of the outstanding shares owned by the controlling shareholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.
Waiver of Appraisal Rights
Manit Holdings, LLC v. Authentix Acquisition Co., No. 354, 2020, decided September 13, 2021. The Delaware Supreme Court held that the individual right of a stockholder to seek a judicial appraisal is not among those fundamental features that cannot be waived. Accordingly, Sec. 262 of the General Corporation Law does not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration.
LLC Conversion
In re Coinmint, LLC, C.A. No. 2019-0983, decided August 12, 2021. The Delaware Chancery Court held that a minority (sweat equity) member of an LLC was estopped from challenging the conversion of a Delaware LLC to a Puerto Rico LLC even though the conversion was effected without compliance with the operating agreement and LLC Act. Because the operating agreement was silent on the issue, approval of the conversion was governed by the LLC Act. The LLC Act requires two steps – majority member approval or consent and approval by the managers. Here, the majority (financial) member approved but the board of managers never voted on or consented to the conversion, which was effected by the filing of a Certificate of Conversion with the Secretary of State. The court ruled that under these facts, with the majority member approving, the LLC had authority to enter into the conversion and it was therefore voidable and not void. Because it was voidable and not void challenges to the conversion were subject to equitable defenses. And in this case the challenge was barred because the minority (sweat equity) member championed the plan to convert to a Puerto Rico LLC and affirmed his consent to it until filing suit.
Malpractice Suit Based on Filing UCC-1 in Wrong State
Juno Investments LLC v. Miller, 2021 U.S. Dist. LEXIS 118776, decided June 25, 2021. The U.S. District Court, District of Delaware denied the defendant lawyers’ motion to dismiss a malpractice suit filed against them by the plaintiff. The plaintiff loaned money to a Delaware LLC of which it was the majority shareholder. The LLC engaged the defendants to provide legal services. The defendants filed a UCC-1 financing statement naming the Delaware LLC as debtor and plaintiff as creditor. However the UCC-1 was filed in North Carolina when it should have been filed in Delaware. Plaintiff claimed the defendants' failure to file the UCC-1 in the correct state rendered it an unsecured creditor in debtor’s bankruptcy, thereby causing it damage. In rejecting the motion to dismiss the court noted that (1) the defendants’ claim the plaintiff suffered no damages was mooted by the resolution of the bankruptcy proceedings, (2) the plaintiff did not lack standing to raise its negligence claim based on its not having an attorney client relationship because the plaintiff was asserting a duty as a nonclient, and (3) the plaintiff could maintain its breach of contract claim because its complaint plausibly showed privity of contract or that it was a direct third party beneficiary to the engagement contract between the debtor and defendants.
Administrative Subpoena
State of Delaware Department of Finance vs. AT&T Inc., No. 303, 2020, decided June 1, 2021. The Delaware Supreme Court, deciding issues of first impression in Delaware, held that it was adopting the procedures and substance followed by the federal courts in administrative subpoena enforcement proceedings. The court then affirmed the Chancery Court’s decision quashing an administrative subpoena served by the Delaware Department of Finance on a Delaware corporation to produce records relating to a financial audit to determine the corporation’s compliance with the state’s unclaimed property law. The court noted that in most cases the subpoena recipient will have a difficult time convincing the court to inquire further into an agency’s good faith once the agency, as in this case, satisfies the federal test. But under the circumstances of this case, where the court had serious questions but the Department refused to provide answers, the Court of Chancery did not err in quashing the subpoena in its entirety. The court also found that the Court of Chancery did not err when it considered the reasonableness of the subpoena in light of the statute of limitations that was in effect before the 2017 amendments to the unclaimed property law.
Reverse Veil Piercing
Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601, decided May 25, 2021. The Delaware Chancery Court, in an issue of first impression, held that Delaware courts will allow for outsider reverse veil-piercing in limited circumstances and in circumscribed execution. The court stated that in reviewing a claim for reverse veil-piercing Delaware courts should consider the so-called “alter ego” factors that include insolvency, undercapitalization, commingling of funds, the absence of corporate formalities, and whether the subsidiary is simply a facade for the owner. The court should then ask whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.
The court then held that this was one of those exceptional circumstances where a plaintiff had well pled a basis for reverse veil piercing. The plaintiffs were creditors of a corporation that was the single member of an LLC, which in turn was the single member of several subsidiaries, and the plaintiffs sought to hold the subsidiaries liable for a judgment held against the member. The court found it reasonably conceivable that the subsidiaries were alter egos and actively participated in a scheme to defraud or work an injustice against creditors, and that no innocent shareholders or creditors of the subsidiaries would be harmed by reverse veil-piercing.
COVID-19 and Material Adverse Effects
Snow Phipps Group, LLC v. KCake Acquisition, Inc., C.A. No. 2020-0282, decided April 30, 2021. The Delaware Chancery Court ordered the buyer to close on its acquisition of a company, thereby rejecting the buyer’s assertion that the acquisition should be terminated based on a material adverse event clause in the sales agreement. The buyer asserted that there was a material adverse change to the company’s business because of COVID-19 . However, the court found that the buyer failed to carry its burden of proving there was a reasonable expectation of a material adverse effect. The court noted that although there was a large downturn in sales at the beginning of the pandemic, sales rebounded quickly and were projected to continue recovering throughout the year. It was not projected to have a sustained drop like in the only case where the Delaware Chancery Court found a material adverse effect to be reasonably expected.
Choice of Law in D&O Policies
RSUI Indemnity Company v. Murdock, No. 154 2020, decided March 3, 2021. The Delaware Supreme Court, in what has been called a “landmark” decision concerning choice of law in the context of a directors and officers (D&O) liability insurance policy, held that Delaware law – and not California law - should be applied in a dispute over whether an excess insurer is obligated to reimburse a Delaware corporation for settlement amounts under a D&O policy where the corporation was based in California, the policy was negotiated and issued to it in California, the officers and directors lived in California, and where its only connection to Delaware was that it was incorporated there.
The court looked at various factors and found they suggested that the state of incorporation is the center of gravity of the typical D&O policy. This included that it is Delaware’s corporation law that allows a corporation to purchase a D&O policy and that Delaware law governs the duties of directors and officers of a Delaware corporation and as such the corporation must assess its need for D&O coverage with reference to Delaware law. And in balancing California’s interest – which was mainly based on physical location, against Delaware’s interest in protecting the ability of its corporate citizenry to secure D&O insurance and thereby attract the best directors and officers, the court found that Delaware had a more significant relationship to the policy and the parties.
As to the issue of whether the insurer was responsible, the court found that it was, rejecting its argument that because there was a finding of fraud it was not liable. The court noted that the policy obligated the insurer to pay for a loss arising from claims for a wrongful act, broadly defined to include a breach of duty – which could include a breach of the duty of loyalty when based on fraud. The court then held that Delaware does not have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract.
Noncompliance with Certificate of Incorporation
Lacey v. Mota-Velasco, C.A. No. 2019-0312, decided February 11, 2021. The Delaware Chancery Court dismissed a stockholder derivative claim against a corporation’s directors for breach of contract based on the directors failing to comply with a clause in the certificate of incorporation that required certain transactions to be approved by an independent board committee. The court stated that the complaint did not plead any facts indicating that the directors were bound to the company contractually, aside from pointing to the existence of the certificate of incorporation itself. The relationship between directors and their corporation is typically fiduciary, rather than contractual. And if any claim is created on behalf of the corporation by a failure on the part of directors to comply with the entity’s formative documents, it is a claim for breach of fiduciary duty, not breach of contract.
Production of Records
Wood v. U.S. Bank National Association, C.A. No. 2017-0034, decided February 4, 2021. The Delaware Chancery Court held that an individual member of an LLC could not invoke the privilege against self-incrimination to avoid producing documents of a collective entity that were in his possession in a representative capacity for the entity. The court also held that the collective entity doctrine applies to a single member LLC, as the member and the LLC are distinct for the purposes of the self-incrimination clause.
Standing to Challenge Merger
Morris v. Spectra Energy Partners (DE) GP, LP, No. 489, 2019, decided January 22, 2021. The Delaware Supreme Court reversed the Chancery Court’s granting the defendants’ motion to dismiss for lack of standing, the plaintiff’s direct claim challenging the fairness of a merger based on the defendants’ failure to secure value for derivative claims. The Chancery Court applied a litigation risk discount to the recovery amount the plaintiff pled in determining its materiality. This was an error because the court must accept the plaintiff’s factual allegations as true in assessing standing at the motion to dismiss stage.
Validity of Board Meeting
Backer v. Palisades Growth Capital II, L.P., No. 156, 2020, decided January 15, 2021. The Delaware Supreme Court affirmed the Chancery Court’s invalidating the actions taken at a board meeting in which the appellant seized control of the corporation. The Chancery Court did not err in finding that the appellant, the former CEO who the board had terminated, affirmatively deceived one of the directors in order to get him to attend the board meeting, thereby providing a quorum so that the appellant could put into action his agenda to be reinstated as CEO.
Inspection of Books and Records
AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60 2020, decided December 10, 2020. The Delaware Supreme Court held that when a Sec. 220 inspection demand states a proper investigatory purpose, it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing. The court also held that an investigating stockholder is not required in all cases to establish that the wrongdoing under investigation is actionable.
Effect of COVID-19 on M&A Deal
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, CA No. 2020-0310, decided November 30, 2020. The Chancery Court held that a company that agreed – pre-COVID 19 – to buy a company that owned 15 luxury hotels was relieved of the obligation to close on the deal because the seller, among things, closed two of the hotels, severely restricted operations at all the others, and laid off thousands of employees due to the pandemic. The court ruled that the seller breached the covenant that required it to operate in the ordinary course of business consistent with past practice in all material respects. The court also found that the buyer could not terminate based on the Material Adverse Effect clause, because an MAE was defined to exclude adverse effects caused by a “calamity” and a pandemic meets the definition of calamity.
Appraisal
In re Solera Insurance Coverage Appeals, Nos. 413, 2019 and 418, 2019, decided October 23, 2020. The Delaware Supreme Court held that an appraisal action brought under GCL Sec. 262 was not a securities claim under a D&O policy that defined a securities claim to include a violation of any law regulating securities. The court held that the plain meaning of the term “violation” suggested an element of wrongdoing and that appraisal proceedings have a neutral purpose—to determine the value of the corporation.
Arbitration
Gulf LNG Energy, LLC v. ENI USA Gas Marketing LLC, No. 22, 2020, decided November 17, 2020. The Delaware Supreme Court held that the Chancery Court has jurisdiction to enjoin a collateral attack on a prior arbitration award. The parties agreed the Federal Arbitration Act governs their dispute. Under the FAA courts have the exclusive power to review and enforce arbitration awards. A party cannot escape the FAA review procedure by filing a follow-on arbitration to attack the outcome of the prior arbitration.
Forum Non Conveniens
Focus Financial Partners, LLC v Holsopple, CA No. 2020-0188, decided November 2, 2020. The Delaware Chancery Court granted the defendant’s motion to dismiss on forum non conveniens grounds in a lawsuit filed by a Delaware LLC arising out of an employee leaving and going to work for the defendant. In evaluating the Cryo-Maid factors, the court found that the fact that a California action filed by the defendant and employee was further along, the predominate role of California law in deciding the issues, and that Delaware lacked jurisdiction over the employee, all weighed against litigating in Delaware.
Definition of “Business Day”
Mad Investors GRMD, LLC v. GR Companies, Inc., CA No. 2020-0589, decided October 28, 2020. The Delaware Chancery Court, in a case of first impression, held that a “business day” for the purposes of Sec. 220(c) of the General Corporation Law expires at 12 midnight and not 5 pm. Sec. 220(c) provides that a stockholder who has demanded an inspection of books and records may not file a lawsuit to compel the inspection until the expiration of 5 five business days after the corporation does not reply to the demand (unless the corporation refuses earlier). The court based its holding in part of the fact that dictionaries indicate that a business day refers to a full calendar day and not a subset of hours and because other sections of the Delaware code define “business day” as a “day” and not limited to hours. The court also distinguished business day from the term “usual hours of busines” as found in Sec. 220(b).
Suit Against Foreign Corporation
Sylebra v. Perelman, C.A. No. 2019-0843, decided October 9, 2020. The Delaware Chancery Court dismissed claims brought by a stockholder in a corporation that was incorporated in Delaware when the stockholder invested but that had since reincorporated in Nevada, seeking to hold provisions of the Delaware bylaws invalid as the bylaws ceased to exist upon the reincorporation. The court also held that the internal affairs doctrine prevented it from declaring provisions of the Nevada corporation’s bylaws invalid under Delaware law, and dismissed the remaining claims under Nevada law because the corporation’s bylaws had an enforceable forum selection clause.
Internal Affairs Doctrine
JUUL Labs, Inc. v. Grove, CA No. 2020-0005, decided August 13, 2020. The Delaware Chancery Court held that a stockholder seeking an inspection of records of a Delaware corporation with its principal place of business in California cannot rely on Sec. 1601 of the California Corporations Code – which grants inspection rights to stockholders of corporations with their principal executive offices in California regardless of the state of incorporation. Under principles articulated by the US and Delaware Supreme Courts, Delaware law governs the internal affairs of its corporations and the scope of a stockholder’s inspection rights is a matter of internal affairs. Therefore, Delaware law applies.
Annual Meeting
Spanakos v. Pate, No. 532, 2019, decided July 31, 2020. The Delaware Supreme Court affirmed the Chancery Court’s denial of a stockholder’s request under Sec. 223 and 211 for a corporation to hold an annual meeting and elect directors, even though the stockholder met the requirements of those sections. Ordering a meeting is in the court’s discretion, and in this case, where the stockholder was involved in litigation in Florida impacting this case, the Chancery Court, by pointing the stockholder back to Florida for that court to clarify its orders, crafted what it believed was the clearest path to obtaining relief in Delaware.
Duty of Disclosure
Dohmen v. Goodman, No. 403,2019, decided June 23, 2020. The Delaware Supreme Court, answering a certified question from the 9th Circuit Court of Appeals, held that under the facts of the dispute, a general partner’s request to a limited partner for a one time capital contribution did not constitute a request for limited partner action such that the general partner had a fiduciary duty of disclosure. And even if the general partner had a fiduciary duty to disclose, the limited partner could not recover compensatory damages without proving reliance and causation.
Caremark Liability
Hughes v. Hu, 2019-0112, decided April 27, 2020. The Delaware Chancery Court held that a stockholder filing a derivative suit had established demand futility where the complaint established the board faced a substantial likelihood of liability under Caremark for failing to establish a system of internal controls over the corporation’s financial reporting. The complaint alleged, among other things, the audit committee met sporadically, failed to address known problems, and relied blindly on management instead of establishing its own system of oversight.
Validity of Stockholder Votes and Consents
Palisades Capital II, LP v. Backer, No. 2019-0931, decided March 26, 2020. The Delaware Chancery Court held that an email sent from a stockholder’s lawyer to the corporation’s counsel requesting counsel take actions to facilitate a stockholder consent to appoint a director was neither a vote nor a valid consent. The General Corporation Law requires a meeting for a vote to be valid and a request to take an action, rather than executing an action, is not a valid consent.
Forum Selection Provisions
Salzberg v. Sciabacucchi, No. 346,2019, decided March 18, 2020. The Delaware Supreme Court upheld the validity of a provision in several Delaware corporations’ certificates of incorporation requiring actions arising under the federal Securities Act of 1933 to be filed in a federal court. The court held that federal forum selection provisions fall within the broad enabling text of Sec. 102(b)(1) of the General Corporation Law and are facially valid, are not against public policy, and advance the goal of Delaware courts to achieve judicial economy and avoid duplicative efforts among courts.
Court of Chancery’s Jurisdiction
Hanna v. Baier, CA No. S12J-03-058, decided January 22, 2020. The Delaware Superior Court held that the Court of Chancery was the proper forum to hear an action to enforce a charging order where the plaintiff claimed certain payments made by the Delaware LLC to the debtor member violated the charging order and where the court had to determine if those transactions were authorized by the LLC Act. In addition, the plaintiff was seeking relief which would require the court to pierce the veil, which the Superior Court cannot do.
Derivative Suit
McElrath v. Kalanick, No. 181, 2019, decided January 13, 2020. The Delaware Supreme Court affirmed the Chancery Court’s dismissal of a derivative suit against a corporation’s board of directors for failure to make a pre-suit demand or allege demand futility. The suit arose out of the board’s approval of a risky acquisition that resulted in the corporation using another company’s proprietary information. The court found that a majority of the directors were independent and disinterested and the complaint failed to allege that the board rubberstamped the flawed transaction or acted in bad faith.
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