Delaware Corporate Law Annual review - Young Conaway ...
←
→
Page content transcription
If your browser does not render page correctly, please read the page content below
Delaware
Corporate Law
Annual review
2021
This publication is intended to be used for informational purposes only and should not be considered legal advice. Receipt of this publication does not give rise to or implicate an attorney-client relationship. In some jurisdictions, this may constitute attorney advertising. Prior results do not guarantee a similar outcome. Although Young Conaway served as counsel to one or more parties or non-parties in several of the cases discussed in this publication, the content of this publication does not necessarily reflect the views of Young Conaway or its clients, and the factual statements in this publication are summaries of the courts’ characterizations of facts, or of the parties’ allegations. © 2022 Young Conaway Stargatt & Taylor, LLP. All Rights Reserved.
Delaware Corporate Law
Annual Review
2021
This publication, which summarizes notable corporate and alternative entity cases decided by the
Delaware Supreme Court, the Delaware Court of Chancery, and the Delaware Superior Court,
Complex Commercial Litigation Division during the year of 2021, is provided compliments of
Young Conaway’s Corporate Counseling and Litigation Section.
Young Conaway’s Corporate Counseling and Litigation Section provides representation and
advice to Delaware entities, including corporations and alternative entities, the individuals and
entities that manage them, their equity holders, and other law firms. Young Conaway’s practice
ranges from advising on the structure and negotiation of corporate and commercial transactions to
defending (or challenging) transactions in the courtroom.
Attorneys within Young Conaway’s Corporate Counseling and Litigation Section have extensive
experience in guiding clients through takeover battles, special committee processes, and dissident
stockholder situations. Young Conaway attorneys also have extensive experience in the prosecution
and defense of litigation involving stockholder challenges to mergers and acquisitions, contests
for corporate control, going private transactions, appraisal and valuation issues, indemnification
and advancement claims, alternative entity disputes, and every other manner of corporate and
alternative entity dispute in the Delaware courts. Some of the higher profile matters in which
our attorneys have played an active role include those that produced the landmark Revlon, Time/
Warner, QVC, Omnicare and Disney decisions of the Delaware Supreme Court. Columbia Pipeline,
Energy Transfer Equity, Morgans Hotel, Ancestry.com, Pine River, and Oxbow are some of the
more recent notable matters in which attorneys in the section played a significant role.
For more information, please call or email your regular Young Conaway contacts or one of the
members of Young Conaway’s Corporate Counseling and Litigation Section listed in the directory
at the end of this publication.
Table of Contents
Practitioner’s Guide to Litigating in the Delaware Court of Chancery
The New Judicial Landscape ...................................................................................................................... 1
The Revised Chancery Guidelines ............................................................................................................ 1
2021 Statistics ................................................................................................................................................. 2
Remote Versus In-Person Proceedings Held in the Court of Chancery .................................................... 2
Cases Filed in the Court of Chancery ........................................................................................................... 3
Opinions Issued & Orders Entered by Delaware Courts ........................................................................... 4
The Weight of a Bench Trial ......................................................................................................................... 4
FirstString Rsch., Inc. v. JSS Med. Rsch. Inc., 2021 WL 2182829
(Del. Ch. May 28, 2021) (McCormick, C.) ................................................................................................. 4
Noteable Developments in Chancery Jurisprudence ....................................................................... 5
Standing ........................................................................................................................................................... 5
United Food & Commercial Workers Union & Participating Food Indus. Emps.
Tri-State Pension Fund v. Zuckerberg, 262 A.3d 1034 (Del. 2021). ........................................................... 5
Morris v. Spectra Energy Partners (DE) GP, LP, 246 A.3d 121 (Del. 2021). ............................................ 6
Direct v. Derivative ............................................................................................................................... 6
Brookfield Asset Mgmt. v. Rosson, 261 A.3d 1251 (Del. 2021). .................................................................. 6
Appraisal .............................................................................................................................................. 7
Manichaean Capital, LLC v. Exela Technologies., Inc., 251 A.3d 694 (Del. Ch. 2021). ........................... 7
Manti Holdings, LLC v. Authentix Acquisition Co., Inc., 261 A.3d 1199 (Del. 2021). ............................... 7
Delaware Insights for Corporate Governance & Counseling Attorneys
Advance Bylaw Notice ................................................................................................................................... 8
Rosenbaum v. CytoDyn Inc., 2021 WL 4775140 (Del. Ch. Oct. 13, 2021). ................................................ 8
Books and Records Demands & Lawsuits.............................................................................................. 9
Gross v. Biogen Inc., 2021 WL 1399282 (Del. Ch. Apr. 14, 2021) (Fioravanti, V.C.) .............................. 10
Jacob v. Bloom Energy Corp., 2021 WL 733438 (Del. Ch. Feb. 25, 2021) (Slights, V.C.) ...................... 10
Employees’ Ret. Sys. of Rhode Island v. Facebook, Inc., 2021 WL 529439
(Del. Ch. Feb. 10, 2021) (Slights, V.C.) .................................................................................................... 10
Corporate Insurace Coverage ................................................................................................................. 11
Caremark Claims .......................................................................................................................................... 11
In re Boeing Co. Derivative Litig., 2021 WL 4059934 (Del. Ch. Sept. 7, 2021) (Zurn, V.C.) ................. 12
Firemen’s Retirement System of St. Louis on behalf of Marriott International, Inc. v. Sorenson,
2021 WL 4593777 (Del. Ch. Oct. 5, 2021) (Will, V.C.) ........................................................................... 12
Entirely Fair Does Not Mean Entirely Equitable ................................................................................. 13
Coster v. UIP Companies, Inc., 255 A.3d 952 (Del. 2021). ...................................................................... 13
COVID-19 Pandemic ................................................................................................................................... 14
Material Adverse Effect & Material Adverse Change Clauses ............................................................... 14
Snow Phipps Grp., LLC v. KCAKE Acquisition, Inc., 2021 WL 1714202 (Del. Ch. Apr. 30, 2021). ....... 14
Ordinary Course Covenant ......................................................................................................................... 14
AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, 2021 WL 5832875 (Del. Dec. 8, 2021). ........ 14
Young Conaway Directory ................................................................................ 16
Delaware Corporate Law Annual Review 2021
Practitioner’s
Guide to Litigating
in the Delaware
Court of Chancery
The New Judicial Landscape
The Court of Chancery is composed one chancellor and six vice chancellors. Two of the vice chancellor positions
were added in 2018 to meet the increasing demands upon the Court. As of February 2022, the Court of Chancery
bench includes: Chancellor McCormick (2018), Vice Chancellor J. Travis Laster (2009), Vice Chancellor Sam
Glasscock III (2011), Vice Chancellor Joseph R. Slights III (2016), Vice Chancellor Morgan T. Zurn (2018), Vice
Chancellor Paul A. Fioravanti, Jr. (2020) and Vice Chancellor Lori W. Will (2021).
The year 2021 was transformative and demanding for the Court of Chancery bench. The Court continued its
technological evolution in response to the COVID-19 pandemic, maintained an onerous docket with increased
expedited actions, saw the retirement of Chancellor Andre G. Bouchard, welcomed Vice Chancellor Lori W. Will
(the fifth-ever female vice chancellor), and witnessed the historic investiture of Chancellor Kathaleen St. Jude
McCormick (previously a Vice Chancellor) as the Court’s first female Chancellor in its 200 plus years.
As the Court enters 2022, it is younger, more diverse, and closer to the practice of law. On January 6, 2022, Vice
Chancellor Joseph R. Slights III, who was sworn in on March 28, 2016, announced his retirement from the Court.
Once Vice Chancellor Slights retires, the majority of the Court will still be in the first half of their first twelve-year
term. With the exception of Vice Chancellors Sam Glasscock III and J. Travis Laster, each judge will have been
on this bench for less than five years. Vice Chancellor Slights’s successor could be a current practicing attorney
or a present member of the Delaware judiciary, but it is likely that either way they will also be younger, diverse,
and close to the practice of law. Teamed with the experience of Vice Chancellors Glasscock and Laster, the 2022
Court of Chancery bench will be one to watch.
The Revised Chancery Guidelines
In August 2021, the Court of Chancery issued an updated version of its Guidelines for Practitioners in the Court of
Chancery (the “Revised Chancery Guidelines”). The guidelines, first published in 2012 and previously updated in
2017, is an indispensable resource for litigators. From providing clarity on the Court’s procedure to setting forth
e-discovery expectations, the Revised Chancery Guidelines are a Chancery litigator’s best friend. Since 2012,
however, the Chancery practice has evolved and the Court has graciously provided counsel updated Chancery
Guidelines to reflect the current practices.
In response to the COVID-19 Pandemic, the Court of Chancery expanded its practice of holding telephonic
hearings on non-evidentiary based motions to holding completely remote video-conference trials. The most
obvious change in the Revised Guidelines is a corresponding new section: the Court of Chancery’s “Expectations
for Remote Hearings and Trials.”
Young Conaway 1
Delaware Corporate Law Annual Review 2021
Counsel, both Delaware and out-of-state, would be wise to review in detail this new section. For example, the
Court clarifies when to use the various remote methods of communications: a traditional call with dial-in vs.
an official conference call hosted by a third-party vendor or a video-conference hosted by the Court vs. a video-
conference hosted by a third-party vendor. While each Vice Chancellor sends counsel their specific remote
proceeding protocol prior to holding a remote hearing, the Revised Guidelines provide standard practices. For
example, the Revised Guidelines note that all counsel should be properly dressed in business attire for a video-
conference, however, at least one Vice Chancellor’s protocol requests that counsel not turn on their camera unless
they are making the argument that day.
Turning to substance, the Revised Guidelines contain a major change in the Court’s preference on confidentiality
stipulations. As with the previous Guidelines, the Revised Guidelines attach sample single-tier and double-tier
confidentiality stipulations to be entered by the Court to permit the filing of documents under seal. However, the
Court now requires that parties use these exact forms. In fact, parties must submit a redlined version to the Court
if their proposed stipulation departs from these forms. Furthermore, if the departure is “material,” the parties must
also submit a letter to the Court explaining the reason for the change.
In a nod to gender equality and the modern Chancery litigator, the Revised Guidelines also appropriately modified
the Court’s attire expectations. Gone is the language requiring counsel wear a “suit or dress with a formal
business shirt or blouse,” and in its place is a requirement of simply business attire. Putting it bluntly, the Revised
Guidelines expressly state: “The Court likewise does not have any preference regarding skirts or dresses versus
pantsuits.”
The Revised Guidelines may be found on the Court’s website at https://courts.delaware.gov/Chancery/
guidelines.aspx.
2021 Statistics
Remote Versus In-Person Proceedings Held in the Court of Chancery
- Remote Hearings & Trials (425)
- In-Person Hearings & Trials (30)
- Hybrid (2)
2 Young Conaway
Delaware Corporate Law Annual Review 2021
Cases Filed in the Court of Chancery
CASE TYPE NO. FILED CASE TYPE NO. FILED
Petition for Adjudication of
Breach of Fiduciary Duties 212 6
Preseumed Death
Petition to Appoint a
Inspection of Books & Records 171 6
Successor Trustee
Petition for Admission -
Breach of Contract 107 5
Copy of Decendents Will
Declartory Judgment 106 Petition for Review 5
Caveat against allowance
Injunctive Relief 104 3
of Intrument’s Will
Civil Action 100 Petition to Reform a Trust 3
Advancemen of Legal Fees
40 Rapid Arbitration ( Rules 96,97) 3
& Expenses
Specific Performance 34 Restraining Order 3
Quiet Title 26 Appeal 2
Partition 25 Contract 2
Dissolution 19 Deed Restrictions 2
Petition for Sale to Pay Debts 19 Petition for Elective Share 2
Appointment of Receiver 18 Petition for Review of Proof of Will 2
Estate 15 Trust Agreement 2
Real Estate 14 Accounting 1
Confirm Arbitration Award 12 Decree of Distribution 1
Compel a Shareholders Meeting 10 Land Disputes 1
Deed Restriction Pursuant to Petition for RTSC to Compel Return
9 1
10 Del. C. Sec. 348 of Assets
Petition for Instructions 8 Resultant Trust 1
Appraisal 7 Total 1107
Young Conaway 3
Delaware Corporate Law Annual Review 2021
Opinions Issued & Orders Entered by Delaware Courts
Supreme Court 69
Superior Court, CCLD 88
Chancery 290
The Weight of a Bench Trial
A plaintiff’s decision to file suit in the Court of Chancery means no jury trial. One of the hallmarks of an action
in the Court of Chancery is that the presiding Chancellor/Vice Chancellor serves as both trier of fact and law.
The jury’s absence affects various aspects of Chancery litigation, including the limited availability of summary
judgment, the use of pre- and post-trial briefing in lieu of opening and closing statements and the tone taken by
Chancery litigators-more akin to a conversation between court and counsel than the oft-portrayed charismatic
attorney to a jury.
Many claims in corporate and business litigation must be brought in the Court of Chancery by either their
equitable nature, statutory mandates or contractual provisions. A litigant does not make a strategic decision
to file a books and records action in the Court—it is the only Delaware court where such a claim may be filed.
However, plaintiffs do make a strategic choice when they assert legal claims along with Chancery-specific counts
in a Chancery complaint. The plaintiff doing so is betting that the Court will exercise discretionary ancillary
jurisdiction over the non-equitable claims and that it will not be forced to bring its legal claims in the Superior
Court where they may be subject to a trial by jury. Chancellor McCormick addressed the question in FirstString
Rsch., Inc. v. JSS Med. Rsch. Inc. of whether this strategic decision by a plaintiff can be imposed on a defendant
over the defendant’s constitutional right to have its legal claims heard by a jury.
FirstString Rsch., Inc. v. JSS Med. Rsch. Inc., 2021 WL 2182829 (Del. Ch. May 28, 2021) (McCormick, C.)
In FirstString Rsch., Inc. v. JSS Med. Rsch. Inc.,1 the Court of Chancery held that the Court’s ancillary jurisdiction
under the clean-up doctrine permits the Court discretion to exercise jurisdiction over a party’s legal claims
otherwise entitled to a trial by jury.
The plaintiff, FirstString Research, Inc. (“FirstString”), was a biopharmaceutical company that retained the
defendant, JSS Medical Research, Inc. (“JSS”) to provide clinical research, data management and project
management for various clinical research studies.2 These agreements required JSS to participate in the wind
down of any of studies.3 The parties initiated their first clinical study but the relationship quickly soured and
FirstString terminated the agreements.4 JSS refused to perform its wind down obligations. FirstString sued JSS
in the Court of Chancery asserting claims for breach of contract, replevin, and conversion and requesting a
permanent injunction ordering JSS to comply with its post-study obligations.5 JSS then sued FirstString in the
Superior Court demanding a jury trial on mirror-image legal claims and sought transfer of FirstString’s legal
claims from the Court of Chancery to Superior Court.6
1 2021 WL 2182829 (Del. Ch. May 28, 2021).
2 Id. at *1.
3 Id.
4 Id. at *2.
5 Id. at *3.
6 Id.
4 Young Conaway
Delaware Corporate Law Annual Review 2021
After finding that it had equitable jurisdiction over FirstString’s specific performance relief,7 the Court considered
JSS’s argument that its constitutional right to a jury trial trumped the clean-up doctrine.8 Briefly delving into the
clean-up doctrine’s historical underpinnings, the Chancellor dismissed JSS’s argument, stating that Delaware’s
Constitution grants the right to a jury trial as it existed at common law in 1776. In 1776, the predominant view
was that the clean-up doctrine took precedence over the right to a jury trial.9 While courts of equity historically
“referred matters to a jury out of concerns for judicial efficiency [it was]. . . ‘not because [they] lacked the power
to decide them[.]’”10
While most states have now rejected the traditional approach of trying intertwined equitable and legal claims
together, Delaware has not. The Court is committed to the clean-up doctrine and exercising, in its discretion,
ancillary jurisdiction over legal claims—notwithstanding a party’s right to a jury trial. 11
Notable Developments in Chancery Jurisprudence
Standing
One line of Delaware Supreme Court cases on a threshold analysis of whether a stockholder has standing to
bring a derivative action has confused countless litigators, in the plaintiffs’ bar as much as the defense bar. For
stockholders to file actions on behalf of a corporation without first taking their complaints to the corporation’s
board of directors, the stockholders must show that making such a demand from the board would be futile because
of the board’s inability to properly consider the demand. For years, Delaware’s demand futility analysis has been
governed by two somewhat redundant tests: Aronson and Rales. During that time, it was never truly clear which
test applied: under Aronson, demand was excused if the stockholder raised a reasonable doubt that the board was
disinterested and independent or that the transaction was otherwise a product of a valid business judgment; while
under Rales, demand was excused if the stockholder created a reasonable doubt that a majority of the board in
place at the time of the demand could have properly exercised its independent and disinterested business judgment
in responding to the demand. These two tests are now one combined, three-part test under Facebook.
United Food & Commercial Workers Union & Participating Food Indus. Emps. Tri-State Pension Fund v.
Zuckerberg, 262 A.3d 1034 (Del. 2021).
For many decades, Delaware demand futility law has confounded analysis by offering a binary choice of distinct
but overlapping tests, the first under Aronson v. Lewis, 473 A.2d 805 (Del. 1984), and the second under Rales v.
Blasband, 634 A.2d 927 (Del. 1993). In a thoughtful and scholarly opinion, the Court of Chancery, which found
that Aronson was no longer a functional test, reformulated the analysis by applying “a three-part test for demand
futility that blended the Aronson test with the test articulated in Rales[.]”12 On appeal, the Delaware Supreme
Court adopted the Court of Chancery’s three-part test, resolving the issue of which test—Aronson or Rales—
should apply in future cases. Specifically, “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
7 Id. at *5.
8 Id. at *6. The clean-up doctrine permits the Court to exercise ancillary jurisdiction over non-equitable claims
where retention of the non-equitable claims will: 1) resolve a factual issue which must be determined in the
proceedings; 2) avoid a multiplicity of suits; 3) promote judicial efficiency; 4) do full justice; 5) avoid great
expense; 6) afford complete relief in one action; or 7) overcome insufficient modes of procedure at law.
9 Id. at *7-8.
10 Id. at *9 (quoting John H. Langbein, Fact Finding in the English Court of Chancery: A Rebuttal, 83 Yale L. J. 1620,
1630 (1974)).
11 Id. at *10.
12 Zuckerberg, 262 A.3d at 1040.
Young Conaway 5Delaware Corporate Law Annual Review 2021
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.”13
Zuckerberg, like Brookfield (discussed above), demonstrates that the Delaware courts are committed to upholding
the time-honored tradition of simplifying and rationalizing the common law both to adapt to new circumstances
and to eliminate doctrinal uncertainty and confusion created by the application of previously articulated holdings.
In that regard the year 2021 represents a noteworthy year of judicial energy and effort.
Morris v. Spectra Energy Partners (DE) GP, LP, 246 A.3d 121 (Del. 2021).
In Spectra, the Delaware Supreme Court adopted and provided guidance on how properly to apply the standard, as
articulated in In re Primedia, Inc. Shareholders Litigation, 67 A.3d 455 (Del. Ch. May 10, 2013), for determining
when pre-merger stockholders have standing to pursue post-merger claims. The Primedia standing analysis, which
specifically “applies to claims challenging a merger because the equity owners are not being fairly compensated
for the value of material derivative claims[,]” requires the court to consider whether the derivative claim: (1) is
viable; (2) is material to the overall transaction; (3) will not be pursued by the buyer; and (4) is not reflected in the
merger consideration.14 In Spectra, the Supreme Court reversed the Court of Chancery’s dismissal of a post-merger
action. The Court of Chancery had determined (under the second prong) that plaintiff’s extinguished derivative
claims were immaterial. The Supreme Court held that the Court of Chancery had erroneously misapplied the
Primedia test at the motion to dismiss stage by failing to draw all reasonable materiality-related inferences in
the plaintiff’s favor by improperly undervaluing the claims to reflect the plaintiff’s likelihood of recovery on the
derivative claims, and then by comparing the plaintiffs’ claimed damages to the overall merger price rather than
to the consideration paid to the public unitholders.
The takeaway is that claim-extinguished lawsuits may be difficult to dispose of at the dismissal stage because of
the fact-intensive nature of the required claim valuation process.
Direct v. Derivative
Another line of Delaware Supreme Court cases has similarly caused great confusion as to the question: are
dilution/overpayment claims dual-natured direct and derivative claims, and, if so, when? After 15 years of
tension in the caselaw, the Delaware Supreme Court provided a firm answer: dilution/overpayment claims are
never dual-natured, they are solely derivative (i.e., they are only an injury to the corporation, not the stockholders
independently).
Brookfield Asset Mgmt. v. Rosson, 261 A.3d 1251 (Del. 2021).
In Brookfield, the Delaware Supreme Court overruled its earlier decision in Gentile v. Rossette, 906 A.2d 91
(Del. 2006), which had held that claims that fiduciaries caused a corporation to overpay for an asset were “dual
natured” (both direct and derivative), where they involve a “controlling stockholder and transactions that resulted
in an improper transfer of both economic value and voting power from the minority stockholders to the controlling
stockholder.”15 The Supreme Court held that any such claims are “exclusively derivative,” consistent with the
holding of Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), that a determination of
whether a claim is direct or derivative turns on whether the alleged harm was suffered by the corporation or the
stockholders, and which party would receive the benefit of any recovery.
13 Id. at 1059.
14 246 A.3d at 127.
15 Brookfield, 261 A.3d at 1264.
6 Young ConawayDelaware Corporate Law Annual Review 2021 This decision is a “must read,” not only because it thoughtfully clarifies the analysis distinguishing “direct” and “derivative” claims, but also because of the scholarly insights it provides into the limits of stare decisis. This overruling of Gentile, and affirmance of Tooley, prevents claimants from recovering twice from the tortfeasor for the same injury, abiding by the double recovery rule. Appraisal Appraisal is a statutory right afforded to stockholders to have an independent determination of the fair value of a stock and to obligate an acquirer to pay that price for the acquired shares. And, the payor cannot evade that obligation by diverting the funds to related entities because the Court may step in in these inequitable/unjust circumstances and utilize theories such as reverse veil piercing to reach those funds as it did in Manichaean Capital, LLC v. Exela Technologies, Inc. However, this statutory right, bestowed upon stockholders in the Delaware General Corporation Law (“DGCL”), may, in certain circumstances, be waived ex ante under the Delaware Supreme Court’s decision in Manti Holdings, LLC v. Authentix Acquisition Co., Inc. Manichaean Capital, LLC v. Exela Technologies., Inc., 251 A.3d 694 (Del. Ch. 2021). In Manichaean, the Court of Chancery addressed “the highly unusual circumstance where an appraisal judgment debtor cannot or will not pay.”16 There, the plaintiffs sought to hold accountable the debtor’s acquirer and affiliated entities in two parallel actions. In a matter of first impression, the Court formally recognized that plaintiffs can state a legally viable claim for third party “reverse veil-piercing,” but limited the reach of this new doctrine to claims where subsidiaries are deployed “to perpetuate fraud or injustice against a judgment creditor of their parent[,]” where veil-piercing will not cause harm to innocent third-party stockholders or creditors, and where no other legal or equitable remedies are available.17 The Manichaean decision validates the ability and willingness of the Court of Chancery to enforce the ancient maxim that equity will not suffer a wrong without affording a remedy. But the Court’s willingness to exercise that power is constrained and limited to cases involving clearly compelling circumstances that justify disregarding corporate separateness. Manti Holdings, LLC v. Authentix Acquisition Co., Inc., 261 A.3d 1199 (Del. 2021). In Manti, the Delaware Supreme Court affirmed a Court of Chancery decision enforcing an ex ante waiver of appraisal rights in a stockholder agreement. In a four-to-one decision, the Supreme Court held that the “sophisticated and informed” stockholders, who owned 100% of the company, had agreed to “clear” language that constituted a waiver of their statutory appraisal rights granted by Section 262 of the DGCL.18 The majority further reasoned that, where a restriction is contractually imposed upon the stockholders themselves as opposed to the shares themselves, the waiver does not constitute a stock restriction that must be included in the company charter under the DGCL. In a thoughtful dissenting analysis, Justice Valihura disagreed, urging that under the DGCL, appraisal rights are mandatory and cannot be waived. This decision reinforces Delaware’s public policy favoring broad contract rights, at least in circumstances where all the contracting parties are sophisticated and agree to waive their statutory appraisal right. The reach and limits of this new waiver doctrine in the appraisal context is unclear and will likely generate further litigation, and perhaps also an effort to settle the waivability issue legislatively. 16 251 A.3d at 699-700. 17 Id. at 714-17. 18 261 A.3d at 1216, 1221. Young Conaway 7
Delaware Corporate Law Annual Review 2021
Delaware Insights
for Corporate
Governance &
Counseling
Attorneys
Advance Bylaw Notice
Stockholders have a fundamental right to vote and Delaware law protects them from disenfranchisement (Blasius).
Advance notice bylaws are a commonplace mechanism at public companies for stockholders to participate in the
voting process for the election of directors. These bylaw provisions provide a timeline to nominate an opposing
slate of directors to be voted on at the annual stockholders’ meeting, ensuring systematic, uniform meetings and
election contests. However, as Rosenbaum v. CytoDyn Inc. instructs, a stockholder must still abide the advance
notice bylaws’ requirements, providing all requested information, to be able to properly engage in a proxy contest.
And, the board’s rejection of an improper notice and decision not to permit an opportunity to cure defects after the
deadline, was not intended to impede the stockholders’ voting rights such that Blasius would be triggered.
Rosenbaum v. CytoDyn Inc., 2021 WL 4775140 (Del. Ch. Oct. 13, 2021).
In CytoDyn, the Court of Chancery denied the dissident stockholder plaintiffs’ application for a mandatory
injunction compelling CytoDyn Inc. to allow plaintiffs’ slate of nominees to stand for election. The company’s
bylaws required stockholders to provide advance notice of any matters they want to have put on the agenda for the
annual meeting, including any nominations for election to the board. The Court found that plaintiffs’ nomination
notice, submitted on the eve of the deadline, was “fatally incomplete” because it failed to disclose, as the bylaws
required, the identity of persons supporting plaintiffs’ efforts and any information concerning potential—or even
obvious—conflicts.1 As such, the plaintiffs’ advance notice “did not provide “Timely Notice[,]” and the board
justifiably rejected the nomination notice and refused to allow the plaintiffs’ board nominees to stand for election.2
CytoDyn is the first post-trial Delaware court decision addressing informational deficiencies in an advance
nomination notice. As such, it provides important guidance for public companies with similar advance notice
bylaws, and for stockholders seeking to comply with such bylaws and to avoid (or prevail in) litigation.
1 2021 WL 4775140, at *2.
2 Id.
8 Young ConawayDelaware Corporate Law Annual Review 2021
Books and Records Demands & Lawsuits
The Court continued to see increased filings of books and records actions in 2021. In many instances, these
actions were brought by pro se plaintiffs. [[confirm]]. While the Court continued to hold that the statutory
requirements to bring a books and records demand must be met by any stockholder (represented or not), the Court
also reiterated its warning that overly aggressive defenses by companies would be met with potentially harsh
consequences, including fee shifting.
Gross v. Biogen Inc., 2021 WL 1399282 (Del. Ch. Apr. 14, 2021) (Fioravanti, V.C.)
In Gross v. Biogen Inc.,3 the Court of Chancery reiterated its warning in Pettry v. Gilead Sciences., Inc. that
defendants should not adopt an “overly aggressive” defense strategy in a Section 220 action. 4
The plaintiff, a stockholder of defendant corporation, Biogen Inc., served a demand on the company pursuant to
Section 220 of the DGCL.5 The stockholder’s stated purpose was to investigate potential wrongdoing relating to
a federal investigation and a wrongful termination suit.6 The company rejected the demand, asserting it did not
meet Section 220’s form and manner requirements and lacked a proper purpose for inspection.7 The company
rejected two subsequent supplemental demands sent by the stockholder, in each case objecting on form and
manner, purpose and scope and, when plaintiff brought suit, maintained its position in litigation, refusing to
produce any documents in response to the demand all the way through trial.8 The Court rejected the company’s
defenses, finding that the stockholder sufficiently met the form and manner requirements, had a proper purpose
and sought necessary and essential documents.9
The Court did not, however, order a full production of all documents requested by the plaintiff.10 It declined
to require the production of emails and texts messages between board members, limiting the production of
investigation-related documents and communications to formal board-level materials as the plaintiff did not show
“that the formal board materials would be insufficient for him to investigate the alleged wrongdoing.”11 Unlike
in Gilead, the Court did not invite the plaintiff to seek fees,12 but still noted that, even in this case, where the
scope of production was ultimately partially limited, the defendant’s defenses did not “warrant complete denial of
Plaintiff’s inspection rights.”13
3 2021 WL 1399282 (Del. Ch. Apr. 14, 2021).
4 Id. at *1 (quoting Pettry v. Gilead Sciences, Inc., 2020 WL 6870461, at *2 (Del. Ch. Nov. 24, 2020)).
5 Id. at *4.
6 Id.
7 Id.
8 Id. at *4-5.
9 Id. at *5.
10 See id. at *15-16.
11 Id.
12 Gilead, 2020 WL 6870461, at *2 (“[P]laintiffs are granted leave to move for their expenses, including attorneys’ fees,
incurred in connection with their efforts to obtain books and records.”)
13 Biogen Inc., 2021 WL 1399282 at *5.
Young Conaway 9Delaware Corporate Law Annual Review 2021
Jacob v. Bloom Energy Corp., 2021 WL 733438 (Del. Ch. Feb. 25, 2021) (Slights, V.C.)
In Jacob v. Bloom Energy Corporation, the Court of Chancery issued a post-trial opinion denying a 220
inspection14 for failure to meet Section 220’s form and manner requirements, which require documentary evidence
of stock ownership.15 Bolouri, the stockholder, sent the company a demand to investigate mismanagement and
wrongdoing. 16 After the company refused the demand, the Court held a trial, in part, on the issue of the proof
of stock ownership that Bolouri attached to his demand. Section 220 requires that a demand be accompanied by
“documentary evidence of beneficial ownership of stock” which “should be at a point proximate to the date of
the Demand.”17 Bolouri attached an account statement indicating that he held shares between October 12 and
October 31, 2018. The problem—the demand was dated November 25, 2019, more than a year later.18 The Court
held the stale account statement as insufficient proof.19
Bolouri’s account statement was also accompanied by an affidavit, but the Court explained that while Section
220(b) requires an affidavit verifying the documentary evidence as “true and correct,” such an affidavit does not
establish proof of ownership.20 An affidavit simply verifies the truthfulness of what the documentary evidence
“purports to be” but cannot provide evidence of ownership.21 The Court stressed that form and manner requirements
place a minor burden on stockholders and “must be fulfilled.”22
Employees’ Ret. Sys. of Rhode Island v. Facebook, Inc., 2021 WL 529439 (Del. Ch. Feb. 10, 2021)
(Slights, V.C.)
In Employees’ Ret. Sys. of Rhode Island v. Facebook, Inc., the Court of Chancery ordered the production of non-
privileged emails and text messages between Facebook and the Federal Trade Commission (“FTC”) concerning
settlement negotiations, finding the records necessary to satisfy the Section 220 plaintiff’s proper purpose, but
also refused to compel production of privileged records of the same under the Garner exception.
In July 2019, Facebook and the FTC agreed to a settlement “whereby Facebook agreed to pay $5 billion in
exchange for a release of claims against both the Company and Zuckerberg” that arose in connection with an
investigation by the FTC into Facebook’s data privacy breaches following the Cambridge Analytica breach.23
“Following numerous reports suggesting that Facebook paid more than its share of the settlement to protect
Zuckerberg from personal liability[,]” the petitioner sought books and records to investigate wrongdoing.24 In
response, the company argued against production of these records because it had already produced in a previous
action formal, non-privileged board-level materials related to Caremark claims arising from the Cambridge
Analytica breach. However, the Court distinguished the present case, and ordered production of non-privileged
electronic communications between Facebook and the FTC on the grounds that the previously produced books
and records were insufficient to satisfy the plaintiff’s proper purpose here, “namely to discern what informed
the Board’s decision to bargain to protect Zuckerberg or to pay $5 billion, and what alternatives to the ultimate
settlement agreement, if any, were available.”25
14 The Court also considered another stockholder-plaintiff’s Section 220 claim, and granted inspection because there
was a credible basis for its demand, but limited the scope of one of its categories, which was overly broad. 2021
WL 733438, at *5-10.
15 Id. at *1-5.
16 Id. at *2.
17 Id. at *4 (internal quotations and citations omitted).
18 Id. at *4.
19 Id. at *4.
20 Id. at *5.
21 Id. at *5.
22 Id. at *5.
23 Id. at *3.
24 Id.
25 Id. at *7.
10 Young ConawayDelaware Corporate Law Annual Review 2021 On the other hand, the Court refused to compel production of privilege documents, given that the plaintiff had not seen the non-privileged documents, and therefore could not honestly assert that the privileged documents were the only source of necessary information, as is required under Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970); see Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Tr. Fund IBEW, 95 A.3d 1264, 1278–79 (Del. 2014) (adopting the test for Garner doctrine in Section 220 proceedings). Corporate Insurance Coverage Delaware courts continue to grapple with what constitutes an insurable securities claim. On multiple occasions in 2021, the courts rejected assertions that certain types of underlying claims are not insurable under Delaware law, finding insurer’s public policy arguments as contrary to the broad authorization of insurability under 8 Del. C. § 145. See RSUI Indemnity Co. v. Murdock, C.A. No. 154, 2020, at 29 (Del. Mar. 3, 2021) (holding that fraud was an insurable claim in Delaware); Sycamore Partners Management, L.P., v. Endurance Am. Ins. Co., C.A. No. N18C-09-211, at 2−3 (Del. Super. Feb. 26, 2021) (LeGrow, J.) (dismissing uninsurability defense because claims for disgorgement and restitution are not proscribed by the Delaware legislature). Even with respect to defining a “securities claim,” claimants saw a relatively pro-policyholder year, as the Superior Court blessed coverage for expenses incurred from a fraudulent transfer lawsuit prosecuted by a bankruptcy trustee. Verizon Commc’s, Inc. v. Nat’l Union Fire Ins. Co., C.A. No. N18C-08-086, at 18 (Del. Super. Feb. 23, 2021) (Davis, J.) (finding that the action constituted a “securities claim” under the policy). This, in spite of the fact that the Court still faced the ripple effects of Solera II, the 2020 Supreme Court decision holding that Delaware’s statutory appraisal actions do not constitute securities claims. See generally Stillwater Mining Co. v. Nat’l Union Fire Ins. Co., C.A. No. N20C-04-190 (Del. Super. Dec. 22, 2021) (LeGrow, J.) (addressing parties’ shifting positions following In re Solera Ins. Coverage Appeals, C.A. Nos. 413, 2019 & 418, 2019 (Del. Oct. 23, 2020)). No doubt, as insureds press on in their “sprawling insurance coverage dispute[s,]” the Complex Commercial Litigation Division of the Superior Court will see many more opportunities to expand and refine the limits of Delaware’s coverage and interpretation of insurance contracts. See e.g., Northrup Grumman Innovation Sys., Inc. v. Zurich Am. Ins. Co., N18C-09-210 (Del. Super. Feb. 2, 2021) (Wallace, J.) (noting that the dispute “involves one transaction, two alleged federal securities law violations, three policy towers, seven motions, and a baker’s dozen parties.”). Caremark Claims A claim that a board of directors violated their fiduciary duty to oversee a company’s compliance with the law remains one the most difficult fiduciary duty claims to bring in the Court of Chancery. So few complaints survive a motion to dismiss that it is a challenge to discern what facts would support a Caremark claim. Two 2021 opinions, with opposite outcomes, provides litigants insight to a successful Caremark complaint. In In re Boeing Co. Derivative Litig., 2021 WL 4059934 (Del. Ch. Sept. 7, 2021) (Zurn, V.C.), the Court denied on a motion to dismiss a claim that the directors of Boeing Company breached their duties of oversight of the company’s airplane safety. Unique in its success and unique in facts, the Boeing complaint is not likely to become a sample to stockholder plaintiffs. In contrast, Firemen’s Retirement System of St. Louis on behalf of Marriott International, Inc. v. Sorenson, 2021 WL 4593777 (Del. Ch. Oct. 5, 2021) (Will, V.C.), the Court granted a motion to dismiss a Caremark claim against the directors of Marriot International Inc. in connection with a massive consumer data breach. While the Marriot stockholder plaintiffs were unsuccessful, the facts of Marriot are not uncommon, cybersecurity is a top concern of boards, and with the right pleading, there may be more Marriot-like complaints. Young Conaway 11
Delaware Corporate Law Annual Review 2021
In re Boeing Co. Derivative Litig., 2021 WL 4059934 (Del. Ch. Sept. 7, 2021) (Zurn, V.C.)
A “claim that corporate fiduciaries have breached their duties to stockholders by failing to monitor corporate affairs
is ‘possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.’”26
Boeing is one of a handful of cases where a Caremark claim has been found sufficient to survive a motion to
dismiss. There, the Court of Chancery held that the Boeing Company stockholders’ Caremark claims related
to the manufacture and production of the 737 MAX aircraft satisfied the onerous dismissal standard, because
the plaintiffs had sufficiently pled that the company’s directors had failed to establish an adequate reporting
system for airplane safety and alternatively, had “turn[ed] a blind eye to a red flag representing airplane safety
problems.”27 The Court emphasized that “the Board has a rigorous oversight obligation where safety is mission
critical, as the fallout from the Board’s utter failure to try to satisfy this ‘bottom-line requirement’ can cause
‘material suffering[.]’”28 And in Boeing, the alleged consequence—a preventable significant risk to health and
safety—had resulted in the loss of human life.
Throughout its opinion, the Court cited and relied upon multitudinous documents, obtained in an earlier Section
220 books and record action, that supported the Caremark claims.
Although Caremark claims are the most difficult to pursue, the Boeing case involved a unique set of well-pled
facts which were supported by extensive documents incorporated by reference, demonstrating that mission
critical oversight process failures and serious consequences, supported by substantial documentary evidence, can
suffice to overcome the formidable Caremark barrier.
Firemen’s Retirement System of St. Louis on behalf of Marriott International, Inc. v. Sorenson, 2021 WL
4593777 (Del. Ch. Oct. 5, 2021) (Will, V.C.)
In Marriott, the Delaware Court of Chancery dismissed derivative Caremark claims brought against the directors
of Marriott International, Inc. relating to a massive breach of consumer data.29 The Court found demand not
excused because a majority of the Marriott directors did not face substantial liability for an improper-oversight
claim under In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996).30 However, the Court
alluded to the possibility that directors could be held liable for future cybersecurity oversight deficiencies.
In 2016, Marriott purchased Starwood Hotels and Resorts Worldwide, Inc., including Starwood’s guest information
system.31 In 2018, Marriott discovered a malware security breach of the Starwood system that exposed 500 million
guests’ personal information.32 Marriott’s stock dropped 12% in the following weeks.33 Stockholders sought to
hold the Marriott directors responsible as a violation of their fiduciary duty to oversee Marriott’s cybersecurity.34
The Court found the allegations did not suggest conscious and bad-faith decisions by the directors warranting
Caremark liability.35 Marriott’s non-compliance with non-binding industry standards was not enough, and
the complaint failed to identify specific laws that Marriott violated, the directors’ knowledge of those legal
requirements, and the directors’ awareness of Marriott’s violation.36
The board was routinely apprised on cybersecurity risks and mitigation, engaged outside cybersecurity consultants,
26 2021 WL 4059935, at *24 (quoting In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).
27 Id. at *1.
28 Id. at *33.
29 2021 WL 4593777, at *1 (Del. Ch. Oct. 5, 2021).
30 Id. at *1.
31 Id. at *3.
32 Id. at *4.
33 Id. at *5.
34 Id. at *5-6.
35 Id. at *19.
36 Id. at *14-15.
12 Young ConawayDelaware Corporate Law Annual Review 2021 and received reports from management on plans to remedy Starwood’s cybersecurity deficiencies.37 While Marriott’s remedial process could have been quicker, the Court concluded there was no alleged bad faith by the directors relating to the data breach.38 However, the Court emphasized that cybersecurity is an “area of consequential risk” and it called upon directors to oversee compliance risk and ensure that their companies have appropriate oversight systems in place.39 While the Court declined to extend Caremark duties to monitoring business risk, it presciently noted that “risks affecting a corporation’s ‘mission critical’ components ha[ve] been a focus of Delaware courts in assessing potential oversight liability,” and that corporate governance must evolve to address growing cybersecurity risks.40 Entirely Fair Does Not Mean Entirely Equitable In Delaware, equitable relief may only be sought in the Court of Chancery. In the corporate context, the Court seeks to alleviate harm caused by a fiduciary’s breach of its duties to stockholders and/or the company. One manner is by requiring that transactions are entirely fair to stockholders. In 2021, the Delaware Supreme Court opined that a transaction that meets the characteristics of “fair price and process” may still not be entirely fair. In that situation, a stockholder plaintiff may still seek equitable relief relating to the transaction in the Court of Chancery. Coster v. UIP Companies, Inc., 255 A.3d 952 (Del. 2021). In Coster, the Delaware Supreme Court reviewed a Court of Chancery determination that a contested sale of a company did not constitute a breach of the directors’ fiduciary duties, because the sale was entirely fair, both as to process and price. Although the Supreme Court did not disturb that determination, it remanded the case to the Court of Chancery, to consider the plaintiff’s additional claims that the sale, even if economically fair, was done to further an inequitable purpose under Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971), as well as under Blasius Industries Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), which held that where a board acts for “the primary purpose of impeding stockholders’ franchise rights, the board must prove a ‘compelling justification’ for its actions.”41 The doctrinal lesson from this decision is that as a matter of equity jurisprudence, “entire fairness” is not an all- inclusive doctrinal umbrella that subsumes all alternative forms of equitable challenges to a business acquisition transaction. 37 Id. at *13, 16. 38 Id. at *16. 39 Id. at *11-12. 40 Id. at *11-12. 41 255 A.3d at 963. Young Conaway 13
Delaware Corporate Law Annual Review 2021
COVID-19 Pandemic
The pandemic affected markets and industries throughout the world. This caused companies and dealmakers to
consider whether they could terminate or renegotiate M&A transactions that they entered into by utilizing material
adverse effect/material adverse change provisions. In turn, this brought an onslaught of litigation to the Court of
Chancery’s door step, which shortly thereafter fizzled out, to consider whether the COVID-19 pandemic could
constitute an MAE/MAC and whether a corresponding response to the pandemic could violate a normal-course-
of-business-covenant. The Court of Chancery’s second-ever post-trial decision addressing COVID-19-related
grounds for termination in Snow Phipps Group, LLC v. KCAKE Acquisition, Inc., and the Delaware Supreme
Court’s affirmance of the first-ever decision in AB Stable VIII, LLC v. MAPS Hotel and Resorts One, LLC, provide
transactional attorneys the helpful rulings they need to focus their clients on these oft-overlooked provisions and
provide them the guidance necessary to explain the risks addressed by MAC/MAE clauses and ordinary course
covenants.
Material Adverse Effect & Material Adverse Change Clauses
Snow Phipps Grp., LLC v. KCAKE Acquisition, Inc., 2021 WL 1714202 (Del. Ch. Apr. 30, 2021).
In KCAKE, the buyers attempted to terminate an agreement to purchase a cake decorating company, after the
company experienced a drop in performance at the beginning of the COVID-19 pandemic. The seller sought
specific performance of the parties’ stock purchase agreement. In a post-trial decision, the Court of Chancery
“order[ed] the buyers to close on the purchase agreement.”42 The Court rejected the buyers’ defenses that the
seller had violated two covenants to closing, namely, that the COVID-19 pandemic had created a material adverse
effect (“MAE”) and that the company had failed to operate in the ordinary course of business. The Court found
that the pandemic’s impact was limited, and that the company’s reduced performance was insufficient to show a
“sustained drop” in business performance.43 Moreover, the buyers’ argument that the seller had failed to satisfy a
condition precedent—namely, a debt-financing condition—was barred because the buyers’ own breach materially
contributed to the sellers’ failure to satisfy it.
As the Chancellor quite accurately observed, this decision can be chalked-up to “a victory for deal certainty,” as
it reinforces Delaware’s extremely high standards for finding a breach of MAE and ordinary course provisions,
even in the face of a global pandemic.44
Ordinary Course Covenant
AB Stable VIII LLC v. MAPS Hotels & Resorts One LLC, 2021 WL 5832875 (Del. Dec. 8, 2021).
AB Stable involved a stock purchase agreement under which the buyer’s subsidiary would acquire an interest in
the seller’s subsidiary, which owned and operated a luxury hotel business. The “ordinary course” covenant of the
agreement provided that the seller was to operate the hotels “only in the ordinary course of business consistent with
past practice in all material respects.”45 The covenant further provided that any departure from this requirement
would require the buyer’s consent which would not be “unreasonably withheld.”46 Six months after the parties
signed the agreement, but before closing, the seller took unprecedented steps in response to the COVID-19
pandemic, including closing certain hotels and sharply reducing hotel services, without having sought the buyer’s
42 2021 WL 1714202, at *2.
43 Id. at *34.
44 Id. at *2.
45 2021 WL 5832875, at *8.
46 Id.
14 Young ConawayDelaware Corporate Law Annual Review 2021 consent. The buyer refused to close, claiming that its refusal was justified by the seller’s breach of the ordinary course covenant. The seller sued for specific performance. Ruling in favor of the buyer, the Court of Chancery held—and on appeal the Delaware Supreme Court concurred—that the seller had breached the ordinary course covenant, whose plain language “created a standard that that looks exclusively to how the business operated in the past.”47 In affirming the Court of Chancery’s ruling, the Supreme Court noted that although the buyer’s conduct was reasonable in light of the unprecedented and exigent circumstances, that fact was irrelevant and insufficient to change the outcome because the contracting parties could have, but did not, include a “reasonableness” qualifier in the covenant.48 Moreover, the seller could have avoided the harshness of the ordinary course requirement by seeking the consent of the buyer, which could not be “unreasonably withheld.”49 The critical takeaway is that Delaware courts will not rewrite the plain language of a purchase agreement and will enforce the terms to which the parties agreed, even if that leads to a harsh outcome. 47 Id. at *7. 48 Id. at *10. 49 Id. at *15. Young Conaway 15
Young Conaway Directory
Delaware Corporate Law Annual Review 2021
Members of
the Corporate
Counseling and
Litigation Section
Tammy L. Mercer James M. Yoch, Jr.
Partner and Chair of Section Partner and Vice-Chair of Section
tmercer@ycst.com jyoch@ycst.com
302.571.6556 302.576.3584
Rolin P. Bissell Elisabeth S. Bradley
Partner Partner
rbissell@ycst.com ebradley@ycst.com
302.571.6560 302.571.5010
Emily V. Burton C. Barr Flinn
Partner Partner
eburton@ycst.com bflinn@ycst.com
302.571.6747 302.571.6692
Young Conaway 17Delaware Corporate Law Annual Review 2021
William D. Johnston Martin S. Lessner
Partner Partner
wjohnston@ycst.com mlessner@ycst.com
302.571.6679 302.571.6698
Paul J. Loughman David C. McBride
Partner Partner
ploughman@ycst.com dmcbride@ycst.com
302.576.3598 302.571.6639
Lakshmi A. Muthu Ryan P. Newell
Partner Partner
lmuthu@ycst.com rnewell@ycst.com
302.576.3248 302.571.6715
Elena C. Norman Nicholas J. Rohrer
Partner Partner
enorman@ycst.com nrohrer@ycst.com
302.571.5029 302.571.6713
Jack B. Jacobs Richard J. Thomas
Senior Counsel Counsel
jjacobs@ycst.com rjthomas@ycst.com
302.571.6626 302.571.6739
18 Young ConawayYou can also read
