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Securities,
Shareholder, and
M&A Litigation
Outlook
2020
1
Contents
The Outlook for 2020 3
Executive Summary 4
Caremark oversight liability 9
Continued Refinement of Key M&A Doctrine 11
Shaping the Boundaries of Section 220 23
Limitations on the Covenant of Good Faith and Fair Dealing 28
Securities, Shareholder, and M&A Litigation practice overview 31
Notable cases and victories 33
Contacts 34
The Outlook for 2020
As we are finalizing this 2020 Outlook, the world is While corporate governance decisions in 2019
dealing with the COVID-19 pandemic. To all of our covered the full range of transactional, governance,
readers, we hope that you and your families, and dispute resolution issues, notable trends Ryan M. Philp
friends, and colleagues are safe. It will come as no emerged in at least four key areas. First, several Editor, Partner
surprise that the pandemic will present new and cases potentially revitalized Caremark oversight New York
unique legal issues and challenges in many areas. liability, highlighting that board members should T +1 212 918 3034
In fact, we already are beginning to address issues carefully analyze whether they are adequately Ryan.philp@hoganlovells.com
arising from the pandemic, and it is only a monitoring the most important risks faced by their
question of “how” – rather than “if” – those issues companies. Second, Delaware courts continued to
will affect securities, shareholder, and M&A refine the seminal doctrines announced in Dell and
litigation. We will be assessing these challenges in DFC (appraisal actions), M&F Worldwide
real time. (controlling stockholder transactions), and Corwin Michael Hefter
(stockholder ratification). Third, numerous cases Partner
In the meantime, the decisions in 2019 provide helped define the boundaries of a proper books and New York
a window into what 2020 holds in store. Courts records claims, which will continue to be shaped in T +1 212 918 3032
around the country issued a number of important 2020. Finally, Delaware courts re-emphasized that Michael.hefter@hoganlovells.com
decisions in 2019 that will affect how all corporate Delaware corporate law favors contractual freedom
stakeholders – buyers and sellers, boards of and significantly limited the ability of parties
directors, management, business partners, to use concepts such as the implied covenant
investors, and creditors – will structure their of good faith and fair dealing or “commercial
affairs, plan and execute transactions, and resolve reasonableness” to vary the terms of unambiguous William (Bill) M. Regan
disputes going forward. written agreements. In the Executive Summary, we Partner
New York
summarize the key developments in these areas and
T +1 212 918 3060
identify certain emerging trends that courts likely
William.regan@hoganlovells.com
will address in the coming year.
3
Executive Summary
4
New Life for Caremark Relying on Marchand, the Court of Chancery
denied a motion to dismiss Caremark claims in In
One of the most notable 2019 developments in
re Clovis Oncology, Inc. Deriv. Litig. In Clovis,
Delaware law was the potential revitalization
the Court of Chancery found that the company
of what are commonly known as “Caremark
failed to implement procedures sufficient to allow
claims” – assertions by stockholders that a
the board of directors to (a) monitor the FDA
company’s board of directors failed to exercise
approval process for the company’s most promising
proper oversight of the business and prevent the
cancer treatment, and (b) detect management
company from violating the law or otherwise
misstatements regarding clinical trial results for
incurring significant liabilities. Under Caremark
that treatment.
and Stone v. Ritter, a stockholder plaintiff could
plead a breach of fiduciary duty by showing that
In light of Marchand and Clovis, companies can
“(a) the directors utterly failed to implement
no longer assume that Caremark claims will
any reporting or information system or controls;
be routinely dismissed. Going forward, it will
or (b) having implemented such a system or
be important to monitor how courts interpret the
controls, consciously failed to monitor or oversee
three factors that led to the outcomes in Marchand
its operations.” Over the years, courts frequently
and Clovis – both companies operated in highly
dismissed Caremark cases at the pleading stage,
regulated industries, both had small nondiversified
citing the maxim that such a claim was “possibly
product lines, and both sustained losses
the most difficult theory in corporation law upon
caused by mission critical risks. Marchand and
which a plaintiff might hope to win a judgment.”
Clovis raise questions regarding appropriate levels
of board monitoring with respect to cybersecurity,
In Marchand v. Barnhill, however, the Delaware
particularly for financial institutions and
Supreme Court reversed the Court of Chancery’s
technology businesses focused on the buying,
decision to dismiss a Caremark claim against
selling, and utilization of data. Similarly, courts
Blue Bell Creamery arising from a listeria
may hold boards at airline, hotel, and cruise
outbreak caused by contamination in the
companies to heightened monitoring duties relating
company’s ice cream production facilities. The
to the coronavirus and other similar industry-
court determined that the plaintiff sufficiently
threatening risks.
alleged a Caremark claim because Blue Bell was
a one-product company, food safety was mission
critical to Blue Bell, and the complaint alleged
that the company failed to implement procedures
for the board to effectively oversee the company’s
most significant risk.
5
Continued Refinement appraisal actions to recover amounts in excess stockholder plaintiffs failed to show a true conflict
of Key M&A Doctrine of the deal price. (because the Towers board knew that its CEO was
going to be the CEO of the combined entity and
In 2019, courts continued to refine and expand
In Khan v. M & F Worldwide Corporation likely would receive increased compensation).
upon key doctrines impacting M&A deals and
(MFW), the Delaware Supreme Court held that Absent a true conflict, the business judgment
related litigations.
a controlling stockholder transaction would be rule applied without any need to analyze the
subject to the business judgment rule (and not Corwin doctrine.
In Dell Inc. v. Magnetar Global Event Driven
entire fairness review) if (a) the transaction was
Master Fund Ltd and DFC Global Corporation
negotiated and approved by an independent
v. Muirfield Value Partners L.P, the Delaware
special committee and (b) the deal was subject
Supreme Court held that, when determining
to approval by a “majority of the minority” vote.
fair value in an appraisal action, courts must
In Olenik v. Lodzinski, the Delaware Supreme
give significant weight to a merger price that
Court held that these MFW procedures must be
was negotiated in an arms-length transaction
in place early in the process in order for the
following a robust shopping process. The court
transaction to be evaluated under the business
declined to create a formal presumption in favor
judgment rule. Specifically, the court held that
of the deal price, however, and left the Court of
the MFW procedures must be in place prior to
Chancery with significant discretion to determine
any substantive economic discussions; putting
fair value based on the facts of each case.
the procedures in place prior to receiving a
definitive proposal will not be sufficient.
In the Verition Partners Master Fund Ltd.
appraisal case, the Court of Chancery determined
And In Corwin v. KKR Financial Holdings, the
the fair value was the target company’s trading
Delaware Supreme Court held that a transaction
price immediately prior to the first public
subject to enhanced scrutiny under Revlon
disclosure of the potential transaction. The
will instead be reviewed under the business
Delaware Supreme Court reversed and held that,
judgment rule after it has been approved by a
given the arms-length nature of the transaction
majority of fully informed stockholders. In In re
and the extensive shopping process, the deal price
Towers Watson & Co. Stockholder Litigation, a
minus any synergies arising from the transaction
stockholder alleged that a merger transaction was
was the best indicator of fair value. Verition
subject to entire fairness review because Towers’
Partners confirms that stockholders will have
CEO allegedly received and failed to disclose a
significant difficulty in using discounted cash
compensation proposal in connection with his
flow analyses, public company trading prices, or
role as the CEO of the combined post-merger
any other similar valuation metric when bringing
entity. The Court of Chancery concluded that the
6
Shaping the Boundaries of Section 220 A number of cases addressed the types of does not need to come forward with credible
documents that fall within the scope of a valid evidence of a viable claim, suggesting a potential
For several years, Delaware courts have
Section 220 request. In K24 Partners LLC v. conflict with other recent decisions by the Court
encouraged stockholder plaintiffs to pursue books
Palantir Technologies, Inc., the Delaware Supreme of Chancery.
and records inspections under Section 220 of the
Court determined that a company was required to
Delaware General Corporation Law before
produce board member emails in response to a We expect the large volume of Section 220 actions
bringing breach of fiduciary of duty claims, and in
Section 220 demand where traditional board to continue in 2020, as the law continues to evolve
particular breach of fiduciary duty claims that
materials (e.g., minutes and resolutions) were not regarding how expansively Section 220 can be used
allege “demand futility” without providing the
sufficient to address the purpose of the demand. In to investigate potential corporate wrongdoing.
court with the necessary particularized factual
Schnatter v. Papa John’s, International, Inc., the Statistics from 2019 signal that Section 220 may be
allegations. As a result of this push, the Delaware
Court of Chancery ordered production of board used to pursue Caremark claims more than in past
courts addressed a number of cases in 2019
member text messages in which the company years, which as discussed above appears to be a
that helped define the boundaries of Section
founder alleged that the board improperly topic of renewed focus relating to potential liability
220 rights.
conspired to remove the founder. And in Tiger v. for corporations and their boards.
Boast Apparel, Inc., the Delaware Supreme Court
Several cases addressed attempts by stockholders
held that a company producing Section 220
to broaden the “proper purpose” for which
records is not presumptively entitled to a
stockholders could seek corporate books and
confidentiality order.
records. For example, In High River LP v.
Occidental Petroleum Corp., the Delaware Court
Going forward, it will be important to monitor the
of Chancery rejected a Section 220 claim by an
Delaware Supreme Court’s decision in the appeal of
activist investor who sought books and records in
Lebanon County Employees’ Retirement Fund v.
order to communicate with other investors and
AmerisourceBergen, Inc. In AmerisourceBergen, a
wage a proxy contest against the incumbent
stockholder sought books and records to
management team. Similarly, in Southeastern
investigate management misconduct relating to the
Pennsylvania Transportation Authority v.
company’s opioid exposure. The company declined
Facebook, Inc., the Court of Chancery rejected a
the request because, among other reasons, any
stockholder’s Section 220 claim to examine
possible claim relating to the company’s opioid
books and records in order to determine the
exposure was barred by the company’s Section
factors that the board considered in setting
102(b)(7) charter provision barring money
management’s compensation – the court found
damages claims for breach of the duty of care. The
that the stockholder was simply second-guessing
Court of Chancery rejected the company’s position,
the board’s business judgment and not
holding that a stockholder seeking books and
investigating actionable misconduct.
records to investigate management misconduct
7
Limitations on the Covenant of used to adjust or rebalance the economic terms
Good Faith and Fair Dealing negotiated by the parties.
Delaware has long been viewed as a pro-contract
As the business and legal world comes to grips
state with courts willing to enforce the clear
with the impacts of COVID-19, and we enter
and unambiguous terms of written agreements
into a potentially prolonged period of economic
negotiated by sophisticated corporate parties.
downturn and distress, the interpretation of
Two 2019 cases reaffirmed that Delaware
contract terms in commercial contracts and
remains a pro-contract state and will enforce the
M&A agreements – such as force majeure and
plain meaning of written agreements even where
Material Adverse Effect (or Change) provisions –
the results may be perceived as harsh or unfair.
is certain to become increasingly important.
In Vintage Rodeo Parent LLC v. Rent-A-Center
Inc., a merger agreement allowed the parties to
terminate the transaction if all closing conditions
were not satisfied by a specified drop dead
date. The Court of Chancery held that the seller
did not waive its termination right by working
with the buyer to obtain a required regulatory
approval, and that the covenant of good faith and
fair dealing and requirements of “commercial
reasonableness” did not impose on the buyer any
obligation to give the seller notice of the buyer’s
intent to exercise its termination right.
Similarly, in Oxbow Carbon & Minerals
Holdings, Inc. v. Crestview-Oxbow Acquisition,
LLC, the Delaware Supreme Court determined
that the covenant of good faith and fair dealing
did not give an LLC member the right to force
an exit transaction that was not expressly
contemplated by the operative LLC agreement.
The court emphasized that the implied covenant
was to be narrowly construed and applied only to
fill genuine gaps in an agreement; it may not be
8
Caremark
oversight liability
9
In re Clovis Oncology, Inc. Derivative Litigation,
C.A. No. 2017-0222 (Del. Ch. Oct. 1, 2019)
Why it is important The plaintiffs alleged that Clovis the ORR reporting constituted a “red flag
misrepresented the ORR by including of noncompliance waived before the Board
In In re Clovis Oncology, Inc. Derivative
patient cases that had not been confirmed by Defendants” that the board chose to ignore.
Litigation, the Court of Chancery denied a
subsequent radiological scans, in violation of
motion to dismiss a claim against the Clovis
the study parameters that had been agreed to
Oncology Board of Directors for breach
with the FDA. The plaintiffs further allege that
of their duties of oversight – a so-called
the Clovis board was aware of the improper
Caremark claim. This decision is the second
calculation of the ORR as early as June 2014,
of two recent decisions sustaining Caremark
over a year before Clovis disclosed the true
oversight claims, despite the fact that
ORR. The plaintiffs also alleged that the
Delaware courts previously commented that
company had failed to report serious side
a Caremark claim is the hardest type of claim
effects of the drug.
to plead and to prove. Clovis demonstrates
that boards of directors face potential liability
The court denied the defendants’ motion to
for breaches of their duties of oversight where
dismiss, finding that demand was excused
red flags dealing with “mission critical” issues
and that the plaintiffs had adequately pleaded
have reached the board and been ignored.
that the board members breached their duties
of loyalty to the company through a failure
Summary
of oversight of “mission critical” functions
This matter arose from the plaintiffs’ like the success of the Roci drug trial. For
allegations that the directors of Clovis such “mission critical” issues, the court held
Oncology, Inc. (Clovis) breached their duties that defendants will be liable if they (1) fail
of loyalty by failing to properly oversee a to implement any compliance system, or (2)
drug trial related to Clovis’ development choose to ignore obvious red flags showing
of Rociletinib (Roci), a new lung cancer deficiencies in that compliance system. The
treatment. Clovis initiated a clinical trial court found it “reasonable to infer” that the
for Roci, setting as a measure of success the For a more detailed discussion of this case:
board understood the ORR metric and its
percentage of patients whose tumors shrunk significance given the extent of Clovis’ reliance
meaningfully. This measure of success is on the ORR when raising capital. As a result, PLEASE CLICK HERE
known as the objective response rate (ORR). the court concluded that the problems with
10Continued Refinement
of Key M&A Doctrine
11FrontFour Capital Grp., LLC v. Taube,
C.A. No. 2019-0100-KSJM (Del. Ch. Mar. 22, 2019)
Why it is important that Medley Capital’s board – which included
co-founders and majority owners Brook and
In FrontFour Capital Grp., LLC v. Taube,
Seth Taube – breached its fiduciary duties
the Delaware Court of Chancery declined to
by entering into the proposed transaction.
order a curative shopping process despite
In particular, the court found that the Taube
finding that the sale process was tainted by
brothers had orchestrated the transaction
conflicted insiders, failed to comply with the
by, among other things, stacking the special
entire fairness test, and involved unreasonably
committee with board members beholden
preclusive deal protection measures. In
to them, depriving the special committee of
so holding, the court reaffirmed that an
information regarding other indications of
injunction will not issue where it would strip
interest, forcing an aggressive timeline with
an innocent third party (here, the buyer) of its
no compelling business reason, and insulating
contractual rights unless the third party aided
the deal from a post-signing market check
and abetted the target’s breach of fiduciary
by including preclusive deal protections,
duty. To address the circumstances, however,
including a no-shop provision. The court,
the court ordered corrective disclosures
however, declined to permanently enjoin
regarding the conflicted sale process and
the merger because plaintiffs failed to show
third-party expressions of interest that were
that the proposed buyer aided and abetted
omitted from the proxy, and enjoined the
those breaches. Instead, the court ordered
stockholder vote pending such corrective
additional disclosures to the Medley Capital
disclosures.
stockholders, and enjoined the stockholder
vote pending such disclosures. Since that
Summary
injunction, a second shareholder filed suit
Stockholders of Medley Capital Corporation, challenging the merger, alleging, among other
a business development corporation, things, that defendants failed to make the
challenged a proposed three-way merger requisite corrective disclosures. The Court
involving Medley Capital Corporation, of Chancery has consolidated the two actions For a more detailed discussion of this case:
Medley Management, Inc., and Sierra and permitted them to proceed.
Income Corporation. The court found that PLEASE CLICK HERE
the Medley Capital stockholders had proven
12Agiliance, Inc. v. Resolver SOAR, LLC,
No. 2018-0389-TMR (Del. Ch. Jan. 25, 2019)
Why it is important Summary
The Court of Chancery’s decision in In a post-merger dispute concerning the
Agiliance, Inc. v. Resolver SOAR, LLC further calculation of the final networking capital
expounds Delaware law addressing the amount, the court addressed whether the
distinction between appointing an expert or dispute resolution provision in the parties’
an arbitrator to resolve disputes arising under purchase agreement called for arbitration or
a merger agreement. This decision follows an expert determination. In addressing the
another recent case on this topic – Penton issue on the seller’s motion for summary
Business Media Holdings LLC v. Informa judgment, the court stated that the
PLC, Del. Ch., C.A. No. 2017-0487-VCL (Del. determination hinges on the parties’ intent,
Ch. July 9, 2018) – featured in our Q3 2018 the best evidence of which is reflected in
publication. Along with Penton, the Agiliance the agreement. After reviewing the relevant
decision shines a light on the importance provision in the purchase agreement, which
of carefully drafting dispute resolution made several references to arbitration,
procedures to clearly articulate the parties’ including that any networking capital dispute
intent regarding whether claims are subject “shall be submitted for arbitration,” the court
to arbitration. concluded that the language in the agreement
evidenced the parties’ intent to arbitrate
the dispute.
For a more detailed discussion of this case:
PLEASE CLICK HERE
13Verition Partners Master Fund Ltd.
v. Aruba Networks, Inc.,
No. 368, 2018 (Del. Apr. 17, 2019)
Why it is important Summary
In Verition Partners Master Fund Ltd. v. After PC-maker HP acquired Aruba – a
Aruba Networks, Inc., the Delaware Supreme network equipment firm – for US$24.67 per
Court reversed the Court of Chancery’s share, certain hedge funds purchased large
reliance on an acquired company’s pre-merger amounts of Aruba’s common stock and filed
(or unaffected) share price in determining an appraisal action after the merger
the fair value of the company’s shares in an closed. Following extensive discovery and
appraisal action. Reaffirming recent precedent a trial, Vice Chancellor Laster rejected the
giving significant weight to market-tested deal valuation methodologies proposed by both
prices, the court held that the appropriate sides and determined that Aruba’s 30-day
measure of fair value was the “deal-priceless- average unaffected market price of US$17.13
synergies.” Together with the Delaware per share represented Aruba’s fair value.
Supreme Court’s recent appraisal decisions in On appeal, the Delaware Supreme Court
Dell, Inc. v. Magnetar Global Event Driven reversed and remanded. The Delaware
Master Fund Ltd., 177 A.3d 1 (Del. 2017) and Supreme Court rejected the Court of
DFC Global Corporation v. Murfield Value Chancery’s decision to rely exclusively on the
Partners, L.P., (172 A.3d 346 (Del. 2017), stock price, finding that it was based on the
Aruba completes a trilogy of decisions that erroneous premise that the deal-price-less-
are likely to have a strong deterrent effect on synergies figure incorporated reduced agency
appraisal arbitrage, particularly in public costs that would need to be estimated and
deals, absent compelling reasons to believe subtracted from the company’s share price.
the merger price is not a reliable indicator The Delaware Supreme Court directed the
of value. lower court to increase its valuation to
US$19.10 per share on remand, reflecting For a more detailed discussion of this case:
the deal price minus estimated synergies.
PLEASE CLICK HERE
14Olenik v. Lodzinski,
No. 392, 2018 (Del. Apr. 5, 2019)
Why it is important Summary Update), clarifying what “up front” means for
In Olenik v. Lodzinski, the Delaware Supreme Two companies, Earthstone Energy, Inc., and purposes of when the procedural protections
Court reversed in part the dismissal of Bold Energy III LLC, entered into discussions of MFW must be in place to secure deferential
a challenge to a controlling shareholder regarding an all-stock “up-C” transaction. business judgment review. The Delaware
transaction, finding that the Court of Chancery At the time of discussions and negotiations, Supreme Court stated that the key is to have
incorrectly applied the framework EnCap Investments, L.P., a private equity the protections in place “early in the process”
established by Khan v. M & F Worldwide firm, allegedly held controlling interests and “before substantive economic negotiation
Corporation (MFW), 88 A.3d 635 (Del. 2014). in both Earthstone and Bold. Following 10 [takes] place.” The Delaware Supreme Court
Under the MFW framework, a controlling months of preliminary discussions, Earthstone held that the Court of Chancery erred
shareholder transaction may be subject formed a special committee of the board in finding that no substantive economic
to deferential review under the business to negotiate and approve the transaction. negotiations had taken place. A conflicted
judgment rule if it is conditioned from the The special committee spent three months member of Earthstone management, who had
outset of negotiations on (1) the approval of an negotiating with Bold and ultimately approved led negotiations prior to the special committee
independent, empowered special committee the deal. A super majority of disinterested being formed, had told the board that he was
and (2) the approval of an informed, shareholders then approved the deal. An “negotiating” with EnCap and would make
uncoerced vote of the majority-of-the- Earthstone shareholder brought claims “an offer” prior to the formation of the special
minority shareholders. The Olenik decision against Earthstone, Bold, EnCap, and committee. Further discussions with EnCap,
provides important guidance on when a Earthstone management for breach of the trading of access to data rooms, and a
transaction begins for purposes of the MFW fiduciary duties and other related claims. The number of valuation analyses convinced the
framework. Previous decisions indicated that Court of Chancery dismissed the plaintiff’s Delaware Supreme Court that the plaintiff had
the MFW protections must be in place when claims, applying the business judgment rule sufficiently pleaded facts that demonstrated
“substantive economic discussions” began. In based on its conclusion that Earthstone that MFW’s procedural protections were not
Olenik, the Delaware Supreme Court clarified complied with the MFW framework. in place “from the beginning.” Additionally,
that “exploratory discussions” regarding The plaintiff appealed to the Delaware claims in Earthstone’s 10-K filing in 2017
value and potential offers may constitute Supreme Court. The Delaware Supreme belied claims by defendants that EnCap was
substantive economic discussions triggering Court reversed in part and affirmed in part the no longer a controlling entity at the time of
the merger. The Delaware Supreme Court For a more detailed discussion of this case:
the need for the MFW protections to be in decision of the Court of Chancery. The
place, even if no definitive proposal has Delaware Supreme Court elaborated on its affirmed the dismissal of the plaintiff’s
been made. rulings under MFW and Flood v. Synutra, 195 disclosure claims and remanded to the Court PLEASE CLICK HERE
A.3d 754 (Del. 2018) (summarized in our Q4 of Chancery for further proceedings on the
2018 Quarterly Corporate / M&A Decisions fairness claims.
15In re Akorn Sec. Litig.,
240 F. Supp. 3d 802 (N.D. Ill. 2017)
Why it is important Summary
In what may turn out to be a milestone Plaintiffs sued Akorn and members of its
decision in M&A federal shareholder board of directors seeking certain disclosures
litigation, Judge Thomas M. Durkin of the regarding Akorn’s acquisition by competitor
District of Illinois abrogated settlement Fresenius Kabi AG. Akorn revised its proxy
agreements that would have resolved three statement and issued a Form 8-K, and
shareholder suits against Akorn, Inc., and plaintiffs dismissed their lawsuits and settled
its board of directors based on additional for attorneys’ fees. An Akorn investor moved
disclosures made by Akorn in connection with to intervene to challenge the settlements and
its acquisition by competitor Fresenius Kabi payment of attorneys’ fees. The court denied
AG, and ordered plaintiffs’ counsel to return the intervention motion, but it ordered
over US$320,000 in attorneys’ fees. The court briefing sua sponte on whether the
found that the additional disclosures made by settlements should be abrogated. Following
Akorn as a result of the lawsuits contained briefing, the court abrogated the settlements,
“nothing of value” to Akorn’s shareholders, finding that the cases should have been
and that the complaints therefore should have “dismissed out of hand,” that the extra
been dismissed. The ruling could result in disclosures Akorn had agreed to make “were
significantly fewer shareholder class actions worthless to investors,” and that the court
being filed in federal court challenging should exercise its “inherent authority to
proxy statement disclosures relating to rectify the injustice that occurred as a
M&A transactions. result” of not immediately dismissing the
plaintiffs’ complaints.
For a more detailed discussion of this case:
PLEASE CLICK HERE
16Scottsdale Ins. Co. v. CSC Agility Platform, Inc.,
2019 U.S. Dist. LEXIS 62985 (C.D. Cal. Feb. 4, 2019)
Why it is important ServiceMesh was acquired by Computer ServiceMesh and Computer Sciences conducted
Sciences three months after the policy went several meetings as well as due diligence. The
Scottsdale Insurance Co. v. CSC Agility
into effect. Subsequently, Computer Sciences court also denied the defendant’s cross motions
Platform, Inc. provides important guidance
brought suit against several employees of to prevent Scottsdale from denying coverage
regarding disclosures in an insurance renewal
ServiceMesh for misrepresentations made as based on theories of waiver and estoppel because
questionnaire at the time of a potential
part of the acquisition. Scottsdale agreed to of their subsequent knowledge of the transaction.
acquisition. The U.S. District Court for
indemnify the individuals for the expenses
the Central District of California held that
related to defending the suit while reserving
Scottsdale was entitled to recover its payments
the right to deny coverage and recoup the
under a business and management indemnity
expenses. After paying out the policy limit,
insurance policy, subject to a reservation of
Scottsdale brought suit to recover its costs.
rights, because the insured failed to disclose
in the insurance renewal questionnaire
The court found that Scottsdale was within its
a transaction that was under “serious
rights to deny coverage after determining that
consideration” even though no formal
ServiceMesh’s answer regarding the
offer had been made at the time.
contemplated acquisition was a material
misrepresentation based on their discussions
with Computer Sciences. The court analyzed
Summary
the plain meaning of the term “contemplate,”
Two companies, ServiceMesh and Computer noting that to contemplate “carries a
Sciences, entered into a business partnership. connotation of serious consideration that goes
During the course of this partnership, the beyond mere fleeting thoughts.” However,
parties began due diligence and discussed the the court also found that a formal offer
possibility of an acquisition. In the midst of was not necessary for a transition to
these conversations, ServiceMesh renewed its be “contemplated.” By holding that
business and management indemnity contemplation required “serious
insurance with its provider, Scottsdale, For a more detailed discussion of this case:
consideration,” the court viewed as distinct
and reported that it was not contemplating every start-up’s hopes of being acquired
any transactions in the next 12 months. from situations like ServiceMesh’s, in which PLEASE CLICK HERE
17Sciabacucchi v. Salzberg et al.,
C.A. No. 2017-0931-JTL (Del. Ch. July 9, 2019)
Why it is important exclusively in a federal forum. As a result, the
plaintiff sought a fee award of US$3 million
We previously covered the Delaware Court
for his and his counsel’s work in invalidating
of Chancery’s decision in Sciabacucchi v.
those forum selection provisions. The
Salzberg, in which the court determined that
defendants disagreed, arguing that the
forum selection clauses were invalid to the
plaintiff should receive at most US$364,723
extent they required stockholders to bring
plus expenses. The court granted the plaintiff’s
claims under the Securities Act of 1933 only
request for US$3 million, relying in large part
in federal forums. (See prior coverage here.)
on the “significant and substantive result” that
Based on this victory, the plaintiff sought a
the plaintiff achieved in the litigation. The
significant fee award of US$3 million. The
court noted that in past cases with significant
court’s decision to grant that request relied
impact on the state of the law – such as the
heavily on the value of the benefit conferred
cases challenging the viability of the
by the plaintiff’s efforts – namely, eliminating
“deadhand pill” in the late 1990s and the
federal forum selection clauses for 1933 Act
“deadhand proxy” in the early 2010s –
claims – rather than the amount of time the
similarly high fee awards were granted. The
plaintiff and the plaintiff’s counsel invested.
court then engaged in an analysis of counsel’s
This case demonstrates that, even in cases
time and effort to act as a cross-check on the
involving non-monetary relief, companies may
fee award in order to avoid granting a windfall
incur significant liabilities above and beyond
to the plaintiff and his counsel. While the fee
the actual value of the plaintiff’s attorneys’
award appeared slightly high on an hourly
fees and expenses based on the court’s
basis, the court noted that the litigation was
valuation of the benefit achieved.
taken on a contingency and counsel still bore
the risk of receiving nothing depending on
Summary
the outcome of the appeals process. The court
In Sciabacucchi v. Salzberg, 2018 WL concluded that under all elements in the
6719718 (Del. Ch. Dec. 19, 2018), the Court applicable Sugarland framework, an award of
of Chancery found in the plaintiff’s favor and US$3 million was reasonable.
declared invalid any forum selection provision
that purported to require a stockholder to
bring a claim under the Securities Act of 1933
18Solera Holdings, Inc. v.
XL Specialty Insurance Co. et al.,
No. 2018-0389-TMR (Del. Ch. Jan. 25, 2019)
Why it is important Summary
In prior editions, we have highlighted a Solera faced an appraisal action after it
number of significant appraisal decisions agreed to a business combination with an
issued by the Delaware courts over the past affiliate of Vista in March 2016. Solera notified
18 months, including an appraisal action its insurers but was denied coverage, and
involving the combination of Solera Holdings, initiated this action as a result. The court,
Inc. (Solera) and Vista Equity Partners (Vista). based on a plain reading of the insurance
(See prior coverage here.) On July 31, 2019, policy, concluded that a claim need not
the Delaware Superior Court addressed what involve allegations of wrongdoing to constitute
appears to be an issue of first impression a “Securities Claim.” The court also found
arising out of the Solera appraisal action – that unless the policy specifically noted that
namely, whether Solera was entitled to recover interest on judgment would not be covered if
its defense costs in the appraisal action under the judgment itself was not covered, the listing
its directors’ and officers’ insurance policies. of “pre-judgment interest” as a covered “Loss”
Based on the terms of the insurance policies requires the insurer to pay pre-judgment
as well as the nature of an appraisal action, interest on a noncovered judgment.
the court denied the insurers’ motion for
summary judgment, finding that the appraisal
action qualified as a covered “Securities
Claim” because that term’s definition was not
limited to claims of wrongdoing.
For a more detailed discussion of this case:
PLEASE CLICK HERE
19In re Towers Watson & Co. Stockholder Litigation,
C.A. No. 2018-0132-KSJM (Del. Ch. July 25, 2019)
Why it is important Summary
In In re Towers Watson & Co. Stockholder In re Towers arises out of the US$18 billion
Litigation, the Delaware Court of Chancery merger of equals between Towers and Willis
dismissed shareholder claims that the Group Holdings plc (Willis). The transaction
CEO of Towers Watson & Co. (Towers) was unpopular with certain shareholders, who
breached his fiduciary duties by failing viewed the transaction as a windfall for Willis
to disclose a proposal regarding his and not in Towers’ interest. The terms of the
postmerger compensation to the Towers board transaction were revised, a supplemental
of directors, and that the Towers board proxy was filed, and the deal ultimately
breached its fiduciary duties by allowing the closed, but some Towers shareholders
CEO to negotiate the transaction. The court remained dissatisfied and brought suit. The
held that the plaintiffs failed to rebut the shareholders alleged, among other things, that
application of the business judgment rule, Towers’ CEO, who served as Towers’ lead
which presumptively applied because the negotiator, had a conflict of interest because
transaction was a “mostly stock-for-stock he wanted to become the CEO of the joint,
merger between widely-traded public entities post-merger company, and that he had failed
and because the propriety of deal protection to disclose a proposal regarding the terms of
devices [was] not at issue.” The decision is his post-merger employment to the Towers
instructive because the court declined to reach board. Towers moved to dismiss, arguing that
whether shareholder ratification pursuant to the business judgment rule applied to Towers’
the “recently fashionable Corwin doctrine” decision to enter into the transaction because
invoked the business judgment standard, the plaintiffs failed to rebut the application of
instead holding that the CEO’s alleged the business judgment rule and, alternatively,
nondisclosure of a compensation proposal that a fully informed stockholder vote
was insufficient to rebut the application of invoked the business judgment rule under
the business judgment rule because the Corwin. The court held that dismissal was For a more detailed discussion of this case:
board was aware of the CEO’s post-merger warranted because the plaintiffs failed to
employment, was kept apprised of the establish that a reasonable director would PLEASE CLICK HERE
transaction, and because the proposal consider the compensation proposal to be
was just that – a proposal. significant when evaluating the merger.
20Obasi Inv., Ltd. v. Tibet Pharmaceuticals, Inc.,
931 F.3d 179 (3d Cir. 2019)
Why it is important operations through an initial public offering question of Section 11 liability for board
(IPO). In the IPO registration statement, observers.
In Obasi Investment, Ltd. v. Tibet
Tibet listed Zou and Downs as non-voting
Pharmaceuticals, Inc., the U.S. Court
board observers representing A&S, rather The Third Circuit ruled for Zou and Downs
of Appeals for the Third Circuit held that
than directors of Tibet. The registration over a one-judge dissent, finding that the
non-voting board observers do not share
statement explained that although neither proper inquiry under Section 11 is whether
sufficiently similar powers and responsibilities
Zou nor Downs had any formal powers or a position formally has similar core powers
with directors to impose liability on board
duties, they may “significantly influence” and responsibilities to a board director. The
observers under Section 11 of the Securities
board decisions. court found that the formal functions of Zou
Act of 1933. The case provides helpful
and Downs differed from those of typical
guidance to investors who are deciding
After the IPO, investors learned the IPO board directors because they (1) lacked
between whether to seek a board observer
documents omitted material information voting power and thus the ability to control
seat or a director seat as part of their
about Yunnan’s finances, including the or direct the actions of the company;
investment. The Third Circuit also held, as
fact that Yunnan defaulted on a loan from (2) were aligned with A&S’ interests rather
a matter of first impression, that the formal
the Chinese government, which then froze than with Tibet’s; and (3) held terms that
powers, rights, and duties of a position
Yunnan’s assets. Soon after the IPO closed, ended automatically, without a mechanism
governs liability under Section 11, not the
the Chinese government auctioned off to vote them out. The court found that
de facto power or influence an individual
Yunnan’s assets, leading NASDAQ to halt “realworld social dynamics of boardrooms”
holding that position might wield.
trading in Tibet stock, triggering a significant were not relevant. The dissenting judge
drop in the stock price. Shareholders sued argued that Zou and Downs were proper
Summary
Tibet, A&S, Zou, and Downs (among others) Section 11 defendants based largely on
Tibet Pharmaceuticals, Inc. (Tibet) is a for violations of Section 11. The district court the same reasoning as the district court
holding company whose subsidiary, Yunnan denied a motion for summary judgment by – namely, that the “significant influence”
Shangri-La Tibetan Pharmaceutical Group Zou and Downs, who argued they were not language in the disclosure statement raised
Ltd. (Yunnan), manufactured and sold directors subject to liability under Section 11, a factual issue as to whether Zou and Downs
traditional Tibetan medicines. Hayden Zou, in significant part because the registration exercised similar powers and control over
an early investor in Tibet, approached L. statement noted that Zou and Downs could Tibet as directors. For a more detailed discussion of this case:
McCarthy Downs III, a managing director at have “significant influence” over the
the investment bank Anderson & Strudwick outcome of board actions. The district court PLEASE CLICK HERE
(A&S), about raising capital for Tibet’s certified an interlocutory appeal on the
21Sheldon v. Pinto Tech. Ventures,
L.P., 220 A.3d 245 (Del. 2019)
Why it is important converting preferred stock to common dilution claims are “classically derivative,” the
stock, issuing a new class of preferred plaintiffs argued that their claims were partially
In Sheldon v. Pinto Tech. Ventures, L.P.,
stock, and eliminating certain rights held direct under Gentile, which permits a plaintiff
the Delaware Supreme Court affirmed the
by stockholders, including Sheldon. The to bring a direct claim if a control group exists.
Court of Chancery’s holding that a group of
VC Firms gave Sheldon and Konya the The Court of Chancery rejected the plaintiffs’
venture capital firms did not constitute a
opportunity to participate in the financing, contention that the VC Firms constituted a
“control group” in connection with an alleged
but neither did. The Confidential Information control group, and therefore dismissed the
dilution scheme. As a result, the plaintiffs
Statement disclosed that the financing plaintiffs’ arguments because they did not make
were barred from bringing direct claims
would “result in substantial dilution to a demand on the board or allege demand futility
against the venture capital firms. The decision
Common Stockholders, and the dilution will and because they lost standing to bring a
reinforces important limitations on the
be significantly increased as to Common derivative suit after Abbott Laboratories
liability of institutional investors who enter
Stockholders that do not participate . . . .” acquired IDEV.
into governance agreements, such as voting
agreements and investor rights agreements, by
Roughly three years later, Abbott Laboratories The Delaware Supreme Court affirmed, finding
clarifying that such agreements, if unrelated to
purchased IDEV for US$310 million. At the that the VC Firms were not connected in a
the challenged transaction, do not create a
time of the sale, Sheldon and Konya owned “legally significant way,” namely “by contract,
de facto control group.
just 0.012 percent of the company due to the common ownership, agreement, or other
fundraising and received a fraction of the arrangement.” The court rejected the plaintiffs’
Summary
proceeds they would have received based on arguments that the VC Firms were a control
Plaintiffs-appellants Jeffrey J. Sheldon and their 2010 share ownership. group because, among other things, the VC Firms
Andras Konya were minority investors in were parties to a voting agreement, had a history
IDEV Technologies, Inc. (IDEV), owning In their lawsuit, the plaintiffs alleged that of investing together, and acquired enough stock
3.75 percent between them, while three the VC Firms constituted a control group to amend the Certificate of Incorporation. In
venture capital firms – Pinto, RiverVest, and and violated a fiduciary duty to the company particular, the court was not persuaded that the
Bay City (the VC Firms) – owned a significant by diluting shareholders’ rights. The Court VC Firms’ rights to appoint directors established
percentage of IDEV’s remaining shares. of Chancery found that the plaintiffs did not domination or control or that a voting agreement
The VC Firms were parties to a voting adequately plead a derivative claim because among the VC Firms created a control group For a more detailed discussion of this case:
agreement that permitted them to appoint they did not make a demand on the board because the agreement did not require them to
board members. or allege demand futility and that they lost vote together nor did the voting agreement “bear
PLEASE CLICK HERE
standing to file a derivative suit after Abbott on the [f]inancing or bind the [VC] Firms beyond
In July 2010, the VC Firms implemented Laboratories purchased IDEV. Although selecting directors.”
a new financing effort, which involved
22Shaping the
Boundaries of
Section 220
23Tiger v. Boast Apparel, Inc.,
C.A. No. 2017-0776 (Del. Aug. 7, 2019)
Why it is important Tiger made successive Section 220 requests or indefinite duration. The court found
for books and records. Both requests stalled that confidentiality orders instead should be
In Tiger v. Boast Apparel, Inc., the Delaware
after the parties could not reach an agreement evaluated using a balancing test that “weigh[s]
Supreme Court held that corporations
on the scope of a confidentiality agreement the stockholder’s legitimate interests in free
responding to shareholder requests for the
that would govern the records Tiger requested. communication against the corporation’s
production of books and records under
legitimate interests in confidentiality,” and that
Section 220 of the Delaware General
After BAI sold substantially all of its a court “must assess and compare benefits and
Corporation Law are not entitled to a
assets against Tiger’s consent, Tiger filed harms when determining the initial degree
presumption of confidentiality. The court
an action demanding access to the books and duration of confidentiality.”
found “that the targets of Section 220
and records he had sought in his earlier
demands will often be able to demonstrate
demands. BAI and Tiger again disagreed
that some degree of confidentiality is
on what confidentiality restrictions should
warranted where they are asked to produce
apply to the requested records. The Master
nonpublic information,” but held that an
in Chancery recommended an indefinite
entitlement to a confidentiality order should
order that could be altered by the filing of a
not be presumed, and that orders requiring
suit that was based on facts in the inspected
materials be kept confidential indefinitely
materials, and the Court of Chancery
should be “the exception.”
adopted the recommendation, finding it was
appropriate and that Tiger had not overcome
Summary
the presumption in favor of confidentiality
Plaintiff Alex Tiger partnered with another or shown the exigent circumstances required
investor, John Dowling, in 2010 to create to justify limiting the confidentiality order’s
Boast Investors, LLC—later converted to BAI duration. Tiger appealed, and the Delaware
Capital Holdings, Inc. (BAI)—in order Supreme Court held that, while the Court
to revive a 1970s era tennis apparel brand. of Chancery’s final judgment granting
Conflicts arose in the company when Dowling an indefinite confidentiality order to BAI
executed a series of actions that Tiger was not an abuse of discretion, there was For a more detailed discussion of this case:
opposed, which resulted in Dowling gaining no presumption of confidentiality and no
additional member units and amending the requirement to show exigent circumstances PLEASE CLICK HERE
operating agreement. After these actions, to avoid a confidentiality order of lengthy
24Southeastern Pennsylvania Transportation
Authority et al. v. Facebook, Inc.,
No. 2018-0928-SG (Del. Ch. Mar. 14, 2019)
Why it is important plaintiffs’ theories impermissibly sought to The plaintiffs alleged that their request
challenge the company’s business judgment had four different purposes, but the court
In Southeastern Pennsylvania
regarding what factors to consider in setting found that their primary purpose was to
Transportation Authority et al. v. Facebook,
executive compensation. This decision investigate possible breaches of fiduciary
Inc., the Delaware Court of Chancery denied
reinforces that, despite the low burden to duty by Facebook’s board in connection
a books and records request brought by
obtain books and records under Section with the level of compensation they
Facebook stockholders, finding that the
220, Section 220 requests premised on mere provided for Facebook executives. The
stockholders failed to show a “proper purpose”
second-guessing of board decision-making court found that this was not a proper
for the request under Section 220 of the
may be denied. purpose because there were no allegations
Delaware General Corporation Law and that
that the board was conflicted or had acted
the limited records that Facebook already had
produced were sufficient. The plaintiffs sought
Summary in bad faith, and the board’s compensation
The plaintiffs, two institutional investors, decisions were therefore subject to the
records following Facebook’s revelation of
sought records regarding how Facebook’s business judgment rule. The court found
systematic issues with its advertising metrics,
Board of Directors determined executive that in light of the business judgment rule
disclosure of revenue growth deceleration,
compensation following Facebook’s and the Facebook charter’s exculpatory
and a stock price drop characterized as the
announcement that it had overstated provisions, alleged violations of the duty of
“biggest-ever one day loss in market value
certain advertising metrics, including the care in connection with executive
for a U.S.-listed company.” After Facebook
amount of time users spent watching video compensation would not be actionable,
voluntarily produced certain board-level
advertisements. The plaintiffs alleged that and therefore disclosure to investigate
documents, the plaintiffs filed suit seeking
the announcement led to decreased Facebook such violations was not proper. The court
documents concerning the extent to which
revenue growth and a drop in the price of also held that further inspection was not
the Facebook Board of Directors considered
Facebook stock. The plaintiffs sought records “necessary and essential” to achieving
advertising revenue growth in its executive
from Facebook under Section 220 of the the plaintiffs’ stated purposes because
compensation decisions. The court found
Delaware General Corporation Law, under Facebook already had produced sufficient
that the plaintiffs had failed to meet their
which stockholders need to demonstrate a information upon which to file a claim. For a more detailed discussion of this case:
minimal burden to show a “credible basis” to
infer waste or mismanagement might have “proper purpose” for their request. Facebook
occurred, the “lowest possible burden of proof provided certain materials but declined to PLEASE CLICK HERE
in Delaware law.” The court found that the produce others. The plaintiffs brought suit to
compel additional disclosure.
25High River LP v. Occidental Petroleum Corp.,
C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019)
Why it is important fight, the Icahn Parties demanded access a “proper purpose.” The court also found
to Occidental’s books and records relating that the Section 220 demand was, in effect,
In High River LP v. Occidental Petroleum
to the merger, Occidental’s decision to be a request for the court to “recognize a
Corp., the Delaware Court of Chancery
a buyer when market conditions seemed new, or at least expanded, rule that would
rejected what it termed a “novel” demand by
favorable for a seller, and provisions of allow a stockholder to inspect books and
an activist shareholder for books and records
Occidental’s governing documents regarding records relating to targeted, board-level
related to a consummated merger transaction
the threshold for calling a special meeting business decisions that are questionable,
under Section 220 of the Delaware General
of the stockholders. The Icahn Parties but not actionable, when the stockholder
Corporation Law, finding that the desire to
admitted that their primary purpose in states and then demonstrates that his
gather information to assist in communicating
seeking the documents was to support purpose is to communicate with other
with other shareholders about a potential
their potential proxy fight, rather than stockholders in furtherance of a potential,
proxy contest is not a proper purpose. The
to investigate corporate wrongdoing or bona fide proxy contest.” Finding that the
decision reiterated the Delaware courts’
mismanagement. The Icahn Parties asked law on using Section 220 was “at best,
reluctance to approve Section 220 demands
the court to recognize a new, or at least murky,” the court held that a “right case”
relating to corporate decisions “that are
expanded, rule under Section 220 that would might exist but had not been presented.
questionable, but not actionable.”
permit stockholders to inspect books and The court also rejected the Icahn Parties’
records relating to “questionable, but not alternative ground for seeking Occidental
Summary
actionable,” board-level business decisions records, finding that the Icahn Parties’
Occidental Petroleum Corporation when the stockholder demonstrates that the disagreement with Occidental’s decision
(Occidental) acquired Anadarko Petroleum purpose for the requests is in furtherance of to acquire Anadarko was insufficient
Corporation (Anadarko) in May 2019 in “a potential, bona fide proxy contest.” to support an inference of corporate
a “merger of equals.” Viewing the merger mismanagement or wrongdoing.
as ill-advised, activist investor Carl Icahn The Delaware Court of Chancery rejected
and affiliated entities (the Icahn Parties) this request, finding that the Icahn Parties
began acquiring Occidental stock, with the did not need access to Occidental’s books
goal of mounting a proxy fight to replace and records to wage a proxy fight given the For a more detailed discussion of this case:
members of Occidental’s board of directors public information already available about the
with a new slate of directors proposed by the merger, and that disclosure was accordingly
Icahn Parties. To help them win the proxy not “necessary, essential, and sufficient” for PLEASE CLICK HERE
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