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Lawmakers passing divisive legislation that restricts the ability of stock corporations to adopt “loser pays” bylaws or charter provisions highlighted a busy second quarter in Delaware corporate law.
In June, Delaware Gov. Jack Markell (D) signed SB 75, which, among other things, invalidates fee-shifting provisions in stock corporations and endorses Delaware exclusive forum selection clauses. With minor changes, the legislation tracks a proposal by the Delaware State Bar's corporation law section.
The push to restrict fee-shifting bylaws was provoked by concerns that such provisions would effectively preclude shareholders from bringing derivative litigation. More than 50 publicly traded companies have adopted such provisions since the Delaware Supreme Court, responding to a certified question in May 2014, found that “loser pays” bylaws can be enforceable in non-stock corporations.
SB 75 faced strong opposition, like a similar bill tabled in the 2014 legislative session. The critics include the U.S. Chamber of Commerce, which has argued that legislation will eliminate an important mechanism that corporations invoke to protect innocent shareholders against the costs of abusive litigation, particularly in the M&A context.
While the passage of SB 75 provides some clarity in Delaware, it also opens the door for many other questions about litigation reform bylaws.
According to John C. “Jack” Coffee, Jr., a professor at Columbia Law School and director of the school's Center on Corporate Governance, because SB 75 only bars fee-shifting bylaws and charters “in connection with an intracorporate claim,” the new legislation could be read not to apply to certain types of federal securities class actions.
However, members of the state's bar council have taken the opposite position.
It also remains to be seen what effect the legislation will have on Delaware's status as the leading domicile for U.S. and international corporations. In November 2014, Oklahoma became the first state to enact legislation mandating the shifting of fees in derivative lawsuits.
In a June article, Stephen M. Bainbridge, a professor at the University of California at Los Angeles School of Law, posits that SB 75 “threatens to undermine Delaware’s profitable position as the leading state of incorporation” and suggests that the legislature should free itself from the bar's influence.
Moreover, while SB 75 limits Delaware stock corporations from enacting fee-shifting provisions, corporations may look to adopt other types of bylaws to potentially limit litigation.
For example, Imperial Holding Inc. adopted a consent-to-sue bylaw, which is currently being challenged in federal court. In a June Harvard Law School post, A. Thompson Bayliss, Abrams & Bayliss LLP, suggested that “no pay” provisions—which require each side to bear their own fees and costs in stockholder litigation unless the court concludes that one side litigated in bad faith—could also become the next battleground over fee-shifting.
In the second quarter, the Delaware courts tackled a number of novel issues including: creditor's standing in derivative lawsuits; the scope of books and records requests; and the application of its McWane doctrine—which allows the court to dismiss or stay lawsuits in favor of a pending action elsewhere.
In what may be the most significant decision of the quarter, the Delaware Supreme Court held that when a transaction is subject to entire fairness review, independent directors protected by exculpatory charter provisions do not need to wait for a fully developed record to have claims against them dismissed (In re Cornerstone Therapeutics Inc., Stockholder Litig., 2015 BL 148672, Del., No. 564, 5/14/15).
In late 2014, the chancery court in two separate decisions denied independent directors' motions to dismiss solely on the grounds that the underlying transactions were governed by entire fairness.
In clarifying its Emerald Partners decisions, the state's high court, in a consolidated opinion, reversed and remanded, finding that the plaintiffs must plead non-exculpated claims against the independent directors.
“A plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule,” Chief Justice Leo E. Strine Jr. wrote for the court.
“Cornerstone signals a significant change of approach in controlling stockholder cases that should generally permit independent directors to avoid the burdens of protracted litigation. The decision is also further confirmation that merger cases under Delaware law are often properly subject to dismissal on early pleadings motions” Theodore N. Mirvis, a partner with Wachtell, Lipton, Rosen and Katz, posted on a May Harvard Law School blog.
Answering a certified question, the Delaware Supreme Court June 24 also held that a parent corporation may sue to enforce its own contractual rights directly, even if the harm from the alleged breach is to its subsidiary (NAF Holdings, LLC v. Li & Fung (Trading) Ltd., 2015 BL 202695, Del., No. 641, 6/24/15).
Under Delaware law, when claims proceed by way of a derivative action, they are subject to demand futility requirements.
The state's high court clarified, however, that commercial contract actions should not be subjected this burden as set out in Tooley v. Donaldson Lufkin & Jenrette Inc., 845 A.2d 1031 (Del. 2004).
Looking ahead, the Supreme Court may not have to wait too long before providing more guidance on when complex commercial litigation claims can be brought directly, without proceeding through a derivative action. Last month, a federal appeals court asked the court to weigh in on whether a loss in value of a limited liability company that serves as a feeder fund to a limited partnership can provide the basis for a direct action against the general partners (Culverhouse v. Paulson & Co., Inc., 11th Cir., No. 14-14526, 6/30/15).
Also last quarter, applying different standards of review led the Delaware Chancery Court to reach different outcomes in deciding whether to dismiss derivative lawsuits challenging compensation awards.
Finding that the entire fairness was the operative standard of review, the court April 30 refused to dismiss a derivative lawsuit alleging that technology services provider Citrix Systems Inc. overpaid eight non-employees directors (Calma v. Templeton, 2015 BL 125718, 114 A.3d 563, Del. Ch., No. 9579-CB, 4/30/15).
Even though the company's shareholders has approved the compensation plan at issue, Chancellor Andre G. Bouchard held that the plaintiff could proceed with his breach of fiduciary duty and unjust enrichment claims because investors had not been asked to approve “any action bearing specifically on the magnitude of compensation for the Company's non-employee directors.”
Because the awards at issue “were self-dealing decisions, the operative standard of review is entire fairness, and it is reasonably conceivable that the total compensation received by the non-employee directors was not entirely fair to the Company,” Bouchard opined.
According to attorneys that spoke during a June 18 ALI-CLE conference, companies may want to reconsider their director compensation plans in light of this decision.
The reason the decision merits attention is that the numbers involved “don't snap out of a page at you,” said Andrew Johnston, a partner at Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Del.
Moreover, in a July 15 post on Columbia Law School's Blue Sky Blog, attorneys from Simpson Thacher & Bartlett, LLP, remarked that this decision reflects “an emerging trend of shareholders challenging director compensation decisions made pursuant to shareholder-approved plans that do not set a meaningful limit on compensation paid to outside directors.”
The attorneys suggest that because these decisions are subject to the entire fairness standard of review rather than the business judgment rule, “companies may want to include in shareholder-approved plans meaningful limits on the aggregate compensation levels—cash and non-cash—permitted to be paid to outside directors.”
In contrast, exactly two months after Bouchard's ruling, the chancery court threw out a lawsuit challenging the compensation paid to Cablevision Systems Corp. founder Charles Dolan and other members of his family (Friedman v. Dolan, 2015 BL 209974, Del. Ch., No. 9425-VCN, 6/30/15).
Despite being “troubled” by the facts of the case, including the “various ties” between Cablevision's compensation committee and the Dolans, Vice Chancellor John Noble applied the business judgment rule and found that the court shouldn't “second-guess an independent compensation committee's business decisions that are not irrational.”
“Although the amount of compensation and board composition raise some concern, that concern does not justify judicial intervention into that thicket here,” he wrote.
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|Topic||Case Name Case Citation (CARE Citation)||Holding|
|Mergers and Acquisitions||LongPath Capital LLC v. Ramtron Int'l Corp., 2015 BL 208944, Del. Ch., No. 8094-VCP, 6/30/15 (13 CARE 1512, 7/3/15)||In an appraisal action, the Delaware Chancery Court held that the transaction price minus synergies provided the best indicator of Ramtron International Corp. shares.|
|Director Liability||In re Gen. Motors Co. Derivative Litig., 2015 BL 206881, Del. Ch., No. 9627-VCG, 6/29/15 (13 CARE 1476, 7/3/15)||A derivative lawsuit alleging that General Motors Co. directors breached their fiduciary duties by allowing the company to make cars with faulty ignition systems was dismissed by the Delaware Chancery Court.|
|Director Nominations||Partners Healthcare Solutions Holdings, LP v. Universal Am. Corp., 2015 BL 192023, Del. Ch., No. 9593-VCG, 6/17/15 (13 CARE 1398, 6/26/15)||Universal American Corp. did not breach an agreement entitling a large shareholder to designate a director to its board when it delayed seating the shareholder's designee, the Delaware Chancery Court ruled.|
|Corporate Governance||Espinoza v. Dimon, 2015 BL 190448, 2d Cir., No. 14-1754, 6/16/15 (13 CARE 1370, 6/19/15)||Applying Delaware law, the U.S. Court of Appeals for the Second Circuit upheld a district court ruling throwing out a derivative lawsuit against Jamie Dimon and other JPMorgan Chase & Co. board members over their allegedly inadequate response to the $6.2 billion London Whale debacle.|
|Litigation||Meyer Natural Foods LLC v. Duff, 2015 BL 187481, Del. Ch., No. 9703-VCN, 6/4/15 (13 CARE 1398, 6/26/15)||The Delaware Chancery Court granted a judicial dissolution of a limited liability company pursuant to §18–802 of Delaware's LLC Act, even though there was no operational deadlock, the company earned profits last year and the LLC agreement forbid the petitioner from filing a dissolution.|
|Mergers and Acquisitions||Owen v. Cannon, 2015 BL 192317, Del. Ch., No. 8860-CB, 6/17/15 (13 CARE 1387, 6/19/15)||In appraisal action, the Delaware Chancery Court held that a petitioning shareholder was inadequately compensated for his shares because the company used improper inputs in valuing his shares|
|Attorneys' Fees||In re Jefferies Grp. Inc. S'holders Litig., 2015 BL 177933, Del. Ch., No. 8059-CB, 6/5/15 (13 CARE 1265, 6/12/15)||Counsel representing Jefferies Group Inc. stockholders in a class action lawsuit are entitled to a $21.5 million attorneys' fees award, the Delaware Chancery Court ruled.|
|Advancement||Mooney v. Echo Therapeutics Inc., 2015 BL 167768, Del. Ch., No. 10054-VCP, 5/28/15 (13 CARE 1192, 6/5/15)||In finding that Echo Therapeutics Inc. must advance certain fees and expenses its former CEO and Chairman incurred, the Delaware chancery court clarified when an officer is defending claims in his or her “official capacity.”|
|Litigation||Shocking Techs. Inc. v. Michael,, 2015 BL 170767, Del. Ch., No. 7164-VCN, 5/29/15 (13 CARE 1200, 6/5/15)||The Delaware Chancery Court vacated its earlier decision finding that a corporate director breached his fiduciary duties because the director lost his opportunity to appeal through no fault of his own.|
|Corporate Governance||Asbestos Workers Local 42 Pension Fund v. Bammann, 2015 BL 160904, Del. Ch., No. 9772-VCG, 5/21/15 (13 CARE 1123, 5/29/15)||JPMorgan Chase & Co. shareholders were collaterally estopped from bringing claims accusing director of disregarding their oversight responsibilities in connection with the $6.2 billion losses from a trader known as the London Whale.|
|Advancement||Blankenship v. Alpha, 2015 BL 167203, Del. Ch., No. 10610-CB, 5/28/15 (13 CARE 1167, 5/29/15)||Massey Energy Co. must advance the legal expenses of former CEO Donald Blankenship for his defense to federal charges stemming from a coal disaster, the Delaware Chancery Court ruled.|
|Derivative Suits||In re Molycorp, Inc. S'holder Derivative Litig., 2015 BL 168796, Del. Ch., No. 7282-VCN, 5/27/15 (13 CARE 1177, 5/29/15)||Shareholder derivative claims accusing private equity investors and directors of rare-earth mining company Molycorp Inc. of improperly excluding the company from the equity market at a time it needed capital were dismissed by the Delaware Chancery Court.|
|Settlements||In re Activision Blizzard Inc. Stockholder Litig., 2015 BL 158217, Del. Ch., No. 8885-VCL, 5/20/15 (13 CARE 1100, 5/22/15)||The Delaware Chancery Court approved a $275 million settlement arising from investor claims that Activision Blizzard Inc. officials improperly benefited from a billion-dollar buyout of Vivendi SA's stake in the video-game maker.|
|Attorneys' Fees||In re Nine Sys. Corp. S'holders Litig., 2015 BL 182892, Del. Ch., No. 3940-VCN 5/7/15 (13 CARE 1032, 5/15/15)||The Delaware Chancery Court used its equitable powers to shift fees as a result of a control group of investors breaching their fiduciary duties by conducting a self-interested recapitalization.|
|Derivative Suits||Ironworkers Dist. Council of Philadelphia & Vicinity Ret. & Pension Plan v. Andreotti, 2015 BL 140562, Del. Ch., No. 9714-VCG, 5/8/15 (13 CARE 1039, 5/15/15)||The Delaware Chancery Court dismissed a derivative lawsuit alleging that several officers and directors of DuPont and its subsidiary Pioneer Hi-Bred International Inc. breached their fiduciary duties in connection with the company's failed attempted to develop a product to compete with Monsanto's “Roundup Ready” seed.|
|Derivative Suits||Quadrant Structured Prods. Co. Ltd. v. Vertin, 2015 BL 128889, Del. Ch., No. 6690-VCL, 5/4/15 (13 CARE 971, 5/8/15)||Answering a question of first impression, the Delaware Chancery Court declined to impose a continuous insolvency requirement for creditor derivative claims.|
|Mergers and Acquisitions||Merlin Partners LP v. AutoInfo Inc., 2015 BL 127097, Del. Ch., No. 8509-VCN, 4/30/15 (13 CARE 952, 5/8/15)||The Delaware Chancery Court determined that AutoInfo Inc. shareholders were cashed out at a fair value because the merger price was the best estimate of the company's value at the time.|
|Delaware Law||In re Carlisle Etcetera LLC, 2015 BL 125504, Del. Ch., No. 10280-VCL, 4/30/15 (13 CARE 952, 5/8/15)||The Delaware Chancery Court held that an assignee of an LLC interest had standing to seek a dissolution in equity, even though it lacked standing under DLLCA §18–802.|
|Books and Record Inspections||In re lululemon athletica Inc., 2015 BL 126240, Del. Ch., No. 9039-VCP, 4/30/15 (13 CARE 959, 5/8/15)||The Delaware Chancery Court determined that lululemon athletica Inc. did not have to search its non-employee directors' personal e-mail accounts to satisfy a DGCL §220 books and record production order, although the plaintiff stockholders were entitled to access other documents withheld as privileged.|
|Litigation||Alliant Techsystems, Inc. v. Midocean Bushnell Holdings LP, 2015 BL 117880, Del. Ch., No. 9813-CB, 4/24/15(13 CARE 962, 5/8/15)||Delaware Chancery Court held that when a dispute could be brought as either part of the purchase price adjustment procedure or as an indemnification claim, the contract's price adjustment procedure trumps the indemnification process.|
|Directors' Fiduciary Duties||Ryan v. Gursahaney, 2015 BL 122294, Del. Ch., No. 9992-VCP, 4/28/15 (13 CARE 919, 5/1/15)||The Delaware Chancery Court dismissed a derivative lawsuit accusing directors of The ADT Corporation of breaching their fiduciary duties because the plaintiffs failed to plead particularized facts showing that a pre-suit demand on the board would have been futile.|
|Delaware Law||UtiliPath, LLC v. Hayes, 2014 BL 106326, Del. Ch., No. 9922-VCP, 4/15/15 (13 CARE 847, 4/24/15)||Delaware's first-filed rule does not apply if the parties agree that the state's courts have jurisdiction over the dispute pursuant to a non-exclusive forum selection clause, according to an Delaware Chancery Court ruling.|
|Arbitration||LG Elecs., Inc. v. InterDigital Commc'n Inc. 2014 BL 105042, Del., No. 475, 4/14/15 (13 CARE 793, 4/17/15)||In a novel ruling, the Delaware Supreme Court dismissed a lawsuit on the grounds that an arbitration proceeding had been filed first.|
|Books and Records Inspections||Se. Pa. Transp. Auth. v. AbbVie Inc., 2014 BL 106373, Del. Ch., No. 10374-VCG, 4/15/15 (13 CARE 840, 4/24/15)||The Delaware Chancery Court denied a §220 books and records inspection related to investigating whether AbbVie Inc. directors breached their fiduciary duties in connection the company's highly publicized failed tax inversion deal.|
|Derivative Suits||In re El Paso Pipeline Partners LP Derivative Litig., 2015 BL 114483, Del. Ch., No. 7141-VCL 4/20/15 (13 CARE 856, 4/24/15)||Directors of El Paso Pipeline Partners LP failed to properly protect investors by agreeing to a deal that forced the master limited partnership to buy El Paso Corp.'s interest in natural-gas pipelines at inflated prices, according to a Delaware Chancery Court ruling.|
|Shareholder Suits||Miramar Police Officers' Ret. Plan v. Murdoch, 2015 BL 97663, Del. Ch., No. 9860-CB, 4/17/15 (13 CARE 755, 4/10/15)||The Delaware Chancery Court ruled that News Corp. doesn't have to abide by a 2006 agreement limiting poison pill procedures.|
|Source: Bloomberg BNA|
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