Justia Corporate Compliance Opinion Summaries

Articles Posted in Delaware Supreme Court
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The Delaware Court of Chancery entered judgment in favor of appellee Sharon Hawkins on her request for a declaration that the irrevocable proxy which provided appellant W. Bradley Daniel (“Daniel”) with voting power over all 100 shares of N.D. Management, Inc. (“Danco GP”) (the “Irrevocable Proxy”), did not bind a subsequent owner of such Danco GP shares. The Court of Chancery also held that an addendum to the Irrevocable Proxy did not obligate the current owner of the Danco GP shares, MedApproach, L.P. (the “Partnership”), to demand that the buyer in a sale to an unaffiliated third party bind itself to the Irrevocable Proxy. Daniel appealed the Court of Chancery’s judgment that the Irrevocable Proxy did not run with the Majority Shares, arguing the court erred by: (1) rather than interpreting and applying the plain language of the Irrevocable Proxy as written, the court relied on the Restatement (Third) of Agency, which was not adopted until nearly a decade after the parties entered into the Irrevocable Proxy; (2) reading additional language into the Irrevocable Proxy in order to support its finding that the broad “catch-all” language that the parties included to prevent termination of the Irrevocable Proxy did not encompass a sale of the shares; and (3) not giving effect to all of the terms of the Irrevocable Proxy and improperly limiting the assignment clause of the Irrevocable Proxy so as not to bind assigns of the stockholder. Finding no reversible error, the Delaware Supreme Court affirmed the Court of Chancery. View "Daniel v. Hawkins" on Justia Law

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An objector appealed a Delaware Court of Chancery decision approving a litigation settlement for claims alleging excessive non-employee director compensation. Initially, the parties agreed to a preliminary settlement and presented it to the Court of Chancery for approval. The Court of Chancery sided with the objector and refused to approve a non-monetary settlement of the derivative claims. The court also awarded the objector fees. After the court denied a motion to dismiss, the parties came up with a new settlement that included a financial benefit to the corporation. The objector renewed his objection, this time arguing that the new settlement improperly released future claims challenging compensation awards and that the plaintiff was not an adequate representative for the corporation’s interests. The Court of Chancery approved the new settlement and refused to award the objector additional attorneys’ fees. On appeal to the Delaware Supreme Court, the objector argued the court erred by: (1) approving an overbroad release; (2) approving the settlement without finding that the plaintiff was an adequate representative of the corporation’s interests; and (3) reducing the objector’s fee because the court believed it would have rejected the original settlement agreement without the objection. Though the Supreme Court acknowledged the Court of Chancery and the parties worked diligently to bring this dispute to a close, it reversed the judgment because the settlement agreement released future claims arising out of, or contemplated by, the settlement itself instead of releasing liability for the claims brought in the litigation. View "Griffith v. Stein" on Justia Law

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The two equal stockholders of UIP Companies, Inc. were deadlocked and could not elect new directors. One of the stockholders, Marion Coster, filed suit in the Court of Chancery and requested appointment of a custodian for UIP. In response, the three-person UIP board of directors — composed of the other equal stockholder and board chairman, Steven Schwat, and the two other directors aligned with him— voted to issue a one-third interest in UIP stock to their fellow director, Peter Bonnell, who was also a friend of Schwat and long-time UIP employee (the “Stock Sale”). Coster filed a second action in the Court of Chancery, claiming that the board breached its fiduciary duties by approving the Stock Sale. She asked the court to cancel the Stock Sale. After consolidating the two actions, the Court of Chancery found what was apparent given the timing of the Stock Sale: the conflicted UIP board issued stock to Bonnell to dilute Coster’s UIP interest below 50%, break the stockholder deadlock for electing directors, and end the Custodian Action. Ultimately, however, the court decided not to cancel the Stock Sale. The Delaware Supreme Court reversed the Court of Chancery on the conclusive effect of its entire fairness review and remanded for the court to consider the board’s motivations and purpose for the Stock Sale. "If the board approved the Stock Sale for inequitable reasons, the Court of Chancery should have cancelled the Stock Sale. And if the board, acting in good faith, approved the Stock Sale for the 'primary purpose of thwarting' Coster’s vote to elect directors or reduce her leverage as an equal stockholder, it must 'demonstrat[e] a compelling justification for such action' to withstand judicial scrutiny." View "Coster v. UIP Companies, Inc." on Justia Law

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Appellant Alex Bäcker was the co-founder and majority common stockholder of QLess, Inc. In June 2019, the Company’s board removed Alex as CEO following an internal investigation into workplace complaints. Alex eventually relented to the change and expressed support for his successor, Kevin Grauman. In the week leading up to the November 15, 2019 board meeting, the Company’s outside counsel circulated board resolutions that, among other things, would appoint Grauman to the board. Alex made a series of statements that collectively represented support for Grauman’s appointment. On the eve of the board meeting, the Company’s independent director unexpectedly resigned, giving Alex a board majority. Alex leapt into action, devising a secret counter agenda to fire Grauman and lock-in Alex’s control of the Company. Alex caught his fellow directors by surprise at the meeting, passing his counter agenda over objections and seizing control of the Company. Palisades Growth Capital II, L.P., the majority owner of the Company’s Series A preferred stock, filed a complaint in the Court of Chancery seeking to reverse Alex’s actions. Following a paper trial, the court held that, even if technically legal, the board’s actions were invalid as a matter of equity because Alex affirmatively deceived a fellow director to establish a quorum. After review of the parties briefs and the record on appeal, the Delaware Supreme Court held the Court of Chancery's finding of affirmative deception was not clearly erroneous. The Supreme Court also held that the Court of Chancery did not impose an equitable notice requirement for regular board meetings, that Appellants failed to properly raise an equitable participation defense below, and that the Court of Chancery did not exercise its equitable powers to grant relief for a de facto breach of contract claim. Accordingly, the Supreme Court affirmed the Court of Chancery’s March 26, 2020 Memorandum Opinion. View "Backer v. Palisades Growth Capital" on Justia Law

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The Court of Chancery issued a memorandum opinion in an action brought under Delaware's Corporation Law, section 220 (the "DGCL"). The opinion ordered AmerisourceBergen Corporation to produce certain books and records to Lebanon County Employees Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan (“Plaintiffs”) and granting Plaintiffs leave to take a Rule 30(b)(6) deposition “to explore what types of books and records exist and who has them.” The Company claimed Plaintiffs’ inspection demand, which, among other things, was aimed at investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing, was fatally deficient because it did not disclose Plaintiffs’ ultimate objective, which was what they intended to do with the books and records in the event that they confirmed their suspicion of wrongdoing. The Company also contended the Court of Chancery erred by holding Plaintiffs were not required to establish a credible basis to suspect actionable wrongdoing. And finally, the Company argued the Court of Chancery erred as a matter of law when it allowed Plaintiffs to take a post-trial Rule 30(b)(6) deposition. After review, the Delaware Supreme Court held that when a Section 220 inspection demand stated a proper investigatory purpose, it did not need to identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing. In addition, the Court held that, although the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating stockholder was not required in all cases to establish the wrongdoing under investigation was actionable. Finally, the Court found the Court of Chancery’s allowance of the post-trial deposition was not an abuse of discretion. View "Amerisourcebergen Corp v. Lebanon County Employees' Retirement Fund" on Justia Law

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Since 2010, appellant Mark Spanakos has tried to gain control over and revive Hawk Systems, Inc., a void Delaware corporation, by filing a series of direct and derivative actions in Florida against former Hawk Systems insiders and taking several steps outside of court to establish himself as the Company’s majority stockholder and sole director. Spanakos was successful in his direct Florida litigation, having won a Partial Final Judgment in one action and favorable Summary Judgment rulings in another. Spanakos’s derivative claims in the third Florida action, however, were stayed to allow Spanakos to clarify his standing to pursue those claims. Accordingly, in 2018 Spanakos filed suit in the Delaware Court of Chancery seeking: (1) a declaration that he controlled a majority of the voting shares of Hawk Systems and that he was the validly elected, sole director and officer of Hawk Systems; or (2) in the alternative, an order compelling the company to hold an annual election of directors under 8 Del. C. sections 223(a) and 211(c). Following a trial, briefing, and post-trial argument, the Court of Chancery denied both of Spanakos’s requests for relief, ruling that he had not carried his burden of proof to obtain any of the relief that he sought. On appeal, Spanakos argues that the Court of Chancery abused its discretion when it declined to order a stockholders’ meeting for the election of directors despite the fact that Spanakos satisfied the elements of Section 211. Having reviewed the record on appeal and the court’s opinion below, the Delaware Supreme Court found the Court of Chancery did not abuse its discretion when it declined to compel a stockholders’ meeting given the unique facts of this case. View "Spanakos v. Page, et al." on Justia Law

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Two limited partners demanded the books and records of certain limited partnerships. Most of the documents demanded were produced, but one category of documents remains in dispute: the Schedule K-1s (“K-1s”) attached to the partnerships’ tax returns. Although the limited partners were provided with their own K-1s, the limited partners sought the K-1s of the other limited partners for the purpose of valuing their ownership stake in the partnerships and in order to investigate mismanagement and wrongdoing. The partnerships countered that the K-1s were not necessary and essential to the valuation purpose and there was no credible basis to suspect wrongdoing. The Court of Chancery, based upon its history of interpreting 6 Del. C. section 17- 305 in the same manner as 8 Del. C. section 220, held that the K-1s were subject to the requirement that documents sought be “necessary and essential” to the stated purpose, and found they failed the "necessary and essential" test. The Delaware Supreme Court disagreed, finding that the limited partners were entitled to the K-1s under the terms of the partnership agreements. The Court thus reversed the Court of Chancery and remanded for further proceedings. View "Murfey v. WHC Ventures, LLC" on Justia Law

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Towers Watson & Co. (“Towers”) and Willis Group Holdings Public Limited Company (“Willis”) executed a merger agreement with closing conditioned on the approval of their respective stockholders. Although Towers had stronger performance and greater market capitalization, Willis stockholders were to receive the majority (50.1 percent) of the post-merger company. Upon the merger’s public announcement, several segments of the investment community criticized the transaction as a bad deal for Towers and a windfall for Willis. Towers’ stock price declined and Willis’s rose in reaction to the news. Proxy advisory firms recommended that the Towers stockholders vote against the merger, and one activist stockholder began questioning whether Towers’ management’s incentives were aligned with stockholder interests. Also, after announcing the merger, ValueAct Capital Management, L.P. (“ValueAct”), an institutional stockholder of Willis, through its Chief Investment Officer, Jeffrey Ubben, presented to John Haley, the Chief Executive Officer (“CEO”) and Chairman of Towers who was spearheading the merger negotiations, a compensation proposal with the post-merger company that would potentially provide Haley with a five-fold increase in compensation. Haley did not disclose this proposal to the Towers Board. In light of the uncertainty of stockholder approval, Haley renegotiated the transaction terms to increase the special dividend. Towers eventually obtained stockholder approval of the renegotiated merger. The transaction closed in January 2016, and the companies merged to form Willis Towers Watson Public Limited Company (“Willis Towers”). Haley became the CEO of Willis Towers and was granted an executive compensation package with a long-term equity opportunity similar to ValueAct’s proposal. At issue were stockholder suits filed in early 2018. Here, Towers stockholders alleged that Haley breached his duty of loyalty by negotiating the merger on behalf of Towers while failing to disclose to the Towers Board the compensation proposal. The Court of Chancery dismissed the claims, holding that the business judgment rule applied because “a reasonable board member would not have regarded the proposal as significant when evaluating the proposed transaction,” and further holding that plaintiffs had failed to plead a non-exculpated bad faith claim against the Towers directors. To the Delaware Supreme Court, plaintiffs argued the Court of Chancery erred in holding the executive compensation proposal was not material to the Towers Board. To this, the Supreme Court concurred, reversed the Court of Chancery, and remanded for further proceedings. View "City of Fort Myers General Employees' Pension Fund v. Haley" on Justia Law

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The Ninth Circuit Court of Appeals certified a question of law to the Delaware Supreme Court arising out of an appeal from the federal district court for the Central District of California. The question asked whether in a Delaware limited partnership, does the general partner’s request to the limited partner for a one-time capital contribution constitute a request for limited partner action such that the general partner has a duty of disclosure, and if the general partner fails to disclose material information in connection with the request, could the limited partner prevail on a breach of fiduciary duty claim and recover compensatory damages without proving reliance and causation? The Delaware Court responded in the negative: "[f]undamentally, this is not a duty to disclose case - it is a breach of the duty of loyalty case for failure to tell the truth." Under the stipulated facts of this dispute, the general partner’s request to a limited partner for a one-time capital contribution does not constitute a request for limited partner action such that the general partner has a fiduciary duty of disclosure. Even if the general partner had a fiduciary duty of disclosure, if the general partner failed to disclose material information in connection with the request, the limited partner cannot recover compensatory damages without proving reliance and causation. View "Dohmen v. Goodman" on Justia Law

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At issue before the Delaware Supreme Court in these cases was the validity of a provision in several Delaware corporations’ charters requiring actions arising under the federal Securities Act of 1933 (the “Securities Act” or “1933 Act”) to be filed in a federal court. Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. were all Delaware corporations that launched initial public offerings in 2017. Before filing their registration statements with the United States Securities and Exchange Commission (the “SEC”), each company adopted a federal-forum provision. Appellee Matthew Sciabacucchi bought shares of each company in its initial public offering or a short time later. He then sought a declaratory judgment in the Court of Chancery that the FFPs were invalid under Delaware law. The Court of Chancery held that the FFPs were invalid because the “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” Because the Supreme Court determined such a provision could survive a facial challenge under Delaware law, judgment was reversed. View "Salzberg, et al. v. Sciabacucchi" on Justia Law