The resolution of corporate law disputes has a significant impact on the stockholders, directors, officers, and employees of companies around the world. With more than 60% of the Fortune 500 incorporated in Delaware, decisions of the state’s courts have a direct impact on leading companies worldwide and greatly influence the law of other jurisdictions. The Enhanced Scrutiny blog provides timely updates and thoughtful analysis on M&A and corporate governance matters from the Delaware courts and, on occasion, from other jurisdictions.

Court of Chancery Issues Reminder Regarding Utility of Properly Formed SLCs in Resolving Pending Derivative Claims

For over 40 years, Delaware’s courts have recognized the special litigation committee (“SLC”) as an efficient means of judging the corporate interest served by a derivative suit when the full board is otherwise disabled by self-interest. Paired with that recognition, however, has been a longstanding skepticism of the structural biases that can affect SLC members. In the leading case of Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court warned that courts should “be mindful that directors are passing judgment on fellow directors in the same corporation . . . . The question naturally arises whether a ‘there but for the grace of God go I’ empathy may not play a role. And the further question arises whether inquiry as to independence, good faith and reasonable investigation is sufficient safeguard against abuse, perhaps subconscious abuse.”

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Environmental, Social, and Governance Disclosures in Proxy Statements: Benchmarking the Fortune 50

It is no secret that the U.S. Securities and Exchange Commission (SEC) has recently ramped up its focus on environmental, social and governance (ESG) disclosures. In February 2021, Acting Chair of the SEC Allison Herren Lee directed the Division of Corporation Finance to enhance focus on climate-related disclosure in public company filings, including reviewing the extent to which public companies address the topics identified in the SEC’s 2010 Guidance Regarding Disclosure Related to Climate Change. Then, in March 2021, she requested public comment on climate change disclosures (which has generated over 600 comment letters, the vast majority of which are supportive of mandatory climate disclosure rules), and new SEC rules on climate risk and human capital disclosures are expected to be proposed yet this year. In addition, holding true to its “all-of-SEC” approach to ESG, the SEC has formed a Climate and ESG Task Force (composed of 22 members and led by the Acting Deputy Director of Enforcement), which will use data analytics to look for material gaps and misstatements in climate risk disclosures under existing rules.

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A Delaware Corporate and M&A Checklist: 11 Cases That Every Practitioner Should Know

As regular readers know, this blog typically covers the latest developments and trends emerging from the Delaware Court of Chancery. For this post, however, we revisit first principles and remind our readers of the bedrock decisions of modern Delaware M&A practice, and highlight 11 key decisions with which every practitioner should be familiar.

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Vice Chancellor Zurn’s First Post-Trial Opinion Provides a Cautionary Tale Regarding Private Ordering Under the LLC Act

In her first true Opinion for the Court, In re Coinmint, LLC, Vice Chancellor Zurn delved deeply into the tortured relationship between the two founders (and sole members) of Coinmint, LLC, a bitcoin mining firm, and ultimately held that Delaware’s strong preference for private ordering is not unlimited where the parties fail entirely to follow the formalities set out in the founding documents to which they collectively agreed.

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Follow the (Stone) Paper Trail: Court Addresses the Difficult Defense of Acquiescence

A recent opinion issued by the Delaware Court of Chancery in Stone & Paper Investors LLC v. Blanch resolved dueling allegations of corporate mismanagement and fraud that pitted a pair of long-time business partners against their protégé and his associates. In the 100+ page opinion, Vice Chancellor Paul A. Fioravanti, Jr., described a years-long scheme to induce a multi-million dollar investment in a new stone-based paper venture and then, when that venture fizzled, to drain the invested funds for personal gain in a series of undisclosed interested transactions. The facts of this case are extreme and involve an extended pattern of intentional wrongdoing. However, as an illustration of what can happen when bad actors take control, Stone & Paper provides important guidance to honest managers and other interested parties who draw salaries from, or otherwise transact with, the companies they control. Interested parties who engage in such transactions should take care that the material facts underlying any interested transactions have been fully disclosed and that they have complied with the requirements of the operating agreement, including documenting any necessary approvals. And if, by inadvertence or mistake, managers fail to secure the necessary approval for these transactions in advance, they should disclose all of the material facts as promptly as possible after the fact, such that the Board may be deemed to have acquiesced in the transactions.

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Stockholder Suits Are Fewer—and Smaller—in 1H 2021

According to Cornerstone’s midyear report on federal and state securities class actions, new securities case filings have continued a substantial downward trend in the first half of 2021.

Plaintiffs filed 112 class action securities cases in the first half of 2021, down 25% from 150 in the second half of 2020 and 38% compared to the 182 cases filed in the first half of 2020, following a marked trend that has emerged since 2019.  That trend continues to be animated in large part by significant declines in M&A-related federal filings, which fell to just 12 during the period, a 66% reduction (or 83% relative to the semiannual average of 70 during the last five years).

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In Case of Emergency, Break Glass: Litigation and Drafting Guidance From Delaware Chancery Court Opinion on “Material Adverse Effect” Clauses

The Delaware Chancery Court recently issued an opinion that confirms the difficulty of successfully invoking a “Material Adverse Effect” (“MAE”) clause in a merger agreement. In particular, the decision underscores the challenges of proving up an MAE — particularly when the target company is in a highly regulated industry — and provides useful guidance for drafting disproportionality exclusions in an MAE clause.

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What’s Cooking When It Comes to Enforcing Business Conduct Clauses in Earnouts: Shareholder Representative Services LLC v. Albertsons Cos.

In Shareholder Representative Services LLC v. Albertsons Cos., the Delaware Court of Chancery denied a motion to dismiss claims that a buyer intentionally avoided an earnout payment by misleading the seller about its plans to operate the acquired business after closing.  The case provides additional guidance in the ever-growing body of case-law addressing “business conduct” clauses in earnout agreements.

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