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Sidley Secures Trial Win; Court of Chancery Enforces Advance Notice Bylaw Where Stockholders Failed To Supply Required Information

Oct 21 2021

On October 13, 2021, Vice Chancellor Joseph R. Slights III issued a post-trial decision affirming the CytoDyn Inc. board of directors’ decision to reject a stockholder nomination of directors for failure to supply information required by the company’s advance notice bylaw. This is the first decision from a Delaware court addressing informational deficiencies in such a nomination notice, and provides important guidance for the many public companies with similar bylaws.

Best Practices; Charter/Bylaw Provisions and Amendments; Expedited Litigation; Shareholder Activism

Delaware Chancery Court Affirms Importance of Director Oversight in Wake of Boeing Crashes

Oct 13 2021

Jim Ducayet, Alex J. Kaplan and Robert M. Garsson

Two years ago the Delaware Supreme Court, in Marchand v. Barnhill, allowed Caremark claims to proceed against a group of directors in connection with a listeria outbreak at their company’s ice cream manufacturing plants. Applying Caremark — often quoted as “possibly the most difficult theory in corporat[e] law” — the court determined the board failed to implement reasonable oversight and monitoring on “mission critical issues.” There, food safety was “mission critical.” Since Marchand¸ courts have applied these principles to, among other cases, a biopharmaceutical company’s failure to comply with FDA regulations and an auto parts company’s failure to properly monitor its financial reporting. Now, the Delaware Chancery Court has provided another guidepost, this time in the aerospace industry, finding that certain of Boeing’s stockholders adequately pled Caremark claims against Boeing’s Board.

Caremark; Derivative Litigation; Director Independence and Conflicts

Boeing Case Highlights Risk For Health, Life Sciences Boards

Oct 08 2021

Paul E. Kalb and Holly J. Gregory

On Sept. 7, the Delaware Chancery Court allowed In re: The Boeing Co. Derivative Litigation to proceed, surviving a motion to dismiss.[1]

The action alleges that directors breached their fiduciary duties with respect to their oversight of safety issues and arises out of two crashes of the company’s 737 MAX aircraft.

Best Practices; Caremark; Derivative Litigation

Delaware Supreme Court Clarifies the Standards for Demand Futility

Oct 06 2021

Heather Benzmiller Sultanian

A pair of opinions released by the Delaware Supreme Court in a single week have revisited longstanding precedent governing shareholder suits that claim corporate wrongdoing. As discussed in a companion post on this blog, the first of those opinions, Brookfield Asset Management Inc. v. Rosson, restricted the ability of shareholders to bring direct claims under certain circumstances, instead forcing them to pursue more procedurally challenging derivative suits. In the second case, United Food & Commercial Workers Union & Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, the Delaware Supreme Court adopted a new three-part demand-futility test that clarifies the standard shareholders must meet to file such derivative suits, without first taking their complaints to the company’s board of directors.

Demand Futility; Derivative Litigation; Special Committee

“Upon Further Review…”: Delaware Supreme Court Admits Mistake and Clears Up Question of Direct vs. Derivative Standing

Oct 01 2021

Andrew W. Stern

Every once in a while, a court admits it made a mistake. And, in even rarer circumstances, that admission comes from a court as prominent as the Supreme Court of Delaware. But that’s exactly what happened last week in Brookfield Asset Management, Inc. v. Rosson, in which Delaware’s highest court overruled its own 2006 holding in Gentile v. Rosette that certain claims of corporate dilution are “dual-natured” and may be pursued both as derivative claims and as direct claims by stockholders. The Court’s decision to revisit a much-criticized decision is likely to restore some predictability and analytic consistency to the resolution of an important and threshold question frequently presented in stockholder litigation: whether a claim is properly characterized as direct (on behalf of one or a class of a company’s stockholders) or derivative (on behalf of the company itself).

Corporate Control; Derivative Litigation

Bear Market For Plaintiffs’ Liquidity-Based Conflict Allegations

Sep 27 2021

Jon Muenz

In M&A litigation, plaintiffs’ lawyers see actual or perceived conflicts of interest as gold. Conflict allegations can take many forms and arise in a variety of contexts: for example, a board member of a target company who is offered employment by the would-be acquirer, or a controlling stockholder who sits on both sides of a transaction. Another common example, and the focus of this post, is a board member or stockholder whose financial interests are alleged to diverge from other stockholders because of a need or desire to quickly liquidate holdings (referred to as a “liquidity-based conflict”).

Corwin; Director Independence and Conflicts; M&A; Materiality of Disclosures; Post-Closing Disputes; Private Equity

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

Sep 20 2021

Yolanda C. Garcia, Robert S. Velevis and Julia L. Bensur

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.”

SLC; Special Litigation Committees

SPACs: A New Frontier for Shareholder Activism

Sep 08 2021

Derek Zaba, Kai H.E. Liekefett and Joshua G. DuClos

In NIRI’s IR Update, Derek Zaba, Kai Liekefett, and Joshua DuClos published an article titled, “SPACs: A New Frontier for Shareholder Activism.” Their article discusses how the SPAC boom has created a new breeding ground for activism targets and how SPACs should prepare for an activist attack.

M&A; Shareholder Activism; SPACs

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

Sep 02 2021

Enhanced Scrutiny Contributors

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.

ESG

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