The Delaware Supreme Court recently reversed Chancellor Kathaleen S. McCormick’s post-trial decision upholding a disputed stock sale after concluding that the sale satisfied the entire fairness standard of review. Although the Court affirmed the trial court’s entire fairness finding — Delaware’s most rigorous standard of review under which a defendant must establish that a transaction was the product of both fair dealing and fair price — it nevertheless reversed because the Court of Chancery concluded that entire fairness was the “end of the road” for judicial review and declined to consider the board’s motivations for the transaction. Invoking the principle expressed in the seminal Delaware opinion in Schnell v. Chris-Craft that “inequitable action does not become permissible merely because it is legally possible,” the Supreme Court remanded the case for further consideration of the motivation for and purpose of the subject stock sale.
Just before year-end, the Delaware Court of Chancery issued a notable decision regarding disclosures around equity incentive plans. On December 16, 2020, the Chancery Court dismissed a stockholder’s direct claim that members of the board of Columbia Financial Inc. (“Columbia” or the “Company”) breached fiduciary duties for failing to disclose purportedly material information regarding equity awards provided to directors. The decision provides guidance on standards for adequate disclosures and affirms the Chancery Court’s willingness to decide questions of materiality at the pleading stage.
The Court of Chancery recently allowed a buyer to walk away from an acquisition due to, among other things, the seller’s failure to satisfy the ordinary course covenant because of changes made to the operating business in response to the COVID-19 pandemic. The opinion, penned by Vice Chancellor Laster, is the first decision offering post-trial guidance as to the application of material adverse effect (MAE) and ordinary course provisions during the pandemic. Its guidance on the application of these provisions should be of interest for all negotiating M&A deals and other commercial agreements generally, and during the COVID-19 pandemic in particular.
In AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, plaintiff sought to sell a subsidiary that owned an approximately US$5.8 billion portfolio of luxury hotels. The deal was signed in September 2019, and was slated to close in April 2020. Due to COVID-19, shortly before the planned closing, the seller made material changes to its business. These included closing two hotels entirely, gutting operations at 13 others, terminating or furloughing staff, and cutting spending on marketing and capital expenditures. The seller filed a complaint seeking specific performance to force a closing; the buyer responded with counterclaims contending, among other things, that it had no obligation to close because an MAE occurred, and the seller breached the ordinary course provision. The Court’s rulings on both of these points are highly instructive.