Chancery to Directors: Don’t Play Dirty
The Delaware Court of Chancery recently provided a powerful reminder of the Court’s equitable purpose, and how it will not countenance bad faith or duplicity. In Ghatty v. Mudili et. al., three board members of a five-member board voted at a special board meeting to remove the remaining two directors from their officer positions, and later sued under 8 Del. C. § 225 to seek confirmation that the two directors had been validly removed from their officer roles. The Defendants challenged their removal on a number of grounds. The Court of Chancery considered one argument dispositive: that the meeting notice was inherently deficient because the meeting agenda omitted the removal action effectuated at the meeting, and indeed misleadingly suggested that one Defendant’s officer role would be expanded. The Court condemned the notice as “duplicity,” voided the vote, and held that the Defendants remained officers of the Company.
Two Cautionary Tales: Fee Shifting Imposed for Litigating Books-and-Records Inspection Demands
While there are limits to a stockholder’s right to inspect books and records under Section 220 of the Delaware General Corporation Law or other sections allowing inspection—and corporations can negotiate the scope of inspection—there are also limits to how vigorously a corporation can resist a stockholder’s inspection demand, particularly when it does not present novel legal issues. Two recent fee-shifting decisions issued by Vice Chancellor Zurn provide a cautionary reminder of those limits, which were previously set out by the Court of Chancery in opinions such as Pettry v. Gilead Scis. Inc. (2020), Marilyn Abrams Living Trust v. Pope Invs. Inc. (2017), and McGowan v. Empress Entm’t (2000). The unmistakable message: if the right to inspection is clear, a defendant should think twice about a blanket opposition, unless the defendant does not mind paying the plaintiff’s legal fees in the end.
Special Committees Require Special Attention: Lessons from GoDaddy
Previously this blog has discussed the importance of procedural compliance with various transaction structures when the transaction involves controlling or interested parties (see an example here). For instance, in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the Delaware Supreme Court held that compliance with certain process elements enables deferential business judgment review of decisions regarding interested transactions with controlling parties (see here for a helpful discussion about MFW protections). Delaware courts have since expanded the role of MFW-like process protections in various contexts, thus demonstrating that adequate decisionmaking procedures are a central prerequisite to business judgment deference when controllers or interested parties are involved in contemplated transactions.
Good Fences Make Good Neighbors and Preserve Attorney-Client Privilege in the Boardroom: A Word of Caution for Boards Navigating Potential Disputes Among Directors or With Funds They Manage
The boardroom frequently presents attorney-client privilege and work product protection issues. The Delaware Court of Chancery’s recent decision in Hyde Park Venture Partners Fund III, LP v. FairXchange, LLC, C.A. No. 2022-0344-JTL (Del. Ch. March 9, 2023), provides a reminder of the importance of vigilance in considering when and how to limit a director’s access to privileged materials in circumstances where directors’ interests may diverge – particularly where directors manage, or are affiliated with, investment funds owning stock of the Company.
