The Delaware Court of Chancery Undertakes Exacting Calculations of Equitable Damages and Will Award Tens of Millions of Dollars? Yes, It Does That, Too.

The Delaware Court of Chancery is of course a court of equity, focusing often on governance and contractual rights. The Court of Chancery also periodically issues damages opinions, and on May 28, 2024, Vice Chancellor Lori Will did just that in Brown v. Matterport, Inc.  At issue in Matterport was whether the plaintiff stockholder—following an earlier trial ruling that the defendant corporation had wrongfully (albeit in good faith) prohibited the stockholder from selling his shares—was entitled to damages and, if so, the proper method for computing damages. Vice Chancellor Will held that damages were appropriate based on the facts at issue, and in issuing a damages award of approximately $79 million, the Court undertook a rigorous approach in determining both the appropriate method to compute damages as well as the inputs for that calculation.

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Sunshine Breaking Through the Clouds: Delaware Supreme Court Sheds Light on Standard of Review for Challenges to Advance Notice Bylaws

On Thursday, the Delaware Supreme Court issued a long-awaited decision regarding the validity and enforceability of certain provisions in a company’s advance notice bylaws.  The Kellner v. AIM Immunotech Inc. decision clarifies how the Delaware courts will evaluate claims challenging an advance notice bylaw.  Critically, it confirms that different standards attach when a plaintiff challenges (i) the language of a company’s bylaw (a so-called facial or validity challenge) in the abstract, absent a proxy contest versus (ii) a board’s decision to adopt, amend, or enforce an advance notice bylaw during a proxy contest (a so-called as applied challenge).  This decision provides helpful guidance to practitioners and will hopefully limit the wave of facial challenge litigation that followed the Kellner trial court ruling.

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Director Wins In Claim of Improper Removal – But Still Loses

In Barbey v. Cerego, Inc., the Delaware Supreme Court affirmed a post-trial judgment denying relief to the plaintiffs in a Section 225 action, despite what the court called the “unusual and troubling circumstances of [the] case.”  The Supreme Court’s decision illustrates the limitations of Section 225 proceedings.  The underlying Court of Chancery decision shows that voiding board actions may in some cases have no practical effect, even when a board acts in the context of entity-altering corporate transactions.

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Five Delaware Cases All Venture Capital Players Should Know

Now and then this blog publishes compendiums of bedrock decisions and key principles of which M&A and Corporate Governance practitioners, and their clients, should be aware (e.g., here and here).  This post takes the opportunity to highlight five relatively recent and important decisions that have shaped Delaware legal practice and discourse involving venture capital investment.  Counsel representing investors and other players in emerging growth companies should familiarize themselves with this digest.

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Delaware’s Appealing Interlocutory Review Regime

In a recent case, Palkon v. Maffei (TripAdvisor), the Delaware Supreme Court accepted an interlocutory appeal of the Court of Chancery’s denial of shareholders’ motion to dismiss. Such appeals are not common: Delaware Supreme Court Rule 42(b) expressly provides that “[i]nterlocutory appeals should be exceptional, not routine, because they disrupt the normal procession of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources.” Even more unusually, the Delaware Supreme Court took this step over the Court of Chancery’s refusal to certify the appeal. This decision and others demonstrate the Delaware Supreme Court’s willingness to step in affirmatively, even mid-case, to ensure the coherence and predictability of corporate governance law — particularly when a matter of public concern is at stake. (more…)

The Powers That Be: Supreme Court Holds That Non-Voting Stockholder Classes Cannot Invoke the “Powers, Preferences or Special Rights” Exception in Section 242, to Vote on Charter Amendments to Exculpate Officers From Duty of Care Breaches

Following amendments in August 2022 to Section 102(b)(7) of the Delaware General Corporate Law (“DGCL”) to allow corporations to include provisions in their respective charters exculpating officers for breaches of the duty of care, a number of corporations naturally took steps to add such provisions.  Stockholder challenges followed in In re Fox Corp./Snap Section 242 Litigation, No. 120, 2023, 2024 WL 176575 (Del. Jan. 17, 2024), as revised (Jan. 25, 2024), which involved parallel lawsuits contesting the manner in which two separate corporations with multi-class capital structures adopted amendments providing for officer exculpation.  The Delaware Supreme Court ultimately affirmed a lower court decision in favor of the corporations, holding that, consistent with their respective charters, the corporations validly obtained approval from stockholder classes permitted to vote and validly excluded from the vote non-voting stockholder classes.

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Voting Commitments Matter and Will Be Enforced: Delaware Supreme Court Affirms Chancery Decision Holding Activist Stockholders to Their Bargain

When companies settle proxy contests with activist stockholders, the activists generally give up stockholder-level influence in exchange for board-level influence.  In a typical agreement in this setting, activists gain board seats in exchange for a commitment to vote their shares with the board’s recommendation on proposals put to stockholders.  Activists also agree to standstill periods in which they refrain from taking actions opposed to the board, and from increasing their holdings above a specified cap.

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On the Efficacy of Litigating Post-Employment Disputes in Delaware (Reciprocity Is a Two-Way Street)

Last November, Vice Chancellor J. Travis Laster issued an Opinion in Sunder Energy, LLC v. Jackson denying a company’s application for a preliminary injunction against a former employee based on restrictive covenants embedded in that employee’s Incentive Units. The Court held that the company could not enforce the covenants because the company’s Managers breached their fiduciary duties in the creation of those covenants, and because the covenants themselves are “overly broad” and “unreasonable.” The Court noted, for example, that covenants in this residential solar panel sales company’s Incentive Units could theoretically have indefinitely prevented the former employee’s daughter from door-to-door sales of Girl Scout cookies. (more…)

A Reminder of Board Primacy: Delaware Court of Chancery Invalidates Stockholder Agreement Provisions Encroaching on Board-Level Decisions

On February 23, 2024, the Delaware Court of Chancery issued an opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co. invalidating certain stockholder agreement provisions that gave a significant stockholder broad pre-approval rights over corporate actions. The opinion serves as a reminder of the contours of board authority under DGCL Section 141(a) and how contractual agreements may “improperly constrain a board’s authority.” It remains to be seen if the decision will be appealed, but at present, it should be evaluated by parties considering contractual provisions that may directly or indirectly limit director decision-making.

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Protecting Its “Unwaivable Right to a Jury Trial,” California Waves Goodbye to a Delaware Forum Selection Clause

I. Overview of Enforceability of Forum Selection Clauses

The Delaware Court of Chancery has promoted the use of forum selection clauses in corporate charters since its 2010 opinion In re Revlon Inc. Shareholders Litigation. Three years later, in Boilermakers v. Chevron, the Delaware Court of Chancery ruled that forum selection clauses in corporate bylaws are facially valid for types of shareholder litigation, including derivative claims, fiduciary claims, statutory claims under the Delaware General Corporation Law, and claims regarding internal affairs. In light of these decisions, Delaware forum selection clauses contained in corporate charters or bylaws of the type found facially valid in Boilermakers have been enforced by state courts in many states. But a recent decision from a California appellate court suggests that some California courts may be resistant to such provisions based on California public policy in favor of the right to a jury trial.

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