Entire Fairness Does Not Require Perfection
The Delaware Supreme Court recently held in In re Tesla Motors Stockholders’ Litigation, ___ A.3d ___, 2023 WL 3854008 (Del. Jun. 6, 2023) (“Tesla”), that an entire fairness analysis does not require perfection, so long as the acquisition itself was the result of fair dealing and fair price. Practitioners and boards engaging with a potentially conflicted transaction would be well served to study this opinion with care, particularly where the potential acquiror cannot (or chooses not to) employ a special committee of independent directors to handle negotiations.
Potential Control Does Not Equal Actual Control: Business Judgment Rule Protects Oracle-Netsuite Transaction
In a May 12, 2023 opinion following trial and post-trial argument, the Delaware Court of Chancery found for defendants Oracle founder Larry Ellison and CEO Safra Catz in In re Oracle Derivative Litigation, 2017-0337-SG, a shareholder derivative litigation case arising out of Oracle’s US$9.3 billion acquisition of NetSuite. The 10-day bench trial took place in July and August 2022 before Vice Chancellor Glasscock, and included two days of testimony by Catz and one day of testimony by Ellison, among other witnesses. The Court’s decision comes several months after plaintiffs’ voluntary dismissal, following the post-trial argument, of then-defendant Renée James, the Chair of a Special Committee of the Oracle Board overseeing the acquisition.
Caveat Emptor Still Rules The Day For MLPs
Just as a $700 million damages award and its accompanying sharp criticism of legal opinions garner headlines, so does reversal of that ruling. The Delaware Supreme Court closed out 2022 with its decision in Boardwalk Pipeline Partners, LP v. Bandera Master Funds LP, reversing the Court of Chancery’s sizeable post-trial award on narrow contractual grounds. The reversal is a substantial victory for the defendants. But for non-parties, of note was the Delaware Supreme Court’s decision to leave intact the trial court’s conclusions regarding law firm opinions. Taken together, both courts’ rulings offer meaningful guidance for parties and counsel negotiating complex transactions and considering inclusion of opinion of counsel conditions (or, attempting to satisfy such conditions in existing contracts).
Indirect Transfers May Not Include Upstairs Entities
The decision in The American Bottling Company v. BA Sports (“American Bottling”)[1] demonstrates that in the context of anti-assignment or change of control provisions, prohibitions against “indirect transfers” (such as those occurring at an entity’s great-grandparent level) are not necessarily triggered by changes at the parent level. This ruling from the Delaware Superior Court, which applied Illinois law, tracks similar rulings applying Delaware law.[2]
In Musk-Twitter Sideshow, Stockholder Standing To Sue for “Lost Premium” Damages Makes Appearance
The on-then-off-then-on-again acquisition of Twitter, Inc. by Elon Musk has generated an unusual amount of attention for corporate litigation. Much of that has focused on the “main show” – the litigation commenced by Twitter seeking to compel Musk to close the transaction. Recently, however, the Delaware Court of Chancery issued a decision in a companion case, brought against Musk directly on behalf of a class of Twitter stockholders. (more…)
Combatting Allegations of “Divided Loyalty”: Important Lessons for Private Equity and Venture Capital Controlling Stockholders
Recently, the Delaware Court of Chancery issued another ruling regarding the sale of Authentix Acquisition Company, Inc. (“Authentix”) to Blue Water Energy LLP (“Blue Water”), which was approved in 2017 by Authentix’s Board of Directors (the “Board”) and its controlling stockholders. The June 3, 2022 decision (Manti Holdings, LLC v. Carlyle Group Inc., C.A. No. 2020-0657-SG, 2022 WL 1815759 (Del. Ch. June 3, 2022)) denied in part a motion to dismiss and held that the gravamen of the plaintiffs’ post-closing money damages complaint—allegations that the defendants breached fiduciary duties regarding the sale—sufficiently stated claims upon which relief could be granted. The ruling underscores the need for heightened care by target companies and their equity sponsors when contemplating a transaction supported by an equity sponsor, including in their communications (or lack of communications) with management and other shareholders.
“Twice Tested” and Still Fair, and the Ongoing Relevance of Schnell
This blog recently discussed the Delaware Supreme Court’s decision in Coster v. UIP Companies, Inc., wherein the Court held that a stock sale that satisfied the entire fairness standard — the most rigorous in Delaware’s corporate law — should undergo still further review to assess the board’s motivations in approving the sale. The Court reversed the decision of the Court of Chancery, which had assumed that entire fairness was the “end of the road” for judicial review, and instead invoked the seminal 1971 decision in Schnell v. Chris-Craft to explain that “inequitable action does not become permissible merely because it is legally possible.” Under Delaware law, therefore, board actions are “twice tested”: first for legal authorization, and second to determine whether such action was equitable. (more…)
Court to Activists (Again): Follow The Rules Or Suffer The Consequences
On February 14, 2022, Vice Chancellor Lori W. Will issued a post-trial decision affirming the Lee Enterprises, Inc. board of directors’ rejection of a shareholder nomination of directors because, in contravention of Lee’s bylaws, the notice neither was submitted by a stockholder of record, nor utilized the company’s required nominee questionnaire forms. This decision in Strategic Investment Opportunities LLC v. Lee Enterprises, Inc. further underscores the Court of Chancery’s recent decision in Rosenbaum v. CytoDyn, Inc., in which (as this blog previously reported here) the Court upheld a board’s decision to reject a nomination notice for failure to comply with information requirements in the governing bylaws. (more…)
Court of Chancery Awards $700M In Opinion Highlighting Opinion Of Counsel Risks And Power Of Contra Proferentem Doctrine
Once in a while, a court decision provides not just guidance for participants in corporate transactions but also can serve as a wakeup call for the players’ legal advisors. Such is the case with the post-trial decision in Bandera Master Fund LP et al v. Boardwalk Pipeline Partners LP, in which Vice Chancellor Laster resolved various disputes regarding a transaction through which Boardwalk Pipeline Partners, LP (“Boardwalk”) was taken private by its controller, Loews Corporation (“Loews”). The resulting $700 million damages award, and sharp criticism of the legal opinions provided in support of the transaction, has garnered headlines, but the decision is also notable for its review of several long-standing principles of Delaware law that provide guidance for contract negotiations and litigation alike. (more…)
“Upon Further Review…”: Delaware Supreme Court Admits Mistake and Clears Up Question of Direct vs. Derivative Standing
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). (more…)