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.

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Key Learnings Regarding the Protectiveness of the MFW Process for Controlling Stockholder Transactions

The Delaware Court of Chancery’s recent decision in City Pension Fund for Firefighters and Police Officers in the City of Miami v. The Trade Desk, Inc. et al., which granted the defendants’ motion to dismiss, demonstrates how protective the MFW process of both an independent special committee of the board and a majority of the minority stockholder vote can be in a transaction with a controlling stockholder. This post provides a reminder concerning the MFW process and highlights two key learnings from the Trade Desk decision, one concerning independence and the second concerning the minority vote.

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“Thick-As-Thieves” Narrative Persuades Court That Director Independence Is In Question in Carvana

The Delaware Court of Chancery recently denied a motion to dismiss stockholder derivative claims against Carvana Co. arising out of a stock offering Carvana announced in March 2020. The Court found that, based on the plaintiff’s allegations, it was reasonably conceivable that the stock offering had been orchestrated to take advantage of pandemic-related market volatility to benefit investors hand-selected by Carvana’s controlling stockholders. In doing so, the Court rejected the defendants’ arguments of demand futility and provided useful guidance regarding the types of allegations necessary to establish a director’s lack of independence.

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“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…)

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Second California Law Mandating Specific Number of Underrepresented Board Members Struck Down as Unconstitutional

For the second time, there has been a successful challenge to the constitutionality of California law requiring increased diversity on boards of directors.

On May 13, 2022, Judge Maureen Duffy-Lewis of Los Angeles Superior Court struck down California’s first board diversification law on the heels of an April 1, 2022, ruling by Judge Terry A. Green, also at Los Angeles Superior Court, each holding the respective board diversification law before them (one addressing gender discrimination and the other addressing racial, ethnic, and sexual orientation discrimination, respectively) to be unlawful. While these rulings are unlikely to be the last word on the viability of such statutes, they are the first to address their constitutionality head-on through lengthy, detailed rulings. As such, their reasoning may resonate with judges facing similar challenges in federal court and at the appellate level as well as in jurisdictions outside of California.

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All Roads Lead to Fair Price: The Tesla Decision

The Delaware Chancery Court’s recent post-trial decision in In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VCS (April 27, 2022), includes a helpful discussion of the importance of fair price when analyzing a transaction under the entire fairness analysis. There, Tesla stockholders brought claims against members of Tesla’s board of directors and Tesla’s CEO and controlling shareholder Elon Musk related to Tesla’s acquisition of SolarCity Corporation. (more…)

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Fate of Board Diversity Requirements In Jeopardy

Recent efforts by the California Legislature to increase corporate boardroom diversity hit a road bump due to the Los Angeles County Superior Court decision earlier this month in Crest v. Padilla, Case No. 20-STCV-37513, which held that California Corporations Code § 301.4 (“Section 301.4”) is unconstitutional. The statute, ruled the court, poses a “present total and fatal conflict” with the Equal Protection Clause of the California Constitution. (more…)

Corwin Cleanse Clarified: Key Lessons for Interested Directors

Since Corwin v. KKR Financial Holdings LLC, Delaware courts have adhered to the proposition that “when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” However, The Delaware Court of Chancery recently issued an opinion (available here)  clarifying the application of Corwin to the fiduciary duties of interested directors. The Court declined to dismiss a complaint alleging that the defendant directors’ approval of a merger was a breach of the directors’ duty of loyalty and constituted unjust enrichment. Specifically, the Court rejected the defendant directors’ contention that Corwin “cleansed” the transaction, and, as a consequence, explained that a duty of loyalty analysis was still appropriate. In what follows, we describe this case and offer some important takeaways concerning interested directors. (more…)

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Caremark’s Comeback Includes Potential Director Liability in Connection With Data Breaches

A Caremark­-based claim against a board of directors alleging a failure to monitor corporate operations has been said to be “the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” or at least to withstand a motion to dismiss.  Yet, Caremark has taken on renewed importance — as noted by this blog — following recent high-profile successes on duty-to-oversee claims, most notably in Marchand v. Barnhill in 2019 and In re Boeing in September 2021, and recent shareholder lawsuits alleging that data breach- and cybersecurity-related failures would have been preventable were it not for oversight failures by corporate officers and directors, are being plead asserting Caremark claims. (more…)

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Delaware Court Enjoins Shareholder Meeting for Disclosure Violations

The Delaware Chancery Court recently issued a rare preliminary injunction delaying the shareholder vote on a proposed merger between QAD, a cloud-based enterprise software company, and the private equity fund Thoma Bravo. The Court required additional disclosures to shareholders but stopped short of enjoining the deal entirely. The case provides useful guidance on conflicts-related disclosure where a controlling shareholder and minority shareholders are “competing” for consideration from a third-party acquirer. It also highlights Delaware’s reluctance to enjoin a transaction that offers shareholders a premium in the absence of a rival bidder, leaving post-closing damages claims as the sole remedy for shareholders who believe the deal involved contractual or fiduciary duty violations. (more…)

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