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.
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…)
Controller’s Ability to Appoint and Remove Directors at Will Insufficient to Establish Demand Futility
In Harrison Metal Capital, an investment fund with an 18% stake in a privately held company called MixMax, Inc. believed the CEO was committing financial improprieties, but found no legal recourse for its complaint. Although certain features of the case are unusual as a factual matter, the Court of Chancery’s analysis of demand futility in a company with a controlling stockholder will be applicable in more conventional derivative actions as well.
Carvana SLC Drives Away Derivative Case
On March 27, 2024, Chancellor McCormick granted the Carvana Special Litigation Committee’s motion to dismiss after finding no wrongdoing by the Company’s controlling stockholders in connection with its March 2020 direct offering and the controlling stockholders’ subsequent sale of Company stock for over US$1 billion. See https://courts.delaware.gov/Opinions/Download.aspx?id=362010.
“A Bad Bull”: Chancery Court Rejects Plaintiffs’ Fee Application in Oracle Derivative Litigation
Plaintiffs’ bid for a US$5 million mootness fee in In re Oracle Corp. Derivative Litigation, C.A. No. 2017-0337-SG was denied by Vice Chancellor Glasscock, who noted that “not even great counsel can wring significant stockholder value from litigation over an essentially loyal and careful sales process.”
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.
Chancery Cancels Corwin for Post-Close Claims for Injunctive Relief
Earlier this month, Vice Chancellor Morgan T. Zurn of the Delaware Court of Chancery issued a decision regarding an unsettled question of Delaware corporate law: whether an uncoerced and fully informed vote of disinterested stockholders may ratify and defeat a post-close claim seeking to enjoin certain governance measures and alleged entrenchment devices negotiated by a company’s board as part of a transaction. The court concluded that such a vote, known commonly as “Corwin cleansing,” does not apply to post-close claims for injunctive relief under Unocal Corp. v. Mesa Petroleum Co. The court’s decision, at least for now, will have immediate significance for company boards and their advisors when negotiating transactions or stockholder agreements that include measures that may be characterized as defensive or entrenching existing management or directors.
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.
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.
SPAC in Action: Court of Chancery Applies Entire Fairness Review in Declining to Dismiss SPAC Lawsuit
The recent Court of Chancery decision in Delman v. GigAcquisitions3 offers some interesting insights into the circumstances in which “entire fairness” review applies, and where “Corwin cleansing” can be used to achieve a lesser review standard.
