Alignment Is Not Control: Court of Chancery Dismisses the KnowBe4 Challenge
In Le Clair v. KnowBe4, Inc., the Delaware Court of Chancery recently dismissed a putative class action brought by former stockholders who claimed that two institutional investors and KnowBe4’s CEO had joined forces as a control group, and that the directors who approved the deal breached their fiduciary duties. The Court of Chancery rejected the control-group theory outright and held that, even assuming the board was conflicted, a fully informed stockholder vote cleansed the transaction.
The decision illustrates the fact-specific showing that plaintiffs need in order to plead the existence of a control group, as well as to plead a disclosure deficiency sufficient to challenge a stockholder vote approving a transaction.
“Clear Day” Corporate Travel Gets Green Light From Delaware Supreme Court
The Delaware Supreme Court’s February 4, 2024 decision in Maffei (TripAdvisor) v. Palkon has substantially reduced procedural friction for Delaware corporations considering reincorporation in other states. It reversed the Court of Chancery’s ruling that denied TripAdvisor’s motion to dismiss and comes nearly a year after TripAdvisor’s interlocutory appeal was accepted. As Sidley’s Jim Ducayet and Deepa Chari wrote last May, the appeal’s acceptance despite the Court of Chancery’s refusal to certify its ruling for interlocutory appeal demonstrated the Delaware Supreme Court’s “willingness to step in … to ensure the coherence and predictability of corporate governance.” This month’s decision affirms Delaware’s commitment to predictability and underscores that a clear day decision to reincorporate elsewhere should be protected by the business judgment rule.
Look at the Big Picture: A Message to Boards Seeking Business Judgment Rule Protection
In City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings, Inc., the Delaware Supreme Court provided additional guidance on the contours of the MFW framework and its application – a timely reminder that stockholders (and courts) are looking at the big picture when assessing disclosures in the MFW context.
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…)
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. 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. 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.
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.
