Previously this blog has discussed the importance of procedural compliance with various transaction structures when the transaction involves controlling or interested parties (see an example here). 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 (see here for a helpful discussion about MFW protections). 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.
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.
The Delaware Court of Chancery recently granted a motion by a single-member special litigation committee to terminate a stockholder derivative suit. In a 77-page opinion, Vice Chancellor Lori W. Will found that the one-member special litigation committee conducted a good faith investigation and reached reasonable conclusions regarding the transactions at issue. The opinion demonstrates that the court’s oversight of a single-member special litigation committee will be rigorous, and it offers valuable practice points for future single-member committees.
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.
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.
The Delaware Court of Chancery recently issued an opinion that reminds controlling stockholders they can successfully implement a going private merger even when a competing bidder makes an offer that is substantially higher than that offered by the controlling stockholder. The court dismissed a lawsuit brought by former Eidos Therapeutics, Inc. stockholders against Bridgebio Pharma, Inc. and three of its directors over a merger in which Bridgebio, as Eidos’s controlling stockholder, acquired the remaining minority shares of Eidos stock. Smart Loc. Unions & Councils Pension Fund v. BridgeBio Pharma, Inc., No. 2021-1030-PAF, 2022 WL 17986515 (Del. Ch. Dec. 29, 2022).
On December 27, 2022, after a 10-day bench trial in July and August 2022 and post-trial argument, the Court granted Plaintiffs’ stipulation to voluntarily dismiss Renée James, the Chair of a Special Committee of the Oracle Board 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. This case is one of the rare post-Cornerstone director independence cases to proceed to trial, following an investigation and decision by a special litigation committee to return the case to the shareholder Plaintiffs to pursue. The case was also procedurally unique as Plaintiffs opted to dismiss James following the 10-day trial and post-trial argument, rather than wait for an opinion from the Court.
In October 2021, in United Food v. Zuckerberg, the Delaware Supreme Court adopted a new three-part test for evaluating whether demand is futile in derivative suits. Prior to Zuckerberg, demand futility was long governed by Aronson v. Lewis (1984) and Rales v. Blasband (1993). The Aronson test excuses demand as futile if the allegations raise a reasonable doubt that “the directors are disinterested and independent” or that “the challenged transaction was otherwise the product of a valid business judgment.” The Rales test excuses demand if the allegations create a reasonable doubt that a majority of the board in place at the time of the demand “could have properly exercised its independent and disinterested business judgment in responding to a demand.” Without expressly overruling Aronson and Rales, the Delaware Supreme Court in Zuckerberg adopted a new three-part test, applied on a director-by-director basis, that excuses demand as futile if any of the three parts is true for at least a majority of the members of the board. The Delaware Supreme Court’s affirmance of the Court of Chancery’s holding in In re Camping World that the plaintiffs did not properly plead that demand was futile further cements the utilization of the Zuckerberg standard as the governing law in demand futility analysis.
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.
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…)