The resolution of corporate law disputes has a significant impact on the stockholders, directors, officers, and employees of companies around the world. With more than 60% of the Fortune 500 incorporated in Delaware, decisions of the state’s courts have a direct impact on leading companies worldwide and greatly influence the law of other jurisdictions. The Enhanced Scrutiny blog provides timely updates and thoughtful analysis on M&A and corporate governance matters from the Delaware courts and, on occasion, from other jurisdictions.

Entire Fairness Standard Applied When Controlling Stockholder Negotiated Economic Terms With a Minority Stockholder Before MFW Protections Were in Place

The Delaware Chancery Court recently held that a going-private transaction was not entitled to the deferential business judgment standard of review because the controlling stockholder failed to condition the transaction on special committee and minority stockholder approval before engaging in substantive economic discussions with a minority stockholder. In re HomeFed Corp. S’holder Litig., C.A. No. 2019-0592-AGB (Del. Ch. July 13, 2020).

Read More

EmailShare

Caremark Claim Allowed to Proceed Against Audit Committee Members Based on Oversight Failures

The Delaware Chancery Court recently denied a motion to dismiss a shareholder derivative suit against directors and officers of Kandi Technologies Group, Inc., a publicly traded Delaware corporation based in China. Hughes v. Hu (Del. Ch. Apr. 27, 2020). The company had persistent problems with financial reporting and internal controls, encountering particular difficulties with related-party transactions dating back to 2010. In March 2014, the company disclosed material weaknesses in financial reporting and oversight, including a lack of audit committee oversight and a lack of internal controls for related-party transactions. The company pledged to remediate these problems. However, in March 2017, the company disclosed that its preceding three years of financial statements needed to be restated and that it continued to lack sufficient expertise and/or controls relating to accounting and SEC reporting.

Read More

EmailShare

Delaware Supreme Court Upholds Federal Forum Provisions

On March 18, 2020, the Supreme Court, in Salzberg v. Sciabacucchi, upheld the validity under Delaware law of “federal-forum provisions,” in which Delaware corporations mandate that claims brought under the Securities Act of 1933 be filed in a federal court.

The highly anticipated opinion, reversing a Chancery Court decision, underscores Delaware’s preference for private ordering and confirms that corporate managers and stockholders have significant latitude in choosing the fora for certain types of litigation. While the decision confirms the facial validity of this particular type of forum provision, other ramifications of this decision remain unclear, and this topic will undoubtedly be the subject of further litigation or possibly legislative action.

Read More

EmailShare

Special Committee Must Be Formed “Ab Initio” to Cleanse a Transaction With a Majority-Conflicted Board

The Delaware Chancery Court recently held that, for a transaction involving a majority-conflicted board to be entitled to business judgment review (rather than the entire fairness standard), the special committee that approved the transaction must have been sufficiently constituted and authorized ab initio (i.e., “from the beginning”). Salladay v. Lev (Del. Ch. Feb. 27, 2020). In doing so, Vice Chancellor Sam Glasscock III borrowed from the framework used to cleanse a controlling stockholder transaction under Kahn v. M&F Worldwide Corp. (MFW), 88 A.3d 624 (Del. 2014). Under MFW, a controlling stockholder transaction is entitled to business judgment review if the controller conditions the transaction ab initio on both the approval of an independent special committee and the uncoerced, informed vote of a majority of the minority stockholders.

Read More

EmailShare
EmailShare