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.

Vice Chancellor Zurn’s First Post-Trial Opinion Provides a Cautionary Tale Regarding Private Ordering Under the LLC Act

In her first true Opinion for the Court, In re Coinmint, LLC, Vice Chancellor Zurn delved deeply into the tortured relationship between the two founders (and sole members) of Coinmint, LLC, a bitcoin mining firm, and ultimately held that Delaware’s strong preference for private ordering is not unlimited where the parties fail entirely to follow the formalities set out in the founding documents to which they collectively agreed.

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Follow the (Stone) Paper Trail: Court Addresses the Difficult Defense of Acquiescence

A recent opinion issued by the Delaware Court of Chancery in Stone & Paper Investors LLC v. Blanch resolved dueling allegations of corporate mismanagement and fraud that pitted a pair of long-time business partners against their protégé and his associates. In the 100+ page opinion, Vice Chancellor Paul A. Fioravanti, Jr., described a years-long scheme to induce a multi-million dollar investment in a new stone-based paper venture and then, when that venture fizzled, to drain the invested funds for personal gain in a series of undisclosed interested transactions. The facts of this case are extreme and involve an extended pattern of intentional wrongdoing. However, as an illustration of what can happen when bad actors take control, Stone & Paper provides important guidance to honest managers and other interested parties who draw salaries from, or otherwise transact with, the companies they control. Interested parties who engage in such transactions should take care that the material facts underlying any interested transactions have been fully disclosed and that they have complied with the requirements of the operating agreement, including documenting any necessary approvals. And if, by inadvertence or mistake, managers fail to secure the necessary approval for these transactions in advance, they should disclose all of the material facts as promptly as possible after the fact, such that the Board may be deemed to have acquiesced in the transactions.

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Stockholder Suits Are Fewer—and Smaller—in 1H 2021

According to Cornerstone’s midyear report on federal and state securities class actions, new securities case filings have continued a substantial downward trend in the first half of 2021.

Plaintiffs filed 112 class action securities cases in the first half of 2021, down 25% from 150 in the second half of 2020 and 38% compared to the 182 cases filed in the first half of 2020, following a marked trend that has emerged since 2019.  That trend continues to be animated in large part by significant declines in M&A-related federal filings, which fell to just 12 during the period, a 66% reduction (or 83% relative to the semiannual average of 70 during the last five years).

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In Case of Emergency, Break Glass: Litigation and Drafting Guidance From Delaware Chancery Court Opinion on “Material Adverse Effect” Clauses

The Delaware Chancery Court recently issued an opinion that confirms the difficulty of successfully invoking a “Material Adverse Effect” (“MAE”) clause in a merger agreement. In particular, the decision underscores the challenges of proving up an MAE — particularly when the target company is in a highly regulated industry — and provides useful guidance for drafting disproportionality exclusions in an MAE clause.

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What’s Cooking When It Comes to Enforcing Business Conduct Clauses in Earnouts: Shareholder Representative Services LLC v. Albertsons Cos.

In Shareholder Representative Services LLC v. Albertsons Cos., the Delaware Court of Chancery denied a motion to dismiss claims that a buyer intentionally avoided an earnout payment by misleading the seller about its plans to operate the acquired business after closing.  The case provides additional guidance in the ever-growing body of case-law addressing “business conduct” clauses in earnout agreements.

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No Shortcuts Allowed: Court of Chancery Rejects Attempt To Circumvent MFW’s Two-Step Mandate

On June 30, 2021, the Delaware Court of Chancery largely denied defendant directors’ motion to dismiss derivative claims for breaches of fiduciary duty arising from a controlling stockholder transaction. Vice Chancellor Fioravanti’s decision in Berteau v. Glazek rejected defendants’ “novel” argument that the “MFW doctrine,” set forth in Kahn v. M & F Worldwide Corp., could mandate application of the business judgment rule absent a majority-of-the-minority vote, and thus also serves as a reminder of the contours of the MFW doctrine.

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“How to Be ESG” — A Registered Fund Board’s Guide to ESG Compliance

How can directors of mutual funds and exchange-traded funds (ETFs) that focus on environmental, social, and governance (ESG) investing prepare for the increased regulatory scrutiny by the U.S. Securities and Exchange Commission (SEC)? The SEC, which is primarily concerned with “greenwashing,” the practice of conveying a false image to investors that a product is ESG-friendly, is focused on registered funds’ disclosures, controls, and policies and procedures.

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When Even “Entirely Fair” Is Not Enough

The Delaware Supreme Court recently reversed Chancellor Kathaleen S. McCormick’s post-trial decision upholding a disputed stock sale after concluding that the sale satisfied the entire fairness standard of review.  Although the Court affirmed the trial court’s entire fairness finding — Delaware’s most rigorous standard of review under which a defendant must establish that a transaction was the product of both fair dealing and fair price — it nevertheless reversed because the Court of Chancery concluded that entire fairness was the “end of the road” for judicial review and declined to consider the board’s motivations for the transaction.  Invoking the principle expressed in the seminal Delaware opinion in Schnell v. Chris-Craft that “inequitable action does not become permissible merely because it is legally possible,” the Supreme Court remanded the case for further consideration of the motivation for and purpose of the subject stock sale.

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