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.

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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Sometimes the Best Defense Is Just … a Defense

On June 16, 2021, the Delaware Court of Chancery denied the plaintiffs’ motion for partial judgment on the pleadings regarding portions of their declaratory judgment claim filed in Dr. Thomas Markusic, Dr. Maxym Polyakov, et al. v. Michael Blum, Patrick Joseph King, et al.  Plaintiffs filed the declaratory judgment action in an attempt to preempt their adversary’s potential claims, and Chancellor McCormick’s rejection of the requested declaratory relief offers a key lesson for litigants contemplating a similar preemptive action.

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The Court of Chancery Breaks New Ground in Allowing “Reverse” Veil Piercing

In a matter of first impression, Vice Chancellor Joseph R. Slights III recently concluded in Manichaean Capital, LLC v. Exela Technologies, Inc. that Delaware law permits a claim for “reverse” veil-piercing — that is, going after the assets of a subsidiary as opposed to a parent corporation. The decision provides a limited yet potentially powerful tool for those seeking to enforce judgments in the context of complex corporate structures, particularly where a corporate family has taken steps to limit assets flowing through the subsidiary that is liable. It also provides occasion to remind business entities of the attendant risks of failing to respect corporate separateness and form.

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