An Arbitration by Any Other Name Is Still an Arbitration, Unless It’s an Expert Determination: Recent Cases Apply Delaware’s Authority Test to ADR Provisions

In M&A transaction agreements, contracting parties frequently negotiate a mechanism to make post-closing adjustments to the purchase price — for example, based on calculations of the target company’s working capital at the time of closing or an “earnout” based on the performance of the company for a specified period after closing. Because parties often disagree over these adjustments, the agreement generally will include a framework for resolving disputes. Although the particulars can vary, the parties typically will agree to negotiate in good faith and, if negotiations fail, to submit any remaining disputes to an independent accountant for final resolution. (more…)

Controller’s Ability to Appoint and Remove Directors at Will Insufficient to Establish Demand Futility

In Harrison Metal Capital, an investment fund with an 18% stake in a privately held company called MixMax, Inc. believed the CEO was committing financial improprieties, but found no legal recourse for its complaint.  Although certain features of the case are unusual as a factual matter, the Court of Chancery’s analysis of demand futility in a company with a controlling stockholder will be applicable in more conventional derivative actions as well.

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The Court of Chancery Prunes Back the Limits of Its Jurisdiction

The Delaware Court of Chancery is one of limited jurisdiction, accessible only when complete relief at law is unavailable. On March 4, 2024, in Graciano v Adobe Healthcare, Inc., Vice Chancellor Glasscock continued a trend from other recent cases toward guarding the limits of the Court of Chancery’s equitable jurisdiction, when he concluded that a claim for release of funds in escrow established through an M&A transaction was not equitable in nature—even though framed as a request for specific performance—because a declaratory judgment was the only judicial action required to afford the Plaintiff relief.

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Corporate Personal Jurisdiction, Mallory, and Forum-Shopping: What’s Next for Multistate or International Corporations?

A new federal court decision, Madsen v. Sidwell Air Freight1,  addresses the scope of general personal jurisdiction over corporations after the Supreme Court’s 2023 decision in Mallory v. Norfolk Southern Railway2.  Madsen suggests that many states’ laws stop short of asserting the kind of registration-based jurisdiction that Mallory approved. This decision highlights key arguments that in-house litigators should bear in mind if their companies do business in multiple states.

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Securities Litigation Against Life Sciences Companies: 2023

Securities class actions against life sciences companies are mostly second-order problems. The first-order problem is a business or regulatory setback that, when disclosed by the company or a third party, triggers a stock price decline. Following the decline, plaintiffs’ class-action attorneys search the company’s previous public statements and seek to identify inconsistencies between past positive comments and the current negative development. In most cases, plaintiffs’ attorneys then seek to show that any arguable inconsistency amounts to fraud — that is, they will claim that the earlier statement was knowingly or recklessly false or misleading. When the challenged statement appears in a public offering document (that is, a registration statement or prospectus), plaintiffs need only show that the statement was materially false or misleading, not that it was made with scienter or caused their losses.

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The Powers That Be: Supreme Court Holds That Non-Voting Stockholder Classes Cannot Invoke the “Powers, Preferences or Special Rights” Exception in Section 242, to Vote on Charter Amendments to Exculpate Officers From Duty of Care Breaches

Following amendments in August 2022 to Section 102(b)(7) of the Delaware General Corporate Law (“DGCL”) to allow corporations to include provisions in their respective charters exculpating officers for breaches of the duty of care, a number of corporations naturally took steps to add such provisions.  Stockholder challenges followed in In re Fox Corp./Snap Section 242 Litigation, No. 120, 2023, 2024 WL 176575 (Del. Jan. 17, 2024), as revised (Jan. 25, 2024), which involved parallel lawsuits contesting the manner in which two separate corporations with multi-class capital structures adopted amendments providing for officer exculpation.  The Delaware Supreme Court ultimately affirmed a lower court decision in favor of the corporations, holding that, consistent with their respective charters, the corporations validly obtained approval from stockholder classes permitted to vote and validly excluded from the vote non-voting stockholder classes.

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Carvana SLC Drives Away Derivative Case

On March 27, 2024, Chancellor McCormick granted the Carvana Special Litigation Committee’s motion to dismiss after finding no wrongdoing by the Company’s controlling stockholders in connection with its March 2020 direct offering and the controlling stockholders’ subsequent sale of Company stock for over US$1 billion. See https://courts.delaware.gov/Opinions/Download.aspx?id=362010.

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<a target=‘_blank’ href="https://www.sidley.com/en/people/s/stern-andrew-w">Andrew W. Stern</a>

Andrew W. Stern

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Charlotte K. Newell

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Elizabeth Y. Austin

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Jaime A. Bartlett

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Jim Ducayet

Chicago
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Yolanda C. Garcia

Dallas
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James Heyworth

New York
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Alex J. Kaplan

New York
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Jodi E. Lopez

Los Angeles

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Jon Muenz

New York
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Ian M. Ross

Miami
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Hille R. Sheppard

Chicago
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Heather Benzmiller Sultanian

Chicago
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Robert S. Velevis

Dallas
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Robin E. Wechkin

Seattle

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