On May 14, 2015, the Delaware Supreme Court clarified that, even in conflict-of-interest transactions subject to “entire fairness” review, breach of fiduciary duty claims against independent, disinterested directors should be dismissed at the pleading stage where a complaint fails to allege a non-exculpated breach. See In re Cornerstone Therapeutics, Inc. S’holder Litig., Case No. 564, 2014; Leal, et al. v. Meeks, et al., Case No. 706, 2014 (Del. May 14, 2015). The Court’s decision resolves two separate consolidated appeals by outside directors of Cornerstone Therapeutics, Inc. and Zhongpin, Inc. (For a discussion of the Chancery Court’s Zhongpin decision, see Jason M. Halper, et al., Delaware Court Determines That 17.5% Stockholder Seeking to Take Company Private Could Be Deemed a Controller, The M&A Lawyer, Jan. 2015, Vol. 19, Issue 1.) In each case, the Chancery Court denied the independent directors’ motions to dismiss, even though there were no allegations that those directors committed a breach of loyalty or acted in bad faith such that the companies’ Section 102(b)(7) charter provisions would not apply. Instead, those courts held that “entire fairness” review effectively precludes dismissal of breach of fiduciary duty claims at the pleading stage based on a Section 102(b)(7) charter provision. The Supreme Court’s rejection of these decisions potentially offers significant protections to independent directors tasked with deciding whether to approve transactions involving interested directors.
On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights. See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015). Vice Chancellor Noble’s decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price. AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.
On April 20, 2015, the Delaware Court of Chancery issued a decision awarding $171 million in damages to the common unitholders of a limited partnership against its general partner in connection with a “dropdown” transaction. The decision is the latest in a series of decisions by the Chancery Court concerning the conduct of directors and advisers in conflict of interest and/or sale of the company transactions. See also In re Rural/Metro Corp. S’holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S’holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014). The decision yet again highlights areas that should be of concern to boards and their advisers in such transactions.
As we have previously discussed in prior posts, shareholder demands to inspect confidential corporate information are being made with increased frequency, and are forcing more and more companies to grapple with their legal obligations to respond. Earlier this month in Fuchs Family Trust v. Parker Drilling, the Delaware Court of Chancery issued further guidance, and explained why in certain cases, companies need not provide any information at all.
On December 19, 2014, the Supreme Court of Delaware reversed the Delaware Court of Chancery’s November decision to preliminarily enjoin for 30 days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. The Supreme Court decision clarifies that in a sale-of-control situation, Revlon and its progeny require an effective, but not necessarily active, market check, and there is no “specific route that a board must follow” in fulfilling fiduciary duties.
On November 26, 2014, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging a going-private transaction where the company’s CEO, Chairman and 17.5% stockholder was leading the buyout group. In his decision in the case, In Re Zhongpin Inc. Stockholders Litigation, Vice Chancellor Noble concluded that the complaint pled sufficient facts to raise an inference that the CEO, Xianfu Zhu, was a controlling stockholder, and as a result, the deferential business judgment rule standard of review did not apply. Instead, the far more exacting entire fairness standard governed, which in turn led the Court to deny the motion.
This is the fourth recent decision to address when a less-than 50% stockholder can be considered a controller, an issue that determines whether the alleged controller owes fiduciary duties to other stockholders and the standard of review the Court will apply in evaluating the challenged transaction. The decision therefore provides important guidance for directors and their advisors in structuring transactions involving large stockholders.
On November 25, 2014, the Delaware Court of Chancery issued a decision in In Re Comverge, Inc. Shareholders Litigation, which: (1) dismissed claims that the Comverge board of directors conducted a flawed sales process and approved an inadequate merger price in connection with the directors’ approval of a sale of the company to H.I.G. Capital LLC; (2) permitted fiduciary duty claims against the directors to proceed based on allegations related to the deal protection mechanisms in the merger agreement, including termination fees potentially payable to HIG of up to 13% of the equity value of the transaction; and (3) dismissed a claim against HIG for aiding and abetting the board’s breach of fiduciary duty.
The case provides important guidance to directors and their advisors in discharging fiduciary duties in a situation where Revlon applies and in negotiating acceptable deal protection mechanisms. The decision also is the latest in a series of recent opinions addressing and defining the scope of third party aiding and abetting liability.
On November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for thirty days a vote by C&J Energy Services stockholders on a merger with Nabors Red Lion Limited, to allow time for C&J’s board of directors to explore alternative transactions. In a bench ruling in the case, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Inc., Vice Chancellor Noble concluded that “it is not so clear that the [C&J] board approached this transaction as a sale,” with the attendant “engagement that one would expect from a board in the sales process.” Interestingly, the Court called the issue a “very close call,” and indicated it would certify the question to the Delaware Supreme Court at the request of either of the parties (at this time it does not appear either party has made a request). The decision provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is assuming minority status in the combined entity yet also acquiring management and board control.
Recently, the Delaware Court of Chancery in Pfeiffer v. Leedle declined to dismiss a shareholder derivative action against a board for breach of fiduciary duty, where the directors allegedly approved stock options exceeding the maximum number of options permissible under the corporation’s stock incentive plan. C.A. No. 7831-VCP (Del. Ch. Nov. 8, 2013).
The Stock Incentive Plan provided that no participant could receive options relating to more than 150,000 shares of stock in any calendar year. Nevertheless, the board of directors allegedly awarded the CEO nearly 450,000 stock options in 2011, and 285,000 stock options in 2012.
Defendants moved to dismiss the complaint for failure to make a demand, and for failure to state a claim. The Court of Chancery rejected both arguments. Read More
Executive compensation decisions are core functions of a board of directors and, absent unusual circumstances, are protected by the business judgment rule. As Delaware courts have repeatedly recognized, the size and structure of executive compensation are inherently matters of business judgment, and so, appropriately, directors have broad discretion in their executive compensation decisions. In light of the broad deference given to directors’ executive compensation decisions, courts rarely second-guess those decisions. That is particularly so when the board or committee setting executive compensation retains and relies on the advice of an independent compensation consultant.
Nevertheless, despite the high hurdle to challenging compensation packages, shareholder plaintiffs continue to aggressively challenge executive compensation decisions, in particular at companies that have performed poorly and received negative or low say-on-pay advisory votes. Read More