Source: https://www.delawarecounselgroup.com/delaware-law-updates/page/2/
Timestamp: 2019-04-24 20:20:09+00:00

Document:
In Sciabacucchi v. Liberty Broadband et al., the Delaware Court of Chancery refused to apply the business judgment standard of review to an equity issuance completed in connection with two acquisitions (the “Acquisitions”) made by a Delaware corporation (“Charter Communications”). The plaintiff, a shareholder of Charter Communications, filed suit against the directors of Charter Communication for breach of fiduciary duty in connection with their issuance of equity to the largest stockholder, Liberty Share, of the company purportedly to help finance the Acquisitions (the “Issuance”). The Acquisitions and the Issuance were both approved by separate votes of the majority of shareholders unaffiliated with Liberty Share. Nevertheless, the plaintiff argued that the shareholder approval of the Issuance was coerced because the largest shareholder controlled the Board.
The Court disagreed and determined that Liberty Share did not control the Board. However, the Court did find that the unaffiliated shareholder approval of the Issuance was “structurally coercive” because the directors made completion of the lucrative Acquisitions contingent upon the shareholders’ approval of the inequitable Issuance. In other words, to receive the full benefit of the Acquisitions, the shareholders had to “swallow the pill” of the Issuance. As a result, the Court refused to apply the business judgment standard of review under the Corwin Presumption.
BOTTOM LINE: Delaware courts will not uphold a shareholder vote unless the shareholders were truly free to accept or reject a transaction without structural restraints.
Finally, Some Sense is Made of Good Faith and Bad Faith!
In Brinckerhoff v. Enbridge Energy Company, Inc., et al., long-term investors of a publicly-traded Delaware limited partnership (the “MLP”) claimed that the General Partner (the “GP”) breached its contractual duty of good faith when the GP agreed to what investors considered an unfair transaction that was influenced by a conflict of interest by intentionally breaching specific requirements of the MLP’s partnership agreement (the “LPA”) by agreeing to a conflicted, unfair transaction (the “Transaction”). Notably, the LPA replaced traditional fiduciary duties with a contractual duty of good faith.
The Court of Chancery dismissed the plaintiffs’ claims for failing to plead a breach of the contractual duty of good faith. On appeal, the Delaware Supreme Court reversed the Court of Chancery’s decision and held that the LPA’s general good faith standard did not displace specific affirmative obligations of the LPA. To hold otherwise would arguably allow the GP to breach other obligations of the LPA as long as it did so in good faith.
a provision that exculpated the GP for monetary damages for actions taken in good faith.
The Supreme Court disagreed with the Court of Chancery and its determination that the plaintiffs were required to show that the GP acted in bad faith under Section 6.10 before it could be determined that the GP breached the “fair and reasonable” standard of Section 6.6. Instead, the Court found that Section 6.6 was an affirmative obligation the GP was required to satisfy, while Section 6.10, “on the other hand, was a general standard of care that operates in the spaces of the LPA without express standards.” “Although [the] GP must act in good faith under the LPA, and is not subject to fiduciary standards of care, it still must comply with the specific requirements of the LPA.” Further, the Court found that, although Section 6.8 immunized the GP from monetary damages, it did not absolutely immunize the GP because equitable remedies were still available to plaintiffs.
Finally, the Court reversed prior precedent that held that pleading bad faith required a showing that the decision at issue was “so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” Instead, the Court determined that plaintiffs need only show that the GP did not reasonably believe its action to be in, or not inconsistent with, the best interests of the Partnership.
BOTTOM LINE: Obligations negotiated in a limited partnership agreement cannot be ignored even if a general partner acts in good faith. The same principal should also apply in the LLC context.
In In Re Saba Software, Inc. Stockholder Litigation, the defendants argued that a conflicted merger had been cleansed by a fully informed, uncoerced vote of disinterested shareholders. The Court rejected the defendants’ argument and concluded that the shareholder vote was not informed given the proxy statement contained material omissions. The Court also found that the lack of information in the proxy statement had a coercive effect that left the shareholders with no choice but to approve the merger. As a result, the shareholder vote did not “cleanse” the conflicts of interest that existed.
The Saba decision illustrates the distinction between form and substance. In contrast to Saba, the Delaware Supreme Court held in Corwin v. KKR Financial Holdings LLC that the business judgment standard of review will apply to transactions subject to enhanced scrutiny if a majority of disinterested stockholders approve the transaction and are not coerced unless the challenged transaction involves a conflicted controller. Since that time, the Delaware Court of Chancery has expanded the “Corwin Presumption” to apply to transactions generally subject to entire fairness (except for those involving a conflicted controller) and, on that basis, has dismissed several plaintiff-shareholder lawsuits by applying the business judgment rule. However, the vote itself works only if complete information is provided and there is no coercion.
BOTTOM LINE: The fact that a vote of shareholders was taken will not guarantee application of business judgement rule; substance matters! The facts underlying the vote matter.
Dieckman v. Regency GP LP, et al.
Limited partners of a publicly traded Delaware limited partnership (the “MLP”) claimed that the General Partner (the “GP”) of the MLP failed to satisfy the safe harbors provided in the MLP’s partnership agreement to cleanse a conflict before approving a merger with an affiliate. The MLP’s partnership agreement contained two safe harbor provisions: (1) approval by an independent Conflicts Committee, or (2) the approval a majority of limited partners unaffiliated with the GP. The MLP partnership agreement did not address how the GP was required to conduct itself when seeking limited partner approval. However, the partnership agreement eliminated fiduciary duties and the only requirement in the MLP partnership agreement relating to a merger was that the GP provide a copy of the merger agreement to the limited partners.
The Court of Chancery ruled that the second safe harbor in the MLP partnership agreement had been satisfied. Although plaintiffs argued that proxy statement distributed to them contained materially misleading disclosures, the Court of Chancery determined that “the express waiver of fiduciary duties and the clearly defined disclosure requirement . . . prevent[ed] the implied covenant [of good faith and fair dealing] from adding any additional disclosure obligations to the agreement.” As a result, the Court dismissed the plaintiffs’ claim.
On appeal, the Delaware Supreme Court reversed the Court of Chancery’s decision. The Court determined that the express terms of the safe harbor provisions “naturally and obviously” implied certain conditions including “a requirement that the [GP] not act to undermine the protections afforded unitholders in the safe harbor process.” The Court applied the rarely-used doctrine of good faith and fair dealing to hold that the GP was bound to use good faith when obtaining safe harbor approval.
BOTTOM LINE: The express elimination of fiduciary duties in a limited partnership agreement has no effect on the application of the implied covenant of good faith and fair dealing. If a safe harbor is included in a partnership agreement, the GP will be subject to an implied duty to obtain safe harbor approval in a good faith manor.
BOTTOM LINE: Corporate directors may only be removed by a majority of shareholders entitled to vote at an election of directors. Although this standard may not be modified in bylaws, there is a possibility that the right may be modified in a certificate of incorporation.
The Delaware Court of Chancery reviewed a shareholder’s challenge to a fee-shifting provision found in a forum-selection bylaw that required all internal corporate claims be brought in Delaware. The bylaw also provided that any shareholder “who fails to obtain a judgment on the merits that substantially achieves … the full remedy sought, shall be obligated to reimburse [the corporation] for the attorneys’ fees and other expenses it incurred in connection with such action.” Although no internal corporate claim had yet been filed outside of Delaware, the Court determined that the shareholder’s action was ripe for review because of the substantial deterrent effect of the bylaw. The Court struck down the fee-shifting provision of the bylaw as a direct violation of Section 109(b) of the DGCL, which prohibits the use of a bylaw that imposes liability on shareholders for attorneys’ fees or expenses in connection with an unsuccessful internal corporate claim. The Court rejected the argument that Section 115, which permits Delaware organizational documents to choose Delaware as an exclusive forum for all internal corporate claims, and Section 109(b) were meant to be read together. The Court determined that 109(b) was intended to prohibit fee-shifting for all internal corporate claims, even when those claims are filed outside of Delaware in violation of an exclusive forum bylaw. The Court noted that Section 109(b) and Section 115 make no reference to one another and found that the plain text of Section 109(b) prohibits “any provision” that would shift fees in connection with an internal corporate claim.
BOTTOM LINE: Regardless of the structure of the bylaw, any provision that purports to shift fees to the shareholders in connection with an internal corporate claim is facially invalid. Delaware corporations should avoid any attempt to vary the rule as doing so will open the corporation up to shareholder claims such as breach of fiduciary duty.
What Information Must Be Disclosed to Minority Shareholders in a Short-Form Merger?
The Delaware Court of Chancery was asked to award a quasi-appraisal to remedy a purported breach of the duty of disclosure in connection with a short-form merger. The merger, which was approved by a Special Committee of the Board of the target corporation, closed in September 2015.
In rejecting the plaintiff’s quasi-appraisal claim, the Court determined that the eighty-page notice sent to the minority shareholders was sufficient because it set forth: (i) sufficient financial data; (ii) the reasoning behind the parent corporation’s offering price; (iii) necessary information regarding the Special Committee’s determination of fair price of the target corporation; (iv) the target corporation’s amount of cash, cash equivalents, and the planned use of each; and (v) facts showing the independence and, where applicable, the potential conflicts, of the members of the Special Committee.
BOTTOM LINE: Notification of a short-form merger must contain all information that is substantially likely to significantly alter the total mix of information already provided to the minority shareholders.
The Delaware Court of Chancery dismissed a complaint that alleged breach of fiduciary duty against directors that approved a merger. The Court concluded that the merger, which would generally have been subject to enhanced scrutiny review, was cleansed by the fully informed, uncoerced vote of the disinterested stockholders. As a result, the business judgment rule applied and, in order to move forward, the plaintiff was required to prove that the directors’ decision constituted waste.
BOTTOM LINE: The fully informed, uncoerced vote of a disinterested majority of shareholder will cleanse a challenged transaction that would generally be subject to enhanced scrutiny.
Sandys v. Pincus, et al.
BOTTOM LINE: Delaware courts will review the independence of directors in as detailed a fashion as they review the independence of financial advisors. As a result, plaintiffs must be extremely diligent in their review of a board’s independence before determining that a pre-suit demand on the board is unnecessary.
The Delaware Court of Chancery addressed a claim of fraud in connection with the purchase of six subsidiary companies of ValueClick, Inc. made pursuant to a Purchase Agreement. The plaintiff-buyer alleged that ValueClick, Inc. fraudulently induced it to overpay for one of the subsidiaries. The Court found that this claim was foreclosed based on the combination of an affirmative anti-reliance clause and an integration clause found in the Purchase Agreement. The anti-reliance clause stated: “The Buyer acknowledges that neither the Seller nor any of its Affiliates or Representatives is making, directly or indirectly, any representation or warranty with respect to any [purchase-related information], unless any such information is contained in [this Agreement].” The Purchase Agreement’s integration clause set forth standard integration language that clearly defined the writings that comprised the parties’ agreement.
BOTTOM LINE: In order to foreclose claims of fraud based on statements or omissions made outside the terms of a contract, the contract must contain an affirmative disclaimer that either: (1) specifically includes what the party claiming fraud is relying upon when it decides to enter into the agreement or (2) that the party claiming fraud was not relying on any representations made outside of the agreement.
If your deal documents do not properly establish which document trumps another, the unintended results may be very costly.
In this connection, please see a new Delaware Supreme Court opinion by clicking here.
It is a reminder to take extra care with your subscription documents, side letters, LLC agreements, partnership agreements and series provisions, just to name a few.
Abelmann v. Granum, et al.
The Delaware Court of Chancery addressed a petition for judicial dissolution of a Delaware limited liability company (the “Company”). The court began its analysis by noting that judicial dissolution of an LLC is granted sparingly and is only proper when “it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.” Both the petitioner and the respondents agreed that the Company was deadlocked and needed to be dissolved. However, the respondents did not want the dissolution of the Company to negatively affect their position in a separate action being litigated in California. To resolve this problem, the Court issued an order that dissolved the Company but mandated that the dissolution not foreclose or affect the respondents’ standing in the separate California Action.
BOTTOM LINE: You can avoid deadlock between the members of an LLC by carefully drafting the operating agreement to account for such a situation. A sound operating agreement will provide the process that must be used to resolve a deadlock. For example, the operating agreement could include a dispute resolution clause, which requires the parties that are deadlocked to submit the issue to a neutral third party for resolution.
NOTE: This is an interesting case in that it involves a Delaware Court ordering a party not to use a specific defense in an out-of-state action as a condition to judicial dissolution. As such, it involves principles of equity under Delaware law as well as principles of choice of law. If appealed, this case should be closely observed to see how the Delaware Supreme Court addresses the interplay between both sources of law.
If You Want an Agreement to Directly Modify an LLC Agreement, Say So!
Finger Lakes Capital Partners, LLC v. Honeoye Lake Acquisition, LLC, et al.
The Delaware Supreme Court was asked to review a Court of Chancery decision that determined the profits of a successful investment entity would be distributed in accordance with the dictates of an LLC Agreement only. Ancillary documents, including a term sheet and clawback agreement, would not be considered. The Court determined that such ancillary documents were secondary agreements, which applied only to reallocate the distributions made pursuant to the LLC operating agreement.
BOTTOM LINE: If transaction documents do not properly establish a hierarchy of authority among them, unintended consequences may result. As a result, when entering an investment venture, it is vital to understand the intertwining relationship among transaction documents.
The Court of Chancery addressed a claim for breach of fiduciary duty in connection with a going-private transaction that utilized the deal protections set forth by the Delaware Supreme Court in Kahn v. M&F Worldwide, Corp. The Court reiterated that the proper use of the Kahn protections makes it nearly impossible for minority shareholders to successfully claim breach of fiduciary duty against controlling shareholders or board members in a going-private transaction. The plaintiff’s only options are to successfully allege that the Kahn protections were not satisfied or that the transaction at issue constituted waste under Delaware law.
BOTTOM LINE: The business judgment rule will apply, and all but foreclose successful claims of breach of fiduciary duty, when (i) a transaction is conditioned on the approval of both an independent Special Committee of the Board and an informed majority of the minority stockholder vote; (ii) the Special Committee is empowered freely to select its own advisors and to say no definitively; (iii) the Special Committee meets its duty of care in negotiating fair price; and (iv) there is no coercion of the minority shareholders.
The plaintiff-stockholder sued the defendant-corporation seeking a declaration that a provision in a corporation’s bylaws was illegal. The provision at issue provided that directors could be removed by shareholders “for cause.” However, pursuant to Section 141(k) of the Delaware General Corporation law, stockholders may remove directors “with or without cause.” After the plaintiff filed for summary judgment, the defendant-corporation amended its bylaws to remove the relevant language, which mooted the action. In addressing the proper fee award in the mootness proceeding, the Court recognized that the bylaw provision at issue was not explicitly illegal, but was misleading to stockholders and could have a chilling effect on the exercise of their franchise under Section 141.
BOTTOM LINE: Shareholders have an absolute right to remove directors with or without cause. A bylaw provision that speaks only to removal of directors “with cause,” without mentioning the removal of directors “without cause,” is misleading and potentially illegal. A bylaw setting forth the process a shareholder may use to remove directors must be drafted to make clear that “cause” is not a requisite for such removal.
The Delaware Court of Chancery was asked to determine whether directors of a Delaware corporation (the “Corporation”) could be found to have individually breached a Shareholders Agreement (the “Agreement”) between the Corporation and its largest shareholder (the “Shareholder”) based on the directors’ signing the Agreement. The Court ruled that it was “clear from the face of the [Agreement]” that the directors did not sign the Agreement in their individual capacity, but rather signed the Agreement on behalf of the Corporation. As such, they were not party to the Agreement under Delaware law and could not be found to have breached its terms.
BOTTOM LINE: If you wish a contract to be enforceable against a certain party, that party must sign the contract in its individual capacity. The fact that the individual has signed as a representative of another is simply not sufficient. Additionally, a standard representation that a corporation will remain in existence in good standing is not a prohibition of its dissolution or cancellation. In order to ensure such a restriction, specific representations must be carefully drafted and included in the relevant document.
The Delaware Court of Chancery was asked to determine whether the beneficial owner (the “LLC”) of a statutory trust (the “Trust”) had the right to inspect the books and records of the trust. The answer depended upon whether the Trust Agreement of the Trust incorporated the terms of 12 Del. C. § 3819, which authorizes restriction to access under certain circumstances. The Court determined that the Trust Agreement did not incorporate the restrictions permissible under § 3819, and, as a result, access could not be restricted. In so doing, the Court relied upon judicial precedent holding that a contractual books and records right in a limited liability company or limited partnership is independent of the relevant statutory right.
BOTTOM LINE: Like Delaware LLCs and LPs, Delaware statutory trusts may create rights under their Trust Agreements separate and apart from their statutory rights. In such instances, the relevant statutory rights will be inapplicable, assuming the Delaware Statutory Trust Act permits modification.
The Court of Chancery analyzed and refined the same principle in a separate opinion published one day after the court’s decision in the case above. In Larkin v. Shah, former shareholders of Auspex Pharmaceuticals, Inc. filed suit for post-closing monetary damages in connection with the 2015 acquisition of Auspex (the “Merger”), which was approved by a majority of Auspex’s disinterested shareholders. The plaintiffs alleged that the directors of Auspex breached their fiduciary duties by entering into the first all-cash deal they could land without regard for other superior offers. They contended that the Corwin decision, which held that the business judgment rule applies to “a transaction not subject to the entire fairness standard, that is approved by a fully informed, uncoerced vote of the disinterested stockholders,” did not apply to any transactions which are subject to entire fairness. The Court disagreed and found that the only transactions subject to entire fairness that cannot be cleansed by proper stockholder approval are those involving a conflicted controller. The Court concluded that because the Merger did not involve a conflicted controller, the Corwin decision applied and the business judgment rule was the appropriate standard of review.
BOTTOM LINE: The business judgment standard applies to transactions subject to enhanced scrutiny if a majority of disinterested, uncoerced stockholders approve the transaction unless the challenged transaction involves a conflicted controller. This application of the rule may not be rebutted. Therefore, if a Board of Directors discloses all information related to the conflict to minority shareholders and they approve the transaction anyway, the plaintiff-shareholders seeking relief must overcome the steep burden of the business judgment rule. The only practical way the plaintiffs will be able to accomplish this is by pleading facts showing the stockholder vote was not informed, was coerced, or that a conflicted controller was in fact at issue.

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