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Delaware Quarterly: January–March 2013 By Jonathan W. Miller, John E. Schreiber, Jill K. Freedman, Ian C. Eisner, Anthony J. Ford, Paul Whitworth, Lee A. Pepper and Sofia Arguello Although it was a relatively low-volume quarter for court opinions, the Delaware courts nevertheless addressed a number of important business, corporate and securities law issues, giving practitioners plenty to consider. Warranting particular attention are three decisions from the Court of Chancery that bear on the nature and scope of directors’ fiduciary duties in various contexts. In Kallick v. SandRidge Energy, Inc.,(1) Chancellor Strine clarified the duties of directors with respect to takeover deterrents, such as so-called “proxy put” provisions that often appear in financing and other commercial agreements, and the potential threat they pose to the stockholder franchise. In another much-discussed opinion authored by Chancellor Strine, In re Puda Coal, Inc. Stockholders Litigation,(2) the court sent a strong message to directors of companies with significant foreign operations, holding – albeit in the motion to dismiss context – that directors must thoroughly understand and actively monitor the company’s overseas affairs or risk being held liable for breaching their fiduciary duties. Finally, in In re Novell, Inc. Shareholder Litigation,(3) Vice Chancellor Noble cautioned that, as a general matter, target boards considering a potential sale transaction should either treat potential bidders equally or create a clear and detailed record justifying any disparity in treatment. Perhaps of even more long-term significance to practitioners were the announcements this quarter by the Delaware State Bar Association that it is considering a new round of amendments to both the Delaware General Corporation Law, 8 Del. C. §§ 1-101, et. seq., (the “DGCL”) and the Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101, et. seq., (the “LLC Act”) – amendments, which, if adopted (as they are expected to be), could significantly alter Delaware practice in several notable respects. All of these matters are discussed in greater detail below, followed by synopses of several other recent decisions 1. 2. 3.
C.A. No. 8182-CS, 2013 WL 868942 (Del. Ch. Mar. 8, 2013). C.A. No. 6476-CS (Del. Ch. Feb. 6. 2013). C.A. No. 6032-VCN, 2013 WL 322560 (Del. Ch. Jan. 3, 2013).
Winston & Strawn LLP | 2 issued by the Delaware courts across a broad range of topics, including: alternative entities; appointment of receivers; arbitration awards; attorneys’ fee awards; books and records actions; contract interpretation; choice of law issues; class actions; damages calculations; derivative actions; discovery disputes; executive compensation; fiduciary duties; preliminary injunctions; settlement approval; standing; and other matters of Delaware practice and procedure.
Kallick v. SandRidge Energy, Inc. In a noteworthy decision this quarter, Chancellor Strine found that the directors of SandRidge Energy, Inc. (“SandRidge”) likely violated their fiduciary duty of loyalty by failing to neutralize a so-called “proxy put” that would be triggered by the election of an activist shareholder’s competing slate of directors. As a result, the court enjoined the SandRidge board from soliciting or voting consent revocations until it defused the proxy put by approving the dissident slate.
Background SandRidge is a public Delaware corporation engaged in the oil and gas business.(4) In November 2012, hedge fund TPG-Axon (“TPG”), a 7% shareholder of SandRidge, sent a public letter to the SandRidge board complaining about the company’s severe underperformance, for which it blamed the board’s poor strategic decisions and corporate governance.(5) TPG demanded that SandRidge amend its bylaws to destagger the board,(6) include TPG representatives on the board, replace the allegedly overpaid Chief Executive Officer, and explore strategic alternatives for the company.(7) The board responded by adopting a poison pill and implementing bylaw amendments making it more difficult for stockholders to act by written consent or amend any portion of SandRidge’s bylaws concerning director election.(8) A proxy contest ensued, with TPG announcing that it would commence a consent solicitation under 8 Del. C. § 228 to amend the bylaws of SandRidge in order to destagger the 4. 5. 6.
Delaware Quarterly board and remove and replace SandRidge’s directors.(9) The directors responded by filing a preliminary consent revocation statement that warned stockholders about the potential harm of a change in control due to proxy put(10) provisions in the company’s credit agreements. In particular, the indentures governing SandRidge’s senior debt contained provisions requiring the company to offer to repurchase its $4.3 billion of debt at 101% of par value in the event of an unapproved change of control. The board thus warned stockholders that, because SandRidge might not have the liquidity to fund such a debt repurchase, a “mandatory refinancing of this magnitude would present an extreme, risky and unnecessary financial burden” on the company.(11) On January 7, 2013, shareholder Gerald Kallick filed a purported class action against SandRidge and its directors, claiming that the board’s failure to approve TPG’s slate for the limited purpose of the proxy put, which would neutralize the device, was a breach of the board’s duty of loyalty. According to Kallick, the board lacked a proper basis upon which to deny approval of the competing slate. The plaintiff sought injunctive relief. TPG then commenced its consent solicitation, and days later, the board began seeking consent revocations. In its definitive consent revocation statement, the board again highlighted the potential harm to SandRidge of a change in control due to the proxy put.(12) The statement acknowledged that approval of the competing slate would avoid the mandatory refinancing, but that the board had not yet decided whether it would do so.(13) A month later, facing expedited proceedings and a motion for a preliminary injunction, the SandRidge board did an abrupt about-face on the proxy put. Though a Form 8-K, the board stated that: (i) SandRidge’s creditors would be “unlikely” to require repayment of the debt (notwithstanding their contractual ability to do so) because the notes were trading above 101% of their par value, the repurchase price set by the proxy put; and (ii) even if they did, backup financing was readily available for SandRidge to repurchase the debt. 9. Id. 10. The defendants objected to the use of the term “proxy put,” but Chancellor Strine noted that it accurately described the device and was not necessarily pejorative. Id. at *1 n.8. 11. Id. at *5. 12. Id. at *6. 13. Id.
Winston & Strawn LLP | 3 Defendants consequently sought to relax the expedited schedule, arguing that their failure to approve TPG’s slate would not have any consequences on the company. The court declined to alter the schedule, and the suit proceeded through expedited discovery to oral argument on plaintiff’s preliminary injunction motion. The court issued its opinion the day after the argument.
The Court’s Legal Analysis Relying on San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals,(26) the court found that defendants’ actions could not withstand Unocal scrutiny because the directors could not offer a reasonable justification for their Id. at *11. Id. Blasius Indus., Inc. v. Atlas Corp., 564 A.2d 651, 661 (Del Ch. 1988). Kallick, 2013 WL 868942, at *11. See Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954-55 (Del. 1985). 24. Kallick, 2013 WL 868942, at *12. 25. Id. 26. 983 A.2d 304 (Del. Ch. 2009). 19. 20. 21. 22. 23.
The Relief The court found that a preliminary injunction was appropriate. First, plaintiff had a strong likelihood of success on the merits, as it appeared to the court that the board had violated its fiduciary duty. Second, plaintiff had established immediate and irreparable harm, as the board had used corporate power to seek to coerce stockholders in the exercise of their vote. And third, a balance of the equities weighed in plaintiff’s favor, particularly because he sought narrowly tailored relief that was proportionate to the board’s conduct.(31) Thus the court enjoined the SandRidge board, until it approved the TPG slate, from: (i) soliciting further consent revocations; (ii) using the consent revocations it had already received; and (iii) impeding TPG’s consent solicitation in any way. 27. 28. 29. 30. 31.
Aftermath Less than a week after the court’s decision and days before the vote on TPG’s proposal, SandRidge and TPG reached an agreement pursuant to which SandRidge would add four seats to its board to be filled by TPG nominees. SandRidge also agreed that, if it did not terminate its Chief Executive Officer by June 30, 2013, three of its current directors would step down and TPG would be entitled to appoint an additional director, giving TPG majority representation on the board. SandRidge’s Chief Operating Officer also announced his resignation.
Takeaways There are several important takeaways from this decision. First, this is the second notable Chancery Court decision in the last few years scrutinizing proxy put provisions. Here, the court emphasized the duty directors have when negotiating credit agreements and considering proxy put or similar provisions threatening the stockholder franchise: “Given the obvious entrenching purposes of a proxy put provision, one would hope that any public company would bargain hard to exclude that toll on the stockholder franchise and only accede to the proxy put after hard negotiation and only for clear economic advantage.”(33) The court indicated that even the initial decision to agree to a proxy put provision is subject to heightened Unocal review – a somewhat surprising pronouncement given that the Unocal standard typically applies only when a corporation faces a threat. Directors should thus carefully review their fiduciary obligations when considering proxy put provisions, and ensure that the adoption of such a provision resulted in a clear and significant economic benefit to the company. Second, it is important to note that the court did not hold that a board’s refusal to neutralize proxy put provision would constitute a per se breach of fiduciary duty. While legitimate grounds for refusal may be narrow, much of this opinion appears to have been driven by defendants’ “shifts 32. Id. at *16-17. 33. Id. at *3.
Winston & Strawn LLP | 5 in position … that seem more convenient than principled,”(34) pretextual, “thin and shifting arguments” and self-interest.(35) By contrast, a board’s good faith and thoroughly-reasoned determination that neutralizing a proxy put provision would threaten a company’s creditors would presumably not offend fiduciary principles. Third, the impact of this opinion may well extend beyond the proxy put context to other director decisions with “entrenchment” implications. By applying the intermediate Unocal standard outside of the usual hostile takeover context and emphasizing its “flexible” nature, the court signaled its willingness to expand the realm of application of heightened reasonableness review. Coupled with the court’s dismissal of the business judgment rule here as “something as close to non-review as our law contemplates,” the decision suggests a potential expansion of Unocal’s reasonableness review to a variety of situations involving continued director/ management control. Fourth, this decision shows the importance of counsel’s careful consideration of the relief it requests from the court. Here, plaintiff first requested, among other things, an order requiring the board to approve its slate of directors.(36) In its brief, however, plaintiff requested a narrower form of relief, seeking to: (i) enjoin defendants from soliciting any consent revocations; (ii) have any consent revocations obtained to be declared invalid; and (iii) enjoin defendants from taking any steps to hinder TPG’s consent solicitations until they had approved the TPG slate or explained in full why they would not approve it.(37) This alternative relief (resulting in effectively the same relief plaintiff first requested) provided an avenue for the court to grant negative relief rather than affirmative, mandatory relief – which is more common and appropriate in the preliminary injunction context. Finally, SandRidge serves as a reminder that corporate boards should be mindful of any business decisions that may affect the stockholder franchise, which is of paramount importance to Delaware courts.
In re Puda Coal, Inc. Stockholders Litigation In a much publicized bench ruling issued on February 6, 2013, Chancellor Strine refused to dismiss breach of fiduciary duty claims against the independent directors of Puda Coal, Inc. (“Puda Coal”) and entered a default judgment against other, non-responding defendants in connection with the unauthorized sale of the company’s corporate assets in China. The decision has far reaching implications for independent directors of companies with significant operations abroad, as the court signaled that directors of such companies could be held liable for breaching their fiduciary duty of loyalty if they do not sufficiently monitor the company’s foreign assets and activities – including through regularly travelling to the foreign country, thoroughly understanding the foreign business and market, and implementing an adequate system of controls there.
Background Puda Coal is a publicly-held Delaware corporation that conducts the majority of its business in China. Puda Coal’s Chairman, Ming Zhao, and another insider allegedly plundered the company by selling its only operating unit to a private equity firm in a series of transactions beginning in September 2009. The three independent members of Puda Coal’s board of directors first learned of the transfers – which were reported in Chinese government documents – more than 18 months later.(38) Rather than initiate litigation against Zhao and his accomplice, however, the three independent directors resigned, leaving Zhao as the only remaining Puda Coal board member.(39) Stockholders of Puda Coal filed derivative suits against the former and current directors of the company, alleging that the directors breached their duty of loyalty by failing to exercise proper oversight of the company’s foreign assets and operations.(40) The derivative suits were consolidated, and defendants moved to dismiss the action on demand excusal grounds and for failure to state a claim.
38. Transcript of Oral Argument at 4, 11, In Re Puda Coal, No. 6476-CS. 39. Id. at 4, 6. 40. Id. at 15-16.
Delaware Quarterly [I]f you’re going to have a company domiciled for purposes of its relations with its investors in Delaware and the assets and operations of that company are situated in China [then], in order for you to meet your obligation of good faith, you better have your physical body in China an awful lot. You better have in place a system of controls to make sure that you know that you actually own the assets. You better have the language skills to navigate the environment in which the company is operating. You better have retained accountants and lawyers who are fit to the task of maintaining a system of controls over a public company.(46) The court emphasized that Delaware does not allow “dummy directors” who behave like “mannequins” and allow themselves to be appointed to a board without any serious effort to fulfill their duties.(47) If a company has assets in other parts of the world, the Chancellor explained, directors cannot “sit in [their] home in the U.S. and do a conference call four times a year and discharge [their] duty of loyalty.”(48) The court noted that the whole purpose of having independent directors on the board is to monitor the people who are managing the company – “[y]ou pick them because of their independence and their ability to monitor the people who are managing the company,” not for “their industry expertise.”(49) Thus, independent directors on a company’s board must know the “ins and outs” of the business and be up to the task of adequately monitoring the company’s foreign operations.(50) Concluding that the facts alleged in the complaint made it conceivable that there was no good faith effort by Puda Coal’s directors to adequately monitor the company’s foreign operations, the court denied the directors’ motion to dismiss. In so doing, the court also suggested that the independent directors’ decision to “run away” by resigning in response to the filing of the derivative complaints could constitute an independent breach of fiduciary duty.(51) 46. 47. 48. 49. 50. 51.
In re Novell, Inc. Shareholder Litigation In In re Novell, Inc. Shareholder Litigation, Vice Chancellor Noble denied a motion to dismiss claims that the directors of Novell, Inc. (“Novell”) breached their fiduciary duties in connection with the company’s acquisition by Attachmate Corporation (“Attachmate”). The court concluded that plaintiffs’ allegations that Novell’s board exhibited “unexplained, extremely favorable” treatment towards Attachmate over other potential acquirers supported a reasonable inference that the board had acted in bad faith.
Background Novell is a Delaware corporation that provides information technology products and services.(54) On March 2, 2010, Elliott Associates LP (“Elliot”), a private investment fund and stockholder of Novell, submitted an unsolicited, non-binding proposal to acquire Novell for $5.75 per share in cash.(55) After several meetings during which Novell’s board considered the Elliott proposal, on March 20, the board rejected the proposal as inadequate and announced that it would explore various alternatives to enhance stockholder value.(56) The sale process was primarily conducted by the board’s financial advisor, J.P. Morgan, from March 2010 through August 2010.(57) During this period, over fifty potential buyers were contacted and more than thirty of those contacted entered into nondisclosure agreements with Novell.(58) In May 2010, the board authorized Attachmate to partner with two of its principal stockholders for the purpose of submitting a preliminary proposal.(59) No other potential bidders were afforded the opportunity to work with strategic partners in the bidding process. Attachmate and eight other potential buyers submitted preliminary non-binding proposals to acquire Novell. Attachmate’s proposal was between $6.50 and $7.25 per share, while the other proposals ranged from $5.50 to $7.50 per share. In late May, the board decided to pursue discussions with five potential buyers, including Attachmate.(60) 54. 55. 56. 57. 58. 59. 60.
Novell, 2013 WL 322560 at *1. Id. Id. at *2. Id. Id. Id. Id.
Winston & Strawn LLP | 8 In late July 2010, due to difficulties with financing, Attachmate asked J.P. Morgan to meet with a broader set of financing sources, including Elliott. J.P. Morgan agreed and contacted Elliot on Attachmate’s behalf.(61) On August 11, the board requested that Attachmate and “Party C,” a private equity firm, each submit “a best and final offer” by August 16, including a proposed purchase price for: (i) the acquisition of all of Novell (including Novell’s patent portfolio); and (ii) the acquisition of all of Novell including the patents but excluding Novell’s open platform solutions business. Attachmate offered $4.80 per share while Party C bid $4.86 per share (both excluding the open platform solutions business).(62) After considering various proposals throughout August and September, the board granted Attachmate exclusivity until September 27, 2010 (which was subsequently extended to October 25).(63) On October 21, the board received a nonbinding letter of intent from Microsoft either to license or to acquire some of Novell’s patent portfolio.(64) Thereafter, Attachmate’s exclusivity period was extended again until November 1. On October 28, Attachmate submitted a revised bid of $5.25 per share in cash. On that same day, Party C submitted an unsolicited, non-binding proposal to acquire all of Novell for $5.75 per share.(65) The following day, Microsoft submitted a letter of intent indicating its interest to acquire certain Novell patents for $450 million.(66) The board then considered pursuing a transaction with Attachmate for Novell as a whole, exclusive of the patents encompassed by the Microsoft offer, and management approached Attachmate with this opportunity. Attachmate submitted a revised bid to acquire all of Novell’s outstanding shares of common stock for $6.10 per share in cash, which was conditioned on the sale of the patents for no less than $450 million.(67) The board agreed to pursue discussions with Attachmate and Microsoft but never contacted Party C to disclose the Microsoft offer or to solicit a higher bid. On November 21, 2010, the board approved a merger agreement (“Merger Agreement”) under which Novell would 61. 62. 63. 64. 65. 66. 67.
68. 69. 70. 71. 72. 73.
Id. Id. at *4. Id. at *1. Id. at *3. Id. at *6. Id.
Bad Faith Analysis In order to show that the board breached the duty of loyalty in challenging a sales process, plaintiffs must allege nonconclusory facts suggesting that a majority of the board lacked independence, was interested in the sales process or acted in bad faith.(82) Plaintiffs did not attempt to plead that a majority of the board was interested or lacked independence – the board consisted of nine directors, seven of whom were clearly independent and disinterested(83) – thus plaintiffs must show that the board acted in bad faith. Bad faith is shown if the fiduciary: (i) acted with a purpose other than advancing stockholder interests (i.e., the best interests of the corporation); (ii) intentionally violated relevant positive law; (iii) intentionally failed to respond to a known duty or exhibited a conscious disregard of a known duty.(84) If the allegations involve a fiduciary’s duty to act, the effort required to satisfy that duty is minimal and the question becomes whether the fiduciary “utterly failed to attempt to obtain the best sale price.”(85) The court found that the Amended Complaint demonstrated that the board, through the prolonged sales process, far exceeded that threshold.(86) The burden then shifted to plaintiffs to overcome the presumption that the fiduciaries acted in good faith. Plaintiffs met this burden by demonstrating that the board’s actions were “so far beyond the bounds of reasonable judgment that [they] seem essentially inexplicable on any ground other than bad faith.”(87) Plaintiffs alleged that Id. Id. at *7. Id. Id. at *8. Id. at *9 (citing Stone v. Ritter, 911 A.2d 362, 369 (Del. 2006); Ryan v. Gifford, 918 A.2d 341, 357 (Del. Ch. 2007)). 85. Id. (citing Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 244 (Del. 2009)). 86. Id. 87. Id. at *10 (citing In re Alloy, Inc., 2011 WL 4863716, at *12; see also White v. Panic, 783 A.2d 543, 554 (Del. Ch. 2001) (“the board’s 80. 81. 82. 83. 84.
Winston & Strawn LLP | 10 the board: (i) knowingly favored Attachmate over other bidders; (ii) knowingly permitted conflicted directors to funnel confidential information to Attachmate and to taint the sale process; (iii) conspired with J.P. Morgan to justify an inadequate merger price; and (iv) favored their own interests and Elliott’s interests by knowingly appeasing Elliott.(88) The court was most troubled by the directors’ failure to tell Party C about the proceeds of the patent sale. That conduct, coupled with the fact that Novell kept Attachmate fully informed, was enough for pleading stage purposes to support an inference that the board acted in bad faith. As a result, the court denied defendants’ motions to dismiss with respect to plaintiffs’ claim for bad faith breach of fiduciary duty.(89) The court dismissed plaintiffs’ remaining breach of fiduciary duty claims.
Takeaways It is important to note that Novell was decided in the context of a motion to dismiss, prior to the development of a full evidentiary record, and the court was forced to rely only on the Amended Complaint and the documents incorporated in it. As the court noted, there may be any number of valid reasons why the board treated Attachmate differently than Party C (and differently than other potential bidders). However, these potential justifications could not be gleaned from the record before the court. Therefore, it is important for boards to be forthcoming with information when potential bidders are treated differently and to create a clear and detailed record as to why there was any differential treatment of potential acquirers in a change of control transaction. Financial and legal advisors should advise boards to do so in these contexts to avoid costly litigation that typically follows the denial of a motion to dismiss. With a more comprehensive, contemporaneous record of the directors’ reasoning for their actions, the court may have found that the board acted in good faith in favoring Attachmate over Party C and other potential acquirers.
Significant Proposed Amendments to the DGCL and LLC Act While not yet law, there are two sets of proposed legislative amendments – one to the Delaware General Corporate Law (in particular those relating to two-step mergers, the ratification of defective corporate acts and public benefit corporations) and a second to the Delaware Limited Liability Company Act concerning default fiduciary duties for LLC managers – that practitioners will want to pay close attention to. If enacted, these likely will effect significant changes in Delaware practice.
board of directors must adopt a resolution: (i) describing the defective corporate act; (ii) setting forth the date and time the defective act occurred; (iii) explaining the nature of the failure of authorization; and (iv) stating that the board approves the ratification of the defective act.
• If the defective act concerns over-issuance of “putative stock,” the resolution must state the number, type and dates of shares of stock issued.
ratification relates back to and retroactively validates the corporate act as of the time it occurred.
board resolution are those existing at the time of the initial adoption of the defective corporate act that is being ratified.
notice of the board’s resolution must be provided within 60 days to all current stockholders (including holders of putative stock), and both voting and non-voting stockholders as of the time of the defective act, and give them 120 days from the board’s approval to challenge the resolution.
• The board resolution must be submitted to stockholders for approval (i) if the defective corporate act would have originally required a stockholder vote, or (ii) if the corporate act being ratified is defective because of a failure to comply with Section 203, the DGCL’s principal anti-takeover provision.
• To ratify an election of directors, holders of a majority of shares must vote for the ratification, unless a greater vote would have been required at the time of election (the Delaware “plurality” default standard is insufficient to ratify an election).
with Section 203 requires a two-thirds vote of the voting stock owned by holders other than the “interested stockholder,” as required by Section 203.
Winston & Strawn LLP | 13 those provisions of the certificate that would have been required to initially authorize the defective act; and (iv) the date and title of any certificate originally filed in connection with the defective act. The other mechanism to address ratification is proposed Section 205, which would give the Court of Chancery jurisdiction to hear and determine cases regarding defective corporate acts, whether or not ratified under the Section 204 self-help process. Under Section 205, the Chancery Court, upon application, could: (i) determine the validity of defective corporate action, whether or not ratified by the corporation; (ii) hear challenges to a board’s ratification under Section 204; and (iii) modify or waive any of the procedures set forth in Section 204 to ratify a defective corporate act. This new section would also (i) give corporations the ability, by petitioning the Chancery Court, to ratify corporate acts that may not be ratified under Section 204, such as where there is no valid board, and (ii) give other parties the ability to challenge either a defective corporate act or a board’s ratification of that act.
Delaware Quarterly the LLC agreement.(95) And as recently as last quarter, in Gatz Properties v. Auriga Capital,(96) the Supreme Court was sharply critical of the Court of Chancery’s extensive discussion of default fiduciary duties under the LLC Act and went out of its way to emphasize that the existence of default fiduciary duties in the LLC context remains an open question under Delaware law: [T]he merits of the issue whether the LLC statute does – or does not – impose default fiduciary duties is one about which reasonable minds could differ. Indeed, reasonable minds arguably could conclude that the statute – which begins with the phrase, “[t]o the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties)” – is consciously ambiguous. That possibility suggests that the “organs of the Bar” (to use the trial court’s phrase) may be well advised to consider urging the General Assembly to resolve any statutory ambiguity on this issue.(97) At a minimum, the Supreme Court’s observation suggested to many that it shares the Chief Justice’s skepticism with respect to default fiduciary duties under the LLC Act. By contrast, and notwithstanding the views of the Supreme Court and its Chief Justice, the Court of Chancery has a long history of imposing default fiduciary duties under the LLC Act if not waived, restricted or eliminated by the LLC agreement – and has so held at least twice in the past six months alone.(98) The proposed amendments to the LLC Act, which are expected to pass and become law as of August 1, 2013, effectively resolve this debate. They specifically provide that an LLC manager owes fiduciary duties even in the absence of a LLC agreement provision establishing those duties (it 95. See, e.g., Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009); accord Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies, 32 Del. J. Corp. L. 1 (2007) (managers of Delaware LLCs should not owe traditional fiduciary duties absent express agreement in LLC agreement). 96. Gatz Properties, LLC v. Auriga Capital Corp., 59 A.3d 1206 (Del. 2012). 97. Id. at 1219 (emphasis in original) (citations omitted). 98. Feeley v. NHOCG, LLC, C.A. No. 7304-VCL, 2012 WL 5949209 (Del. Ch. Nov. 28, 2012); Auriga Capital Corp. v. Gatz Properties, LLC., 40 A.3d 839 (Del. Ch. 2012), aff’d sub nom., 59 A.3d 1206.
Winston & Strawn LLP | 14 is worth noting that even with these amendments, drafters of LLC agreements may still expressly eliminate an LLC manager’s fiduciary duties in the LLC agreement).
Additional Developments In Delaware Business And Securities Law Beyond those topics addressed above, the Delaware courts also issued noteworthy decisions in the following areas of law during the past quarter.
was deadlocked over competing loan offers, and one of its directors, in an attempt to prevent the board from accepting a loan offer that he believed would harm Shocking, refused to attend board meetings. The court found that the board’s paralysis in the face of Shocking’s insolvency, along with the director’s “negative” control over the board by refusing to attend its meetings, was sufficient under Delaware law to justify appointment of a receiver.
Vice Chancellor Parsons considered whether a receiver should be appointed for a Delaware corporation that had dissolved over ten years ago after defending against numerous asbestos-related tort lawsuits and whose only remaining assets were insurance liability contracts. The court noted that while it has the authority to appoint a receiver “at any time,” it must do so pursuant to a valid statutory purpose, such as for the “benefit of shareholders and creditors where assets remain undisposed of after dissolution.” Because the court concluded that the dissolved corporation could not be liable for asbestosrelated tort lawsuits brought more than ten years after its dissolution, the insurance contracts had no value – and thus could not constitute assets justifying appointment of a receiver. Accordingly, the court rejected plaintiffs’ request to appoint a receiver and granted an opposing motion for summary judgment brought on behalf of the dissolved corporation.
101. C.A. No. 6049-VCP, 2013 WL 1092598 (Del. Ch. Feb. 4, 2013). 102. C.A. No. 7457-VCP, 2013 WL 1092817 (Del. Ch. March 18, 2013).
Garda USA, Inc. v. SPX Corporation,(103) Master in Chancery LeGrow confirmed an arbitration award arising out of the alleged breach of a stock purchase agreement containing an arbitration provision, finding that the acquirer, plaintiff Garda USA, Inc. and its parent company failed to demonstrate that the arbitrator’s ruling was in “manifest disregard” of either the agreement’s language or the law governing its interpretation. Master LeGrow explained that an arbitration award should only be overturned if the arbitrator acted in “manifest disregard” of the law. Otherwise, a court must confirm the award, even if it “is convinced [the arbitrator] committed serious error” by interpreting the contract in a manner “contrary to the established rules of contract interpretation.” Because Master LeGrow found that the arbitrator had a “colorable, if flawed” justification for his interpretation of the stock purchase agreement, she rejected Garda’s attempt to set aside the arbitration award.
Dawson v. Pittco Capital Partners, L.P.,(104) Vice Chancellor Noble, in a letter opinion, awarded attorneys’ fees and expenses to plaintiffs who had obtained a declaratory judgment confirming their continuing rights under a Notes and Security Agreement but who did not prevail on certain related claims. While defendant LaneScan, LLC argued that plaintiffs’ attorneys’ fees award should be limited to the claims on which plaintiffs prevailed, the court disagreed, reasoning that the Notes provided for recovery of “reasonable costs and expenses” incurred “in connection with [the plaintiffs’] exercise of any or all of [their] rights” thereunder. According to the court, this broad language included the right to fees and expenses incurred in connection with claims on which plaintiffs did not ultimately prevail as long as such claims were asserted in connection with plaintiffs’ effort to vindicate their rights under the Notes.
Delaware Quarterly parties’ partnership agreement. Plaintiffs based their claim on an indemnification provision in the parties’ subscription agreement providing for the advancement of fees in connection with actions arising out of, inter alia, the breach of “any . . . document furnished to the General Partner or Partnership” by the subscriber. According to plaintiffs, their injunction action fell within the ambit of the provision because the partnership agreement allegedly breached by defendant constituted a document “furnished” to the partnership. The court disagreed, holding that the indemnification provision covered only actions arising from alleged breaches of documents that the subscriber was required to provide to plaintiffs pursuant to the subscription agreement – and this did not include the partnership agreement. The court also rejected plaintiffs’ request for fees based on defendant’s alleged breaches of the subscription agreement, finding that this claim was premature and not supported by the record.
In re Moneygram International Shareholder Litigation,(106) Vice Chancellor Laster, in a letter opinion, awarded plaintiffs’ counsel $3.4 million in attorneys’ fees from a general fund created in connection with the settlement of a shareholder class action. Plaintiffs had challenged a recapitalization of MoneyGram International, Inc. (“MoneyGram”), seeking pre-closing injunctive relief. In response to plaintiffs’ injunction application, defendants amended the agreement governing MoneyGram’s recapitalization and issued a supplemental disclosure containing a “significant amount of material information.” After the recapitalization closed, plaintiffs continued to pursue the litigation, which settled on the eve of trial in exchange for defendants’ creation of a $10 million settlement fund. When making their fee application, plaintiffs’ counsel requested $3 million plus expenses, which they sought as a percentage of the $10 million fund. However, the court reasoned that, as a practical matter, the value of the settlement fund was not $10 million because the fund value was reduced by the fee award for the non-monetary benefits achieved by plaintiffs in the injunction phase, which, according to the court totaled $1.2 million. The court awarded plaintiffs’ counsel an additional 25 percent of the remaining $8.8 million in the settlement fund (i.e., $2.2 million), which the court held fairly compensated plaintiffs’ counsel for their litigation efforts leading to the creation of the fund.
106. C.A. No. 6387-VCL, 2013 WL 68603 (Del. Ch. Jan. 7, 2013).
In re PAETEC Holding Corp. Shareholders Litigation,(107) Vice Chancellor Glasscock granted plaintiffs’ uncontested request for $500,000 in fees and costs in connection with a “disclosure-only” settlement of a shareholder class action. In evaluating plaintiffs’ request, the court observed that Delaware courts have a “longstanding practice of exercising judicial scrutiny over attorneys’ fees even in cases where the fee request is uncontested by the defendant or by any members of the stockholder class.” Vice Chancellor Glascock cautioned that with respect to a “disclosure-only” settlement, there is a risk that “both the plaintiffs and the defendants have agreed to trivial disclosures as the path of least resistance” to a mutually beneficial settlement. However, the court, in applying the test in Sugarland Industries., Inc. v. Thomas,(108) found that certain of the disclosures obtained by plaintiffs had value, including a supplemental disclosure concerning the existence of a possible conflict of the acquiring company’s financial advisor. Because the fees sought by plaintiffs were in line with fee awards issued in connection with settlements that produced similar disclosures, the court granted plaintiffs’ request.
Miller v. Palladium Industries, Inc.,(109) Vice Chancellor Noble, in a letter opinion, granted judgment on the pleadings for Palladium Industries, Inc. (“Palladium”), finding that it was not required to advance legal fees to a former director, president, and CEO of Palladium incurred in connection with his defense against a claim for breach of fiduciary duty. Palladium’s bylaws provided that “[e]xpenses incurred by [directors or officers] . . . in defending a proceeding shall be paid by the corporation in advance of such proceeding’s final disposition unless otherwise determined by the Board of Directors in the specific case . . . .” While the court recognized that Delaware public policy favors the advancement of legal fees, it ruled that Palladium’s board, in denying the request for advancement, acted within its express authority under Palladium’s bylaws.
110. C.A. No. 7640-VCG, 2013 WL 616232 (Del. Ch. Feb. 19, 2013). 111. C.A. No. 7048-VCN, 2013 WL 396178 (Del. Ch. Jan. 31, 2013). 112. No. 372, 2012, 2013 WL 1136821 (Del. Mar. 19, 2013).
Bean v. Fursa Capital Partners, LP,(113) Vice Chancellor Parsons dismissed the misrepresentation claim of a limited partner in a Delaware limited partnership who asserted that the partnership and its general partner failed to timely provide audited financial statements pursuant to the limited partnership agreement. The court noted that plaintiff was effectively arguing that defendants had “made a promise” to deliver audited financials that they “had no intention of keeping,” which “amount[ed] to an allegation of promissory fraud.” According to the court, plaintiff failed to meet his elevated burden of pleading “specific facts” necessary to prevail on what was effectively a fraud claim. Vice Chancellor Parsons also dismissed in part plaintiff’s breach of contract claims, which were based on the same alleged misconduct as his misrepresentation claim, holding that the alleged breaches occurring in 2008 were time-barred. However, the court declined to grant plaintiff summary judgment on his remaining breach of contract claims, finding that there existed several issues of material fact.
Delaware Quarterly other party. According to the court, defendant had not “objectively manifested” its subjective understanding to plaintiff.
Inc.,(115) Vice Chancellor Noble, in a letter opinion, certified a class of stockholders in an action alleging breaches of fiduciary duty in connection with a merger, rejecting defendant’s assertion that plaintiff’s proposed class representatives failed to satisfy the adequacy and typicality requirements of Court of Chancery Rule 23(a). Defendants argued that the proposed class representatives were not “adequate” because they lacked “sufficient knowledge of the claims” and “improperly abdicated control of the litigation to their counsel.” Defendants also asserted that the proposed class members were not “typical” because there were “certain defenses that were potentially applicable to the proposed class representatives that might not be asserted against other class members,” including that one of the proposed class representatives had sold most of its shares before the merger at a lower price and had voted to approve the merger. The court rejected each of these arguments. It found that the proposed class representatives were adequate because they had sufficient knowledge of the case and because their claims were consistent with the class claims. The court also ruled that the proposed class representatives were typical because: (i) pursuant to the Delaware Supreme Court’s decision in In re Celera Corporation Shareholder Litigation,(116) a class representative need only have owned some of the company’s stock at the time when the merger was approved to have standing; and (ii) the mere possibility that an acquiescence defense could be asserted against a proposed representative who voted in favor of the merger would not, at this stage of the litigation, constitute sufficient grounds to exclude that representative because the court had no basis on which to determine whether that class representative’s vote was fully informed. The court also rejected, on similar grounds, defendants’ request to narrow the scope of the class.
115. C.A. No. 5334-VCN, 2013 WL 610143 (Del. Ch. Feb. 13, 2013). 116. No. 212, 2012, 2012 WL 607736 (Del. Dec. 27, 2012).
Henkel Corp. v. Innovative Brands Holdings, LLC,(117) Vice Chancellor Noble rejected the parties’ cross-motions for summary judgment with respect to calculation of damages in an action in which the defendant, Innovative Brands Holdings, LLC (“IBH”), had stipulated that it breached an agreement to acquire a segment of plaintiff Henkel Corporation’s (“Henkel”) consumer adhesive business (the “Business”). Henkel, which ultimately sold the Business to another buyer for approximately $15.5 million less than the price at which IBH agreed to acquire the Business, sought the difference between the contract price and the price it obtained for the Business. IBH requested a reduction in damages to account for the revenue that the Business generated for Henkel from the date of IBH’s breach to the date on which the Business was sold (the “Interim Period”). The court explained that, under Delaware law, parties are typically granted expectation damages, which “are calculated as the amount of money that would put the non-breaching party in the same position that the party would have been in had the breach never occurred.” However, the court cautioned that contract damages should not result in a “windfall” and, for this reason, found that Henkel was not entitled to recover both expectation damages and the revenues generated by the Business during the Interim Period. Because the court could not, without a “better factual record,” determine how much income should be credited against Henkel’s damages, it denied the parties’ cross-motions for summary judgment.
complaint benefitted XTO by causing it to ultimately adopt the plan. The Supreme Court explained that a claim of waste arises only in the “rare, unconscionable case where directors irrationally squander or give away corporate assets.” According to the Supreme Court, the stockholder’s claim was defective because: (i) she did not allege that any of the bonuses actually paid by XTO would have been tax-deductible under Section 162(m); and (ii) XTO’s board properly exercised its business judgment in initially declining to implement a Section 162(m) plan, believing it would constrain the compensation committee in its determination of appropriate bonuses.
In re Freeport-McMoRan Copper & Gold Inc. Derivative Litigation Consolidated,(119) Vice Chancellor Noble, in a letter opinion, granted a request by proposed intervenors to: (i) intervene in the action, which was brought derivatively to challenge Freeport-McMoRan Copper & Gold, Inc.’s acquisition of two natural gas developers; and (ii) certify an interlocutory appeal of the court’s order establishing a plaintiffs’ management structure for the derivative action. However, the Delaware Supreme Court subsequently declined to accept the interlocutory appeal on the ground that the requisite exceptional circumstances did not exist.(120) In granting the intervention request, the Court of Chancery reasoned that the intervenors’ potential derivative action would likely have shared multiple questions of law and fact with the pending derivative action and that intervention would not delay the pending action.
119. C.A. No. 8145-VCN, 2013 WL 616296 (Del. Ch. Feb. 10, 2013). 120. No. 67, 2013 WL 749315 (Del. Feb. 26, 2013). 121. No. 177, 2011, 2013 WL 22093 (Del. Jan. 2, 2013).
the Delaware Supreme Court issued an opinion marking a significant change in how Delaware courts view informal discovery extensions. In a medical malpractice action, the parties informally agreed, without seeking court approval, to extend the time for plaintiffs’ expert discovery disclosures. Just two months in advance of the trial date, plaintiffs identified their experts and submitted “preliminary disclosures” of their experts’ reports. Defendants subsequently moved for an order precluding plaintiffs’ experts from testifying at trial, arguing that defendants were prejudiced by plaintiffs’ delay with respect to their expert disclosures. The trial court granted defendants’ motion, barring plaintiffs from relying on expert discovery and testimony, and thereafter dismissed the case on summary judgment. The Supreme Court remanded the issue for further consideration by the trial court, but not before establishing new parameters governing situations in which parties informally grant discovery extensions without court approval. According to the Supreme Court, “parties who ignore or extend scheduling deadlines without promptly consulting the trial court” are deemed to have “waived the right to contest any late filings by opposing counsel from that time forward.” While acknowledging that this new approach might “provoke more motion practice,” the Supreme Court noted that it would provide much-needed certainty to the discovery process.
In re BJ’s Wholesale Club, Inc. Shareholders Litigation,(125) Vice Chancellor Noble dismissed a shareholder class action alleging that defendant directors of BJ’s Wholesale Club, Inc. (“BJ’s”) breached their fiduciary duties in connection with their approval of a leveraged buyout of BJ’s. Plaintiffs, while not challenging the board’s independence, alleged that the board acted in bad faith by summarily rejecting two higher offers from potential acquirers and refusing to share material, non-public information with one of the potential acquirers despite sharing it with other potential acquirers. The court held that these allegations were insufficient to demonstrate that the board consciously disregarded its Revlon duties. The court noted that the board met regularly to discuss strategic alternatives, established an independent special committee, actively solicited interest from other bidders, and relied on outside financial and legal advisors when evaluating the deal. According to the court, the fact that BJ’s shareholders received a thirty-eight percent premium to BJ’s stock price made it particularly difficult for plaintiffs to prevail on their claim that defendants acted in bad faith.
124. No. 11-560-LPS, 2013 WL 1010290 (D. Del. Mar. 14, 2013). 125. C.A. No. 6623-VCN, 2013 WL 396202 (Del. Ch. Jan. 31, 2013).
agreement (“Conversion Agreement”), which concerned the capital restructuring of ARG, to determine if it was in the best interests of ARG and its unit holders. In granting summary judgment on the breach of contract claim, the court observed that the unit holders agreement provided only that ARG “may” repurchase the Class A units. According to the court, plaintiffs had not shown that, in light of the agreement’s permissive language, the parties had any reasonable expectation that ARG would in fact repurchase plaintiffs’ Class A units. With respect to the breach of fiduciary duty claim, the court ruled that plaintiffs had not presented evidence to overcome the presumption that the defendant director acted in good faith, let alone establish that he had acted in bad faith. The court found that the defendant officer did not breach her fiduciary duties because, inter alia, plaintiffs failed to show that they suffered harm as a result of her alleged misconduct. Finally, with respect plaintiffs’ conspiracy claim, the court held that there was an issue of material fact regarding whether certain of the defendants conspired to pursue the Conversion Agreement and thereby harm plaintiffs. The court thus denied defendants’ summary judgment motion as to plaintiffs’ conspiracy claim except with respect to the defendant director, as to whom there was no evidence of knowing participation in the alleged conspiracy.
128. C.A. No. 6001-VCP, 2013 WL 398946 (Del. Ch. Jan. 31, 2013).
no harm as a result of the director defendants’ breaches of the operating agreement, and, as such, awarded plaintiff only nominal damages.
GMBH,(131) Vice Chancellor Parsons granted defendants’ motion for summary judgment in part, holding that a reverse triangular merger did not effect an assignment of rights. Plaintiffs Meso Scale Diagnostics and Meso Scale Technologies (jointly, “Meso”) alleged that Roche Diagnostics GMBH and related entities (“Roche”) breached an anti-assignment provision in a consent agreement to which Meso, Roche, and the merger target, BioVeris Corporation (“BioVeris”) were parties. According to Meso, Roche breached the antiassignment provision because certain of BioVeris’ intellectual property rights were, by operation of law, transferred to Roche pursuant to a reverse triangular merger by which Roche acquired BioVeris. The court disagreed, relying on substantial legal commentary in finding that a reverse triangular merger does not constitute an assignment by operation of law as it relates to the surviving corporation. The court noted that this approach differs from that of California courts, which hold the contrary.
131. C.A. No. 5589-VCP, 2013 WL 655021 (Del. Ch. Feb. 22, 2013). 132. C.A. No. 7016-VCP, 2013 WL 812489 (Del. Ch. Mar. 6, 2013).
of stock was invalid, (ii) the shares reverted back to TPR; and (ii) the Trump Group had a right to purchase the shares. The court concluded that these issues were “essential to the previous action,” and thus that defendants were barred from relitigating them under the doctrine of issue preclusion. Because defendants could not show that there was any triable issue of fact on the only outstanding issue not resolved in the prior litigation, the court granted plaintiffs’ summary judgment motion.
135. C.A. No. 6894-VCP, 2013 WL 1200273 (Del. Ch. Mar. 26, 2013). 136. No. 609, 2011, 2013 WL 22087 (Del. Jan. 2, 2013).
neglect sufficient to obtain relief under Delaware Superior Court Rule 60(b), the Supreme Court disagreed, noting that Rule 60(b) should be “liberally construed” because there is a “strong policy in favor of deciding cases on the merits.” According to the Supreme Court, in view of “all surrounding circumstances,” including the fact that the “case was not languishing” and that plaintiffs “attempted to promptly file the required response and affidavit,” plaintiffs’ conduct constituted excusable neglect under Rule 60(b).
“sufficiently colorable claim and show[s] a sufficient possibility of a threatened irreparable injury.” Plaintiff alleged that: (i) defendant had improperly caused AM General to make a quarterly tax distribution solely to defendant without making a valuation of its capital accounts as required by the LLC agreement; and (ii) defendant was not permitted to make distributions once plaintiff had invoked an alternative dispute mechanism under the LLC agreement. While the court expressed doubts concerning plaintiff’s interpretation of the LLC agreement, it nonetheless granted plaintiff’s motion to expedite, finding that plaintiff’s claim was “colorable” and noting that the LLC agreement expressly waived the irreparable harm requirement for purposes of a preliminary injunction.
Chancellor Strine granted defendants motion to dismiss or stay a derivative action in favor of an earlier-filed litigation pending in the United States District Court, Northern District of California and California state court involving substantially identical derivative claims. According to the court, permitting the Delaware action to proceed despite the overlapping litigation pending in California would run afoul of the McWane doctrine by wasting judicial resources and unjustly burdening defendants. The court rejected plaintiffs’ argument that the Delaware action raised a novel issue of Delaware law warranting a separate litigation, finding that this contention was belied by the fact that plaintiffs themselves had filed the California federal action.
Gallagher v. Long,(140) Chancellor Strine, in a letter opinion, dismissed plaintiff’s claim alleging that defendant breached his fiduciary duties, as the liquidating trustee of an LLC, by selling the assets of an LLC without maximizing value, finding that it was timebarred. Chancellor Strine also denied plaintiff’s request that he recuse himself after allegedly “threat[ening] to harm” plaintiff at a prior hearing, finding that: (i) he could “hear [plaintiff’s] motion without bias”; and (ii) his statements at the prior hearing “cannot reasonably be construed as a threat” to plaintiff.
139. C.A. No. 7657-CS, 2013 WL 755673 (Del. Ch. Feb. 28, 2013). 140. C.A. No. 8181-CS, 2013 WL 718773 (Del. Ch. Feb. 28, 2013).
Vice Chancellor Noble denied plaintiff Intrepid Investments, LLC’s (“Intrepid”) motion to expedite proceedings, finding that Intrepid: (i) had unjustifiably waited five months to file the motion; and (ii) was unable to demonstrate that it would be irreparably harmed in the absence of injunctive relief because its alleged harm – i.e., its failure to receive a payment pursuant to a promissory note – could be remedied by an award of money damages.
• In Edgewater Growth Capital Partners LP v. H.I.G.
Capital, Inc.,(142) Chancellor Strine rejected Edgewater Growth Capital Partners LP’s (“Edgewater”) challenge to the foreclosure sale of its former company, Pendum, to Pendum’s largest senior secured lender, H.I.G. Capital, Inc. (“HIG”), finding that the sale was commercially reasonable in all aspects. Shortly after Edgewater created Pendum, Pendum began to default on its agreements with creditors and ultimately became insolvent. Eventually, HIG purchased a majority of Pendum’s senior debt and, along with Pendum’s other secured lenders, refused to allow Edgewater to remain in control of Pendum. After a market check failed to secure a buyer, HIG sold Pendum at an open auction to one of HIG’s affiliates, which was the only bidder. Edgewater alleged that: (i) the sale process was commercially unreasonable and thus a violation of the Uniform Commercial Code; and (ii) HIG fraudulently conveyed Pendum’s assets to itself, interfered with Edgewater’s contracts, and breached its duties of loyalty and care. The court rejected Edgewater’s claims, holding that in view of the dire economic circumstances confronting Pendum, its sale was commercially reasonable and presented a “meaningful opportunity” for buyers other than HIG, including Edgewater, to bid for Pendum’s assets.
Delaware Quarterly court granted defendants’ summary judgment motion with respect to the largest portion of plaintiffs’ damages claims. Following a mediation, the parties agreed to settle the action, but the named plaintiffs subsequently joined a group of objectors in opposing the proposed settlement. In evaluating the proposed settlement, the court had found that it fell “within a range of fairness, albeit at the low end,” and made a conditional ruling in May 2012 that permitted the objectors to continue the litigation provided that they produced a proposal that protected the interests of the non-objecting plaintiffs. In reviewing the objectors’ proposal, the court noted that it was “not only concerned with economic rationality” but was also “concerned with reasonable terms and a resistance to disproportionate outcomes.” It concluded that, although the objectors’ proposal offered the potential for a greater recovery, the objectors had not carried their burden of demonstrating that the terms on which the litigation would proceed were reasonable. Accordingly the court denied the objectors’ motion to take over the case and finalized its earlier conditional order approving the settlement.
144. C.A. No. 6574-CS, 2013 WL 1191738 (Del. Ch. March 8, 2013).
Carsanaro v. Bloodhound Technologies, Inc., et al.,(145) Vice Chancellor Laster shed light on the interplay between derivative and direct claims, holding that plaintiffs had standing to bring a direct claim for dilution of their shares in Bloodhound Technologies, Inc. (“Bloodhound”) after the company’s merger had extinguished plaintiffs’ right to pursue that claim derivatively. Plaintiffs alleged that Bloodhound’s board of directors financed the company through self-interested and dilutive stock issuances, which plaintiffs did not learn of until after Bloodhound was sold to Verisk Health Inc. In their motion to dismiss, defendants asserted that because claims concerning equity dilution are ordinarily regarded as derivative in nature, plaintiffs lacked standing to sue. The court rejected this argument, explaining that, as set forth in Gentile v. Rossette,(146) where both the corporation and its stockholders suffer an injury, the shareholders may assert a claim directly against the corporation. While Gentile concerned stock dilution allegedly perpetrated by a controlling shareholder, the court found that the same analysis applied to self-interested transactions even in the absence of a controlling shareholder. Because “each financing challenged in the complaint was a self-interested transaction implicating the duty of loyalty and raising an inference of expropriation,” the court held that plaintiffs had standing to pursue their dilution claim directly.
Akamai was acquiring NSC, and brought this action after Akamai completed the acquisition. In evaluating defendants’ motion for summary judgment, the court considered whether plaintiffs had standing to pursue their dilution claims despite the intervening acquisition. The court explained that although dilution claims are usually derivative, under the Gentile exception, a derivative claim may also be pursued directly when a controlling shareholder or a “control group” extracts or expropriates a minority stockholder’s economic value and voting power. According to the court, there was sufficient evidence to support a “reasonable inference” that a control group consisting of stockholders collectively owning more than fifty percent of NSC’s equity had expropriated the minority shareholders’ value and voting power by working in conjunction to accomplish the recapitalization. The court thus held that plaintiffs’ dilution claims could be pursued directly. The court did, however, dismiss the claims brought by debt holders, finding that holders of debentures, bonds and warrants were not owned fiduciary duties and thus lacked standing to pursue claims associated with the recapitalization.
This Quarter’s Authors Jonathan W. Miller and John E. Schreiber are partners, and Jill K. Freedman, Ian C. Eisner, Anthony J. Ford, Paul Whitworth, Lee A. Pepper and Sofia Arguello are associates, in the Litigation Department of Winston & Strawn LLP, resident in the Firm’s Los Angeles and New York offices.
Winston & Strawn LLP Winston & Strawn LLP, a global, full-service law firm with approximately 1,000 lawyers around the world, has one of the country’s preeminent litigation practices. In the area of M&A, securities and corporate governance litigation, our litigators regularly represent targets, bidders, boards of directors and board committees, financial advisors and others in the full range of corporate control and corporate governance litigation, including hostile takeovers, proxy fights and other stockholder challenges to board action, shareholder class actions and derivative suits involving breach of fiduciary duty and other state law claims, as well as claims under the federal proxy rules and other applicable federal law.

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