Key Delaware Corporate & Commercial Decisions of 2024 - Part 1

Wilmington, Del. (January 15, 2025) - In Part 1 of his 20th annual listing of key Delaware commercial and corporate decisions, Wilmington Managing Partner Francis G.X. Pileggi explores several of the most significant rulings from the Delaware Supreme Court and Court of Chancery in 2024.

Non-Voting Class Stock Gets No Vote on Officer Exculpation

In a decision driven by longstanding precedent and close adherence to historical interpretations of the Delaware General Corporation Law, the Supreme Court in In re Fox Corp./Snap Inc. Section 242 Litig., Nos. 120 & 121, 2023 (Del. Supr., Jan. 17, 2024), affirmed the Court of Chancery’s holding that Section 242(b)(2) of the DGCL did not require a separate class vote of non-voting shares for a certificate of incorporation amendment to provide for officer exculpation under Section 102(b)(7).

Both Fox Corp. and Snap Inc., who each had several classes of stock, adopted in 2022 officer exculpation charter amendments allowed by recent Delaware legislation. Both were sued by their respective non-voting common stockholder class and those actions were consolidated by the Court of Chancery, which granted the defendants’ joint motion for summary judgment.

The Class A Stockholders claimed that the “plain language” of Section 242(b)(2) unambiguously required a class vote before adopting the exculpatory charter provisions. They argued stockholders have three fundamental “powers” – to vote, sell, and sue–and that power includes “[t]he ability to act or not act[.]”

The companies countered that Sections 242(b)(2), 151(a), and 102(a)(4) – with their overlapping use of the terms “powers,” “preferences,” and “special rights” – must be read together—and when read together, “powers” cannot carry the powerful dictionary definition that the plaintiffs contend it must have. The Court of Chancery agreed. On appeal, the high court agreed that the “the stockholders’ rigid interpretation of “powers” upsets the balance between Sections 242(b)(1) and (2). Section 242(b)(2) is intended as a “safeguard” to protect the powers, preferences and special rights authorized by Section 151 and expressed in the charter. It is not a broad grant of the right to vote on any amendment affecting any attribute of stock ownership.”

Delaware Supreme Court Again Clarifies MFW Standard

The full Supreme Court recently reversed the dismissal of a shareholder challenge to a private equity consortium’s acquisition of Inovalon Holdings Inc. after finding the cloud-based healthcare industry support provider’s directors did not fully reveal to investors the conflicted roles of the deal’s financial advisors, as the high court’s seminal MFW ruling requires, in City of Sarasota Firefighters Pension Fund et al. v. Inovalon Holdings Inc., No. 305, 2023 (Del. Supr., May 1, 2024).

The high court said MFW required Inovalon’s special committee of directors that negotiated the merger terms to reveal the full extent of their financial advisors’ involvement with counterparties in this transaction. Without that information, the Inovalon minority shareholders could not cast the informed merger vote that would justify business judgment review and dismissal of the suit.

It was not enough to simply disclose to investors that the advisors might have received fees from counterparties to the transaction, the high court said, because, “when a board chooses to disclose a course of events or to discuss a specific subject, it has long been understood that it cannot do so in a materially misleading way, by disclosing only part of the story, and leaving the reader with a distorted impression.” Rather, “[d]isclosures must provide a balanced, truthful account of all matters they disclose.”

The decision marked the second time in as many months that the high court overturned a Court of Chancery’s merger ruling on grounds that, the justices found, too little was required of the challenged deal’s proponents under MFW. In the case styled In re Match Group Inc. Derivative Litigation, Del. Supr., No. 368, 2022 (April 4, 2024), Chancery had allowed an asset reshuffle that allegedly dealt less value and more debt to pension fund investors compared to IAC insiders. The high court said, in a controller-dominated deal, all the directors of the negotiating committee—not just a majority—had to be independent to avoid review under the exacting entire fairness standard.

Limited Scope of Section 225 Proceedings Confirmed

The Supreme Court recently affirmed a Chancery decision that described the limited scope of a summary proceeding under DGCL Section 225 to determine who properly holds a corporate office.

In Barby v. Young, No. 391, 2023 (Del. Supr. June 11, 2024), the high court indicated that among the limited related topics that can be addressed in connection with determining who properly holds a corporate office are: the validity of stock issuances, stock transfers, and stock acquisitions to determine which vote should be counted in ascertaining proper board composition.

The court emphasized that the limited scope of a 225 proceeding cannot include the rescission of a transaction procured through unlawful behavior, which is the type of relief that can only be obtained in a plenary action in a court that has in personam jurisdiction over necessary parties as opposed to an in rem Section 225 proceeding.

Chancery Partially Strikes Privileged and Confidential Information Contained in the Complaint

The Court of Chancery, in Icahn Partners LP, et al. v. deSouza, et al., C.A. No. 2023-1045-PAF (Del. Ch. Jan. 16, 2024), granted a motion to strike portions of a complaint derived from privileged or confidential board-level communications. The issue was whether an employee of the plaintiff was permitted to share privileged information with the plaintiffs and whether the plaintiffs could disclose that confidential information in a civil complaint against the company’s directors. Vice Chancellor Fioravanti acknowledged that the court “has not developed a bright-line rule” regarding directors’ sharing of privileged information with the stockholders who nominated them. Under Delaware law, a director may share privileged or confidential company information with a stockholder when the director is either: (i) Designated to the board by the stockholder (known as “designated-director” matters) pursuant to a contract; or the stockholder’s voting power, i.e., a controlling stockholder, or (ii) serves in a controlling or fiduciary capacity with the stockholder (known as “one-brain” or “dual-fiduciary” matters).

The court recognized the challenged information did “not neatly fit into the four categories that permit the court to strike information from a pleading under Rule 12(f).” Nevertheless, the court used its broad equitable powers “to protect confidential information and to formulate an appropriate remedy in the event confidential or privileged information is improperly interjected into litigation.” The court granted the motion and required all references to challenged information be stricken from the complaint.

Chancery Illustrates Fundamental Principles of Delaware Corporate Law

The Court of Chancery’s decision in In Re Sears Hometown & Outlet Stores, Inc. S’holder Litig., 2024 WL 262322 (Del. Ch., Jan. 24, 2024), clarified the fiduciary duties of controlling stockholders (controllers) who use their voting power to alter the "status quo." The court ruled that such controllers owe fiduciary duties of loyalty and care to the corporation and its minority shareholders. These duties, while not as stringent as those of directors, include the obligation not to intentionally harm the company or its minority stockholders and to avoid grossly negligent actions. A controller may block or vote against transactions but fiduciary duties are triggered when taking action to change the status quo.

The case involved a Sears controller who owned over 50% of the company’s stock and initially acted passively. However, when a special committee proposed a liquidation plan, the controller opposed it, fearing it would destroy value. To block the plan, the controller amended the company’s bylaws to impose a 90% board vote requirement and removed two directors who supported the liquidation. The controller then negotiated a transaction that would eliminate the minority stockholders' interests, but the court later found this action to be unfair.

While the court determined that the controller did not breach his fiduciary duties in blocking the liquidation, it applied the entire fairness test to the subsequent transaction. The controller failed to meet the fairness standard, as the transaction was not conducted at a fair price or in good faith. As a result, the court ordered the controller to pay damages equal to the difference between the transaction price and the company’s true value.

Best Practices for Answering a Complaint

The transcript ruling in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., C.A. No. 2023-0128-JTL, (Del. Ch. Feb. 9, 2023), provides best practices for how to craft answers to a complaint. The court disapproved of the common tactic of denying most allegations in the complaint when those denials demonstrate a lack of careful attention to detail. The court discouraged denials of things that should be “really difficult to dispute” and instead expected parties to prepare answers that “fairly meet the allegations of the complaint . . . [in a way that] will help frame the issues in dispute.”

Various Precepts of Delaware LLC Law with Broad Application Discussed

A Court of Chancery decision in Kuramo Capital Mgmt., LLC v. Seruma, 2024 Del. Ch. LEXIS 177 (Del. Ch. Apr. 30, 2024), addressed many Delaware legal precepts of importance in connection with claims by members in a web of related alternative entities that have broad application for those involved in commercial and business litigation, including:

The fiduciary duties of LLC managers, and the prerequisites for limiting or eliminating those duties;
The contractual standard requiring actions to be “fair and reasonable,” to be akin to an entire fairness review;
The well-known three standards of review when analyzing claims for breach of fiduciary duty; and
A helpful discussion of why there was no right to indemnification due to the findings of a lack of good faith and breach of fiduciary duty, resulting in a clawback of funds previously advanced.

Portfolio Theory and Delaware Corporate Law Discussed

The plaintiff argued in McRitchie v. Zuckerberg, 315 A.3d 518 (Del. Ch. 2024), that Delaware law has adopted—or should adopt— a diversified-investor model, particularly for systemically significant corporations like Meta, which the plaintiff claims impacts the economy significantly. In response, Meta argued that Delaware law currently supports a firm-specific model, which justifies their management approach. They sought to dismiss the complaint for failure to state a valid claim. Vice Chancellor Laster granted the motion to dismiss, stating:

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it.

Ultimately, the court held that (1) directors' fiduciary duties run to the corporation and the stockholders of that specific corporation under a single-firm rather than diversified-investor model, and (2) the defendants did not have a fiduciary duty to seek to maximize value for stockholders who were diversified investors.

Chancery Discusses Caremark and Massey Claims

In Firefighters' Pension Sys. v. Found. Bldg. Mat'ls, Inc., C.A. No. 2022-0466-JTL (Del. Ch. May 31, 2024), the Court of Chancery addressed at the motion to dismiss stage numerous claims brought by a stockholder plaintiff against a controlling stockholder, directors under the control of the controller, a special committee, and financial advisors, concerning a consummated merger. The court’s lengthy decision underscored its vigilance and interest in protecting minority shareholders from the effects of conflicts of interest, in particular those stemming from a controlling stockholder that may have an influence on terms of a transaction.

The traditional rule is that “Delaware law does not charter lawbreakers,” articulated in In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), and part of a general family of cases that fall under the Caremark rubric that requires Delaware managers to take reasonable steps to ensure legal compliance.

Chancery Discusses Requirements for Dissolution of an Entity

A gem of a decision, notwithstanding—or maybe because of—its brevity, that addresses the minimum allegations required to seek dissolution of a business entity, deserves a place in the pantheon of Delaware court rulings. It presents itself to the world in the form of a short and humble Order that simply recites core principles while denying a motion to dismiss a petition for the dissolution of an LLC. It is a big win for acknowledging the nuanced dynamics of business relationships in a closely-held entity.

In Walter v. McManus, C.A. No. 2024-0412-NAC (Del. Ch. June 7, 2024) (ORDER), the court restated several key principles of law regarding the dissolution of LLCs or corporations highlighted below in bullet points. Among the most exemplary discussions of the minimum requirements for surviving a motion to dismiss a petition for dissolution of a business entity are those in the Chancery decision of T&S Hardwoods, highlighted on these pages. Highlights of other dissolution decisions on these pages over the last 20 years are available at this link.

Highlights:

The first paragraph of the Order describes several “convincing” factors that support a judicial dissolution, such as an operating agreement that gives no means of navigating around a deadlock, or the existence of a board-level voting deadlock—but the Order wisely at least implies that there is no express per se requirement for a deadlock.
The court made the sensible observation that it is not necessary to suggest that the business must be “metaphorically ablaze to state a reasonably conceivable claim to dissolve.”
Importantly, the court instructed that the counterpart corporate statute, DGCL Section 273, is often used by analogy to apply to dissolution cases under the LLC Act. The court sagely reasons that the corporate dissolution statute: “does not mandate that the parties struggle until they have destroyed their relationship entirely and jeopardized their business.”
Although it is not required to be so pled, the court found it relevant that there was “grave risk to the business, even if it is entirely profitable, via a residual inertial status quo.”
"Delaware law does not require a member to plead she made a performative proposal she knew would be dead-on-arrival as a predicate to seeking judicial resolution.” (citing Seokoh, 2021 WL 1197593, at * 11) (also distinguishing Arrow, 2009 WL 1101682, as not based on deadlock.)
Both the T&S Hardwoods Chancery opinion described on these pages, and this decision demonstrate a sensitivity to the exigencies of the nuanced business dynamics in closely- held entities, and that recognition supports a standard that is more closely aligned to no-fault divorces, as opposed to some opinions at the trial-court level that have attempted to impose additional requirements that are not in the statute, but instead are akin to requiring a purity test in order to establish a deadlock.
Lastly, but perhaps of at least equal importance to other principles stated in this Order, is that it remains an insufficient basis to oppose dissolution if a party has an option to sell his interest to a third party, because it would be inequitable to force a party to exercise an option to sell, when that option to sell is entirely voluntary, as an alternative to dissolution.

It would exalt artifice over pragmatism to require talismanic or magic words to be used in pleadings, or to require pleadings that, figuratively speaking, must describe “someone’s hair on fire” in order for one’s investment to be freed from the bondage of a dysfunctional group of a few business owners.

Part 2 of this client alert will include additional court decisions.

For more information on these cases, contact the author of this alert. Visit our Complex Business & Commercial Litigation Practice and Directors & Officers Litigation Practice pages for more information about Lewis Brisbois’ capabilities in this area.