Justia Securities Law Opinion Summaries

Articles Posted in Delaware Supreme Court
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In 2017, the Delaware Court of Chancery held that Plaintiff Robert Lenois had pled with particularity that the controlling stockholder of Erin Energy Corporation (“Erin” or the “Company”) had acted in bad faith. It further held that Lenois had pled either “very serious claims of bad faith” or “a duty of care claim” against the remainder of Erin’s board in connection with two integrated transactions. In those transactions, the controller allegedly obtained an unfair windfall by selling certain Nigerian oil assets to Erin. The trial court dismissed the derivative claims on standing grounds (i.e., holding that demand was not excused). Lenois appealed that decision. During the pendency of the appeal, Erin voluntarily filed for bankruptcy. The Chapter 7 Trustee obtained the permission of the Bankruptcy Court to pursue, on a direct basis, the claims that had been asserted in the Lenois action in the Court of Chancery. As a result of the bankruptcy proceedings, which vested the Trustee with control over the claims, the Delaware Supreme Court determined that the sole issue on appeal was moot. The case was remanded to the Court of Chancery to resolve two pending motions — a Rule 60(b) motion and the Trustee’s motion pursuant to Rule 25(c) to be substituted for nominal defendant Erin and then realigned as plaintiff (the “Realignment Motion”). The Court of Chancery denied the Rule 60(b) motion and summarily denied the Rule 25(c) motion. Here, the Supreme Court reversed, holding the Court of Chancery should have granted the Trustee’s Substitution and Realignment Motion. View "Lenois v. Lukman" on Justia Law

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In 2016, the board of directors of Facebook, Inc. (“Facebook”) voted in favor of a stock reclassification that would allow Mark Zuckerberg, Facebook’s controller, chairman, and chief executive officer, to sell most of his Facebook stock while maintaining voting control of the company. Zuckerberg proposed the Reclassification to allow him and his wife to fulfill a pledge to donate most of their wealth to philanthropic causes. With Zuckerberg casting the deciding votes, Facebook’s stockholders approved the Reclassification. Not long after, numerous stockholders filed lawsuits in the Delaware Court of Chancery, alleging that Facebook’s board of directors violated their fiduciary duties by negotiating and approving a purportedly one-sided deal that put Zuckerberg’s interests ahead of the company’s interests. The trial court consolidated more than a dozen of these lawsuits into a single class action. At Zuckerberg’s request and shortly before trial, Facebook withdrew the Reclassification and mooted the fiduciary-duty class action. Facebook spent more than $20 million defending against the class action and paid plaintiffs’ counsel more than $68 million in attorneys’ fees under the corporate benefit doctrine. Following the settlement, another Facebook stockholder, the United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund (“Tri-State”), filed a derivative complaint, rehashing many of the allegations made in the prior class action but sought compensation for the money Facebook spent in connection with the prior class action. Tri-State pleaded that making a demand on Facebook's board was futile because the board’s negotiation and approval of the Reclassification was not a valid exercise of its business judgment and because a majority of the directors were beholden to Zuckerberg. Facebook and the other defendants moved to dismiss Tri-State’s complaint arguing Tri-State did not make demand or prove that demand was futile. The Court of Chancery dismissed Tri-State's complaint under Rule 23.1. Finding no reversible error in that judgment, the Delaware Supreme Court affirmed dismissal. View "United Food and Commercial Workers Union v. Zuckerberg, et al." on Justia Law

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The issue presented from this interlocutory appeal of a Court of Chancery order holding that Appellees/Cross-Appellants, former stockholders of TerraForm Power, Inc. (“TerraForm”), had direct standing to challenge TerraForm’s 2018 private placement of common stock to Appellant/Cross-Appellees Brookfield Asset Management, Inc. and its affiliates, a controlling stockholder, for allegedly inadequate consideration. The trial court held that Plaintiffs did not state direct claims under Tooley v. Donaldson, Lufkin & Jennette, Inc., but did state direct claims predicated on a factual paradigm “strikingly similar” to that of Gentile v. Rossette, and that Gentile was controlling here. Appellants contended Gentile was inconsistent with Tooley, and that the Delaware Supreme Court’s decision in Gentile created confusion in the law and therefore ought to be overruled. Having engaged in a "full and fair presentation and searching inquiry has been made of the justifications for such judicial action," the Supreme Court overruled Gentile. Accordingly, the Court of Chancery's decision was reversed, but not because the Court of Chancery erred, but rather, because the Vice Chancellor correctly applied the law as it existed, recognizing that the claims were exclusively derivative under Tooley, and that he was bound by Gentile. View "Brookfield Asset Management, Inc., v. Rosson" on Justia Law

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In 2017, a third-party entity acquired Authentix Acquisition Company, Inc. (“Authentix”). The cash from the merger was distributed to the stockholders pursuant to a waterfall provision. The Authentix common stockholders received little to no consideration. A group of common stockholders filed a petition for appraisal to the Court of Chancery under Section 262 of the Delaware General Corporation Law (“DGCL”). Authentix moved to dismiss the petition, arguing that the petitioners had waived their appraisal rights under a stockholders agreement that bound the corporation and all of its stockholders. The Court of Chancery granted the motion to dismiss, holding that the petitioners had agreed to a clear provision requiring that they “refrain” from exercising their appraisal rights with respect to the merger. The court awarded the petitioners equitable interest on the merger consideration and declined to award Authentix pre-judgment interest under a fee-shifting provision. All parties appealed the Court of Chancery’s decisions. Pointing to Delaware’s "strong policy favoring private ordering," Authentix argued stockholders were free to set the terms that will govern their corporation so long as such alteration was not prohibited by statute or otherwise contrary to Delaware law. Authentix contended a waiver of the right to seek appraisal was not prohibited by the DGCL, and was not otherwise contrary to Delaware Law. "As a matter of public policy, there are certain fundamental features of a corporation that are essential to that entity’s identity and cannot be waived." Nonetheless, the Delaware Supreme Court determined the individual right of a stockholder to seek a judicial appraisal was not among those fundamental features that could not be waived. Accordingly, the Court held that Section 262 did not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration. Further, the Court found the Court of Chancery did not abuse its discretion by awarding the petitioners equitable interest on the merger consideration; nor did the court abuse its discretion by declining to award Authentix pre-judgment interest under a fee-shifting provision. Accordingly, the Court of Chancery’s judgment was affirmed. View "Manti Holdings, LLC et al. v. Authentix Acquisition Company, Inc." on Justia Law

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The two equal stockholders of UIP Companies, Inc. were deadlocked and could not elect new directors. One of the stockholders, Marion Coster, filed suit in the Court of Chancery and requested appointment of a custodian for UIP. In response, the three-person UIP board of directors — composed of the other equal stockholder and board chairman, Steven Schwat, and the two other directors aligned with him— voted to issue a one-third interest in UIP stock to their fellow director, Peter Bonnell, who was also a friend of Schwat and long-time UIP employee (the “Stock Sale”). Coster filed a second action in the Court of Chancery, claiming that the board breached its fiduciary duties by approving the Stock Sale. She asked the court to cancel the Stock Sale. After consolidating the two actions, the Court of Chancery found what was apparent given the timing of the Stock Sale: the conflicted UIP board issued stock to Bonnell to dilute Coster’s UIP interest below 50%, break the stockholder deadlock for electing directors, and end the Custodian Action. Ultimately, however, the court decided not to cancel the Stock Sale. The Delaware Supreme Court reversed the Court of Chancery on the conclusive effect of its entire fairness review and remanded for the court to consider the board’s motivations and purpose for the Stock Sale. "If the board approved the Stock Sale for inequitable reasons, the Court of Chancery should have cancelled the Stock Sale. And if the board, acting in good faith, approved the Stock Sale for the 'primary purpose of thwarting' Coster’s vote to elect directors or reduce her leverage as an equal stockholder, it must 'demonstrat[e] a compelling justification for such action' to withstand judicial scrutiny." View "Coster v. UIP Companies, Inc." on Justia Law

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GXP Capital, LLC filed two lawsuits against defendants in different federal courts. GXP alleged defendants violated non-disclosure agreements by using confidential information to buy key assets at bargain prices from GXP’s parent company. Those cases were dismissed for lack of personal and subject matter jurisdiction. GXP then filed a third suit in Delaware Superior Court, which stayed the case on forum non conveniens grounds to allow GXP to file the same case in California state court - a forum the court decided had a greater connection to the dispute and was more convenient for the parties. On appeal GXP argued: (1) the Superior Court did not apply the correct forum non conveniens analysis when Delaware was not the first-filed action, the prior-filed lawsuits have been dismissed, and no litigation was pending in another forum; and (2) defendants waived any inconvenience objections in Delaware under the forum selection clause in their non-disclosure agreements. The Delaware Supreme Court affirmed, finding the trial court properly exercised its discretion in this case’s procedural posture to stay the Delaware case in lieu of dismissal when another forum with jurisdiction existed and that forum was the more convenient forum to resolve the dispute. “And certain of the defendants’ consent to non-exclusive jurisdiction in California did not waive their right to object to venue in other jurisdictions, including Delaware.” View "GXP Capital v. Argonaut Manufacturing Services, et al" on Justia Law

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After a $3.3 billion “roll up” of minority-held units involving a merger between Enbridge, Inc. and Spectra Energy Partners L.P. (“SEP”), Paul Morris, a former SEP minority unitholder, lost standing to litigate an alleged $661 million derivative suit on behalf of SEP against its general partner, Spectra Energy Partners (DE) GP, LP (“SEP GP”). Morris repeated the derivative claim dismissal by filing a new class action complaint that alleged the Enbridge/SEP merger exchange ratio was unfair because SEP GP agreed to a merger that did not reflect the material value of his derivative claims. The Court of Chancery granted SEP GP’s motion to dismiss the new complaint for lack of standing. The court held that, to have standing to bring a post-merger claim, Morris had to allege a viable and material derivative claim that the buyer would not assert and provided no value for in the merger. Focusing on the materiality requirement, the court first discounted the $661 million recovery to $112 million to reflect the public unitholders’ beneficial interest in the derivative litigation recovery. The court then discounted the $112 million further to $28 million to reflect what the court estimated was a one in four chance of success in the litigation. After the discounting, the $28 million, less than 1% of the merger consideration, was immaterial to a $3.3 billion merger. On appeal, Morris argued the trial court should not have dismissed the plaintiff’s direct claims for lack of standing. After its review, the Delaware Supreme Court agreed with Morris finding that, on a motion to dismiss for lack of standing, he sufficiently pled a direct claim attacking the fairness of the merger itself for SEP GP’s failure to secure value for his pending derivative claims. The Court of Chancery’s judgment was reversed and the matter remanded for further proceedings. View "Morris v. Spectra Energy Partners" on Justia Law

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Insurance providers asked the Delaware Supreme Court whether certain costs incurred in connection with an appraisal action under 8 Del. C. 262 were precluded from coverage under the primary and excess directors’ and officers’ insurance policies (the “D&O Policies”) issued to Solera Holdings, Inc. (“Solera”). An affiliate of Vista Equity acquired Solera in 2016. That transaction gave rise to litigation, including an appraisal action. Solera requested coverage under the D&O Policies for the Appraisal Action. The insurers denied the request. Solera then filed suit against the insurers for breach of contract and declaratory judgment, seeking coverage for pre-judgment interest and defense expenses incurred in connection with the Appraisal Action. However, Solera did not seek coverage for the underlying fair value amount paid to the dissenting stockholders, upon which the pre-judgment interest was based. The issuer of the primary policy settled, and the excess policy insurers moved for summary judgment. The superior court denied the motion, interpreting the policy to hold that: (1) a “Securities Claim” under the policy was not limited to a claim alleging wrongdoing, and the Appraisal Action was for a “violation” under the Securities Claim definition; (2) because the “Loss” definition was not limited by any other language, the policy covered pre-judgment interest on a non-covered loss; and (3) as to defense expenses, Delaware law implied a prejudice requirement in insurance contract consent clauses, and Solera’s breach of the consent clause did not bar coverage for defense expenses absent a showing of prejudice. The Insurers appealed, contending that the superior court erred in holding that the Appraisal Action could be covered under the D&O Policies for a violation of a “Securities Claim.” The Supreme Court disagreed with the superior court's determination the Appraisal Action was for a “violation,” concluding the Appraisal Action did not fall within the definition of a “Securities Claim.” Because the Appraisal Action was not a Securities Claim, the remaining issues were moot. View "In Re Solera Insurance Coverage Appeals" on Justia Law

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In 2017, Sibanye Gold Ltd. (“Sibanye”) acquired Stillwater Mining Co. (“Stillwater”) through a reverse triangular merger. Under the terms of the merger agreement, each Stillwater share at closing was converted into the right to receive $18 of merger consideration. Between the signing and the closing of the merger, the commodity price for palladium (which Stillwater mined) increased by nine percent, improving Stillwater’s value. Certain former Stillwater stockholders dissented to the merger, perfected their statutory appraisal rights, and pursued this litigation. During the appraisal trial, petitioners argued the flawed deal process made the deal price an unreliable indicator of fair value and that increased commodity prices raised Stillwater’s fair value substantially between the signing and closing of the merger. In 2019, the Delaware Court of Chancery issued an opinion, holding that the $18 per share deal price was the most persuasive indicator of Stillwater’s fair value at the time of the merger. The court did not award an upward adjustment for the increased commodity prices. Petitioners appealed the Court of Chancery’s decision, arguing that the court abused its discretion when it ignored the flawed sale process and petitioners’ argument for an upward adjustment to the merger consideration. After review of the parties’ briefs and the record on appeal, and after oral argument, the Delaware Supreme Court found no reversible error and affirmed the Court of Chancery. View "Brigade Leveraged Capital Structures Fund Ltd v. Stillwater Mining Co." on Justia Law

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Martin Franklin, the Chief Executive Officer and co-founder of Jarden Corporation, negotiated the corporation’s sale to Newell Brands for $59.21 per share in cash and stock. Several large Jarden stockholders refused to accept the sale price and petitioned for appraisal in the Court of Chancery. The Court of Chancery found that, of all the valuation methods presented by the parties’ experts, only the $48.31 unaffected market price of Jarden stock could be used reliably to determine the fair value. The court placed little or no weight on other valuation metrics because the CEO dominated the sales process, there were no comparable companies to assess, and the parties’ experts presented such wildly divergent discounted cash flow models that, in the end, the models were unhelpful to the court. On appeal, the petitioners argued the Court of Chancery erred as a matter of law when it adopted Jarden’s unaffected market price as fair value because it ignored what petitioners claim is a “long-recognized principle of Delaware law” that a corporation’s stock price does not equal its fair value. They also claimed the court abused its discretion by refusing to give greater weight to a discounted cash flow analysis populated with data selected by petitioners, ignoring market-based evidence of a higher value, and refusing to use the deal price as a “floor” for fair value. Finding no abuse of discretion or other reversible error, the Delaware Supreme Court affirmed the Court of Chancery. View "Fir Tree Value Master Fund v. Jarden Corp" on Justia Law