A guide to recent court decisions as reflected in Practical Law Corporate and M&A resources.
One of the missions of Practical Law's Corporate & Securities team is to keep transactional lawyers informed of judicial decisions and guidance that will impact their practice. At the heart of this mission, Practical Law regularly publishes timely and instructive Legal Updates on major court decisions such as Kahn v. M & F Worldwide Corp., Third Point LLC v. Ruprecht and ATP Tour, Inc. v. Deutscher Tennis Bund.
In addition to publishing Legal Updates, the Practical Law team also regularly maintains its resources to reflect the practical implications of these decisions. In this regard, many other decisions that do not require stand-alone treatment in a Legal Update are also reflected in Practical Law's Corporate and M&A resources. To call attention to some of those cases, this Legal Update describes how various Practice Notes and Standard Documents in Practical Law's Corporate and M&A service have been maintained to reflect court decisions issued in 2014.
Fiduciary Duties
The most regularly maintained resource in Practical Law's Corporate service is Practice Note, Fiduciary Duties of the Board of Directors. The Delaware courts regularly issue foundational decisions that warrant treatment in that Practice Note. The following updates have been made to it in 2014:
The standard in Chen v. Howard-Anderson for demonstrating a failure to act in good faith in the context of a sale of a corporation is discussed in Duty of Good Faith (87 A.3d 648, 684 (Del. Ch. Apr. 8, 2014)). The Chen decision is also cited in Revlon Duties in Mixed-consideration Deals.
The Hamilton Partners, L.P. v. Highland Capital Management, L.P. decision is cited in Business Judgment Rule for the principle that if a plaintiff chooses to file a claim for breach of fiduciary duties against only one director, it still must rebut the presumptions of the business judgment rule regarding a majority of the directors to succeed against the individual ( (Del. Ch. May 7, 2014)).
The section Exculpation for Failure to Satisfy Revlon Duties was updated to provide an example of the need to demonstrate bad faith on the part of the board in order to overcome a 102(b)(7) exculpation provision. In Houseman v. Sagerman, the Court of Chancery dismissed a fiduciary duty claim against a board that had failed to obtain a formal fairness opinion and failed to audit the company's financial statements. Even though the board "did not conduct a perfect sales process," it defeated the claim because it did not "utterly fail to undertake any action to obtain the best price for stockholders" (, at *7 (Del. Ch. Apr. 16, 2014)).
The discussion of the Duty of Disclosure was revised to explain that in a merger with a controlling stockholder, where the outcome of the vote itself is not in question, there is less of a need to provide disclosure of the financial projections relied on by the financial advisor for its fairness opinion (Dent v. Ramtron Int'l Corp., , at *11 (Del. Ch. June 30, 2014)).
The discussion of Corporate Waste was updated to provide examples of spending and other board actions that typically do not support a finding of waste under the Delaware Supreme Court's Disney standard. These include spending on items such as employee vehicles, outings, social-club dues, holiday gifts and "a large supply of gummy bear snacks for the office" (Zutrau v. Jansing, , at *20-21 (Del. Ch. July 31, 2014)).
The section Qualifying as a Controlling Stockholder was updated for the Hamilton Partners decision to provide an example of how a stockholder can be deemed controlling without necessarily having board-designation rights or owning a majority of the stock.
The section Privilege Considerations in Shareholder Derivative Lawsuits in Practice Note, Shareholder Derivative Litigation was updated for the foundational Delaware Supreme Court decision in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW that adopted the Garner exemption to attorney-client privilege under Delaware law (, at *11 (Del. July 23, 2014)). The other updates to this Practice Note are:
The section Director's Interest in the Underlying Transaction was revised to reflect the Delaware Court of Chancery's decision in Cambridge Retirement System v. Bosnjak, , at *4 (Del. Ch. June 26, 2014). The Bosnjak decision explains that demand is deemed futile, with no need for the plaintiff to meet a materiality standard, when a transaction involves any self-dealing on the part of the director. A director's own compensation is deemed a self-dealing transaction, as the decision confirms.
Drafting Note, Judicial Dissolution was updated to reflect a New York court's decision to not dissolve an LLC that was "both financially viable and capable of operating efficiently even in the face of its members' acrimony" (Natanel v. Cohen, , at *4 (N.Y. Sup. Ct. Apr. 18, 2014)). The decision is contrasted with a line of Delaware cases in which the court chose to dissolve companies that remained profitable, on the basis that the managers had become hopelessly deadlocked.
Drafting Note, Standard of Care was revised to reflect the discussion in Allen v. El Paso Pipeline GP Co., L.L.C. of both the implied covenant of good faith and fair dealing and the "best interest of the company" standard (, at *9 (Del. Ch. June 20, 2014)).
We have also added a new Section 8.02(d) to the LLC Agreement to reflect the requirement of the new Section 18-305(h) of the Delaware Limited Liability Company Act, which obligates the LLC to maintain a current record of the name and last known business, residence or mailing address of each member and manager (6 Del. C. § 18-305(h)).
In Dent v. Ramtron International Corp., the Delaware Court of Chancery upheld a common suite of deal-protection provisions in a public merger agreement ( (Del. Ch. June 30, 2014)). The break-up fee was set at 4.5% of the transaction's equity value, a somewhat large fee compared to market practice. Dent is cited in Practice Note, Break-up or Termination Fees: Size of the Break-up Fee as an example of a break-up fee that the Court has upheld in light of the total circumstances of the merger and the board's conduct.