The New York Court of Appeals has followed Delaware in holding that the business-judgment rule applies to going-private mergers as long as certain shareholder-protective measures are met. The court’s May 5, 2016 decision in In the Matter of Kenneth Cole Productions, Inc. Shareholder Litigation, Case No. 54, adopts the standard set forth by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), and relaxes judicial scrutiny of controlling shareholders’ going-private mergers if the transactions provide certain protective conditions to safeguard the interests of minority shareholders.
Delaware Court of Chancery Rejects Another Disclosure-Only M&A Settlement and Warns of “Increasingly Vigilant” Scrutiny
The Delaware Court of Chancery last week dealt another blow to disclosure-only settlements of merger litigation and refused to approve a proposed class-action settlement arising from Zillow, Inc.’s acquisition of Trulia, Inc. The court’s decision held that the supplemental disclosures that formed the basis of the settlement were not “material
Delaware Supreme Court Holds Tooley Direct vs. Derivative Rule Is No Bar to Parent Corporation’s Contract Claim
As previously reported, in NAF Holdings, LLC v. Li & Fung (Trading) Limited, 772 F.3d 740 (2d Cir. 2014), the Second Circuit certified to the Delaware Supreme Court an unusual question regarding whether the direct vs. derivative test for stockholder claims would bar a direct breach of contract claim by a parent corporation whose subsidiary was injured. The Delaware Supreme Court has now given its answer: the direct vs. derivative analysis for fiduciary breach claims does not apply and the parent company may sue directly to enforce its own contracts, regardless of its status as stockholder of an injured subsidiary.
The issue arose following a failed acquisition transaction. The proposed acquirer, NAF, contracted directly with defendant Li & Fung to provide services to the target company. NAF then formed two wholly-owned subsidiaries to effectuate the acquisition. Li & Fung allegedly repudiated its agreement, causing NAF to lose the financing it needed to fund the acquisition, which resulted in injury to the subsidiaries. Li & Fung argued that, under the test established in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004), NAF’s contract claim could only be brought derivatively because NAF was a stockholder of the injured subsidiaries. In Tooley, addressing a typical minority stockholder claim of breach of fiduciary duty, the Delaware Supreme Court instructed that determining whether a stockholder’s claim is derivative or direct turns on “[w]ho suffered the alleged harm – the corporation or the suing stockholders individually – and who would receive the benefit of the recovery or other remedy?” 845 A.2d at 1035. To maintain a direct claim, “[t]he stockholder’s claimed direct injury must be independent of any alleged injury to the corporation. The stockholder must demonstrate that the duty breached was owed to the stockholder and that he or she can prevail without showing an injury to the corporation.” Id. at 1039.
Delaware Governor Signs Bill Prohibiting Bylaws on Fee-Shifting
Last week, Delaware Governor Jack Markell signed Senate Bill 75, which amends the Delaware General Corporation Law to prohibit Delaware stock corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims.
Section 115 defines “internal corporate claims” as “claims, including claims in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery.”
Delaware House Passes Bill Prohibiting Bylaws on Fee-Shifting
Yesterday, the Delaware House of Representatives unanimously passed a bill prohibiting publicly traded corporations from adopting bylaws that force shareholders to pay legal fees if they do not prevail in lawsuits asserting internal corporate claims against Delaware corporations. The bill would also allow Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The Delaware Senate passed the same bill last month, as we reported here. The bill now heads to Governor Jack Markell for signature.
Delaware Senate Passes Bill Prohibiting Bylaws on Fee Shifting
Yesterday, the Delaware Senate passed legislation prohibiting publicly-traded corporations from adopting bylaws that force shareholders to pay legal fees if they bring internal corporate claims against the company in court and do not win. The legislation also allows Delaware corporations to designate Delaware – but not any other state – as the exclusive forum for internal corporate claims. The bill passed on a 16-5 vote and now heads to the Delaware House of Representatives.
Delaware Legislature to Consider New Fee-Shifting Legislation
On April 29, 2015, Senator Bryan Townsend introduced legislation that would amend the Delaware General Corporation Law (DGCL) to ban fee-shifting bylaws for Delaware stock corporations (non-stock corporations would continue to be able to adopt fee-shifting bylaws). The bill, Senate Bill No. 75, would also confirm the Court of Chancery’s decision in Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), by amending the DGCL to permit board-adopted bylaws designating Delaware as the exclusive forum for intra-corporate litigation. However, the bill would reject the Chancery Court’s decision in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), by prohibiting Delaware corporations from designating an exclusive forum other than Delaware for such claims.
State Bar Council Proposes New Legislation for Delaware Fee-Shifting Ban and Delaware Court of Chancery Considers Fee-Shifting Bylaw
In December, we reported on the Delaware Court of Chancery’s continued validation of board-adopted forum-selection bylaws in City of Providence v. First Citizens BancShares, Inc., 99 A.3d 229, 234 (Del. Ch. 2014), and the proposed amendment to the Delaware General Corporation Law (DGCL) that would eliminate the ability of Delaware stock corporations to impose liability for attorneys’ fees on shareholders through bylaw and charter provisions—a response to the Delaware Supreme Court’s decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554, 555 (Del. 2014).
With a new legislative proposal from the Delaware Corporation Law Council this month, legislative action may be on the horizon. This new proposal would not only prohibit stock corporations from imposing liability on shareholders through fee-shifting but also from designating a forum other than Delaware as the exclusive forum for resolving intracorporate disputes.