Archive: January 2017

Chancery Court Invalidates Supermajority Director Removal Bylaw

By: Lisa R. Stark and Taylor B. Bartholomew

In Frechter v. Zier, C.A. No. 12038-VCG (Del. Ch. Jan. 24, 2017), the Delaware Court of Chancery held that a corporation’s bylaw, which purported to require 66 2/3% of the voting power of all of the corporation’s outstanding stock to remove directors, was inconsistent with Section 141(k) of the General Corporation Law of the State of Delaware (the “DGCL”).  Section 141(k) of the DGCL provides that, except with respect to corporations having a staggered board or cumulative voting, “[a]ny director or the entire board of directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors . . . .”  Unlike some other provisions of the DGCL, Section 141(k) does not expressly provide for a default rule that applies “unless otherwise provided in the certificate of incorporation or bylaws.”

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CHANCERY COURT EXPLAINS STANDING FOR FIDUCIARY CLAIMS WHEN A STOCKHOLDER IS SQUEEZED OUT

By: Holly Hatfield and Michael Bill

In I.A.T.S.E. Local No. One Pension Fund v. General Electric Company, et al., No. 11893-VCG (Del. Ch. Ct. December 6, 2016), the Delaware Court of Chancery, denied defendants’ motion to dismiss and held that a breach of fiduciary duty claim is personal and does not adhere to the stock of the company where the transaction at issue severs the relationship between the stockholder and the entity.

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Chancery Court Dismisses Minority Stockholders’ Action Seeking Quasi-Appraisal in United Capital Corp. Buyout

By: Shoshannah Katz and Andrew Gahan

In In re United Capital Corp., Stockholders Litigation, C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017), the Delaware Court of Chancery dismissed a suit brought by plaintiff minority stockholders (“Plaintiff”) that sought a quasi-appraisal to remedy alleged breaches of the duty of disclosure in connection with the acquisition of United Capital Corp. (“United Capital” or “Company”) via short-form merger.  The Court concluded that Plaintiff had not adequately alleged that any omitted information was material to the decision to seek appraisal and that the duty of disclosure was not violated.

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Delaware Chancery Court Confirms the Invalidity of Fee-Shifting Bylaws for Stock Corporations

By Lisa R. Stark and Taylor B. Bartholomew

In Solak v. Sarowitz, C.A. No. 12299-CB (Del. Ch. Dec. 27, 2016), the Delaware Court of Chancery held that plaintiff stated a claim that a stock corporation’s fee-shifting bylaw was facially invalid under Section 109(b) of the General Corporation Law of the State of Delaware (the “DGCL”).  The fee-shifting bylaw purported to apply to a stockholder who sought to litigate claims involving the corporation’s internal corporate governance in a forum other than Delaware in violation of the corporation’s forum-selection bylaw.  No stockholder had violated the forum-selection bylaw at the time of the decision, and the plaintiff successfully overcame a ripeness defense.  In rendering its decision, the Court of Chancery confirmed that fee-shifting bylaws relating to internal corporate claims are impermissible for stock corporations following the 2015 amendments to the DGCL (the “2015 DGCL Amendments”) which prohibit stock corporations from enacting fee-shifting bylaws or certificate of incorporation provisions, in each case, relating to “internal corporate claims.”  Under Section 115 of the DGCL, “internal corporate claims” are claims, including derivative claims, (1) that are “based upon a violation of a duty by a current or former director or officer or stockholder in such capacity” or (2) as to which the DGCL “confers jurisdiction upon the Court of Chancery.”

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“Cleansing” the Merger: Stockholder Vote Protects Directors from Class Action Where Plaintiffs Fail to Sufficiently Allege Material Deficiency in Proxy Statement

By:  Joanna Diakos Kordalis and Max E. Kaplan

By memorandum-opinion dated January 5, 2017, Chancellor Bouchard granted defendants’ motion to dismiss a putative class action complaint in In re Solera Holdings, Inc. Stockholder Litigation.  Specifically, the Court held that absent allegations specifically identifying material deficiencies in the operative disclosure documents, ratification by a majority of disinterested stockholders rendered defendant-directors’ approval of a merger subject to the business judgment rule.

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