In EMSI Acquisition, Inc. v. Contrarian Funds, LLC, et al., C.A. No. 12648-VCS (Del. Ch. May 3, 2017) the Delaware Chancery Court denied a motion to dismiss brought by defendants who were sellers (“Sellers”) in the acquisition of EMSI Holding Company (“EMSI”) by an affiliate of private equity firm Beecken Petty O’Keefe & Company where “inelegant drafting” created an ambiguity that may make the Sellers liable for EMSI’s fraudulent representations and warranties. To reach this conclusion, the Court considered whether the provisions of the Stock Purchase Agreement (“SPA”) permitted the plaintiff (“Buyer”) to seek indemnification beyond the cap on liability and, if so, whether the Sellers could be liable for the allegedly fraudulent representations and warranties from EMSI. The Court concluded that the SPA contained conflicting provisions with interpretations that could reasonably support either party’s claims and the conflicts could not be resolved on a motion to dismiss.
By: Shoshannah Katz and Alexa Ekman
In In re Investors Bancorp, Inc. Stockholder Litigation, C.A. No. 12327-VCS (Del. Ch. Apr. 5, 2017), the Delaware Court of Chancery granted a motion to dismiss derivative claims for breach of fiduciary duty and unjust enrichment, asserting that directors of Investors Bancorp, Inc. (“Company”) granted themselves equity compensation that was “excessive and unfair to the corporation”. Vice Chancellor Joseph R. Slights ruled against the plaintiffs due to the fact that the stockholder approved equity compensation plan included director-specific limits on equity compensation that the grants were within, and that the stockholder vote to adopt the equity compensation plan was fully informed and the stockholder approval constituted “ratification of the awards”
The Company’s Board of Directors (“Board of Directors”) adopted the Company’s 2015 Equity Incentive Plan on March 24, 2015 (the “EIP”), to provide additional incentives for the Company’s officers, employees and directors to promote the Company’s growth and performance and further align their interests with those of the Company’s stockholders. The EIP authorized 30,881,296 shares of the Company’s common stock for issuance under the EIP for restricted stock awards and stock options for the Company’s officers, employees, and non-employee directors. The EIP also set separate limits on the number of shares (i) the Company could issue as stock options or as restricted stock awards, restricted stock units or performance shares, (ii) that could be awarded to any one employee pursuant to a restricted stock or restricted unit grant or the exercise of stock options, and (iii) that could be issued or delivered to all non-employee directors, in the aggregate, pursuant to the exercise of stock options or grants of restricted stock or restricted stock units at no more than 30% of all shares available for awards to be granted in any calendar year). A proxy statement was filed on April 30, 2015 soliciting stockholder votes to adopt the EIP. The proxy statement disclosed “[t]he number, types and terms of awards to be made pursuant to the EIP are subject to the discretion of the Compensation Committee and will not be determined until subsequent stockholder approval.” The EIP was put to a stockholder vote on June 9, 2015, and received approval from 96.25% of the shares voted at the meeting (representing 79.1% of the total shares outstanding).
Shortly after the stockholders adopted the EIP, the Compensation Committee held several meetings in June of 2015 that resulted in the Compensation Committee’s approval of awards of restricted stock and stock options to all twelve members of the Board of Directors (which, at the time, included two employee directors). In addition to the Compensation Committee’s recommendation, the Board of Directors also received input from various experts as to awards other similar companies had distributed to its directors and officers over the past twenty years, including a presentation by outside counsel. The Board of Directors then awarded stock options and restricted stock for each of the twelve members of the Board of Directors, with an aggregate grant date fair value of approximately $51.5 million. The Company’s Chief Executive Officer was awarded a grant valued at more than $16 million, while the Company’s Chief Operations Officer was awarded a grant valued at more than $13 million.
The plaintiffs, stockholders of the Company at all relevant times, filed their suit shortly after the awards were announced on April 14, 2016, alleging that the directors had breached their fiduciary duties by awarding themselves grossly excessive compensation. The defendants filed a Court of Chancery Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted under Court of Chancery Rule 23.1, for failing to make a pre-suit demand with respect to the grants of equity compensation to the executive directors. The key issue was whether stockholder approval of the EIP would be deemed ratification of the awards made under the EIP. If so, then the awards to all directors would be subject to the business judgment standard of review and would be reviewed for waste.
Plaintiffs pled the only circumstance in which a stockholder vote could prospectively ratify a board’s decision to approve equity awards to directors is when the plan is “completely self-executing” in that it provides a fixed amount of compensation or specifically imposes meaningful limits on the directors’ ability to compensate themselves. The court denied this claim and explained that the key issue was “whether the stockholder approval of the plan will be deemed ratification of the awards under the plan.” The Court concluded that “approval of plans with ‘specific limits’…will be deemed as ratification of awards that are consistent with those limits,” and “this plan included director-specific limits that differed from the limits that applied to awards to other beneficiaries under the plan.”
Plaintiffs also alleged that the disclosures related to the vote were insufficient, yet the Court held that the plaintiffs either pointed to omissions that are not material as a matter of law or have selectively referred to portions of the proxy without providing full context. The plan (with director-specific limits) was approved by a fully informed stockholder vote and as the plaintiffs did plead a claim for waste, the Court held the plaintiffs failed to adequately plead a claim of breach of fiduciary duty against Defendants relating to subsequent awards issued under the plan. Plaintiff’s claim for unjust enrichment was dismissed by the Court for being “duplicative of the breach of fiduciary duty claim” and also deficient.
In Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. Apr. 19, 2017), the Chancery Court dismissed the entire complaint brought by one member of a limited liability company against another member for paying himself an unauthorized salary and misappropriating the proceeds of a sale of the company’s assets, concluding that the claims made were derivative rather than direct stockholder claims. The Court also held that plaintiff’s claims were not “dual-natured” (i.e., having both direct and derivative aspects), because the plaintiff failed to plead that the transaction resulted in both an improper transfer of economic value and voting power from the minority equity holders to the controlling equity holder.
On a motion to “’confirm the trial schedule,’” Vice Chancellor Glasscock determined that actions brought by the limited partners of a partnership based upon the general partner’s alleged fraud, self interest and breach of the partnership agreement were direct claims and therefore not subject to a stay pursuant to the partnership’s bankruptcy proceeding. Sehoy Energy LP et al. v. Haven Real Estate Group, LLC et al., C.A. No. 12387-VCG (Del. Ch. April 17, 2017), addressed a situation in which the general partner of a limited partnership (and the person controlling the general partner) used funds of the limited partnership to make investments into the business of a personal friend which ultimately resulted in the bankruptcy of the partnership.
In In re Paramount Gold and Silver Corp. Stockholders Litigation, Consol. C.A. No. 10499-CB (Del. Ch. Apr. 13, 2017), the Delaware Chancery Court dismissed a stockholder derivative suit asserting a claim for breach of fiduciary duty against the directors (“Defendants”) of Paramount Gold and Silver Corporation (“Paramount” or the “Company”) in connection with Paramount’s merger with Coeur Mining, Inc. (“Coeur”). The Court dismissed the claim finding that a side royalty agreement entered into by Paramount and Coeur did not constitute a deal protection device and because the Court found that Plaintiffs had failed to identify any material deficiencies in Paramount’s registration statement.
In Rodgers v. Cypress Semiconductor Corporation, C.A. No. 2017-0070-AGB (Del. Ch. April 17, 2017), the Court of Chancery held that shareholder plaintiff T.J. Rodgers (“Rodgers”) had established several proper purposes for his demand to inspect certain books and records of Cypress Semiconductor Corporation (the “Company”), along with a credible basis to infer wrongdoing by at least one of the Company’s directors. The Court granted Rodgers’ Section 220 action and directed the parties to meet and submit an order for production of all responsive documents.