By: Jill B. Louis and Gilbert A. Perales
In Simon-Mills II, LLC, et al., v. KanAm USA XVI Limited Partnership, et al., C.A. No. 8520-VCG (Del. Ch. March 30, 2017), the Court of Chancery denied Plaintiffs’ request to enforce its call right and granted Defendants’ request for declaratory judgment when the contracted consideration for the call right could not be tendered.
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.
By: Michelle McCreery Repp and Benjamin Kendall
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.
By: Scott Waxman and David Noll
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.
By: Scott Waxman and H. Corinne Smith
In Steven B. Trusa v. Norman Nepo, et al., Civil Action No. 12071-VCMR, the Delaware Court of Chancery granted defendants’ motion to dismiss, holding that the creditor plaintiff lacked standing to pursue a claim for breach of fiduciary duty and a claim for dissolution of the company, that he failed to state a claim for the remaining assertions, and that the declaratory judgment claim was duplicative.
By: Lisa R. Stark and Taylor B. Bartholomew
In In re Saba Software, Inc. Stockholder Litigation, C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017, revised Apr. 11, 2017), the Delaware Court of Chancery held that the board of Saba Software, Inc. could not invoke the business judgment rule under the Corwin doctrine in response to a fiduciary challenge arising from Saba’s acquisition by Vector Capital Management, L.P. According to the Court, plaintiff pled facts which supported a reasonable inference that the stockholder vote approving the acquisition was neither fully-informed nor uncoerced. The Court also denied defendants’ motion to dismiss plaintiff’s claims that the Saba board breached its duty of loyalty and engaged in acts of bad faith by rushing the sales process, refusing to consider alternatives to the merger and granting itself substantial equity awards.
By: Scott E. Waxman and James R. Parks
Vice Chancellor Glasscock, by memorandum opinion dated February 28, 2017, dismissed cross-motions for partial summary judgment in a dispute over the issuance of partnership units of Energy Transfer Equity, L.P., a Delaware master limited partnership (“ETE”). The challenged issuance (the “Issuance”) arose out of a contemplated, but never consummated, merger between ETE and The Williams Companies, Inc. (“Williams”), and was designed, according to the defendants, as a tool to improve ETE’s ability to enter into the merger by deferring some of ETE’s obligations to make distributions to its unitholders. The Issuance was intended to accomplish this by having certain unitholders give up their common units, which were entitled to quarterly distributions from ETE, in exchange for convertible units, which received distributions on a different schedule. Not all unitholders, however, were afforded the opportunity to participate in the Issuance and not all of the unitholders given the opportunity to participate chose to do so.
Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG (Del. Ch. Feb. 27, 2017)
By Joanna Diakos Kordalis and Max E. Kaplan
By memorandum-opinion dated February 27, 2017, Vice Chancellor Glasscock dismissed plaintiff’s Verified Complaint to Compel Inspection of Books and Records in Weingarten v. Monster Worldwide, Inc. after finding plaintiff lacked standing to bring such a claim. Specifically, the Court held that, under Section 220 of the Delaware General Corporation Law, only a current stockholder may bring an action to redress the denial of access to a corporation’s books and records, even if the plaintiff had been a stockholder when initially demanding access.
In re Dole Food Company, Inc., Stockholders Litigation
By: Remsen Kinne and Eryn Correa
The Court of Chancery granted a motion for leave to modify a settlement agreement in a merger-related class action suit to distribute settlement proceeds through DTC to Dole Food Company, Inc. (“Dole”) common stockholders of record. The Court held that the original stipulation providing for settlement proceeds to be distributed to both record holders and beneficial holders through a traditional notices and claims forms process proved to be too costly and burdensome in practice, which justified modifying the allocation procedure.
By: Michelle McCreery Repp and Joshua Haft
The Court of Chancery granted a motion to dismiss a shareholder derivative action brought against the board of directors of UPS for breach of their fiduciary duty of loyalty in which it was alleged that the board failed to monitor UPS’s compliance with laws governing the transportation and delivery of cigarettes, resulting in the government seeking approximately $180 million in a pending enforcement action against UPS. In ruling on the motion, the Court held that the plaintiffs did not adequately plead facts to support their contention that making a demand on the board of directors to take corrective action or pursue the claim would be futile, which is a prerequisite to a shareholder derivative action.
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