Topic: Business Judgment

MOTION FOR A TEMPORARY RESTRAINING ORDER OF CONTROLLING STOCKHOLDERS DENIED AS NO EXTRAORDINARY CIRCUMSTANCES FOUND

By Annette Becker and Caitlin Velasco

In CBS Corporation, et al. v. National Amusements, Inc., et al., Civil Action No. 2018-0342-AGB, the Court of Chancery denied a motion for temporary retraining order brought by CBS Corporation (“CBS”) and five independent directors of CBS (the “Plaintiffs”) to restrain controlling shareholders, Shari Redstone, her father Sumner Redstone, National Amusements, Inc. (“NAI”), NAI Entertainment Holdings LLC, and the Sumner M. Redstone National Amusements Trust (the “Defendants”) from taking certain actions that would interfere with the governance of CBS or other proposed actions of the board of directors of CBS.  The Court found that there was no precedent for the type of relief requested by Plaintiff and that no extraordinary circumstances existed to warrant the grant of such relief. Read More

CONTROLLING STOCKHOLDER CANNOT ADVANCE ITS OWN SELF-INTEREST AT EXPENSE OF MINORITY STOCKHOLDERS

By: C. J. Voss and Rich Minice

In Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders.  In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.

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PLAINTIFFS WERE UNABLE TO ROUSE SUPPORT FOR THEIR POSITION THAT A MINORITY STOCKHOLDER WAS A CONTROLLER AND BREACHED FIDUCIARY DUTIES BECAUSE THEY DID NOT PLEAD SUFFICIENT FACTS

By: Annette Becker and Rich Minice

In In re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS, the George Leon Family Trust and Dr. Robert A Corwin (the “Plaintiffs”) sought to recover damages on behalf of Rouse Properties Inc. (“Rouse”) stockholders, for breach of fiduciary duties and aiding and abetting breaches of fiduciary duties against Brookfield Asset Management Inc. (“Brookfield”) and five Rouse directors individually arising out of a July 2016 merger between two mall real estate holding companies (the “Merger”). The court dismissed all claims finding that Brookfield was not a minority controlling stockholder of Rouse and did not wield undue influence over the board of directors of Rouse in general or during Merger discussions and that the Plaintiffs failed to well plead that the stockholder vote approving the Merger was uninformed or coerced.

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MULTI-BILLION DOLLAR INVESTMENT MANAGER AND DIRECTORS REMAIN AT RISK

By: Kevin Stichter and Samira Torshizi

In Cumming v. Edens, et al., C.A. No. 13007-VCS (Del. Ch. Feb. 20, 2018), the Court of Chancery denied a motion to dismiss a derivative suit for breach of fiduciary duties brought by a stockholder of New Senior Investment Group, Inc. (“New Senior”) against New Senior’s board of directors (the “Board”) and related parties in connection with New Senior’s $640 million acquisition of Holiday Acquisition Holdings LLC (“Holiday”). The Court made clear that compliance with Section 144 does not necessarily provide a safe harbor against claims for breach of fiduciary duty and invoke business judgment review of an interested transaction. Because the complaint alleged with specificity “that the Board acted out of self-interest or with allegiance to interest other than the stockholders,” the court applied the entire fairness standard of review and concluded that the transaction was not fair to New Senior stockholders. Read More

Board’s Failure to Adhere to Best Practices in Drug Clinical Trial Does Not Excuse Stockholder Demand as Futile

By:  Remsen Kinne and J. Tyler Moser

In Wilkin v. Narachi, et al., and Orexigen Therapeutics, Inc., Civil Action No. 12412-VCMR (Del. Ch. February 28, 2018), the Delaware Court of Chancery granted a motion to dismiss brought by defendants (“Defendants”), directors and officers of biopharmaceutical company Orexigen Therapeutics, Inc. (“Orexigen”), for failure to plead demand futility under Court of Chancery Rule 23.1.  The Court ruled that the plaintiff, a stockholder of Orexigen (“Plaintiff”), did not plead sufficient facts to show that a substantial likelihood of liability prevented the directors from exercising independent and disinterested business judgment when considering a demand to bring a lawsuit on behalf of the corporation.

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Chancery Court Grants in Part and Denies in Part Motion to Dismiss Brought by Defendant FXCM, Inc. in Derivative Suit Alleging That FXCM Knowingly Violated Regulation 5.16

By: Scott E. Waxman and Daisy Sexton

In Brett Kandell v. Dror Niv et al., the Delaware Chancery Court denied in part and granted in part a motion to dismiss a derivative action brought by a stockholder (“Plaintiff”) against nominal defendant FXCM, Inc. (“FXCM” or “the Company”), a foreign exchange (“FX”) broker.  The claim was brought against FXCM directors (“Defendants”) for losses associated with the “Flash Crash” in the value of the euro relative to the Swiss franc, which happened when the Swiss decoupled the two currencies.  As a result of these huge losses, FXCM had to obtain a loan under onerous conditions.  Two main causes of action were asserted: (1) that the directors’ ability to exercise business judgment with respect to the Flash Crash was impaired, and (2) that the directors knowingly violated 17 C.F.R. § 5.16 (“Regulation 5.16”) which prohibits foreign exchange traders from representing that they will limit clients’ trading losses.  Plaintiff did not make a demand on the company prior to bringing suit.

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Chancery Court Dismisses Claims Against Defendants and Holds that the Transactional Structure in M&F Worldwide Applies to Conflicted One Sided Controller Transactions

By: Annette Becker and Joshua Haft

In In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, Consolidated C.A. No. 11202-VC (Ch. Ct  August 18, 2017) former stockholders of Martha Stewart Living Omnimedia, Inc. (“MSLO”) brought a consolidated class action suit against Martha Stewart (“Stewart”), the former controlling stockholder of MSLO, for breach of fiduciary duty and against Sequential Brands Group, Inc. (“Sequential”), the acquirer of MSLO by merger, for aiding and abetting that breach claiming that Stewart leveraged her position as a controller to obtain disparate consideration for herself as compared to the minority stockholders of MSLO in the acquisition of MSLO.  Plaintiffs moved to dismiss, with the Court finding that the complaint failed to state a claim for breach of fiduciary duty against Stewart, and on that basis need not reach the question of whether the complaint adequately pleads the elements of aiding and abetting such a breach, and granted the plaintiffs’ motion to dismiss the complaint.

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Court of Chancery Applies Corwin Ratification to Merger Involving Private Equity Firm Favored by Company’s Founder

By: Nicholas I. Froio and Taylor B. Bartholomew

In Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017), the Delaware Court of Chancery held on a motion to dismiss that plaintiff failed to plead facts from which it was reasonably conceivable that a tender of nearly eighty percent of the shares of The Fresh Market (the “Company”) was uninformed or coerced for purposes of surviving ratification under applicable caselaw in connection with the Company’s acquisition by private equity firm Apollo Management, L.P. (“Apollo”).

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CHANCERY COURT DENIES MOTION TO DISMISS AND ALLOWS DERIVATIVE SUIT AGAINST BOARD MEMBERS TO CONTINUE

By: Whitney J. Smith and Michael Bill

In H&N Management Group, Inc. & Aff Cos Frozen Money Purchase Plan v. Robert M. Couch et al., No. 12847-VCMR (Del. Ch. Ct. August 1, 2017), the Court of Chancery denied defendants’ motion to dismiss and held that plaintiffs sufficiently alleged a reason to doubt that the board of AGNC Investment Corp (the “Company”) was adequately informed when approving (i) subsequent renewals of a management agreement between the Company and American Capital Mortgage Management, LLC (the “Manager”) as well as (ii) the acquisition of the Manager for a price of $562 million.

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CHANCERY COURT DISMISSES STOCKHOLDER DERIVATIVE SUIT THAT CHALLENGED EXCESSIVE EQUITY AWARDS TO DIRECTORS THAT WERE WITHIN THE LIMITS SET FORTH UNDER STOCKHOLDER APPROVED EQUITY INCENTIVE PLAN

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.

Chancery Court Holds That Stockholder Vote on Merger Was Neither Fully-Informed nor Uncoerced

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.

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Chancery Court Clarifies the Cleansing Power of an Uncoerced and Fully Informed Disinterested Majority Stockholder Vote

By:  Annette Becker and Will Smith

In In re Merge Healthcare Inc. Stockholders Litigation, No. 11388-VCG (Del. Ch. Ct. January 30, 2017), the Delaware Court of Chancery granted the defendant directors’ motion to dismiss brought against the plaintiff stockholders, holding that the cleansing effect of an uncoerced and fully informed vote of a majority of disinterested shares shields company directors from liability for alleged fiduciary violations as to an improper merger price and process. The Court found that the business judgment rule applied on review as opposed to the entire fairness standard.

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