Tag: Breach of Fiduciary Duty

Chancery Court Finds No Breach of Duty in Failed Corporate Inversion

By Joanna Diakos and Tom Sperber

In Kyle Ellis (AbbVie, Inc.) v. Richard A. Gonzalez, et al., the Delaware Chancery Court dismissed a derivative suit for failing to make a demand and to allege particularized facts demonstrating that demand would have been futile. Kyle Ellis (“Plaintiff”) alleged breaches of fiduciary duty by the CEO of AbbVie, Inc. (“AbbVie”), Richard A. Gonzalez (“Gonzalez”), and the individual members of AbbVie’s board of directors (“Director Defendants”) in connection with a proposed but ultimately abandoned corporate inversion between pharmaceutical giants AbbVie and Shire plc (“Shire”). The Court held that because AbbVie’s certificate of incorporation contained a Section 102(b)(7) exculpatory clause, Plaintiff had to allege that a majority of the board faced a substantial likelihood of liability for breaching the duty of loyalty in order for demand to be excused. Ultimately, Plaintiff failed to do that.

At all relevant times, Plaintiff was a minority stockholder of AbbVie, a Delaware corporation headquartered in Chicago, Illinois. Shire was an Island of Jersey biopharmaceutical company with its headquarters in Dublin, Ireland.

On July 18, 2014, AbbVie and Shire entered into an acquisition agreement. Pursuant to that agreement, AbbVie would acquire Shire for $54 billion worth of cash and stock of a new, wholly owned Jersey subsidiary (“New AbbVie”). Both AbbVie and Shire would then become wholly owned subsidiaries of New AbbVie, which would be headquartered in Ireland. Among other financial benefits that AbbVie stated when announcing the corporate inversion, the corporation cited tax savings from placing New AbbVie’s headquarters in Ireland rather than in the United States. On July 21, Gonzalez spoke at an investor conference. There, he reiterated the strategic rationales for the merger, stating that the avoidance of paying the higher US corporate tax rate was “clearly a benefit, but [] not the primary rationale.” On August 21, AbbVie filed a Form S-4 that outlined the strategic advantages of such a merger. Among nine other rationales for the transaction, the S-4 included the benefit of “the potential realization of tax and operational synergies by New AbbVie as a result of the Merger.”

On September 22, the Treasury Department announced that it would issue regulatory guidance that would eliminate some tax benefits that US-based corporations saw from merging with foreign companies through corporate inversions. One week later, AbbVie filed two Form 425s which included letters from Gonzalez and AbbVie Vice President Chris Turek. In their letters, Gonzalez and Turek assured employees of each company that the deal would close despite the Treasury Department’s announcement. On October 14, AbbVie announced that, in light of the regulatory shift, the board was reconsidering the merger. The next day, the board withdrew its recommendation and Shire’s stock price dropped substantially. AbbVie issued a press release on October 21 announcing the termination of the proposed merger and the payment of a $1.64 billion termination fee to Shire. Plaintiff’s complaint alleged that Gonzalez’s statements to investors in July as well as the letters included in the Form 425 filings in September amounted to breaches of fiduciary duty: Gonzalez’s statements had allegedly understated the importance of the inversion tax benefits in the decision to merge; and the Form 425 letters stated AbbVie’s intent to follow through with the merger, even though, according to Plaintiff, they had already abandoned that plan.

The defendants moved to dismiss Plaintiff’s complaint for failure to make a demand. Plaintiff argued demand-futility under the theory that the board could not impartially consider a demand because they faced a substantial likelihood of liability for the alleged material misrepresentations and omissions in the statements in question.

In finding that Plaintiff failed to sufficiently allege futility, the Court looked first to his allegation that the statements made to investors in July of 2014 were false or misleading. The Court cited Malone v. Brincat for the proposition that such a futility argument would require an allegation that the directors “deliberately misinform[ed] shareholders.” The Court identified that AbbVie’s charter’s exculpatory provision required Plaintiff to plead particularized facts that would lead to an inference that the board acted knowingly, intentionally, or in bad faith.

Plaintiff’s theory was that despite Gonzalez’s claim that tax arbitrage was but one of many motivations, realizing tax benefits was the “sole, or at least primary, rationale for the merger.” Plaintiff points to AbbVie’s press release after the decision had been made to abandon the merger, which stated that the recommendation to merge was withdrawn after a detailed consideration of the impact of the new tax rules. The Court found this argument conclusory. In so finding, the Court stated that while the tax benefits may have been necessary to the deal, it does not follow that they were the primary motivation of AbbVie. Ultimately, the Court found that Plaintiff would have had to allege that “most of the value” of the deal came out of the tax break in order to meet the heightened pleading standard of Rule 23.1. The Court also found that Plaintiff failed to allege with particularity that the Director Defendants were involved in the July statements made by Gonzalez.

The Court also examined Plaintiff’s second allegation that statements in the Form 425 letters were misleading in that AbbVie expressed a continued interest in pursuing the merger when, in reality, plans to merge had been abandoned as soon as the Treasury Department made its announcement. In arguing that the Director Defendants could face liability for these letters, Plaintiff argued that they must have authorized or at least known about these letters. The Court found only conclusory allegations regarding the Director Defendants’ involvement.

In arguing that the letters were misleading, Plaintiff explained that the defendants intentionally failed to correct the false statements in order to avoid paying interest on the $1.6 billion termination fee for the time difference between when the board began reconsidering the deal and when it ultimately terminated it. The Court pointed out that the Complaint itself alleged that the fee would be triggered only if and when the board withdrew or modified its recommendation. This meant that the fee would have been triggered on October 15, rather than when the board started having doubts, making Plaintiff’s argument flawed. While the Court conceded that the statements made by Gonzalez and Turek may have caused a “misimpression” that the deal would still close, the Court found that Plaintiff’s remaining allegations that the statements were made in bad faith were conclusory.

In addition to the “substantial likelihood of liability” theory, Plaintiff advanced two alternative arguments for futility which the Court largely disregarded. Plaintiff alleged that some defendants served on the Audit Committee and, presumably, that would limit their ability to be impartial. The Court cited the “well-settled rule that mere membership on a board committee is insufficient to support a reasonable inference of disloyal conduct.” Plaintiff also contended that the company’s insurance policy did not provide coverage for actions that the company brings against its directors. In rejecting that argument, the Court pointed to the rejection of a similar argument made by the plaintiff in Decker v. Clausen, characterizing it as an assertion that the directors cannot be impartial if they are “suing themselves.”

As such, Plaintiff failed to adequately plead any of his claims to the extent required by Rule 23.1, resulting in the Court granting the defendants’ motion to dismiss with prejudice.

Kyle Ellis… v. Richard A. Gonzalez, et al., and AbbVie, Inc., nom. def…

Chancery Court Claims for Breach of Fiduciary Duty Dismissed for Failure to Establish Demand Futility

By: Annette Becker and Geoffrey Locher

Jennifer L. Stritzinger v. Dennis Barba, et al., letter opinion 180831

In Jennifer L. Stritzinger v. Dennis Barba, et al. Civil Action No. 12776-CB, the Delaware Court of Chancery granted the defendants’ motion to dismiss Stritzinger’s derivative lawsuit for breach of fiduciary duty for alleged mismanagement of Newark Country Club (the “Club”), a private corporation located in Newark, Delaware.  The Court dismissed Stritzinger’s suit finding Stritzinger failed to establish demand futility before filing suit against the Club.

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CHANCERY COURT VALIDATES A DEFECTIVE MERGER AND REAFFIRMS RELIANCE ON OUTSIDE LEGAL COUNSEL UNDER DELAWARE LAW

By Holly Hatfield and Dean Brazier

In The Cirillo Family Trust v. Aram Moezinia, Lewis Tepper, Mark Walter, and DAVA Pharmaceuticals, Inc., C.A. No. 10116-CB (Del. Ch. Jul. 11, 2018), the Delaware Chancery Court granted the defendants’ motion dismissing certain claims arising from the 2014 merger between DAVA Pharmaceuticals, Inc. (“DAVA”) and an affiliate of Endo Pharmaceuticals, Inc. (such affiliate, “Endo”).  The Court held that Section 205 of the Delaware General Corporation Law (the “DGCL”) validated deficiencies in the written consents to the merger (the “Written Consents”) and a director’s reasonable, good faith reliance on the advice of legal counsel hired for specific expertise can exculpate the director for a fiduciary duty breach.  The Court also granted part of the plaintiff’s motion to amend the complaint to add a claim against certain directors in their capacities as officers of DAVA.

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A Conflicted Controller Transaction Survives a Motion to Dismiss

By: Lisa R. Stark and Samira F. Torshizi

In In re Hansen Medical, Inc. Stockholders Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018), the Delaware Court of Chancery found that plaintiffs had stated a reasonably conceivable claim that the acquisition of Hansen Medical, Inc. (“Hansen”) by Auris Surgical Robotics, Inc. (“Auris”) should be reviewed under the entire fairness standard of review because the transaction involved a controlling stockholder group which extracted benefits from the transaction not shared with the minority. The Court denied motions to dismiss filed by the alleged control group and Hansen’s directors and officers.

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Court of Chancery Dismisses Derivative Suit for Failure to Demonstrate Demand Futility because Plaintiff Failed to Allege Particularized Facts

By: Charles Carter and Caitlin Velasco

In Steinberg on behalf of Hortonworks, Inc. v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s derivative claims for breach of fiduciary duties under Court of Chancery Rule 23.1, because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile. The Court found that the plaintiff failed to plead particularized facts sufficient to raise reasonable doubt that a majority of the directors on the Hortonworks, Inc. board could have exercised their independent and disinterested business judgment in responding to a pre-suit demand. Read More

Court of Chancery Holds That Plaintiff Failed to Meet Burden of Proof With Respect to Mistake-Based Reformation Claim

By: Scott Waxman and Tami Mack

In Richard B. Gamberg 2007 Family Trust v. United Restaurant Group, L.P., C.A. No. 10994-VCMR (Del. Ch. January 26, 2018), the Court of Chancery held that limited partner, Richard B. Gamberg 2007 Family Trust (the “Plaintiff”), failed to meet its burden of proof with respect to various claims against United Restaurant Group L.P. (the “Partnership”), Atlantic Coast Dining, Inc. (the “General Partner”), and the directors/shareholders of the General Partner (the “Shareholder Defendants”; together with the Partnership and the General Partner, the “Defendants”), which included a mistake-based reformation claim, among other breach of contract and breach of fiduciary duty claims.

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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

COURT OF CHANCERY HOLDS THERE MUST BE A GAP IN AGREEMENT FOR AN IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING

By: Scott E. Waxman and Douglas A. Logan

In Christopher Miller, et al., v. HCP & Company, et al., memorandum opinion 180201, the Court of Chancery granted a motion to dismiss because the underlying Limited Liability Company Agreement did not contain a “gap” for an implied covenant of good faith and fair dealing to fill. Rather, the Court of Chancery held that the Limited Liability Company Agreement contained negotiated investor favorable provisions regarding good faith and fair dealing, thus undercutting any argument that the Court of Chancery should read an implied covenant into the operating agreement.

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Court of Chancery Holds That Corwin Defense Is Not Appropriate for the Limited Scope and Purpose of a Books and Records Action Under Section 220

By: David Forney and Tami Mack

In Lavin v. West Corporation, C.A. No. 2017-0547-JRS (Del. Ch. December 29, 2017), the Court of Chancery held that stockholder plaintiff Mark Lavin (“Lavin”) had adequately demonstrated a credible basis from which the Court could infer that wrongdoing had occurred regarding the merger of West Corporation (the “Company”) and Apollo Global Management (“Apollo”) in support of Lavin’s Section 220 demand for inspection, and that a Corwin defense (that the transaction at issue was approved by a majority of disinterested and informed stockholders) is not a bar to an otherwise properly supported Section 220 demand for inspection.

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Class Action Dismissed as Demand was Not Excused as Futile; Plaintiff Failed to Allege Facts Sufficient to Establish that a Majority of the Board Faced Substantial Likelihood of Liability for Non-Exculpated Claims

By: Annette Becker and Will Smith

In Lenois, et al. v. Lawal, et al., and Erin Energy Corporation, C.A. No. 11963-VCMR (Del. Ch. November 7, 2017), plaintiff Robert Lenois (“Plaintiff”) on behalf of himself and other stockholders brought a class action for breach of fiduciary duty against controllers and the board of directors of Erin Energy Corporation (“Erin”) for approving what was claimed to be an unfair transaction. The Delaware Court of Chancery dismissed the class action suit under Court of Chancery Rule 23.1, holding that the directors were protected by an exculpatory charter, and Plaintiff failed to meet the heightened pleading standard for demand futility set by the second prong of Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Although Plaintiff pled with particularity that one director acted in bad faith, the complaint did not allege facts sufficient to establish that a majority of the board faced a substantial likelihood of liability for non-exculpated claims.

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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 DISMISSES DERIVATIVE BREACH OF FIDUCIARY DUTY CLAIMS FOR FAILURE TO MAKE A PRE-SUIT DEMAND OR DEMONSTRATE DEMAND FUTILITY

By: Annette Becker and Caitlin Velasco

In Chester Cty. Emp. Ret. Fund v. New Residential Inv. Corp., C.A. No. 11058-VCMR (Del. Ch. Oct. 6, 2017), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s direct and derivative claims for breach of fiduciary duties under the Court of Chancery Rules 23.1 and 12(b)(6), because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile.  The Court found that although the facts alleged gave rise to a derivative claim, the plaintiff failed to make a pre-suit demand or plead particularized facts sufficient to raise a reasonable doubt that a majority of the directors on the New Residential Corp. (“New Residential”) board could have exercised their independent and disinterested business judgment in responding to a demand.

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