Delaware Court of Chancery

In a recently issued letter decision, the Delaware Court of Chancery reiterated the general rule that directors have an unencumbered right to access corporate information (with certain exceptions). The case involves a dispute between two groups of directors—those affiliated with a controlling stockholder, and those that are not. An affiliated director filed a motion to compel the production of information, including corporate communications between (1) unaffiliated directors and officers of the corporation and company counsel; and (2) members of a special committee formed specifically to negotiate with the controlling stockholder and that committee’s own independent counsel. The court largely granted the affiliated director’s request, with the exception of communications between the special committee and its counsel.
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In a stark application of the adage that one should be careful what one wishes for—because one may get it—on May 30, Vice Chancellor Sam Glasscock III of the Delaware Chancery Court issued an opinion in In re Appraisal of SWS Group, Inc. (C.A. No. 10554-VCG), a stockholder lawsuit seeking appraisal for the shares of SWS Group, Inc. (SWS), a financially struggling bank and broker-dealer firm. The appraisal claim arose out of the merger of SWS with Hilltop Holdings Inc. (Hilltop) in January 2015. The court’s decision on the fair value of the SWS shares reduced the price paid to dissenting stockholders from the merger price of $6.92 per share, payable in a mixture of cash and stock, to $6.38, payable in cash. This decision, and the resulting 7.8 percent reduction in consideration, demonstrates the risks inherent in “appraisal arbitrage.”
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On July 6, the United States Court of Appeals for the Third Circuit issued an opinion overturning the November 2014 ruling of the United States District Court for the District of Delaware that Wal-Mart Stores, Inc. had improperly excluded a shareholder proposal from its proxy statement. The Third Circuit’s written opinion follows its prior order issued in April 2015 vacating the District Court’s earlier decision.
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In In re Cornerstone Therapeutics Inc. Stockholder Litigation/Leal v. Meeks, the Delaware Supreme Court reversed decisions of the Delaware Chancery Court denying director-defendants’ motions to dismiss breach of fiduciary duty claims brought in connection with two transactions involving controlling stockholders. In reversing the Delaware Chancery Court’s decisions, the Delaware Supreme Court held that a plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct. The cases were remanded for the Delaware Chancery Court to determine whether the plaintiffs sufficiently pled facts suggesting that the independent directors committed a non-exculpated breach of their fiduciary duties.
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The Corporation Law Section of the Delaware State Bar Association has approved, in substantially the form proposed by the Delaware Corporate Council, amendments to the General Corporation Law of the State of Delaware (DGCL) that would prohibit so-called “fee-shifting” provisions in charters and bylaws, expressly permit “exclusive forum provisions” in a corporation’s charter and bylaws, and make certain changes with respect to appraisal rights. The fee-shifting and exclusive forum proposals of the Delaware Corporate Council were discussed in the March 20 edition of Corporate and Financial Weekly Digest.
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The Delaware Court of Chancery recently held, in a case of first impression, that a non-reciprocal fee-shifting bylaw cannot be applied to a claim brought by a former shareholder who had been cashed out of the company before the bylaw was adopted.

In May 2014, First Aviation Services, Inc. completed a 10,000 – 1 reverse stock split at the instigation of the CEO and controlling stockholder. As a result of this transaction, Plaintiff Robert Strougo and other shareholders/putative class members were involuntarily cashed out, thereby making First Aviation a privately owned company. Four days later, First Aviation’s Board of Directors adopted a bylaw that applied to current and former shareholders and shifted attorney’s fees and litigation expenses to unsuccessful plaintiff-shareholders, but did not impose a parallel obligation on First Aviation or its officers or directors. Strougo filed suit in June 2014 alleging the reverse stock split was a breach of fiduciary duty and challenging the fee-shifting bylaw.
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The Delaware Court of Chancery recently dismissed corporate mismanagement and breach of fiduciary duty claims filed by a dissenting stockholder, but ordered that the surviving corporation in a merger was required to pay the merger consideration to the dissenting stockholder when the statutory appraisal period expired. 

Plaintiffs Ram and Neena Mehta (“Plaintiffs”) owned shares of Smurfit-Stone Container Corporation, which had declared bankruptcy in 2009 and, post-bankruptcy, merged with Rock-Tenn Company in 2011. Plaintiffs made a timely demand for appraisal after the merger announcement but never perfected their statutory rights. In fact, Plaintiffs withdrew their appraisal demand roughly a year after making it, and no other stockholder filed an appraisal petition. Rock-Tenn, however, refused to pay the merger consideration to Plaintiffs unless Plaintiffs agreed to broad settlement terms.
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