Q3 2022 Quarterly Corporate / M&A decisions updates

Below is our Corporate / M&A decisions update covering decisions in the third quarter of 2022. This update is designed to highlight selected important M&A, corporate, and commercial court decisions on a quarterly basis.

The Delaware courts have issued another set of exciting opinions this fall. The Delaware Court of Chancery granted motions to dismiss in two Caremark cases, running contrary to the recent trend of more Caremark claims surviving motions to dismiss. The court also applied the Zuckerberg demand futility test to find demand futile where directors were “thick as thieves” with beneficiaries of the alleged misconduct. Finally, the court was forced to reach what it considered an inequitable result, despite sitting as a court of equity, because Delaware precedent required rejection of equitable defenses where a transaction was considered “void.” 

Brief summaries of these key decisions appear below with links to more robust discussions.

Hamrock: No Caremark liability for natural gas explosion

In City of Detroit Police & Fire Ret. Sys. on Behalf of NiSource, Inc. v. Hamrock, No. CV 2021-0370-KSJM, the Delaware Court of Chancery granted a motion to dismiss duty of oversight claims against an energy company’s directors following a pipeline explosion. Acknowledging that recent caselaw has underlined that, for “mission critical” operations, a “board’s oversight function must be rigorously exercised,” the court nonetheless found that the defendants did not face a substantial likelihood of oversight-related liability sufficient to support a finding of demand futility because: (1) the record showed an active committee overseeing pipeline safety; and (2) that, even though certain red flags were present, none of them would have put a reasonable board member on notice of the risk of a pipeline explosion.

Please click HERE for a more detailed discussion of this case.


In re Carvana: Demand is futile when directors are “thick as thieves” with beneficiary of misconduct

The Delaware Court of Chancery, in In re Carvana Co., No. 2020-0415-KSJM (Del. Ch. June 30, 2022), applied the recently adopted Zuckerberg test for demand futility and denied the defendants’ motion to dismiss. The court found that the stockholders in this derivative action pled demand futility by alleging facts showing that two of the six directors had deep personal and professional ties to a third director, defendant Ernest Garcia III (who received a material personal financial benefit in the transaction at issue), such that they could not objectively consider a demand to pursue litigation against Garcia III. The court then found that the plaintiffs stated a viable breach of fiduciary duty claim, and that the transaction at issue, a US$600 million stock offering to Garcia, his father, and a few other select investors during a March 2020 pandemic-related dip in stock prices, would be subject to entire fairness review because it was not approved by a majority of disinterested directors.

Please click HERE for a more detailed discussion of this case.


SolarWinds: Caremark liability rejected in cybersecurity oversight claim

In Construction Industry Laborers Pension Fund v. Bingle, (C.A. No. 2021-0940-SG (Del. Ch. Sept. 6, 2022)) (SolarWinds), the Delaware Court of Chancery granted a motion to dismiss a derivative suit against the directors of SolarWinds Corporation for allegedly breaching their duty of loyalty by failing to take steps to prevent a cybersecurity attack, finding that the plaintiffs had not alleged a viable Caremark claim under Delaware law. The court found that “cybersecurity, for online service providers, is mission critical.” However, dismissal was nonetheless warranted because the plaintiffs had not alleged that SolarWinds violated any laws and had not alleged sufficient particularized facts to create an inference that the directors had acted in bad faith in breach of their duty of loyalty, as they were required to plead to demonstrate demand futility under Caremark.

Please click HERE for a more detailed discussion of this case.


XRI Investment Holdings v. Holifield:  Precedent based on “magic words” leads to inequitable result

In XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL, the Court of Chancery found that defendant Holifield violated a No Transfer Provision in the limited liability company agreement of XRI Investment Holdings LLC when he transferred shares to a special purpose vehicle. Although “the law require[d] this result,” the court found it an “inequitable result” and that the outcome was “disquieting to a court of equity.” The court found that Holifield proved XRI’s acquiescence, but that the LLC agreement’s mandate that unpermitted transfers were “void,” rather than “voidable,” meant that all equitable defenses were inapplicable, according to binding Delaware Supreme Court precedent. As a result, the court indicated that it was bound by pre-existing law and granted judgment in XRI’s favor. In doing so, the court urged the Delaware Supreme Court to reconsider its precedent in connection with any appeal to avoid such inequitable outcomes in the future.

Please click HERE for a more detailed discussion of this case


Authored by  Jon M. Talotta, Bill Regan,  David R. Michaeli, Allison M. Wuertz, Maura Allen, Elizabeth Cochrane, and Jack Shaked. 


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