Q3 2021 Quarterly Corporate / M&A decisions updates

Below is our Corporate / M&A decisions update covering decisions in the third quarter of 2021. This update is designed to highlight selected important M&A, corporate, and commercial court decisions on a quarterly basis.

The Delaware courts had another active quarter, issuing opinions on several important shareholder and corporate governance issues. Notably, the Delaware Court of Chancery sustained another Caremark claim, this time against Boeing in connection with the mission critical issue of safety. The Delaware Supreme Court also overruled its prior decision in Gentile, which found that certain derivative claims also could be brought as direct claims. In addition, the Delaware courts weighed in on waiver of appraisal rights, the standard of review for mixed consideration deals, the survival of merger rights post-termination, and the proper reach of fraud carve outs.

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

United Food & Com. Workers Union v. Zuckerberg: Exculpatory clause does not render demand futile

In United Food & Com. Workers Union v. Zuckerberg, No. 404, 2020 (Del. Sup. Sep. 23, 2021), the Delaware Supreme Court adopted a new, three-part test for determining when a shareholder is required to make a pre-suit demand on a corporation’s board before pursuing derivative claims on behalf of a corporation. The court’s new demand futility test, which shifts the focus to “the decision regarding the litigation demand, rather than the decision being challenged,” looks on a “director-by-director basis” at (1) whether the director received a material personal benefit from the alleged misconduct; (2) whether the director would face a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (3) whether the director lacks independence from someone covered by prongs one and two.

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


Brookfield Asset Management Inc. v. Rosson: Gentile overturned, eliminating dual-natured claims

In Brookfield Asset Management Inc. v. Rosson, the Delaware Supreme Court unanimously overturned its 2006 decision in Gentile v. Rossette, thereby eliminating the dual nature “Gentile carve-out” that allowed for both direct and derivative claims for alleged breaches of fiduciary duty premised on dilutive transactions for the benefit of controlling stockholders. The Delaware Supreme Court agreed with Brookfield’s argument that Gentile deviated from and was doctrinally inconsistent with the “simple analysis” previously adopted by the Delaware Supreme Court in 2004 in Tooley v. Donaldson, Lufkin & Jenrette. Specifically, the Delaware Supreme Court held that certain aspects of Gentile are in tension with Tooley, most importantly the test determining whether claims are direct or derivative, and that the Gentile carve-out was superfluous.

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


Delaware Chancery Court finds Boeing Board oversight allegations satisfy Caremark standards

In In re The Boeing Company, the Delaware Court of Chancery held that Boeing stockholders that sued the company over losses relating to safety problems with Boeing’s 737 MAX airplane had adequately pleaded that a majority of Boeing’s directors “face a substantial likelihood of liability for Boeing’s losses.” Although it noted that the plaintiffs were pursuing “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment,” the court nonetheless found that the plaintiffs had adequately alleged “the directors’ complete failure to establish a reporting system for airplane safety” and “their turning a blind eye to a red flag representing airplane safety problems.” While duty of oversight claims remain “extremely difficult” to plead, this decision illustrates that they are far from impossible to plead, particularly where, as here, the shareholders obtain substantial discovery through a pre-litigation books and records demand under Section 220.

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


Yatra Online v. Ebix: Clarify post-termination rights to ensure hook for breach of contract claim

The court’s decision in Yatra Online, Inc. v. Ebix, Inc. et al (C.A. No. 2020-0444-JRS (Del. Ch. May 13, 2021)) underscores the importance of carefully considering the language of a contract’s termination provisions when negotiating and terminating a merger agreement. In Yatra Online, the plaintiff terminated the merger agreement and sued the defendant for breach of contract and other claims. The court ruled that the defendant was not liable post-termination because the plain language of the agreement stated that “[i]n the event of termination ... there shall be no liability on the part of any party.” The court’s decision reminds merger parties to consider what remedies are available in the event of a breach and how the plain language of agreements, including termination clauses, impacts the availability of those remedies.

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


Flannery v. Genomic Health: Mixed consideration deal with 58 percent stock evades Revlon enhanced scrutiny

In Flannery v. Genomic Health, Inc., et al. (C.A. No. 2020-0492-JRS (Del. Ch. Aug. 16, 2021)), the Delaware Chancery Court made three key holdings regarding a merger involving mixed consideration of 58 percent stock and 42 percent cash. First, entire fairness review was not triggered because the Baker Brothers Entities (BBEs), were neither controlling stockholders nor conflicted. Second, the merger did not trigger Revlon duties because the company “stay[ed] in a large, fluid, changeable and changing public market.” Third, Exact was not an interested stockholder subject to 8 Del. C. § 203 because there was no voting agreement in place between the BBEs and Exact prior to the Board’s vote to approve the merger. This case explores the application of Revlon to mixed consideration deals and illustrates the detailed analysis Delaware courts apply to questions regarding independence and control.

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


Online HealthNow, Inc., et al: Anti-fraud provisions can be 'too much dynamite'

The Delaware Court of Chancery in Online HealthNow, Inc., et al. v. CIP OCL Investments, LLC, et al., C.A. No. 2020-0654-JRS (Del. Ch. August 12, 2021) extended a recent line of cases declining to enforce seller-friendly provisions limiting claims by buyers for fraudulent misrepresentations within the contract. The court likened the “remarkably robust” seller protections in the agreement at issue to “too much dynamite” and found that the provisions were ineffective in barring claims for fraud within the contract itself because a party “cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.”

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


Manti Holdings: Delaware Supreme Court permits advance waiver of appraisal rights

In Manti Holdings, the Delaware Supreme Court affirmed a decision that a corporation can enforce an advance waiver of appraisal rights against its stockholders. In a stockholders agreement, the petitioners agreed to “refrain from the exercise of appraisal rights....” The Delaware Supreme Court concluded that both the Delaware General Corporation Law (DGCL) and public policy permitted an ex ante waiver of appraisal rights in a stockholder agreement specifically (as opposed to in a company’s charter or bylaws), finding that the DGCL is a “broad enabling act” that “allows immense freedom for businesses to adopt the most appropriate terms for … their enterprise.” The court also found that the agreement the petitioners signed did, in fact, waive their appraisal rights, even though the language did not use the word “waive.” One justice dissented, concluding that appraisal rights cannot be waived generally and that the specific agreement here was not a valid waiver.

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


Authored by David R. Michaeli, Allison M. Wuertz, Jon M. Talotta, and William M. Regan.


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