Delaware Law Updates 2017

In 2017, the Delaware Court of Chancery has continued to refine the appropriate standard of review for breach of fiduciary duty claims. A selection of recent cases is summarized below:

  • Chancery Court Finds that Shareholder Vote was Structurally Coerced: On May 31, 2017, in Sciabacucchi v. Liberty Broadband Corporation, the Court of Chancery denied a motion to dismiss the plaintiff’s claim that a vote by Charter Communications, Inc. (“Charter”) stockholders approving a share issuance to and voting agreement with Liberty, a stockholder of Charter, was structurally coercive. The court found that while “inherent coercion” did not exist because the large stockholder did not control the company, the plaintiffs had stated a claim for structural coercion because stockholders were forced to approve those transactions to avoid a detriment, not because the transactions were beneficial to the company. A structurally coerced vote meant that the board’s actions could not receive *Corwin *cleansing, which would have entitled the board’s actions to business judgment review.

  • Chancery Court Grants in Part Fiduciary Duty Claims Arising from a Self-Tender Offer: On July 24, 2017, the Court of Chancery denied in part a motion to dismiss claims for breach of the fiduciary duty of loyalty brought by minority stockholders in R. L. Polk & Co., Inc. against the directors of Polk and members of the Polk family in a self-tender offer. The court first noted that it would review the transaction under the entire fairness standard because the transaction involved self-dealing by the Polk family, the controlling shareholder. The court denied the motion to dismiss as to the Polk family, finding that those who tendered their shares at the self-tender price missed out on dividends amounting to one-third the tender price, and a cash-out merger consideration three times that of the tender price. The court granted the motion to dismiss as to the independent directors, finding the Complaint did not sufficiently allege why the independent directors had a conflict of interest in the 2011 self-tender offer.\

  • Chancery Court Dismisses Stockholders’ Breach of Fiduciary Duty and Aiding and Abetting Claims in Stock-For-Stock Merger: On August 17, 2017, in In re MeadWestvaco Stockholders Litigation, the Court of Chancery dismissed claims brought by stockholders of MeadWestvaco against the MeadWestvaco directors for breach of duty of loyalty based on allegations that they acted in bad faith in approving a strategic stock-for-stock merger of equals. The court’s ruling suggests that (1) the standards of “waste” and “bad faith” are equivalent; (2) non-controller, non-Revlon transactions, like the one in MeadWestvaco, continue to be subject to business judgment review both pre- and post-closing; and (3) there is still some uncertainty whether the Corwin doctrine cleanses bad faith by directors.\

  • Chancery Court Applies MFW Business Judgment Review to Controlling Shareholder Selling to a Third Party: On August 18, 2017, the Court of Chancery dismissed claims made by former stockholders of Martha Stewart Living Omnimedia against Martha Stewart, the former controlling stockholder, for alleged breaches of her fiduciary duty in the sale of the company to a third party buyer. The court applied the business judgment rule instead of the stricter entire fairness test, the default standard of review for challenges to conflicted controller transactions. The court found that (1) Martha Stewart’s personal arrangements, alleged by the plaintiffs to have diverted merger consideration to Stewart away from the public, did not render Stewart a “conflicted” controller since she received the same stated price per share as the public stockholders, and (2) even if the personal arrangements had rendered Stewart conflicted, the three procedural protections afforded to the minority stockholders in the sale, as laid out in MFW, would have lowered the standard of review to business judgment regardless.\

  • Chancery Court Dismisses Suit Asserting Breach of Fiduciary Duty and Quasi-Appraisal Remedy: On August 28, 2017, the Court of Chancery dismissed a class action against Kreisler Manufacturing Corporation’s board of directors in connection with the sale of Kreisler to Arlington Capital Partners. The court held that (1) no controlling stockholder was involved in the transaction, (2) the majority of the board was not interested in the transaction, and (3) Kreisler’s charter contained an exculpation provision, so plaintiff could only successfully plead a breach of fiduciary duty claim by alleging the directors acted in bad faith. The court found that the directors’ alleged “side deals” and new employment agreements with Arlington were insufficient to plead bad faith.