Delaware Chancery

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The Delaware Supreme Court in Kellner v. Aim Immunotech[1]recently ruled on the enforceability of a “modern” set of advance notice bylaws. Advance notice bylaws are the key tool corporations have to regulate the director nomination process and ensure full and fair disclosure to stockholders in a proxy fight. Critically, advance notice bylaws also allow the board to gather information necessary to guide its recommendation for or against a nominated candidate. While the headline may be that the court found all the challenged bylaws to be unenforceable, looking at each bylaw individually reveals a much less discouraging picture for corporations.[2]
Continue Reading Delaware Supreme Court Ruling on Advance Notice Bylaws – What’s In, What’s Out and What’s Missing from Advance Notice Bylaws

Summary

Founders and controlling stockholders often seek to retain control over their companies even after taking them public, typically via high-vote share classes or, as was at issue in this case, via stockholder agreements granting the pre-IPO owners broad governance rights.

In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, the Delaware Court of Chancery recently held that a “new wave” stockholder agreement between Moelis & Company (the “Company”) and its founder, CEO, and board chairman, Ken Moelis was invalid under Section 141(a) of the Delaware General Corporation Law (the “DGCL”) because it contained  “pre-approval rights” over a number of corporate actions, required the board to recommend individuals designated by Moelis for a majority of directorships and fill committee positions and board vacancies with Moelis designees, impermissibly constraining the board’s ability to manage the business and affairs of the company—powers the statute does not allow the board to delegate via contract.[1]

Moelis is a strong reminder that the foundation of the corporate form in Delaware is the independent authority of a board of directors, elected by stockholders and entrusted to manage the business and affairs of the corporation as fiduciaries. Delaware will not permit this foundation to be eroded through contractual arrangements with stockholders.
Continue Reading Delaware Court of Chancery Rejects Validity of “New Wave” Stockholder Agreement Terms that Constrain Traditional Board Authority

For the past several years, boards of directors have increasingly faced claims that they have failed in their duty of oversight.  These so-called Caremark claims can arise in a number of contexts involving allegations of systemic failures or intentional wrongdoing.  Recently, the Delaware Court of Chancery held for the first time that officers owe the same duty of oversight as directors, an expansion of Caremark which had previously only been applied to directors.

In In re McDonald’s Corp. Stockholder Derivative Litigation,[1] the Delaware Court of Chancery denied a motion to dismiss a breach of fiduciary duty claim against the former Executive Vice President and Global Chief People Officer of McDonald’s Corporation (“McDonald’s” or the “Company”) relating to alleged sexual misconduct and inadequate oversight.Continue Reading Recent Delaware Chancery Court Decision Finds That Corporate Officers Owe the Same Caremark Oversight Duties as Directors

Aiding and abetting claims against a buyer for a target’s breach of fiduciary duties are meant to be rare, given the “long-standing rule that arm’s-length bargaining is privileged and does not, absent actual collusion and facilitation of fiduciary wrongdoing, constitute aiding and abetting . . .”[1] (emphasis added). Yet to survive a motion to dismiss, plaintiff must show only that it is “reasonably conceivable” that buyer “knowingly participated” in the breach of fiduciary duties.[2] This may explain why there were at least three cases last year in which aiding and abetting claims against buyer survived a motion to dismiss.[3]
Continue Reading Buyers Beware – Aiding and Abetting Claims Based on Target’s Proxy Disclosure

At the beginning of the COVID outbreak in the US, The Williams Companies adopted an unusually protective poison pill to thwart any activist campaigns that might arise in the then existing market conditions. Vice Chancellor McCormick struck down the pill in a decision published February 26. The Vice Chancellor’s decision is important in at least two regards.
Continue Reading Chancery Court Strikes Down The Williams Companies “Activist Pill”

In AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC et al., the Delaware Court of Chancery, held for the first time that reasonable measures aimed at combatting COVID-19 can violate the ordinary course of business covenant in a sale agreement if those measures “materially change [the] business or business practices” of the target company.  In connection with the attempted sale by AB Stable VIII LLC ( “Seller”) of a subsidiary holding 15 hotels to MAPS Hotel and Resorts One LLC ( “Buyer”), the Court held that by temporarily closing two hotels, limiting the capacity and amenities in others, and by furloughing and laying off workers in light of the COVID-19 pandemic, the Seller materially breached its covenant to operate in the ordinary course of business between the signing and closing of the transaction.  Accordingly, the Buyer was not required to complete the transaction.
Continue Reading Reasonable COVID-19 Preventative Measures Can Breach Ordinary Course of Business Covenant