In a prior post, we discussed the standards required to obtain relief under Section 273 of the Delaware General Corporation Law (“DGCL”), i.e. (i) that a Delaware corporation has two 50/50 stockholders, (ii) that the company is engaged in a joint venture, and (iii) the 50/50 stockholders are unable to agree as to whether to discontinue the company.

But upon showing these elements, will the Court automatically grant dissolution of the entity?

The text of DGCL Section 273 states that the Court “may” dissolve the corporation and wind up its affairs when the requirements of the statute are met.  Case law has held that when a petitioner has satisfied each of these elements, the Court’s discretion to deny the petition is “sparingly exercised.”  In re McKinney-Ringham Corp., 1998 Del. Ch. LEXIS 34, at *16 (Del. Ch. Feb. 25, 1998).

But other remedies may be granted by the Delaware Court of Chancery.  For example, the Court has interpreted the permissive “may” language of Section 273 to give it authority to grant relief other than dissolution.

For example, in Fulk v. Washington Service Assoc., Inc., C.A. No. 17747-VCJ (Del. Ch. June 21, 2002), the Court of Chancery entered an order granting a custodian’s plan to sell the joint venture to either stockholder, instead of granting dissolution.  In that decision, the Court stated “the statute permits the Court flexibility in deciding how the joint venture should be discontinued[.]”  As demonstrated by Fulk, a sale of one stockholder’s interest to another is not uncommonly granted, especially if the corporation can be continued as a going concern.

Accordingly, the Court in a DGCL Section 273 action has broad discretion to determine the appropriate measure of relief, and may grant relief other than the dissolution of the joint venture under the statute.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Searchlight CST, L.P. v. MediaMath Holdings, Inc., C.A. No. 2020-0652-SG (Del. Ch. Sept. 28, 2020), the Delaware Court of Chancery granted Defendant MediaMath Holdings, Inc.’s (“Defendant”) motion for summary judgment in connection with a contract dispute over a provision limiting the amount of indebtedness Defendant is able to incur.

According to the opinion, Plaintiff Searchlight CST, L.P. (“Plaintiff”) is an investor in the Defendant. In connection with its purchase of preferred stock, it contracted for a limit on the amount of indebtedness that Defendant is able to incur. Defendant is in the process of negotiating a new credit facility.  Plaintiff contends that the Defendant is contractually prohibited from entering the facility without its consent.

Plaintiff moved for a TRO and expedited proceedings of the action, to enjoin Defendant from consummating the transaction at issue.  In response, Defendant moved for summary judgment in its favor.

Upon review of the contract and each side’s interpretation thereof, the Court held that the contract does not require Defendant to obtain the Plaintiff’s consent before entering or borrowing under the proposed credit facility, up to $100 million.

The Court noted that while each side had differing views of the contract language at issue, the language was unambiguous (a point on which the parties agreed), and therefore the Court was able to rule on the language without considering extrinsic evidence.

As the Court noted, “[a] contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, an ambiguity exists [w]hen the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings.”  Slip op. at 18-19 (quoting GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)).

Previously, the Court had ruled upon Defendants’ motion to seal the entirety of the upcoming TRO hearing, which the Court summarily denied in a one page ruling.  A recent blog post concerning this ruling can be found here.

Accordingly, the Court granted Defendant’s Motion for Summary Judgment, and ruled that the TRO request is moot.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Rudd v. Brown, et al., C.A. No. 2019-0775-MTZ (Del. Ch. Sept. 11, 2020), the Delaware Court of Chancery granted defendants’ motion to dismiss plaintiffs’ derivative claims in their entirety in light of an exculpatory provision in the corporation’s charter.

Plaintiffs’ derivative claims alleged that the company’s directors breached their fiduciary duties in connection with a $1.6 billion sale of Outerwall Inc., the owner of Redbox.  Among other things, the suit claimed that Outerwall’s directors were motivated to take less than full value after a sizeable stockholder threatened a proxy fight to remove board members if they opposed a quick sale.

The Court ruled that plaintiff failed to adequately show the defendants were conflicted in pursuing the transaction. Vice Chancellor Zurn held that an exculpatory provision in Outerwall’s certificate of incorporation “bars any claims for monetary damages against the director defendants for duty of care violations committed in their capacities as directors.”  Slip op. at 2.

The Court utilized an “enhanced scrutiny” of the acquisition under the Revlon standard, which is an intermediate review standard, established in Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986). The standard falls between the business judgment review and the “entire fairness” standard.

The Court held that even under Revlon scrutiny, which is less friendly to a company’s directors then the business judgment rule, exculpatory charter provisions nonetheless shield directors from liability because the suit’s claims were “based only on duty of care violations.”  Slip op. at 17.  In light of the exculpatory provision, plaintiffs were required to file a non-exculpated claim, which the Court found they failed to do.

This decision demonstrates the significance of an exculpatory provision in a company’s corporate charter.  As reflected herein, even claims subject to the less business-friendly Revlon standard may be subject to dismissal for breach of the fiduciary duty of care.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

When a Delaware corporation is deadlocked and unable to operate as a result of dissension among its shareholders or directors, or has abandoned its business, what remedies are available to the company’s shareholders under Delaware law? Section 226 of the Delaware General Corporation Law (“DGCL”) squarely addresses this issue.  Under that statute, any shareholder of the corporation may petition the court to appoint a receiver to a deadlocked corporation.  This article will address Section 226 of the DGCL, along with the required showing for the Court to appoint a custodian or a receiver to a Delaware corporation that is deadlocked or has abandoned its business and failed to windup its assets.

Section 226(a) of the DGCL provides that the Court of Chancery may appoint a custodian, or receiver if the corporation is insolvent, when:

(1) At any meeting held for the election of directors the stockholders are so divided that they have failed to elect successors to directors whose terms have expired or would have expired upon qualification of their successors; or

(2) The business of the corporation is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the affairs of the corporation that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division; or

(3) The corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.

Del. C. § 226(a).

Section 226(b) of the DGCL contemplates the potential powers that may be granted to a receiver or custodian appointed under this statute.  Under Section 226(b), a receiver “shall have all the powers and title of a receiver appointed under § 291 of this title”.  By contrast, a custodian “is to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the Court shall otherwise order and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title.”  8 Del. C. § 226(b).

Notably, the appointment of receivers of an insolvent corporation is generally made under Section 291 of the DGCL, given its broader and more permissive provisions.

Below is a brief summary of the inner-workings of Section 226 of the DGCL:

The Circumstances Under Which the Court May Appoint a Custodian or Receiver of a Corporation Under Section 226

• The shareholders are divided such that they cannot elect successors.

• The business of the corporation is suffering or threatened with irreparable injury because the directors are divided such that the required vote for action by the board of directors cannot be obtained and the stockholders are unable to terminate this division.

• The corporation has abandoned its business and failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.

The Necessary Showing to Obtain a Custodian When There is Deadlock Among Shareholders

It must be demonstrated that the shareholders of the company are unable to elect successor directors due to deadlock.

The Necessary Showing to Obtain a Custodian When There is Deadlock Among Directors

• The corporation must be suffering or threatened with irreparable injury.

• The injury must result from the inability of the board to obtain the votes necessary to take action as a result of the division of opinion.

• The deadlock of the board must not be one that can be resolved by action of the shareholders.

Who Can Be Appointed as a Custodian or Receiver of a Corporation?

A judicial custodian is often, but not necessarily, a Delaware attorney.  He or she must be impartial and qualified, and will owe fiduciary duties to the corporation upon appointment.

The Scope of Authority Provided to the Custodian or Receiver

The scope of authority granted to the custodian will be determined by the order appointing such custodian.  These orders may be the subject of negotiation among the parties after the Court has determined that a custodian will be appointed.  If the parties cannot reach an agreement on the proposed order, then they may submit competing orders to the Court.

The authority provided to the custodian or receiver may vary based upon the circumstances of the corporation and its business.  Among other things, in the case of corporate deadlock, a custodian may be ordered to continue managing the corporate affairs for a period of time until appropriate measures are taken to resolve the deadlock.

When a receiver is appointed (in the context of an insolvent corporation), or a custodian (in the event that the corporation has abandoned its business under Section 226(a)(3)) such individual may be ordered to marshal the assets of the corporation, collect debts and claims of the corporation, prosecute and defend claims or suits involving the corporation, and take any other actions necessary to wind-up the corporation, consistent with the terms of the order appointing such custodian or receiver.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On Friday, September 4, 2020, the Delaware Supreme Court released a plan to restart jury trials in October, 2020, while extending the current judicial emergency an additional 30 days until October 5, 2020.  The Chief Justice likewise issued Administrative Order No. 10 memorializing the same.

According to the notice, the resumption of jury trials will mark a move to a modified Phase 3 of the Delaware Judiciary’s four-phase reopening plan that was released in May by the Courts Reopening Committee.  The move to a modified Phase 3 will also allow court facilities and staffing to increase up to 75 percent capacity and increase the number of people allowed in courtrooms to accommodate jury trials.

Similar to the prior order, per Administrative Order No. 10, all Delaware Courts are authorized to continue to utilize audiovisual devices at their facilities and remotely to conduct proceedings, with the exception of jury trials.  Moreover, the suspension of requirements for sworn affidavits, verifications, oaths or affidavits filed in the Delaware Courts, as set forth under Administrative Order No. 3, remains in effect.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a short, one-page order, the Court of Chancery denied a motion by defendants to seal the entirety of an upcoming TRO hearing, in the case of Searchlight CST, L.P. v. MediaMath Holdings, Inc., C.A. No. 2020-0652-SG (Del. Ch. Aug. 24, 2020).  Vice Chancellor Glasscock ruled that the “Court does not conduct public hearings under seal”, referring to the concept as “oxymoronic.”  However, to the extent that information disclosed at the hearing is subject to confidential treatment under Rule 5.1 of the Rules of the Court of Chancery, the order provides that the public may be excused from such portion of the hearing.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In a matter of first impression, the Delaware Court of Chancery ruled that management of a Delaware corporation may not preclude a director from obtaining privileged information of the company.  The decision was handed down yesterday by Chancellor Bouchard in the ongoing WeWork litigation, styled as In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020).

The procedural history of this action is worth noting.  The lawsuit was filed by The We Company (“Company”) in April 2020, at the direction of its Special Committee, against SoftBank Group Corp. and SoftBank Vision Fund (AIV M1) L.P., alleging that defendants breached contractual obligations owed to the Company to use reasonable best efforts to purchase up to $3 billion of the Company’s stock in a tender offer.

A new committee of the Company’s board of directors consisting of two temporary directors was then formed on May 29, 2020 (the “New Committee”), after the putative controlling stockholder of the Company and SoftBank asked the Company’s board to confirm that the Special Committee did not have authority to bring the litigation on behalf of the Company.  Under the direction of the New Committee, the company then brought a motion under Court of Chancery Rule 41(a) for leave to voluntarily dismiss the complaint filed in the action.

In response, the Special Committee sought access to the Company’s privileged information relating to the circumstances under which the New Committee was established and how it may have been influenced by the Company’s management (“Management”), the Chief Executive Officer of which was chosen by SoftBank.  The Special Committee does not seek privileged information between the New Committee and its counsel.

In opposing the requested discovery, Management referred the Court to competing letters written to the board regarding the SoftBank contract litigation, which, according to Management, demonstrated that the special committee had shown “adversity” to the Company, and should thus be blocked from viewing these privileged communications.

In its analysis, the Court noted that although “a director’s right to information is essentially unfettered in nature”, there are “three recognized limitations on a director’s ability to access privileged information”:

  1. The existence of an ex ante agreement among the contracting parties;
  2. A board may appoint a special committee, which would be free to retain separate counsel, and communications with separate counsel would be protected as necessary for the special committee to conduct its ongoing work; or
  3. To the extent there is sufficient adversity between a director and the corporation “such that the director would no longer have a reasonable expectation that he was a client of the board’s counsel.”

Slip op. at 15-16 (quoting Kalisman v. Friedman, 2013 WL 1668205, at *4-*5 (Del. Ch.).

The Court disagreed, stating that the letters reflect a dispute between the Special Committee and SoftBank, both of which contend that the other is motivated by self-interest, and not a dispute between the Special Committee and the Company.

Chancellor Bouchard then turned to the more fundamental question raised by the dispute: whether or not adversity exists, “does management have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s
privileged information?”  Slip op. at 18.

The Court found that management did not have such authority.  The Court stated that “[i]t is a “cardinal precept” of Delaware law that “the business and affairs of a corporation . . . shall be managed by or under the direction of a board of directors . . . .”, and that, “[i]n claiming the right to shield Company privileged information from the entire Board, Management turns these bedrock principles of Delaware law on their head.”  Id. at 19 (citations omitted).

As stated by Chancellor Bouchard:

To summarize, this decision holds, under basic principles of Delaware law, that directors of a Delaware corporation are presumptively entitled to obtain the corporation’s privileged information as a joint client of the corporation and any curtailment of that right cannot be imposed unilaterally by corporate management untethered from the oversight and ultimate authority of the corporation’s board of directors.

As such, Chancellor Bouchard held that the Special Committee was entitled to receive the privileged documentation of the Company that it had requested.

Key Takeaway

This decision holds, as a matter of first impression, that management of a Delaware corporation (as compared to the board) lacks authority to unilaterally deprive the board of privileged communications of the corporation, while reiterating familiar notions that a board oversees management, and a director’s right to corporate information, including privileged information, is very broad in scope.  This decision is an important read for any litigant or counsel involved in disputes over privilege between company management and the board or special committee appointed by the board.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

Section 220 of the Delaware General Corporation Law permits a stockholder or director to make a books and records against a corporation incorporated in Delaware, regardless of where the corporation conducts its business.  Yet many jurisdictions have their own inspection statutes, some of which govern not only entities incorporated or formed in that state, but also foreign entities that have a principal place of business in the state, even if incorporated elsewhere, such as Delaware.

The question therefore becomes, which state’s law governs a books and records demand, the state of incorporation or the state in which the company’s principal place of business is located?  This precise question was addressed in the recent decision of JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020).  There, defendant Daniel Grove made a demand to inspect the books and records of plaintiff JUUL Labs, Inc. (“JUUL”) in California under Cal. Corp. Code § 1601.  JUUL is a Delaware corporation with its principal place of business in California.

Under Section 1601 of the California Corporations Code, a stockholder of a company whose principal place of business is located in California may demand inspection of the corporate books and records of such entity, even if the entity is a foreign corporation.

In response to the demand, JUUL filed a declaratory judgment action in Delaware, asserting that Section 220 of the DGCL governed the demand, not Section 1601 of the California Corporations Code.  JUUL argued: (i) that Grove could only make a demand under Section 220 of the DGCL, (ii) that a forum selection clause in the corporation’s certificate of incorporation prohibited Grove from bringing a books and records action outside of Delaware, and (iii) Grove waived his rights to inspection under various agreements entered into between the parties.

Vice Chancellor Laster held that Grove’s inspection demand was governed by Section 220 of the DGCL, not Section 1601 of the California Corporations Code.  This is so because the Court determined that inspection rights are governed by the internal affairs doctrine, under which Delaware law applies. “The internal affairs doctrine applies to those matters that pertain to the relationships among or between the corporation and its officers, directors, and shareholders.”  Slip op. at 15-16 (citing VantagePoint Venture P’rs 1996 v. Examen, Inc., 871 A.2d 1108, 1113 (Del. 2005)). The Court stated that “[s]tockholder inspection rights are a core matter of internal corporate affairs”, and noted that the Delaware Supreme Court has described the ability of stockholders to access books and records as “an important part of the corporate governance landscape.”  Id. at 17 (citing Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 120 (Del. 2006) (internal quotation marks omitted)).

Given the application of the internal affairs doctrine, the Court of Chancery found that Section 1601 of the California Corporation Code did not apply to a books and records demand made upon a Delaware corporation, even if that entity has its principal place of business in the state of California.  Rather, a books and records demand made upon a Delaware corporation would be governed by Delaware law, notwithstanding the fact that Section 1601 permits inspection rights against corporations doing business in California, even if incorporated elsewhere.

Finally, the Court did not reach the issue of whether a stockholder can waive inspection rights under Delaware law.  In this regard, the Court noted that “Delaware decisions have rejected efforts by corporations to limit or eliminate inspection rights”, however, “there are strong countervailing considerations, including Delaware’s broad recognition of parties’ ability to waive other important rights, whether constitutional or statutory.” Slip op., at 24.   Because Grove did not make a demand under Section 220 of the DGCL, the Court did not address this issue.

Key Takeaway and Open Question

This decision is significant as it clarifies that a Delaware court will apply Delaware’s books and records statute to an inspection demand made upon a Delaware corporation, even if another jurisdiction provides statutory inspection rights. But an open question remains: how will a California court, which is not bound by Delaware precedent, react to an inspection demand made upon a foreign company doing business in California?  Will it follow the lead of the Delaware judiciary and apply the law of the state in which the company was formed, or instead nonetheless enforce the demand based upon the statutory power conferred upon it under Section 1601 of the California Corporations Code?  This is certainly an issue to keep an eye on moving forward.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

Today, the Chief Justice of the Delaware Supreme Court issued Administrative Order No. 9, which extends Delaware’s Judicial Emergency for another 30 days, effective August 7, 2020.  Per the Administrative Order, the Delaware courts will continue to operate under Phase 2.

Citing the “national trend of increasing virus spread, new quarantine requirements by other states, and hotspots within [Delaware]”, the courts will not enter Phase 3 of the Reopening Plan until “medical experts believe it is safe to do so and more information becomes available about the trends in COVID-19 infections and its spread in the United States and Delaware.”

Moreover, per the Administrative Order, all Delaware Courts are authorized, to the greatest extent possible under 10 Del. C. § 2008, to continue to utilize audiovisual devices at their facilities and remotely to conduct proceedings, with the exception of jury trials.  Moreover, the suspension of requirements for sworn affidavits, verifications, oaths or affidavits filed in the Delaware Courts, as set forth under Administrative Order No. 3, remains in effect.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

Section 225 of the Delaware General Corporation Law is an important and powerful tool for any shareholder, director or officer seeking to challenge the results of an election of directors of a Delaware corporation, along with the appointment, removal or resignation of any director or officer.

From a procedural perspective, a party seeking such relief may submit a Section 225 petition to the Delaware Court of Chancery.  In such an action, the Delaware Court of Chancery may determine “the validity of any election, appointment, removal or resignation of any director or officer of any corporation, and the right of any person to hold or continue to hold such office.”  Del. C. § 225(a).

A section 225 action is what’s known as a “summary proceeding” in the Delaware Court of Chancery.  Summary proceedings are typically expedited by the Court, and depending on the circumstances of the case, a petitioner can expect a trial on the merits within several months, subject to Court availability.  All trials before the Court of Chancery are bench trials, and opening and closing statements are made through either pre-trial or post-trial submissions.

Further, the Court “may determine the person entitled thereto; and to that end make such order or decree in any such case as may be just and proper, with power to enforce the production of any books, papers and records of the corporation relating to the issue.” Id.  In addition, the Court may also determine the result of any vote of the stockholders upon matters other than the election of directors or officers.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.