Recent Maintenance for Key Corporate Decisions

Practical Law Legal Update 0-578-1926 (Approx. 8 pages)

Recent Maintenance for Key Corporate Decisions

by Practical Law Corporate & Securities

Fiduciary Duties

The most regularly maintained resource in Practical Law's Corporate service is Practice Note, Fiduciary Duties of the Board of Directors. The Delaware courts regularly issue foundational decisions that warrant treatment in that Practice Note. The following updates have been made to it in 2014:

The section Avoiding Entire Fairness by Employing Procedural Protections was updated for Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).
The standard in Chen v. Howard-Anderson for demonstrating a failure to act in good faith in the context of a sale of a corporation is discussed in Duty of Good Faith (87 A.3d 648, 684 (Del. Ch. Apr. 8, 2014)). The Chen decision is also cited in Revlon Duties in Mixed-consideration Deals.
The Rural Metro decision is discussed in Duty of Care for its ruling that liability can attach to third parties for breaches by the board (even if the directors are personally indemnified), and is cited in Duty of Disclosure as an example of the need for full disclosure of investment banker compensation and conflicts (In re Rural Metro Corp. S'holders Litig., 88 A.3d 54 (Del. Ch. 2014)).
The Hamilton Partners, L.P. v. Highland Capital Management, L.P. decision is cited in Business Judgment Rule for the principle that if a plaintiff chooses to file a claim for breach of fiduciary duties against only one director, it still must rebut the presumptions of the business judgment rule regarding a majority of the directors to succeed against the individual ( (Del. Ch. May 7, 2014)).
The Orchard Enterprises decision is discussed in Duty of Loyalty for the application of 102(b)(7) provisions when a transaction is reviewed for entire fairness (In re Orchard Enter., Inc. S'holder Litig., 88 A.3d 1, 37 (Del. Ch. 2014)).
The section Exculpation for Failure to Satisfy Revlon Duties was updated to provide an example of the need to demonstrate bad faith on the part of the board in order to overcome a 102(b)(7) exculpation provision. In Houseman v. Sagerman, the Court of Chancery dismissed a fiduciary duty claim against a board that had failed to obtain a formal fairness opinion and failed to audit the company's financial statements. Even though the board "did not conduct a perfect sales process," it defeated the claim because it did not "utterly fail to undertake any action to obtain the best price for stockholders" (, at *7 (Del. Ch. Apr. 16, 2014)).
The discussion of the Duty of Disclosure was revised to explain that in a merger with a controlling stockholder, where the outcome of the vote itself is not in question, there is less of a need to provide disclosure of the financial projections relied on by the financial advisor for its fairness opinion (Dent v. Ramtron Int'l Corp., , at *11 (Del. Ch. June 30, 2014)).
The discussion of Corporate Waste was updated to provide examples of spending and other board actions that typically do not support a finding of waste under the Delaware Supreme Court's Disney standard. These include spending on items such as employee vehicles, outings, social-club dues, holiday gifts and "a large supply of gummy bear snacks for the office" (Zutrau v. Jansing, , at *20-21 (Del. Ch. July 31, 2014)).
Most recently, the well-known though not always directly discussed principle that directors, not corporations, owe fiduciary duties is cited in Core Fiduciary Duties and attributed to Buttonwood True Value Partners, L.P. v. R.L. Polk & Co., Inc., C.A. No. 9250-VCG (Del. Ch. Aug. 7, 2014).

Going Private Transactions

Practice Note, Going Private Transactions: Overview was updated to reflect the M & F Worldwide decision. The other updates to the practice note in 2014 are:

The section Avoiding Entire Fairness Review by Employing Procedural Protections summarizes the explanation in Frank v. Elgamal for why reasonableness review under Revlon is not applied to a controlling-stockholder transaction even if the buyer can avoid entire fairness review (, at *21 (Del. Ch. Mar. 10, 2014)).
The section Qualifying as a Controlling Stockholder was updated for the Hamilton Partners decision to provide an example of how a stockholder can be deemed controlling without necessarily having board-designation rights or owning a majority of the stock.
The discussion of Entire Fairness with Non-Controlling Stockholder Transactions was updated to reflect the Delaware Supreme Court's affirmation of the Court of Chancery's Volgenau decision, implying its approval of the Hammons standard (Se. Pa. Transp. Auth. v. Volgenau, 91 A.3d 562 (Del. 2014)).

Shareholder Derivative Litigation

The section Privilege Considerations in Shareholder Derivative Lawsuits in Practice Note, Shareholder Derivative Litigation was updated for the foundational Delaware Supreme Court decision in Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW that adopted the Garner exemption to attorney-client privilege under Delaware law (, at *11 (Del. July 23, 2014)). The other updates to this Practice Note are:

The decision of a California court to enforce a Delaware forum-selection by-law and distinguish an earlier California federal court decision that did not is cited in Impact of Forum Selection Clauses in Derivative Suits (see Groen v. Safeway Inc., (Cal. Super., Alameda County, May 14, 2014)).
The section Director's Interest in the Underlying Transaction was revised to reflect the Delaware Court of Chancery's decision in Cambridge Retirement System v. Bosnjak, , at *4 (Del. Ch. June 26, 2014). The Bosnjak decision explains that demand is deemed futile, with no need for the plaintiff to meet a materiality standard, when a transaction involves any self-dealing on the part of the director. A director's own compensation is deemed a self-dealing transaction, as the decision confirms.
A new section, Whether the Plaintiffs May Assert Direct and Derivative Claims, was added to reflect In re Ebix, Inc. Stockholder Litigation, , at *18 (Del. Ch. July 24, 2014). The Ebix decision discusses the conflict of interest apparent when a plaintiff attempts to assert direct and derivative claims simultaneously.

LLC Agreement

Three updates have been made to Standard Document, LLC Agreement (Multi-Member, Board-Managed) (Private Equity Buyout) to reflect 2014 case law. The updates are:

Drafting Note, Judicial Dissolution was updated to reflect a New York court's decision to not dissolve an LLC that was "both financially viable and capable of operating efficiently even in the face of its members' acrimony" (Natanel v. Cohen, , at *4 (N.Y. Sup. Ct. Apr. 18, 2014)). The decision is contrasted with a line of Delaware cases in which the court chose to dissolve companies that remained profitable, on the basis that the managers had become hopelessly deadlocked.
Drafting Note, Judicial Appointment of Liquidator was added to reflect the decision in Comerica Bank v. Global Payments Direct, Inc., , at *13 (Del. Ch. Aug. 1, 2014). The Drafting Note describes how, based on Comerica Bank, the standard for intervention by the Court of Chancery in the winding up of an LLC is lower than for intervention in the dissolution.
Drafting Note, Standard of Care was revised to reflect the discussion in Allen v. El Paso Pipeline GP Co., L.L.C. of both the implied covenant of good faith and fair dealing and the "best interest of the company" standard (, at *9 (Del. Ch. June 20, 2014)).

We have also added a new Section 8.02(d) to the LLC Agreement to reflect the requirement of the new Section 18-305(h) of the Delaware Limited Liability Company Act, which obligates the LLC to maintain a current record of the name and last known business, residence or mailing address of each member and manager (6 Del. C. § 18-305(h)).

Appraisal Rights

In 2014, the Delaware Court of Chancery twice discussed the circumstances in which the Court may have to rely on alternative methods of valuation (see Huff Fund Inv. P'ship v. CKx, Inc., (Del. Ch. May 19, 2014) and Laidler v. Hesco Bastion Envtl., Inc., (Del. Ch. May 12, 2014)). Practice Note, Appraisal Rights has been maintained to reflect these decisions.

Delaware By-laws

The Delaware Court of Chancery ruled in Oracle Partners, L.P. v. Biolase, Inc. that a typical provision in the by-laws for resignation that tracks the language of Section 141(b) of the DGCL permits verbal resignation by a director (, at *15-16 (Del. Ch. May 21, 2014)). The Biolase decision is discussed in Standard Document, Private Company By-Laws (Delaware Corporation): Drafting Note, Resignation. The drafting note also provides alternate language for the by-laws that can be used to prohibit verbal resignation.

Break-up Fees

In Dent v. Ramtron International Corp., the Delaware Court of Chancery upheld a common suite of deal-protection provisions in a public merger agreement ( (Del. Ch. June 30, 2014)). The break-up fee was set at 4.5% of the transaction's equity value, a somewhat large fee compared to market practice. Dent is cited in Practice Note, Break-up or Termination Fees: Size of the Break-up Fee as an example of a break-up fee that the Court has upheld in light of the total circumstances of the merger and the board's conduct.

Certificate of Designation

Standard Document, Certificate of Designation of Preferred Stock (Convertible, Double-dip Participating) contains detailed provisions for a stockholder's right of redemption. The Delaware Court of Chancery in Brevan Howard reviewed the wording of a certificate of designation to determine whether it obligated the company to take action to raise the necessary funds, including by selling assets or issuing additional equity, to raise sufficient funds for a redemption (Brevan Howard Credit Catalyst Master Fund Ltd. et al. v. Spanish Broad. Sys., Inc., (Del. Ch. June 27, 2014)). Drafting Note, Insufficient Funds cites the Brevan Howard decision and explains how the drafting of our Standard Document avoids the problem.

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