United States: Delaware Discourages Appraisal Arbitrageurs (March 2015 Corporate Alert)

The Herrick Advantage

Herrick Corporate partners Irwin A. Kishner and Daniel A. Etna recently advised longtime client Legends Hospitality in a major strategic partnership with concert and entertainment giant Live Nation. The deal, which has Legends operating food and beverage services at 34 of Live Nation's music venues in North America, is one of the largest venue food and beverage contracts in history.

Delaware Discourages Appraisal Arbitrageurs

The Delaware Supreme Court recently affirmed the Chancery Court's ruling in Huff Fund Investment Partnership v. CKx, Inc., in a decision that could potentially slow the surge in appraisal proceedings. In Huff Fund, two bidders expressed an interest in acquiring CKx. One bidder, a private equity fund, bid $5.50 per share and the other bidder, unidentified, bid $5.60 per share. CKx accepted the lower bid because CKx knew that the higher bidder had not yet obtained the financing to close the deal. Huff Fund Investment Partnership, was among the investors that petitioned for appraisal, claiming that the fair value of the company is higher than the deal price. Vice Chancellor Sam Glasscock III held that the deal price was the most reliable and probative indicator of fair value and rejected each party's expert valuations. Earlier this year, Vice Chancellor Glasscock similarly held in In re Appraisal of Ancestry.com that the fair value is "best represented by the market price." The Delaware Supreme Court's decision in Huff Fund affirms Vice Chancellor Glasscock's holdings in both Huff Fund and Ancestry.com.

This decision may subdue the recent upward trend of appraisal proceedings. Companies in recent years have been spending millions of dollars in defense costs due to appraisal litigation initiated by hedge funds. In addition to CKx and Ancestry.com, Dole Food Co. has also recently battled appraisal suits. This prompted Dole's President to propose to the Delaware legislature a bill to restrict such suits and a threat to take its business out of the state if the laws did not change. The Dole proposal would limit appraisal challenges to investors who held shares before a takeover announcement and would lower the current statutory interest payout of 5.75%.

Huff Fund Investment Partnership v. CKx, Inc., Civil Action No. 6844-VCG

Delaware Focuses on Fee-Shifting Bylaws

The Delaware courts and state legislature are addressing the ramifications of last year's Delaware Supreme Court decision in ATP Tour, Inc. v. Deutscher Tennis Bund, upholding the facial validity of a fee-shifting bylaw in a non-stock corporation as a matter of contract law.

In Strougo v. Hollander, the Delaware Chancery Court recently held that a non-reciprocal fee-shifting bylaw, adopted after a plaintiff's interest in the corporation was eliminated in a reverse stock split, could not bind a stockholder challenging the fairness of the transaction. On May 30, 2014, First Aviation Services, Inc. ("First Aviation") consummated a 10,000-to-1 reverse stock split, the effect of which was to involuntarily eliminate the interests of certain stockholders and make First Aviation a privately-owned company.  Shortly thereafter, on June 3, 2014, the board of directors of First Aviation adopted a fee-shifting bylaw that was admittedly modeled after the bylaw at issue in ATP Tour.  First Aviation's bylaw provided that it would apply to "any current or prior stockholder . . . [who] does not obtain a judgment on the merits that substantially achieves . . . the full remedy sought . . . ".  On June 14, 2014, the plaintiff, on behalf of himself and a class of former stockholders that were similarly cashed out, sued First Aviation and its directors challenging the fairness of the reverse stock split, and later amended the complaint to challenge the bylaw provision.  In the instant case, the court only decided whether the bylaw was applicable to the former stockholder.

Delaware courts view bylaws as "an inherently flexible contract between the corporation and its stockholders," thus, the court began its analysis under contract law principles. Accordingly, the court reasoned that "a stockholder whose equity interest is eliminated is equivalent to a non-party to the corporate contract, meaning that a former stockholder is not subject to, or bound by, any bylaw amendments after one's interest in the corporation has been eliminated." Rather, the bylaws in effect at the time of the cash-out transaction would bind the stockholder who challenges the transaction post- closing.  Furthermore, the court held that the plain language of the Delaware General Corporation Law ("DGCL") contemplates that the term "stockholder" refers only to current stockholders, and "not to former stockholders who no longer have an equity interest in the corporation."

Earlier this month, the Corporation Law Council of the Delaware State Bar Association (the "Council") proposed two amendments to the DGCL that, if enacted, would prohibit fee-shifting provisions in both the certificate of incorporation and the bylaws. As the council reasoned, the widespread adoption of fee-shifting provisions would make "stockholder litigation, even if meritorious, untenable" because few stockholders would accept the risk of litigation if it meant "exposure to millions of dollars in attorneys' fees to attempt to rectify a perceived corporate wrong, no matter how egregious."

Strougo v. Hollander, C.A. No. 9770-CB WL 1189610 (Del. Ch. March 16, 2015)

Delaware Chancery Court Addresses Arbitration Provision

In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the limited liability company agreement of Rubicon Media, LLC provided that disputes would be resolved by arbitration.  Rubicon Media, LLC was subsequently converted into a corporation and its certificate of incorporation implemented a litigation-only approach for disputes. Members of Rubicon brought suit in Delaware Chancery Court, alleging breaches of fiduciary duties, among other things. Rubicon asserted that the Court lacks subject matter jurisdiction because the parties agreed in Rubicon's LLC agreement to submit all disputes to arbitration.

Whether parties have an agreement to arbitrate "is generally a decision for a court," and there is a presumption that parties intended "issues of substantive arbitrability to be decided by a court." This presumption can be rebutted with evidence that parties "clearly and unmistakably" intended otherwise. A previous case, Willie Gary (906 A.2d 76, 19 (Del. 2006)), established that this evidence is found where an arbitration clause generally provides for arbitration of all disputes and also incorporates a set of arbitration rules that empower arbitrators to decide arbitrability. However, even if those two elements are satisfied, the Court must resolve issues of substantive arbitrability if the party seeking to avoid arbitration makes "a clear showing that its adversary has made essentially no non-frivolous argument about substantive arbitrability."

Here, the Court found that the arbitration provision in the Rubicon LLC agreement meets both prongs of Willie Gary - it applies to "any dispute arising under or relating to" the LLC agreement and, by stating that arbitration will be governed by the Commercial Arbitration Rules of the American Arbitration Association, empowers an arbitrator to rule on jurisdiction. The Court also found that Rubicon has a non-frivolous argument for arbitration since it is unclear whether the plaintiff's claims arise out of the LLC agreement or the certificate of incorporation and, therefore directed the case to an arbitrator to decide the issue of arbitrability.

The Court also addressed the issue of whether Rubicon Inc. could be required to arbitrate based on a provision in a contract to which it is not a signatory. The Court relied on its previous ruling in Bernstein v. TractManger, Inc. (953 A. 2d at 1005) that "rights created by an LLC's operating agreement may be enforced against the corporation into which the LLC was converted." The Court also noted that requiring arbitration of claims involving affiliates of signatories is "not unusual." Therefore, the Court held that requiring Rubicon Inc. to arbitrate is permissible and not inequitable.

3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN, (February 26, 2015)

NJ Courts Will Not Enforce Unclear Arbitration Provisions. Will SCOTUS Weigh In?

This spring, the United States Supreme Court ("SCOTUS") may take up U.S. Legal Services Group v. Atalese, a case decided by the New Jersey Supreme Court ("NJSC") in September of 2014.  In Atalese, the NJSC held that an arbitration provision providing that disputes "shall be submitted to binding arbitration" was not enforceable in New Jersey, unless such an arbitration provision was accompanied by language that is unambiguous and sufficiently clear to a reasonable consumer and states that the party was waiving its statutory right to seek relief in a court of law.

In January, the defendant in Atalese filed a petition of writ of certiorari with SCOTUS. In late February, several amicus briefs, including an amicus brief of the Chamber of Commerce of the United States of America and the New Jersey Civil Justice Institute were also filed with SCOTUS. The petitioner and the amicus curiae generally argue that, among other things, the NJSC's decision in Atalase should be overturned because it is in conflict with the Federal Arbitration Act, which requires parties that have executed agreements containing arbitration clauses to arbitrate instead of seeking relief in a judicial forum. The petitioner points to SCOTUS' decision in Doctors' Associates v. Casarotto. In Casarotto, SCOTUS overturned a decision of the Montana Supreme Court which had upheld a notice requirement for all agreements containing an arbitration provision. In their opinion, SCOTUS noted that Congress "precluded states from singling out arbitration provisions for suspect status" when it passed the Federal Arbitration Act. Essentially, SCOTUS held that state courts may not invalidate arbitration provisions under state laws that treat arbitration provisions different from other contractual provisions.

The decision in Atalese may threaten small businesses with burdensome litigation costs in the event of a dispute if they have contracted with customers in New Jersey and expressly agreed to arbitrate. Unless, SCOTUS decides to review and overturn Atalese, the ruling in that case will remain the law in New Jersey.

Atalese v. United States Legal Services Group, L.P., 219 N.J. 430 (2014)

New York Attorney General's Proposed Financial Frauds Whistleblower Act

New York Attorney General Eric T. Schneiderman is proposing legislation in Albany to protect and reward employees who report information about illegal activity in the banking, securities, and insurance and financial services industries.  The proposed legislation, "Financial Frauds Whistleblower Act," would provide financial compensation to whistleblowers that voluntarily provide original information, not previously known to the Attorney General, which leads to more than $1 million in penalties and settlement proceeds for financial fraud or misconduct. The Act would also protect whistleblowers against retaliation by current and prospective employers.  In 2010, the New York State False Claims Act was amended to include incentives and protections for whistleblowers who report abuses of taxpayer funded state expenditures. However, no law currently exists in New York State to protect or incentivize whistleblowers who report securities or financial frauds.

The rewards to whistleblowers would not be drawn from state funds, but from monetary recoveries from wrongdoers.  Whistleblowers would receive 10% to 30% of the money obtained in a fraud case. Additionally, the proposed legislation would create significant incentives for employees to provide information to the Attorney General rather than reporting such information internally. The Financial Frauds Whistleblower Act is similar to the whistleblower program that was created under the Dodd-Frank Act. However, the SEC has previously explained that such whistleblower programs encourage whistleblowers to first report any misconduct internally, a factor which the SEC considers when determining the amount of the monetary award. Accordingly, the expectation was that directors would foster a culture that affirmatively encourages employees to report any wrongdoing without any fear of retaliation. As for New York, we have yet to see the proposed text of the Financial Frauds Whistleblower Act, and, if adopted, the effect it will have in the corporate governance of companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions