Wilmington, Del. (January 18, 2024)- In the second part of a two-part series, we explore more of the notable corporate and commercial decisions of Delaware courts in 2023, including a Court of Chancery ruling that rejected a former Twitter investor's request for a mootness fee in connection with the decision of Elon Musk to purchase the social media giant.

Chancellor "X"s Out Twitter Investor's Claim He Spurred Musk's Social Media Mind Change

In Crispo v. Musk, 2023 Del. Ch. LEXIS 466 (Del. Ch. Oct. 31, 2023), the Court of Chancery declined to award a mootness fee because the plaintiff shareholder filed an unmeritorious claim. The decision turned on whether a merger agreement's lost premium carve-out to its general no third-party beneficiaries clause conferred standing on the shareholder seeking damages for the then-failed merger agreement. Examining the development of lost premium provisions in the M&A space, the court detailed the unique relationship between Delaware's board-centric governance paradigm, merger agreements, and shareholder interests.

Invoking Delaware's hesitance to confer third-party merger agreement standing on shareholders, the court found the contractual scheme afforded the shareholder plaintiff no third-party beneficiary status, thus rendering his mooted claim unmeritorious.

Chancery Court Finds Collection of Bad Faith Factors Enough to Keep GoDaddy Suit Alive

The Court of Chancery, in IBEW Local Union 481 Defined Contribution Plan & Trust v. Winborne, 2023 Del. Ch. LEXIS 342 (Del. Ch. Aug. 24, 2023), allowed a shareholder derivative suit to survive a motion to dismiss because the plaintiff adequately pleaded demand futility based on the board's alleged bad faith overpayment to settle an outstanding company liability.

Reviewing Rule 23.1's doctrinal pillars, the court examined the pleading standard required to withstand dismissal for want of "reasonable doubt" as to the board's ability to properly respond to a pre-suit demand. Focusing on the second prong of Delaware's demand futility test, the court considered whether at least three of the directors faced a substantial likelihood of bad faith liability for approving the settlement.

Noting that "clairvoyance plays no role," the court extensively reviewed the precedent detailing how Delaware measures pleadings-stage fiduciary bad faith. In sum: "Properly understood, the good faith inquiry is a holistic one." A court of equity can allow a case to proceed past the pleading stage when the allegations as a whole support an inference of bad faith. The "constellation of factors" — including an almost $700 million disparity between what the company valued the settlement at and what the company actually paid for it — supported a pleading stage bad faith inference sufficient to pass demand futility review.

Chancery Rejects Request for Specific Performance to Close Deal

With a factual background that reads like a Hollywood thriller, in 26 Capital Acquisition v. Tiger Resort Asia, 2023 Del. Ch. LEXIS 364 (Del. Ch. Sept. 7, 2023), the Court of Chancery declined to compel an acquisition target to close a busted deal. The acquirer sought specific performance under a de-SPAC merger agreement. The court meticulously weighed the factors supporting specific performance after criticizing the sponsor and its hedge fund majority shareholder's duplicitous behavior. Refusing to specifically enforce the merger agreement's reasonable best efforts clause, the court concluded that the transaction's troubling factual backdrop disfavored such a remedy.

Chancery Rules That Delaware Allows Grant of 10 votes Per- Share to "Up-C" CEO

In Colon v. Bumble, 2023 Del. Ch. LEXIS 367 (Del. Ch. Sep. 12, 2023), the Court of Chancery upheld the validity of a challenged capital arrangement that layered standard Up-C and dual class voting structures into a "bespoke" capital design. The share classes' voting power differed depending on the holder's identity. If a separately referenced and defined (outside the charter) "principal stockholder" held a class A share, then it carried ten votes per share; otherwise, it carried only one. And if a
principal stockholder held a class B share, then it carried ten votes per each class A share into which it could convert; otherwise, it carried only one.

Though the court noted that its opinion did not consider whether such an identity-based governance regime would pass Delaware's "twice tested" review of corporate action, it concluded the challenged charter provisions and capital structure complied with the Delaware General Corporation Law.

Section 225 Action Determines That Board Members Were Properly Removed

In Barbey v. Cerego, 2023 Del. Ch. LEXIS 379 (Del. Ch. Sept. 29, 2023), after a wholly-owned foreign subsidiary launched a tender offer to the shareholders of its Delaware parent, resulting in an inversion, the Court of Chancery upheld as valid the removal of the entire parent board. A shareholder and ousted director challenged the removal under DGCL Section 225, contending that the director's failure to receive the required notice of the meeting at which the board approved the tender offer rendered the approval thereof and subsequent management change void.

The court partially agreed, but nevertheless determined that the plaintiffs failed to draw a sufficient connection between the void meeting and the effect of the tender offer. Noting that the internal affairs doctrine governed whether the foreign subsidiary enjoyed the authority to independently launch the tender offer without the parent's approval, the court concluded that the plaintiffs failed to timely meet their burden, and upheld the board's removal.

Entire Fairness Test Applied, But No Damages

The Court of Chancery in In re Straight Path Communications Consolidated Stockholder Litigation, 2023 Del. Ch. LEXIS 387 (Del. Ch. Oct. 3, 2023), held that a controlling shareholder drove a not-entirely-fair transaction and breached fiduciary duties he owed to the minority. Yet, the court found that the transaction, while unfair under Delaware's "unified fairness review, considering both price and process," caused the minority no actual damages. Nevertheless, finding the controller steered the transaction "in a manifestly unfair manner," the transaction thus "was not entirely fair." Pointing out that a claim for breach of fiduciary duties does not require proving actual damages, the court awarded the minority class nominal damages.

Lead Plaintiff Forced to Elect Remedy

In litigation following a plenary Revlon action (in which the Delaware Court of Chancery awarded damages to a shareholder class after finding the CEO, with a private equity firm's aiding and abetting, breached his fiduciary duty), in In re Mindbody, 2023 Del. Ch. LEXIS 575 (Del. Ch. Nov. 15, 2023), the court concluded that Delaware law permitted the lead hedge fund class plaintiffs, who simultaneously petitioned for appraisal, to elect to receive the merger consideration and class damages remedy. Because the appraisal-seeking hedge funds shouldered no obligation to "make a binding election as to remedy" before the plenary action's trial, and the shareholder class included the funds, Delaware precedent allowed them to choose either. But the court prohibited a double recovery. If the funds elected to pursue their appraisal petition, they could not receive the class remedy. Conversely, if the funds elected to receive the class remedy, then the court would not appraise their shares.

Restrictive Covenants Found Unenforceable

In Sunder Energy v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023), the Court of Chancery denied a solar power system dealer's application for a preliminary injunction to enforce restrictive covenants against a former minority member.

The court found that two of the members surreptitiously procured an amendment to the LLC agreement in breach of their fiduciary duties. The amendment rendered the resulting minority little more than mere employees and imposed onerous restrictive covenants. Because the purported majority members breached their fiduciary duties in connection with the amendment, the court prevented them from enforcing the covenants.

The court further opined, assuming arguendo their threshold validity, the restrictive covenants failed to "pass muster" under Delaware law. Reviewing the primary and additional factors governing the enforceability of restrictive covenants, the court evaluated "all of the dimensions" of the disputed provisions "holistically and in context." The court considered how they operated within the contract as a whole and declined to "tick through individual features of a restriction in insolation, because features work together synergistically." With reasonableness as the touchstone, the court found the "astonishingly broad" restrictions unreasonable and refused to enforce them.

Rarely Invoked Provision of DGCL Examined

As one part of a vast, multijurisdictional saga between oil giants, in a decision concerning a DGCL provision that is rarely the subject of a judicial decision, the Court of Chancery in Venezuela v. PDC Holding, 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023), ordered a wholly-owned Delaware subsidiary to issue a replacement stock certificate to its Venezuelan parent.

The court detailed the three requirements under section 168 of the DGCL that a shareholder must satisfy to receive a judicially-ordered replacement of a "lost, stolen, or destroyed" stock certificate. Though the parties did not dispute the typically litigated elements, the subsidiary initially requested that the parent post a bond in the neighborhood of $40 billion. Although the court lacked power to waive the bond requirement altogether (if the issuer requested one), the court nevertheless enjoyed discretion to set the amount "based on the circumstances presented in each case." After examining the purpose for the bond-as-security requirement and the circumstances surrounding the potential ramifications of reissuing a certificate evincing ownership of the particular shares, the court found a "nominal, unsecured" bond in the amount of $10,000 appropriate.

Full summaries of these cases and those featured in Part 1 - including links to the decisions - are available on Francis G.X. Pileggi's Delaware Corporate & Commercial Litigation Blog.

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.