Delaware Corporate And Commercial Case Law Year In Review

• Published date: 09 August 2022
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Corporate and Company Law, Directors and Officers, Contracts and Commercial Law
• Law Firm: Morris James LLP
• Author: Mr Albert J. Carroll, Lewis Lazarus and Albert H. Manwaring, IV

Our 2021 Top 10 list summarizes decisions from the Delaware courts likely to affect business transactions and business litigation going forward. Our criteria for selection are that the decision either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware. This year's list includes decisions regarding whether a stockholder's claim for alleged breaches of fiduciary duty is direct or derivative, the new test for assessing demand futility in derivative litigation, busted merger litigation arising out of the pandemic, and ex ante waivers of statutory appraisal rights afforded to stockholders of Delaware corporations. Before detailing the decisions, one topic warrants special emphasis.

In 2021, the Delaware Supreme Court and the Court of Chancery issued several decisions certain to affect the future investigation and prosecution of derivative claims. Following the attorney fee-shifting decision in Pettry v. Gilead Sciences, Inc., 2021 WL 3087027 (Del. Ch. July 22, 2021), corporations opposing stockholder books-and-records inspections exploring potential derivative claims will need to reevaluate defense strategies that may be perceived as overly aggressive. Under Brookfield Asset Management, Inc. v. Rosson, 261 A.3d 1251 (Del. 2021), stockholder plaintiffs pursuing overpayment or dilution claims against alleged controllers must proceed derivatively'such claims are no longer dual-natured derivative and direct claims under the now-abandoned rule of Gentile v. Rosette. Under Morris v. Spectra Energy Partners (DE) GP, LP, 246 A.3d 121 (Del. 2021), the Primedia test provides the framework to evaluate standing to pursue a post-merger claim challenging a merger's fairness based on the alleged failure to secure value for derivative claims. Finally, under Food Industry Employers Tri-State Pension Fund v. Zuckerberg, 2021 WL 4344361 (Del. Sept. 23, 2021), Delaware now utilizes a single, unified three-part test for assessing demand futility in derivative litigation, obviating the need to choose between the tests set forth in Aronson and Rales. Summaries of these and other important decisions follow.

TOP TEN

ONE: Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., --- A.3d ----, 2021 WL 4344361 (Del. Sept. 23, 2021).

Under Delaware law, a derivative claim for harm to the corporation is a corporate asset that the board of directors has the right to control unless half or more of the directors lack impartiality on the claim's subject. When a stockholder plaintiff sufficiently pleads that half or more of the directors are conflicted, demand is excused as futile and the plaintiff may advance the claim in litigation. Delaware law has long recognized two tests used to determine the demand futility question, each applied to different circumstances'Aronson and Rales. Fundamentally, the two tests address the same question of whether the board can exercise its business judgment for the corporation. Over time, decisions observed their substantial equivalence, with Rales encompassing Aronson.

The derivative claims in Zuckerberg arose from a stock reclassification approved by the board of Facebook and related class action lawsuits. The Court of Chancery dismissed the claims for failure to plead demand futility, while finding that exculpated duty of care claims do not excuse demand under the second prong of the Aronson test. In reaching its conclusion, the trial court opined that, considering Delaware's evolving jurisprudence, maintaining separate tests under Aronson and Rales could create doctrinal confusion. The trial court therefore proposed a single, unified three-part test for assessing demand futility, which it applied to dismiss the case at bar.

On appeal, the Delaware Supreme Court agreed with the trial court's determinations, including the trial court's articulation of a new universal demand futility test. The Supreme Court likewise cited developments in the law since the articulation of Aronson and Rales, such as the adoption of Section 102(b)(7) of the Delaware General Corporation Law (DGCL), which authorizes exculpation of duty of care claims, and the rule of In re Cornerstone Therapeutics Inc., Stockholder Litigation, 115 A.3d 1173 (Del. 2015), which allows for pleading stage dismissals of claims against directors protected by exculpatory provisions regardless of the underlying standard of review for the challenged conduct. The Supreme Court adopted the Court of Chancery's test, which asks on a director-by-director basis: "(i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand; (ii) whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand." Importantly, as the Supreme Court observed, "this refined standard is consistent with Aronson, Rales, and their progeny" and "cases properly applying those holdings remain good law."

Key Takeaway: Zuckerberg establishes a single, unified test for assessing demand futility, obviating the need to choose between Aronson and Rales.

TWO: Brookfield Asset Mgmt., Inc. v. Rosson, 261 A.3d 1251 (Del. 2021)

Whether a stockholder's claim is direct or derivative is potentially outcome-determinative, such as when a stockholder's derivative standing is eliminated by a merger. In Tooley v. Donaldson, Lufkin & Jennette, Inc., 845 A.2d 1031 (Del. 2004), the Delaware Supreme Court created a new test to distinguish direct and derivative claims and to clarify jurisprudence. Tooley asks who, between the company and the stockholders individually, suffered the alleged harm and would benefit from any recovery or remedy? Under that test, dilution claims have been described as "classically" derivative, or the "quintessence" of a claim belonging to the corporation. In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), the Delaware Supreme Court recognized an exception to Tooley under which a plaintiff could assert a dual-natured direct and derivative claim against a controlling stockholder for a corporate overpayment that extracts economic value and voting power from the minority...