Adina Shapiro
Herzog Fox & Neeman, Tel Aviv
shapiroa@herzoglaw.co.il

Report on a session of the IBA Corporate and M&A Law Committee at the 19th Annual International Mergers and Acquisitions Conference in New York

Tuesday 14 June 2022

Moderators

David Ross Ross Aronstam & Moritz, Wilmington

Eric Schiele Kirkland & Ellis, New York

Speakers

Hon Kathaleen St J McCormick Chancellor, Delaware Court of Chancery, Wilmington

Hon Karen L Valihura Justice, Delaware Supreme Court, Wilmington

Below is a high-level summary of the main issues discussed by the panellists.

Brief overview of the Delaware judicial system

Over two thirds (2/3) of Fortune 500 companies are incorporated in Delaware and as of 2021 there were approximately 1.8 million legal entities incorporated in Delaware. As such, many corporate disputes are litigated in Delaware. Overall, the Delaware judicial system is comprised of the Supreme Court, the Court of Chancery, the Superior Court, the Family Court, the Court of Common Pleas, the Justice of the Peace Court, the Alderman’s Court, and related judicial agencies.

Delaware’s Court of Chancery is a business court with jurisdiction to hear and determine cases involving matter and causes in equity. The Court of Chancery has no juries, so all cases are decided by the Chancellor or a Vice Chancellor, who explain their decisions in comprehensive and reasoned written opinions. Rulings of the Court of Chancery may be appealed to the Delaware Supreme Court (there is no intermediary appellate court).

The Delaware Supreme Court is the ultimate authority on issues of Delaware corporate, business, and commercial law. The Supreme Court also has jurisdiction to hear questions certified to it by other Delaware courts as well as from other state and federal courts, where it appears to the Supreme Court that there are important and urgent reasons for intermediate determination.

Effects of Covid-19

The Covid-19 pandemic presented the Delaware courts with one of its greatest challenges. On 14 March 2020, Chief Justice Collins of the Delaware Supreme Court exercised his authority under State law and declared a judicial emergency which was extended a number of times, ending in July 2021. On 22 March 2020, all Delaware Court facilities were closed as part of the response to the pandemic.

The Delaware courts are service oriented and aim for as much transparency as possible. Briefs and online viewing have been available starting from 2013. Thus, when the ‘world shut down’ due to the pandemic, the Delaware courts explored how they would stay open. In fact, the Delaware courts never closed. There was flexibility in scheduling and a suspension of speedy trial guidelines. While some Delaware courts, particularly those with jury trials, experienced significant backlogs and delays due to Covid-19, the Delaware Supreme Court stayed on top of its docket and had no backlog of cases in 2020-21.

In addressing the challenges presented by the pandemic, the Delaware court system took several steps, including:

• court employees moved to work remotely to the extent possible. All courts moved to video proceedings in one form or another; generally encouraging the use of audio-visual devices by all courts, with the Court’s Judicial Information Center finding ground-breaking ways to conduct proceedings, using hardware and software technologies (eg, creating video ‘carts’ that could be moved from one courtroom to another), also leading to a governor’s citation for innovation;

• courts convened a daily morning teleconference with all stakeholders, including all six courts, court staff and law enforcement for the purposes of information sharing, logistical issues and problem solving for the operation of the justice system;

• courts worked with state public health officials and engaged experts on infectious diseases for the purposes of maintaining public health and at the same time ensured that the court staff, attorneys, and the general public had confidence that the state courthouse was safe;

• the courts shared information with the public on an ongoing basis, inter alia, by issuing press releases and statements posted on its webpage along with dozens of orders as well as up-to-date information on how to contact the court and other practical advice for the public (eg, how to file paperwork and log on to video proceedings); and

• the courts created a cross-agency committee to work on creating a detailed plan to reopen safely. The reopening plan was initially shared on 29 May 2020 with a phased approach for reopening, commencing 8 June 2020 and up-to-date information was shared with the public as to what phase the courts were in and what restrictions were associated with each phase.

Covid-19 related chancery matters

The panel identified and discussed several M&A-related chancery matters in connection with the Covid-19 pandemic, including 1. litigation resulting from failed mergers citing ‘material adverse effect’ clauses, ordinary business clauses, or satisfaction of conditions precedent, and the unprecedented economic impact of Covid-19; 2. litigation challenging shareholder rights plans adopted by companies in response to Covid-19-related market volatility. For example, in the Williams Companies Stockholder¹ matter, the Court issued a unique opinion declaring that the poison pill plan adopted was unenforceable and permanently enjoined its continued operation. In its conclusion, the Court did note that boards have latitude in targeted measures they adopt and noted that in this case the unenforceability was due to the fact that the director defendants breached their fiduciary duties when adopting it and included guidance to boards.

During the Covid-19 pandemic, there was also a significant increase in requests for expeditions. Additional chancery matters addressed by the courts (not necessarily M&A-related), included an increase in guardianship filings and litigation challenging vote-by-mail statutes enacted in response to the need for social distancing and shelter-in-place during an election year.

Additional notable matters addressed in Delaware courts

Director liability

The panel discussed developments since the Caremark² chancery decision in 1997 that established the conditions for director oversight liability under Delaware law. The ‘Caremark standard’ imposes liability under two conditions: 1. the directors utterly failed to implement reporting or information systems and controls; or 2. having implemented such system of controls the directors consciously failed to monitor or oversee its operations thus disabling themselves from being informed of the risks of problems requiring their attention. Since Caremark and until recently there have been few oversight claims, and when brought they have rarely survived motions to dismiss.

In 2019, the Marchand³ opinion reflected the beginning of a change indicating further scrutiny of board oversight liability. In Marchand, the Delaware Supreme Court provided that the directors are required to assess the risk profile of the company and manage potential risks, such as in the case of Marchand, that the board of the Blue Bell ice cream company was required to identify and oversee food safety. Other areas have subsequently been identified in other cases since then, such as airline safety in the ‘Boeing’⁴ matter, and clinical trial procedure compliance in the Clovis⁵ matter. In Hughes,⁶ the Court determined that it is not enough for the board to set standards and policies, but it must actively be engaged in their oversight.

Overall, since Marchland, ‘Caremark claims’ have been more frequently pursued and approximately one-third (a significantly larger percentage than expected) have survived motions to dismiss.

Derivative actions

There were two notable cases in respect of direct versus derivative claims, addressing where demand for company action can be excused and generally indicating a tendency of the Delaware courts to evolve from past precedents, noting new developments.

In Brookfield,⁷ stockholders challenged private placement of stock to a controlling stockholder with the claim that the stock was undervalued. The board was charged with allegedly misusing a bylaw allowing them to increase the number of directors. The motion was dismissed in Chancery Court noting that the claimant failed to demonstrate that it would be futile to ask the board to pursue litigation on the company’s behalf. On interlocutory appeal, the Supreme Court ruled (setting aside previous precedents while still acknowledging the importance of the stare decisis principle) that claims challenging corporate overpayment/dilution are considered exclusively derivative.

In the Zuckerberg⁸ matter, stockholders filed a derivative suit to recover close to $90m that Facebook spent defending and settling an earlier consolidated class action. The claimant shareholders did not make a litigation demand before filing its derivative action, alleging that demand was excused as futile. The Court of Chancery noting significant changes that arose since previous tests applied by the courts were set out, introduced a new three-pronged test for ‘demand’, namely: 1. whether the director received a material personal benefit from the conduct that is the subject of the litigation demand; 2. whether the director faces a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and 3. 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.

The tests are to be assessed independently for each director and if the response is ‘yes’ for at least half of the directors, then the demand is excused as futile, and the court would consider the derivative claim.

Section 220 actions

Section 220 of the Delaware General Corporation Law allows shareholders to inspect corporate books and records under certain circumstances. In recent years there has been an increase in ‘Section 220 actions’, which have more than doubled in the past four years, 2019 being pivotal in that regard. This increase was also matched by an increase in complexity of such matters. While the panel noted that recently filings have slightly reduced, they also drew attention to the more complex questions, as they increasingly also apply to M&A inspections which raise different problems than traditional inspections.

Notes

1 The Williams Companies Stockholder Litigation, 2021 WL 754593 (Del Ch, 26 Feb 2021).

2 In re Caremark Int’l Inc Derivative Litig., 698 A.2d 959 (Del Ch, 1996).

3 Marchand v Barnhill, 212 A.3d 805 (Del, 2019).

4 In re the Boeing Co Derivative Litig., No. 2019-0907 (Del Ch, 7 Sept 2021).

5 In re Clovis Oncology, Inc. Derivative Litig., C A No 2017-0222-JRS, 2019 WL 4850188 (Del Ch, 1 Oct 2019).

6 Hughes v Hu, C A No. 2019-0112-JTL, 2020 WL 1987029 (Del Ch, 27 Apr 2020).

7 Brookfield Asset Management, Inc v Rosson, 261 A,3d 1251 (Del, 2021).

8 United Food & Com Workers Union v Zuckerberg, 250 A.3d 862, 889 (Del Ch, 2020).