THE 31ST ANNUAL FEDERAL SECURITIES INSTITUTE RECENT DEVELOPMENTS IN … · 2013-02-07 · the cases discussed herein, the views expressed do not necessarily represent views of the

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THE 31ST ANNUAL FEDERAL SECURITIES INSTITUTE

__________________________________

RECENT DEVELOPMENTS IN DELAWARE CORPORATE LAW

By

Gregory P. Williams Lisa A. Schmidt1

Gregory P. Williams Lisa A. Schmidt Richards, Layton & Finger, P.A. One Rodney Square 920 North King Street Wilmington, DE 19801 © February 7, 2013 All Rights Reserved

1 Gregory P. Williams and Lisa A. Schmidt are directors of Richards, Layton & Finger,

P.A., Wilmington, Delaware. Although Richards, Layton & Finger acted as counsel in some of the cases discussed herein, the views expressed do not necessarily represent views of the Firm or its clients. Portions of this outline are drawn from materials prepared by other members of Richards, Layton & Finger and have been used in other presentations and continuing legal education workshops.

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TABLE OF CONTENTS

Introduction ....................................................................................................................................1

I. RECENT DECISIONS OF DELAWARE COURTS. ....................................................1

A. Business Combinations. .........................................................................................1

1. Breach of Fiduciary Duty.............................................................................1

a. In re Comverge Inc. Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. May 8, 2012). ...................................................................1

b. In re Answers Corporation Shareholders Litigation, Consol. C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012).........................................2

c. N.J. Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Sept. 30, 2011, revised Oct. 6, 2011). ...........3

d. In re Massey Energy Co. Derivative & Class Action Litigation, C.A. No. 5430-VCS (Del. Ch. May 31, 2011).................................4

e. In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. No. 6164-VCP (Del. Ch. May 20, 2011). ........................................5

f. In re Del Monte Foods Co. Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011). ........................................7

g. In re Dollar Thrifty Shareholder Litigation, Consol. C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010); Forgo v. Health Grades, Inc., C.A. No. 5716-VCS (Del. Ch. Sept. 3, 2010) (TRANSCRIPT). .....8

2. Deal Protection Devices. ............................................................................10

a. In re Micromet, Inc. Shareholders Litigation, C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012). ...............................................................10

b. In re OPENLANE, Inc. Shareholders Litigation, Consol. C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011).............................................11

3. Disclosures. ................................................................................................13

a. In re Atheros Communications, Inc. Shareholder Litigation, Consol. C.A. No. 6124-VCN (Del. Ch. Mar. 4, 2011). .................13

b. In re Art Tech. Group, Inc. S'holders Litig., Consol. C.A. No. 5955-VCL (Del. Ch. Dec. 20, 2010) (TRANSCRIPT); Steinhardt

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v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (TRANSCRIPT). ...........................................................................14

c. Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., C.A. No. 5402-VCS (Del. Ch. May 13, 2010); Steamfitters Local Union 447 v. Walter, C.A. No. 5492-CC (Del. Ch. June 21, 2010) (TRANSCRIPT). ...........................................................................15

4. Two-Step Merger Transactions..................................................................17

a. Olson v. ev3, Inc., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011). 17

b. In re Cogent, Inc. Shareholder Litigation, Consol. C.A. No. 5780-VCP (Del. Ch. Oct. 5, 2010), appeal refused, 30 A.3d 782 (Del. 2010). .............................................................................................18

5. Merger Agreement Construction. ..............................................................20

a. Amirsaleh v. Board of Trade of New York, Inc., 27 A.3d 522 (Del. 2011). .............................................................................................20

b. Narrowstep, Inc. v. Onstream Media Corp., C.A. No. 5114-VCP (Del. Ch. Dec. 22, 2010). ...............................................................22

c. Aveta Inc. v. Cavallieri, C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010). .............................................................................................23

6. Merger As Implicating Anti-Assignment Agreement................................25

a. Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011). ........................................25

7. Confidentiality Agreements. ......................................................................26

a. Martin Marietta Materials, Inc. v. Vulcan Materials Co., 2012 WL 2783101 (Del. July 12, 2012). .......................................................26

b. RAA Management, LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012). .............................................................................28

B. Stockholder and Creditor Litigation. .................................................................30

1. Scrutiny of Settlements. .............................................................................30

a. Forsythe v. ESC Fund Management Co. (U.S.), Inc., C.A. No. 1091-VCL (Del. Ch. May 9, 2012). ...............................................30

b. Scully v. Nighthawk Radiology Holdings, Inc., C.A. No. 5890-VCL (Del. Ch. Dec. 17, 2010) (TRANSCRIPT). ..........................31

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c. In re Revlon, Inc. S'holders Litig., Consol. C.A. No. 4578-VCL (Del. Ch. Mar. 16, 2010). ...............................................................33

2. Creditor Claims and Debt Instruments. .....................................................34

a. Bank of N.Y. Mellon Trust Co. v. Liberty Media Corp., 29 A.3d 225 (Del. 2011). .............................................................................34

3. Preferred Stock Issues. ...............................................................................35

a. Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012). .........................................................................35

b. SV Investment Partners, LLC v. ThoughtWorks, Inc., 37 A.3d 205 (Del. 2011). ....................................................................................36

c. Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 JRS CCLD (Del. Super. July 21, 2011), aff'd, 41 A.3d 381 (Del. 2012). .............................................................................................37

d. Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCS (Del. Ch. Mar. 29, 2011). .............................................38

e. LC Capital Master Fund, Ltd. v. James, C.A. No. 5214-VCS (Del. Ch. Mar. 8, 2010). ..........................................................................40

4. § 220 Actions. ............................................................................................41

a. Central Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. 2012). .............................................................................................41

b. King v. VeriFone Holdings, Inc., 12 A.3d 1140 (Del. 2011). ........43

c. City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., 1 A.3d 281 (Del. 2010). ..................................44

5. Appraisal Actions and Proceedings. ..........................................................45

a. In re Appraisal of Orchard Enterprises, Inc., 2012 WL 2923305 (Del. Ch. July 18, 2012). ................................................................45

b. Gearreald v. Just Care, Inc., C.A. No. 5233-VCP (Del. Ch. Apr. 30, 2012). .......................................................................................47

c. In re Appraisal of Aristotle Corp., Consol. C.A. No. 5137-CS (Del. Ch. Jan. 10, 2012). .........................................................................48

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d. Golden Telecom, Inc. v. Golden GT LP, 993 A.2d 497 (Del. 2010); Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., C.A. No. 5745-VCS (Del. Ch. Dec. 17, 2010). ......49

6. Derivative Actions and Claims. .................................................................50

a. Louisiana Municipal Police Employees' Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012) .......................................................................50

b. In re Goldman Sachs Group, Inc. Shareholder Litigation, C.A. No. 5215-VCG (Del. Ch. Oct. 12, 2011), aff'd sub nom. Southeasern Pennsylvania Trans. Authority v. Blankfein, 44 A.3d 922 (Del. 2012) (TABLE). .............................................................................52

c. Kahn v. Kohlberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011). .............................................................................................53

d. Lambrecht v. O'Neal, 3 A.3d 277 (Del. 2010). ..............................54

7. Independence and Good Faith of the Special Committee. .........................56

a. In re Southern Peru Copper Corp. Shareholder Derivative Litigation, 30 A.2d 60 (Del. Ch. 2011). .........................................56

b. In re Orchid Cellmark Inc. Shareholder Litigation, C.A. No. 6373-VCN (Del. Ch. May 12, 2011). ......................................................57

c. Krieger v. Wesco Financial Corp., C.A. No. 6176-VCL (Del. Ch. May 10, 2011) (TRANSCRIPT). ...................................................60

d. S. Muoio & Co. LLC v. Hallmark Entertainment Investments Co., C.A. No. 4729-CC (Del. Ch. Mar. 9, 2011), aff'd, 35 A.3d 419 (Del. 2011) (TABLE).....................................................................61

e. London v. Tyrell, C.A. No. 3321-CC (Del. Ch. Mar. 11, 2010). ...64

8. Governing Pleading Standard in Delaware. ...............................................66

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531 (Del. 2011). ......................................................66

9. Stockholder Rights Plans. ..........................................................................67

a. Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011). .............................................................................................67

b. eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010). .............................................................................................68

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c. Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010), aff'd, 15 A.3d 218 (Del. 2011) (TABLE). ..........................70

d. Selectica, Inc. v. Versata, Inc., C.A. No. 4241-VCN (Del. Ch. Feb. 26, 2010), aff'd, 5 A.3d 586 (Del. 2010). .......................................72

10. Implied Covenant of Good Faith and Fair Dealing. ..................................74

a. Nemec v. Shrader, 991 A.2d 1120 (Del. 2010). .............................74

11. Limitations on and Sanctions for Plaintiff-Representatives' Trading. .......76

a. In re Celera Corporation Shareholder Litigation, No. 212, 2012 (Del. Dec. 27, 2012). ......................................................................76

b. Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012). ..................................................................................77

12. Plaintiff's Attorney's Fees Awards. ............................................................78

a. Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012). .............................................................................................78

b. In re Compellent Technologies, Inc. Shareholder Litigation, Consol. C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011). ..................80

c. In re Del Monte Foods Co. Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. June 27, 2011). ......................................82

C. Corporate Governance Issues. ............................................................................84

1. Annual Meetings and Meeting Procedures. ...............................................84

a. Sherwood v. Chan, C.A. No. 7106-VCP (Del. Ch. Dec. 20, 2011).84

b. Goggin v. Vermillion, Inc., C.A. No. 6465-VCN (Del. Ch. June 3, 2011). .............................................................................................86

c. Airgas, Inc. v. Air Prods. & Chems., Inc., C.A. No. 5817-CC (Del. Ch. Oct. 8, 2010), rev'd, 8 A.3d 1182 (Del. 2010). .......................87

2. Construction and Validity of Charter and Bylaw Provisions.....................89

a. Kurz v. Holbrook, C.A. No. 5019-VCL (Del. Ch. Feb. 9, 2010), aff'd in part and rev'd in part sub nom., Crown EMAK P'ners, LLC v. Kurz, 992 A.2d 377 (Del. 2010). ................................................89

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3. Void and Voidable Stock Issuances. ..........................................................92

a. Keyser v. Curtis, 2012 WL 3115453 (Del. Ch. July 31, 2012). .....92

b. Johnston v. Pedersen, C.A. No. 6567-VCL (Del. Ch. Sept. 23, 2011). .............................................................................................93

c. Blades v. Wisehart, C.A. No. 5317-VCS (Del. Ch. Nov. 17, 2010).95

d. Prizm Group, Inc. v. Anderson, C.A. No. 4060-VCP (Del. Ch. May 10, 2010). ...............................................................................97

e. Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCP (Del. Ch. Mar. 24, 2010). .............................................98

4. Liability for Usurpation of Corporate Opportunity ...................................99

a. Dweck v. Nasser, Consol. C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012). .............................................................................................99

5. Liability of Corporate Officers for Breaches of Fiduciary Duty. ............101

a. Hampshire Group, Ltd. v. Kuttner, C.A. No. 3607-VCS (Del. Ch. July 12, 2010)...............................................................................101

6. Executive Compensation. ........................................................................103

a. Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch. June 21, 2012). ...........................................................................................103

D. Controlling Stockholder Issues. ........................................................................105

a. In re Synthes, Inc. Shareholder Litigation, 2012 WL 3594293 (Del. Ch. Aug. 17, 2012)..............................................................105

b. Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012).106

c. In re Delphi Financial Group Shareholder Litigation, Consol. C.A. No. 7144-VCG (Del. Ch. Mar. 6, 2012)..............................108

d. In re John Q. Hammons Hotels Inc. S'holder Litig., C.A. No. 758-CC (Del. Ch. Jan. 14, 2011). ........................................................109

e. In re CNX Gas Corp. S'holders Litig., C.A. No. 5377-VCL (Del. Ch. May 25, 2010). ......................................................................111

II. 2011–2012 AMENDMENTS TO THE GENERAL CORPORATION LAW. .........113

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A. 2012 Amendments (effective August 1, 2012 or August 1, 2013). ..................113

1. Section 254 (Merger or consolidation of domestic corporation and joint-stock corporation or other association); Section 263 (Merger or consolidation of domestic corporations and partnerships); Section 265 (Conversion of other entities to a domestic corporation); and Section 267 (Merger of parent entity and subsidiary corporation or corporations). ....113

2. Section 311 (Revocation of voluntary dissolution). ................................113

3. Section 312 (Renewal, revival, extension and restoration of certificate of incorporation). ..........................................................................................113

4. Section 377 (Change of registered agent). ...............................................114

5. Section 381 (Withdrawal of foreign corporation from State; procedure; service of process on Secretary of State). ................................................114

6. Section 390 (Transfer, domestication or continuance of domestic corporations). ...........................................................................................114

7. Section 391 (Amounts payable to Secretary of State upon filing certificate or other paper). .........................................................................................115

8. Effective Date. .........................................................................................115

B. 2011 Amendments (effective August 1, 2011). .................................................115

1. Certificate of Incorporation......................................................................115

2. Effective Date of Original Certificate ......................................................116

3. Registered Office in State ........................................................................116

4. Indemnification ........................................................................................116

5. Conversion to a Domestic Corporation....................................................117

6. Payment of Franchise Taxes ....................................................................117

7. Religious, Charitable, Educational, etc., Corporations ............................117

8. Annual Report ..........................................................................................117

9. Taxes and Fees Payable ...........................................................................117

10. Corporations Using "trust" in Name ........................................................118

11. Franchise Taxes .......................................................................................118

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Introduction

These materials summarize and explain the significance of various recent (decided in the last three years) decisions of the Delaware Supreme Court, Delaware Court of Chancery, Delaware Superior Court and U.S. District Court for the District of Delaware regarding Delaware corporate law. These materials also highlight amendments to the Delaware General Corporation Law that became effective in 2011 and 2012.

I. RECENT DECISIONS OF DELAWARE COURTS.

A. Business Combinations.

1. Breach of Fiduciary Duty.

a. In re Comverge Inc. Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. May 8, 2012).

In In re Comverge Inc. Shareholders Litigation, C.A. No. 7368-VCP (Del. Ch. May 8, 2012), the Court of Chancery in an oral ruling denied a motion to preliminarily enjoin the acquisition of Comverge, Inc. ("Comverge") by HIG Capital LLC and its affiliates ("HIG"). The Court found that in hindsight certain choices made by Comverge's directors were debatable, but the Court declined to second-guess decisions made by the independent directors.

Comverge had lost money every year of its existence and had long sought, to no avail, to solve its liquidity problems through various types of transactions. In November 2011, HIG contacted Comverge to express an interest in acquiring the company. In February 2012, the Comverge board declined HIG's offer to buy the company for $2.25 per share, in part because another bidder had suggested a higher price. HIG thereafter acquired certain notes issued by Comverge. The notes carried the right to accelerate the company's debt and (because Comverge was, or soon would be, in default on the underlying loan) likely force it into bankruptcy, as well as to block other acquisition bids and to reject prepayment of the debt. HIG promptly indicated that it would exercise those rights unless the board accepted a new, lower-priced offer. The board negotiated for a somewhat higher price and for a go-shop period, and then took the deal at $1.75 per share.

The plaintiffs alleged that HIG's purchase of the notes breached a non-disclosure agreement ("NDA") entered into by Comverge and HIG in connection with due diligence, which prohibited HIG from acquiring Comverge's securities if that acquisition would violate U.S. securities laws. The plaintiffs argued that the directors breached their fiduciary duties under Revlon by accepting HIG's $1.75 per share offer rather than suing to enforce the NDA in order to decrease HIG's negotiating power. On April 27, 2012, the Court granted the motion to expedite based in part on this argument.

Eleven days later, however, the Court denied the plaintiffs' motion for a preliminary injunction. Although the Court was inclined to agree that Comverge may have had a claim against HIG for breach of the NDA, the Court reasoned that Comverge's board deliberately considered whether to file suit on more than one occasion and sought legal advice in connection

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with its decision. As the Court summarized, "the directors had to decide whether shareholders would be better off if the company fought to the end and even won in the legal arena if doing so exposed them to an increased risk of bankruptcy, or if it salvaged whatever value it could, however disappointing, for at least some shareholder return by avoiding litigation and proceeding to get the best deal that it could." The Court noted that the tactical advantages of either option could be debated, but held that the Comverge board's decisions were reasonable and therefore satisfied the directors' fiduciary duties.

b. In re Answers Corporation Shareholders Litigation, Consol. C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012).

In In re Answers Corporation Shareholders Litigation, Consol. C.A. No. 6170-VCN (Del. Ch. Apr. 11, 2012), the Court of Chancery refused to dismiss breach of fiduciary duty and aiding and abetting claims in connection with the acquisition of Answers Corporation ("Answers") by Summit Partners, L.P. ("Summit"), a private equity fund. The Court held that the plaintiffs adequately pled that three of Answers' seven directors were interested in the merger and four conceivably could have acted in bad faith by having known of the other directors' interest but nevertheless conducting an unnecessarily expedited sales process. The Court had previously refused to enjoin the merger, but at the motion to dismiss stage, the Court did not rely on the factual record developed in connection with the earlier preliminary injunction proceeding.

According to the plaintiffs' allegations, by early 2010 Redpoint Ventures ("Redpoint"), then a 30 percent stockholder of Answers, wanted to end its investment in Answers. Due to the size of Redpoint's investment and the fact that Answers' stock was thinly traded, Redpoint could only monetize its investment if Answers were sold. Two of Answers' seven directors, who had been appointed to the board by Redpoint, began arranging meetings between Answers' founder and CEO, also a director, and potential acquirors. Redpoint informed the board that if Answers were not sold in the near future, the entire management team, including the CEO, would be replaced.

In November 2010, Answers and Summit Partners agreed to a price of $10.25 per share, and in response to pressure from Summit Partners, the Answers board agreed to a two-week market check and did not perform any analysis regarding alternatives to the merger. The board allegedly sped up the sales process because Answers' financial outlook was improving, which could have caused Answers' stock price to rise above the offer price and placed the merger in jeopardy. Answers persuaded Summit Partners to increase its bid to $10.50 per share, and in February 2011—before Answers was required to report improved results—the Answers board obtained a fairness opinion and approved the merger. Answers' stockholders voted in favor of the merger in April 2011.

The Court held that the plaintiffs stated a claim against all seven of Answers' directors for breach of the duty of loyalty. The complaint adequately alleged that Answers' founder/CEO was interested in the merger because he knew from Redpoint that he would lose his job if he did not sell the company; allegedly, it was his desire to keep his job that caused him to approve the merger. The complaint also adequately alleged that the two directors appointed by Redpoint were interested in the merger because of their desire to achieve liquidity for Redpoint.

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Regarding the four remaining outside directors, according to the Court, the complaint adequately alleged that they acted in bad faith because they allegedly knew that the three interested directors wanted to enter into the merger before Answers' stock price rose above Summit Partner's offer price, but nevertheless agreed to expedite the sales process. The Court stated: "In other words, the Complaint alleges that [the four outside directors] agreed to manipulate the sales process to enable the Board to enter quickly into the Merger Agreement before Answers' public shareholders appreciated the Company's favorable prospects. That is a well-pled allegation that those Board members consciously disregarded their duty to seek the highest value reasonably available for Answers' shareholders."

The Court also held that the plaintiffs stated a claim against Summit Partners for aiding and abetting breach of fiduciary duties. The plaintiffs alleged that Summit Partners received confidential information showing that Answers' operating and financial performance was improving and then pressured the Answers board to conduct a flawed, expedited sales process. These allegations, the Court held, were sufficient to constitute the required "knowing participation" in the Answers directors' alleged breach of fiduciary duties.

c. N.J. Carpenters Pension Fund v. infoGROUP, Inc., C.A. No. 5334-VCN (Del. Ch. Sept. 30, 2011, revised Oct. 6, 2011).

In N.J. Carpenters Pension Fund v. infoGROUP, Inc., the Court of Chancery refused to dismiss a breach of fiduciary duty claim where the plaintiff had adequately pled that the founder and largest stockholder of defendant infoGROUP, Inc. dominated his fellow directors and forced them to approve a sale of the company at an unfair price in order to provide himself with some much-needed liquidity.

Plaintiff challenged the July 1, 2010 merger between infoGROUP and a subsidiary of CCMP Capital Advisors, LLC ("CCMP"). The plaintiff alleged that the merger was orchestrated by Vinod Gupta, infoGROUP's founder, former CEO and chairman of the board, and a beneficial owner of 37% of the company's common stock, at an inopportune time and as a result of an inadequate sales process. Defendants moved to dismiss.

Plaintiff's principal allegation was that Gupta controlled the infoGROUP board by engaging in "a pattern of threats aimed at other Board members and unpredictable, seemingly irrational actions that made managing [infoGROUP] difficult and holding the position of director undesirable." Gupta's motive, alleged plaintiff, was a need for liquidity arising from a desire to fund a new business and substantial debts Gupta owed from loans used to purchase infoGROUP stock and multi-million dollar settlements of recent derivative claims and an SEC investigation.

The plaintiff pled that Gupta, who admitted that he had no material source of cash flow from his other investments, had no way to liquidate his infoGROUP position in light of the size of his holdings. The Court held that this desire for liquidity, in light of the well-pled allegations regarding Gupta's need for cash and lack of cash flow from other sources, was sufficient under the standards governing a motion to dismiss to establish that Gupta stood to receive a material financial benefit from the merger that was not equally shared by other investors: "while the other shareholders did receive [the same amount of] cash [per share as Gupta in the merger], liquidity was not a benefit to them, as it was to Gupta, because their investment in infoGROUP stock was

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already a relatively liquid asset prior to the Merger." On the issue of materiality, the Court commented that it would be naïve to conclude that the liquidity offered by the $100 million in cash Gupta stood to gain through the merger was immaterial.

Having established Gupta's interest in the merger, the Court found that the well-pled allegations of the complaint, which included allegations that Gupta repeatedly threatened his fellow board members with lawsuits and excerpts from email communications among Board members decrying Gupta's tactics and forewarning that other board members may want to "dump the company and run"all of which were required to be accepted as true on a motion to dismisswere sufficient to support plaintiff's allegation that Gupta controlled and dominated the rest of the board. The Court therefore denied defendants' motion to dismiss the counts for breach of the fiduciary duty of loyalty. Certain other counts, involving disclosures made in connection with the merger and potential claims based on Gupta's post-merger activities, were dismissed.

d. In re Massey Energy Co. Derivative & Class Action Litigation, C.A. No. 5430-VCS (Del. Ch. May 31, 2011).

In In re Massey Energy Company Derivative and Class Action Litigation, the Delaware Court of Chancery declined to preliminarily enjoin a merger between Massey Energy Company ("Massey") and Alpha Natural Resources, Inc. ("Alpha"). The Court, in its denial of the requested injunction, discussed extensively the value of potential derivative claims against Massey directors and officers (the "Derivative Claims") in the context of the merger.

Massey is a coal mining corporation with a history of subpar safety practices. In April 2010, a massive explosion occurred at one of Massey's mines, killing 29 miners. At least one subsequent governmental investigation attributed the explosion to Massey's failure to comply with critical safety procedures. Massey's stock price plummeted and stockholders filed the Derivative Claims against Massey's directors and officers seeking to recover for Massey's losses flowing from the mine explosion. Following the disaster, Massey began to explore strategic alternatives and ultimately entered into a merger agreement with Alpha pursuant to which the Massey stockholders would become stockholders of Alpha. The merger consideration reflected a 27% premium to Massey's stock price immediately prior to the mine explosion. While negotiating the transaction with Alpha, the Massey board did not attempt to value separately the Derivative Claims, but instead assumed, based on advice from counsel, that the Derivative Claims would survive the merger and transfer to Alpha. Following the announcement of the transaction, certain Massey stockholders filed suit to enjoin the transaction on the basis that the Massey board did not attempt to value the Derivative Claims and only entered into the merger agreement to limit the board's exposure to those claims.

The Court began its analysis by acknowledging that the Derivative Claims likely stated a claim for director oversight liability due to a failure of certain Massey directors to ensure Massey's compliance with applicable safety laws. The Court, however, rejected plaintiffs' valuation approach to the Derivative Claims. Plaintiffs had asserted that the Derivative Claims were worth between $900 million and $1.4 billion. In support of their valuation, plaintiffs submitted an expert report that equated the value of the Derivative Claims with the aggregate financial harm resulting from the mine disaster. Reasoning that the Derivative Claims were not an independent asset but at best a way for Massey to mitigate its potential monetary liability

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flowing from the mine disaster, the Court determined the value of the Derivative Claims and the harm resulting from the mine explosion were not equal. Furthermore, Alpha's incentive to pursue the Derivative Claims to reduce its potential liability resulting from the mine disaster undermined the plaintiffs' argument that the Massey board entered into the merger agreement to limit its exposure to the Derivative Claims.

In rejecting plaintiffs' valuation approach, the Court identified several additional flaws in plaintiffs' case. First, based on the business judgment rule and Massey's exculpatory charter provision, plaintiffs would have to prove that the Massey directors and officers acted knowingly in order to receive a money judgment against them. The uncertainty of plaintiffs' ability to meet such a high burden decreased the value of the Derivative Claims. Second, if the Derivative Claims were proven, Massey could be exposed, and thereby its stockholders could be exposed, to severe financial harm in the form of judgments, fines and even punitive damages. Third, the value of any judgment on the Derivative Claims would be limited to the amount that could be collected from defendants. In this instance, the maximum coverage of the defendants' D&O insurance policy was $95 million, an immaterial amount in the context of an $8.5 billion merger. Furthermore, the insurance likely would not cover acts involving knowledge, which here would have to be proved to impose monetary liability. Finally, the fact that no other bidder made a topping bid evidences the public's view that Alpha did not undervalue the Derivative Claims.

The Court found that plaintiffs would not suffer irreparable injury without an injunction because they had other remedies at their disposal, such as appraisal, a direct action against the Massey directors for breach of fiduciary duty, a double-derivative action, or a continued pursuit of the Derivative Claims (in limited circumstances). Also, the Court noted that the stockholders could vote against the merger. All of these factors led the Court to conclude that plaintiffs' valuation of the Derivative Claims was faulty and that the likely actual value of those claims was not material to the value of the merger. Although the Court acknowledged that the Massey board's failure to value the Derivative Claims in connection with its evaluation of a deal with Alpha may be characterized as a breach of the duty of care, the Court ultimately declined to issue a preliminary injunction since the record before the Court did not support a conclusion that the Massey directors entered into the transaction with Alpha in order to diminish their exposure to liability for the Derivative Claims. The day after the Court's decision, the Massey's stockholders approved the merger.

e. In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. No. 6164-VCP (Del. Ch. May 20, 2011).

In In re Smurfit-Stone Container Corp. Shareholder Litigation, the Delaware Court of Chancery addressed "whether and in what circumstances Revlon applies when merger consideration is split roughly evenly between cash and stock." Although "not free from doubt" because the issue has not been addressed directly by the Delaware Supreme Court, Vice Chancellor Parsons found that the stockholder plaintiffs were likely to prevail on their argument that the enhanced reasonableness scrutiny required by Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), would apply to the challenged merger transaction under which the target's stockholders would receive merger consideration consisting of 50% cash and 50% stock of the acquiring company in return for their shares. The Court, however, ultimately denied the plaintiffs' motion for a preliminary injunction because it found that the

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plaintiffs did not demonstrate a reasonable probability of success on their claim that the director defendants breached their fiduciary duties by approving the challenged merger.

In Smurfit, the board of directors of the target, Smurfit-Stone Container Corp. ("Smurfit"), unanimously approved a merger agreement whereby Smurfit would be acquired by Rock-Tenn Company ("Rock-Tenn") for $35 per share. Under the merger agreement, Smurfit's stockholders would receive $17.50 in cash and 0.30605 shares of Rock-Tenn common stock for each share of Smurfit common stock. Following the merger, Smurfit's stockholders would own approximately 45% of Rock-Tenn's outstanding common stock and control of Rock-Tenn would remain in a large, fluid market. Following the announcement of the merger, several Smurfit stockholders filed putative class actions and moved to enjoin the merger.

The Delaware Supreme Court has determined that enhanced reasonableness scrutiny under Revlon applies in at least three scenarios: (i) when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; (ii) where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the break-up of the company; or (iii) when approval of a transaction results in a sale or change of control. If Revlon applies, the board's actions in approving the sale are subject to enhanced reasonableness scrutiny, rather than the business judgment rule.

In Smurfit, the Court considered "when a mixed stock and cash merger constitutes a change of control transaction for Revlon purposes." On the one hand, pure stock-for-stock transactions do not necessarily trigger Revlon. On the other hand, Revlon will govern a board's decision to sell a corporation where stockholders will receive cash for their shares. Based on economic implications and relevant judicial precedent, including In re Lukens Shareholders Litigation, 757 A.2d 720 (Del. Ch. 1999), the Court found Revlon to be applicable to the merger because the 50% cash and 50% stock consideration qualified the merger as a change of control transaction. According to the Court, "there is no 'tomorrow' for approximately 50% of each stockholder's investment in" Smurfit. While Smurfit's stockholders would have half of their equity transformed to Rock-Tenn equity, with the potential for future value, half of their investment would be liquidated and deprived of its "long-run" potential. The Court therefore concluded that the plaintiffs were likely to succeed on their argument that the 50% cash and 50% stock consideration triggered enhanced reasonableness scrutiny under Revlon.

The Smurfit decision is consistent with Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (TRANSCRIPT), where Vice Chancellor Laster reviewed a board's actions for reasonableness in connection with a challenged merger under which the target's stockholders would receive approximately 50% cash and 50% stock of the acquiring company in return for their shares but, unlike in Smurfit, would own approximately 15% of the combined entity. Vice Chancellor Laster stated, "This is a situation where the target stockholders are in the end stage in terms of their interest in [the target].… This is the only chance that [the target] stockholders have to extract a premium, both in the sense of maximizing cash now, and in the sense of maximizing their relative share of the future entity's control premium."

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f. In re Del Monte Foods Co. Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011).

In In re Del Monte Foods Company Shareholders Litigation, the Court of Chancery found on a preliminary record that a proposed $5.3 billion cash merger (including assumption of debt) with a group of private equity buyers was potentially tainted by alleged misconduct by the target banker, with the alleged knowing participation of the buyers. The Court preliminarily enjoined the defendants from proceeding with a stockholder vote on the proposed transaction for a period of twenty days and further enjoined the defendants from enforcing certain deal protection measures in the merger agreement (including no solicitation, termination fee and matching right provisions), pending the stockholder vote.

Under the terms of the merger agreement, a private equity group consisting of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), Vestar Capital Partners ("Vestar"), and Centerview Partners would acquire all outstanding shares of Del Monte common stock for $19 per share. The Court expressed that, on the preliminary record, the Del Monte board appeared to have "sought in good faith to fulfill its fiduciary duties" and predominantly made decisions that ordinarily would be regarded as falling within the range of reasonableness for purposes of Revlon enhanced scrutiny. The Court found, however, that the Board "was misled by Barclays" Capital ("Barclays"), its financial advisor, and that Barclays "secretly and selfishly manipulated the sale process." In particular, the Court noted that (1) Barclays "crossed the line" in seeking permission from Del Monte to provide buy-side financing before a price was agreed to between KKR and Del Monte while failing to disclose to the Board the fact that Barclays had intended to seek to provide buy-side financing since the beginning of the process; and (2) Barclays had paired Vestar with KKR in violation of existing confidentiality agreements and then concealed the fact of the pairing from the Board for several months. According to the Court, the pairing of KKR and Vestar materially reduced the prospect of price competition for Del Monte. Further, the Court found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that the Board, despite not knowing the extent of Barclays' behavior, failed to act reasonably in ultimately acceding to Barclays' request to provide buy-side financing and Barclays' recommendation to permit Vestar to participate in KKR's bid, and by then permitting Barclays to run the go-shop process. The Court also found (on the preliminary record) that plaintiff had shown a reasonable probability of success on its claim that KKR "knowingly participated" with Barclays in these self-interested activities.

The Court concluded that loss of "the opportunity to receive a pre-vote topping bid in a process free of taint from Barclays' improper activities" constituted irreparable injury to the Del Monte stockholders. The Court held that the imprecision of a potential post-closing monetary remedy weighed in favor of injunctive relief, as did the powerful defenses available to the director defendants (including exculpation under Section 102(b)(7) and reliance on the advice of experts selected with reasonable care under Section 141(e) of the General Corporation Law of the State of Delaware).

Finally, regarding the balance of the hardships, the Court considered that an injunction could jeopardize the stockholders' ability to receive a premium for their shares and pose difficult questions regarding the parties' contract rights under the merger agreement. The Court also recognized that the deal had been subject to a 45-day go-shop period and to a continuing

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"passive market check" for several more weeks. Ultimately, however, the Court concluded that enjoining the deal protection devices was appropriate because "they are the product of a fiduciary breach that cannot be remedied post-closing after a full trial," and a twenty-day injunction would "provide ample time for a serious and motivated bidder to emerge." The Court conditioned the injunction on plaintiff posting a bond in the amount of $1.2 million.

g. In re Dollar Thrifty Shareholder Litigation, Consol. C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010); Forgo v. Health Grades, Inc., C.A. No. 5716-VCS (Del. Ch. Sept. 3, 2010) (TRANSCRIPT).

In In re Dollar Thrifty Shareholder Litigation, Dollar Thrifty Automotive Group, Inc. ("Dollar Thrifty") stockholders sought to enjoin a merger between Dollar Thrifty and Hertz Global Holdings, Inc. ("Hertz"), arguing, among other things, that the Dollar Thrifty board breached its fiduciary duty to take reasonable steps to maximize value for its stockholders under Revlon. In April 2010, Hertz entered into a merger agreement (the "Agreement") to acquire Dollar Thrifty for a price of $41 per share, which included a $200 million special cash dividend to be paid by Dollar Thrifty only if the merger was consummated. The merger price represented a 5.5% premium over Dollar Thrifty's market price, and the Agreement contained a no-shop provision with a fiduciary out, matching rights and a termination fee. The merger was conditioned on, among other things, the receipt of antitrust approval, and required both parties to use their reasonable best efforts to obtain such approval. Accordingly, the Agreement also contained a reverse termination fee payable by Hertz in the event (among others) that such approval was not obtained. After execution of the Agreement, Avis Budget Group, Inc. ("Avis") made an offer to acquire Dollar Thrifty at a price of $46.50 per share. After examining the reasonableness of the board's process, and the board's determination that Avis's offer lacked deal certainty, the Court of Chancery denied plaintiffs' motion for a preliminary injunction.

From 2007 through 2009, Dollar Thrifty had engaged in unsuccessful negotiations with both Hertz and Avis. In late 2009, Dollar Thrifty renewed negotiations with Hertz, and after months of bargaining, Dollar Thrifty and Hertz executed the Agreement on April 25, 2010. On May 3, 2010, Avis's CEO sent Dollar Thrifty's CEO and chairman a letter announcing Avis's intention to make a substantially higher offer to acquire Dollar Thrifty. The board concluded that Avis's proposal could reasonably be expected to result in a superior proposal and agreed to execute a confidentiality agreement with Avis. Three months later, Avis made an offer to acquire Dollar Thrifty for a price of $46.50 per share, which included the same $200 million special cash dividend as the Hertz deal. Avis's offer, however, did not contain matching rights, a termination fee or a reverse termination fee. On August 3, 2010, Dollar Thrifty's CEO communicated to Avis that the board could not declare Avis's offer superior due to the lack of a reverse termination fee and antitrust approval concerns.

Plaintiffs' central argument was that, by failing to take affirmative steps to draw Avis into a bidding contest with Hertz before executing the Agreement, the Dollar Thrifty directors breached their fiduciary duty to take a reasonable approach to immediate value maximization, as required by Revlon. Plaintiffs also challenged the deal protection measures contained in the Agreement.

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The Court concluded that the Dollar Thrifty directors were properly motivated. The Court determined that there was no evidence in the record that Dollar Thrifty's CEO harbored any entrenchment motivation or any particular desire to sell Dollar Thrifty to Hertz. The Court also found no evidence in the record that the board preferred to do a deal with Hertz at some lower value if a better deal was actually attainable from Avis. Thus, the Court concluded that there was no basis to question the board's loyalty. The Court also noted that the board was closely engaged at all relevant times in making decisions regarding how to handle negotiations with Hertz and whether to try to bring Avis into the process.

The Court next addressed the alleged flaws in the board's decision-making process. Plaintiffs challenged the board's decision not to seek out other bidders, including Avis, or conduct a pre-signing market check. The Court held that the board's decision to negotiate only with Hertz was reasonable, rejecting the claim that a board is required to conduct a pre-signing market check. The Court also found that the board had reasonable grounds for not reaching out to Avis before executing the Agreement, including the board's substantial and legitimate concerns regarding Avis's ability to obtain financing and clear antitrust hurdles.

Plaintiffs also challenged the board's decision to enter into the Agreement with Hertz and the terms of the Agreement. The Court rejected plaintiffs' argument that the board's decision to enter into the Agreement was unreasonable because the 5.5% market premium that Dollar Thrifty's stockholders would obtain was insufficient, finding that the Dollar Thrifty board reasonably focused on the "company's fundamental value" rather than a spot market price in considering the sale of the company. The Court held that a well-motivated board is not obligated to refuse an offer that it reasonably believes appropriately meets or exceeds the fundamental value of the company merely because the market premium is comparatively low. The Court also determined that the deal protection measures were neither preclusive nor coercive. As for the termination fee, the Court concluded that the termination fee constituted approximately 3.5% of the value of the $1.275 billion deal (taking into account the special cash dividend and the amounts payable in respect of share-equivalents), and approximately 3.9% of the value when the additional $5 million in expenses was taken into account. This amount constituted approximately $1.60 per share and was therefore a relatively insubstantial barrier, as the Avis bid demonstrated, to any serious topping bid. The Court also concluded that the "relatively lenient no-shop provision" and the matching rights would not deter a bidder interested in making a materially higher bid.

Finally, the Court held that plaintiffs failed to demonstrate a likelihood of success on the merits. The record depicted a well-motivated and diligent board that responded with openness, rather than resistance, to Avis, who had twice before failed to reach an agreement with Dollar Thrifty. Although Avis's bid was superior in theory, the Court noted that value is not value if it is not ultimately paid. The Court held that the Dollar Thrifty board bargained hard with Hertz and extracted the best deal available for its stockholders. The reverse termination fee and significant divestitures to obtain regulatory approval provided deal certainty, which, at the time, Avis was unwilling to match. The balance of harms also tilted against an injunction because the Dollar Thrifty stockholders would have the ability to vote against the transaction—which they subsequently did—if they believed that Dollar Thrifty was better off as a stand-alone entity or if they believed that Avis would offer a superior transaction.

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The Court of Chancery recently addressed another Revlon claim in the single-bidder context. In Forgo v. Health Grades, Inc., plaintiffs sought to enjoin the all-cash tender offer by Vestar Capital Partners V, L.P. for all the outstanding shares of Health Grades, Inc. Just as in Dollar Thrifty, the Court of Chancery denied plaintiffs' motion in part on the ground that the stockholders of Health Grades should be permitted to decide for themselves whether to accept the tender offer price. In doing so, however, the Court questioned the board's process and expressed concern over the informational basis for the board's decision to deal exclusively with Vestar. The Court also remarked that Health Grades' chairman and CEO, who had agreed to tender his significant block of stock on the same terms as other stockholders, potentially had interests that diverged from those of the other stockholders, including the possibility of continued employment or post-closing equity participation. The Court noted the availability of the statutory appraisal remedy and post-closing monetary relief and declined to issue a preliminary injunction; however, the Court remarked that, had it been necessary to determine whether the plaintiffs had shown a likelihood of success on the merits of their claims, the Court might well have held that the plaintiffs had done so.

2. Deal Protection Devices.

a. In re Micromet, Inc. Shareholders Litigation, C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012).

In In re Micromet, Inc. Shareholders Litigation, C.A. No. 7197-VCP (Del. Ch. Feb. 29, 2012), the Court of Chancery denied the plaintiffs' motion to preliminarily enjoin Amgen, Inc.'s ("Amgen") $1.16 billion acquisition of biopharmaceutical company Micromet, Inc. ("Micromet") in a tender offer at $11 per share followed by a second-step cash-out merger. The Court concluded that the plaintiffs failed to show a reasonable likelihood of success on their claims and specifically rejected the plaintiffs' challenges to Micromet's market check and the merger agreement's deal protection measures.

In 2010, Micromet and Amgen began a collaboration for certain cancer treatment technologies. Amgen's interest in Micromet grew, and Amgen made several offers to purchase Micromet in 2011. Micromet's board rejected Amgen's offers as inadequate, and Micromet continued to look for partnership opportunities with larger, more capitalized biopharmaceutical companies for commercialization and distribution of its drugs. In January 2012, after having reviewed updated financial projections, Micromet's board resolved to negotiate with Amgen regarding a sale.

While negotiating with Amgen regarding the key terms of the agreement, Micromet's board simultaneously contacted seven large pharmaceutical companies that the board determined might be interested in acquiring Micromet, six of which had completed due diligence on the company during a potential partnering process. Of the seven companies contacted, three expressed interest and conducted additional due diligence, but none were ultimately interested in acquiring Micromet.

Following a three-week period of negotiation and due diligence efforts, Micromet's board announced on January 26, 2012 that it had approved the merger agreement with Amgen at an $11 per share price—a 37 percent premium to Micromet's stockholders. The merger agreement

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contained several deal protection measures, including a no-shop provision, matching rights, a termination fee of $40 million, and an amendment to Micromet's rights agreement exempting Amgen from its poison pill, but otherwise leaving the pill in place. Several groups of Micromet stockholders filed complaints alleging that Micromet's board failed to conduct a meaningful market check and that the agreed deal protections would preclude competing bids.

In denying the plaintiffs' motion to enjoin the transaction, the Court of Chancery first found that the market check and week-long diligence period provided during the market check were reasonable given the Micromet board's understanding of the industry and Micromet's needs. Also, six of the seven companies had engaged in due diligence with Micromet during a prior partnering process and were therefore familiar with the company and the potential value of its products. The Court rejected the plaintiffs' argument that Micromet's board should have expanded its search to private equity buyers on the grounds that Micromet's business needed not only capital but also technical expertise to develop and distribute its products.

The plaintiffs also failed to convince the Court that the deal protection measures in the merger agreement precluded potential bidders from making competing bids or that a termination fee of roughly 3 percent of equity value was unreasonable. In particular, the plaintiffs argued that a change of recommendation provision—giving Amgen a four-day period to negotiate with Micromet's board in response to any superior offer, after which Micromet's board would determine whether to change its recommendation—was problematic under the Court of Chancery's recent opinion in In re Compellent Technologies, Inc. Shareholder Litigation, 2011 WL 6382523 (Del.Ch. Dec. 9, 2011). The Court, however, characterized the recommendation provision in Compellent as "less clear than in this case and could be read to mean that upon the Board's having determined that it had a fiduciary duty to change its recommendation, it still would have had to wait four business days before satisfying those duties by, e.g., notifying its shareholders." In contrast, the Court determined that the recommendation provision challenged by the plaintiffs was distinguishable because the provision could not be read as restricting the Micromet board's ability to fulfill its fiduciary duties promptly after determining to change its recommendation.

b. In re OPENLANE, Inc. Shareholders Litigation, Consol. C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011).

In In re OPENLANE, Inc. Shareholders Litigation, the Court of Chancery denied a motion to enjoin preliminarily the merger between OPENLANE, Inc. and KAR Auction Services, Inc. (through its wholly-owned subsidiary, ADESA, Inc.) ("KAR"), even though the merger agreement did not include a fiduciary-out and the transaction was effectively locked-up within 24 hours after signing by written consents from the holders of a majority of its stock.

After engaging in a lengthy process to locate potential acquirors, OPENLANE ultimately entered into a merger agreement with KAR on August 11, 2011. The terms of the merger agreement required OPENLANE to obtain stockholder approval of the merger quickly but gave the Board the right to terminate the agreement without paying a termination fee if approval was not received within 24 hours. OPENLANE ultimately received consents from the holders of a majority of its stock within 24 hours of the execution of the merger agreement.

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Shortly after OPENLANE filed its proxy statement with the SEC on September 8, 2011, plaintiff, an OPENLANE stockholder, filed a complaint and motion for preliminary injunction asserting, inter alia, that the board breached its fiduciary duties by failing to engage in an adequate process to sell the company. In a challenge to the deal protection measures, plaintiff focused on the Merger Agreement's no-solicitation covenant (which did not contain a fiduciary out) and the fact that the directors and executive officers of OPENLANE together held more than 68% of OPENLANE's outstanding stock and thus had the combined voting power to approve the merger. Plaintiff alleged that these were improper defensive devices similar to those employed in the transaction in Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).

The Court, however, upheld the OPENLANE merger under the Supreme Court's ruling in Omnicare. In Omnicare, the Supreme Court held that stockholder voting agreements "negotiated as part of a merger agreement, which guaranteed shareholder approval of the merger if put to a vote, coupled with a merger agreement that both lacked a fiduciary out and contained a Section 251(c) provision requiring the board to submit the merger to a shareholder vote, constituted a coercive and preclusive defensive device" and made the merger an "impermissible fait accompli." Unlike the transaction in Omnicare, the Court of Chancery found that the OPENLANE merger was not a fait accompli. Regardless of the fact that the combined voting power of the directors and executive officers was sufficient to approve the merger, the Court held that there was no stockholder voting agreement and the record merely suggested that the board approved the merger and the holders of a majority of shares quickly consented. Additionally, the provision allowing the board to terminate the Merger Agreement without paying a termination fee if stockholder approval was not received within 24 hours caused the no-solicitation clause to be "of little moment" because the board was able to back out of the agreement if the consents were not obtained.

While the Court acknowledged that Omnicare could be read to say that there must be a fiduciary out in every merger agreement, the Court found that when a board enters into a merger agreement that does not contain such a provision, "it is not at all clear that the Court should automatically enjoin the merger when no superior offer has emerged." Omnicare put hostile bidders on notice that Delaware courts may not enforce a merger agreement that does not contain a fiduciary out if they present the board with a superior offer. The Court noted that enjoining a merger when no superior offer has emerged "is a perilous endeavor because there is always the possibility that the existing deal will vanish, denying stockholders the opportunity to accept any transaction."

In addition, the Court found that the board made a reasonable effort to maximize stockholder value under Revlon despite the fact that the board did not obtain a fairness opinion and did not contact any financial buyers about a potential transaction. Thus, the Court reaffirmed that "[t]here is no single path that a board must follow in order to maximize stockholder value, but directors must follow a path of reasonableness which leads toward that end." The Court further noted that if a board does not utilize a "traditional value maximization tool, such as an auction, a broad market check, or a go-shop provision" the board must possess an "impeccable knowledge of the company's business." Because OPENLANE was actually managed by, as opposed to under the direction of, its board, the Court found that the OPENLANE board was one of the few boards with an "impeccable knowledge" of its company's business.

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3. Disclosures.

a. In re Atheros Communications, Inc. Shareholder Litigation, Consol. C.A. No. 6124-VCN (Del. Ch. Mar. 4, 2011).

In In re Atheros Communications, Inc. Shareholder Litigation, the Court of Chancery preliminarily enjoined Atheros Communications, Inc. ("Atheros") from holding a meeting of its stockholders to vote on a $3.1 billion all-cash merger agreement with Qualcomm Incorporated ("Qualcomm"), pending appropriate distribution of curative proxy disclosures regarding contingency fees to be paid to Atheros' financial advisor, and the potential employment of Atheros' CEO by Qualcomm.

Applying the Revlon standard, the Court first rejected the plaintiffs' breach of fiduciary duty claims due to an allegedly inadequate sale process, instead finding that the board had deployed a "robust and sophisticated process" resulting in a fair price. In so holding, the Court pointed out that a board need not follow one single path under Revlon, rather the issue is whether the approach adopted by a board represented a reasonable choice under the circumstances it faced. In evaluating the board's process, the Court noted that the independent Atheros board had taken an active role at an early point in the lengthy sale process, meeting twelve times with management to discuss the process, vetting eleven potential acquirers and pursuing communications with three of those corporations. While two potential buyers eventually emerged, the Court found that the Atheros board acted reasonably by entering into an exclusivity agreement with Qualcomm in its efforts to preserve the Qualcomm increased offer—rather than risk the offer to pursue a potential competing bid from a sluggish suitor that had provided only vague overtures. Accordingly, the Court declined to second guess the actions of the Atheros board leading up to the execution of the merger agreement.

Regarding the plaintiffs' disclosure claims, the Court found that the Atheros board had omitted a material fact by failing to disclose that 98% of the financial advisor's fee was contingent on the success of the transaction. Reaffirming prior statements by the Court regarding the disclosure standards with respect to financial advisors, the Court pointed out that there should be full disclosure of advisors' compensation and potential conflicts that may influence the financial advisor in the exercise of its judgment. Even though contingency fees are "undoubtedly routine" and "customary," the Court stated, "[s]tockholders should know that their financial advisor, upon whom they are being asked to rely, stands to reap a large reward only if the transaction closes and, as a practical matter, only if the financial advisor renders a fairness opinion in favor of the transaction." The Court emphasized that while there is no bright-line rule for determining whether a contingency percentage requires disclosure, "it is clear that an approximately 50:1 contingency ratio requires disclosure."

In addressing the plaintiffs' other disclosure claims, the Court found that the Atheros board failed to provide sufficient disclosures in the proxy statement regarding the corporation's CEO and his knowledge that Qualcomm intended to offer him employment after the closing of the merger. While the proxy statement contained robust disclosures regarding the terms of the CEO's post-closing employment, the Court noted that the CEO was also aware prior to the time disclosed in the proxy statement that he would likely receive an offer for employment from

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Qualcomm, which was during the same time period in which he was heavily involved in the price negotiations for the transaction.

b. In re Art Tech. Group, Inc. S'holders Litig., Consol. C.A. No. 5955-VCL (Del. Ch. Dec. 20, 2010) (TRANSCRIPT); Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011) (TRANSCRIPT).

The Court of Chancery in In re Art Technology Group, Inc. Shareholders Litigation, C.A. No. 5955-VCL (Del. Ch. Dec. 20, 2010), enjoined a merger until the target company disclosed to its stockholders additional information about its financial advisor's prior work for the buyer. In Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 24, 2011), the Court of Chancery applied the enhanced Revlon standard of review to a stockholder's motion to preliminarily enjoin the acquisition of Occam Networks, Inc. ("Occam Networks") by Calix, Inc. ("Calix") whereby Occam stockholders would receive cash and stock consideration. Although the Court denied the injunction request based on process grounds, the Court of Chancery enjoined the transaction until additional disclosures are made and the deposition of a managing director of Occam Networks' financial advisor is taken.

In Art Technology, Plaintiffs filed suit to challenge a merger of Oracle Corporation and Art Technology Group, Inc. ("ATG") and moved for a preliminary injunction. Plaintiffs argued that ATG had improperly failed to disclose information regarding the process undertaken by ATG, aspects of Morgan Stanley's financial analysis, and details of Morgan Stanley's prior work for Oracle. The Court found that only one of plaintiffs' disclosure claims was reasonably likely to succeed. Morgan Stanley was ATG's financial advisor, but Morgan Stanley had also performed work for Oracle for a number of years. In an order dated December 21, 2010, the Court enjoined the stockholder vote on whether to approve the ATG/Oracle merger agreement pending further disclosures regarding Morgan Stanley's work for Oracle.

The Court ruled that ATG and Oracle had to disclose to ATG's stockholders (i) the aggregate annual compensation paid by Oracle to Morgan Stanley from 2007 to 2010 and (ii) a description of the nature of services that Morgan Stanley provided to Oracle. The Court did not require a separate mailing regarding the supplemental disclosures; it allowed ATG to make the disclosures in a public filing with the Securities and Exchange Commission. Further, the Court required the vote to await only 10 calendar days after the disclosure to ATG's stockholders. The Court noted during the hearing that, had the disclosures been more price-related, such as ATG's financial projections, the Court might have required 15 days' notice. The Court also suggested that ATG could convene the stockholders' meeting and adjourn it until after the 10-day period had ended.

The Court opted not to require a bond before issuing the injunction, but stated that it was not announcing a "rule for all-time." Further, in the order granting the preliminary injunction, the Court made clear that it would entertain an interim fee application from the plaintiffs relating to the injunction they obtained.

A review of the supplemental disclosures reveals that Oracle's payments to Morgan Stanley over the four-year period were not much more than ATG's payment to Morgan Stanley

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for its work regarding the merger. The Court's ruling in Art Technology therefore suggests that the Court will scrutinize proxy statements when the target's financial advisor has done substantial past work for the buyer and may require disclosures regarding that work, even if it is no more extensive, in dollar terms, than the merger-related work performed for the target.

Similarly demonstrating the scrutiny with which the Court of Chancery will review disclosures pertaining to and the role of financial advisors, in Steinhardt v. Howard-Anderson, the Court enjoined the acquisition of Occam Networks by Calix until additional proxy disclosures are made and the deposition of a managing director of Occam Network's financial advisor is conducted.

Plaintiff in Steinhardt sought to enjoin the transaction on process and disclosure grounds. First, the Court addressed the standard of review to be applied to the process claims. Under the terms of the transaction, Occam Networks' public stockholders were to receive approximately 50% of the merger consideration in cash and 50% in the acquiror's stock (and thus retaining an approximate 15% equity interest in the post-transaction entity). Defendants argued that enhanced Revlon review was not necessary or appropriate in this combined cash and stock transaction. In its transcript ruling, the Court indicated its view that Revlon did apply noting that "now is the time [] when the target fiduciaries are bargaining for how much of [any] future control premium their folks will get." Ultimately, however, the Court determined to deny the injunction request based on process grounds.

With respect to plaintiff's disclosure claims, the Court concluded that Occam Networks must disclose additional information with respect to the involvement of Occam Networks' financial advisor in shopping the company and the mix of consideration negotiated, the accretion/dilution analysis conducted by the financial advisor, and the identity of a certain director of the surviving company. Finally, and of particular note, the Court expressed concern with respect to the discrepancies between preliminary books prepared by Occam's financial advisor for the board and the final book presented to the board and ordered that the transaction could not close until 10 business days after curative disclosures and the lodging of a transcript of a deposition of one of the financial advisor's managing directors involved in the deal. The 30(b)(6) deposition witness previously provided by the financial advisor was a banker who had only worked on 6 fairness opinions and who had only been involved at the tail end of this transaction's 18-month process. The Court expressed that "managing directors who quarterbacked the process need to do so with the expectation that when there is expedited litigation challenging the deal, that they will respond and be available for a deposition and [provide] testimony if warranted about what happened in the deal."

c. Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., C.A. No. 5402-VCS (Del. Ch. May 13, 2010); Steamfitters Local Union 447 v. Walter, C.A. No. 5492-CC (Del. Ch. June 21, 2010) (TRANSCRIPT).

In two recent decisions, the Court of Chancery addressed the issue of disclosure of free cash flow estimates in connection with a merger. In Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., the Court enjoined the challenged merger pending disclosure of free cash flow estimates. But in Steamfitters Local Union 447 v. Walter, the Court denied a motion to expedite,

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holding that disclosure of free cash flow estimates would not be material and distinguishing PLATO Learning.

In PLATO Learning, the plaintiff challenged the acquisition of PLATO Learning, Inc. ("PLATO") by Thoma Bravo, LLC ("Thoma Bravo") for $5.60 per share, in part because PLATO's proxy statement omitted free cash flow estimates that PLATO had provided to its financial advisor, Craig-Hallum. The Court ordered the free cash flow estimates, which it found were "selectively" removed from the projections provided to PLATO's stockholders, to be disclosed. In the Court's view, "management's best estimate of the future cash flow of a corporation that is proposed to be sold in a cash merger is clearly material information." If stock value is based on expected future cash flows, "as is encouraged under sound corporate finance theory," the Court reasoned that free cash flow estimates would allow the stockholders to determine if the price being offered in the transaction is fair compensation for the benefits they would receive if the corporation remained as a going concern.

The Court also required PLATO to make other corrective disclosures. PLATO's proxy statement indicated that Craig-Hallum selected discount rates "based upon an analysis of PLATO's … weighted average cost of capital," and that Craig-Hallum used a range of 23%-27% when conducting its DCF analysis. However, Craig-Hallum's calculations of the company's weighted average cost of capital had generated discount rates of 22.5% and 22.6%, which were disclosed to the special committee. The proxy statement disclosed only the range of 23%-27% used by Craig-Hallum. In the litigation, Craig-Hallum provided various reasons why the higher range was used and disclosed, but there was no evidence that Craig-Hallum had explained these reasons to the special committee and no explanation had been provided to the stockholders. Thus, the Court ordered disclosure of the value that would be obtained by using the discount rates generated by the company's weighted average cost of capital.

PLATO's proxy statement also indicated that a factor the board and special committee considered in approving the transaction was "that Thoma Bravo did not negotiate terms of employment, including any compensation arrangements or equity participation in the surviving corporation, with [PLATO's] management for the period after the merger closes." The Court found that this "suggests that the decision whether to sell PLATO to Thoma Bravo was unaffected by any understandings between Thoma Bravo and the Company's management about future economic arrangements." In fact, PLATO's CEO had "extended discussions" with Thoma Bravo regarding Thoma Bravo's typical equity incentive package and its preference for keeping existing management after an acquisition. The Court ordered that the proxy statement clarify the extent of those discussions.

In Walter, the plaintiffs relied on PLATO Learning, among other cases, in arguing that free cash flow estimates were required to be disclosed. The transaction at issue was the acquisition of inVentiv Health, Inc. ("inVentiv") by Thomas H. Lee Partners, L.P. for $26 per share. Goldman Sachs, inVentiv's financial advisor, provided a fairness opinion based on projections of the company's net revenue, net income, earnings per share, and EBITDA estimates for five years. The Court held that, under the circumstances, free cash flow estimates would not be material. The Court distinguished PLATO Learning, where the estimates were presented to the financial advisor but were later excised from the proxy statement, and In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch. 2007), where the directors

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undertook to disclose free cash flow estimates but then disclosed stale estimates that were not meaningful. In Walter, no free cash flow estimates were provided to Goldman Sachs and the company did not disclose stale estimates.

Recognizing the potential inconsistency among the Court's decisions, Chancellor Chandler suggested in Walter that he would certify an interlocutory appeal to the Delaware Supreme Court in an attempt to provide clarity on the issue of whether free cash flow estimates must always be disclosed. The plaintiffs, however, did not appeal.

4. Two-Step Merger Transactions.

a. Olson v. ev3, Inc., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011).

In Olson v. ev3, Inc., the Court of Chancery awarded plaintiff's counsel the full amount of attorneys' fees and expenses requested—$1.1 million—for what was, according to the Court, "the first meaningful full-scale challenge to the use of a top-up option." Under the terms of the merger agreement entered into between defendant ev3, Inc. ("ev3") and Covidien Group S.a.r.l. ("Covidien"), Covidien would acquire ev3 pursuant to a standard two-step acquisition, facilitated by a top-up option if certain conditions were met. Plaintiff Joanne Olson (the "Plaintiff") brought an action challenging the use of the top-up option. Specifically, the Plaintiff had advanced four arguments in seeking a preliminary injunction to block the transaction: (i) the top-up option failed to comply with Sections 152, 153, and 157 of the Delaware General Corporation Law (the "DGCL"); (ii) the exercise of the top-up option would be coercive, forcing stockholders to tender under the threat of "appraisal dilution"; (iii) the ev3 directors breached their fiduciary duties in granting the top-up option; and (iv) Covidien aided and abetted such breach of fiduciary duties by the ev3 directors.

The Court had previously granted the Plaintiff's motion to expedite because the Plaintiff "advanced a strong claim" regarding the purported failure of the top-up option to comply with Sections 152, 153, and 157 of the DGCL. Reaffirming prior cases where the Delaware courts emphasized strict statutory compliance with respect to matters involving a corporation's capital structure, the Court noted that if the second-step of the acquisition were to be effected using shares received through the exercise of an invalid top-up option, then the merger itself would be subject to attack as ultra vires and void. The Court had further granted the motion to expedite because, at the time of the hearing, limited Delaware authority existed on top-up options, none of which addressed the concept of "appraisal dilution." Shortly after the motion to expedite was granted, the parties entered into a memorandum of understanding (the "MOU") which the Court found "provided the plaintiff with all the relief she could have hoped to achieve on the merits." Pursuant to the MOU, certain terms of the merger agreement and top-up option were amended to correct the statutory defects, and the parties agreed that no shares issued under the top-up option would be considered in an appraisal proceeding.

In ruling on the Plaintiff's contested fee application, the Court applied the factors established in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). With regard to the benefits achieved, the Court first found that the agreement between the parties that no shares issued under the top-up option would be considered in an appraisal proceeding completely alleviated the threat of appraisal dilution. The Court noted, however, that this benefit was

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"ephemeral at best" given that any legal uncertainty could have been addressed by an agreement of the constituent corporations in their disclosure documents that the top-up option shares would not be considered in any appraisal proceeding. In contrast, by correcting the statutory issues with respect to the top-up option, the Court found that the settlement conferred a "meaningful benefit" on ev3 and its stockholders. In particular, the settlement required that the merger agreement specify the terms of the promissory note to be issued in exchange for the top-up shares, ensuring that the instrument evidencing the option, the merger agreement, set forth the option terms and the consideration to be paid for the shares as required by Section 157(b). The settlement also required the ev3 board's approval of the amended merger agreement, ensuring that that board had approved the option terms and determined the sufficiency of the consideration to be received for the top-up shares as required by Sections 152, 153(a), and 157(d). The ev3 board was further required to adopt an implementing resolution for the creation and issuance of the top-up option, as required by Section 157(b). In its analysis of these statutory provisions, the Court pointed out that Sections 152, 153 and 157 of the DGCL were to be read narrowly and that these provisions do not contain similar grants of statutory authority to condition terms on facts ascertainable outside the governing instrument, such as is found in the provisions of Sections 151(a) (the terms of a class or series of stock) or Section 251(b) (the terms of a merger agreement). Accordingly, knowing the generalities of a transaction is not sufficient for a board of directors to satisfy the requirements of Sections 152, 153 and 157(b) and (d). Finally, the merger agreement was amended to require Covidien to pay, in cash, the par value of any top-up shares, thus eliminating any question as to whether the value of the consideration for the top-up shares was less than the par value of those shares in violation of Section 153(a). The Court concluded that because the top-up option and any shares issued pursuant to it likely were void under the merger agreement as originally structured, this litigation and subsequent settlement "prevented the seeds of a future legal crisis from germinating," thus the Plaintiff's counsel was entitled to its full fee award that it submitted.

b. In re Cogent, Inc. Shareholder Litigation, Consol. C.A. No. 5780-VCP (Del. Ch. Oct. 5, 2010), appeal refused, 30 A.3d 782 (Del. 2010).

In In re Cogent, Inc. Shareholder Litigation, the Delaware Court of Chancery denied plaintiffs' motion for a preliminary injunction, which sought to enjoin a two-step acquisition in which a third-party acquiror, 3M Company ("3M"), agreed to commence a tender offer for the stock of the target corporation, Cogent, Inc. ("Cogent"), to be followed by a back-end merger at the same tender offer price.

In 2008, Cogent, with the aid of financial advisors, began exploring strategic opportunities and in connection therewith reached out to 27 potential suitors. By the summer of 2010, however, only two of these potential suitors emerged as bona fide potential counter-parties -- 3M and Company D. Both 3M and Company D had been discussing a transaction with Cogent at various levels since 2008. No competitive offers materialized, however, until July 2, 2010, when 3M submitted a written nonbinding proposal to acquire Cogent for $10.50 per share in cash, followed by a formal written proposal and draft merger agreement on August 11. On August 17, Company D responded by submitting a preliminary nonbinding indication of interest in acquiring Cogent for between $11.00 and $12.00 per share, contingent, however, upon completion of satisfactory due diligence. On August 19, 3M responded to Company D's

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expression of interest by notifying Cogent that it would formally withdraw its offer, if not accepted, at 5 p.m. on August 20. After reviewing the merits and risks associated with each offer, the Cogent board decided to negotiate a merger agreement with 3M at the $10.50 per share price.

On August 29, Cogent entered into an agreement and plan of merger (the "Merger Agreement") with 3M at the $10.50 per share price. The Merger Agreement included several deal protection devices, including granting 3M five days to match any superior proposal, a no-shop provision with a fiduciary out clause, a termination fee of $28.3 million, and a top-up option through which 3M had the option to purchase approximately 139 million shares of Cogent stock at the tender offer price of $10.50 per share, which could be financed with a promissory note due in one year. Pursuant to the terms of the Merger Agreement, the Cogent board filed a Schedule 14D-9 recommending that Cogent's stockholders accept 3M's proposal (the "Recommendation Statement").

Plaintiffs filed suit on September 1, 2010, asserting that the Cogent directors breached their fiduciary duties of loyalty and good faith as well as their fiduciary duty to disclose all material information regarding the transaction, and thereafter sought a preliminary injunction to prevent the transaction with 3M from moving forward.

Plaintiffs first attacked the sale process undertaken by the Cogent board. The Court determined that the Cogent board followed a reasonable course of action and found plaintiffs' criticism of the board's sale process unwarranted, citing the number of potential suitors that were contacted, the board's engagement in various levels of discussions with strategic acquirors and reengagement with potential suitors on multiple occasions, the independence and disinterestedness of three of the four members of Cogent's board, and that the interests of Cogent's founder, CEO and 38.88% stockholder appeared to be closely aligned with the interests of the Cogent stockholders as a whole. Plaintiffs also attacked the board's determination that $10.50 per share was a fair price on the ground that there was potential for a higher offer from Company D. The Court found that the Cogent board "acted reasonably when it effectively discounted Company D's [$11.00 to $12.00 per share] offer based on, among other things, the risk that Company D would not make a firm offer."

Plaintiffs then attacked the Merger Agreement as providing unreasonably preclusive defensive measures such that a superior proposal was unlikely to emerge. Plaintiffs alleged that the no-shop provision and the matching rights provision discouraged potential buyers because they unfairly tilted the playing field towards 3M, that the $28.3 million termination fee was unreasonably high, and that the top-up option was exceedingly broad.

The Court rejected each of plaintiffs' contentions. First, the Court found that the no-shop and matching rights provisions were reasonable and mitigated by the fiduciary out provision, which provided the Cogent board with sufficient ability to engage with any bidder who makes a definitively higher or reasonably competitive bid. Second, the Court found that the termination fee (representing approximately 3% of Cogent's equity value and 6.6% of its enterprise value) was not unreasonably high, rejecting plaintiff's argument that the cash on Cogent's balance sheet should be excluded (which would increase the percentage of the fee in relation to the transaction value) for purposes of evaluating the reasonableness of the termination fee. The Court held that

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the relevant transaction value should be quantified as the amount of consideration flowing to the stockholders, not the amount of money coming exclusively from the bidder. Third, the Court found that the top-up option was likely reasonable because: (1) the exercise of the option was conditioned upon a majority of the outstanding shares being tendered to 3M (i.e., a minimum tender condition), subject to waiver only with the consent of the Cogent board; (2) in order for 3M to meet the 90% threshold necessary to effect a short-form merger, 3M would have to acquire a majority of the minority's outstanding shares; and (3) the Merger Agreement explicitly provides that a promissory note issued by 3M to pay for the top-up shares is a recourse obligation against 3M. In light of these findings, the Court concluded that the deal protection provisions, separately and in combination, were not unreasonable or preclusive.

Finally, plaintiffs alleged that the Cogent directors breached their fiduciary duty of disclosure with regard to material omissions in Cogent's Recommendation Statement. The Court summarily rejected plaintiffs' contentions, finding that the information requested by plaintiffs was either sufficiently disclosed or immaterial and cumulative.

Ultimately, the Court found that plaintiffs failed to demonstrate a reasonable probability of success on the merits or an imminent threat of irreparable harm and that the balance of equities weighed against enjoining the tender offer. The Court therefore denied plaintiffs' motion for a preliminary injunction.

In response to the Court's denial of their motion, plaintiffs filed an application for certification of an interlocutory appeal from the portion of the Court's opinion concerning the validity of the top-up option. In a letter opinion dated October 15, 2010, the Court of Chancery denied plaintiffs' application, finding that its opinion did "not involve such exceptional circumstances that the challenged ruling can be said to have determined a substantial issue, established a legal right, or satisfied one of the criteria in Rule 42(b)(i)-(v) sufficient to warrant an interlocutory appeal." In re Cogent, Inc. S'holder Litig., C.A. No. 5780-VCP (Del. Ch. Oct. 15, 2010). The Delaware Supreme Court affirmed the Court of Chancery's letter opinion denying plaintiffs' application for an interlocutory appeal. In re Cogent, Inc. S'holder Litig., 30 A.3d 782 (Del. 2010).

5. Merger Agreement Construction.

a. Amirsaleh v. Board of Trade of New York, Inc., 27 A.3d 522 (Del. 2011).

In Amirsaleh v. Board of Trade, the Delaware Supreme Court held that appellee Board of Trade of the City of New York, Inc. ("NYBOT") had not validly retracted its previous waiver of a contractual deadline by which its members were supposed to elect the form of consideration they would receive in connection with NYBOT's 2007 merger with Intercontinental Exchange, Inc. ("ICE"). The Supreme Court therefore reversed a prior decision of the Court of Chancery and remanded the case for proceedings consistent with its opinion.

Defendants-below/appellees ICE and NYBOT (collectively, the "Defendants") entered into an Agreement and Plan of Merger (the "Merger Agreement") on September 14, 2006. The Merger Agreement provided that NYBOT's predecessor would be merged with and into a wholly

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owned subsidiary of ICE. Prior to the merger, plaintiff Mahyar Amirsaleh was a member of NYBOT, owning two "membership interests" in the commodities and futures exchange, which represented not only his proportionate interest in NYBOT but also gave him the right to trade on the NYBOT exchange.

The Merger Agreement gave NYBOT members the option to receive either cash or ICE common stock in exchange for their NYBOT membership interests. In order to make this election, NYBOT members were required to submit a form (the "Election Form") designating their consideration preference by January 5, 2007. The Merger Agreement contained a maximum amount of cash consideration that would be paid in the merger, and provided that any member who failed to submit their Election Form by the election deadline would automatically be allocated the form of consideration that was undersubscribed. Importantly, in order to retain trading rights on NYBOT each former member would be required to own a minimum amount of shares of ICE common stock after the merger.

Once the deadline for submission of Election Forms passed, it became clear that several NYBOT members (including Amirsaleh) had failed to return their Election Form. Thereafter a back and forth ensued between the Defendants about whether or not to accept the Election Forms received after the Initial Deadline. Ultimately, the Defendants determined to extend the Election Form deadline to January 18, although they did not inform the members of the new deadline. By this time it had become evident to the Defendants that the cash portion of the merger consideration had been undersubscribed.

Amirsaleh submitted his Election Form, electing to receive 100% stock consideration, on January 19. However, because his Election Form was deemed untimely, Amirsaleh was automatically allocated the undersubscribed form of consideration (cash) and subsequently lost his trading rights. Amirsaleh sued in the Court of Chancery, alleging breach of contract and breach of the implied covenant of good faith and fair dealing.

The Court of Chancery found in favor of the Defendants on the breach of contract claim, deciding that there was no issue of material fact as to whether the Defendants "mutually agreed" to stop accepting Election Forms at some point prior to the time Amirsaleh submitted his form. After a three day trial, the Court of Chancery also found for the Defendants on Amirsaleh's breach of the implied covenant claim.

The Supreme Court reversed on appeal. Repeatedly criticizing the "suboptimal" process followed by the Defendants, the Court held that Defendants had explicitly and unambiguously waived the initial deadline for submission of Election Forms under the Merger Agreement. The Supreme Court confirmed, however, that Delaware law imposes requirements on a party attempting to retract such a waiver: In general, a waiving party "may retract the waiver by giving reasonable notice to the non-waiving party before that party has suffered prejudice or materially changed his position." After finding that Amirsaleh had not received notice of the later-imposed deadline for submission of Election Forms and that he had suffered prejudice through the loss of his trading rights, the Court concluded that the Defendants had not properly retracted their waiver.

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b. Narrowstep, Inc. v. Onstream Media Corp., C.A. No. 5114-VCP (Del. Ch. Dec. 22, 2010).

In Narrowstep, Inc. v. Onstream Media Corp., the Court of Chancery, expressly relying on the motion to dismiss standard articulated by the United States Supreme Court in Bell Atlantic v. Twombly, dismissed an implied covenant of good faith and fair dealing claim but refused to dismiss claims for breach of fiduciary duty, fraud and unjust enrichment in connection with the failed merger between Narrowstep Inc. ("Narrowstep") and Onstream Media Corporation ("Onstream").

After engaging in a process to locate potential acquirors, Narrowstep ultimately entered into a merger agreement with Onstream, one of its competitors in the internet TV industry, in May 2008. In a decision that the Court found to be curious and perhaps unwise, as part of the merger agreement, Narrowstep agreed to cede all operational control of its business to Onstream before the closing of the merger in order to expedite the integration of the companies and to create immediate cost savings. This action, according to Narrowstep, had the immediate effect of causing it to be "completely dependent on Onstream for its continued survival."

Shortly after obtaining operational control of Narrowstep, Onstream began expressing concerns regarding Narrowstep's business. While Narrowstep may have disagreed with these concerns and previously disclosed information on all of the related topics to Onstream during the due diligence process, its inability to operate independently of Onstream caused it to agree to several concessions, including two reductions in the merger price. After unsuccessfully attempting to obtain a third price reduction, Onstream purported to exercise its rights under the merger agreement to terminate the proposed merger. Narrowstep filed suit asserting, inter alia, breach of the merger agreement, breach of the implied covenant of good faith and fair dealing, fraud and unjust enrichment.

In addressing Onstream's motion to dismiss, the Court relied on the standard recently articulated by the United States Supreme Court in Bell Atlantic v. Twombly which provided that, in evaluating a motion to dismiss, "the court must determine whether the complaint offers sufficient facts to plausibly suggest that the plaintiff will ultimately be entitled to the relief she seeks." This standard replaced the more lenient, pre-Twombly standard in which dismissal was only appropriate if a court determined with reasonable certainty that the plaintiff cannot prevail on any set of facts that can be inferred from the complaint. In applying the Twombly standard to Narrowstep's complaint, the Court found that it alleged sufficient facts to plausibly suggest that Narrowstep will ultimately be entitled to relief for its breach of the merger agreement, fraud and unjust enrichment claims, but did not allege sufficient facts for its implied covenant of good faith and fair dealing claim.

With regard to Narrowstep's breach of contract claims, the Court found that Narrowstep alleged sufficient facts to plausibly suggest that Onstream failed to take all steps necessary to meet its obligations under the merger agreement and instead deliberately and in bad faith took actions to prevent the timely filing of a registration statement and intentionally manufactured concerns regarding topics that were addressed during due diligence in order to delay the closing of the merger. Similarly, in addressing Narrowstep's common law and equitable fraud claims, the Court focused on Narrowstep's allegations that Onstream made several false representations

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regarding its desire to close the merger expeditiously while engaging in a scheme to make Narrowstep dependent on it in order to obtain a reduced merger price or strip Narrowstep, a competitor, of its value. Narrowstep's dependence on Onstream forced it to agree to several concessions and price reductions and rely only on Onstream's continuous reassurances that the merger would eventually close.

The Court did, however, grant Onstream's motion to dismiss with regard to Narrowstep's implied covenant of good faith and fair dealing claim. Narrowstep alleged that Onstream violated the implied covenant by not using its reasonable best efforts to close the merger expeditiously and by repeatedly delaying the closing of the merger in bad faith. In addressing the implied covenant claims, the Court noted that, due to its narrow purpose, the implied covenant is "rarely invoked successfully" and explained that the implied covenant "operates only in that narrow band of cases where the contract as a whole speaks sufficiently to suggest an obligation and point to a result, but does not speak directly enough to provide an explicit answer." Narrowstep's claims, by contrast, were general accusations of bad faith that were duplicative of its breach of contract claims and either did not identify a specific implied contractual obligation that was breached or sought to override an explicit provision of the merger agreement.

c. Aveta Inc. v. Cavallieri, C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010).

In Aveta Inc. v. Cavallieri, the Court of Chancery held that the contractual process for calculating post-closing adjustments to plaintiff's purchase price for Preferred Medical Choice Inc. ("PMC") was binding on all former PMC stockholders.

In 2006, Aveta Inc. ("Aveta"), a Delaware corporation, acquired PMC, a Puerto Rico corporation, in a transaction involving both a purchase of shares and a merger (together, the "transaction"). Aveta purchased PMC's Class A shares from its controlling stockholders (the "Principal Stockholders") for 60.93% of the total transaction consideration and then merged a Puerto Rico acquisition subsidiary into PMC. In the merger, PMC's Class B shares were converted into the right to receive the remaining 39.07% of the transaction consideration. The transaction agreement (the "Agreement") provided that the transaction consideration was subject to certain post-closing adjustments and included a procedure for calculating such adjustments. The Agreement contemplated that Aveta would calculate the post-closing adjustments based on PMC's books and records and provide its calculations to the PMC stockholders' representative for review. If the stockholders' representative and Aveta agreed on the calculations, the result would be final and binding. If the stockholders' representative and Aveta could not agree on the calculations, their disputes would be resolved through binding arbitration. The Agreement designated Roberto L. Bengoa, a Principal Stockholder, as the PMC stockholders' representative.

After closing, Aveta provided Bengoa its calculation of the post-closing adjustments. Aveta and Bengoa were unable to reach an agreement on the calculations. During the course of exploring potential resolutions, Aveta and Bengoa executed an informal agreement outlining a framework for potentially resolving disputes (the "Total Proposal"). Aveta and Bengoa also began the arbitration procedure. For nearly a year, Aveta attempted to arbitrate with Bengoa to resolve the post-closing adjustments calculation, but Bengoa refused to proceed any further with

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arbitration. In 2008, the Court of Chancery ordered Bengoa to arbitrate pursuant to the terms of the Agreement. See Aveta Inc. v. Bengoa, 2008 WL 5255818 (Del. Ch. Dec. 11, 2008). Bengoa failed to arbitrate and the Court held Bengoa in contempt of the arbitration order. See Aveta Inc. v. Bengoa, 986 A.2d 1166 (Del. Ch. 2009). Meanwhile, former PMC stockholders purported to revoke the designation of Bengoa as the stockholders' representative. Former PMC stockholders also filed actions in Puerto Rico, challenging Aveta's calculation of the post-closing adjustments, alleging that the Total Proposal superseded the Agreement and seeking specific performance of the Total Proposal. In response, Aveta filed the present action and the Puerto Rico actions were stayed pending the outcome of this action.

The central question for the Court was whether all former PMC stockholders were bound by the contractual process for calculating post-closing adjustments, including the outcome of the arbitration. The Court held that the Principal Stockholders were bound by the determinations made in the post-closing adjustment process, including the results of the arbitration, under agency law. The Court found that because the Principal Stockholders were signatories to the Agreement, which irrevocably appointed Bengoa as their agent, the Principal Stockholders were bound by Bengoa's actions. Because Bengoa, as a Principal Stockholder, had an interest in PMC, the Agreement and the calculation of the transaction consideration, the Court held that Bengoa's authority was coupled with an interest sufficient to make it irrevocable. Alternatively, the Court validated the grant of irrevocable authority to Bengoa under the principles articulated in Abercrombie v. Davies, 123 A.2d 893 (Del. Ch. 1956), rev'd on other grounds, 130 A.2d 338 (Del. 1957). As was stated by the Court of Chancery in Abercrombie, "the irrevocability of the grant of authority in this case was essential to functioning of the interrelated provisions of the agreement" and each of the parties "relied on the irrevocability of the grant of authority in entering into the [transaction] agreement." The Court concluded that the Principal Stockholders clearly and unambiguously granted Bengoa irrevocable authority to act as their stockholder representative, and they could not later revoke that authority. Thus, the Principal Stockholders were bound by Bengoa's actions as a matter of agency law.

With regard to the Class B Stockholders, who did not sign the Agreement, the Court held that corporate law rather than agency law dictated the same result. Because the merger converting PMC's Class B shares into a percentage of the consideration occurred between two Puerto Rico corporations, the merger was governed by Section 3051 of the General Corporation Law of 1995 of the Commonwealth of Puerto Rico, a section that paralleled Section 251 of the DGCL as it existed in 1995. Like Section 251, Section 3051 provided that any of the terms of a merger agreement "may depend upon facts ascertainable outside of such agreement." In interpreting that provision to determine whether the post-closing adjustment calculations were "facts ascertainable," the Court looked to the legislative history of Section 251, case law interpreting Section 251 and the similar "facts ascertainable" provision of Section 151 of the DGCL. The Court noted that in 1994, Section 151(g) was amended to specify that the term "facts" includes "the occurrence of any event, including a determination or action by any person or body, including the corporation," and that Section 251 was likewise amended in 1996. The Court noted that Section 251 permits a merger agreement to provide for merger consideration that is contingent on future circumstances, such as future earnings or the net worth of a corporation at a future date.

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The Court concluded that the post-closing adjustments were clearly and expressly set forth in the Agreement and qualified as facts ascertainable outside of such agreement, as the calculations turned on financial figures from PMC's books and records. Moreover, the Court concluded that requiring the post-closing adjustments to be determined by a neutral arbiter, unless the parties agreed on the calculations, placed a natural check on the exercise of Aveta's discretion. For those reasons, the Court held that all Class B stockholders were bound by the determinations made in the post-closing adjustment process, including the results of the arbitration.

The Court also addressed Aveta's argument that, by filing suit in Puerto Rico, the stockholders had breached the exclusive forum selection clause in the Agreement. The Court concluded that the Principal Stockholders were bound by the choice of forum clause in the Agreement as signatories thereto and that the Class B stockholders were bound by their conduct. The Court noted that under Delaware law, "a non-signatory to a contract will be estopped from arguing that a dispute-resolution provision does not apply when the non-signatory consistently maintains that other provisions of the same contract should be enforced to benefit him." The Court found that the Class B stockholders were estopped from arguing that the forum selection clause did not apply because their claims in Puerto Rico relating to the Total Proposal were dependent on the terms of the Agreement. The Court concluded that, by invoking the terms of the Agreement, the Class B stockholders were estopped from "picking only the provisions they liked and ignoring others." The Court held that the stockholders had breached the Agreement by pursuing the actions in Puerto Rico and were jointly and severally liable to Aveta for the costs it had incurred in the Puerto Rico actions.

For the foregoing reasons, the Court granted plaintiff's motion for summary judgment and denied defendant stockholders' cross-motion for summary judgment.

6. Merger As Implicating Anti-Assignment Agreement.

a. Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011).

In Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, the Court of Chancery considered whether a reverse triangular merger would result in an assignment by operation of law—an issue of first impression under Delaware law. The Court did not resolve the question at the motion to dismiss stage, instead finding two competing, reasonable interpretations as to whether the merger resulted in a breach of an anti-assignment clause.

In 2007, Roche Holding Ltd. ("Roche") acquired BioVeris Corporation ("BioVeris") in a reverse triangular merger whereby a wholly-owned subsidiary of Roche merged with and into BioVeris with BioVeris as the surviving entity. As a result of the merger, existing BioVeris stockholders were cashed out and Roche became the sole stockholder of BioVeris. At the time of the merger, Roche and BioVeris were also parties to a Global Consent and Agreement with the plaintiffs that contained an anti-assignment clause prohibiting the assignment of certain intellectual property rights "by operation of law or otherwise" without the consent of the plaintiffs. In their complaint, the plaintiffs asserted that Roche and BioVeris had breached the anti-assignment provision because the plaintiffs had not consented to the merger—a transaction

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that they contended constituted an assignment of BioVeris's intellectual property by operation of law. Roche moved to dismiss the claims, contending that the plaintiffs' consent was not required because, although ownership of BioVeris had changed as a result of the merger, no property was assigned from BioVeris to Roche.

At the outset, the Court noted that the language at issue, on its face, covered "assignments" and did not expressly prohibit a change of "control" or "ownership" of BioVeris. Nevertheless, the absence of a change of control provision in the Global Consent and Agreement did not necessarily mean that the merger fell outside the scope of the assignment "by operation of law" language. The Court, in addressing whether a reverse triangular merger would result in an assignment by operation of law, considered cases involving both stock acquisitions and forward triangular mergers. In the stock acquisition context, Delaware courts have held that the change of ownership in a corporation's securities, without more, is not an "assignment" of the corporation's contractual rights where none of the corporation's contractual responsibilities are varied or assigned. On the other hand, Delaware courts have held that a forward triangular merger does result in an assignment "by operation of law" because the target corporation is not the surviving entity and its rights, interests, and obligations vest in the surviving entity.

The Court concluded that neither line of cases was controlling. Although the Court stated that stock acquisitions do exemplify situations where a mere change in ownership does not constitute an assignment as a matter of law, the Court also noted that stock acquisitions are not mergers, and in any event, the stock acquisition cases were arguably distinguishable from the dispute before it. Specifically, the plaintiffs had alleged more than a mere change of BioVeris's ownership—that is, the plaintiffs alleged that BioVeris was essentially converted into a holding corporation for the intellectual property assets after the merger. The Court concluded that, as alleged, there could be an issue of fact regarding whether the parties intended an assignment "by operation of law" to cover mergers that operate as an assignment, thus the Court found the term "by operation of law" to be ambiguous and denied the motion to dismiss.

7. Confidentiality Agreements.

a. Martin Marietta Materials, Inc. v. Vulcan Materials Co., 2012 WL 2783101 (Del. July 12, 2012).

In Martin Marietta Materials, Inc. v. Vulcan Materials Co., 2012 WL 2783101 (Del. July 12, 2012), the Delaware Supreme Court affirmed the Court of Chancery's decision enjoining Martin Marietta Materials, Inc. ("Martin") from taking any action in connection with its hostile takeover bid for Vulcan Materials Co. ("Vulcan"), including proceeding with its exchange offer and prosecuting its proxy contest, for a period of four months, in order to remedy Martin's breach of two confidentiality agreements between the companies.

Over a period of several years, Martin and Vulcan occasionally discussed the possibility of a friendly business combination, and in the spring of 2010, those discussions restarted. Because both companies were concerned that disclosure of such discussions could put either company "in play" and subject to a hostile takeover bid, they entered into two strict confidentiality agreements—the non-disclosure agreement (the "NDA") and the joint defense agreement (the "JDA" and together with the NDA, the "Confidentiality Agreements").

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Accordingly, the Confidentiality Agreements protected both companies from disclosure of the fact that negotiations were taking place and also protected the use and disclosure of the companies' confidential information, except in certain specific circumstances. Both agreements were governed by Delaware law and the NDA contained a Delaware choice of forum provision, though neither company is incorporated in Delaware.

In 2011, with market conditions favoring Martin and negotiations for a friendly business combination with Vulcan stalling, Martin began using Vulcan's confidential information to evaluate alternatives to a friendly business combination. Shortly thereafter, Martin launched an unsolicited exchange offer for Vulcan's shares and announced its proxy contest to oust several members of the Vulcan board of directors. In connection with Martin's hostile takeover bid, Martin disclosed Vulcan's non-public, confidential information and the existence of the negotiations between Martin and Vulcan regarding a business combination to third-party advisors and to the public in its filings with the Securities and Exchange Commission.

On the same day that it launched its exchange offer, Martin filed an action in the Court of Chancery for a declaratory judgment that it did not breach the NDA in conducting its exchange offer or proxy contest. In response, Vulcan filed a counterclaim for a judgment that Martin's actions breached the Confidentiality Agreements and for an injunction prohibiting Martin from proceeding with its hostile takeover bid.

Following a trial on the merits, the Court of Chancery found that Martin breached the Confidentiality Agreements by impermissibly using and disclosing Vulcan's confidential information. The trial court enjoined Martin from proceeding with its exchange offer and proxy contest, from otherwise taking steps to acquire control of Vulcan, and from further violating the confidentiality agreements for a period of four months. As a result, Martin terminated its exchange offer and proxy contest and filed an appeal to the Delaware Supreme Court. In its appeal, Martin challenged the Court of Chancery's determination that it violated the Confidentiality Agreements and its imposition of injunctive relief.

Before addressing Martin's substantive claims of error, the Supreme Court addressed Martin's claim that the trial court's interpretation of the Confidentiality Agreements improperly and "stealthily" converted those documents into a standstill agreement. As to this issue, the Supreme Court found that Martin's claim was factually incorrect—the trial court properly interpreted and enforced the agreements as confidentiality agreements—and that Martin's claim confused the distinction between a standstill agreement (which protects a party from a hostile takeover) and a confidentiality agreement (which protects a party from unauthorized use or disclosure of its confidential information).

Turning to Martin's substantive claims that the trial court erred in finding that Martin's use and disclosure of Vulcan's non-public information violated the Confidentiality Agreements, the Supreme Court affirmed the Court of Chancery's decision that (i) the JDA prohibited Martin from using and disclosing Vulcan's confidential information without Vulcan's consent except "for purposes of pursuing and completing" the transaction being discussed between Vulcan and Martin, which the Court of Chancery found was limited to a friendly business combination; (ii) the NDA prohibited Martin from using and disclosing Vulcan's confidential information without Vulcan's pre-disclosure consent except for disclosure in response to certain external demands and

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only after complying with a notice and vetting process; and (iii) Martin's actions in connection with its hostile takeover bid breached these disclosure restrictions.

With regard to the trial court's imposition of an injunction against Martin for a period of four months, Martin claimed not only that the Court of Chancery erred in balancing the equities because there was no evidence that Vulcan suffered any irreparable harm, but also that the scope of the injunction was unreasonable because it would have the effect of delaying Martin's takeover bid for a period of one year. The Supreme Court affirmed the Court of Chancery's decision in balancing the equities, finding that Vulcan suffered irreparable harm as a result of Martin's breach. More specifically, the Supreme Court held that the provisions of the confidentiality agreements that stipulated that a breach of such agreements would entitle the non-breaching party to equitable relief were sufficient to establish irreparable harm for purposes of an injunction and affirmed the Court of Chancery's factual finding that Vulcan suffered irreparable harm through the loss of its negotiating leverage due to Martin's breach, which was "exactly the same kind of harm [Martin] demanded the Confidentiality Agreement shield [it] from." In connection with Martin's claims regarding the scope of the injunction, the Supreme Court found that, although the expiration date of the NDA combined with Vulcan's advance notice bylaw provision may prevent Martin from prosecuting its proxy contest for a period of one year, the Court of Chancery had properly balanced the need to vindicate Vulcan's reasonable contractual expectations with the delay imposed on Martin due to its own conduct.

b. RAA Management, LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012).

In RAA Management, LLC v. Savage Sports Holdings, Inc., 45 A.3d 107 (Del. 2012), the Delaware Supreme Court affirmed the Superior Court's dismissal of a fraud claim based on a non-disclosure agreement ("NDA") entered into between RAA Management, LLC ("RAA") and Savage Sports Holdings, Inc. ("Savage"). In the action, RAA sought to recover costs incurred performing due diligence in preparation for a potential transaction with Savage, which RAA alleged it would not have pursued but for certain misrepresentations by Savage. The Court analyzed the NDA and determined that, under either Delaware or New York law, the non-reliance and waiver provisions in the NDA foreclosed Savage's fraud claims.

On September 17, 2010, RAA entered into an NDA with Savage in order to obtain confidential documents and information as part of a due diligence process aimed at potentially acquiring Savage. The NDA explicitly provided that (1) Savage would not be held liable for RAA's reliance on information provided during the course of due diligence: (2) Savage did not make any representations or warranties as to the accuracy or completeness of the information provided: and (3) RAA waived its right to bring claims against Savage except with respect to any representations and warranties that may be made in a final agreement of sale. On December 22, 2010, subsequent to a cursory due diligence process, the parties executed a letter of intent ("LOI") contemplating a cash acquisition of $170 million. Thereafter, RAA continued to engage in due diligence, until finally notifying Savage in March 2011 that it was no longer interested in the acquisition and believed it was entitled to $1.2 million for its "sunken due diligence costs."

In April 2011, RAA filed suit against Savage alleging that Savage had told RAA at the outset of discussions that there were "no significant unrecorded liabilities or claims against

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Savage." However, during the due diligence, Savage disclosed three such matters: (1) an investigation by the New York State Department of Environmental Conservation, (2) the potential unionization of the employees at Savage's BowTech facility, and (3) a lawsuit that constituted a "multi-million" dollar potential liability. RAA claimed that had Savage disclosed any one of the foregoing matters early in the discussions, as it was obligated to do, RAA would not have expended any of its resources on due diligence. While RAA acknowledged that the NDA included non-reliance and waiver of claims provisions, RAA argued that such provisions should be construed as limited to mistakes, oversights, or simple disclosure negligence, but "not willful falsehoods."

In affirming the lower court's dismissal, the Supreme Court relied heavily on two cases that formerly analyzed NDA provisions similar to the NDA at issue. In Great Lakes Chemical Corp. v. Pharmacia Corp., 788 A.2d 544 (Del. Ch. 2001), the Court of Chancery found that where two sophisticated parties entered into an NDA disclaiming liability for the transfer of information, such parties were barred from asserting claims of fraud because such claims would effectively "defeat the reasonable commercial expectations of the contracting parties and eviscerate the utility of written contractual agreements." Similarly, in In re IBP, Inc. S'holders Litig., 789 A.2d 14 (Del. Ch. 2001), the Court of Chancery considered provisions "nearly identical" to the NDA provisions at issue in RAA v. Savage and found that such provisions precluded liability for fraud claims under New York law. In that case, then-Vice Chancellor (now Chancellor) Strine reasoned that because the confidentiality agreement emphasized that the acquisition negotiation process would not provide a basis for reliance claims, it was reasonable to require the potential buyer to convert its reliance into actual contractual warranties and representations in order to establish a basis for legal claims. Following the reasoning of these decisions, the Supreme Court found that the non-reliance and waiver provisions were unambiguous and, under their plain language, were not limited to unintentional inaccuracies.

The Supreme Court also rejected RAA's assertions that the non-reliance and waiver provisions should not bar its claims under New York's "peculiar knowledge" exception and/or on public policy grounds. While the Court acknowledged New York's peculiar knowledge exception—that claims of fraudulent inducement could not be barred by non-reliance provisions if the facts at issue were "peculiarly within the misrepresenting party's knowledge"—it found that the exception had been rejected by New York courts in circumstances where sophisticated parties could have easily insisted on contractual protections for themselves. Accordingly, assuming that New York law applied (an issue that was disputed by the parties), the Court found that the "peculiar knowledge" exception would not be applicable in these circumstances. Regarding public policy, the Court relied on Abry Partners v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), wherein the Court of Chancery found that "to fail to enforce non-reliance clauses is not to promote a public policy against lying[;] [r]ather, it is to excuse a lie made by one contracting party in writing—the lie that it was relying only on contractual representations and that no other representations had been made—to enable it to prove that another party lied." The Supreme Court concluded that "Abry Partners accurately states Delaware law and explains Delaware's public policy in favor of enforcing contractually binding written disclaimers of reliance on representations outside of a final agreement of sale or merger."

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B. Stockholder and Creditor Litigation.

1. Scrutiny of Settlements.

a. Forsythe v. ESC Fund Management Co. (U.S.), Inc., C.A. No. 1091-VCL (Del. Ch. May 9, 2012).

In Forsythe v. ESC Fund Management Co. (U.S.), Inc., C.A. No. 1091-VCL (Del. Ch. May 9, 2012), the Court of Chancery implemented a novel form of relief in resolving an objection to the adequacy of the consideration received in the settlement of representative litigation. Although the Court was prepared to approve the proposed $13.25 million settlement, the Court gave the objectors the option of continuing the case in pursuit of a larger recovery if they agreed to post a secured bond that would ensure that the partnership would, at a minimum, receive the full amount of the proposed settlement consideration once the litigation had ultimately been resolved.

The parties' long-running dispute involved the performance of the CIBC Employee Private Equity Fund (U.S.) I, L.P. (the "Fund"), which was formed in 1999 by Canadian Imperial Bank of Commerce ("CIBC") to give senior CIBC employees the opportunity to coinvest with CIBC in private equity opportunities. The Fund performed poorly, generating approximately $200 million less than the returns generated by the lowest quartile of comparable funds during the first nine years of its existence. In 2005, the plaintiffs filed a derivative action on behalf of the Fund against the Fund's general partner, the individual directors of the Fund's general partner, the Fund's investment advisor, the Fund's special limited partners, and CIBC, claiming breaches of fiduciary duties in connection with the management and oversight of the Fund, and asserting claims for losses suffered in each of the Fund's investment categories.

In August 2010, the Court entered summary judgment in favor of the defendants with respect to the largest portion of the plaintiff's damages claims. The parties then engaged in a pretrial mediation session in March 2011 that resulted in the proposed settlement. In exchange for a global release from liability, the defendants agreed to pay the Fund $10.25 million in cash and forgo claims for indemnification from the Fund in the amount of approximately $3 million. The named plaintiffs initially agreed to the settlement, but by January 2012, they had joined a group of 57 objectors in opposing the proposed settlement.

In assessing the reasonableness of the proposed settlement, the Court noted that several significant factors weighed in favor of approval: the parties negotiated at arm's length with the assistance of a mediator, the plaintiffs had settled on the eve of trial after completing discovery, and the settlement consideration included a cash component and was not composed of merely intangible or therapeutic benefits. On the other hand, the Court also indicated that a number of factors weighed against approval: a large number of objectors with a significant stake in the litigation (including the named plaintiffs) opposed the settlement, the objectors had hired separate counsel, and the objectors had advanced an argument for reviving the largest portion of the plaintiffs' damages claims that, if successful, could result in a significantly larger recovery for the Fund. After weighing the various factors, the Court concluded that the settlement consideration was within the range of fairness, albeit at the low end of that range. Nevertheless,

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the Court recognized that if the objectors were able to revive part of the damages claims, the settlement consideration would be inadequate.

The Court discussed the potentially divergent interests of counsel and objecting clients at the settlement stage of representative litigation. The Court noted that counsel, who has at this stage invested substantial resources in the case, may be inclined to settle rather than pursue a case to the end, particularly in a situation where a significant increase in recovery would involve the uncertainties inherent in trial and a potentially costly appeal process. The objectors, who to this point have not been directly burdened with the costs of litigating the action, rationally could prefer to continue the case in an attempt to secure a larger recovery.

In an effort to resolve these potentially conflicting interests, the Court devised a method to protect the interests of the non-objecting plaintiffs while providing the objectors the opportunity to continue the litigation in pursuit of a larger recovery for the Fund as a whole. If the objectors posted a secured bond, letter of credit, or similar security for the benefit of the Fund in the amount of the full $13.25 million settlement consideration, the Court would allow the objectors to take over the case. If the objectors were successful in recovering more than the proposed settlement, the increased consideration would inure to the benefit of the Fund. If the objectors ultimately recovered less than the proposed settlement, the Fund would have the right to execute on the security to collect the difference. The Court indicated that if no secured bond had been posted by the objecting plaintiffs within 60 days, the proposed $13.25 million settlement would be approved.

b. Scully v. Nighthawk Radiology Holdings, Inc., C.A. No. 5890-VCL (Del. Ch. Dec. 17, 2010) (TRANSCRIPT).

At a status conference in Scully v. Nighthawk Radiology Holdings, Inc., Vice Chancellor Laster stated that there was prima facie evidence of collusive forum shopping in connection with a settlement of multi-jurisdictional, representative litigation challenging the fairness of a merger and announced that he would appoint special counsel to the Court to investigate these issues and possibly to recommend disciplinary action.

Following the announcement of the proposed merger of Nighthawk Radiology Holdings, Inc. and Virtual Radiologic Corporation, putative class actions challenging the deal were filed in the Delaware Court of Chancery and Arizona state court. The parties to the Delaware action briefed and argued a motion to expedite, during which (i) defendants expressed a strong preference for litigating the cases in Delaware; (ii) the Court signaled that plaintiffs' disclosure claims were not colorable; and (iii) the Court signaled that the case presented meaningful, litigable process claims, which plaintiffs had ignored.

Shortly thereafter, the parties to the Delaware action notified the Court that they had entered into a memorandum of understanding that, subject to confirmatory discovery, would result in a global disclosure-only settlement. Further, the parties informed the Court that they intended to present the settlement for approval in Arizona, where there had been no litigation activity. In response, Vice Chancellor Laster immediately scheduled a status conference.

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During the status conference, the Vice Chancellor expressed concern that the settlement consideration involved only disclosure claims that he already had said were not colorable and that there was no apparent effort to address the process claims, which he had expressed "had legs." Further, the parties were seeking approval of the settlement from a court that had not yet looked at any of these issues and might never discover that the Court of Chancery had made preliminary determinations as to the merits.

According to the Vice Chancellor, it appeared that what took place was "the classic reverse auction . . . where defendants benefit and utilized multiple [fora] to force plaintiffs essentially to constructively reverse-bid for the lowest possible settlement." Defendants could accomplish this goal by, for example, giving preferential access to documents, stipulating to consolidation and certification of a class, and threatening to cut certain plaintiffs' counsel completely out of settlement negotiations.

The Vice Chancellor noted that historically plaintiffs' lawyers have been criticized for suing on the announcement of every deal and then agreeing to disclosure-only settlements. "But what needs to be understood is that defense lawyers benefit from this game, too. They get to bill hours without any meaningful reputational risk from a loss. They then get to get a cheap settlement for their client." The Vice Chancellor went on to explain that while many defense counsel rightly regard this dynamic as benefitting their clients, as he "tried to remind people in the Revlon case,[2] you're dealing with fiduciaries for a class. And when you knowingly induce a fiduciary breach, you're an aider and abettor."

Vice Chancellor Laster concluded that the Arizona court would determine whether or not to approve the settlement and that Delaware would give full faith and credit to its decision. However, he entered an order directing that the status conference transcript and the case files be sent to the Arizona court with a letter indicating that he was available to discuss his views.

He also indicated that he would appoint special counsel to the Court to investigate the prima facie case of collusion and forum shopping and will consider revocation of pro hac vice admissions and possible referrals to disciplinary counsel. All parties and their counsel were ordered to submit, by February 11, separate briefs and affidavits detailing every aspect of the settlement negotiations. The Vice Chancellor expressed that his mind was open to being convinced that what he has called collusive forum shopping "is a necessary part of the practice and should not be condemned," but that he was deeply skeptical.

Gregory P. Williams, a director at Richards, Layton & Finger, has been appointed the special counsel to the Court for this matter to, inter alia, advise the Court as to potential changes to judicial procedures and rules pertaining to multi-forum litigation.

2 In In re Revlon, Inc. Shareholders Litigation, Consol. C.A. No. 4578-VCL (Del. Ch.

Mar. 16, 2010), the Court of Chancery replaced lead representative plaintiffs and their counsel after concluding that the plaintiffs and their counsel failed to litigate the case adequately and exaggerated their litigation efforts in filings submitted to the Court.

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c. In re Revlon, Inc. S'holders Litig., Consol. C.A. No. 4578-VCL (Del. Ch. Mar. 16, 2010).

In In re Revlon, Inc. Shareholders Litigation, the Court of Chancery replaced lead representative plaintiffs and their counsel after concluding that the plaintiffs and their counsel failed to litigate the case adequately and exaggerated their litigation efforts in filings submitted to the Court.

The case arose after Revlon, Inc.'s announcement that its controlling stockholder, MacAndrews & Forbes Holdings Inc., offered to acquire all of Revlon's publicly traded common stock in exchange for a new series of preferred stock. Within three weeks of this announcement, four lawsuits were filed by law firms the Court characterized as "frequent filers" -- plaintiffs' firms that regularly bring representative actions on behalf of stockholders with small ownership stakes. A flurry of litigation followed as the law firms fought for control of the litigation. According to the Court, all litigation activity stopped after the parties agreed to consolidate the actions and appoint two of the law firms as co-lead counsel.

The Court described the initial litigation activity as "the opening steps in the Cox Communications Kabuki dance," referring to In re Cox Communications, Inc., 879 A.2d 604 (Del. Ch. 2005). According to the Court, in the Cox Communications "ritual," representative plaintiffs hastily file complaints after disclosure of a corporate transaction and litigate for control of the case. Once the leadership structure is settled, however, litigation activity stops and the plaintiffs seek a settlement and attorneys' fees. The defendants, meanwhile, proceed forward with the transaction and become willing to enter into a settlement, pay a modest attorneys' fee award and obtain a broad, transaction-wide release. The Court found the facts before it followed form as the parties to the litigation agreed to minor changes to the transaction and signed a memorandum of understanding ("MOU") to settle the action.

In the Court's opinion, however, a number of events should have alerted the plaintiffs' counsel that the proposed transaction warranted closer attention and more vigorous litigation efforts. For example, the transaction was originally structured as a merger until the financial advisor to Revlon's special committee indicated that it could not provide a fairness opinion. The special committee then disbanded, and Revlon restructured the transaction as a tender offer even though Revlon's outside directors did not believe they could obtain a fairness opinion for the tender offer either. Additionally, the Court noted case law suggesting that the Revlon board's involvement with the tender offer could result in the application of the stringent entire fairness review to the transaction. Moreover, the tender offer did not receive a recommendation from an independent committee, and after the MOU was signed, an insufficient number of shares were tendered to satisfy a minimum tender condition. The Court was critical of the plaintiffs' response -- consenting to an amendment to the minimum tender condition so it would be met.

After the tender offer closed and Revlon announced third quarter results which exceeded expectations, several other stockholders filed separate actions. The existing lead plaintiffs' counsel reacted by filing an amended complaint and moving to consolidate the new actions into the prior consolidated action and to confirm the then-existing leadership structure. The Court, however, was concerned that the only real litigation activity occurred when there was a dispute over control of the case and counsel's path to a fee. The Court was also critical of

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representations in the MOU and court filings that may have exaggerated lead counsel's role in the settlement and litigation. Consequently, the Court appointed the plaintiffs that had filed the new actions as new lead plaintiffs and gave decision-making authority to the one firm the Court did not consider to be "entrepreneurial litigators" who manage a portfolio of cases to maximize returns through attorneys' fees. The Court also ordered the newly appointed lead counsel to investigate the negotiations of the MOU and the work done by the law firms they replaced.

2. Creditor Claims and Debt Instruments.

a. Bank of N.Y. Mellon Trust Co. v. Liberty Media Corp., 29 A.3d 225 (Del. 2011).

In Bank of New York Mellon Trust Co. v. Liberty Media Corp., the Delaware Supreme Court held that the split-off of the Capital and Starz business groups (the "Capital Split-off") following three other major distributions of assets since 2004 did not constitute a transfer of "substantially all" of the assets of Liberty Media Corporation and its wholly owned subsidiary, Liberty Media LLC (together, "Liberty"), under the terms of an indenture.

Shortly after the Capital Split-off was announced, Liberty received a letter from an anonymous bondholder alleging that Liberty had pursued a "disaggregation strategy" designed to shift substantially all of the assets against which the bondholders have claims into the hands of Liberty's stockholders in violation of an indenture dated July 7, 1999 (the "Indenture"). In response, Liberty commenced an action against The Bank of New York Mellon Trust Company, N.A., as trustee under the Indenture (the "Trustee"), seeking injunctive relief and a declaratory judgment that the proposed Capital Split-off would not constitute a disposition of "substantially all" of Liberty's assets in violation of the Indenture. While all parties agreed that, considered in isolation, the Capital Split-off would not constitute a transfer of substantially all of Liberty's assets, the Capital Split-off would be Liberty's fourth major distribution of assets since March 2004 and the Trustee argued that the Capital Split-off should be aggregated with the prior dispositions by Liberty in determining whether "substantially all" of Liberty's assets had been transferred.

In the underlying proceeding, the Court of Chancery held that the Capital Split-off and the three other major distributions of assets should not be aggregated. Applying New York law, which governed the Indenture, Vice Chancellor Laster concluded that the Capital Split-off was not "sufficiently connected" to the prior transactions to warrant aggregation, noting the seven-year period over which the dispositions occurred, the different facts and circumstances surrounding each disposition, and that each disposition resulted from an independent decision by Liberty rather than "a plan to engage in seriatim distributions that would remove the assets from Liberty's corporate form and evade the bondholders' claims." In so holding, the Court of Chancery relied on the Second Circuit's 1982 decision in Sharon Steel Corp. v. Chase Manhattan Bank, N.A., 691 F.2d 1039 (2d Cir. 1982). Additionally, Vice Chancellor Laster applied the "step-transaction doctrine" in determining not to aggregate the dispositions. Under the step-transaction doctrine, dispositions are to be aggregated if the dispositions are (i) prearranged parts of a single transaction intended to achieve the ultimate result, (ii) so interdependent as to be fruitless without the series, or (iii) pursuant to a prearranged and binding commitment to

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undertake the later steps. With none of these conditions satisfied, the Court of Chancery held that the dispositions should not be aggregated.

The Delaware Supreme Court affirmed the decision based on the Court of Chancery's application of the principles outlined in Sharon Steel. However, the Supreme Court concluded that it was unnecessary to determine whether the step-transaction doctrine would be adopted as New York law in a similar analysis because the legal conclusions would have been the same under an independent reading of Sharon Steel.

3. Preferred Stock Issues.

a. Shiftan v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012).

In Shiftan v. Morgan Joseph Holdings, Inc., the Court of Chancery concluded on summary judgment that a specific, non-speculative future redemption right of preferred stockholders must be taken into account when determining the fair value of their shares in an appraisal under 8 Del. C. § 262(h).

In December 2010, Morgan Joseph Holdings, Inc. ("Morgan Joseph") merged with another investment bank, Tri-Artisan Capital Partners, LLC. Instead of exchanging their Series A preferred stock for new Series A preferred stock, petitioners demanded appraisal. Under the terms of Morgan Joseph's certificate of incorporation, an "Automatic Redemption" would have been triggered on July 1, 2011, entitling the Series A preferred stockholders to $100 per share. The petitioners argued that because the Automatic Redemption triggered an unconditional obligation to redeem their shares on July 1, 2011 for $100, the $100 per share redemption value should be given effect in the Court's determination of fair value. Morgan Joseph responded with two separate arguments: first, the Automatic Redemption clause was subject to an Excess Cash requirement; second, the Court should disregard the Automatic Redemption because it was not triggered by the merger and had not occurred as of the merger. The Court sided with petitioners on both issues.

Applying Delaware's traditional contract interpretation principles, the Court found that the Automatic Redemption provision's unambiguous terms did not support a reading that the provision was subject to an Excess Cash requirement, and that the clause clearly created an unconditional obligation to redeem the shares on July 1, 2011 at the $100 redemption value. The Court did not address, and thus implicitly rejected, a related argument made by Morgan Joseph based on the Chancery Court's recent opinion in SV Investment Partners, LLC v. ThoughtWorks, Inc. that the Company's redemption obligation was not fixed because of uncertainty over whether the Company would have "lawful funds" on the mandatory redemption date. While the Court noted that under Section 160 of the DGCL a company must have "lawful funds" to redeem its stock, it did not suggest that Section 160 required anything other than that the company have statutory surplus therefor.

Despite finding that the terms of Morgan Joseph's certificate of incorporation were unambiguous, the Court nonetheless took the opportunity to address a doctrinal tension that emerges when contractual ambiguity in the preferred stock context does exist. Delaware courts

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generally adhere to the doctrine of contra proferentem—that a contract should be interpreted against the drafter—in order to resolve ambiguity in governing instruments of business entities in favor of investors. However, the principle of contra proferentem is in tension with another well-settled principle of Delaware contract law requiring strict construction of preferences claimed by preferred stockholders. Thus, a Delaware court will not imply or presume a preference of a preferred stockholder unless it is clearly set forth in the certificate. In dicta, the Court concluded that while the strict construction principle does not preclude considering parol evidence where ambiguity exists, "unless the parol evidence resolves the ambiguity with clarity in favor of the preferred stock, the preferred stockholders should lose."

Finally, the Court explained that because the Series A preferred stockholders would have been entitled to an Automatic Redemption six months after the merger, this specific, non-speculative contractual right must be taken into account in the appraisal analysis. The Court distinguished In re Appraisal of Metromedia International Group, Inc., 971 A.2d 893, 905 (Del. Ch. 2009), a case relied upon by Morgan Joseph in arguing that the Automatic Redemption cannot be considered in an appraisal, because the rights claimed by the preferred stockholders in that case were based on future events that were not certain to occur.

b. SV Investment Partners, LLC v. ThoughtWorks, Inc., 37 A.3d 205 (Del. 2011).

In SV Investment Partners, LLC v. ThoughtWorks, Inc., the Delaware Supreme Court affirmed the Court of Chancery's holding that SV Investment Partners, LLC ("SVIP") failed to prove that ThoughtWorks, Inc. ("ThoughtWorks") had "funds legally available" to satisfy SVIP's redemption demand, even assuming that SVIP was correct in arguing that the phrase "funds legally available," as used in ThoughtWorks' certificate of incorporation, was equivalent to the term "surplus," as used in 8 Del. C. § 160. Thus, the Supreme Court determined that it did not need to address the Court of Chancery's other holding that "funds legally available" was not equivalent to "surplus."

In 2000, SVIP invested $26.6 million in ThoughtWorks in exchange for Series A Preferred Stock that was redeemable at the option of the holder after five years, subject to the funds being legally available (the "Redemption Provision"). Specifically, the Redemption Provision provided that "each holder of Preferred Stock shall be entitled to require the Corporation to redeem for cash out of any funds legally available therefor."

In 2005, SVIP demanded redemption of the Preferred Stock. In response, the ThoughtWorks board of directors convened a special meeting to consider the extent to which ThoughtWorks had the "funds legally available" to redeem the stock. Determining that ThoughtWorks had $500,000 in funds legally available for redemption, the board redeemed shares of Preferred Stock up to that amount. In each of the 16 successive quarters, the board evaluated the financial state of ThoughtWorks, consulting with its financial advisers as to the amount of funds legally available to redeem the Preferred Stock. During this period, ThoughtWorks redeemed a total of $4.1 million of Preferred Stock. Nevertheless, SVIP claimed that more Preferred Stock should have been redeemed, and sought a declaratory judgment in the Court of Chancery as to the meaning of "funds legally available" and a monetary judgment for

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the full amount of the funds legally available for redemption, which it argued was equivalent to statutory "surplus."

The Court of Chancery rejected SVIP's contention that "funds legally available" meant statutory "surplus" and held that "funds legally available therefor" meant "cash funds on hand that can be legally disbursed for redemption without violating 8 Del. C. § 160 or any other statutory or common law." Alternatively, the Court of Chancery held that, assuming "funds legally available" did mean statutory "surplus," SVIP failed to prove that ThoughtWorks had "funds legally available" to redeem the Preferred Stock. The Court of Chancery premised this aspect of its decision, in part, on the insufficiency of SVIP's expert witness testimony at trial. In particular, the Court of Chancery noted that the expert did not consider the amount of funds ThoughtWorks could use to redeem the stock while still operating as a going concern. Thus, while the expert's testimony was "defensible as a theoretical exercise," it did not reflect "real economic value or bear any relationship to what ThoughtWorks might borrow or its creditors recover." Further, because the board had made determinations as to the amount of funds legally available for redemptions, SVIP was required to prove that the board had acted in bad faith, had relied on methods and data that were unreliable, or had made a determination so far off the mark as to constitute actual or constructive fraud. Because the expert testimony did not offer any evidence that went to those issues, the Court of Chancery held that SVIP failed to carry its burden in proving that ThoughtWorks had the "funds legally available" to redeem the Preferred Stock, even assuming that "funds legally available" was equivalent to statutory "surplus."

The Delaware Supreme Court affirmed the Court of Chancery's decision solely on the ground that SVIP failed to carry its burden of proof to establish that ThoughtWorks had "funds legally available" to redeem the Preferred Stock, regardless of the construction of the term "funds legally available." Thus, the Supreme Court did not address whether SVIP's definition of "funds legally available" as statutory surplus was legally correct. Rather, the Supreme Court noted that "a factual finding based on a weighing of expert opinion may be overturned only if arbitrary or lacking any evidential support" and concluded that the Court of Chancery had explained a logical rationale for rejecting the testimony of SVIP's expert witness. Accordingly, because the Court of Chancery's finding that SVIP had failed to carry its burden of proving that ThoughtWorks had the funds legally available did not constitute reversible error, the Supreme Court affirmed.

c. Alta Berkeley VI C.V. v. Omneon, Inc., C.A. No. N10C-11-102 JRS CCLD (Del. Super. July 21, 2011), aff'd, 41 A.3d 381 (Del. 2012).

In Alta Berkeley VI C.V. v. Omneon, Inc., the Delaware Superior Court's Complex Commercial Litigation Division3 denied a claim for a liquidation preference by certain former

3 The Superior Court Complex Commercial Litigation Division was created in May of

2010 to handle complex business disputes. A panel of four Superior Court judges comprises the Division and has drafted rules and procedures for the expeditious handling of these cases. See Superior Court Complex Commercial Litigation Division, http://courts.delaware.gov/Superior/complex.stm.

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preferred stockholders of Omneon, Inc. in connection with a merger between Omneon and Harmonic, Inc.

In May, 2010, Omneon entered into an Agreement and Plan of Reorganization (the "Reorganization Agreement") with Harmonic pursuant to which Harmonic was to acquire Omneon for approximately $190 million in cash and $120 million in stock. The Reorganization Agreement provided for a sequence of transactions, including as a first step a conversion of all but one series of Omneon's preferred stock into common stock, subject to a vote of Omneon's preferred stockholders. Once that conversion took place, the Reorganization Agreement contemplated a series of steps that would culminate in Omneon being merged with and into an acquisition vehicle formed by Harmonic.

Plaintiffs, who were holders of one of the series of preferred stock that was converted into common stock, brought an action for breach of contract against Omneon alleging that Omneon wrongfully denied them a liquidation preference in connection with the merger. Plaintiffs asserted that each step of the proposed merger, including the vote to convert preferred stock into common stock, was part of a "series of related transactions" that comprised a Liquidation Event under Omneon's Certificate of Incorporation and allegedly entitled plaintiffs to a liquidation preference. Omneon argued that the vote to convert Omneon preferred stock to common stock occurred prior to the Liquidation Event (the merger), and therefore the right to a liquidation preference never accrued.

In addressing the parties' respective contentions, the Court confirmed that, under Delaware law, the rights of preferred stockholders as set forth in a certificate of incorporation are contractual rights, but cautioned that Delaware Courts may not "by judicial action, broaden the rights obtained by a preferred stockholder at the bargaining table."

The Court found that Omneon's Certificate of Incorporation clearly and unambiguously provided that plaintiffs were entitled to a liquidation preference if and only if the Liquidation Event occurred prior to the conversion of their shares. On this issue, the Court held that while the conversion was clearly an "integral part" of the proposed merger, it was "equally clear that a 'reasonable third party' would read the Reorganization Agreement to stage the automatic conversion as a condition, inter alia, to the first-step merger, not to include the conversion among the 'series of related transactions' that comprised the merger itself." Because the conversion occurred prior to the Liquidation Event, the Court held that plaintiffs were not entitled to a liquidation preference and granted summary judgment to the defendants.

Plaintiffs appealed the decision to the Delaware Supreme Court. On March 5, 2012, the Delaware Supreme Court issued a written opinion affirming the Court of Chancery's holding that the overall transaction did not constitute a "Liquidation Event," as defined in Omneon's certificate of incorporation, because the conversion and the merger were legally separate events.

d. Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCS (Del. Ch. Mar. 29, 2011).

The efforts of Fletcher International, Ltd. ("Fletcher") to block a joint venture between ION Geophysical Corp. ("ION") and China National Petroleum Corporation ("China National")

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have resulted in multiple opinions interpreting Fletcher's rights as a preferred stockholder of ION. In the latest opinion, Fletcher International, Ltd. v. ION Geophysical Corp., the Court of Chancery reaffirmed the primacy of contract principles when interpreting the rights of preferred stockholders under Delaware law and refused to expand the rights of Fletcher beyond the clear and unambiguous terms of ION's certificate of incorporation.

The preferred stock provision at issue provided that the prior consent of a majority of the holders of ION's Series D preferred stock (in this case, Fletcher) was necessary to "permit any Subsidiary of [ION] to issue or sell, or obligate itself to issue or sell, except to [ION] or any wholly owned Subsidiary, any security of such Subsidiaries." In two of the Court's previous opinions, Fletcher successfully argued that this provision required ION to obtain Fletcher's consent before a different ION subsidiary could issue a convertible note in connection with the joint venture. Fletcher failed to persuade the Court, however, to enjoin the overall transaction, which was completed on March 24, 2010 when ION transferred 51% of the stock of INOVA Geophysical Equipment Limited ("INOVA"), a wholly owned subsidiary of ION, to China National pursuant to a term sheet and share purchase agreement. After the joint venture transaction had been completed, Fletcher amended its complaint alleging that (i) ION had breached its contractual rights as a preferred stockholder by permitting INOVA to sell or issue securities to China National without Fletcher's prior consent and (ii) INOVA had tortiously interfered with these same rights. ION and INOVA moved to dismiss both claims, arguing that the preferred stock provision did not give Fletcher a consent right with respect to ION's sale of INOVA stock.

Fletcher's primary argument in support of its claims was that ION had violated Fletcher's consent rights when it entered into the term sheet and the share purchase agreement with China National because ION essentially "permit[ed] INOVA to 'sell and obligate itself to sell securities equaling 51% of its equity to [China National]' without first obtaining Fletcher's consent." Alternatively, Fletcher asserted that, while formally speaking, the sale of INOVA stock was from ION to China National, the economic substance of the entire joint venture transaction was a sale by INOVA of INOVA stock to China National. Fletcher urged the Court to look beyond the form of the transaction and treat ION's transfer of 51% of its INOVA stock to China National as an issuance by INOVA of those shares directly to China National.

The Court rejected both arguments, finding them to be "meandering in the sense that [they are] selectively formal and deconstructive in [their] logical approach." On the one hand, Fletcher argued that the term sheet bound INOVA to transfer its own shares of stock to China National while admitting that under the plain terms of the term sheet, ION would be the one doing the selling of the to-be-formed subsidiary's stock. On the other, if the Court accepted the argument that INOVA was, from its creation, intended to be an entity owned 51% by China National and only 49% owned by ION, then INOVA was never an ION subsidiary under the terms of the preferred stock provision and thus not subject to Fletcher's consent right.

Ultimately, the Court held that the rights that Fletcher had bargained for as set forth in the ION certificate of incorporation were clear and unambiguous and did not provide Fletcher with a consent right under any of the scenarios advanced by Fletcher. The Court reiterated the principles that a preferred stockholder's rights are contractual in nature, are to be strictly construed and must be expressly set forth in the relevant governing document. Applying these

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principles, the Court concluded that in the transaction at issue the plain language of the preferred stock provisions did not give Fletcher a consent right and that the Court was not empowered to rewrite an unambiguous contract in order to meet Fletcher's current business interests. Further, the Court noted that it was immaterial whether ION, in structuring the transaction, purposefully chose a structure that did not trigger Fletcher's consent rights. In the Court's view, Fletcher was a sophisticated contracting party that could have bargained for the right to consent to ION's sale of its subsidiary's stock, but failed to do so. Accordingly, both Fletcher's breach of contract claim and the dependent tortious interference claim were dismissed.

e. LC Capital Master Fund, Ltd. v. James, C.A. No. 5214-VCS (Del. Ch. Mar. 8, 2010).

In LC Capital Master Fund, Ltd. v. James, the Delaware Court of Chancery denied a preferred stockholder's motion to enjoin the acquisition of QuadraMed Corporation by affiliates of Francisco Partners II, L.P., holding that the directors fulfilled the limited fiduciary duties owed to the preferred stockholders in approving the merger which cashed out the preferred stockholders at a price based upon the preferred stock's conversion rate to common stock.

Under the terms of the proposed transaction, Francisco Partners would acquire QuadraMed at $8.50 per share of common stock, and the preferred stockholders would be cashed out on an as-if converted basis ($13.7097 per preferred share). The QuadraMed directors sought advice from counsel regarding the permissibility of such treatment of the preferred stockholders, and were advised that the board could adopt a merger agreement that cashed out the preferred stockholders, and that, so long as the board honored the contractual rights of the preferred stockholders in a merger, it did not have to allocate additional value to the preferred stockholders.

The certificate of designation that governed the preferred stockholders' rights did not afford the preferred stockholders a right to vote on any merger. Though the certificate of designation provided for a liquidation preference of $25 for each share of preferred stock, the certificate expressly stated that a merger did not trigger the preferred stockholders' liquidation preference. Instead, the certificate essentially provided that in a merger, the preferred stockholders either would receive the consideration determined by the board in a merger agreement or, if the preferred stockholders were not cashed out in the merger, the preferred stockholders had the right to convert their shares and receive (at any time in the future) the consideration received by the common stockholders.

LC Capital moved to enjoin preliminarily the stockholder vote on the merger, arguing that the QuadraMed board breached its duty to make a "fair" allocation of the merger consideration between the common and preferred stockholders. LC Capital argued that to ensure a fair allocation, the board had to designate an agent to negotiate on behalf of the preferred stockholders throughout the allocation process and also retain a financial advisor to value the preferred stock. The plaintiff claimed that these duties were particularly significant in this case because each QuadraMed director owned common stock or common stock options, but not preferred stock.

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The Court denied the injunction motion, explaining, "When, by contract, the rights of the preferred in a particular transactional context are articulated, it is those rights that the board must honor. To the extent that the board does so, it need not go further and extend some unspecified fiduciary beneficence on the preferred at the expense of the common." The Court also found that plaintiff had not advanced facts supporting a reasonable inference that any of the special committee members were materially interested in the transaction, noting, "To hold that independent directors are disabled from the protections of the business judgment rule when addressing a merger because they own common stock, and not the corporation's preferred stock, is not . . . something that should be done lightly." Further, the Court concluded that the special committee's decision to treat the preferred stockholders on an as-if converted basis was made on a thoughtful basis informed by advice of counsel, with no hint of any lapse of care.

In addition to finding that LC Capital had not demonstrated a probability of success on the merits, the Court noted that LC Capital purported to represent 95 percent of the preferred stockholders, that the preferred stockholders had appraisal rights unfettered by an "appraisal out" in the merger agreement, and that the common stockholders would be harmed if the merger were enjoined. Thus, the Court held that the balance of harms also weighed against the issuance of a preliminary injunction.

4. § 220 Actions.

a. Central Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. 2012).

In Central Laborers Pension Fund v. News Corp., 45 A.3d 139 (Del. 2012), the Delaware Supreme Court affirmed the Court of Chancery's dismissal of the plaintiff's complaint, which sought to enforce a demand for inspection of books and records under Section 220 of the Delaware General Corporation Law ("Section 220"). The Supreme Court based its decision on the plaintiff's failure to attach to its demand documentary evidence of its beneficial ownership of News Corporation's ("News Corp.") stock and stressed that stockholders seeking inspection of books and records must strictly comply with the "form and manner" requirements of Section 220.

On March 7, 2011, plaintiff Central Laborers Pension Fund ("Central Laborers") sent to News Corp.'s general counsel a demand letter for inspection of certain books and records related to News Corp.'s then-pending acquisition of Shine Group Ltd. (the "Shine Transaction"). The Shine Group Ltd. is an international television production company that had been formed in 2001 by Elizabeth Murdoch, the daughter of News Corp.'s founder and CEO, Rupert Murdoch. Central Laborers asserted that the purpose of its demand was to investigate potential breaches of fiduciary duty or other wrongdoing in connection with the Shine Transaction. The demand letter further stated that Central Laborers wanted to "determine whether a presuit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company."

On March 16, 2011, Central Laborers, along with another stockholder plaintiff, filed a verified derivative complaint (the "Derivative Complaint") in the Court of Chancery challenging the Shine Transaction and asserting claims for breach of fiduciary duty against each member of News Corp.'s board. The Derivative Complaint alleged that demand on the News Corp. board

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was excused because the directors had shown an unwillingness or inability to challenge Rupert Murdoch's purported control over News Corp.

Approximately one hour after the filing of the Derivative Complaint, Central Laborers filed another complaint (the "Section 220 Complaint") in the Court of Chancery seeking to enforce its demand letter pursuant to Section 220. The Section 220 Complaint alleged that one of the primary purposes for the requested inspection was "to investigate possible breaches of fiduciary duty" and, ultimately, "to determine whether a presuit demand is necessary or would be excused prior to commencing any derivative action on behalf of the Company" (emphasis added).

News Corp. moved to dismiss the Section 220 Complaint on the grounds that: (1) the demand letter was not accompanied by evidence of Central Laborers' beneficial stock ownership; (2) the filing of the Derivative Complaint refuted Central Laborers' purported purpose for seeking the inspection (i.e., investigating whether to pursue a derivative claim and determining whether demand on the News Corp. board was excused); and (3) the scope of the inspection sought was overbroad. The Court of Chancery granted the motion to dismiss on the second ground. The Court of Chancery reasoned that "[b]ecause Central Laborers' currently-pending derivative action necessarily reflects its view that it had sufficient grounds for alleging both demand futility and its substantive claims without the need for assistance afforded by Section 220, it is, at this time, unable to tender a proper purpose for pursuing its efforts to inspect the books and records of News Corp." The Court of Chancery did not reach the other grounds for dismissal argued by News Corp.

On appeal, Central Laborers asserted that the Court of Chancery decision constituted error in two regards: (1) the time to evaluate whether a stockholder has a proper purpose is when the inspection demand is made, and such proper purpose cannot be mooted by the subsequent filing of a derivative action; and (2) even if an otherwise proper purpose can be impacted by the subsequent filing of a derivative action, such proper purpose exists so long as the documents sought by the plaintiff could be used to amend the derivative complaint. Thus, according to Central Laborers, a Section 220 demand should be deemed to have a proper purpose despite the stockholder's filing of a derivative action, so long as leave to amend in the derivative action had not been explicitly precluded. For its part, News Corp. asked that the Supreme Court affirm the judgment of the Court of Chancery on the grounds expressed by that Court and on the alternative basis that Central Laborers failed to attach evidence of its beneficial ownership of News Corp. stock to its demand letter.

The Supreme Court affirmed the judgment on the alternative ground that Central Laborers had failed to comply with the "form and manner" requirements of Section 220 by not accompanying its demand with evidence of its beneficial ownership. The Court stressed that the express statutory requirements of Section 220 must be strictly followed by a stockholder seeking an inspection of books and records. Absent compliance with the statutory requirements, the Court held that "the stockholder has not properly invoked the statutory right to seek inspection, and consequently, the corporation has no obligation to respond." Accordingly, the Court rejected Central Laborers' argument that it had cured the defect in its demand when Central Laborers submitted evidence of beneficial ownership of News Corp. stock along with its brief in opposition to the motion to dismiss in the Court of Chancery. The Supreme Court explained that

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such subsequent action could not satisfy the statutory requirement that the demand "shall … be accompanied by documentary evidence of beneficial ownership of the stock." Because Central Laborers had failed to submit a procedurally proper demand letter, the Supreme Court found that it was unnecessary and would be inappropriate to express a view on whether the Derivative Complaint affected the propriety of the purpose set forth in the demand letter.

b. King v. VeriFone Holdings, Inc., 12 A.3d 1140 (Del. 2011).

In King v. VeriFone Holdings, Inc., the Delaware Supreme Court reversed the Court of Chancery's decision that established a bright-line rule barring stockholder-plaintiffs from seeking books and records pursuant to 8 Del. C. § 220 ("Section 220") solely because they filed a derivative action first. The Supreme Court reaffirmed "long-standing Delaware precedent which recognizes that it is a proper purpose under Section 220 to inspect books and records that would aid the plaintiff in pleading demand futility in a to-be-amended complaint in a plenary derivative action, where the earlier-filed plenary complaint was dismissed on demand futility-related grounds without prejudice and with leave to amend."

On December 3, 2007, VeriFone Holdings, Inc. ("VeriFone") restated its reported earnings and net income for the prior three fiscal quarters. In response, plaintiff filed a derivative action in federal court alleging, among other things, that the directors and officers of VeriFone breached their fiduciary duties and committed corporate waste. The federal court dismissed the plaintiff's complaint for failure to allege particularized facts that would excuse pre-suit demand. In granting leave to amend the complaint, the federal court suggested that plaintiff utilize Section 220 to obtain facts that might aid in pleading demand futility. In 2009, plaintiff submitted to VeriFone a written demand pursuant to Section 220, and VeriFone produced documents responsive to all but one of plaintiff's requests. VeriFone declined to produce an audit committee report, which contained the results of an internal investigation of VeriFone's accounting and financial controls that had been conducted after the 2007 restatement. Thereafter, plaintiff filed a complaint under Section 220 seeking an order permitting him to inspect the audit committee report. The Court of Chancery dismissed plaintiff's complaint for failure to state a proper purpose as required by Section 220. In doing so, the Court of Chancery held that plaintiff lacked a proper purpose under Section 220 because he elected to prosecute the derivative action before conducting a pre-suit investigation, including use of the Section 220 process. The Court of Chancery stated: "[S]tockholders who seek books and records in order to determine whether to bring a derivative suit should do so before filing the derivative suit. Once a plaintiff has chosen to file a derivative suit, it has chosen its course and may not reverse course and burden the corporation (and its other stockholders) with yet another lawsuit to obtain information it cannot get in discovery in the derivative suit."

On appeal, the Supreme Court concluded that the Court of Chancery's bright-line rule "does not comport with existing Delaware law or with sound policy." The Supreme Court noted that Delaware courts have strongly encouraged stockholder-plaintiffs to utilize Section 220 to obtain facts sufficient to plead demand futility before filing a derivative action. The decision to file a derivative complaint before using the Section 220 inspection process, the Supreme Court noted, is "ill-advised" but not "fatal" to a stockholder-plaintiff's right to seek books and records pursuant to Section 220. The Supreme Court relied on earlier decisions, such as In re Walt Disney Co. Derivative Litigation, Ash v. McCall and Melzer v. CNET Networks, Inc., as

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examples of situations in which Delaware courts have dismissed derivative complaints, but recommended that stockholder-plaintiffs utilize Section 220 as a tool to obtain facts sufficient to replead demand futility in an amended derivative complaint. In each case noted above, the plenary court dismissed the stockholder-plaintiff's derivative complaint without prejudice and with leave to amend. These factors distinguished the cases relied upon by VeriFone, cases which held that stockholder-plaintiffs lack a proper purpose because their earlier-filed derivative action was dismissed with prejudice or without leave to amend. Thus, the Supreme Court held that a stockholder-plaintiff seeking books and records under Section 220 does not lack a proper purpose simply because the stockholder-plaintiff filed a derivative action first, which was dismissed for failure to plead demand futility adequately.

Lastly, the Supreme Court concluded that the bright-line rule adopted by the Court of Chancery was "overbroad and unsupported by the text of, and the policy underlying, Section 220." The Supreme Court, however, cautioned that "filing a plenary derivative action without having first resorted to the inspection process afforded by [Section 220] may well prove imprudent and cost-ineffective. But, absent some other, sufficient ground for dismissal, that sequence is not fatal to the prosecution of a Section 220 action." Expressing its sensitivity to the policy concerns raised by the Court of Chancery, the Supreme Court recognized that the plenary court may fashion remedies to deter a race to the courthouse and the premature filing of derivative actions. For example, the Supreme Court noted that the plenary court may deny lead plaintiff status, grant a motion to dismiss with prejudice and without leave to amend as to the named plaintiff or require the plaintiff to pay the defendants' attorneys' fees incurred on the initial motion to dismiss. Automatically foreclosing a stockholder-plaintiff's ability to utilize the Section 220 inspection process after filing a derivative complaint, however, is not warranted under Delaware law.

c. City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., 1 A.3d 281 (Del. 2010).

In City of Westland Police & Fire Retirement System v. Axcelis Technologies, Inc., the Delaware Supreme Court affirmed the dismissal of a books and records action under 8 Del. C. § 220 ("Section 220"), holding that plaintiff did not meet its evidentiary burden to demonstrate a "proper purpose" to support inspection where a board of directors rejected the resignations of three directors who failed to receive a majority of the votes cast in an uncontested election.

Defendant Axcelis Technologies, Inc. ("Axcelis") followed the plurality voting provisions of Delaware statutory law, under which a director may be elected upon receiving a plurality of votes cast. See 8 Del. C. § 216(3). Importantly, the Axcelis board of directors also had adopted a "plurality plus" governance policy, which provided that any nominee in an uncontested election receiving a greater number of votes "withheld" than votes "for" his or her election would be required to submit a letter of resignation for consideration by the board of directors. All three directors seeking reelection at the 2008 annual meeting received less than a majority of the votes cast and in accordance with the "plurality plus" governance policy tendered their resignations. The board, however, decided not to accept the tendered resignations.

The Court acknowledged that plaintiff's stated purpose for its Section 220 demand—the investigation of possible wrongdoing or mismanagement—was a proper purpose, but held that

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plaintiff failed to present any evidence to suggest a credible basis from which a court could infer possible mismanagement or wrongdoing that would warrant further investigation.

The Court also rejected plaintiff's argument that the board must show a "compelling justification" under Blasius for its decision not to accept the three directors' resignations because the board's nonacceptance of the resignations frustrated the stockholder vote. The Court concluded that plaintiff's Blasius argument improperly attempted to shift to Axcelis plaintiff's burden to establish a "proper purpose" and affirmed the Court of Chancery's decision not to adopt the Blasius standard for reviewing a board of directors' discretionary decision to reject resignations where a "plurality plus" governance policy is triggered and requires that resignations be tendered.

Importantly, the Court also discussed that another proper purpose for seeking inspection of corporate books and records under Section 220 is to determine an individual's suitability to serve as a director, a purpose that plaintiff did not rely upon for seeking relief. In this connection, the Court noted that Axcelis's "plurality plus" policy was adopted unilaterally as a resolution by the board of directors. The Court explained that where a board confers upon itself the power to override the determination of a stockholder majority by unilaterally adopting a "plurality plus" policy, the board should be held accountable for its exercise of that "unilaterally conferred power" by being subject to a stockholder's right under Section 220 to seek inspection of any documents or other records upon which the board relied in deciding to reject the tendered resignations, indicating that in such circumstances there is a credible basis to infer that a director is unsuitable, thereby warranting further investigation. The Court indicated, however, that the filing of a Section 220 action for the purpose of investigating the suitability of directors whose tendered resignations are rejected in the context of a "plurality plus" policy will not automatically entitle a plaintiff stockholder to relief. A plaintiff still must satisfy the other evidentiary burdens required, including the necessity of the requested information to assess the suitability of the director.

5. Appraisal Actions and Proceedings.

a. In re Appraisal of Orchard Enterprises, Inc., 2012 WL 2923305 (Del. Ch. July 18, 2012).

In In re Appraisal of Orchard Enterprises, Inc., 2012 WL 2923305 (Del. Ch. July 18, 2012), the Court of Chancery, in a post-trial decision, determined that the petitioners, certain common stockholders of The Orchard Enterprises, Inc. ("Orchard"), were entitled to $4.67 per share, rather than the $2.05 per share they received in a going-private transaction.

Orchard is a specialty music company which primarily generates revenue through the retail sale of a catalog of licensed music through digital stores such as Amazon and iTunes. Prior to the going-private transaction, Orchard was traded on the NASDAQ stock exchange. A large block, around 40%, of Orchard's common stock was owned by Dimensional Associates, LLC ("Dimensional"), which also owned nearly all of Orchard's preferred stock. Because the preferred stock could vote on an as-converted basis, Dimensional controlled 53% of the voting power of Orchard's outstanding stock.

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In July 2010, Orchard's common stockholders were cashed out for $2.05 per share in a merger with Dimensional (the "Merger"). The petitioners claimed that the value of each Orchard common share was $5.42 at the time of the Merger. Respondent Orchard maintained that the Merger was generous and that in fact each share of common stock was only worth $1.53. The Court stated that the primary issue behind the parties' price disparity was whether a $25 million liquidation preference of Orchard's preferred stock should be taken into account when valuing the common stock.

The certificate of designations governing Orchard's preferred stock required payment of a $25 million liquidation preference to Dimensional in three circumstances: (i) a dissolution of the company, (ii) a sale of all or substantially all of Orchard's assets leading to a liquidation, or (iii) a sale of control of Orchard to an "unrelated third party." The Court held that the liquidation preference was not triggered by the Merger, noting that Dimensional still owned the preferred stock and could potentially receive the preference in the future.

Despite the fact that the liquidation preference was not triggered, Orchard asserted that the Court was required to take the liquidation preference into account during the valuation process. Orchard first argued that the common stock could not be properly valued without subtracting the $25 million preference because the preference was implicitly a negotiated part of the Merger. The Court quickly rejected this argument as "non-factual." The Court held that the plain terms of the preferred stock's certificate of designations required the payment of the liquidation preference in only three scenarios, none of which the Merger triggered.

The Court also rejected Orchard's "market-based" argument that the value of the common stock should be reduced because the liquidation preference effectively created a $25 million dollar liability that should be factored into the appraisal price. According to Orchard, the real-world implications of Dimensional's voting control and contractual rights as a preferred stockholder made payment of the preference a near certainty.

Siding with petitioners, the Court concluded that Orchard's position was wrong as a matter of law. The Court found that the untriggered contractual rights of the preferred stock reflected only speculative value. In the context of an appraisal proceeding, the Court held that it could not assign value to a liquidation preference based on the occurrence of uncertain future events that did not have to occur by any particular time.

Although acknowledging that this argument "may be grounded in market realities," the Court held that it nonetheless conflicts with the Delaware Supreme Court's determination that an appraisal must be focused on a company's going-concern value. That is, the company must be valued without regard to the possibility of liquidation or other "post-merger events or … possible business combinations." Thus, because the specific terms of the preferred stock's certificate of designations were not triggered by the Merger, the voting control and other blocking rights of the preferred stock were not accorded any value.

After resolving the liquidation preference issue, the Court went on to resolve various disputes between the parties over the proper valuation methods and metrics. The Court rejected a comparable companies or precedent transaction analysis, instead relying on a discounted cash flow ("DCF") analysis.

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Of note to practitioners familiar with the Court's treatment of DCF analyses, the Court commented on the appropriateness of using a supply-side premium as opposed to a historical equity risk premium. The Court noted that in Global GT LP v. Golden Telecom, Inc., 993 A.2d 497 (Del. Ch. 2010), aff'd, 11 A.3d 214 (Del. 2010), it discussed a perceived shift in the academic community to favoring the supply-side equity risk premium.

b. Gearreald v. Just Care, Inc., C.A. No. 5233-VCP (Del. Ch. Apr. 30, 2012).

In Gearreald v. Just Care, Inc., C.A. No. 5233-VCP (Del. Ch. Apr. 30, 2012), the Court of Chancery found in an appraisal proceeding that the fair value of Just Care, Inc. ("Just Care") was $34,244,570, approximately $6 million less than the acquisition price.

Just Care—a privately held company that operates a private healthcare detention facility in South Carolina—was acquired in a strategic transaction for $40 million. The appraisal petitioners included Just Care's founder and former CEO, who voted in favor of the merger as a director before voting against it as a stockholder, and Just Care's CFO. The petitioners claimed that the fair value of Just Care as of the merger was $55.2 million; Just Care contended $33.6 million.

The Court relied upon a discounted cash flow analysis in determining fair value. Initially, the Court considered the credibility of Just Care's management projections, which were prepared outside of the ordinary course and at a time when the CEO and CFO risked losing their positions if the acquisition bid succeeded and were trying to convince Just Care's board to pursue different alternatives. Accordingly, the Court found that the projections were not entitled to the same deference usually afforded to contemporaneously prepared management projections. Additionally, the Court determined that an out-of-state expansion scenario included in the projections was too speculative to be included in the valuation of Just Care, which had operated only one facility in 11 years of existence.

In determining a discount rate for the DCF analysis, the Court stated that the correct capital structure for an appraisal of Just Care is the theoretical capital structure it would have maintained as a going concern. Specifically, changes to Just Care's capital structure made in relation to the merger—in this case, Just Care's paying off all debt as a condition of the merger—should not be considered in determining appraised value. Accordingly, the Court explained that it was inappropriate to apply Just Care's actual capital structure as of the merger's closing in the appraisal analysis.

The Court also applied an equity size premium to account for the higher rate of return demanded by investors to compensate for the greater risk associated with smaller companies. Both experts agreed that, by size alone, Just Care falls within Ibbotson decile 10b, which includes companies with market capitalizations of $1.6 million–$136 million, but the petitioners argued for the application of an equity size premium implied for larger decile 10a companies. Since one of the reasons investors demand higher returns from smaller companies is because smaller companies tend to be less liquid, the petitioners advocated applying a lower equity size premium to eliminate the "liquidity effect" contained within the size premium. While the Court agreed that a liquidity discount related to transactions between a company's shareholders and

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other market participants is prohibited in an appraisal proceeding, the liquidity effect the petitioners advocated eliminating in this case arose in relation to transactions between Just Care and its providers of capital and, as such, was part of Just Care's value as a going concern.

c. In re Appraisal of Aristotle Corp., Consol. C.A. No. 5137-CS (Del. Ch. Jan. 10, 2012).

In In re Appraisal of Aristotle Corp., the Court of Chancery granted a motion to dismiss, for lack of standing, a complaint for breach of the fiduciary duty of disclosure brought by certain stockholders who had dissented from a short-form merger under 8 Del. C. § 253 and perfected their appraisal rights. The complaint, which was filed 18 months after petitioners commenced appraisal proceedings, alleged that directors of Aristotle Corporation ("Aristotle") failed to disclose all material facts in connection with the merger, including that the merger allegedly had been consummated without a majority of the minority stockholder vote in contravention of Aristotle's certificate of incorporation. As a remedy, petitioners sought the fair value of their shares, the same remedy they were already seeking under the appraisal statute. Notably, petitioners sought only to represent themselves and not a class of other stockholders.

The Court noted similarities between this case and Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000). In Andra, a stockholder who declined to tender into a tender offer, and instead preserved her appraisal rights, was denied standing to file a disclosure claim after the consummation of the merger. The Court in Andra reasoned that because the stockholder had withdrawn her preliminary injunction motion and advanced a disclosure claim only after the merger closed, she could not meet the standing requirement and show that she was individually injured by the allegedly misleading disclosures because she had not tendered her shares and had timely sought appraisal.

The Court noted that at least two lines of Delaware precedent have recognized a dissenting stockholder's standing to bring a fiduciary duty of disclosure claim in conjunction with an appraisal action. First, in the context of a tender offer designed to gain control of the corporation's voting power, a non-tendering stockholder may plead and prove harm, despite not tendering in response to allegedly faulty disclosures, where the tendering decisions of others may result in the non-tendering stockholder becoming a minority stockholder, subject to the control of a majority stockholder. Second, stockholder-plaintiffs who seek injunctive relief on a class-wide basis and subsequently perfect appraisal claims as additional grounds for relief may be permitted to proceed with disclosure claims after completion of the merger, although such plaintiffs' standing to do so is rarely contested.

But the petitioners in Aristotle were not reduced to minority status, did not seek injunctive relief, and did not purport to seek relief on a class-wide basis. The Court concluded that the appraisal petitioners lacked standing to pursue individual claims for alleged breaches of the fiduciary duty of disclosure because, even if they prevailed on the merits of those claims, they would be entitled to no relief different than the relief to which they had already demonstrated their entitlement as appraisal petitioners, i.e., an award of the fair value of their shares. The Court concluded, "To require the defendants and this Court to go through a moot court determination in order to award the petitioners the right to a quasi version of something

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that they already have would be inequitable to the defendants and to the taxpayers and litigants who depend on this Court."

d. Golden Telecom, Inc. v. Golden GT LP, 993 A.2d 497 (Del. 2010); Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., C.A. No. 5745-VCS (Del. Ch. Dec. 17, 2010).

In Golden Telecom, the Supreme Court declined to impose strict requirements on the trial court's determination of fair value, including deference to merger price or a requirement that the subject company be bound by previously disseminated company-specific data. In AT&T Mobility, the Court of Chancery held that a stockholder has the entire 20-day statutory period to consider whether or not to seek appraisal, and may even revoke a prior waiver of appraisal rights during that period, under certain circumstances.

In Golden Telecom, Inc. v. Global GT LP, the parties to an appraisal action below cross-appealed the Court of Chancery's ruling, which determined fair value for Golden Telecom, Inc.'s ("Golden Telecom") stock to be $125.49 per share in circumstances where: (1) Golden Telecom had formed a special committee to negotiate the merger, (2) the stock had never traded above the $60 range prior to a leak into the market of the merger negotiations, and (3) the special committee successfully negotiated the offer up from an initial $80 per share offer to the final deal price of $105 per share, with no matching rights and the absence of any alternative offers despite months of market knowledge of the deal.

Golden Telecom appealed based on, among other things, the large discrepancy between the deal price of $105 per share and the Court's determination of fair value at $125.49 per share. The appeal sought, in pertinent part, the announcement of a rule enshrining the price paid in a deal containing all of the typical indicia of fairness required under Delaware's law of fiduciary duty as either conclusively or presumptively indicative of fair value in an appraisal proceeding.

In its opinion, the Supreme Court affirmed Vice Chancellor Strine's approach to valuation, noting that in the context of an appraisal proceeding, the use of the deal price as an indicia of fair value is entirely up to the discretion of the Court:

Requiring the Court of Chancery to deferconclusively or presumptivelyto the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine "fair value" from the court to the private parties.

Similarly, the Court rejected the cross-appellees' request that it adopt a bright-line rule prohibiting the corporation in an appraisal proceeding from relying on company-specific data which differed from the company-specific data utilized by the corporation's financial advisor in connection with its fairness opinion. The Court again turned to the language of the statute, noting that "Section 262(h) controls, it is unambiguous, and it nowhere requires the appraising authority to require the parties to adhere to previously prepared data." The Court noted that to hold otherwise "would pay short shrift to the difference between valuation at the tender offer stage … and valuation at the appraisal stage," which involve the divergent goals of determining a

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fair price in the context of a specific transaction as opposed to determining fair value of a company as a going concern.

In Golden Telecom, the Court reinforced its view that "appraisal is, by design, a flexible process … and the adoption of strict rules to govern the process" would contravene the statutory scheme "vest[ing] the court with significant discretion to consider 'all relevant factors.'"

In Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., the Court of Chancery resolved a question of first impression regarding whether, during the 20-day statutory period for demanding appraisal, a minority stockholder has the ability to change its mind about whether to seek or withdraw a demand for appraisal.

In AT&T, the Court was asked to determine the members of the appraisal class in an action arising from a short-form merger in which a controlling stockholder cashed out the minority. One would-be member of the class, ARAP Partners ("ARAP"), had submitted its stock certificates along with a letter of transmittal indicating that it would not seek appraisal, accepted (but did not cash) a check for the merger consideration, and subsequently, but prior to the expiration of the statutory period, returned the check and revoked its waiver.

The Court concluded that ARAP had perfected its appraisal rights and was a proper member of the appraisal class:

[W]here a minority stockholder perfects its right to an appraisal within the statutory election period and does not accept the merger consideration in the sense that it does not exercise dominion over that merger consideration, that stockholder is entitled to participate in an appraisal action notwithstanding the fact that it made a previous, but promptly revoked, waiver of such right to an appraisal. Absent actual or other prejudice to the surviving corporation, the appraisal statute is best implemented giving stockholders the full 20 days to decide whether to demand appraisal.

The Court noted that, while ARAP may have waived its statutory right to an appraisal, waiver and estoppel are equitable doctrines and the waiver could not be enforced in the absence of prejudice to, or detrimental reliance on the part of, AT&T. The Court emphasized this point, explaining that "had ARAP cashed or further negotiated the check [for the merger consideration], or had AT&T Mobility initially given ARAP cash …, AT&T would have a claim that it had relied to its detriment on ARAP's waiver." The Court concluded that, in the absence of prejudice to the company, the "already brief 20 day election period" should not be truncated further by barring a minority stockholder from retracting its waiver and perfecting appraisal rights during the statutory period.

6. Derivative Actions and Claims.

a. Louisiana Municipal Police Employees' Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012)

In Louisiana Municipal Police Employees' Ret. Sys. v. Pyott, 46 A.3d 313 (Del. Ch. 2012), the Court of Chancery held that a federal court's decision to dismiss derivative litigation

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for failure to plead demand futility adequately under Rule 23.1 did not preclude relitigation of that same issue in another case involving a different stockholder plaintiff. The defendants have appealed the Court's ruling, and that appeal remains pending.

On September 1, 2010, Allergan, Inc.—the manufacturer of the drug Botox—announced that it had entered into a settlement with the United States Department of Justice. The settlement arose out of allegations that Allergan had misbranded Botox and illegally marketed the drug for "off-label" uses. Allergan pled guilty to criminal misdemeanor misbranding, paid a total of $600 million in civil and criminal fines, and entered into a five-year Corporate Integrity Agreement with the Department of Health and Human Services, Office of Inspector General.

Within 48 hours of the announcement of the settlement, Allergan stockholders began to file derivative actions against Allergan's board of directors for their alleged complicity in the misbranding, and by September 24, 2010, at least four separate cases had been filed in the Delaware Court of Chancery and the United States District Court for the Central District of California.

In addition, on November 3, 2010, U.F.C.W. Local 1776 ("UFCW"), an Allergan stockholder, sent Allergan a books and records demand pursuant to 8 Del. C. § 220. After receiving documents, UFCW joined in the existing Delaware Court of Chancery action, and the Delaware plaintiffs filed an amended complaint. Allergan shared the books and records it produced to UFCW with the plaintiffs in the California action, who also filed an amended complaint.

The defendants moved to dismiss in both Delaware and California. The California court reached a decision first, holding in January 2012 that the California plaintiffs had failed to plead demand futility adequately and that their amended complaint would be dismissed with prejudice pursuant to Rule 23.1.

In the Delaware action, the defendants argued that the doctrine of collateral estoppel precluded relitigation of the demand futility issue, in addition to their substantive arguments that the complaint was inadequate under Rules 23.1 and 12(b)(6). In response to the collateral estoppel argument, the Court of Chancery noted a "growing body of precedent" holding that a Rule 23.1 dismissal has a preclusive effect on other derivative complaints, based on the theory that all stockholder plaintiffs are in privity with each other because they all are suing in the name of the corporation.

The Court declined to follow that authority, holding that the Delaware Supreme Court has made clear that a stockholder whose litigation efforts are opposed by the nominal defendant corporation does not have authority to sue on the corporation's behalf until either (i) there is a finding of demand excusal, or (ii) a court holds that the corporation wrongly refused the stockholder's demand to sue. Because a stockholder who loses a Rule 23.1 motion necessarily fails to win the right to sue on the corporation's behalf, the basis of previous court holdings that collateral estoppel prevented relitigation of demand futility allegations—that successive stockholders were in "privity" with each other because they were all suing in the corporation's name—is inconsistent with Delaware law. The Court therefore held that a Rule 23.1 dismissal of

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one stockholder's derivative complaint would not preclude a different stockholder from relitigating that issue in a separate case.

Going further, the Court held that an "independent basis" for its refusal to apply collateral estoppel to the case at hand applied: the plaintiffs in the California action did not adequately represent Allergan. The Court addressed at length what it referred to as the "fast-filing problem" and held that in cases such as the one at issue where swift action was not required in order to prevent irreparable harm, a plaintiff who files a derivative action shortly after announcement of a corporate loss without first conducting a meaningful investigation has not provided adequate representation to the corporation it is seeking to represent.

Having determined that the California court's judgment did not collaterally estop the Delaware plaintiffs from proceeding with their demand futility arguments, the Court addressed the substance of the claims. The Court of Chancery held that the complaint at issue contained adequate factual allegations from which it could reasonably be inferred that the Allergan directors faced a substantial risk of liability if the litigation were pursued, and demand would therefore have been futile. Not surprisingly, given its holding that the complaint survived the more rigorous scrutiny required by Rule 23.1, the Court also denied the defendants' motion to dismiss for failure to state a claim upon which relief can be granted.

b. In re Goldman Sachs Group, Inc. Shareholder Litigation, C.A. No. 5215-VCG (Del. Ch. Oct. 12, 2011), aff'd sub nom. Southeasern Pennsylvania Trans. Authority v. Blankfein, 44 A.3d 922 (Del. 2012) (TABLE).

In his first major corporate decision, Vice Chancellor Glasscock dismissed a stockholder derivative action brought against directors and officers of Goldman Sachs. In In re Goldman Sachs Group, Inc. Shareholder Litigation, the Court of Chancery dismissed the plaintiffs' claims for failure to make demand on Goldman Sachs's board of directors. Plaintiffs had claimed that Goldman Sachs's directors breached their fiduciary duties by failing to set or pay appropriate compensation for Goldman Sachs employees and by failing to monitor Goldman Sachs's operations adequately and allowing Goldman Sachs to act in a "grossly unethical manner." The plaintiffs' claims generally addressed Goldman Sachs's compensation and trading practices during the mortgage crisis and the subsequent fallout. Because the plaintiffs had not first made a demand that the directors pursue these claims, the Court analyzed whether the plaintiffs had adequately alleged that demand would have been futile. The Court first found that the plaintiffs failed to raise a reasonable doubt that Goldman Sachs's directors were disinterested or independent, even though plaintiffs' amended complaint alleged that the Goldman Sachs Foundation had made contributions to charitable organizations affiliated with a number of the directors. The Court next determined that the plaintiffs failed to raise a reasonable doubt that the Goldman Sachs compensation scheme was implemented in good faith and on an informed basis. Finally, the Court determined that the plaintiffs failed to plead facts showing a substantial likelihood of liability on the directors' part because no reasonable inference could be made that the directors consciously disregarded their duty to be informed about business riskassuming that such a duty exists, which the Court discussed but did not decide. The Court therefore dismissed the plaintiffs' claims with prejudice and did not need to reach the issue whether plaintiffs had stated a valid claim.

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On May 3, 2012, the Delaware Supreme Court issued a table opinion affirming the Court of Chancery's holding.

c. Kahn v. Kohlberg Kravis Roberts & Co., L.P., 23 A.3d 831 (Del. 2011).

In Kahn v. Kohlberg Kravis Roberts & Co., L.P., the Delaware Supreme Court held that a plaintiff may state a derivative claim for insider trading without a showing of actual harm to the corporation.

During a time when Primedia, Inc. ("Primedia") had authorized the redemption of $200 million of its preferred stock, Kohlberg, Kravis Roberts & Co., L.P. ("KKR")Primedia's indirect controlling stockholderpurchased, based on nonpublic information KKR received from its designees on Primedia's board, over $75 million of preferred stock. Primedia stockholders brought a derivative action against directors and officers of Primedia and against KKR, claiming that KKR and the individual defendants breached their fiduciary duties in connection with several recent transactions involving Primedia, including an issuance of convertible preferred stock, the redemption of various series of preferred stock and the sale of various assets. After a motion to dismiss was denied, Primedia formed a special litigation committee ("SLC") to investigate the claims. After the SLC had concluded its investigation, plaintiffs presented the SLC with a claim that KKR breached its fiduciary duty to Primedia by purchasing preferred stock at a time when KKR possessed material, nonpublic information (a "Brophy"4 claim). After determining that pursuit of the various claims was not in the best interests of the company, the SLC moved to dismiss. The Court of Chancery granted the dismissal.

In its granting of the motion to dismiss, the Court of Chancery held that disgorgement of profits was not an available remedy for the plaintiff's Brophy claims due to a prior Court of Chancery decision in Pfeiffer v. Toll.5 The Pfeiffer Court, interpreting Brophy by determining that "the purpose of Brophy is to 'remedy harm to the corporation,'" had limited the disgorgement remedy to instances involving the usurpation of a corporate opportunity or where an insider uses confidential corporate information to compete directly with the corporation.

The Delaware Supreme Court disagreed, finding that a corporation need not suffer actual harm for a viable Brophy claim to exist. The Supreme Court based its decision on Brophy's policy of "preventing unjust enrichment based on the misuse of confidential corporate information." In light of the fact that the Court could not determine whether the Court of Chancery had "improperly rel[ied] on Pfeiffer," the Court remanded the matter to the Court of Chancery for proceedings consistent with the holding. Accordingly, by declining to adopt Pfeiffer's interpretation of Brophy and strongly reaffirming the public policy of Brophy, the Supreme Court indicated that Delaware courts will not dismiss outright a well-pled allegation of

4 Brophy v. Cities Serv. Co., 70 A.2d 5 (Del. Ch. 1949).

5 989 A.2d 683 (Del. Ch. 2010).

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insider trading under state law simply because there is no allegation that the corporation has suffered any actual harm.

d. Lambrecht v. O'Neal, 3 A.3d 277 (Del. 2010).

In Lambrecht v. O'Neal, the Delaware Supreme Court answered a certified question of law submitted by the United States District Court for the Southern District of New York (the "Southern District Court"). In this en banc opinion, the Delaware Supreme Court clarified the standing requirements for maintaining a "double derivative" suit under Delaware law.

The underlying actions began as standard derivative lawsuits, filed on behalf of Merrill Lynch & Co., Inc. ("Merrill Lynch"), to recover for purported breaches of fiduciary duties by Merrill Lynch officers and directors prior to Bank of America Corporation's ("BofA") acquisition of Merrill Lynch in a stock-for-stock merger (the "Merger"). Following the Merger, BofA and Merrill Lynch (collectively, the "Defendants") moved to dismiss the two pending derivative actions on the ground that the plaintiffs, who were no longer stockholders of Merrill Lynch by virtue of the Merger, had lost their standing to assert derivative claims on behalf of Merrill Lynch. The Southern District Court granted the motions but dismissed the actions without prejudice, allowing the plaintiffs to replead their claims as "double derivative" actions (i.e., actions to enforce a claim of Merrill Lynch through BofA). The Defendants again moved to dismiss plaintiffs' claims for lack of standing, arguing that in order to have standing to sue double derivatively, the plaintiffs had to be able to demonstrate that: (1) they were (and remain) stockholders of BofA both after the Merger and also at the time of the alleged fiduciary misconduct prior to the Merger; and (2) BofA itself was a stockholder of Merrill Lynch at the time of the alleged fiduciary misconduct prior to the Merger. Following oral argument, the Southern District Court certified the following question to the Delaware Supreme Court:

Whether plaintiffs in a double derivative action under Delaware law, who were pre-merger shareholders in the acquired company and who are current shareholders, by virtue of a stock-for-stock merger, in the post-merger parent company, must also demonstrate that, at the time of the alleged wrongdoing at the acquired company, (a) they owned stock in the acquiring company, and (b) the acquiring company owned stock in the acquired company.

The Delaware Supreme Court ultimately concluded that the certified question must be answered in the negative. In so ruling, the Supreme Court overruled the Court of Chancery's decision in Saito v. McCall, 2004 WL 3029876 (Del. Ch. Dec. 20, 2004), to the extent it is inconsistent with the Supreme Court's reasoning and conclusions set forth in its opinion.

At the outset of its analysis, the Court noted that a double derivative action generally falls into one of two distinct categories with "different standing (and pre-suit demand) issues." In the first category are actions that are originally brought as double derivative actions on behalf of a parent corporation that has a wholly owned subsidiary at the time of the alleged misconduct at the subsidiary level. The second category includes actions, such as the underlying actions at issue here, originally brought derivatively on behalf of a stand-alone corporation that is subsequently acquired by another corporation in a stock-for-stock merger. Because the merger deprives the original derivative plaintiff of its shares in the acquired corporation and the pending derivative claim is transferred, as an asset of the acquired corporation, to the acquiring

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corporation as a matter of statutory law, the original derivative plaintiff can no longer satisfy the "continuous ownership" requirement and loses standing to maintain the derivative claim. As the Court noted, what differentiates the two categories is that in the second category, the merger operates, as a matter of law, "to divest the original shareholder plaintiff of standing to maintain the standard derivative action brought originally on behalf of the acquired corporation."

In determining whether the procedural requirements proposed by the Defendants were mandated under Delaware law, the Court first examined Defendants' conceptual argument, which was premised on "a model of a double derivative action as being two separate derivative lawsuits, stacked on top of the other." According to the Defendants, a double derivative action should be "viewed as two lawsuits in one," consisting of both a standard derivative action by the parent corporation (through a stockholder of the parent corporation), asserting a claim on the subsidiary's behalf, and a second derivative action asserting the same claim derivatively on the parent corporation's behalf as the new owner of the subsidiary. The Court noted that under the Defendants' model, all the procedural requirements for bringing each derivative action would need to be satisfied.

The Court found that Defendants' conceptual model of a double derivative action as two separate derivative lawsuits was flawed for several reasons. First, the additional procedural requirements under the Defendants' model "would render double derivative lawsuits virtually impossible to bring," in contradiction of Delaware precedent affirming the validity of such actions "in cases where standing to maintain a standard derivative action is extinguished as a result of an intervening merger."

Second, the Defendants' model would require that BofA owned Merrill Lynch stock at the time of the alleged fiduciary misconduct prior to the Merger, which erroneously presumes that to enforce Merrill Lynch's pre-Merger claim, BofA must proceed derivatively. As discussed above, as a result of the Merger, Merrill Lynch's pre-Merger claim transfers to and becomes the property of BofA as a matter of statutory law. Accordingly, "[a]s the sole owner of Merrill Lynch, BofA is not required to proceed derivatively; it may enforce that claim by the direct exercise of its 100 percent control."

Third, the Defendants' model would require that the original derivative plaintiffs owned BofA shares at the time of the alleged fiduciary misconduct, which misapplies the contemporaneous requirement contained in 8 Del. C. § 327. Because plaintiffs are enforcing BofA's post-Merger right (as the new owner of Merrill Lynch) to prosecute Merrill Lynch's pre-Merger claim and BofA is not required to have owned shares of Merrill Lynch at the time of the alleged fiduciary misconduct, plaintiffs are also not required to have owned BofA shares at that point in time. Thus, in this particular case, "it suffices that the plaintiffs own shares of BofA at the time they seek to proceed double derivatively on its behalf."

Finally, the Court concluded that a "post-merger double derivative action is not a de facto continuation of the pre-merger derivative action" but instead "a new, distinct action in which standing to sue double derivatively rests on a different temporal and factual basis—namely, the failure of the BofA board, post-merger, to enforce the premerger claim of its wholly-owned subsidiary."

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The Supreme Court also rejected the Defendants' argument that Saito v. McCall provides legal support for Defendants' proposed procedural requirements, finding that insofar as Saito addresses the standing requirements for maintaining a double derivative action, it does not represent sound Delaware law. The Supreme Court held that to the extent Saito is inconsistent with the Court's reasoning and conclusions set forth in its opinion, it is overruled.

7. Independence and Good Faith of the Special Committee.

a. In re Southern Peru Copper Corp. Shareholder Derivative Litigation, 30 A.2d 60 (Del. Ch. 2011).

In In re Southern Peru Copper Corp. Shareholder Derivative Litigation, the Court of Chancery awarded $1.263 billion as damages in a derivative action challenging the acquisition by Southern Peru Copper Corporation of another corporation controlled by Southern Peru's controlling stockholder since the Court determined after trial that the controlling stockholder defendants breached their duty of loyalty.

Grupo Mexico, S.A.B. de C.V. is the controlling stockholder of Southern Peru. In 2004, Grupo Mexico proposed that Southern Peru acquire its 99.15% interest in Minera Mexico, S.A. de C.V. for approximately $3.05 billion in the form of shares of Southern Peru common stock. In response, the Southern Peru Board of Directors formed a special committee to evaluate the transaction, which in turn retained its own advisors. After initially engaging in an "illustrative give/gets analysis" indicating a $1.4 billion disparity between the value (based on trading price) of the Southern Peru common stock that would be issued to Grupo Mexico and the value of Minera, the special committee's financial advisor abandoned such analysis and instead focused on "relative" value metrics reflecting the projected relative contribution to cash flows of the two entities to the combined corporation and similar analyses. This approach, which the Court found essentially ignored the market value of the shares being issued by Southern Peru, enabled the special committee's financial advisor to opine that the transaction was fair, and the special committee approved the transaction.

As of the signing of the definitive agreements, the value of the Southern Peru shares to be delivered to Grupo Mexico, based on Southern Peru's share price, was approximately $3.1 billion. But that value increased through closing since the consideration payable to Grupo Mexico, at the special committee's insistence, was a fixed number of shares of Southern Peru common stock and since Southern Peru's share price increased substantially during the post-signing, pre-closing time period.

Consistent with the views of the parties, the Court determined that entire fairness was the appropriate standard of review for a transaction where a controlling stockholder stood on both sides of the transaction, regardless of the existence of the special committee. Indeed, although admittedly not outcome determinative in this case, the Court determined that the defendants (other than the special committee members who had previously been dismissed since the plaintiff had failed to allege non-exculpated breaches of their fiduciary duties) bore the burden of demonstrating the entire fairness of the transaction. The Court concluded that the defendants were not entitled to a shift of the burden of persuasion given the special committee's relative ineffectiveness and issues with the supermajority stockholder vote, including that the vote was

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not "conditioned up front" and the proxy statement omitted material facts regarding the negotiation process.

Criticizing, among other actions, the special committee's extraction of a narrow mandate for evaluating the proposed transaction and failure to attempt to explore alternatives to the acquisition offered by the controlling stockholder, the "strenuous lengths" the special committee and its financial advisor went to equalize the values of Minera and Southern Peru, the special committee's ignorance of the market value of the Southern Peru shares being issued (when there was no dispute as to the cash value of those shares) and the special committee's failure to consider changing its recommendation with respect to the transaction prior to the stockholder vote in light of the post-signing performance of Southern Peru relative to its projections as well as the substantial increase in the Southern Peru share price after the execution of the definitive acquisition agreement, the Court determined that the transaction was not entirely fair. As a remedy, the Court awarded damages to approximate the difference between the price that would have been paid in an entirely fair transaction and the price actually paid. Using the trading value of the shares issued as of closing of $3.672 billion and the Court's view of the actual value of Minera as of closing of $2.409 billion (based on discounted cash flow and comparable companies analyses as well as a value implied by an initial counteroffer by the special committee), the Court determined the resulting damages to be $1.263 billion, which the Court indicated that Grupo Mexico could satisfy by returning Southern Peru shares.

b. In re Orchid Cellmark Inc. Shareholder Litigation, C.A. No. 6373-VCN (Del. Ch. May 12, 2011).

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In In re Orchid Cellmark Inc. Shareholder Litigation, the Delaware Court of Chancery denied plaintiffs' motion to enjoin preliminarily a cash tender offer by Laboratory Corporation of America Holdings, Inc. ("LabCorp") for all of the shares of Orchid Cellmark Inc. ("Orchid") for $2.80 per share under an Agreement and Plan of Merger, dated April 5, 2011 (the "Merger Agreement"). This decision reaffirms that the Court of Chancery is unlikely to overturn business decisions of boards comprised of a majority of independent directors that utilize special committees of independent directors in sale of control transactions. In addition, while not indicating at what point an amalgamation of deal protection devices becomes so burdensome and costly to render a fiduciary out illusory—but acknowledging that there could be such a point—the Court determined that the combination of deal protections in this transaction was reasonable under the circumstances. Of note, the Delaware Supreme Court declined to accept an interlocutory appeal of the decision.

Orchid has a six-member board of directors (the "Board") consisting of five independent directors and one inside director, the CEO. The Board formed a special committee consisting of three independent directors (the "Special Committee") to evaluate LabCorp's initial indication of interest. The Special Committee selected Oppenheimer & Co. ("Oppenheimer") as its financial advisor. After several rounds of negotiations and substantial work by the Special Committee and Oppenheimer, the Board ultimately voted to approve the Merger Agreement and recommended that Orchid's stockholders tender their shares to LabCorp, with the CEO abstaining from the vote.

Plaintiffs alleged that the transaction, valued at $85.4 million, was the result of a flawed and inadequate process and that Orchid's stockholders had been provided with materially misleading and incomplete information in a recommendation statement on SEC Form 14D-9 (the "Registration Statement"). Under the preliminary injunction standard, the Court first assessed whether there was a reasonable probability that plaintiffs would be successful on the merits of their claims at trial.

While plaintiffs challenged the sufficiency of the market check, the Court found that there was no indication that Orchid favored LabCorp over any other potential bidder, noting that LabCorp's earlier expressions of interest were rejected and that during the market check Oppenheimer solicited the interest of six potential bidders. As for the language used by Oppenheimer in its market check that Orchid "was not putting itself up for sale but, having received an unsolicited indication of interest, was checking the indication against the market," the Court noted that potential bidders seemingly understood that they were invited to make a bid. Most important to the Court, at the time Oppenheimer stated that the Company was not for sale, the statement was true because the Board had not formally decided to accept the LabCorp proposal.

Plaintiffs also alleged that the Board ignored the possibility that an alternative transaction involving only Orchid's U.K. operations could provide substantially superior value to Orchid's stockholders. The Court found that the Special Committee and the Board had adequately considered this alternative with Oppenheimer, which had calculated that one such indication of interest by a U.K. private equity buyer equaled approximately $2.93 per share. Nevertheless, due to the risks and uncertainties involved in pursuing an alternative transaction where no offer had yet been made by any of these private equity firms, the Board determined that a transaction

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with a private equity firm for only the Company's U.K. business was not superior to the LabCorp offer. The Court found no reason to second guess the Board's decision.

Plaintiffs also alleged that the Board and Oppenheimer disregarded management input, resulting in financial projections that undervalued Orchid. Despite plaintiffs' claim that the projections were manipulated in favor of the transaction, the Court found no basis to question the motivations of the Special Committee or to doubt the independence and credentials of Oppenheimer. The Court stated that the Special Committee and its financial advisor "are not precluded from considering various sets of financial projections before determining that one set reflects the best estimate of future performance." Also, with respect to the Board's consideration of the CEO's dissent, the Court found that the Board did not fail to consider it as plaintiffs alleged, but rather simply disagreed with the CEO's optimism toward Orchid remaining as a stand-alone company.

Finally, the Court turned to the numerous deal protection terms: a top-up option, a no-shop clause, match rights, informational match rights, a termination fee payable either where Orchid pulls out of the deal or where stockholders fail to tender a majority of shares, and Orchid's agreement to pull its rights plan with respect to LabCorp only. Taken individually, the Court found these provisions insufficient to deter a serious bidder. The Court noted that the no-shop provision was balanced by a fiduciary out that allows the Board to negotiate and exchange confidential information with a bidder who presents what is, or is likely to become, a superior offer. Rejecting plaintiffs' argument that termination fees should be measured by a company's enterprise value (i.e., Orchid's value after discounting its cash on hand), the Court followed Cogent6 and found the $2.5 million termination fee to be 3% of Orchid's equity value and therefore reasonable. In evaluating the cumulative effect of all the deal protection devices, as it was also required to do, the Court found that a sophisticated buyer could overcome them if it wanted to make a serious bid; accordingly, they were reasonable under the circumstances.

Plaintiffs also alleged that defendants had made several inadequate or misleading disclosures in the Registration Statement. First, plaintiffs alleged that the disclosures surrounding several U.K. private equity firms' interest in purchasing only Orchid's U.K. operations were inadequate. While the Court stated that the materiality of disclosing the $2.93 per share price was a close call, the Court ultimately determined that such disclosure was not required. Relatedly, plaintiffs alleged that the terms of Oppenheimer's engagement biased it towards recommending the LabCorp tender offer and against a sale of only Orchid's U.K. operations. Plaintiffs argued that Oppenheimer was only engaged to advise Orchid regarding transactions involving the sale of "all or substantially all of the assets or outstanding securities of the Company," which would exclude a transaction involving only a sale of Orchid's U.K. operations, but the Court found that the engagement involved a broader range of transactions. Distinguishing the recent Atheros decision,7 the Court found that the terms of Oppenheimer's engagement did not create an unavoidable conflict of interest that required a curative disclosure.

6 In re Cogent, Inc. S'holder Litig., 7 A.3d 487 (Del. Ch. 2010).

7 In re Atheros Commc'ns, Inc., 2011 WL 864928 (Del. Ch. Mar. 4, 2011).

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Second, plaintiffs alleged that Orchid should have disclosed projections by Orchid's management regarding its prospects as a continuing stand-alone entity, which were more optimistic than those used by Oppenheimer in its fairness opinion and disclosed to stockholders in the Registration Statement. However, given that (i) the Board was independent and deemed a different set of projections more reliable, (ii) such projections were disclosed, and (iii) stockholders were cautioned about the reliability of such projections, the Court found that plaintiffs had not shown a reasonable probability that they would succeed in showing that disclosure of management's projections would be material to a reasonable stockholder's decision, although the Court noted that this too was a close call.

Third, plaintiffs argued that Orchid should have disclosed that Oppenheimer told potential bidders that the company was not conducting an auction. The Court reiterated that sophisticated buyers knew that they could have indicated their interest in response to Oppenheimer's inquiries and found that further disclosures would not be material to a stockholder's decision.

Fourth, plaintiffs argued that Orchid should have disclosed the reasons why its two largest stockholders decided not to enter tender agreements sought by LabCorp in conjunction with the transaction. The Court confirmed that Orchid should not be held responsible for or otherwise required to report on a third-party stockholder's thought process.

Fifth, plaintiffs alleged that additional details regarding conflicts within the Board over negotiations with LabCorp must be disclosed. Although the Registration Statement did not disclose a preliminary 4-to-2 vote to continue negotiations with LabCorp (with the CEO opposing), the Court found that disclosing the CEO's opposition to the transaction and his abstention from the final vote put the stockholders on notice that there was disagreement within the Board about whether to proceed.

Finding no reasonable probability of success on plaintiffs' price and process or disclosure claims, the Court briefly commented that the irreparable harm prong counseled against an injunction as well. Finally, in balancing the equities, the Court noted that it should be careful about depriving stockholders of their opportunity to make a choice to tender, especially with a significant premium of 40% to market price, and that this tipped the balance against an injunction.

c. Krieger v. Wesco Financial Corp., C.A. No. 6176-VCL (Del. Ch. May 10, 2011) (TRANSCRIPT).

In Krieger v. Wesco Financial Corporation, the Delaware Court of Chancery denied plaintiff stockholder's motion for a preliminary injunction against a proposed acquisition of Wesco Financial Corporation (the "Company") by Berkshire Hathaway ("Berkshire"), the holder of 80.1% of the Company's common stock, in which Berkshire sought to acquire the remaining outstanding shares of common stock.

The transaction was negotiated under the direction of and approved by a fully empowered and independent special committee of the board of directors of the Company and was subject to a nonwaivable majority of the minority voting condition. Additionally, to the extent that no

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transaction was approved, the Company would continue to operate as it did prior to the proposal and Berkshire would maintain its 80.1% ownership of the Company. Under the terms of the proposed acquisition, Company stockholders would be entitled to elect either Berkshire Class B shares or cash valued at the book value per share of the Company, without any proration or reallocation.

The Court followed the "unified standard of review" of In re CNX Gas Corp. Shareholder Litigation, 4 A.3d 397 (Del. Ch. May 25, 2010), under which the business judgment rule presumptively applies where a transaction is (i) negotiated and approved by a special committee and (ii) conditioned on the affirmative vote of a majority of the unaffiliated stockholders. The Court found that the transaction satisfied both prongs of the unified standard of review and refused to issue the preliminary injunction. In reaching its conclusion, the Court did not find plaintiff's arguments persuasive that certain members of the special committee were interested based on their ownership of shares of Berkshire. The Court also rejected plaintiff's argument that the majority of the minority vote was defective because it failed to exclude the Company's largest minority stockholder who was also a member of the special committee. The Court, in declining to exclude such stockholder, noted that although there may be times when the Court would be concerned about the divergent interests of a large stockholder and other minority stockholders, this was not such an instance.

The plaintiff stockholder also asserted that stockholders were entitled to appraisal rights in connection with the permitted acquisition and, relatedly, that the Company did not adequately disclose in the proxy statement the existence of such appraisal rights. The Company's proxy statement stated that appraisal rights are only available under Delaware law where stockholders are required to accept cash for their shares and, because stockholders were able to choose between cash or stock (although the default option was receiving cash consideration), neither the Company nor Berkshire "believe[d] that Wesco shareholders will have any appraisal rights with respect to the shares of Wesco common stock they hold in connection with the merger." The Court appeared to be unpersuaded by the plaintiff stockholder's argument that the option to choose between cash or shares, with a default of cash, resulted in a stockholder being "required to" accept cash for purposes of appraisal rights. Similarly, the Court was unwilling to find that the Company's description of its view of the matter in the proxy statement was an inadequate disclosure. Rather, the Court found that the Company had expressed its view on the unsettled matter of law and held that such statement was sufficient under General Datacomm Industries v. Wisconsin Investment Board, 731 A.2d 818 (Del. Ch. 1999). Moreover, the Court found that the threat of irreparable harm to the stockholders if they were in fact entitled to appraisal rights was de minimis, as any such harm could be remedied at a later time as part of a quasi-appraisal proceeding.

d. S. Muoio & Co. LLC v. Hallmark Entertainment Investments Co., C.A. No. 4729-CC (Del. Ch. Mar. 9, 2011), aff'd, 35 A.3d 419 (Del. 2011) (TABLE).

In S. Muoio & Co. LLC v. Hallmark Entertainment Investments Co., the Court of Chancery held that a recapitalization of Crown Media Holdings, Inc. ("Crown") by its controlling stockholder and primary debtholder, Hallmark Cards, Inc. and its affiliates (collectively "Hallmark"), was entirely fair. The Court closely examined the special committee

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process at issue, and its post-trial opinion demonstrates the benefits of a properly functioning special committee.

Hallmark first proposed a recapitalization of Crown on May 28, 2009. At that time, Crown owed Hallmark over $1.1 billion in debt and the debt service on Crown's obligations had risen to $100 million a year. Crown's cash flows, however, were insufficient to pay the interest or principal on the debt, which matured in 2011. To allow Crown to operate despite its debt load, Hallmark and Crown had in prior years negotiated waiver and standstill agreements that enabled Crown to defer payment on the debts and avoid an event of default and potential bankruptcy.

Upon receiving the recapitalization proposal, Crown's board of directors formed a special committee consisting of three independent directors of Crown (the "Special Committee"). The authorizing resolutions empowered the Special Committee to consider Hallmark's proposal as well as such other matters as the Special Committee deemed advisable. Following its establishment, the Special Committee retained Richards, Layton, & Finger, P.A., as its legal advisor and Morgan Stanley as its primary financial advisor; at a later stage in the process, the Special Committee also retained Houlihan Lokey to render an opinion as to the fairness of the recapitalization.

In consultation with Morgan Stanley, the Special Committee considered all available options, including a third-party refinancing, a third-party sale, simply rejecting Hallmark's proposal in favor of the status quo, or negotiating the recapitalization with Hallmark. After extensive due diligence, Morgan Stanley advised the Special Committee that Crown's value did not exceed the value of its debt and that Crown was unlikely to be able to meet its debt obligations as they matured. In light of these facts, the Special Committee determined that the status quo (i.e., expecting Hallmark to grant further extensions to Crown to repay its debt) was unsustainable and that Crown faced serious insolvency risks. Thus, the Special Committee decided not to seek further debt extensions from Hallmark. Additionally, while the Special Committee remained open to the possibility of a third-party refinancing or sale, it considered both events unlikely, given Crown's financial situation, prior extensive sale efforts and the advice of its financial advisors.

The Special Committee's initial response to Hallmark's proposal was to ask Hallmark to take Crown private at a price fair to the minority stockholders, however Hallmark rejected that alternative. In response, the Special Committee then submitted a counterproposal to the recapitalization. Following months of negotiation, Crown and Hallmark announced the approval of a non-binding term sheet and nearly a month later the parties entered into a formal agreement providing for the terms of the recapitalization. The recapitalization agreed to by the parties significantly improved on the terms of Hallmark's initial proposal. Notable terms of the recapitalization included Hallmark exchanging its $1.1 billion in debt for $315 million in new debt and $185 in preferred stock, Hallmark's guarantee of a new revolver for Crown, and a standstill agreement limiting Hallmark's ability to purchase or sell Crown stock (and, importantly, restricting its ability to effect a short-form merger). As the Court noted in its analysis of the transaction, the Special Committee had negotiated for a lower amount of debt with lower interests rates and longer maturities than Hallmark had originally proposed. The Court also noted that the Special Committee achieved one of its important goals when Hallmark

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agreed to reduce Crown's debt level to $500 million. This reduction meant that Crown's minority stockholders' equity would have value to the extent Crown was worth more than $500 million, instead of the pre-recapitalization level of $1.1 billion.

Plaintiff S. Muoio & Co. LLC ("Muoio"), a Crown stockholder, filed suit on July 13, 2009, seeking to enjoin the recapitalization. The parties agreed to stay the litigation while the Special Committee considered Hallmark's proposal. After the Special Committee approved the recapitalization agreement with Hallmark, Muoio filed an amended complaint seeking rescission of the recapitalization. Muoio alleged that the recapitalization process was flawed, including claims that (i) Hallmark dominated the Special Committee process; (ii) the chair of Special Committee was not independent; (iii) the Special Committee's mandate was too narrow; and (iv) the recapitalization was timed to disadvantage Crown's minority stockholders. Muoio further alleged that the recapitalization significantly undervalued Crown and therefore improperly transferred wealth and voting power from Crown's minority stockholders to Hallmark.

The Court examined the recapitalization pursuant to the exacting entire fairness standard, requiring a review as to fair price and fair dealing. While the initial burden of establishing entire fairness rests with the party who stands on both sides of a transaction, the Court shifted the burden of proof to Muoio because the recapitalization had been negotiated and approved by an independent special committee.

After evaluating the actions of the Special Committee, the Court held that the recapitalization was the result of a fair process. The Court noted that the Special Committee met 29 times over a nine-month period to consider the recapitalization and potential alternatives. The Court disagreed with Muoio's allegations that Hallmark dominated the formation of the Special Committee by drafting the resolutions establishing and empowering the Special Committee and by suggesting possible counsel for the Special Committee. Instead, the Court pointed out that the Special Committee's counsel had completely redrafted the resolutions—which, significantly, provided the Special Committee with veto power over any transaction. The Court also found that the Special Committee selected its counsel based on the recommendation of one of its members, and not at Hallmark's behest.

The Court also rejected Muoio's challenge to the independence of the chairman of the Special Committee. Muoio had argued that the chairman lacked independence by virtue of (i) his charitable and civic service (which included serving on certain advisory boards with Hallmark executives and members of the Hall family, which controls Hallmark) and (ii) his fundraising efforts on behalf of the University of Kansas (which received funding from the Hall family). The Court declined to find that the chairman was not independent, noting, among other things, that he had received no salary from the University of Kansas and that he had never solicited the Hall family or Hallmark on the university's behalf. Further, the Court stated that "the individual committee members impressed me as directors willing to assume the task of the committee 'in a rigorous and independent manner.'"

Muoio further argued that the Special Committee was "hamstrung by its narrow mandate." The Court rejected this argument, noting that the Special Committee was broadly empowered to consider the recapitalization as well as other matters it deemed advisable. Further, the Court found that the Special Committee members viewed their mandate broadly and

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understood that they had the power and authority to negotiate with Hallmark, recommend or reject the recapitalization, and consider all alternatives.

In addition, the Court did not credit Muoio's allegation that Hallmark's recapitalization proposal was opportunistically timed. The Court noted that this "timing" theory was almost entirely based on Muoio's allegation that Crown had recently turned EBITDA-positive and was poised for substantial growth. The Court stated that if Crown was likely to experience a sudden and dramatic increase in value, either Hallmark or one of the sophisticated industry players that had recently examined Crown would have sought to capture this upside. Instead, despite the fact that Crown had been extensively shopped since 2005, no offer exceeding the value of Crown's debt had emerged.

In evaluating fair price of the recapitalization under the entire fairness standard, the Court stated that Crown's financial situation, which included serious liquidity issues, could not be ignored. The Court analogized this case to In re Vision Hardware Group, Inc. and In re Hanover Direct, Inc. Shareholder Litigation. In those cases, both of which involved the valuation of insolvent or nearly insolvent corporations, the Court recognized the reality that the value of a corporation's equity may approach zero as it approaches insolvency. In light of the economic problems facing Crown, the Court held that the recapitalization was entirely fair on its face.

Despite finding the recapitalization to be entirely fair, the Court nonetheless examined the parties' competing valuations. Muoio's expert witness proffered a valuation of Crown nearly three times higher than any other valuation. Further, Muoio's expert rejected his own comparable companies and comparable transactions analyses as absurdly low. In contrast, the defendants' experts utilized a variety of valuation techniques and considered valuations of Crown recently performed by potential acquirers. The Court held that the defendants' valuation analyses were more reliable because, among other reasons, the multiple methods of analysis served as a check on the reasonableness of each individual valuation technique.

The Court ultimately concluded that the recapitalization was entirely fair, and stated the Special Committee "reached the best deal possible through intense negotiations that were appropriately adversarial." Muoio filed an appeal of the decision on April 7, 2011.

e. London v. Tyrell, C.A. No. 3321-CC (Del. Ch. Mar. 11, 2010).

In London v. Tyrell, the Court of Chancery denied a special litigation committee's ("SLC") motion to dismiss, finding that there were material questions of fact regarding the SLC's independence and the reasonableness and good faith of its investigation.

This action, brought by two former directors individually and derivatively on behalf MA Federal, Inc. ("iGov"), alleged several violations of fiduciary duty in connection with the enactment of the company's Executive Incentive Plan ("EIP"). Specifically, the complaint alleged that the defendants, the iGov directors responsible for approving the EIP, manipulated financial projections in order to obtain an artificially low valuation of the company. This, according to the plaintiffs, allowed the defendants to receive underpriced shares and options.

Though not enacted by the iGov board until January 2007, the EIP was proposed and developed over the summer of 2006. In connection therewith, the board retained Chessiecap

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Securities, Inc. to determine the equity value of the company as of July 31, 2006. To develop its valuation, the company provided Chessiecap with the "Original Chessiecap Forecast," a fiscal year 2007 revenue projection reflecting EBITDA of approximately $3 million.

In October 2006, Chessiecap returned a draft valuation, showing iGov's equity value at $5.5 million, to Michael Tyrell, the company's CFO. After reviewing the draft valuation, Tyrell sent Chessiecap an email expressing his belief that the draft valuation overstated the value of iGov. In support of this position, Tyrell pointed to several specific line items that he believed were no longer accurate. Tyrell also sent Chessiecap the "Revised Chessiecap Forecast," which reduced the projected revenue of the company in several areas and reflected EBITDA of $1.8 million. The final valuation received from Chessiecap, after consideration of the revised forecast, reflected a lower equity value of $4.7 million.

As of January 1, 2007, the plaintiffs comprised one-half of the iGov board; two of the defendants, Nevan and Hupalo, comprised the other half. After delivery of the final valuation, the plaintiffs requested, and received, the Revised Chessiecap Forecast. After reviewing the underlying financials, the plaintiffs objected to using Chessiecap's final valuation for purposes of the EIP because it was based on outdated and unreliable information. The plaintiffs asserted that while the Revised Chessiecap Forecast incorporated negative developments in the company's financial prospects after July 31, 2006, it failed to include material positive developments that occurred after the valuation date. Moreover, the plaintiffs pointed out that several of the company's internal valuations from that period projected EBITDA of at least $3 million.

After it became clear that the plaintiffs would not approve the EIP, defendants Nevan and Hupalo, along with an otherwise uninvolved iGov officer, executed written stockholder consents removing the plaintiffs from the board and electing Tyrell as a director. Several weeks later, the newly-comprised board adopted the EIP. The defendants were awarded 60 percent of the options available under the plan.

By the time the plaintiffs brought suit, the iGov board had been expanded with the addition of Vincent Salvatori and John Vinter. After the Court concluded that the amended complaint "easily survived" the defendants' motion to dismiss, the iGov board formed a two-person SLC comprised of the two new directors. The committee conducted a four-month investigation which concluded that the board had employed a fair process and that the exercise price of the options was within the range of fair market value. The SLC's report also found that maintaining the suit was not in the best interests of the company.

Chancellor Chandler began his analysis by reiterating the well-known, two-step Zapata standard applied where an SLC evaluates a pending lawsuit and recommends its dismissal. First, the Court evaluates the committee's independence and considers whether the SLC conducted a good-faith investigation -- reasonable in scope and revealing a reasonable basis for its recommendation. Second, the Court may, in its discretion, apply its own independent business judgment to evaluate the best interests of the corporation.

The Court determined that both members of the SLC had relationships with Tyrell that raised a material question as to their independence. Vinter's wife was Tyrell's cousin, and although Tyrell and his cousin were not "close," the Court concluded that "appointing an

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interested director's family member to an SLC will always position a corporation on the low ground." Salvatori, on the other hand, had hired Tyrell as a consultant for his own business several years earlier. Salvatori credited Tyrell with allowing him to sell that business at a significant profit. Thus, it was conceivable that Salvatori would feel a sense of obligation towards Tyrell. This, according to the Court, raised a material question with regard to his independence.

The Court also found that the SLC had failed to conduct a good-faith, reasonable investigation. Addressing the duty of care claims, the SLC based its recommendation to dismiss on the iGov charter's Section 102(b)(7) exculpatory provision. However, under Delaware law, an exculpatory provision only precludes a court from entering judgment for monetary damages. Here, where the plaintiffs sought rescission of the EIP, a Section 102(b)(7) provision would not preclude relief. Moreover, the Court explained that the company's exculpatory provision does not shield the defendants from liability where they "derived an improper personal benefit" from the questioned transaction. Thus, the Court found that it was unreasonable to conclude, solely based on the charter's Section 102(b)(7) provision, that the duty of care claims should be dismissed.

With regard to its analysis of the duty of loyalty claims, the Court criticized the SLC's narrow focus and its persistent failure to examine critically the defendants' version of disputed facts. In its report, the SLC concluded that it was permissible for Tyrell to maintain and employ different revenue forecasts for different purposes. The Court, however, took issue with the scope of the SLC's investigation, concluding that it had failed to deal with the issue of fair process raised by the claims fully. For example, the SLC did not investigate why the company's other internal projections all showed EBITDA of approximately $3 million. Additionally, the SLC accepted Tyrell's representation that the Revised Chessiecap Forecast was the company's most accurate FY07 forecast without asking why it was never used in any other context. After listing numerous similar examples, the Court found that such an inadequate investigation could not provide a reasonable basis for recommending dismissal of the duty of loyalty claims.

8. Governing Pleading Standard in Delaware.

Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, 27 A.3d 531 (Del. 2011).

In Central Mortgage Co. v. Morgan Stanley Mortgage Capital Holdings LLC, the Delaware Supreme Court declined to address whether the "plausibility" standards set forth in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009) should be applied in Delaware, and instead unanimously held that until the Delaware Supreme Court "decides otherwise or a change is duly effected through the Civil Rules process, the governing pleading standard in Delaware to survive a motion to dismiss is reasonable 'conceivability.'"

Central Mortgage Company ("CMC") brought this action against Morgan Stanley Mortgage Capital Holdings LLC ("Morgan Stanley") after certain mortgages for which CMC purchased servicing rights from Morgan Stanley began to fall delinquent during the early financial crisis in 2007. CMC made a variety of claims, and the Court of Chancery dismissed

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those claims with prejudice, except for two breach of contract claims, which the Court dismissed without prejudice. As to those claims, the Court of Chancery determined that CMC failed to follow the requirements of the notice provision of the master contract by failing to provide Morgan Stanley adequate notice of the alleged breaches and an opportunity to cure. In dismissing these claims, the Court of Chancery cited the Twombly-Iqbal plausibility standard.

The Supreme Court noted that since Twombly was decided in 2007, the Court of Chancery has, on various occasions, cited with approval the "plausibility" standard. Prior to this case, however, the Delaware Supreme Court had not addressed the appropriate pleading standard since it reaffirmed the "conceivability" standard in 2002. Because the issue had not been briefed by either party, the Supreme Court declined to use this case as a vehicle to make a final determination on whether Twombly-Iqbal should apply in Delaware. Instead, it made clear that until it (or the legislature) decides otherwise, the standard in Delaware is "conceivability."

The Court explained that Delaware's "conceivability" standard is "more akin to possibility." The federal "plausibility" standard, by contrast, falls somewhere between mere "possibility" but short of "probability." Under Delaware's "minimal" pleading standard "a trial court should accept all well-pleaded facts as true, accept even vague allegations in the Complaint as 'well-pleaded' if they provide the defendant notice of the claim, draw all reasonable inferences in favor of the plaintiff, and deny the motion unless the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof."

The Supreme Court determined that under the conceivability standard, it was sufficient that the complaint alleged that CMC did provide prompt notice with specific grounds for breach. By deciding that CMC did not provide adequate notice, reasoned the Supreme Court, the trial court inappropriately shifted the burden, holding CMC to a higher pleading standard than required. The Supreme Court made clear, however, that it was not making a judgment on the substantive adequacy of the notice or whether the notice provided could survive a motion for summary judgment.

9. Stockholder Rights Plans.

a. Air Prods. & Chems., Inc. v. Airgas, Inc., 16 A.3d 48 (Del. Ch. 2011).

Marking the latest chapter in the attempt of Air Products and Chemicals, Inc. to acquire Airgas, Inc., the Court of Chancery ruled for defendant Airgas. In Air Products & Chemicals, Inc. v. Airgas, Inc., the Court found following trial that the Airgas board had not breached its fiduciary duties and refused to order Airgas to redeem its poison pill. Describing his holding as constrained by Delaware Supreme Court precedent, Chancellor Chandler found that the Airgas board had met its burden under Unocal to articulate a legally cognizable threat the allegedly inadequate price of Air Products' offer, coupled with the fact that a majority of Airgas's stockholders would likely tender into that inadequate offer — and had taken defensive measures — including the maintenance of a stockholder rights plan — that fall within a range of reasonable responses proportionate to that threat. Concluding that the Airgas board had not breached its fiduciary duties by preventing Air Products from taking its tender offer to Airgas stockholders for over a year, the Court found that the Airgas board had acted in good faith and in

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the honest belief that Air Products' $70 per-share offer is inadequate. Noting that, in his personal view, Airgas's rights plan had "served its legitimate purpose," the Chancellor followed the Delaware Supreme Court's recognition that inadequate price could be a valid threat to corporate policy and effectiveness. Therefore, the Court noted, a board acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, could address that threat by blocking a tender offer and forcing the bidder to elect a board majority that supports its bid.

b. eBay Domestic Holdings, Inc. v. Newmark, 16 A.3d 1 (Del. Ch. 2010).

The Delaware Court of Chancery's decision in eBay Domestic Holdings, Inc. v. Newmark provides important insight on the use—and possible limitations—of takeover defense mechanisms in the context of private, closely held corporations.

The litigation arose from a dispute among the stockholders of craigslist, Inc. craigslist is a private Delaware corporation that has only three stockholders: Craig Newmark ("Newmark"), James Buckmaster ("Buckmaster") and eBay Domestic Holdings, Inc. ("eBay"). Newmark and Buckmaster—craigslist's founder and CEO, respectively—collectively own a majority of craigslist's shares and are the only two members of craigslist's board of directors.

eBay acquired its shares of craigslist in 2004 when a stockholder named Philip Knowlton began to shop his shares to third parties. eBay hoped that purchasing Knowlton's 28.4% interest in craigslist would ultimately lead to a deal whereby eBay would be able to acquire craigslist and capitalize on the monetization potential of craigslist.

In what ultimately would be a $32 million transaction, eBay paid $16 million for Knowlton's shares and paid Newmark and Buckmaster $16 million collectively in exchange for certain minority investor protections. The purchase was memorialized in a stock purchase agreement (the "SPA") and a stockholders' agreement (the "Shareholders' Agreement"). Among other protections, the Shareholders' Agreement granted eBay the right to consent to certain corporate governance transactions, including any charter amendment that adversely affects eBay, and granted the parties rights of first refusal over each other's shares. As would prove to be important, if eBay engaged in "Competitive Activity," as defined in the Shareholders' Agreement, it would lose both its consent rights over certain corporate governance transactions and its right of first refusal over Newmark's and Buckmaster's shares. At the same time, however, Newmark and Buckmaster would lose their right of first refusal over eBay's shares, making eBay's shares freely transferable.

After the transaction closed, craigslist reincorporated in Delaware. The Delaware charter provided for a three-person board of directors elected by cumulative voting, thus ensuring that eBay could use its 28.4% stake in craigslist to elect one of the three members of the craigslist board unilaterally. At the time that eBay purchased its craigslist stock, Newmark and Buckmaster had entered into a voting agreement ensuring that their shares would be voted in such a way that the remaining two members of craigslist's board of directors would be elected by Newmark and Buckmaster, respectively.

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The Court of Chancery's opinion describes a relationship between two companies that "are, to put it mildly, different animals." eBay "operates its business with an eye to maximizing revenues, profits, and market share." craigslist, by contrast, "largely operates its business as a community service," with nearly all of its classified advertisements being placed free of charge. Perhaps not surprisingly, the relationship between the stockholders quickly began to deteriorate.

In 2007, eBay launched a competing online classifieds website, called Kijiji, in the United States. craigslist sent eBay a notice of "Competitive Activity" within the meaning of the Shareholders' Agreement, and after failing to cure, eBay lost both its consent rights over certain corporate governance transactions and its right of first refusal over Newmark's and Buckmaster's shares. Buckmaster and Newmark encouraged eBay to sell back its craigslist shares and began exploring ways to ensure that having a competitor as a large stockholder with the ability to elect a director would not harm craigslist.

After several months of consideration, Newmark and Buckmaster approved three measures that were the subject of the Court of Chancery's post-trial opinion: (1) the implementation of a staggered board through amendments to the craigslist charter and bylaws (the "Staggered Board Amendments") (thereby preventing eBay from utilizing cumulative voting to elect one of craigslist's three directors unilaterally); (2) the adoption of a stockholder rights plan (the "Rights Plan"); and (3) an offer "to issue one new share of craigslist stock in exchange for every five shares on which a craigslist stockholder granted a right of first refusal in favor of craigslist" (the "ROFR Transaction"). Subsequently, eBay initiated the action at issue here, alleging that the three measures were approved in breach of the fiduciary duties that Newmark and Buckmaster owed to eBay in their capacities as directors and controlling stockholders.

The Court determined that the three measures approved by Newmark and Buckmaster were not "inextricably related" defensive actions such that all three would have to be analyzed collectively under the Unocal standard of review. With respect to the Staggered Board Amendments, the Court found that implementation of the staggered board structure was not a defensive measure taken for entrenchment purposes and, therefore, should not be reviewed under Unocal because, even without a staggered board, Newmark and Buckmaster would control a majority of the craigslist board by virtue of their voting agreement. The Court also determined that entire fairness review was not appropriate because eBay failed to rebut the presumption of the business judgment rule, rejecting eBay's arguments that Newmark and Buckmaster were personally interested in the Staggered Board Amendments and approved the Staggered Board Amendments in bad faith. In particular, the Court was not persuaded that the Staggered Board Amendments should be reviewed for entire fairness on the ground that eBay was affected differently than Newmark and Buckmaster by the implementation of the staggered board structure. The Court therefore reviewed the Staggered Board Amendments under the business judgment rule standard and held that the Staggered Board Amendments were a reasonable response to a concern (one validated by evidence adduced at trial) that eBay would misuse confidential craigslist information it learned at board meetings to obtain a competitive advantage.

The other two measures challenged by eBay did not stand up under the Court's review. With respect to the Rights Plan, the Court (utilizing the Unocal standard of review) held that potential changes in the craigslist corporate culture, standing alone, were not a threat to corporate policy or effectiveness sufficient to justify a defensive measure. Rather, the Court found that in

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order to protect "corporate culture" with a defensive measure such as a rights plan, there must be some evidence that the culture will "lead at some point to value for stockholders." The Court found that in the absence of any "serious attempt" by Newmark and Buckmaster to prove that "the craigslist culture, which rejects any attempt to further monetize its services, translates into increased profitability for stockholders," craigslist did not possess "a palpable, distinctive and advantageous culture that sufficiently promotes stockholder value to support the indefinite implementation of a poison pill." The Rights Plan was therefore held invalid.

With respect to the ROFR Transaction, because the Court held that Newmark and Buckmaster stood on both sides of the ROFR Transaction and concomitant share issuance in the traditional sense, that measure was analyzed under the entire fairness standard. The Court held that the ROFR Transaction failed the "fair price" prong of the entire fairness test for at least two reasons. First, although each craigslist stockholder was offered one additional craigslist share in exchange for granting a right of first refusal over five craigslist shares, the Court found that "it actually costs eBay more to grant a right of first refusal over five of its craigslist shares than it actually costs [Newmark or Buckmaster] to do the same" because Newmark's and Buckmaster's shares were already encumbered (by a right of first refusal between Newmark and Buckmaster) and eBay's shares were not. Thus, while Newmark and Buckmaster could receive an additional craigslist share in exchange for five already-encumbered shares, the Court found that eBay would have to provide more consideration in the form of five freely transferable shares to receive an additional craigslist share. Second, the Court held that the transaction put eBay in a situation where either choice it made would result in economic harm to eBay while simultaneously benefitting Newmark and Buckmaster. If eBay agreed to accept the ROFR Transaction, it would suffer an illiquidity discount by encumbering its then freely transferable shares. If eBay did not agree to the ROFR Transaction, its ownership interest in craigslist would be diluted. Having failed the "fair price" prong of the entire fairness test, the ROFR Transaction was found to be invalid.

As a remedy, the Court ordered rescission of the Rights Plan and the ROFR Transaction.

c. Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310 (Del. Ch. 2010), aff'd, 15 A.3d 218 (Del. 2011) (TABLE).

In Yucaipa American Alliance Fund II, L.P. v. Riggio, the Delaware Court of Chancery confirmed in a post-trial decision that a board's decision to adopt and maintain a stockholder rights plan triggered upon the acquisition of beneficial ownership of more than 20% of the company's shares is subject to Unocal review, even where the board "grandfathers" an existing significant stockholder from the operation of the plan. The Court ultimately concluded in the instant case that the board's adoption and use of the rights plan was a good faith, reasonable response to a threat to the company and its stockholders and, therefore, dismissed the plaintiffs' claims for breach of fiduciary duty.

In November 2009, funds associated with Ronald Burkle ("Yucaipa") doubled their stake in Barnes & Noble, Inc. ("B&N") to nearly 18% through open-market purchases. Yucaipa disclosed these acquisitions on Schedules 13D in which it criticized B&N's management and indicated that it might pursue various M&A transactions. In response, B&N's board adopted a rights plan with a 20% triggering threshold. The rights plan included a "grandfather" clause for

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Leonard Riggio, B&N's founder and the holder of approximately 30% of B&N's stock, but limited further acquisitions by Riggio. Yucaipa brought suit, claiming that the adoption of the rights plan, and the board's refusal to amend the plan according to Yucaipa's requests, constituted a breach of fiduciary duties.

Yucaipa argued in the first instance that the board's decision to adopt the rights plan was subject to entire fairness review, claiming that Riggio, as the largest stockholder, stood on both sides of that matter. The Court rejected this argument, noting that the rights plan did not confer any special benefit upon Riggio. While the rights plan "grandfathered" his existing stake, it also prevented him from acquiring a majority stake in B&N. In any case, the approval of the rights plan by an independent board majority invoked the business judgment rule standard. Alternatively, Yucaipa argued that the board was required to demonstrate a "compelling justification" under Blasius for adopting the rights plan, arguing that the plan was adopted for the purpose of disenfranchising stockholders. Noting that the Blasius standard of review applies where the board acts for the primary purpose of impeding a stockholder vote, the Court rejected Yucaipa's argument. The Court found that the evidence reflected that the Board's motivation was to protect B&N from the threat of a group of stockholders potentially acquiring control without paying a control premium.

Yucaipa also challenged the rights plan on the basis that it prevented groups of stockholders holding over 20% in the aggregate from forming coalitions to mount a proxy contest. To this argument, the Court confirmed the following: (1) it is not unprecedented for rights plans to restrict stockholders collectively owning shares in excess of the triggering threshold from banding together to promote a joint slate in a proxy context, and (2) the test articulated in Unocal (generally, the board must reasonably perceive a threat to corporate policy and effectiveness, and the response must be proportionate to the threat posed) is the appropriate standard of review in determining whether a rights plan is being exercised in a manner consistent with the board's fiduciary duties.

In its Unocal analysis, the Court noted that the concepts of preclusion and coercion are useful in determining whether the defensive measure is reasonable. In a footnote, the Court expressed skepticism about the view that a rights plan is "not preclusive if it merely leaves open a mathematical or theoretical possibility of winning a proxy contest," suggesting instead that the rights plan must not prevent the insurgent from having a "fair chance for victory." The Court further stated that where a plan "unfairly tilts the electoral playing field" against the insurgent, its operation may be enjoined. In the present case, however, B&N's rights plan did not unreasonably restrict Yucaipa's ability to mount a proxy contest because, according to the Court, even with the rights plan in place, Yucaipa had a fair chance to prevail in the proxy contest.

The Court next addressed Yucaipa's argument that the rights plan was not a reasonable response to the threat posed. Specifically, Yucaipa argued that Riggio's significant equity stake made the use of a 20% threshold unreasonable. Yucaipa argued that the board's refusal to amend the rights plan to increase the triggering threshold to 37% at Yucaipa's request was unreasonable. (A 37% threshold would have enabled Yucaipa and fellow investor Aletheia, which had amassed a 17% stake in B&N and which had a history of following Yucaipa's investment decisions, to select and promote a joint slate.) The Court acknowledged that Riggio likely had reasons to view other significant stockholders as a threat and that those concerns were distinct from the

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threats posed to B&N. The Court also expressed some concern with the process through which the rights plan was adopted, noting in particular that the independent directors did not exclude Riggio and other arguably interested directors from the board room during a discussion of Riggio's own interests and the possibility that those interests might pose a threat to corporate policy and effectiveness. Nonetheless, the Court was convinced that the board acted loyally—that is, in the best interests of the B&N and its stockholders generally, rather than just Riggio—and also was convinced that the rights plan is not an unreasonable device that "fundamentally restricts" Yucaipa from winning a proxy contest.

d. Selectica, Inc. v. Versata, Inc., C.A. No. 4241-VCN (Del. Ch. Feb. 26, 2010), aff'd, 5 A.3d 586 (Del. 2010).

In Moran v. Household Int'l, the Delaware Supreme Court approved the adoption of the first stockholder rights plan but cautioned that the use of such plans would be subject to careful scrutiny under Unocal. A quarter century later, the Delaware Court of Chancery issued this opinion sustaining under the Unocal standard a board's decision to adopt, and then a special committee's decision to use, a poison pill rights plan with a 4.99% flip-in trigger, designed to protect the usability of the corporation's net operating losses ("NOLs"). In its post-trial opinion, the first court review of the use of an NOL pill, the Delaware Court of Chancery held that the board of directors had valid reasons to believe that the triggering stockholder's acquisitions posed a threat to the usability of the corporation's NOLs under Section 382 of the Internal Revenue Code, that protection of the NOLs was a valid corporate objective, that the NOL pill was not an unlawfully preclusive defensive measure (either per se or as applied) and that the decisions to exchange the rights for newly-issued shares and to issue a new rights dividend (thereby "reloading" the pill) were proportionate and entitled to deference under the business judgment rule.

Selectica is a microcap enterprise software company that accumulated substantial NOLs over the years. At the end of July 2008, Versata, a competitor whose relationship with Selectica the Court characterized as "complicated and often adversarial," made a proposal to acquire some or all of Selectica's business. The board rejected Versata's proposal, and a second proposal in early October. In October 2008, Versata began buying Selectica stock, and on November 10, Versata's CFO called Selectica's co-chairman to advise that Versata had acquired over 5% of Selectica's outstanding stock, and would shortly file a Schedule 13D.

On November 16, 2008, the Selectica board met and, after hearing presentations from the company's Delaware counsel, its investment banker, its CFO and the accountant retained to analyze the NOLs, amended the company's existing stockholder rights plan (which had a 15% flip-in trigger) by lowering the trigger to 4.99%, while grandfathering in existing 5%-or-greater stockholders and permitting them to acquire up to an additional 0.5% without triggering the pill. After Selectica announced the NOL pill, Versata ceased buying, but demanded a meeting with Selectica management to discuss an asserted breach of the terms of an intellectual property licensing agreement.

After the requested meeting was held, Versata bought a sufficient number of shares to exceed the 0.5% "cushion" and become an "Acquiring Person" under the rights plan. Under the NOL pill, the rights would flip in ten business days after Versata became an Acquiring Person,

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unless the board either granted Versata an exemption or exchanged the rights for common stock. The pill conditioned the board's ability to grant "Exempt Person" status on a finding that the person's ownership of more than 4.99% of the common stock would not jeopardize or endanger the availability to the corporation of the NOLs. The board met seven times between December 19, 2008 and January 2, 2009, and received updated presentations from its investment banker, the accountant retained to evaluate the NOLs and Delaware counsel. Three times during this period, Selectica offered Versata an exemption in exchange for a standstill, and three times Versata declined.

On January 2, 2009, a committee of two directors, after consultation with the board's legal and financial advisors, decided that Versata could not be granted an exemption. The committee decided, rather than allow a flip-in, to exchange the rights (other than those belonging to Versata and its affiliates) for new common stock, thereby reducing Versata's proportionate interest in the company by approximately half. The committee also recommended (and the board subsequently approved and declared) a dividend of new rights, thereby keeping a pill with a 4.99% trigger in place.

Selectica sued Versata in the Delaware Court of Chancery, seeking declaratory judgment upholding the board's and the committee's actions. Versata counterclaimed, seeking invalidation of those actions on legal and equitable grounds, including on the grounds that a 4.99% trigger was per se invalid.

In its decision after trial, the Court evaluated the board's and the committee's actions under the standard set forth in Unocal Corp. v. Mesa Petroleum Co. The Court first held that, because the value of NOLs is "inherently unknowable ex ante, a board may properly conclude that the company's NOLs are worth protecting where it does so reasonably and in reliance upon expert advice." The Court therefore concluded that protection of NOLs "may be an appropriate corporate policy meriting a defensive response when threatened." Noting that the board and the committee had received advice from advisors with substantial experience in valuing NOLs, the Court held that the board and the committee were "reasonable in concluding that Selectica's NOLs were worth preserving and that [Versata's] actions presented a serious threat to their impairment." Accordingly, the Court determined that the directors had acted reasonably in identifying a threat to corporate policy and effectiveness.

The Court next considered whether the directors' response was reasonable. The Court rejected Versata's argument that a 4.99% pill was preclusive, writing that the applicable standard "operates to exclude only the most egregious defensive responses…. To find a measure preclusive … the measure must render a successful proxy contest a near impossibility or else utterly moot, given the specific facts at hand." Relying in part on expert evidence provided by a proxy solicitor concerning the concentration in Selectica's stockholder base, the Court determined that the NOL pill did not meet this standard.

The Court also held that the board's and the committee's actions fell within a range of reasonableness. In making this finding, the Court relied on extensive testimony about the board's deliberative process, on evidence that Versata, "a longtime competitor sought…intentionally to impair corporate assets, or else to coerce the Company into meeting certain business demands" and on Versata's failure "to suggest any meaningfully different approach that the Board could

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have taken in November and December 2008 to avoid the seemingly imminent impairment of Selectica's NOLs" by Versata. The Court reemphasized that the Unocal test provides the directors with substantial latitude in fashioning an appropriate response, writing that, "once a siege has begun, the board is not constrained to repel the threat to just beyond the castle walls."

The Court concluded by warning that its holding was fact-specific and dependent upon a record developed during a weeklong trial. The Court recognized the risk that NOLs could "provide a convenient pretext for perpetuating a board-preferred shareholder structure. For this reason, shareholder rights plans, such as the ones adopted by Selectica, must be subject to careful review." However, the Court concluded that the board "reasonably believed, based on the guidance of appropriate experts, that the NOLs had value, a value worth protecting…. It is not for the Court … to substitute its judgment for the reasonable conclusions of the Board, protected as they are by 8 Del. C. § 141(e)." Accordingly, the Court concluded, the board's and the committee's actions -- adoption of the NOL pill, the exchange of the rights for common stock, and the renewing of the rights plan -- "were valid exercises of the Board's business judgment."

On October 4, 2010, the Delaware Supreme Court issued an opinion affirming the Court of Chancery's decision upholding the board's adoption of a poison pill rights plan with a 4.99% triggering threshold, designed to protect the usability of the corporation's NOLs, and a special committee's subsequent decision (following a deliberate trigger of the pill) to deploy the exchange mechanism in the rights plan to dilute the triggering stockholder. The Supreme Court largely affirmed the reasoning employed by the Court of Chancery, and held that the board of directors had met its burden under the Unocal standard.

The Supreme Court upheld the Vice Chancellor's post-trial rulings that the board of directors had reasonable grounds to believe that the triggering stockholder's purchases threatened the corporation's NOLs and that the NOLs were corporate assets worth protecting. The Supreme Court further held that the NOL pill was non-preclusive and within the range of reasonableness under the circumstances. The Court noted that the preclusion test enunciated in Unitrin, focusing on whether a defensive device renders a bidder's attempt to wage a proxy contest and gain control "either mathematically impossible or realistically unattainable," is analytically speaking a single test, because mathematical impossibility is "subsumed within the category of preclusivity described as 'realistically unattainable.'" The Court also reiterated that the Unocal review is context-specific, and emphasized that its ruling should not be taken as "generally approving the reasonableness of a 4.99% trigger in the Rights Plan of a corporation with or without NOLs." The Court also emphasized that a potential future decision by the board to retain the NOL pill in the face of another threat would be subject to fresh evaluation under the Unocal standard at that time.

10. Implied Covenant of Good Faith and Fair Dealing.

a. Nemec v. Shrader, 991 A.2d 1120 (Del. 2010).

In Nemec v. Shrader, a divided Delaware Supreme Court upheld a Court of Chancery decision granting defendants' motion to dismiss a claim for breach of the implied covenant of good faith and fair dealing brought against them. Plaintiffs Joseph Nemec and Gerd Witkemper were former officers and stockholders of Booz, Allen & Hamilton Inc., a Delaware corporation

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("Booz Allen"). As parties to the Booz Allen stock rights plan, Nemec and Witkemper could have required Booz Allen to purchase their Booz Allen stock at book value for a period of two years beginning at the time of their retirement from Booz Allen. Subsequent to that two-year period, Booz Allen had the right to acquire Nemec's and Witkemper's stock at any time at book value. Both Nemec and Witkemper retired from Booz Allen. During the subsequent two-year period, Nemec did not require Booz Allen to purchase any of his stock; Witkemper retained some of his stock but required Booz Allen to purchase the remainder.

During the two-year period following Nemec's and Witkemper's retirement, Booz Allen's board of directors decided to sell part of its business to a third party pursuant to a merger (the "Merger"), which the parties expected to occur prior to the expiration of Nemec's and Witkemper's put rights. The Merger did not occur, however, until four months after their put rights expired. Prior to the Merger closing, Booz Allen exercised its rights to acquire all of Nemec's and Witkemper's stock at book value, resulting in Nemec and Witkemper receiving $60 million less than they would have received had they retained their stock until the closing of the Merger. Nemec and Witkemper filed suit alleging, inter alia, that Booz Allen breached the implied covenant of good faith and fair dealing contained in the Booz Allen stock rights plan by acquiring their stock, rather than allowing them to retain it until the Merger closed.

In stating that the implied contractual covenant of good faith and fair dealing "only applies to developments that could not be anticipated [at the time the contract was made], not developments that the parties simply failed to consider," and "requires a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the bargain," the court held that Booz Allen had not breached the implied covenant contained in the Booz Allen stock rights plan. A key issue was whether, at the time of contracting, Nemec and Witkemper had a reasonable expectation of participating in the Merger. The court found no facts pled that would allow it to conclude that had the parties specifically contemplated the issue at hand at the time the contract was made, they would have agreed to allow Nemec and Witkemper to retain their stock until the Merger closed.

In addressing the requirement that Booz Allen's exercise of its contractual rights must "further a legitimate interest of [Booz Allen]," the court found that while Booz Allen was not directly affected by the purchase of Nemec's and Witkemper's stock, failure to exercise its call rights may have subjected Booz Allen and its directors to a lawsuit by the remaining Booz Allen stockholders for favoring retired stockholders at the expense of working stockholders. Similar to the courts in Kelly and Kuroda, the court stated that "the covenant is a limited and extraordinary remedy." The court found that Nemec and Witkemper "got the benefit of their actual bargain," and therefore affirmed the Court of Chancery's dismissal of the plaintiffs' claim for breach of the implied covenant of good faith and fair dealing.

The dissent in the case vigorously disagreed with the majority, especially in light of the procedural context of the decision, namely, a motion to dismiss. The dissent felt the complaint had stated a claim for breach of the implied covenant because of allegations that Booz Allen's acquisition of the shares harmed Nemec and Witkemper and served no legitimate interest of Booz Allen. "[A] contracting party, even where expressly empowered to act, can breach the implied covenant if it exercises that contractual power arbitrarily or unreasonably."

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11. Limitations on and Sanctions for Plaintiff-Representatives' Trading.

a. In re Celera Corporation Shareholder Litigation, No. 212, 2012 (Del. Dec. 27, 2012).

In In re Celera Corporation Shareholder Litigation, No. 212, 2012 (Del. Dec. 27, 2012), the Delaware Supreme Court upheld the Court of Chancery's decision to certify as class representative a plaintiff that had sold its stock prior to the challenged merger, but held that, under the facts and circumstances of the case, the Court of Chancery had abused its discretion by failing to provide a significant stockholder with the right to opt out of the class. BVF Partners, L.P., Celera Corporation's largest stockholder, objected to the proposed settlement Celera had entered into with New Orleans Employees' Retirement System (NOERS) to resolve litigation challenging Quest Diagnostic Incorporated's acquisition of Celera for $8.00 per share. BVF argued on appeal that NOERS was not an adequate class representative because, among other things, it had sold its stock after execution of the merger agreement but before the transaction closed. BVF also asserted that it should have been permitted to opt out of the class to pursue its individual claims for monetary damages.

In March 2011, Celera's board approved a merger agreement under which Quest would launch a tender offer followed by a back-end merger. Under the terms of the agreement, Celera was required to pay a termination fee of $23.45 million if it accepted a competing bid; Celera's board was subject to a "no shop" provision; and several initial bidders were bound by a "don't-ask-don't-waive" standstill agreement. Shortly after the transaction's announcement, NOERS filed a class action complaint alleging breach of fiduciary duty claims. After expedited discovery, NOERS and the defendants entered into a non-binding memorandum of understanding providing for certain therapeutic benefits, including a reduction in the termination fee from $23.45 million to $15.6 million, the elimination of the "don't-ask-don't-waive" standstill agreements, an extension of the tender offer, and supplemental disclosures. The MOU was conditioned on NOERS' general release of all claims (including monetary damages) by any member of the class, including BVF.

BVF objected to the settlement, claiming that the therapeutic benefits were of no value to it and stating that it sought monetary damages to reflect the real value of its stock. On March 23, 2012, over BVF's objection, the Court of Chancery certified the class as a non-opt-out class under Court of Chancery Rules 23(b)(1) and (b)(2) and approved the settlement. On appeal, the Supreme Court held that NOERS was an adequate class representative because, although it sold its stock four days before the transaction closed and ten months before the settlement was approved, it had owned its stock at the time Celera's board approved and executed the merger agreement and at the time the parties executed the MOU.

While the Supreme Court held that the Court of Chancery did not abuse its discretion by certifying the class under Rules 23(b)(1) and (b)(2), it held that the trial court did abuse its discretion by denying BVF a discretionary right to opt out of the class. Recognizing that Rule 23, similar to its federal counterpart, does not contain a provision that authorizes the court to grant opt-out rights to class members of any class not certified under Rule 23(b)(3), the Supreme Court held that Rule 23(d)(2), providing for notice to class members, permits a discretionary opt-out right. The Supreme Court also recognized that the litigation as originally filed presented claims

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that were primarily for equitable relief, which typically supports certification of a non-opt-out class. Nonetheless, the Supreme Court observed that "in somewhat unique circumstances, the parties agreed to a de facto settlement of those equitable claims without formal court approval, leaving only monetary damage claims as the subject of a later formal, de jure application for a court-approved settlement." The Supreme Court held that the Court of Chancery, in considering whether to certify a class, "should not—and indeed cannot—blind itself to that reality and treat the settlement as one in which the equitable claims were still viable and predominant." Because the Court of Chancery, in determining whether to certify a class, must consider the posture of the case "as it realistically exists," the Supreme Court held that the Court of Chancery erred by denying a discretionary opt-out right where the policy favoring a global settlement was outweighed by due process concerns. Accordingly, the Supreme Court held that the Court of Chancery had to provide an opt-out right under these particular facts and circumstances.

b. Steinhardt v. Howard-Anderson, C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012).

In Steinhardt v. Howard-Anderson, the Court of Chancery imposed sanctions on representative plaintiffs for improper trading by plaintiff-fiduciaries. Michael Steinhardt and two funds managed by him filed suit as representative plaintiffs on behalf of stockholders of Occam Networks, Inc. ("Occam") challenging the acquisition of Occam by Calix, Inc. ("Calix"). Steinhardt short-sold shares of Calix stock after the Court entered a confidentiality order restricting trading on the basis of confidential information obtained in the lawsuit and after Steinhardt had received information about the lawsuit from another representative plaintiff. The Court sanctioned Steinhardt and the funds by (i) dismissing them from the case with prejudice, (ii) barring them from recovering anything from the litigation, (iii) requiring them to self-report to the SEC, (iv) directing them to disclose the Court's opinion in any future application to serve as lead plaintiff, and (v) ordering disgorgement of profits in the amount of $534,071.45.

Steinhardt and other representative plaintiffs filed suit on October 6, 2010, alleging that Occam directors breached their fiduciary duties in approving the merger at an unfair price. The merger agreement provided that Occam would merge with an acquisition subsidiary of Calix, with Occam stockholders receiving $3.8337 in cash and 0.2925 shares of Calix stock for each share of Occam common stock. On November 12, 2010, the Court entered a confidentiality order, which explicitly prohibited persons receiving confidential discovery information from trading in securities of Calix or Occam on the basis of such information, and document production began on December 1, 2010. Another representative plaintiff, Herbert Chen, worked out of Steinhardt's offices. Chen had pre-merger holdings of Occam stock amounting to approximately 20 to 25% of his net worth and was deeply involved in the case. Although Steinhardt was not as deeply involved in the prosecution of the action, Chen provided Steinhardt with regular updates concerning the litigation. Despite the confidentiality order, Steinhardt began short-selling Calix common stock on December 28, 2010.

The Court explained that, when a stockholder files a representative action, the plaintiff voluntarily assumes the role of fiduciary for the putative class and that it is unacceptable for a plaintiff-fiduciary to trade on the basis of nonpublic information obtained in the litigation, as such trading undermines the integrity of the representative litigation process. According to the Court, the fact that a representative plaintiff does not have direct access to confidential

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information produced in discovery is not determinative. While Steinhardt did not speak directly with plaintiffs' counsel until two days before his deposition in May 2011 and did not have direct access to discovery, Steinhardt nevertheless received regular written and oral updates about the litigation from Chen, whose insights in turn were based on discussions with counsel and the discovery record. The Court therefore held that by trading after receiving information from Chen, which was derived from confidential discovery material, Steinhardt and the funds breached their fiduciary obligations as representative plaintiffs and violated the confidentiality order.

The defendants also sought sanctions against Chen. Chen sold Occam shares between October 29 and November 2, 2010, but the Court did not find these trades improper because the defendants had not yet produced nonpublic information and the Court had not yet entered the confidentiality order. Chen also sold Occam shares on January 25, 2011, but the Court found that trade to have been inadvertent. Additionally, Chen's January 25 trade came a day after the Court's preliminary injunction ruling, which, according to the Court, eliminated the principal benefit Chen obtained from the confidential information by making it reasonably clear to the public that the merger was highly likely to close after the issuance of supplemental disclosures. The Court also found Chen to be a highly motivated and effective representative plaintiff and stated that Chen's removal would harm the class. The Court accordingly declined to impose sanctions on Chen.

12. Plaintiff's Attorney's Fees Awards.

a. Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012).

In Americas Mining Corp. v. Theriault, No. 29, 2012 (Del. Aug. 27, 2012), the Delaware Supreme Court affirmed the Court of Chancery's post-trial decision and final judgment awarding more than $2 billion in damages (including interest) and $304 million in attorneys' fees in In re Southern Peru Copper Corp. Shareholder Derivative Litigation, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011, revised Dec. 20, 2011). In Southern Peru, the plaintiff brought a derivative action challenging the fairness of Southern Peru's acquisition of Minera México, S.A. de C.V., which was 99.15% owned by Southern Peru's controlling stockholder, in a stock-for-stock merger. The Court of Chancery determined that Southern Peru overpaid for Minera and awarded damages in the amount of the overpayment, plus pre- and post-judgment interest.

The defendants raised several issues on appeal, arguing that the Court of Chancery impermissibly denied the defendants an opportunity to present testimony from a key witness (namely, an employee of the special committee's investment banker); committed reversible error by failing to determine which party bore the burden of proof before trial and by incorrectly allocating that burden to the defendants, despite the existence of a well-functioning special committee; made an arbitrary and capricious determination regarding the fair price of the transaction; and abused its discretion in granting a $304 million award of attorneys' fees. In its nearly 110-page opinion, the Supreme Court rejected each of these arguments.

First, the Court found that the Court of Chancery did not impermissibly exclude the testimony of a key defense witness. Rather, the Court found that the Court of Chancery, acting

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within its discretion to control its docket, simply declined to change the trial scheduling order to accommodate the defendants' "eleventh-hour" request. The Court reasoned that the defendants' assertion that they were unfairly prejudiced by the denial of the request was undermined by the record, given that they had previously acknowledged that they may not have a live witness from the investment banker at trial. Moreover, the Court held that the Court of Chancery's finding that allowing the "eleventh-hour" request would have been unfair to the plaintiff was supported by the record and was the product of a logical and deductive reasoning process.

Second, the Supreme Court found no fault with the Court of Chancery's determinations on the burden of persuasion as to fairness in this context, where the controlling stockholder was on both sides of the transaction and the entire fairness standard applied ab initio and the only question was whether to shift the burden of persuasion to the plaintiff. Given the fact-intensive nature of this exercise, the Court did not fault the Court of Chancery for failing to allocate the burden before trial, although it did state "which party bears the burden of proof must be determined, if possible, before the trial begins." In any event, the Court affirmed the Court of Chancery's determination that the outcome of the case would have been the same regardless of which party bore the burden of persuasion. Regarding future entire fairness cases in this context, the Court held that "if the record does not permit a pretrial determination that the defendants are entitled to a burden shift, the burden of persuasion will remain with the defendants throughout the trial to demonstrate the entire fairness of the interested transaction." Nevertheless, the Court suggested that transaction participants will continue to have an incentive to use special committees, since "a fair process usually results in a fair price" and the use of a special committee of independent directors remains a valuable means of demonstrating the integrity of the process.

The Court adopted the Court of Chancery's characterization of the special committee's process as one that was cramped by a "controlled mindset." In addition, the Court rejected the defendants' argument that the Court of Chancery failed to give appropriate weight to the special committee's "relative valuation" method. Reciting the Court of Chancery's method of determining the transaction's fairness, the Court found that it applied a "disciplined balancing test" and "considered the issues of fair dealing and fair price in a comprehensive and complete manner." That determination, the Court noted, must be accorded substantial deference on appeal. Given that the Court of Chancery's factual findings were supported by the record, and that its conclusions were the product of an orderly and logical reasoning process, the Court affirmed its determination on the question of fairness.

Third, the Court affirmed the Court of Chancery's calculation of damages and its award of attorneys' fees (which fees amounted to 15% of the total judgment (inclusive of pre-judgment interest), plus post-judgment interest through satisfaction of the award). Noting that a post-trial award of damages in an entire fairness proceeding is reviewed for abuse of discretion—and that the Court of Chancery has wider discretion in a case involving loyalty breaches (as in the present case) than in an appraisal action—the Court found that the Court of Chancery fashioned a proper remedy based on its multi-factored "give-get" analysis. On the issue of attorneys' fees, the Court rejected the defendants' arguments that the Court of Chancery improperly applied the so-called Sugarland factors, which are considered in determining attorney fee awards. The defendants argued, among other things, that the Court of Chancery gave undue weight to the "results achieved" component of the Sugarland test and that it committed reversible error by allowing

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plaintiff's counsel to collect fees premised on nearly $700 million in pre-judgment interest, despite plaintiff counsel's delay in prosecuting the litigation. The Supreme Court held that the Court of Chancery had not abused its discretion, agreeing that the "extraordinary benefit" achieved through the plaintiff's efforts merited "a very substantial award of attorneys' fees." The Court also found it was not improper to use the total damages award (inclusive of pre-judgment interest) in calculating the fee award, given that the Court of Chancery had already factored the "slow pace" of the litigation into the overall percentage of the benefit it was awarding as fees.

It is worth noting that Justice Berger, although concurring on the merits, dissented on the issue of whether the Court of Chancery properly applied the law when it awarded attorneys' fees. In Justice Berger's view, the Court of Chancery's indication that whether a fee is "reasonable" should be based on whether it establishes a good incentive for plaintiffs to take cases to trial was not grounded in Sugarland.

b. In re Compellent Technologies, Inc. Shareholder Litigation, Consol. C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011).

In In re Compellent Technologies, Inc. Shareholder Litigation, the Court of Chancery ruled on an application for attorneys' fees brought by class counsel who had secured a settlement loosening the "buyer-friendly" deal protection provisions of a merger agreement. Based upon the benefits conferred by the settlement, which shifted the merger agreement's protective array of defensive measures from the aggressive end of the spectrum towards the middle, the Court rejected plaintiffs' counsel's request for a $6 million fee award and awarded $2.4 million.

On December 13, 2010, Dell Inc. ("Dell") and Compellent Technologies, Inc. ("Compellent" or the "Company") announced a definitive merger agreement whereby Dell agreed to acquire Compellent for $27.75 per share, valuing the Company's equity at approximately $960 million. Following announcement of the transaction, eight putative stockholder class actions were filed in Delaware and Minnesota. Each lawsuit challenged, among other things, the various deal protection measures included in the merger agreement. The merger agreement contained a no-shop provision with a fiduciary out, information and matching rights, a "force-the-vote" provision, support agreements from the holders of 27% of Compellent's outstanding stock, and a termination fee of 3.85% of equity value, and required Compellent to adopt a stockholder rights plan, which exempted Dell, with a 15% trigger. The Court observed that "to identify defensive measures by type without referring to their details ignores the spectrum of forms in which deal protections can appear" and that the merger agreement "combined aggressive variants of each familiar [deal protection] provision with additional pro-buyer twists."

Following expedited discovery, Dell and Compellent agreed to modify certain deal protection provisions and to issue supplemental disclosures in order to settle the litigation. In considering whether to approve the settlement, the Court focused on five provisions of the original merger agreement: (i) the no-shop provision; (ii) the information rights provision, including the matching rights; (iii) the recommendation or "force-the-vote" provision; (iv) adoption of the stockholder rights plan; and (v) the termination fee.

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With respect to the no-shop provision, the Court observed that the prohibition on solicitation in the original merger agreement was "expansive and unqualified," while the exception to the prohibition was "cabined and constrained." The Court found that several features of the no-shop provision were particularly pro-buyer. These included the imposition of strict contractual liability for any breach by any representative of the Company, the lack of knowledge or materiality qualifiers on the requirements of the provision, the broad definition of the terms "Acquisition Proposal" and "Acquisition Inquiry," and the requirement that a potential bidder enter into a 275-day (or nine-month) standstill agreement before the Company could provide any information. The Court also noted that Compellent's compliance with the mechanics of the no-shop provision "literally required the Board to knowingly breach its fiduciary duties, albeit for a limited period of time, by first requiring the Board to determine that failing to act constituted a breach of its fiduciary obligations and then forbidding the Board to act until subsequent contractual conditions were met."

Next, the original information rights provision, which required the Company to notify Dell of the identity of a competing bidder at least two days before initiating negotiations, to provide Dell with any non-public information at least 24 hours before the competing bidder, and to update Dell on negotiations with any competing bidder, was characterized by the Court as "expansive." The merger agreement also required Compellent to submit the transaction for approval at a special meeting of the Company's stockholders, regardless of whether the Company's board changed its recommendation, and imposed procedural restrictions on the board's ability to change its recommendation. The Court noted that the "aggressive [recommendation] provision raise[d] a host of questions," including, among others, whether the board could agree to delay changing its recommendation with respect to the merger consistent with its duty of candor to the stockholders, and whether the board could agree not to postpone or to adjourn a special meeting without Dell's consent if the board had determined such action was required to fulfill its fiduciary duties.

Further, the merger agreement required Compellent to adopt a stockholder rights plan with a 15% trigger that exempted Dell. The Court stated that the stockholder rights plan was "novel and bidder-friendly" and that merger agreements "have not traditionally required that a target board adopt a rights plan." Finally, the Court stated that the 3.85% termination fee, together with the expense reimbursement fee, gave the board a "strong financial inducement not to respond to a bid or provide stockholders with an updated recommendation."

As part of the settlement, each of these deal protections was modified. The no-shop provision was changed to eliminate the 275-day standstill requirement and to add materiality qualifiers relating to breaches committed by representatives of the Company other than directors, officers, or financial advisors. The "force-the-vote" provision was modified to allow the Company's board to change its recommendation in a wider variety of circumstances. The information rights were modified by reducing the advance notice periods to require notification "prior to" entering into discussions with a competing bidder, by adding a materiality qualifier to Dell's right to receive summaries of initial communications between Compellent and potential competing bidders, and by eliminating Dell's right to receive copies of subsequent written communications with bidders, substituting a general provision obliging Compellent to keep Dell "reasonably informed." The termination fee was reduced from $37 million to $31 million, or from 3.85% to 3.23%. Finally, Compellent rescinded the stockholder rights plan in its entirety—

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relief that the Court described as "exceptional." Compellent also issued six supplemental disclosures concerning the background of the transaction and the bankers' fees paid by Compellent and Dell. Compellent also agreed to delay the Company's meeting of stockholders for at least 21 days.

In determining the appropriate fee to award, the Court stated that "plaintiffs achieved significant benefit by loosening the aggressive deal protections." The Court noted that modifications to deal protections benefit stockholders because they increase the probability that an alternative bidder will submit a higher bid for a company. According to the Court, this benefit exists whether or not an alternative bidder actually emerges. Under the analytical framework developed by the Court, the amount of the fee awarded to plaintiffs' counsel should therefore "depend[] on the increased likelihood of a topping bid under the revised defensive measures." Accordingly, "[b]ecause more extreme defensive measures should have a more powerful dampening effect, settlements that ameliorate stronger forms of deal protection should warrant larger fees."

Using statistical evidence submitted in an expert report provided by the plaintiffs and data submitted by the defendants to rebut the report, the Court concluded that the realistic likelihood of a topping bid for Compellent under the original merger agreement was negligible, but that the modifications to the merger agreement raised the probability of a topping bid to approximately 8%. Based upon the 11.37% expected premium of a topping bid calculated by the Court and the Court's determination that the efforts of the plaintiffs' attorneys were entitled to 25% of the benefit conferred upon the stockholders, the Court determined that a fee award of $2.3 million was reasonable under the circumstances. The Court also awarded $100,000 for the six supplemental disclosures.

Although noting that the calculation was "admittedly rough," the Court stated that "estimating the benefit of reduced defensive measures in this fashion helps anchor this Court's discretionary fee determinations to something more objective than the boldness of the plaintiffs' ask and the vigor or passivity of the defendants' response."

c. In re Del Monte Foods Co. Shareholders Litigation, Consol. C.A. No. 6027-VCL (Del. Ch. June 27, 2011).

In In re Del Monte Foods Company Shareholders Litigation, the Delaware Court of Chancery awarded plaintiff's counsel $2.75 million in attorneys' fees and expenses for supplemental disclosures achieved during the preliminary injunction phase of the case. Previously, the Court had enjoined for a period of 20 days the stockholder vote on this $5.3 billion transaction, in which a private equity group consisting of Kohlberg Kravis Roberts & Co., L.P. ("KKR"), Vestar Capital Partners ("Vestar") and Centerview Partners acquired all outstanding shares of Del Monte common stock.8

8 See In re Del Monte Foods Co. S'holders Litig., 2011 WL 1677458 (Del. Ch. Feb. 14,

2011).

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As an initial matter, the Court noted that granting an interim fee award is within its equitable and discretionary powers. Referencing Louisiana State Employees Retirement Systems v. Citrix Systems, Inc., 2001 WL 1131364 (Del. Ch. Sept. 17, 2001), the Court concluded that an interim fee award was appropriate in this instance because "the benefits [resulting from dissemination of the supplemental disclosures] cannot be revised or modified as a result of future events." Although Vice Chancellor Laster cautioned that he will not "invariably entertain post-injunction fee applications" and that other members of the Court of Chancery may not share this preference, he will consider an interim fee petition where the Court has expended judicial resources ruling on a preliminary injunction motion and the resulting benefit is not subject to reversal or alteration as litigation proceeds.9

Next, the Court applied the factors established in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). With regard to the benefits conferred by the supplemental disclosures, the Court identified three general categories of supplemental disclosures: (i) disclosures that "adverted to Barclays' behind-the-scenes activities during the sales process"; (ii) disclosures of Barclays' and Perella Weinberg's estimates of Del Monte's future cash flows and additional information about the summaries of the investment bankers' analyses; and (iii) disclosures pertaining to Del Monte executives' individual compensation arrangements. With respect to the first category, the Court used the fee award in In re Lear Corp. Shareholder Litigation, C.A. No. 2728-VCS (Del. Ch. June 3, 2008) (TRANSCRIPT), where the negotiator of a transaction was conflicted, as a starting point. The Court distinguished Lear on the grounds that the plaintiff's counsel in the present case uncovered facts previously unknown to the Del Monte board of directors, thus informing two corporate decision-making bodiesthe board and the stockholdersand "empower[ing] the Del Monte directors to re-evaluate their prior decisions and reliance on Barclays." Accordingly, the Court awarded $1.6 million for this aspect of the fee application. For the second category, the Court concluded that disclosures regarding the Barclays and Perella Weinberg opinions, bankers' fees and historical engagements warranted a fee of $950,000, well above the usual $400,000-$500,000 range awarded for supplemental disclosures about banker analyses and relationships. The third category of supplemental disclosures, which warranted a fee award of $200,000, provided a comparison between the proceeds each executive would receive upon consummation of the merger as opposed to what they would receive if terminated without a change in control.

The Court declined, however, to award interim fees based on the benefit conferred by the preliminary injunction because "the fruits of post-injunction discovery and the insights provided by live witnesses at trial should help . . . develop a more tailored assessment" of an appropriate award. The Court offered guidance on the value of the injunction, noting that the benefit conferred does not vary depending on whether or not a topping bid actually emerged. Moreover, the Court stated that pricing the benefit requires two inputs: "(i) the overall likelihood of a

9 In Forgo v. Health Grades, Inc., C.A. No. 5716-CS (Del. Ch. June 29, 2011)

(TRANSCRIPT), Chancellor Strine expressed concern with a divided fee approach. Tr. at 57. But see Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. July 28, 2011) (declining to award interim fees).

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topping bid,"10 and "(ii) the incremental gain that the likely topping bid would have created." As to the first input, the Court indicated an intent to rely on an article by Professor Guhan Subramanian, which examined the percentage of instances of topping bids generated in certain going-private deals between January 2006 and August 2007 where the transaction included a no-shop or go-shop provision.11 As to the second input, the Court noted that the negotiated termination fee should serve as a lower bound for the incremental value of a topping bid because it "represented the parties' responsible estimate of the minimum incremental price increase that a serious acquirer would be willing to offer."

C. Corporate Governance Issues.

1. Annual Meetings and Meeting Procedures.

a. Sherwood v. Chan, C.A. No. 7106-VCP (Del. Ch. Dec. 20, 2011).

In Sherwood v. Chan, the Court of Chancery issued a temporary restraining order enjoining ChinaCast Education Corporation ("ChinaCast") and certain of its directors (collectively, "Defendants") from holding ChinaCast's annual meeting for a period of 20 days so that stockholders could express their "fully informed" views in the corporate election. Plaintiffs Ned Sherwood and ZS EDU, L.P. (collectively, "Plaintiffs") brought the action on December 12, 2011, asserting claims for breach of fiduciary duty and defamation and seeking a temporary restraining order against Defendants so that certain corrective disclosures could be made and Plaintiffs' competing slate of nominees could be considered prior to the annual meeting, which was scheduled to take place on December 20, 2011. The Court noted that, of the Plaintiffs' claims, only the disclosure claims could warrant a temporary restraining order, and proceeded to find that: (i) those claims were colorable, (ii) irreparable harm existed because of the threat of an uninformed stockholder vote, and (iii) while the equities claimed by both Plaintiffs and Defendants might be in equipoise, the balance of equities as between Defendants and ChinaCast's stockholders tipped decidedly in favor of granting the temporary restraining order.

In a definitive proxy statement filed with the SEC on November 14, 2011, ChinaCast recommended Sherwood, a ChinaCast director and stockholder, for reelection to its board of directors. Then, on December 8, 2011, 12 days before the scheduled annual meeting, the board issued supplemental proxy materials (the "Proxy Supplement") removing Sherwood from ChinaCast's slate of nominees to the board. Among the reasons provided in the Proxy Supplement for removing Sherwood from the slate were alleged insider trading activity in

10 In Health Grades, Chancellor Strine seemed to reject the quantification approach taken

by Vice Chancellor Laster in Del Monte, noting "I don't pretend to know how you would price [the assurance for strategic buyers that, if they made a topping bid, they would not be blocked] in some sort of market for options in reduced deal protections and how that translates into the probability of a topping bidder emerging. And I think it's actually counterproductive to try to quantify something that's unquantifiable." Health Grades, Inc., C.A. No. 5716-CS, Tr. at 77.

11 Guhan Subramanian, Go-Shops vs. No-Shops in Private Equity Deals: Evidence and Implications, 63 BUS. LAW. 729 (2008).

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violation of ChinaCast's internal policies, and behavior that was deemed detrimental to "a productive and professional working relationship." The Proxy Supplement stated that Sherwood's alleged insider trading activity was reported to the SEC, but it did not disclose the existence or status of any SEC investigation.

The Court found that Sherwood had shown two possible ways in which the Proxy Supplement could be misleading, sufficient to support a finding that a colorable disclosure claim existed. First, the Court found that the Proxy Supplement might be misleading by failing to disclose candidly the board's motivations for removing Sherwood from ChinaCast's slate of nominees, which could have been based on avoiding policy disputes between Sherwood and other directors. Second, the Court found that the Proxy Supplement might be misleading in that it stated that management informed the SEC of Sherwood's alleged insider trading activity (thus creating the impression that Sherwood was unsuitable to serve as a director because of a possible criminal or civil enforcement action), but failed to state that Sherwood informed ChinaCast that he had been told that the SEC had determined not to pursue an action against him. Defendants contended that any SEC action was not material. The Court rejected this, noting that "if the SEC's actions were not material . . . it begs the question why the Company disclosed their reporting of the [alleged insider trading activity] to the SEC at all."

Next, the Court found irreparable harm because, absent a temporary restraining order, ChinaCast's stockholders would not have adequate time to consider corrective disclosures or Plaintiffs' competing slate of nominees prior to the vote, thereby rendering the vote uninformed. Defendants argued that there was no risk of harm with respect to Plaintiffs' competing slate, because Plaintiffs could not comply with the advance notice bylaw and thus were prevented from nominating a competing slate at the upcoming election. The Court stated that a finding of irreparable harm was not dependent on two properly nominated slates, because misleading disclosures might affect reasonable stockholders' decisions to vote "for" or "withhold," and therefore, "a threat of irreparable harm may exist in even an uncontested election where shareholders are not fully and fairly informed." Furthermore, the Court found that Defendants' argument that the advance notice bylaw precluded Plaintiffs from nominating their slate was "less than compelling," and that absent a temporary restraining order, federal regulations guaranteed Plaintiffs would lose because their proxies would not become effective until after December 21.

The Court also found that the balance of the equities weighed in favor of granting a temporary restraining order. Although the parties disputed whether Plaintiffs acted in a timely fashion to present their grievances to the stockholders, the Court found that the facts supported a reasonable inference that both parties pursued aggressive, but good faith, negotiating strategies to resolve their disputes leading up to the date of the Proxy Supplement, and that Plaintiffs acted relatively quickly to preserve their rights once they learned Sherwood would not be on ChinaCast's slate. The Court noted that the situation was reminiscent of Blasius Industries, Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), where a board's good faith effort to protect its incumbency in order to thwart implementation of a corporate policy that it reasonably feared would be harmful to the company interfered with the effectiveness of a stockholder vote. In this instance, the board's inaction in failing to resolve differences among its members and not taking steps to alleviate the issues created by belatedly removing Sherwood from the slate operated inequitably against the Plaintiffs and the interests of corporate democracy. The Court concluded

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that allowing the annual meeting to proceed on December 20 would not comport with the "scrupulous fairness" required in corporate elections, and thus enjoined the meeting for 20 days. However, to allay Defendants' concerns that delaying the annual meeting would require ChinaCast to incur additional significant expense, the Court required Plaintiffs to post a $250,000 bond.

b. Goggin v. Vermillion, Inc., C.A. No. 6465-VCN (Del. Ch. June 3, 2011).

In Goggin v. Vermillion, Inc., Vice Chancellor Noble, interpreting the Delaware Supreme Court's opinion in Airgas, Inc. v. Air Products and Chemicals, Inc., 8 A.3d 1182 (Del. 2010), denied plaintiff's motion to enjoin the 2011 annual stockholders meeting of Vermillion, Inc. ("Vermillion" or the "Company"), which was scheduled to occur six months after the 2010 annual meeting. Plaintiff requested that the Court delay the meeting by at least one month, determine that stockholder proposals made before any rescheduled meeting be considered, and enjoin any threatened use of Vermillion's rights plan to restrict stockholders' ability to communicate with one another about the Company.

From its inception, Vermillion held its annual meeting of stockholders in June, with one class of its classified board standing for election each year. In March 2009, the Company filed for bankruptcy. While in bankruptcy, the Company did not hold an annual stockholders meeting. After emerging from bankruptcy in January 2010, Vermillion held an annual meeting on December 3, 2010, at which Class III directors (who would have stood for election at the 2009 annual meeting if it had been held) were elected to a two year term and Class I directors were elected to a three year term. The Class II directors were serving for a term expiring at the 2011 annual meeting.

In anticipation of the 2010 annual stockholders meeting, the Company issued a proxy statement in October 2010 notifying stockholders of the 2010 annual meeting. Vermillion included in the proxy statement language requiring stockholders to submit proposals for the 2011 annual stockholders meeting—including proposals for director nominees—by January 1, 2011. Vermillion then announced on February 28, 2011 in its annual report that the 2011 annual meeting would take place in June—approximately six months after the 2010 annual meeting.

In early 2011, plaintiff began communicating his dissatisfaction with Vermillion's board of directors and management to Vermillion's board and requested that the board call an emergency stockholder meeting to consider the CEO's tenure, to adopt more stockholder-friendly bylaws and to remove the Company's rights plan. After considering plaintiff's request, the Company's board amended Vermillion's bylaws to include an advance notice provision for future annual meetings relating to stockholder proposals and director nominations, and determined to not remove the rights plan or take any other action. After receiving similar complaints from four other stockholders, Vermillion requested information from plaintiff and the other stockholders relevant to the stockholders' communications for purposes of the rights plan. Instead of responding to the Company's request for information, plaintiff filed suit alleging that the Company's directors were entrenching themselves in office.

In denying plaintiff's motion for a preliminary injunction, the Court addressed three issues: (i) the scheduling of the 2011 annual stockholders meeting, (ii) the advance notice

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requirement for stockholder proposals to be presented at an annual meeting, and (iii) the allegedly preclusive effect of the rights plan on stockholder communications.

First, plaintiff relied on the Delaware Supreme Court's decision in Airgas, Inc. v. Air Products and Chemicals, Inc. to argue that the 2011 annual meeting, scheduled only six months after the 2010 annual meeting, violates Delaware law "because it is not approximately twelve months after the 2010 annual meeting and future annual meetings held in June will truncate the terms of the Vermillion directors elected in 2010." The Court of Chancery disagreed and determined that the scheduling of the 2011 annual stockholders meeting was consistent with Delaware law and the Company's charter, bylaws and practices pre-bankruptcy. Thus, the 2011 annual stockholders meeting did not "run afoul of Airgas; there, the Supreme Court invalidated a shareholder bylaw that advanced the annual meeting with the effect of 'so extremely truncat[ing] the directors' term as to constitute a de facto removal. . . .'" Accordingly, plaintiff failed to demonstrate a reasonable probability of success with respect to his annual meeting claim.

Second, plaintiff argued that the advance notice requirement for stockholder proposals to be presented at the 2011 annual stockholders meeting was unwarranted and entrenched the board. The Court noted that "Delaware law does not require that shareholders provide advance notice of proposals or of director nominations to be raised at an annual meeting, unless the corporation has duly imposed such a requirement." Here, the Company set forth its notice requirement for the 2011 annual stockholders meeting in the October 2010 proxy. The Court determined that since the advance notice requirement was in place before plaintiff expressed any dissatisfaction with the Company's board of directors, the record did not support an entrenching or defensive motive on behalf of the board.

Third, plaintiff sought to limit the board's use of the Company's rights plan. Plaintiff asserted that the Company's letter requesting information concerning the dissatisfied stockholders' relationships was an indication of the board's willingness to use the rights plan as a defensive device against Vermillion's stockholders. Plaintiff also argued that the amended bylaws expanded the board's power to utilize the rights plan "by adopting and defining the phrase 'acting in concert.'" The Court held, however, that a complete reading of that provision indicated that whether a person is "acting in concert" was relevant only to the proper form of notice required by a stockholder giving advance notice of a meeting proposal or a director nomination. As a result, the events triggering the Company's rights plan remained unchanged from the original rights plan adopted by Vermillion's board of directors.

The Court of Chancery also addressed the cumulative effect of (i) the scheduling of the 2011 annual stockholders meeting, (ii) the advance notice requirements, and (iii) the Company's rights plan. Plaintiff argued "that the record reflects 'a pattern of conduct in which Defendants manipulate[d] Vermillion's corporate machinery to ensure that the incumbent Board and management are perpetuated in office indefinitely. . . .'" The Court disagreed and denied plaintiff's motion for a preliminary injunction.

c. Airgas, Inc. v. Air Prods. & Chems., Inc., C.A. No. 5817-CC (Del. Ch. Oct. 8, 2010), rev'd, 8 A.3d 1182 (Del. 2010).

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In Airgas, Inc. v. Air Products & Chemicals, Inc., a case of first impression, the Delaware Court of Chancery considered the validity of a stockholder-proposed bylaw amendment causing a corporation's annual meeting to be held each year in the month of January, as opposed to the month of August, when the corporation's annual meetings had historically been held. The bylaw was adopted in the context of defendant Air Products and Chemicals, Inc.'s takeover battle with Airgas, Inc.; it would result in Airgas's 2011 annual meeting being held in January 2011, barely four months after its 2010 annual meeting. Since Airgas currently has a classified board, the bylaw would enable Air Products, sooner than normal, to seek to add directors to Airgas's board (in addition to the three it had elected at the 2010 annual meeting).

The parties also disputed whether the bylaw was subject to the ordinary voting standard (majority of a quorum) or the supermajority provision applicable to bylaws "inconsistent" with the classified board provision, which provided that directors in each class would serve for a term expiring "at the annual meeting held in the third year following the year of their election." Air Products argued that one class of Airgas directors had served their full terms because the 2011 annual meeting would be held in the "third year" after 2008.

Interpreting ambiguities in the words "annual" and "year" in favor of stockholders' electoral rights, the Court held that the bylaw amendment was valid under Delaware statutory and case law. That is, the word "annual" (for example, in the phrase "annual meeting") means only "occurring once each year," and not "separated by approximately 365 days." Delaware law prescribes no minimum time that must elapse between annual meetings of a Delaware corporation—only a maximum time. Similarly, the word "year," which was undefined in Airgas's charter or bylaws, did not refer specifically to a fiscal year, and could include a calendar year. Therefore, the directors' full terms needed only to run to the 2011 annual meeting, which could be held in January 2011. The Court noted that its holding could have been different if Airgas had specified a term of office for its directors, had defined the words "annual" or "year" or had required minimum durational intervals between meetings. The Court also held that the bylaw amendment was not inconsistent with Airgas's classified board provision and was therefore validly adopted under the ordinary "majority of a quorum" voting standard.

On November 23, 2010, the Delaware Supreme Court issued an opinion reversing the Chancery Court's decision upholding the validity of the stockholder-proposed bylaw accelerating Airgas's annual meeting by approximately eight months. As noted, the bylaw, which was adopted in the context of Air Products' takeover battle with Airgas, would have given Air Products, whose nominees had been elected to the open directorships at Airgas's 2010 annual meeting, the opportunity to elect additional directors to Airgas's classified board just four months later (and, conceivably, to obtain control of a majority of Airgas's board without waiting for a full two-year meeting cycle to run). The Chancery Court upheld the bylaw, finding it was not inconsistent with the classified board provision in Airgas's charter, which provided that directors' terms would expire at "the annual meeting of stockholders held in the third year following the year of their election." Like the Chancery Court, the Supreme Court found the language of Airgas's charter defining the duration of the directors' terms to be ambiguous. Looking to extrinsic evidence to construe that provision, the Supreme Court found that the language "has been understood to mean that the Airgas directors serve three year terms." Accordingly, the Supreme Court held that the bylaw was invalid because it "prematurely terminate[d]" the three-year terms of Airgas's directors provided by statute and Airgas's charter.

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While the Supreme Court noted that neither Section 141(d) of the General Corporation Law of the State of Delaware nor Airgas's charter "requires that the three year terms be measured with mathematical precision," it could "safely conclude" that the four-month period that would have resulted from the annual meeting bylaw did not "qualify under any construction of 'annual'" within the meaning of Section 141(d) or Airgas's charter. The consequence of the bylaw, according to the Supreme Court, was to "so extremely truncate[] the directors' term" as to frustrate the purpose behind Airgas's classified board provision—i.e., to prevent the removal of directors without cause. Thus, the annual meeting bylaw was invalid "not only because it impermissibly shorten[ed] the directors' three year staggered terms, but also because it amounted to a de facto removal without cause" without the super-majority vote required by Airgas's charter.

2. Construction and Validity of Charter and Bylaw Provisions.

a. Kurz v. Holbrook, C.A. No. 5019-VCL (Del. Ch. Feb. 9, 2010), aff'd in part and rev'd in part sub nom., Crown EMAK P'ners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).

On February 9, 2010, the Delaware Court of Chancery issued an opinion with substantial significance for corporate practitioners (which was later affirmed in part and reversed in part by the Supreme Court). In Kurz v. Holbrook, the Court of Chancery addressed competing requests for relief with respect to control of the board of directors of EMAK Worldwide, Inc. ("EMAK"). In its post-trial opinion, the Court redefined the law on record holders of a corporation's stock, clarified what is, and is not, vote buying under Delaware law and addressed whether a bylaw provision that imposed a new qualification for service as a director could result in the termination of a sitting director's service.

The dispute in Kurz involved competing consent solicitations for control of EMAK. The first consent solicitation, run by insurgent Take Back EMAK, LLC ("TBE"), sought to remove two directors on the EMAK board and fill three of the four vacancies so as to establish a TBE majority on the board. In response, Crown EMAK Partners, LLC ("Crown"), a large preferred stockholder of EMAK, launched its own consent solicitation seeking to amend EMAK's bylaws to reduce the size of the board and effectuating the dismissal of certain sitting directors, thereby maintaining Crown's control of the board and mooting TBE's consent solicitation. Ultimately, Crown secured a majority of consents to approve the bylaw amendments. A few days later, TBE also obtained a majority of consents in favor of its insurgent slate, but the inspector of elections subsequently invalidated over 1,000,000 shares of EMAK stock that were held in "street name" for failure to obtain an omnibus proxy from DTC. TBE filed suit, challenging both the validity of the bylaw amendments and the invalidation of the votes held in "street name."

The Court ruled in favor of TBE on both counts. With respect to the validity of the "street name" consents, the Court found that the TBE consents had validly effected corporate action. In reaching its conclusion, the Court redefined Delaware's interpretation of "stockholders of record" to include "street name" holders – the DTC participant banks and brokers listed on the Cede breakdown – for purposes of determining the stockholders entitled to vote or act by written consent, thereby eliminating the need for a DTC omnibus proxy in such circumstances. The Court made clear, however, that its holding did not alter the traditional distinction between

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record and beneficial ownership, and that its analysis did not apply to any entity other than DTC in its role as a federally registered clearing agency. In its analysis, the Court also held that the Cede breakdown is part of a corporation's stock ledger for purposes of Section 219(c) of the General Corporation Law, just as it had long been part of the stock ledger for purposes of Section 220(b). The Court's holding aligns Delaware law's definition of record holders with federal regulations under which the participant banks and brokers, and not DTC, are recognized as the record holders of the shares held by DTC. Further, the Court's holding may potentially impact the applicability of Sections 203 and 262 of the General Corporation Law, Delaware's antitakeover and appraisal statutes, to corporations by increasing the number of record holders.

The Court rejected Crown's claim that TBE had engaged in improper "vote buying" when Kurz, a TBE member and EMAK director, purchased the voting and economic rights of 150,000 EMAK shares. In beginning its analysis, the Court noted that vote buying that did not involve the use of corporate resources, so-called "third party vote buying," was an undeveloped area of Delaware law. The Court pointed out, however, that the concept of vote buying was broad enough to encompass practices and techniques whereby voting rights were manipulated, including the decoupling of economic interests from voting rights. The Court stated that where such practices proved deleterious to stockholder voting, the "Court can and should provide a remedy." To that end, the Court identified several broad concepts that would govern its analysis of vote buying, including (i) whether the practices were actually disenfranchising, e.g. delivering swing votes or altering the voting pattern in a critical way; (ii) whether the arrangement was the product of fraud or a disparity of information; and (iii) whether the transaction created a misalignment between the voting interest and the economic interest of the shares. Finding no evidence of fraud in the present case, that in purchasing the shares Kurz had assumed the economic risks of ownership and that Kurz did not have any competing economic or personal interests that might create an overall negative economic ownership in EMAK, the Court concluded that the purchase of the EMAK shares was not a "legal wrong."

Finally, addressing Crown's bylaw amendments that purported to reduce the number of directors comprising the EMAK board, the Court found the amendments to be invalid. The Court held that a bylaw amendment that would eliminate directorships through shrinking the number of board seats below the number of sitting directors, and not by removal, conflicted with the provisions of the General Corporation Law and was void. Similarly, a bylaw provision that established qualifications for directorships that would disqualify a sitting director and terminate his service would conflict with the General Corporation Law and thus be invalid under Delaware law. An expedited appeal followed.

On April 21, 2010, the Delaware Supreme Court affirmed in part and reversed in part the Court of Chancery's holding. The Supreme Court upheld the Court of Chancery's analysis concerning what is, and what is not, impermissible vote-buying under Delaware law, and concerning the impermissibility of bylaw amendments reducing the size of a board of directors to a number less than the number of sitting directors between annual meetings without first removing directors. The Delaware Supreme Court, however, disagreed with the Court of Chancery's analysis of whether a restricted stock agreement was violated by a purchase agreement relating to the shares subject to the restricted stock agreement, invalidating the votes attributable to the purchase agreement on account of the purchase agreement violating the restricted stock agreement. Given its ruling invalidating these votes, the Supreme Court declined

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to rule on, but labeled as "obiter dictum and without precedential effect," the Court of Chancery's much-discussed determination that the Cede breakdown is part of the stock ledger for purposes of 8 Del. C. § 219(c).

On appeal, the Supreme Court affirmed the Court of Chancery's analysis of the vote-buying issue and its determination that Kurz had not engaged in improper vote-buying. The Court of Chancery had found no evidence of fraud in the transaction between Kurz and Boutros, and further found that Kurz's voting interests and his economic interests in the Boutros shares were aligned. The Supreme Court agreed on the ground that "the economic interests and the voting interests of the [Boutros] shares remained aligned since both sets of interests were transferred from Boutros to Kurz by the Purchase Agreement."

However, the Supreme Court reversed the Court of Chancery's determination that Boutros and Kurz had successfully contracted around the sale and transfer restrictions imposed by the Restricted Stock Grant Agreement. The Court of Chancery had noted that the Restricted Stock Grant Agreement prohibited sales and transfers of Boutros's shares, but did not prohibit agreements to sell or transfer the shares in the future. The Supreme Court held, however, that because Boutros conveyed both (i) all economic interest in the shares, and (ii) the right to vote the shares (via an irrevocable proxy), Boutros had "immediately conferred upon Kurz the functional equivalent of 'full ownership.'… There was nothing for Boutros to transfer to Kurz in the future, other than bare legal title." The Supreme Court concluded that this transaction violated the Restricted Stock Grant Agreement, and consequently held that the transaction "did not operate as a legally valid sale or transfer of Boutros' shares, and that Kurz was not entitled to vote those shares."

Because the Supreme Court held that Kurz lacked the right to vote the Boutros shares, the TBE consent solicitation failed to garner the support of the requisite majority of common shares, regardless of whether the shares held in street name (as to which no omnibus proxy executed by Cede had been submitted) were properly counted in TBE's favor. The Supreme Court therefore expressly declined to review the Court of Chancery's holding that the Cede breakdown constituted part of the stock ledger for purposes of 8 Del. C. § 219(c). The Supreme Court wrote that a "gratuitous statutory interpretation resolving this difficult issue" would not be "prudent," and indicated that a legislative cure by the Delaware General Assembly to resolve the question was preferable. The Supreme Court concluded with the statement that "the Court of Chancery's interpretation of stock ledger in section 219 is obiter dictum and without precedential effect."

Finally, the Supreme Court affirmed the Court of Chancery's holding that the Crown bylaw amendments conflicted with the Delaware General Corporation Law and were void. The Court of Chancery had held, and the Supreme Court agreed, that stockholders cannot end an incumbent director's term between annual meetings by purporting to eliminate the director's seat or by purporting to elect the director's successor, without in either case first removing the incumbent director.

The Supreme Court remanded the case to the Court of Chancery for further proceedings in accordance with the opinion.

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3. Void and Voidable Stock Issuances.

a. Keyser v. Curtis, 2012 WL 3115453 (Del. Ch. July 31, 2012).

In a summary proceeding under Section 225 of the Delaware General Corporation Law, the Court of Chancery in Keyser v. Curtis, 2012 WL 3115453 (Del. Ch. July 31, 2012), applied the entire fairness test to a sole director's effort to prevent stockholders from electing a new board by issuing a new series of preferred stock with powerful voting rights to himself for one cent per share, held that the issuance was not entirely fair, and determined that the newly issued stock could not be counted in determining whether the plaintiff-stockholders had delivered sufficient written consents to elect a new board.

Plaintiffs Robert D. Keyser, Jr., Frank Salvatore and Scott Schalk sued for a determination that they had been elected as the new board of directors of Ark Financial Services, Inc. ("Ark") by stockholder written consent. Ark contended that one of the plaintiffs, Robert Keyser, was required under a prior settlement agreement to transfer approximately seven million shares of common stock back to Ark, and that Keyser therefore could not give written consents to elect a new board as to those shares. Although the Court determined that Keyser had breached the settlement agreement, the Court declined to order specific performance on the ground that Keyser also had breached an obligation under the same agreement to pay Keyser $50,000. Consequently, the Court held that Keyser was entitled to execute written consents as to the shares, and that the written consents delivered to Ark represented a majority of the outstanding common stock.

Ark also contended that the written consents were insufficient to elect a new board because, approximately a year before the consents were delivered, Albert Poliak, then the CEO and sole director of Ark, had authorized and issued to himself 25,000 shares of a newly created, super-voting Series B preferred stock. Poliak paid $0.01 per share for the Series B stock, but acquired both the right to redeem the stock on demand for $1.00 per share and overwhelming voting power over any matter subject to a vote of Ark's stockholders.

The Court noted that Poliak admitted that the purpose of the Series B issuance was to prevent the election of a new board, which purpose arguably triggered review under the standard set forth in Blasius Industries Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988). However, the Court explained that, unlike the directors in Blasius, Poliak engaged in a self-dealing transaction. Under Delaware law, self-dealing transactions are subject to review under the more burdensome entire fairness standard.

The defendants argued that because Ark was insolvent at the time of the Series B stock issuance, the shares Poliak received were worthless and thus the penny per share price was fair. The Court rejected this argument, stating that "even if Ark had absolutely no money, it was self-dealing for Poliak to pay $250 for an option to demand $25,000 from Ark in the event it became solvent." The Court continued that "[c]ontrol of an insolvent corporation is worth something because there is always a chance it will become solvent." The Court determined that the issuance was not entirely fair and hence that it was invalid.

Accordingly, the Court affirmed that the plaintiffs constituted Ark's board of directors.

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The Court declined to award attorneys' fees to the plaintiffs. The Court's decision clarified uncertainty around the composition of Ark's board of directors and the validity of the Series B preferred stock, and thus provided a corporate benefit that could justify awarding the plaintiffs their costs and fees. However, the Court concluded that in bringing the action, Keyser was principally motivated by a desire to benefit himself rather than a desire to benefit Ark.

b. Johnston v. Pedersen, C.A. No. 6567-VCL (Del. Ch. Sept. 23, 2011).

In Johnston v. Pedersen, the Court of Chancery held that the directors of a Delaware corporation violated their duty of loyalty when designing and issuing a new series of preferred stock because those directors intentionally "structure[d] the stock issuance to prevent an insurgent group from waging a successful proxy contest."

In Johnston, an action brought pursuant to 8 Del. C. § 225, the Court was called on to determine the proper board of directors of Xurex, Inc. ("Xurex" or the "Company"). Xurex is an early stage company which sells protective coatings primarily used in the oil and gas industry. Between 2005 and 2009, Xurex raised over $10 million through the sale of common stock and Series A Preferred Stock. Notably, however, two founders continued to control a majority of the Company's outstanding voting power.

Despite its substantial fundraising, Xurex had never developed a commercial product of its own. Rather, 99% of Xurex's sales were to one distributor, DuraSeal Pipe Coatings Company ("DuraSeal"), which had developed unique methods of using Xurex's coatings in the oil and gas industry. As a result of Xurex's lack of commercial success, and following allegations of financial misconduct by one of its founders, the Company underwent several director changes in 2009 and early 2010. The board that was eventually elected in early 2010 was concerned about the Company's financial viability. Also, because of the Company's tumultuous relationship with the founders (who continued to hold a majority of the outstanding shares), the board was concerned that the founders would again support an effort to change the board. The Court found that the board decided to address both of these issues at once through the issuance of a new series of preferred stock.

The board first pursued a bridge loan offering in the spring of 2010. Investors in the bridge loan had the right to convert their bridge loan notes into a planned new preferred stock series at a 50% discount to its issue price. Several months later, in August 2010, the board offered the Series B Preferred Stock (the "Series B"). The Series B contained an expansive class voting provision (the "Class Vote Provision") which required the affirmative support of a majority of the Series B for the approval of "any matter that is subject to a vote of the [Company's] stockholders." The Court found that the board had developed the idea of vesting the Series B with a "super vote right" during the bridge loan offering. However, the board only selectively disclosed this information to stockholders whom the directors believed were likely to support the incumbent board in a future control contest. Similarly, even though the defendants argued that the Class Vote Provision was necessary to induce investment in the Series B, the Series B private placement memorandum only contained a brief discussion of the provision on page 29 of the 34-page document. The Court found that the apparent tension between the avowed necessity of the Class Vote Provision and the lack of disclosure was easily resolved: "the

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directors needed to provide the class vote to induce favored (viz. incumbent-supporting) stockholders to invest. There was no need to call this attractive feature to the attention of other non-favored and potentially non-incumbent-supporting investors."

In April 2011, DuraSeal began soliciting proxies from Xurex stockholders to remove the incumbent directors and elect a new board. On June 14, 2011, five written consents and supporting proxies (the "Written Consents") representing a majority of the outstanding shares of the Company were delivered to the Company and its registered agent. The Written Consents purported to remove the board and elect a new slate of directors. Although the Written Consents represented a majority of the Company's outstanding voting power, they were not supported by a majority of the outstanding shares of the Series B.

Promptly after delivering the Written Consents, the plaintiffs filed suit seeking a determination that the consents were valid and effective. In opposition, the incumbent directors argued that they were not validly removed because the Class Vote Provision of the Series B required that the Written Consents be supported by a majority of the shares of the Series B.

After trial, the Court held that the board issued the Series B in breach of their duty of loyalty. Therefore, the Court would not enforce the Class Vote Provision of the Series B in connection with the removal of the incumbent board and the election of a new board. The Court held that enhanced scrutiny applied because the board's actions in issuing the Series B affected the stockholder franchise. Additionally, because the Class Vote Provision affected the ability of stockholders to vote for directors or determine corporate control, the Court found that the defendant directors must demonstrate a "compelling justification" for their actions in accordance with Blasius Indus., Inc. v. Atlas Corp., 813 A.2d 1113 (Del. Ch. 1988).

The Court held that the record established that the board specifically intended for the Class Vote Provision to prevent the common stock and the Series A Preferred holders from electing a new board. While the Court credited the defendants' position that they honestly believed that the Company would benefit from a period of "stability," the Court noted that "[w]hat the directors actually meant by 'stability' was to prevent themselves from being removed from office, making 'stability' a euphemism for entrenchment." Thus, even though the Court found that the directors in good faith believed that preventing another control dispute would best serve the Company, the Court held that the directors essentially usurped the stockholders' ability to choose the directors of Xurex. The Court stated that the board could not act loyally while depriving stockholders of this right.

Also, the Court noted that even if the board had subjectively intended to include the Class Vote Provision solely to raise capital, it would still be invalid. Two defendants admitted at trial that the Class Vote Provision was broader than necessary to achieve its stated goal (i.e., to entice investment). The Court further noted that the board effectively transferred negative control of Xurex to the Series B holders for too low of a price. For these reasons as well, the defendants were unable to satisfy the compelling justification standard.

Thus, the Court concluded that while the board honestly believed that preventing a change of control was in the best interests of Xurex, their efforts to deprive stockholders of the ability to elect new directors constituted a violation of the duty of loyalty. As such, the Court

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refused to enforce the Class Vote Provision with respect to the Written Consents.

c. Blades v. Wisehart, C.A. No. 5317-VCS (Del. Ch. Nov. 17, 2010).

In Blades v. Wisehart, the Court of Chancery held that a corporation had not validly effectuated a stock split because it had not complied with the requisite corporate formalities, notwithstanding that the corporation's board and stockholders all had the subjective intent to effectuate the split.

Blades involved a dispute under 8 Del. C. § 225 over the proper composition of the board of directors of Global Launch, Incorporated ("Global Launch"). Global Launch was the brainchild of plaintiff Rusty Blades, and was dedicated to pursuing Blades' idea of taking the concept of layaway purchasing to the internet.

When Global Launch was formed, Blades received roughly two-thirds of its 10 million shares of authorized stock. The remaining one-third interest went to The Ohio Company, in exchange for its agreement to provide Global Launch with $500,000 in capital.

Shortly after Global Launch was formed, Blades and The Ohio Company agreed to amend Global Launch's certificate of incorporation by increasing the authorized stock from 10 million to 50 million shares, and to engage in a 1 for 5 forward stock split. The additional stock was intended to be sold to other investors to raise capital, and a portion was intended (by Blades) to become gifts to certain Global Launch employees. Defendant Richard Wetzel, an Ohio attorney who had assisted with Global Launch's formation and who was familiar with Blades and a number of people interested in investing in Global Launch, was tasked with effectuating these transactions. While Wetzel prepared (and the board, Blades and The Ohio Company approved) resolutions authorizing the increase in capital stock and amending Global Launch's certificate of incorporation to reflect this increase, he never prepared a resolution or amended Global Launch's charter to reflect the stock split.

Notwithstanding this failure, all interested parties acted as if the split had taken place. Accordingly, for the next several months, The Ohio Company identified a number of potential investors and the Global Launch board of directors proceeded with plans to issue stock to interested investors. Wetzel was tasked with making investor presentations and materials, and with documenting the transactions once they were completed.

In late 2008, Blades resigned from the Global Launch board and from his position as President of the company due to legal troubles. Shortly thereafter, Wetzel and certain members of the Global Launch board "stepped up a series of purported transfers of Global Launch stock" with little or no notice to Blades. Some transfers went to individuals identified by The Ohio Company; others went to employees Blades had previously identified, but in all instances, Wetzel's cursory attempts to document the transfers "did not accurately or reliably reflect the substance of these transactions."

For the next year, and while these purported transfers were ongoing, Blades claimed that he was "increasingly frozen out" from Global Launch business. Accordingly, in November 2009 Blades convinced an ally on the company's board to notice an annual meeting. At that meeting,

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the stockholders elected seven new directors for a one-year term. Wetzel briefly attended the meeting, informed the stockholders of his belief that the meeting had been improperly called and would not result in valid stockholder action, and was then escorted out. After the meeting, the new board (among other things) purported to adopt new bylaws, remove all of the current officers, install Blades back in his position as President, and terminate Wetzel's representation of the Company.

Concerned that the annual stockholders meeting had not been properly called, on March 8, 2010 Blades and The Ohio Company executed a unanimous written consent ratifying the actions from the annual meeting. Blades then initiated this action to confirm the actions taken through the consent.

As all of the purported transfers of stock had relied on the stock split and were intended to be comprised of post-split shares, the Court of Chancery's decision hinged on whether the stock split had validly been effectuated. If the split was invalid, the transfers of post-split shares would be void, and Blades and The Ohio Company would be the only two stockholders of Global Launch.

Blades argued that the split had not validly been effectuated because of the failure to comply with three requirements set forth in the Delaware General Corporation Law to split stock(i) passage of a board resolution setting forth an amendment to the certificate of incorporation effectuating the split, declaring the advisability of the amendment, and calling for a stockholder vote; (ii) proper notice of the proposed amendment and stockholder meeting; and (iii) if the vote is approved, a certificate of amendment being filed. Defendants argued that the split should be recognized because Blades and The Ohio Company admitted that they supported the concept, and evidence existed suggesting that the board also supported the concept.

The Court of Chancery held that Global Launch (and Wetzel's) attempts to effectuate the split were ultimate failures. Analogizing to the Delaware Supreme Court's decisions in Waggoner v. Laster and STAAR Surgical Company v. Waggoner (which involved issuances of stock), the Court held that "the same policy reasons recognized in those cases for requiring scrupulous adherence to corporate formalities are germane to a board's adoption of a stock split because both board actions involve a change in the corporation's capital structure." Thus, notwithstanding that the Court found it "clear from the record" that both the Global Launch board and the two pre-split stockholders subjectively wished to adopt a stock split, the failure to adhere to the requirements of the DGCL in adopting that split was fatal.

Because all of the purported transfers were with post-split shares, those transfers were declared void. Global Launch's only two stockholdersBlades and The Ohio Companyhad therefore validly taken action to replace the company's board through the March 8, 2010 written consent.

The Court's opinion concluded with a warning that plaintiffs' victory "may not be the cause for celebration they may have anticipated at the outset of this litigation." Global Launcha struggling companyand its newly elected board now have to address various

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claims brought by investors, employees and certain of the defendants regarding the stock transfers that had been declared invalid.12

d. Prizm Group, Inc. v. Anderson, C.A. No. 4060-VCP (Del. Ch. May 10, 2010).

In Prizm Group, Inc. v. Anderson, Prizm Group, Inc., a Delaware corporation ("Prizm"), sought a declaration that Mark E. Anderson ("Anderson"), who was issued common stock of Prizm in exchange for an unsecured promissory note, had failed to provide valid consideration for the shares and that the shares were void ab initio or voidable at the election of Prizm. The Court of Chancery held that under Delaware law in effect prior to August 1, 2004, an unsecured promissory note does not constitute valid consideration for the issuance of stock of a Delaware corporation. The Court therefore issued a declaratory judgment that Anderson no longer owned the shares of Prizm, but it declined to determine whether the shares were void ab initio or voidable at the election of Prizm.

In May 2004, Anderson and two other investors purchased Prizm and elected themselves directors. Each agreed to make an initial equity contribution of $7000 and to provide a $100,000 loan to Prizm. The other two investors each made their respective contribution and loan, but Anderson could not contribute cash or property and instead executed an unsecured $107,000 promissory note. Prizm then issued to each investor 333 shares of common stock. Shortly thereafter, Prizm's financial situation worsened, and Prizm sent Anderson a formal demand for payment of the promissory note. After Anderson failed to pay the note, the board of directors of Prizm held a meeting and voted to cancel Anderson's shares for failure to pay any consideration. Approximately two years later, Protective Life Corporation ("Protective Life") offered to purchase Prizm for $15 million. However, Protective Life delayed the transaction because Anderson emerged, claiming to be a stockholder of Prizm and demanding to be a part of the negotiations. Eventually, Prizm was sold to Protective Life, but the value of the transaction declined significantly because of the delays caused by Protective Life's concerns regarding Anderson.

The Court considered whether an unsecured promissory note constituted valid consideration for the issuance of stock of a Delaware corporation. At the time of the issuance of the shares by Prizm, Article 9, Section 3 of the Delaware Constitution provided that "[n]o corporation shall issue stock, except for money paid, labor done, or personal property, or real estate or leases thereof actually acquired by such corporation." Similarly, 8 Del. C. § 152

12 While Blades makes clear that failure to follow requisite corporate formalities can be

fatal to a corporation's efforts to implement a stock split, an even more recent Court of Chancery decision suggests that stock splits are also subject to equitable attack. More specifically, in Reis v. Hazelett Strip-Casting Corp., C.A. No. 3552-VCL (Del. Ch. Jan. 21, 2011), the Court of Chancery held that a reverse stock split implemented at the behest of a controlling stockholder was susceptible to a claim for a breach of the duty of loyalty, that, therefore, the controlling stockholder bore the burden of demonstrating the entire fairness of the reverse stock split that cashed out minority stockholders and ultimately awarded plaintiffs monetary damages based on the Court's appraisal-like going-concern analysis of the fair price of the relevant shares.

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("Section 152") required that consideration for newly issued shares be paid in "the form of cash, services rendered, personal property, real property, leases of real property or a combination thereof." According to the Court, the provisions of the Delaware Constitution and Section 152 required that consideration for newly issued shares be in the form of (i) money paid, (ii) labor performed or (iii) property actually acquired, or some combination thereof, and that these were each forms of current, rather than future, consideration. The Court held that the unsecured promissory note did not constitute valid consideration for the issuance of stock, as an unsecured promissory note is merely a promise to pay in the future, which was not intended by the framers of the Delaware Constitution to constitute the capital of a Delaware corporation.

The Delaware Constitution and Section 152 were amended in relevant part effective August 1, 2004. Under the amended Section 152, newly issued stock may be obtained for "cash, any tangible or intangible property or any benefit to the corporation, or any combination thereof." The Court did not address what result it might have reached under the amended provisions.

After finding that the unsecured promissory note did not constitute valid consideration, the Court declined to determine whether Anderson's shares were void ab initio or voidable. The Court noted that shares of stock issued in exchange for improper consideration are typically void ab initio, absent certain equitable considerations. Where such equitable considerations do exist, shares purchased with invalid consideration are generally deemed voidable at the election of the corporation. Even if Anderson's shares were merely voidable by action of the board of directors—the best-case scenario for Anderson—the board had properly voided the shares.

e. Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCP (Del. Ch. Mar. 24, 2010).

In Fletcher International, Ltd. v. ION Geophysical Corp., the Court of Chancery held that a company's issuance of a promissory note convertible into common stock likely violated a contractual right of the company's preferred stockholder to consent to the issuance of "any security," but declined to issue a preliminary injunction based on the balance of hardships.

Fletcher International, Ltd. ("Fletcher") was the owner of preferred stock of ION Geophysical Corp. ("ION"). Under the terms of the preferred stock, Fletcher retained the right to consent to the issuance of "any security" by any subsidiary of ION. As part of an impending transaction with a third party, a wholly owned subsidiary of ION issued a convertible promissory note (the "Note") without Fletcher's consent.

Fletcher alleged in its complaint breaches of contract and fiduciary duty in connection with the issuance of the Note without Fletcher's consent. As part of its motion for partial summary judgment, Fletcher asked the Court to invalidate the issuance of the Note and require that ION repay any funds borrowed under the Note. Due to ION's imminent transaction with a third party that involved the Note (scheduled to close the day after the ruling was issued), the Court addressed only Fletcher's request for injunctive relief.

The Court analyzed Fletcher's injunctive relief request under the well-known preliminary injunction standard, requiring the movant to demonstrate: "(1) a reasonable probability of

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success on the merits at a final hearing, (2) an imminent threat of irreparable injury, and (3) a balance of the equities that tips in favor of issuance of the requested relief." While declining to make a final ruling on the issue of whether the Note is a "security," the Court found that Fletcher had demonstrated a reasonable probability of success on the merits of its claim that ION violated Fletcher's rights by issuing a security through its subsidiary without first obtaining Fletcher's consent. The Court reached this conclusion by reasoning that an instrument convertible into a security is itself considered to be a security. The Court also found that Fletcher made a weak showing that it may suffer irreparable injury if its request for injunctive relief were not granted, because although an award of monetary damages may prove difficult for the Court to determine, it was not beyond the Court's ability.

The Court, however, refused to grant a preliminary injunction based largely on the third and final factor: balance of the equities. The Court found that if ION were required to pay back the funds borrowed under the Note, ION would be required to pay down indebtedness under an existing credit facility that would cause significant liquidity problems that may lead to default and even bankruptcy. Furthermore, the Court determined that, based on statements made in ION's recent Form 10-K, requiring ION to repay the funds borrowed under the Note could prevent ION from closing its impending third party transaction, which may, consequently, cause ION to suffer significant adverse financial consequences. Because ION would be exposed to significant potential harm if the injunctive relief were granted, and because Fletcher faced little potential harm if an injunction were not issued, the Court found that the balance of equities strongly favored denial of the requested injunctive relief.

Accordingly, the Court denied Fletcher's motion for partial summary judgment to the extent it sought to require ION's immediate repayment of funds under the Note or otherwise block the closing of ION's third-party transaction based on the asserted invalidity of the Note.

4. Liability for Usurpation of Corporate Opportunity

a. Dweck v. Nasser, Consol. C.A. No. 1353-VCL (Del. Ch. Jan. 18, 2012).

In its post-trial opinion, Dweck v. Nasser, the Court of Chancery found that officers and directors of children's apparel manufacturer Kids International Corporation ("Kids") breached their fiduciary duties of loyalty to Kids by establishing competing clothing companies that usurped opportunities and converted resources from Kids. In addition, the Court found that an officer who approved expense reimbursements of another officer and director without considering their validity or asking any questions failed to act in the face of a known duty to act, and imposed liability for the improper expenses on a joint and several basis.

In 1993, Gila Dweck and her brother formed Kids with financial assistance from Albert Nasser. By 2001, Dweck owned 30% of Kids' stock and was CEO and a director. Nasser held a 50% stake in the company and was chairman of the board. As the company proved to be quite profitable, Dweck sought to increase her equity share, but she was rebuffed by Nasser and her brother.

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Convinced that her compensation was inadequate, Dweck formed two competing clothing companies, Success Apparel LLC ("Success"), which she formed with Kids' president Kevin Taxin in October 2001, and Premium Apparel Brands LLC ("Premium"), which she formed in June 2004. Dweck and Taxin channeled business opportunities from Kids to Success and Premium. In addition, they operated Success and Premium out of Kids' facilities and utilized Kids' employees, letters of credit, and vendors. According to the Court, Dweck and Taxin "operated Success and Premium as if the companies were divisions of Kids, but kept the resulting profits for themselves."

Around January 2005, Nasser became concerned about Dweck's management of Kids and attempted to gain more control over the company. Dweck and Taxin subsequently decided to leave Kids in May 2005. Before doing so, Dweck and Taxin diverted orders placed by Wal-Mart and Target from Kids to Success, took boxes of company files, and, with the assistance of Kids CFO David Fine, convinced a number of Kids employees to join Success. Litigation ensued, with Dweck and Nasser each alleging that the other had breached fiduciary duties.

In analyzing the conduct of Dweck and Taxin, the Court applied the corporate opportunity doctrine, which holds that a corporate officer or director may not take a corporate opportunity for his own if: (i) the corporation is financially able to exploit the opportunity; (ii) the opportunity falls within the corporation's line of business; (iii) the corporation has an interest or expectancy in the opportunity; and (iv) the officer or director will be placed in a position inimical to his or her duties to the corporation by exploiting the opportunity. Under this standard, the Court determined that Dweck and Taxin had violated their duty of loyalty to Kids by diverting opportunities to Success and Premium. The fact that Success and Premium utilized Kids' resources and personnel convinced the Court that Kids could have pursued the opportunities in its own name. As a remedy, the Court awarded damages for Kids' lost profits from the founding of Success and Premium through May 2005, as well as profits lost after May 2005 from license agreements signed by Success and Premium while Dweck and Taxin were Kids employees.

In their defense, Dweck and Taxin argued that because Kids had focused on the manufacture of non-branded clothing, they were free to exploit opportunities related to branded clothing. The Court rejected this contention, noting that a corporation's interest in a line of business should be "broadly interpreted." The Court also rejected Dweck's contention that Nasser had consented to her establishing the competing companies. Dweck referenced purported oral communications and pointed to drafts of an agreement among Kids' stockholders that contained a "free-for-all" provision permitting the parties to exploit corporate opportunities that belonged to Kids. Acknowledging that such a provision would raise "complex legal issues," the Court ultimately concluded that it had never become effective because Nasser had never signed or approved the stockholders' agreement or any of its drafts. Finally, Dweck argued that her conduct was justified by a similar "free-for-all" provision in the operating agreement of Essential Childrenswear, a different company formed by Nasser, Dweck, and Dweck's brother. The Court responded that even if the provision applied with regard to Essential Childrenswear, it could not eliminate the duty of loyalty for other entities formed by the same parties.

The Court also concluded that Dweck, Taxin, and Fine had breached their duties of loyalty in May 2005 by diverting orders from Kids to Success, taking boxes of company files,

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and orchestrating a mass departure of Kids' employees. As Kids failed following these events, Nasser argued that Kids was entitled to damages equal to the company's going concern value in May 2005. Since Dweck and Taxin were not bound by restrictive covenants and, in the Court's opinion, could have captured Kids' core business had they left the company legitimately, the Court awarded damages only for those orders that Dweck and Taxin had diverted from Kids to Success.

In addition, the Court found Dweck liable to Kids for over $300,000 in personal expenses she had billed to the company, including vacations and luxury goods. Finding that Fine had abdicated his responsibilities as CFO by failing to review such expenses before reimbursing Dweck, the Court found Fine jointly and severally liable for the expenses.

Finally, the Court also considered Dweck's claim that Nasser had received improper consulting fees from Kids. Due to Nasser's position as Kids' controlling stockholder, the Court applied the entire fairness standard. Because Nasser had not performed any actual consulting work for Kids, the Court determined that the consulting payments were not fair to Kids and ordered Nasser to return them.

5. Liability of Corporate Officers for Breaches of Fiduciary Duty.

a. Hampshire Group, Ltd. v. Kuttner, C.A. No. 3607-VCS (Del. Ch. July 12, 2010).

In Hampshire Group, Ltd. v. Kuttner, the Delaware Court of Chancery held two former corporate officers of Hampshire Group, Ltd. ("Hampshire") partially liable on certain of the corporation's claims that the officers breached fiduciary duties by making false certifications regarding Hampshire financial statements, knowingly causing Hampshire to mischaracterize certain personal and compensation expenses as reimbursable business expenses, and approving tuition payments that were improperly recorded as charitable donations. However, the Court held that the two former officers were not liable to Hampshire for any excessive expense reimbursements to the company's former chief executive officer ("CEO"). The Court further held that the former officers were not entitled to severance based on an oral agreement with the former CEO, and rejected the former officers' counterclaims that Hampshire defamed them in press releases announcing the terminations of their employment.

Between 2004 and 2006, Hampshire brought aboard several new high-ranking

employees, including Maura McNerney Langley as Compliance Officer, Heath Golden as Vice President of Business Development and Assistant Secretary and, eventually, General Counsel and CEO, and Jonathan Norwood as Vice President and Chief Financial Officer ("CFO"). These new officers soon developed concerns regarding Hampshire's recent business practices. In May 2006, these employees issued what they termed an Internal Review Memorandum. The Internal Review Memorandum outlined 23 matters these officers suspected involved illegal activity or violations of corporate policy, the majority of which involved Ludwig Kuttner, Hampshire's founder and CEO for almost three decades. In particular, the Memorandum highlighted potential issues with Kuttner's untimely and undocumented expense reports, as well as more general potential indications of unauthorized or illegal transactions involving Kuttner, Charles ClaytonHampshire's CFO and a Hampshire employee since 1978and Roger

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ClarkHampshire's Principal Accounting Officer and a Hampshire employee since 1998. The Memorandum recommended that the Hampshire board put Kuttner, Clayton and Clark on immediate leave, and that an internal investigation be undertaken.

After presenting the Memorandum to the Audit Committee and placing Kuttner, Clayton

and Clark on administrative leave, the Hampshire board commenced full-scale investigations, hiring major consulting, law and accounting firms (the "Outside Advisors") to investigate and remedy specific issues that were raised in the Memorandum. The Outside Advisors found that 16 of the 23 issues raised in the Memorandum were not substantiated concerns, but that 7 did raise important compliance problems. At the conclusion of the investigations, the board voted to terminate Kuttner and Clayton on September 25, 2006, and Clark on December 1, 2006. Hampshire issued multiple press releases announcing the terminations, and in mid-December 2006 further announced that it would restate its annual and quarterly financial statements for the year 2003 through fiscal quarter ending April 1, 2006 based on the findings of the investigations. The investigations wound up costing Hampshire around $5.5 million.

In March 2008, Hampshire commenced suit against Kuttner, Clayton and Clark alleging a

host of claims all centering on the 7 issues raised in the internal investigations. In August 2008, Hampshire reached a settlement with Kuttner, the principal target of the lawsuit. In exchange for a complete release, Kuttner paid Hampshire $1.5 million and also sold Hampshire his and his family's 30% block of stock at a below-market price, netting Hampshire a discount over market of just over $3 million. With Kuttner out of the picture, the litigation staggered on between Hampshire and Clayton and Clark. The matters pressed by these remaining parties centered around Clayton and Clark's prior actions while serving as officers of Hampshire. Specifically, Hampshire pressed that Clayton and/or Clark breached their fiduciary duties as officers by failing to act with due care in (1) approving fraudulent expense reports submitted by Kuttner, (2) approving additional compensation for the personal expenses of employees of a Hampshire subsidiary, (3) establishing a program allowing Hampshire employees to take tax deductions for sweater donations that Hampshire made, (4) falsely recording payments of Kuttner's assistant's tuition as "donations" in Hampshire's books, and (5) filing or signing false financial statements regarding the integrity of Hampshire's internal controls and financial statements. Clayton and Clark denied generally Hampshire's assertions, and retorted that Hampshire was liable to them for severance payments formerly promised by Kuttner and for defaming them in public press releases announcing their terminations.

For purposes of analyzing Hampshire's claims against Clayton and Clark, the Court stated

that corporate officers owe two primary duties to the corporation: (1) a duty to pursue the best interests of the company in good faith (duty of loyalty); and (2) a duty to use the amount of care that a reasonably prudent person would in similar circumstances (duty of care). For purposes of the duty of care, the Court stated that the appropriate standard for determining whether a breach occurred is gross negligence.

Turning to Hampshire's claims, the Court held (1) that Clayton and Clark were not liable

in damages for any payments to Kuttner of excessive expense reimbursements. The Court found that Clayton and Clark attempted in good faith to perform the difficult task of processing over a dozen years of expense reports Kuttner had failed to timely file. The Court found that, despite

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several potential inaccuracies in the reports, both Clayton and Clark reviewed Kuttner's expense reports for accuracy with as much diligence as could be reasonably expected. The Court held (2) that Clayton breached his fiduciary duty of loyalty by knowingly causing Hampshire to reimburse employees of a Hampshire subsidiary for personal expenses. The Court found that, although Clayton did not approve the transactions to enrich himself, he nevertheless knowingly caused Hampshire to break the law by treating concealed compensation as reimbursable business expenses. The Court held (3) that Clayton breached his duty of loyalty by participating in and permitting to continue an improper program whereby sweaters without market value were given out to Hampshire employees, who then gave them to charities and took personal tax deductions for the donation. The Court found that in December 2004, the Audit Committee specifically instructed that employees not be permitted to act as if the sweaters were charitable donations from themselves, and that Clayton nevertheless circumvented that instruction and personally tried to take deductions after the instruction was given. The Court held (4) that Clayton and Clark breached their fiduciary duties of loyalty by approving tuition payments made on behalf of Kuttner's assistant as charitable donations. The Court found that, because Clayton and Clark were aware of suspicious circumstances regarding the payments, including that the cancelled checks all referenced the assistant's name and social security number and that the payments were being made on a periodic basis more consistent with a tuition schedule, Clayton and Clark breached their duties by failing to investigate more into the matter. The Court held (5) that Clayton and Clark breached their fiduciary duties of loyalty by preparing and/or filing certain certifications regarding the integrity of Hampshire's financial statements and internal controls because they knew that the books of the company were false and that improper conduct had occurred.

Turning to Clayton and Clark's counterclaims, the Court held that Hampshire was not

liable to them for severance payments previously promised by Kuttner when he was the CEO. The Court found that Clayton and Clark's assertions that they were orally promised six months severance by Kuttner and that such severance was consistently offered were undermined by the lack of a written promise and by the severance pay provisions in Hampshire's Personnel Policy. Finally, the Court rejected Clayton and Clark's claims that Hampshire defamed them in press releases announcing their terminations. The Court found that any unflattering statements made in the releases could not be the basis for a libel claim because the statements made were not false. The Court added that, by accepting high-ranking positions at a public company, both Clayton and Clark were choosing to accept the kind of accountability that would allow Hampshire to inform the investing public of their terminations in the wake of an internal investigation.

6. Executive Compensation.

a. Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch. June 21, 2012).

In Zucker v. Andreessen, 2012 WL 2366448 (Del. Ch. June 21, 2012), the Court of Chancery applied the heightened pleading burden under Court of Chancery Rule 23.1 and dismissed a derivative complaint for failure properly to allege demand futility.

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The derivative plaintiff in Zucker challenged the Hewlett-Packard Co. ("HP") board's payment of severance benefits to the company's CEO, Mark Hurd ("Hurd"). The board determined to terminate Hurd after an internal investigation revealed that his conduct had fallen short of HP's standards of business conduct. The board appointed HP's chief financial officer to serve as interim CEO while it worked to locate a permanent replacement. The plaintiff claimed that HP's directors breached their fiduciary duty of care by failing to adopt a long-term succession plan to provide for leadership in the event of Hurd's departure as CEO. In addition, the plaintiff alleged that the severance agreement, which provided Hurd with over $40 million in benefits, constituted a waste of corporate assets.

The derivative plaintiff conceded that HP's directors were independent of Hurd and had

no interest in the severance agreement. As a result, in order to avoid dismissal under the standard articulated in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), the plaintiff must have alleged "particularized facts that raise a reasonable doubt that the Severance Agreement was the product of a valid exercise of business judgment." The Court explained that this standard was particularly difficult in the context of a waste claim, which requires a showing that the board's decision was so egregious or irrational that it could not have been based on a valid assessment of the corporation's best interests. In reviewing the complaint under this standard, the Court noted that HP received certain consideration in exchange for the severance payments, including, among other things, a release of any claims Hurd may have had against HP, an agreement to extend his confidentiality obligations to HP, and an agreement to assist the company in several areas post-termination. The Court further found that the board's decision to approve the severance agreement may also have benefitted the company in other ways, including by avoiding the costs and negative publicity that could have resulted from a dispute with Hurd. Also, under Delaware law, executive compensation may be based on successful past performance. The complaint failed to allege that Hurd's tenure at HP was not successful; therefore, the severance payment could also have been rational compensation for past performance. For these reasons, the Court found that the complaint failed to include particularized allegations raising a reasonable doubt that the severance agreement was a good faith business judgment.

The Court addressed the board's alleged inaction, i.e., its failure to adopt a succession

plan, under the standard stated in Rales v. Blasband 634 A.2d 927, 934 (Del. 1993). This standard requires a plaintiff to plead particularized facts that create a reasonable doubt regarding whether the board could have exercised its independent and disinterested business judgment when responding to a stockholder demand.

The Court noted that unless the alleged failure to have an appropriate succession plan in

place represented a bad faith breach of the directors' duties, the HP directors would not be deemed to suffer a disabling likelihood of personal liability. The Court concluded that directors are not under a per se obligation to implement a succession plan, and hence the HP directors could not have consciously disregarded a known duty. Thus, because the plaintiff failed to allege demand futility adequately under either Aronson or Rales, the amended complaint was dismissed.

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D. Controlling Stockholder Issues.

a. In re Synthes, Inc. Shareholder Litigation, 2012 WL 3594293 (Del. Ch. Aug. 17, 2012).

In In re Synthes, Inc. Shareholder Litigation, 2012 WL 3594293 (Del. Ch. Aug. 17, 2012), the Court of Chancery dismissed an amended class action complaint alleging that Synthes, Inc.'s ("Synthes") chairman and controlling shareholder Hansjoerg Wyss ("Wyss") and its board of directors (the "Board") breached their fiduciary duties by approving a merger with Johnson & Johnson ("J&J"). Significantly, the Court rejected the plaintiffs' claim that Wyss had conflicts of interest with the minority stockholders that required application of the entire fairness standard, holding that the business judgment rule applied because Wyss would receive pro rata treatment with the minority stockholders.

Synthes was a global medical device company headquartered in Switzerland. Wyss

owned approximately 38.5% of the company's outstanding stock. The plaintiffs alleged that Wyss also beneficially controlled 52% of Synthes's stock held by family members and trusts. In April 2010, the Board approached Wyss regarding a potential sale of the company, appointed an independent director to lead the sale process, and retained Credit Suisse as its financial advisor. Three of the nine strategic buyers contacted by the Board, including J&J, executed confidentiality agreements and began due diligence. The Board also approached six private equity firms, four of which executed confidentiality agreements and received due diligence.

In December 2010, three of the potential financial buyers submitted separate non-binding

indications of interest to acquire Synthes at ranges up to CHF (Swiss franc) 150 per share in cash. J&J submitted its first non-binding offer of CHF 145-150 per share, with more than 60% of the consideration to be paid in J&J stock. The private equity buyers sought, and were granted, permission to join together to attempt to secure sufficient financial resources. By February 2011, the private equity consortium offered a firm CHF 151 per share, conditioned on Wyss converting a substantial portion of his equity investment in Synthes into an equity investment in the post-transaction company. Having considered these offers, the Board negotiated with J&J to seek a higher price, and ultimately J&J increased its offer to CHF 159 per share—composed of 65% stock (subject to a collar) and 35% cash. Notably, under J&J's proposal, Wyss was to receive only his pro rata share of the transaction proceeds. Then the Board and J&J negotiated a merger agreement containing several deal protection provisions, including a no-shop clause with a fiduciary out, a force-the-vote provision, matching rights and a termination fee of 3.05%. Wyss, together with family members and family trusts, agreed to vote approximately 37% of the company's stock in favor of the transaction.

The parties announced the $21.3 billion acquisition of Synthes by J&J on April 26, 2011.

The deal represented a 26% premium to Synthes's 30-day trading price (the "Merger"). The plaintiffs filed suit alleging breach of fiduciary duty claims against Wyss and the Board. The plaintiffs argued that the Merger was subject to entire fairness review because Wyss had financial motives adverse to the best interests of Synthes's stockholders and was supposedly anxious to sell his equity stake rapidly to facilitate his own exit. The plaintiffs further alleged that the Merger was subject to enhanced scrutiny under Revlon because it was an "end stage" transaction. The Court rejected the plaintiff's claims and dismissed the complaint with prejudice.

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The Court rejected a review under entire fairness, holding that the business judgment rule applies to a merger resulting from an open and deliberative sale process when a controlling stockholder shares the control premium ratably with the minority stockholders. Because a large stockholder's interests are generally aligned with the minority's interest in obtaining the highest price reasonably available, the Court observed that "there is a good deal of utility to making sure that when controlling stockholders afford the minority pro rata treatment, they know that they have docked within the safe harbor created by the business judgment rule." Thus, the Court held that the plaintiffs failed to plead facts to suggest that Wyss forced a fire sale of the company in order to satisfy some urgent need for liquidity or that he was in any particular rush to sell his stake in Synthes. Rather, the plaintiffs' arguments ran contrary to the facts pled about the strategic process that the Board pursued. The Court also rejected the plaintiffs' claim that they were unfairly deprived of the chance to sell all of their shares for cash because Wyss refused to support a deal that would require him to remain a substantial investor in the post-transaction entity. The Court stated that the plaintiffs' argument was "astonishing" and reflected "a misguided view of the duties of a controlling stockholder under Delaware law." That is, Delaware law does not impose on controlling stockholders a duty to engage in self-sacrifice for the benefit of the minority stockholders.

The Court also rejected the plaintiffs' Revlon and Unocal claims. The plaintiffs argued

that the Merger was subject to Revlon's enhanced scrutiny because Synthes's stockholders received mixed consideration of 65% J&J stock and 35% cash. Relying on Delaware Supreme Court precedent, the Court held that a change of control for purposes of Revlon does not occur where control of the corporation post-merger is in a large, fluid market. Here, J&J's stock is widely held. Lastly, the Court dismissed the plaintiffs' challenge to the deal protection measures under Unocal. The Court concluded that the plaintiffs made no attempt to show how the deal protections would have unreasonably precluded the emergence of a genuine topping bidder willing to make a materially higher bid.

b. Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012).

In Frank v. Elgamal, C.A. No. 6120-VCN (Del. Ch. Mar. 30, 2012), the Court of Chancery held that entire fairness review would apply to the merger of American Surgical Holdings, Inc. ("American Surgical") with an unaffiliated private equity purchaser in which American Surgical's minority stockholders were cashed out. Because the Court concluded that the plaintiff had adequately alleged the existence of a control group, the Court found that the merger would be subject to entire fairness review under the standard set forth in In re John Q. Hammons Hotels Inc. Shareholder Litigation., 2009 WL 3165613 (Del. Ch. Oct. 2, 2009).

The American Surgical board designated two directors as a special committee charged with negotiating the terms and conditions of any potential transaction involving the sale of the company. After conducting a strategic process, the company entered into a merger agreement with an unaffiliated private equity firm, Great Point Partners I, LP ("Great Point"). The plaintiff alleged that the company had received a proposal from a different private equity firm for a multi-million dollar investment that would have allowed the company to fund its expansion plans and allowed the company's public stockholders to continue their investment in the company. However, this proposed investment was allegedly less lucrative than the Great Point merger

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proposal to the company's alleged "control group," which included two directors who also served as top managers of the company and two other managers. Accordingly, the plaintiff alleged that the control group pushed forward with the merger with Great Point's affiliate, AH Holdings, Inc. ("Holdings"), and that the special committee acquiesced to the control group.

The merger was structured as a reverse-triangular merger, in which Holdings merged with American Surgical and American Surgical was the surviving entity. Under the terms of the merger agreement, each share of American Surgical common stock was converted into the right to receive $2.87 in cash. However, on the same day as the execution of the merger agreement, the members of the alleged control group entered into exchange agreements pursuant to which they would exchange, immediately prior to the merger, some of their American Surgical stock for shares of Holdings. As a result, while all other American Surgical stockholders would be cashed out through the merger, the members of the control group would retain an interest in the company. The members of the control group also entered into voting agreements, pursuant to which they agreed to vote all of their American Surgical common shares in favor of the merger. Finally, the members of the control group also each executed employment agreements with Holdings, which became effective with the merger.

In addressing the complaint's breach of fiduciary duty claims, the Court primarily focused on whether the plaintiff had adequately alleged the existence of a control group. The Court began its analysis by noting that Delaware case law has recognized that a number of stockholders could together constitute a control group "where those shareholders are connected in some legally significant way—e.g., by contract, common ownership, agreement, or other arrangement—to work toward a shared goal." If such a control group exists, it is accorded controlling stockholder status and each of its members owes fiduciary duties to the minority stockholders of the corporation.

Although none of the individuals in the alleged control group owned more than 30 percent of the company's common stock, they collectively owned more than 70 percent of the common stock as of the record date for voting on the merger. Moreover, the complaint alleged that each member of the control group acted in concert and had contemporaneously entered into the voting agreements, the exchange agreements, and the employment agreements. The Court concluded that, for the purposes of a motion to dismiss, these allegations were sufficient to establish the existence of a control group. The Court noted that private equity purchasers often condition a transaction on the continued employment of key members of management and sometimes provide that those persons receive an equity stake in the company. The Court recognized that, in other circumstances, the Court of Chancery had found it permissible to structure a transaction in this way. However, the Court noted that where the complaint adequately alleges that the managers who will be given a continuing interest in the company are members of a control group, it is reasonable for the Court to infer that the managers/control group members are using their control to acquire unique benefits for themselves at the expense of the minority stockholders.

Having concluded that the existence of a control group was adequately alleged, the Court explained that the merger is analogous to the transaction at issue in Hammons. Following the reasoning of Hammons, the Court explained that, in such circumstances, the controlling stockholders and the minority are "competing" for portions of the consideration that the third-

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party acquiror is willing to pay. In Hammons, the Court of Chancery held that the business judgment rule would apply to such a situation only if the merger was subject to "robust procedural protections," such as a nonwaivable vote of a majority of the minority stockholders and a recommendation by a disinterested and independent special committee. Because American Surgical had not conditioned the merger on approval by a majority of the minority stockholders, the Court found that the transaction would be subject to entire fairness review and therefore refused to grant American Surgical's motion to dismiss.

c. In re Delphi Financial Group Shareholder Litigation, Consol. C.A. No. 7144-VCG (Del. Ch. Mar. 6, 2012).

In In re Delphi Financial Group Shareholder Litigation, the Court of Chancery declined to enjoin Tokio Marine Holdings, Inc.'s proposed takeover of Delphi Financial Group. The Court found that the plaintiffs had demonstrated a likelihood of success on the merits with respect to their allegations against Delphi's founder and controlling stockholder, Robert Rosenkranz, but it found that the balance of the equities weighed against an injunction because the deal was a large premium to market, damages were available as a remedy, and no other potential purchaser had emerged.

Delphi had two classes of common stock: Class A, with one vote per share, and Class B, with ten votes per share. Rosenkranz and his affiliates owned all of the Class B and some of the Class A, but Rosenkranz's voting power was capped at 49.9% under Delphi's certificate of incorporation and a voting agreement. Delphi's certificate of incorporation prohibited disparate treatment between the Class A and Class B in a merger. The Court noted that these provisions were in place at the time of Delphi's initial public offering and that, while they preserved Rosenkranz's voting power, they limited his ability to realize additional benefits through his ownership of Class B shares.

Tokio Marine approached Delphi with a takeover proposal, and Rosenkranz negotiated on Delphi's behalf. Rosenkranz later indicated to the Delphi board that he was a seller, but only if he obtained a control premium for his stake. The board formed a special committee to negotiate the proposed transaction with Tokio Marine, and the special committee, in turn, formed a sub-committee to negotiate the "price differential" with Rosenkranz. Ultimately, the parties settled on a transaction in which the Class A would receive approximately $45 per share (representing a 76% premium to market), while Rosenkranz would receive approximately $54 per share for his Class B shares. The transaction was conditioned on a non-waivable vote of a majority of the disinterested Class A stockholders as well as on an amendment to Delphi's certificate of incorporation allowing Rosenkranz to receive a control premium.

Although the Court stated that a controlling stockholder is entitled to negotiate for a control premium, it found that, in this case and at the preliminary injunction stage, the prohibition in Delphi's post-IPO certificate of incorporation on disparate merger consideration reflected that Rosenkranz had already received a control premium in connection with the sale of Class A shares, which enabled him to exercise voting control despite retaining only 12.9% of Delphi's equity. Presumably, the Court noted, the Class A shares were priced to reflect Rosenkranz's inability to receive an additional control premium in the event of a merger. While noting that Rosenkranz could have negotiated to amend the certificate of incorporation on a clear

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day, the Court suggested that Rosenkranz's attempt to "coerce such an amendment" by tying it to the merger proposal rendered the existing provisions "illusory." Ultimately, the Court found that the plaintiffs were reasonably likely to demonstrate at trial that Rosenkranz breached his fiduciary duties in "negotiating for disparate consideration and only agreeing to support the merger if he received it." Thus, although it did not enjoin the transaction, the Court indicated that it could remedy this potential breach by ordering disgorgement of the improper consideration.

d. In re John Q. Hammons Hotels Inc. S'holder Litig., C.A. No. 758-CC (Del. Ch. Jan. 14, 2011).

In In re John Q. Hammons Hotels Inc. S'holder Litig., the Court of Chancery applied the entire fairness standard to review the September 2005 merger of John Q. Hammons Hotels, Inc. ("JQH") with and into an acquisition vehicle indirectly owned by Jonathan Eilian. The Court's holding was significant because it applied the entire fairness standard of review to a merger involving a third-party purchase of a corporation that had a controlling stockholder, even though the Court held that the controlling stockholder was not "on both sides" of the transaction and that Kahn v. Lynch13 did not apply to the transaction.

In early 2004, John Q. Hammons, who owned roughly 76% of the total vote of JQH through his ownership of 5% of JQH's Class A common stock and all of the nonpublic Class B common stock, told the JQH board that he was considering selling JQH (or his interest in JQH) to a third party. In October 2004, Barceló Crestline Corporation ("Barceló") informed the JQH board that it was offering $13 per share to acquire all of JQH's Class A stock. Soon after the Barceló transaction was announced, the JQH board formed a special committee of independent and disinterested directors to evaluate and negotiate proposed transactions on behalf of the unaffiliated stockholders and to make a recommendation to the board. The special committee retained Lehman Brothers as its financial advisor.

In December 2004, Jonathan Eilian submitted a proposal to the special committee, and the special committee rejected Barceló's original $13-per-share offer after Lehman Brothers advised the special committee that, based on its preliminary evaluation, the offer was inadequate, from a financial point of view, for the minority stockholders. Barceló and Eilian submitted revised proposals, and in January 2005 Eilian offered to take JQH private and acquire all outstanding Class A common stock for $24 per share.

Over the next few months, the terms of a transaction were negotiated with Eilian. The special committee negotiated with Eilian on behalf of the minority stockholders, and Hammons negotiated with Eilian on his own behalf. In June 2005, Lehman provided the special committee with a fairness opinion that the $24-per-share price for the JQH minority stockholders was fair from a financial point of view. Hammons had negotiated several side agreements with Eilian for his Class B stock, and Lehman calculated the value of Hammons's consideration to be between $11.95 and $14.74 per share. Lehman also advised the special committee of its opinion that the allocation of the consideration between Hammons and the minority stockholders was reasonable.

13 Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110 (Del. 1994).

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Based on the special committee's recommendation, the JQH board (after Hammons recused himself) voted to approve the merger agreement and the agreements between Hammons and Eilian.

Pursuant to the merger agreement, each share of Class A common stock was converted into the right to receive $24 per share in cash. The merger was contingent on approval by a majority of the unaffiliated Class A stockholders. Although this condition was waivable by the special committee, the special committee never waived it. In addition to the merger agreement, Hammons entered into a number of other agreements with Eilian designed to provide Hammons the ability to continue developing hotels without triggering tax liability. Hammons's Class B shares were eventually converted into a preferred interest in the surviving limited partnership, in which he was allocated a 2% interest in the cash-flow distributions and preferred equity. Hammons was also provided with other rights and obligations, including a $25 million short-term line of credit and a $275 million long-term line of credit. At a special meeting of stockholders on September 15, 2005, over 72% of the issued and outstanding shares of Class A stock voted to approve the merger.

Plaintiffs brought a class action alleging, inter alia, breach of fiduciary duties against Hammons as controlling stockholder for negotiating benefits for himself that were not shared with the minority stockholders and against the JQH directors for deficient process in negotiating the merger and for approving the merger. All defendants filed motions for summary judgment, and plaintiffs filed a cross-motion for partial summary judgment, leaving only the issue of fair price for trial. The Court granted defendants' motions in part (related to one of plaintiffs' disclosure claims) and otherwise denied all parties' motions, holding that entire fairness was the appropriate standard of review.

At the outset, the Court held that the merger did not fall under the Kahn v. Lynch line of cases. Even though Hammons retained a minor stake in the surviving entity, the Court noted that a third party had made the offer to the minority stockholders and held that Hammons was not "on both sides" of the transaction.

Nevertheless, the Court held that entire fairness applied. Because Hammons was in a sense "competing" with the minority stockholders for the merger consideration, the Court held that business judgment review would only apply if the transaction were (i) recommended by a disinterested and independent special committee and (ii) approved by stockholders in a non-waivable vote of the majority of all the minority stockholders.

The Court then held that defendants had not met the two procedural requirements. Even though plaintiffs had conceded that the special committee was independent and disinterested, the Court left open for further factual development that the special committee had been "coerced" because Hammons's controlling position and alleged self-dealing conduct depressed the pre-transaction value of JQH's shares. Furthermore, the merger's majority-of-the-minority condition was waivable and was based only on those voting (and not all minority stockholders), so the Court held that entire fairness applied—even though the condition was not waived and even though a majority of all minority stockholders did approve the transaction. The Court also left open for future resolution plaintiffs' challenge of Lehman's opinion regarding the consideration

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Hammons received; therefore, the Court refused to find that Hammons had made a showing of fair price.

Following trial, on January 14, 2011, the Court of Chancery ruled in favor of defendants, finding that the merger price was fair value, that controlling stockholder John Q. Hammons did not breach his fiduciary duties, and that the third-party acquirers did not aid and abet a (nonexistent) fiduciary duty breach. In its post-trial opinion, the Court noted that defendants "may actually have been entitled to business judgment rule protection," but it analyzed the transaction under the entire fairness standard and found the process and the price to be fair. The Court found that Mr. Hammons did not breach any fiduciary duties, particularly as he took less per-share consideration than the minority stockholders received. Finally, because no fiduciary duties had been breached, the Court rejected the claim against the acquirers for aiding and abetting.

e. In re CNX Gas Corp. S'holders Litig., C.A. No. 5377-VCL (Del. Ch. May 25, 2010).

In In re CNX Gas Corp. Shareholders Litigation, the Delaware Chancery Court attempted to clarify the standard applicable to controlling stockholder tender offers and mergers. In a challenge to a controlling stockholder's proposed freeze-out transaction (a first-step tender offer followed by a second-step short-form merger), the Court applied a standard derived from In re Cox Communications, Inc. Shareholders Litigation to hold that the presumption of the business judgment rule would apply to a controlling stockholder freeze-out only if the first-step tender offer is both (i) negotiated and recommended by a special committee of independent directors and (ii) conditioned on a majority-of-the-minority tender or vote (as the case may be) condition. The Court held that, because CNX's special committee did not make a recommendation in favor of the tender offer, the transaction would be reviewed under the entire fairness standard. While that fact, under the Court's analysis, was sufficient to trigger the application of the entire fairness standard, the Court also noted that the special committee was not provided with the authority to bargain with the controller on an arm's-length basis and that the majority-of-the-minority tender condition may have been ineffective. Nonetheless, the Court declined to issue an injunction since any harm to the stockholders could be remedied through post-closing money damages.

In 2005, CONSOL formed CNX to conduct its natural gas operations, and CONSOL's board approved a public offering of less than 20% of CNX's stock. A few years later, CONSOL sought to acquire all of CNX's publicly held stock. In March 2010, CONSOL entered into (and publicly announced) an agreement with T. Rowe Price, the holder of 37% of CNX's public float, in which T. Rowe Price agreed to tender its shares to CONSOL in a public tender offer. CNX's board then formed a special committee, consisting of CNX's sole independent director, to evaluate CONSOL's tender offer. But the special committee's authority was limited; it was authorized only to evaluate the tender offer, to prepare a Schedule 14D-9 and to engage legal and financial advisors. It was not authorized to negotiate the terms of the tender offer or to consider alternatives.

On April 28, 2010, CONSOL launched its public tender offer with a price of $38.25 per share, committing to effect a short-form merger at the same price. The tender offer was subject to a non-waivable majority-of-the-minority condition. Even though the special committee was

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not expressly authorized to negotiate the offer, it sought a price increase, indicating that it could not recommend the offer at $38.25, but likely could recommend an offer at $41.20. CONSOL declined to increase the price. In May 2010, the special committee issued a Schedule 14D-9 in which it remained neutral on the tender offer, citing concerns about the determination of the price and CONSOL's unwillingness to negotiate over price.

Because plaintiffs argued that the tender offer should be reviewed for entire fairness, the Court stated it was required to "weigh in on a critical and much debated issue of Delaware law: the appropriate standard of review for a controlling stockholder freeze-out." The Court noted that a negotiated merger between a controlling stockholder and its subsidiary is subject to entire fairness review under the Delaware Supreme Court's holding in Kahn v. Lynch Communication Systems, Inc. But, the Court stated, under In re Siliconix, a controlling stockholder tender followed by a short-form merger is reviewed under "an evolving standard far less onerous than Lynch." The Court then noted the previous efforts in In re Pure Resources to harmonize these cases and to set forth three elements for determining whether a controlling stockholder tender offer should be viewed as non-coercive (i.e., whether it is subject to a non-waivable majority-of-the-minority tender condition, whether the controller commits to consummate a short-form merger at the same price, and whether the controller has made no retributive threats). The Court suggested that this standard was effectively revised in Cox Communications, indicating that Cox stands for the proposition that "if a freeze-out merger is both (i) negotiated and approved by a special committee of independent directors and (ii) conditioned on an affirmative vote of a majority of the minority stockholders, then the business judgment rule presumptively applies." (Notably, the Court in Cox essentially indicated that applying its proposed standard in a negotiated merger context would require overturning the Delaware Supreme Court's holding in Kahn v. Lynch). If either requirement is not met, the Court stated, then the transaction must be reviewed for entire fairness.

The Court applied Cox's requirements to controlling stockholder tender offers as well (amending the test slightly to require that the special committee affirmatively recommend the transaction), and found that CONSOL's tender offer failed to meet these requirements. Most important, the special committee did not recommend the transaction, nor was it authorized to negotiate the transaction or consider alternatives. The Court stated that an effective special committee must be "provided with authority comparable to what a board would possess in a third-party transaction," including (contrary to the holding in Pure Resources) potentially adopting a poison pill. Next, the Court found that the involvement of T. Rowe Price "undercut the effectiveness of the majority-of-the-minority tender condition." Citing to the Delaware Supreme Court's recent opinion in Crown EMAK Partners, LLC v. Kurz, which addressed the validity of so-called third-party vote buying arrangements, the Court noted that economic incentives should be taken into account when determining the "effectiveness of a legitimizing mechanism like a majority-of-the-minority tender condition or a stockholder vote." In this case, the Court expressed concern that T. Rowe Price's interests were potentially in conflict with those of the public stockholders. Due to its 6.5% ownership stake in CONSOL, the Court stated, T. Rowe Price was either "indifferent to the allocation of value between CONSOL and CNX" or had an incentive to favor CONSOL.

Finally, the Court noted that, if it had evaluated the tender offer under Pure Resources, the structural problems with the tender offer--the defects in the tender condition and the

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limitations on the special committee's authority--likely would have counseled in favor of an injunction. Because the Court applied its "Cox Communications unified standard," however, there was no need to enjoin the transaction. The transaction was an all-cash deal to which no alternative had been identified. Here, given the lack of any evidence casting doubt on CONSOL's ability to satisfy a money judgment, the remedy of post-trial money damages would be sufficient.

II. 2011–2012 AMENDMENTS TO THE GENERAL CORPORATION LAW.

A. 2012 Amendments (effective August 1, 2012 or August 1, 2013).

Legislation amending the DGCL was adopted by the Delaware General Assembly and was signed by the Governor of the State of Delaware on June 29, 2012. Most of the amendments to the DGCL became effective on August 1, 2012, while the remaining amendments will become effective on August 1, 2013. The DGCL amendments are designed to keep Delaware law current and address issues raised by practitioners, the judiciary and legislators with respect to the current language or interpretation of the DGCL.

1. Section 254 (Merger or consolidation of domestic corporation and joint-stock corporation or other association); Section 263 (Merger or consolidation of domestic corporations and partnerships); Section 265 (Conversion of other entities to a domestic corporation); and Section 267 (Merger of parent entity and subsidiary corporation or corporations).

Section 254(d)(1) of the DGCL has been amended to provide that a certificate of merger effecting the merger of a domestic corporation and a joint-stock corporation or other association must now state the type of entity of each of the constituent entities to the merger. Section 263(c)(1), which governs the merger of a domestic corporation and a partnership, has been amended to require that the certificate of merger state the type of entity of each of the constituent entities to the merger. Section 265(c)(2) has been amended to require that a certificate of conversion effecting a conversion of another entity to a domestic corporation state the type of entity of the other entity converting to a domestic corporation. Section 267, which governs short-form mergers involving a parent entity other than a corporation, also has been amended to require that the certificate of ownership and merger provide the type of entity of each constituent entity to the merger.

2. Section 311 (Revocation of voluntary dissolution).

Section 311 of the DGCL, which governs the revocation of a voluntary dissolution by a Delaware corporation, has been amended to require that the certificate of revocation of dissolution include the address of the corporation's registered office in the State of Delaware and the name of its registered agent at such address.

3. Section 312 (Renewal, revival, extension and restoration of certificate of incorporation).

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Section 312 of the DGCL sets forth the requirements for a Delaware corporation to renew or revive its existence. Section 312(d)(2) has been amended to clarify that the address of the registered office which must be stated in the certificate of renewal or revival must be stated in accordance with Section 131(c) of the DGCL.

4. Section 377 (Change of registered agent).

Section 377 of the DGCL addresses how a foreign corporation registered to do business in the State of Delaware may change its registered agent. Sections 377(a) and 377(b) have been amended to clarify the types of entities that may serve as registered agents for foreign corporations registered to do business in the State of Delaware. Section 377(a) now refers to Section 371(b)(2)(i) of the DGCL, which provides that the registered agent may be the foreign corporation itself, an individual resident in the State of Delaware, a domestic corporation, a domestic partnership (whether general (including a limited liability partnership) or limited (including a limited liability limited partnership)), a domestic limited liability company, a domestic statutory trust, a foreign corporation (other than the foreign corporation itself), a foreign partnership (whether general (including a limited liability partnership) or limited (including a limited liability limited partnership)), a foreign limited liability company or a foreign statutory trust. Section 377(b) has been amended to change the reference from "corporation" to "entity."

Section 377 also was amended to add a new requirement for the reinstatement of a foreign corporation when such foreign corporation has been forfeited for failure to appoint a registered agent. New subsections (d) and (e) were added to Section 377 to provide that a foreign corporation whose qualification to do business has been forfeited may be reinstated if it files a certificate of reinstatement setting forth the name of the foreign corporation, the effective date of the forfeiture, and the name and address of the foreign corporation's registered agent. Upon the filing of the certificate of reinstatement, the qualification of the foreign corporation to do business in the State of Delaware is reinstated with the same force and effect as if it had not been forfeited.

5. Section 381 (Withdrawal of foreign corporation from State; procedure; service of process on Secretary of State).

Section 381 of the DGCL, which addresses the withdrawal of a foreign corporation from the State of Delaware, has been amended to eliminate the option of filing a certificate of dissolution issued by the proper official of the other jurisdiction as a means to effect such a withdrawal. As amended, a foreign corporation must file a certificate of withdrawal to withdraw from the State of Delaware. Section 381 also has been amended to remove the requirement that the Secretary of State of the State of Delaware (the "Secretary of State") issue a certificate of withdrawal to the agent of the withdrawing corporation, which conforms the DGCL to the Secretary of State practice of only providing such certificate to the withdrawing corporation.

6. Section 390 (Transfer, domestication or continuance of domestic corporations).

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Section 390 of the DGCL permits a Delaware corporation to transfer to a foreign jurisdiction. In connection with a transfer, a Delaware corporation files with the Secretary of State a certificate of transfer which must state, among other things, the address to which service of process may be sent to the corporation that has transferred out of the State of Delaware. Section 390(b)(5) has been amended to provide that such address cannot be the address of the corporation's registered agent without the written consent of such registered agent, which consent must be filed with the certificate of transfer.

7. Section 391 (Amounts payable to Secretary of State upon filing certificate or other paper).

Section 391 of the DGCL, which sets forth the amounts payable to the Secretary of State in connection with the filing of certificates and other documents, has been amended to clarify that charges assessed by the Secretary of State pursuant to Section 391 are not taxes. In addition, Section 391 was amended to set forth the fee for filing a certificate of reinstatement of a foreign corporation.

8. Effective Date.

Except for the amendments to Section 377 of the DGCL adding subsections (d) and (e), all of the foregoing amendments to the DGCL became effective on August 1, 2012. The addition of subsections (d) and (e) to Section 377 of the DGCL will become effective on August 1, 2013.

B. 2011 Amendments (effective August 1, 2011).

1. Certificate of Incorporation

Section 102 of the DGCL sets forth the required contents of a certificate of incorporation. Under Section 102(a)(1) of the DGCL, the name of a corporation (i) shall contain certain "corporate" endings, such as "company", "corporation" or "incorporated" (or abbreviations thereof) unless waived by the Division of Corporations in the Department of State upon the certification by the corporation that its total assets are not less than $10,000,000; (ii) shall be distinguishable upon the records in the office of the Divisions of Corporation in the Department of State from the names that are reserved and from the names on records for other entities; and (iii) shall not contain the word "bank" or any variation thereof, except in certain circumstances. Section 102(a)(1) has been amended in two respects.

First, Section 102(a)(1) has been amended to allow the Division of Corporations in the Department of State, in its sole discretion, to waive the requirement that a corporation's name contain certain "corporate" endings (or abbreviations thereof) if the corporation is both a nonprofit nonstock corporation and an association of professionals.

Second, Section 102(a)(1) has been amended, in conjunction with amendments to Section 395 of the DGCL, to give the Director of the Division of Corporations and the State Bank Commissioner the discretion to waive certain requirements and restrictions that apply when a corporation uses the word "trust" in its name, so long as the use of the word "trust" is clearly not purporting to refer to a trust business. In that connection, Section 102(a)(1) has been amended to

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specifically provide that, except as provided in Section 395 of the DGCL, the name of a corporation shall not include the word "trust".

Also, under Section 102(a)(2) of the DGCL, a corporation's certificate of incorporation must include the address (which shall include the street, number, city and county) of the corporation's registered office in the State of Delaware and the name of the registered agent at such address. Section 102(a)(2) has been amended in connection with the amendment to Section 131 of the DGCL. Section 102(a)(2) now requires the address of the registered office to be stated in accordance with Section 131(c) of the DGCL, which adds the requirement that the postal code be included in such address.

2. Effective Date of Original Certificate

Section 103 of the DGCL sets forth the requirements to file documents with the Secretary of State of the State of Delaware (the "Secretary of State"). Section 103 has been amended in connection with the amendments to Sections 102(a)(2), 131 and 374 of the DGCL by adding a new subjection (j) to clarify that it is not necessary for a Delaware corporation to amend its certificate of incorporation, or any other document, that has been filed with the Secretary of State prior to August 1, 2011, to add the postal code to the address of its registered office as is required pursuant to the amendments to Sections 102(a)(2), 131 and 374. However, any certificate or other document filed on or after August 1, 2011 that changes the address of the registered agent must comply with Section 131(c) (i.e., such address must include the postal code).

3. Registered Office in State

Section 131 of the DGCL provides that every corporation must maintain a registered office in the State of Delaware. Section 131 has been amended to add a new subsection (c), which provides that the address of the registered office contained in any certificate of incorporation or other document filed with the Secretary of State shall include the street, number, city, county and postal code. Sections 102(a)(2) and Section 374 have both been amended to cross reference Section 131(c) with respect to the contents of the address of the registered office of the corporation.

4. Indemnification

Section 145 of the DGCL provides that a Delaware corporation may provide indemnification and advancement of expenses to its officers, directors, employees and agents. In 2009, Section 145(f) was amended to provide that a right to indemnification and advancement of expenses under a provision in the certificate of incorporation or bylaws could not be eliminated or impaired by an amendment to such provision after the occurrence of the act or omission giving rise to the indemnification or advancement claim, unless the provision contained, at the time of the act or omission, an explicit provision permitting such elimination or limitation. Section 145(f) has been amended to clarify that indemnification and advancement of expenses under a provision of a certificate of incorporation or bylaw cannot be eliminated or impaired by an amendment to the certificate of incorporation or the bylaws after the occurrence of the act or omission to which the indemnification or advancement of expenses relates, unless the provision, at the time of the act or omission, explicitly authorizes such elimination or limitation. Thus, for

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example, a corporation may not circumvent an indemnification or advancement of expenses obligation in a bylaw provision by adopting an amendment to its certificate of incorporation.

5. Conversion to a Domestic Corporation

Section 265 of the DGCL permits "other entities" to convert to a Delaware corporation by filing a certificate of conversion and a certificate of incorporation with the Secretary of State. Section 388 of the DGCL permits a non-United States entity to become domesticated as a Delaware corporation by filing a certificate of corporate domestication and a certificate of incorporation with the Secretary of State. Both Section 265(b) and Section 388(b) have been amended to clarify that the certificate of incorporation and the certificate of conversion or certificate of corporate domestication, as applicable, must be filed simultaneously with the Secretary of State and, to the extent such certificate of incorporation and certificate of conversion or certificate of corporate domestication, as applicable, are to have a post-filing effective date or time, such certificates must provide for the same effective date or time.

6. Payment of Franchise Taxes

Section 277 of the DGCL provides that no corporation shall be dissolved or merged until all franchise taxes due or assessable, including all franchise taxes that would be due or assessable for the entire calendar month during which the dissolution or merger becomes effective, have been paid. Section 277 has been amended to also include conversions of corporations to other entities pursuant to Section 266 of the DGCL and transfers to foreign jurisdictions (without continuing its existence as a corporation of the State of Delaware) pursuant to Section 390 of the DGCL. The amendment also clarifies that the corporation must file all annual franchise tax reports, including the final franchise tax report for the year in which the dissolution, merger, transfer or conversion becomes effective. Notwithstanding the foregoing, the amendments to Section 277 provide that if the Secretary of State certifies an instrument effecting a dissolution, merger, transfer or conversion, the corporation will be dissolved, merged, transferred or converted at the effective time of the instrument.

7. Religious, Charitable, Educational, etc., Corporations

Section 313 of the DGCL governs how religious, charitable, educational and certain other corporations whose purpose is for the public welfare may renew its certificate of incorporation that has become inoperative or void. In order to conform Section 313 to the amendments made to Section 501(b), Section 313 has been amended to use the term "exempt corporation".

8. Annual Report

Section 374 requires a foreign corporation doing business in the State of Delaware to file an annual report with the Secretary of State. Such annual report must include, among other things, the address of the corporation's registered office in the State of Delaware. Section 374 has been amended to add a cross reference to new Section 131(c) to clarify that the address of the registered office must contain all the information required by Section 131(c), which now must include the postal code.

9. Taxes and Fees Payable

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Section 391 of the DGCL sets forth the taxes and fees payable to the Secretary of State in connection with the filing of certain documents with the Secretary of State. Like Section 313, Section 391(a)(3) has been amended to use the term "exempt corporations" instead of "corporations created solely for religious and charitable purposes" in order to conform Section 391 to the amendments made to Section 501.

10. Corporations Using "trust" in Name

Section 395 of the DGCL, which sets forth when a Delaware corporation may use the word "trust" in its name, has also been amended. The amendments to Section 395 include adding a new subsection (d) providing that the limitations on the use of the word "trust" as part of the corporation's name shall not apply to a corporation that is not subject to the supervision of the State Bank Commissioner of the State of Delaware and that is not regulated under the Bank Holding Company Act of 1956 or section 10 of the Home Owners' Loan Act, and where the use of the word "trust" clearly (i) does not refer to a trust business; (ii) is not likely to mislead the public into believing that the nature of the business of the corporation includes activities that fall under the supervision of the State Bank Commissioner of the State of Delaware or that are regulated under the Bank Holding Company Act of 1956 or section 10 of the Home Owners' Loan Act; and (iii) will not otherwise lead to a pattern and practice of abuse that might cause harm to the interests of the public or the State of Delaware, as determined by the Director of the Division of Corporations and the State Bank Commissioner. The amendments to Section 395 also update statutory references to the Savings and Loan Holding Company Act, which was moved to section 10 of the Home Owners' Loan Act.

11. Franchise Taxes

Section 501 of the DGCL sets forth which corporations are subject to annual franchise taxes and which corporations are exempt from annual franchise taxes. Section 501 has been amended in two ways. First, Section 501(a) has been amended to clarify that captive insurance companies licensed under chapter 69 of Title 18 of the Delaware Code are not required to pay annual franchise taxes. Second, Section 501(b)(5) has been amended to clarify that the definition of "exempt corporation" includes a religious corporation or purely charitable or educational association, and a company, association or society, that, by its certificate of incorporation, has for its object the assistance of sick, needy or disabled members, or the defraying of funeral expenses of deceased members, or to provide for the wants of the widows and families after the death of its members.

Documents

THE 31ST ANNUAL FEDERAL SECURITIES INSTITUTE RECENT DEVELOPMENTS IN … · 2013-02-07 · the cases discussed herein, the views expressed do not necessarily represent views of the