The last several months have marked an extremely busy time in Delaware corporate law, with regard to decisions out of the Delaware courts, proposed legislative responses, and shifting market practices. In recent weeks in particular, the Delaware Supreme Court issued a much-anticipated ruling addressing controlling stockholder conflicts of interest that is important for companies with significant stockholders. The Council of the Corporation Law Section of the Delaware State Bar Association (the DSBA) has also proposed an extensive set of amendments to the Delaware General Corporation Law (the DGCL) that address several recent cases, particularly relating to mergers and acquisitions and stockholder agreements. Those amendments still must be adopted by the Executive Committee of the DSBA, enacted by the Delaware legislature, and signed by the Delaware Governor before they become law. This alert is designed to provide an overview of the most pertinent information about these developments.
Match and Controlling Stockholder Structuring
In In re Match Group, Inc. Derivative Litigation,1 the Delaware Supreme Court affirmed several rules developed in Delaware Court of Chancery decisions. First, for most types of transactions in which a controlling stockholder gains a special benefit compared to stockholders as a whole, the exacting entire fairness standard of review, instead of the business judgment rule, will apply in ensuing stockholder litigation. The entire fairness standard generally makes litigation challenging to get dismissed at the pleadings stage, and the underlying litigation generally involves an assertion that the defendants breached their duty of loyalty and some sort of remedy should be available for stockholders. Perhaps most famously, this is the standard that applied in the recent litigation over Elon Musk’s compensation at Tesla. Second, the Supreme Court affirmed that in order for a controlling stockholder conflict transaction to be subject to the deferential business judgment rule, it must be subject to both 1) approval by a fully empowered independent board committee and 2) a fully informed, uncoerced minority vote, with both requirements declared as conditions to the transaction before substantive economic negotiations begin.
Because the Supreme Court had asked in the Match litigation for supplemental briefing as to whether proper use of an independent board committee process or minority stockholder approval could be sufficient to restore the protections of the business judgment rule outside of a controlling stockholder squeeze-out of minority stockholders, many had hoped that the Court would ease the burdens on controlling stockholder transactions. The litigation appears, however, to have been fought over what prior Delaware case law provided rather than the practical implications of that case law. Apart from the above matters, the Match ruling also provides that when an independent board committee is used as part of this framework to cleanse controlling stockholder conflicts, all members of the board committee must be independent as defined under Delaware law—not simply a majority of the committee, as the Court of Chancery had held. These rules from the Match case will significantly shape transaction planning for companies with large stockholders.
Recently Proposed DGCL Amendments
The proposed DGCL amendments would provide for a number of important rules, all of which are generally designed to address recent case law:
- The amendments would provide that companies and stockholders can enter into stockholder agreements conferring, among other things, governance rights upon stockholders. These amendments would address concerns raised in West Palm Beach Firefighters’ Pension Fund v. Moelis & Co.,2 where the Court of Chancery determined that a stockholder agreement that provided a large stockholder with an array of consent rights and governance rights outside of the certificate of incorporation infringed on the board’s obligation to oversee the company in governance matters. Our previous client alert detailing that case is available here. The proposed DGCL amendments would provide that, outside of the certificate of incorporation, a corporation can enter into agreements with current or prospective stockholders giving stockholders consent rights or specifying that the corporation, stockholders, or directors will take certain actions or refrain from taking certain actions.
- As to the M&A context, the amendments would permit parties to a merger agreement to provide for penalties or consequences for a breach of the merger agreement and to allow the target corporation to obtain an award of damages based on the loss of premium payable to stockholders should the deal fall apart. This proposed amendments would address Crispo v. Musk,3 in which the Court of Chancery held that, because merger consideration is generally paid directly to stockholders (as opposed to the corporation itself), when a buyer wrongfully terminates a merger agreement, the target company generally has no right or expectation to receive the merger consideration, and the target company is therefore not entitled to pursue lost stockholder premium damages in the event of a busted deal. Our previous client alert detailing that case is available here. Prior to this case, many practitioners generally had assumed that target companies could seek such damages under Delaware law, so the DGCL amendments would align the statute with typical market practice.
- Further addressing the M&A context, the amendments would provide clarity around the manner in which boards and stockholders must approve merger agreements, as Delaware law generally requires for corporations that are parties to a merger. In particular, the amendments would provide that a board can approve a merger agreement in “substantially” final form, that disclosure schedules are not part of the merger agreement that the board and stockholders must approve, that the merger agreement does not have to include a copy of the as-amended charter of the surviving corporation in deals where stockholders will not receive stock in the surviving corporation, and that the notice that stockholders receive with respect to the meeting to approve the merger agreement will be deemed to include attachments and enclosures. These amendments address a recent decision—Sjunde AP-fonden v. Activision Blizzard4—in which the Court of Chancery called into question whether the board and stockholders of a target company had validly approved a merger agreement in compliance with the Delaware statute based on a variety of alleged foot faults that the proposed amendments would now address.
Conclusions
The Match case will prove consequential in many transactions involving companies with large stockholders. The proposed DGCL amendments, meanwhile, would have significant impacts for both private and public companies and ease the rulings of the recent cases. We will monitor the status of the proposed DGCL amendments and provide further updates as appropriate.
[1] 2024 WL 1449815 (Del. Apr. 4, 2024).
[2] 2024 WL 747180 (Del. Ch. Feb. 23, 2024).
[3] 2023 WL 7154477 (Del. Ch. Oct. 31, 2023).
[4] 2024 WL 863290 (Del. Ch. Feb. 29, 2024).
