The German Federal Court of Justice (Bundesgerichtshof) recently had the opportunity to clarify a number of important practical questions of corporate law in connection with asset disposals, the allocation of responsibilities among directors and transactions concluded with board members. We summarize the three relevant decisions from 2018/2019 below.
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In late March 2019, the Hertz Corporation and Hertz Global Holdings, Inc. (collectively, “Hertz”), filed two complaints (the “Damages Proceedings”) against its former CEO, CFO, General Counsel and a group president seeking recovery of $70 million in incentive payments and $200 million in consequential damages resulting from Hertz’s 2015 decision to restate its financial statements and an ensuing SEC settlement against Hertz and federal class action lawsuit (which was dismissed).  At the same time, the defendants in those actions each filed separate complaints (which have been consolidated in the Delaware Chancery Court) demanding advancement of their legal fees in the Damages Proceedings (the “Advancement Proceedings”).  The litigation between Hertz and its former executives raises novel questions about whether executives have a legally cognizable duty to set the right “tone at the top” and the consequences if they fail to do so.  The litigation also raises important and interesting questions regarding clawbacks and indemnification.[1]    
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In the wake of the Securities and Exchange Commission’s proposed clawback rules under the Dodd-Frank Wall Street Protection and Consumer Reform Act of 2010, many US public companies began implementing clawback policies.[1]  Although the proposal was originally issued in 2015 and the SEC has yet to adopt final clawback rules, instances of alleged executive misconduct in recent years has begun leading to claims under the clawback policies.  Increased scrutiny from legislators, institutional investors, shareholders and the general public has put significant pressure on boards of directors and compensation committees to exercise their rights to claw back compensation in the event of a corporate scandal.[2]

This post discusses two recent developments related to the exercise of compensation clawbacks.  The first confirms that boards should have broad discretion in deciding when to exercise a clawback, and the second discusses important indemnification and advancement issues that can arise in connection with a claim for the enforcement of a clawback policy.
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The Delaware Supreme Court issued a decision last week that further clarifies when MFW’s “dual protections” must be put in place in order to qualify the transaction for deferential business judgment review.  See Olenik v. Lodzinski, No. 392, 2018 (Del. April 5, 2019).

Under MFW, business judgment review applies to a merger proposed by a controlling stockholder conditioned “ab initio” on two procedural protections: (1) the approval of an independent, adequately-empowered special committee that fulfills its duty of care; and (2) the uncoerced, informed vote of a majority of the minority stockholders.  If the controlling stockholder does not commit to these dual protections ab initio, i.e., from the beginning of negotiations, then the traditional entire fairness standard applies instead.[1]
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In recent years, in part in response to decisions like Corwin that have raised the pleading standard for stockholder plaintiffs, the Delaware courts have encouraged stockholders to seek books and records under Section 220 of the Delaware General Corporation Law (DGCL) before filing stockholder derivative or post-merger damages suits, and – in response – each year more stockholders have done so.  As a result of this trend, we have already seen several important decisions addressing books and records demands in 2019.  These decisions have (i) clarified the types of documents that may be obtained, including (in some limited circumstances) personal emails or text messages; (ii) explained when a stockholder’s demand will be denied as impermissibly lawyer-driven (and when it will not be); and (iii) described the threshold showing of suspected wrongdoing that stockholders must make.  As the plaintiffs’ bar makes more use of Section 220, these are important issues for boards of directors to consider.
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Last week, the Delaware Court of Chancery found that a target company in an agreed merger properly terminated the merger agreement following the passage of the specified “end date” where the buyer failed to exercise its right under the agreement to extend the end date.  See Vintage Rodeo Parent, LLC v. Rent-a-Center, Inc., C.A. No. 2018-0927-SG (Del. Ch. Mar. 14, 2019).  The decision is a stark reminder that courts will enforce the terms of a merger agreement as written, and that the failure to comply with seemingly ministerial formalities can have severe consequences.   
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On December 19, 2018, the Delaware Court of Chancery issued an opinion holding that Delaware law does not permit corporations to use charter provisions to require stockholders to litigate certain claims brought under the federal securities laws in a specific forum.  In Sciabacucchi v. Salzberg, Vice Chancellor Laster determined that such forum-selection provisions are

In In re Xura, Inc. Stockholder Litigation,[1] decided earlier this week, the Delaware Court of Chancery denied the target CEO’s motion to dismiss claims that he breached his fiduciary duties by “steer[ing]” the company into an allegedly unfair acquisition by a private equity firm that promised to retain him post-acquisition, while knowing that his job was in jeopardy if the target remained independent.  This case is yet another example of why disclosures are so important in the post-Corwin[2] era:  Vice Chancellor Slights rejected the CEO’s argument that the claims against him were extinguished by the stockholder vote approving the transaction, finding that a number of material omissions precluded a finding that the stockholders’ vote was fully informed.  The vote was thus ineffective to invoke the business judgment rule at the pleading stage.
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Voting rights held by shareholders who are “acting in concert” are mutually attributed for purposes of the German Securities Trading Act (“WpHG”) and the German Takeover Act (“WpÜG”).  Such attribution may thus not only trigger (additional) voting rights notifications, if the relevant voting rights thresholds are reached or crossed, but also the obligation to launch a mandatory offer, if based on the voting rights so attributed a shareholder acquires control of a company.  In light of these implications, the question of what type of behavior constitutes acting in concert is of high practical relevance.  Unfortunately, the definition in statutory law is open-ended, and several details are heavily disputed.  In its decision of September 25, 2018 (II ZR 190/17), the German Federal Court of Justice (“FCJ”) had the opportunity to clarify two important questions:

First, the coordination of shareholder behavior in an individual case does not qualify as acting in concert. According to the FCJ, the question of whether coordination among shareholders is limited to an “individual case” is to be determined applying a formal rather than substantive test. Second, mutual coordination of conduct among shareholders does not constitute acting in concert if it is aimed at maintaining an existing corporate strategy (or defining it for the first time), rather than at bringing about a permanent and material change to an existing corporate strategy.
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The Delaware Court of Chancery recently denied Corwin cleansing[1] in a case involving the sale of a public company while it was engaged in a restatement of its prior audited financial statements.  See In re Tangoe, Inc. S’holders Litig., C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018).  If this sounds familiar, that is because it is the second time in two years that the Court of Chancery has denied a motion to dismiss shareholder litigation on Corwin grounds where the target was in the middle of a restatement process.[2]  Together, these decisions suggest that if a board decides to sell the company while under a cloud of an ongoing restatement process, it would need to satisfy a heightened level of scrutiny of its disclosures in order to obtain the benefit of Corwin.  The court in Tangoe, however, sought to reassure practitioners that it is not impossible to satisfy Corwin in a case involving an ongoing restatement by the target, and provided a checklist of the kinds of facts that, if disclosed, would result in pleading stage dismissal of a shareholder lawsuit in such a case.
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