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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Last month, former Uber executive Eric Alexander filed a complaint (the “Complaint”) against another former Uber executive, Rachel Whetstone.  The Complaint alleges breach of a mutual non-disparagement clause in Whetstone’s separation agreement with Uber; a clause that Whetstone, during her negotiation with Uber, apparently insisted specifically name Alexander and preclude them from disparaging each other.  In the Complaint, Alexander alleges that he is a third party beneficiary of the contract and can therefore enforce the non-disparagement obligation against Whetstone.

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In its recent Synutra opinion, the Delaware Supreme Court clarified that take-private transactions will be reviewed under the business judgment rule, so long as the controlling stockholder commits to special committee approval and a majority-of-the-minority vote before “substantive economic negotiations” take place, even if the controlling stockholder fails to self-disable in its initial written offer. The opinion, written by Chief Justice Strine, explained that the touchstone of the analysis is whether there was any “economic horse trading” before the conditions were put in place. (This memo expands upon our prior discussion of the Synutra decision, which was posted to the Cleary M&A and Corporate Governance Watch on October 10, 2018.)
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The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). This decision serves as a reminder of the importance of full disclosure of material facts in cases involving potential conflicts (and not just of the potential conflicts themselves, but also of the ways in which such potential conflicts manifest themselves)—both at the board level and at the stockholder level. As this decision also demonstrates, in addition to the more familiar allegations of financial advisor conflicts, the court may find potential conflicts exist where an activist investor in the target with short-term interests that could be perceived to diverge from the interests of other stockholders is involved in merger negotiations.
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Until Vice Chancellor Laster’s decision last week in Akorn Inc. v. Fresenius KABI AG,[1] no Delaware court had released an acquiror from its obligation to close a transaction as a result of the occurrence of a “Material Adverse Effect.”[2]  The cases previously adjudicated in Delaware all had required the acquiror to close, often despite a significant diminishment in target value and, in some, the court criticized the acquiror for seeking to avoid its obligations based on little more than buyer’s remorse.  Against this weight of precedent, the Vice Chancellor found that the grievous decline of generics pharmaceutical company Akorn, Inc. after it agreed to be acquired by Fresenius constituted a MAC.  While Akorn presents a stark set of facts and the Delaware Supreme Court has yet to have the final word in the case,[3] the decision nonetheless provides useful guidance to practitioners in shaping and navigating MAC clauses and related contractual provisions.
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The Delaware Supreme Court has clarified that controlling stockholder take-private transactions will be reviewed under the business judgment rule, rather than the less deferential entire fairness standard, if the controlling stockholder self-disables by committing to special committee and majority-of-the-minority approval before “economic negotiations” take place, even if the controlling stockholder fails to do so in its initial written offer.  See Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).[1]

The Delaware Supreme Court first announced in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) that 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.[2]
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On May 29, 2018, the U.S. Supreme Court issued an unanimous opinion in Lagos v. United States. Lagos presented the issue of whether costs incurred during and as a result of a corporate victim’s investigation (rather than a governmental investigation) must be reimbursed by a criminal defendant under the Mandatory Victims Restitution Act (“MVRA”).

Public and private businesses today face many decisions that do not arise from, and have consequences far beyond, solely financial performance.  Rather, these decisions are primarily driven by, and implicate, important social, cultural and political concerns.  They include harassment, pay equity and other issues raised by the #MeToo movement; immigration and labor markets; trade policy; sustainability and climate change; the manufacture, distribution and financing of guns and opioids; corporate money in politics; privacy regulation in social media; cybersecurity; advertising, boycotts and free speech; race relations issues raised by the pledge of allegiance controversy; the financing of healthcare; the tension between religious freedom and discrimination laws; and the impact of executive pay on income inequality, among others.  If the nature of the issues is not unprecedented, the number, diversity and polarization seem to be. 
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