Merger Litigation

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Cleary Gottlieb’s “2020 Developments in Securities and M&A Litigation” discusses major developments from 2020 and highlights significant decisions and trends ahead.

In Liu v. SEC, the most notable securities decision of 2020, the Supreme Court cemented but limited the SEC’s authority to seek disgorgement as “equitable relief” for a securities law violation.…

The following post was originally included as part of our recently published memorandum “Selected Issues for Boards of Directors in 2021”.

As the 25th anniversary of the seminal Delaware Court of Chancery decision In re Caremark Int’l Inc. Deriv. Litig. (Caremark) approaches, there has been a notable rise in the number…

In In re Nine West LBO Securities Litigation, Case No. 20-2941 (S.D.N.Y. Dec. 4, 2020), U.S. District Court Judge Jed Rakoff denied a motion to dismiss claims brought by the Nine West liquidating trustee against former directors of Jones Group (the predecessor to Nine West) for breach of fiduciary duty and aiding and abetting breach of fiduciary duty stemming from a 2014 going-private transaction with private equity sponsor Sycamore Group.  While it remains to be seen whether the defendant directors ultimately will be found liable for such claims, we highlight certain lessons learned and best practices that can be followed in light of the ruling.…
Continue Reading Lessons Learned and Best Practices in LBO Transactions Following the Nine West Decision

Last week, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s decision in Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp.,[1] a closely watched appeal in which the court clarified the circumstances in which stockholders are entitled to demand books and records to investigate allegations of mismanagement pursuant to Section 220 of the Delaware General Corporation Law.  In a decision that will likely continue the recent trend of an increasing number of Section 220 demands being made, particularly in the wake of allegations of corporate wrongdoing, the Delaware Supreme Court ruled that:…
Continue Reading Delaware Supreme Court Clarifies Section 220’s “Proper Purpose” Test

Much has been written of late about the growing prevalence of books and records demands by stockholders under Section 220 of the Delaware General Corporation Law, and the increased willingness of Delaware courts to expand the boundaries of stockholders’ inspection rights conferred by that statute.[1]  A recent decision from the Delaware Court of Chancery exemplifies this trend and introduces an additional risk that companies should consider when determining how to respond to a Section 220 demand.  Specifically, the court’s suggestion that it would consider awarding attorneys’ fees to plaintiffs’ counsel for its costs to litigate the Section 220 action adds a new twist to the already delicate balance that companies must strike when deciding whether (and to what extent) to comply with a stockholder’s Section 220 demand.
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Continue Reading Fee-Shifting—A Potential New Tool In Stockholders’ Toolbox When Seeking Books And Records

In a recent decision, the Delaware Court of Chancery found that the board omitted material information from its proxy statement recommending stockholders vote in favor of an all-cash acquisition of the company, and thus “Corwin cleansing”[1] did not apply.  Nonetheless, the court dismissed all claims against the directors because the complaint failed to adequately allege that they acted in bad faith, as required by the company’s Section 102(b)(7) exculpation provision.  See In re USG Corp. S’holder Litig., Consol. C.A. No. 2018-0602-SG (Del. Ch. Aug. 31, 2020).

This decision provides helpful guidance regarding the kind of information that should be included in a merger proxy statement.  It also provides a reminder that Corwin is not the only defense available to directors at the motion to dismiss stage.  In particular, Section 102(b)(7) remains a powerful tool to support dismissal of stockholder claims against directors, even in cases where the proxy omits material information and/or the transaction is subject to “Revlon duties.”[2]…
Continue Reading Stockholder Claims Dismissed Even After Corwin Defense Fails

A recent decision of the Delaware Court of Chancery in the ongoing WeWork/SoftBank litigation addressed a previously unresolved question:  can management withhold its communications with company counsel from members of the board of directors on the basis that such communications are privileged?  Building on past Delaware decisions concerning directors’ rights to communications with company counsel, including in the CBS case we previously discussed here, the court clarified that directors are always entitled to communications between management and company counsel unless there is a formal board process to wall off such directors (such as the formation of a special committee) or other actions at the board level demonstrating “manifest adversity” between the company and those directors.  See In re WeWork Litigation, C.A. No. 0258-AGB (Del. Ch. August 21, 2020).  In other words, management cannot unilaterally decide to withhold its communications with company counsel from the board (or specified directors management deems to have a conflict).
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Continue Reading Recent Decision Confirms Directors’ Right to Access Privileged Communications Between Management and Company Counsel

These days, most public company mergers continue to attract one or more boilerplate complaints, usually filed by the same roster of plaintiffs’ law firms, asserting that the target company’s proxy statement contains materially false or misleading statements.  These complaints usually also assert that the stockholder meeting to approve the merger should be enjoined unless and until the company “corrects” the false or misleading statements by making supplemental disclosures.  While not too long ago cases like this tended to be filed in the Delaware Court of Chancery and other state courts asserting breaches of state-law fiduciary duties, including the duty of disclosure, after Trulia the vast majority of these cases today are filed in federal court under Section 14 of the Securities Exchange Act of 1934.[1]…
Continue Reading Rare Federal Court Decision Casts Doubt On Merger Disclosure Claims, But Will It Change Anything?

In an important decision for M&A professionals and other board advisors, the Delaware Court of Chancery addressed a stockholder plaintiff’s claims that the target board’s financial advisor and law firm, as well as the private equity buyer, aided and abetted a breach of fiduciary duty by the target board in connection with a take-private merger.  See Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. June 1, 2020).  While the claim against the financial advisor was allowed to proceed, the claims against the law firm and buyer were dismissed.  These diverging results provide early guidance as to when the Delaware courts will (and when they will not) dismiss aiding and abetting claims.  In many cases, the determining factor will be whether the complaint pleads facts raising a reasonably conceivable inference that the advisor, buyer, or other third party knew the board was engaging in a breach of its fiduciary duty.  This has important implications for the way board advisors and M&A buyers should approach a situation in which they become aware that the board of a target company is unaware of some material fact that could conceivably affect its ability to fulfill its fiduciary duties.…
Continue Reading Knowledge Is Key: Recent Decision Addresses Aiding and Abetting Claims Against Board Advisors And Buyer

On March 18, 2020, the Delaware Supreme Court issued an opinion in the closely watched appeal in Sciabacucchi v. Salzberg, a case involving a challenge to charter provisions of three Delaware corporations requiring stockholder plaintiffs to litigate claims under the Securities Act of 1933 (the “1933 Act”) in federal court. The en banc Supreme…