(Article from Securities Law Alert, Year in Review 2020)
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Federal Forum Selection Provisions for Securities Act Claims Are Facially Valid
On March 18, 2020, the Delaware Supreme Court held that forum selection provisions in certificates of incorporation requiring actions arising under the Securities Act of 1933 (the “Securities Act”) to be filed in federal court are facially valid under Section 102(b)(1)[1] of the Delaware General Corporation Law. Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020) (Valihura, J.). The Court recognized that federal forum provisions “can provide a corporation with certain efficiencies in managing the procedural aspects of securities litigation following the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund,” 138 S. Ct. 1061 (2018), which held that state courts have concurrent jurisdiction over actions asserting Securities Act claims.
The Chancery Court based its decision on Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), which held that companies may adopt forum selection bylaws requiring “internal affairs” litigation to be brought in Delaware Chancery Court. The Delaware Supreme Court found that “Boilermakers did not establish the outer limit of what is permissible under . . . Section 102(b)(1).” The Court explained that “[t]here is a category of matters that is situated on a continuum between the Boilermakers definition of ‘internal affairs’ and its description of purely ‘external’ claims,” and held that that the federal forum provision in this case falls within “the universe of matters encompassed by Section 102(b)(1).” The Court found that claims under Section 11 of the Securities Act “are ‘internal’ in the sense that they arise from internal corporate conduct on the part of the Board and, therefore, fall within Section 102(b)(1).”
Approval of a “Flawed Transaction” After Consideration of Its Risks Does Not Give Rise to an Inference of Bad Faith
On January 13, 2020, the Delaware Supreme Court held that a board’s approval of a “flawed transaction” that implicated the misappropriation of a competitor’s confidential information did not give rise to an inference of bad faith, where “the directors considered the risks and nonetheless proceeded with the transaction.” McElrath v. Kalanick, 224 A.3d 982 (Del. 2020) (Seitz, C.J.). The Court underscored that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”
In the case, plaintiff stockholder filed suit against the company’s directors claiming that they ignored an alleged theft of intellectual property and failed to investigate pre-closing diligence that would have revealed problems with a 2016 transaction. Defendant directors moved to dismiss under Court of Chancery Rule 23.1, asserting that plaintiff failed to make a demand on the board. The Court of Chancery dismissed the complaint, finding that a majority of the board could have fairly considered the demand. The Delaware Supreme Court affirmed, finding that a majority of the board was independent and disinterested “because it had no real threat of personal liability due to [the company’s] exculpatory charter provision.”
The Court explained that because of the exculpation clause in the company’s Certificate of Incorporation, the directors could face personal liability only if “their conduct [was] motivated by an actual intent to do harm,” or if there was “an intentional dereliction of duty.” The Court emphasized that “[p]leading bad faith is a difficult task and requires that a director acted inconsistent[ly] with his fiduciary duties and, most importantly, that the director knew he was so acting.”
The Court concluded that “[t]he complaint’s allegations do not lead to a reasonable inference that the board intentionally ignored the risks of the transaction.” Here, the “board met to consider the [] acquisition,” hired outside counsel and an investigative firm to conduct due diligence, listened to a presentation from the company’s CEO, and “discussed the terms of the deal and its risks.” The Court determined that “the board’s failure to investigate further cannot be characterized fairly as an intentional dereliction of its responsibilities.”
Chancery Court Did Not Err in Finding the Deal Price Was the Best Evidence of Fair Value Despite a Sales Process Described as “Not Perfect”
On October 12, 2020, the Delaware Supreme Court affirmed a Chancery Court decision holding that the deal price was the most reliable indicator of a metal mining company’s fair value in an appraisal action, even though “[t]he sale process was not perfect.” Brigade Leveraged Cap. Structures Fund v. Stillwater Mining Co., 240 A.3d 3 (Del. 2020) (Montgomery-Reeves, J.). The Delaware Supreme Court further determined that the Chancery Court did not err in declining to adjust the deal price to account for an increase in the commodity price of the metal mined by the mining company. The Delaware Supreme Court explained that “fair value is just that, fair. It does not mean the highest possible price that a company might have sold for.”
The Delaware Supreme Court observed that the Chancery Court “walked through each step of the sale process” and “found that there were objective indicia of reliability.” While the Delaware Supreme Court acknowledged that there were “fewer indicia of fairness than [it] identified when reviewing the sales processes in DFC, Dell or Aruba, the [Chancery Court] did not abuse its discretion by determining that the objective indicia that were present provide a cogent foundation for relying on the deal price as a persuasive indicator of fair value.”[2]
Because the Chancery Court “thoroughly analyzed the facts surrounding [the company’s] sale in accordance with [Delaware Supreme Court] precedent,” the Delaware Supreme Court declined to “second-guess” the Chancery Court’s determination that “the deal price was a reliable indicator of [the company’s] fair value.”
[1] Section 102(b)(1) provides that a company’s certificate of incorporation may include: “Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockholders . . . if such provisions are not contrary to the laws of this State.” 8 Del. C. § 102(b)(1).
[2] Please click here to read our discussion of the Delaware Supreme Court’s discussion in Aruba. (This discussion also addresses the Delaware Supreme Court’s decisions in DFC and Dell.)