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Attempts to make fundamental changes in the rules governing squeeze-out mergers for corporations. Public minority in a cash squeeze-out merger; Failure to establish fair dealings with minority stockholders; Relationship between the committee and the insiders.

REITs have transformed the commercial real estate industry over the last twentyfive years and are now a mature asset class. Their explosive growth is likely to continue, especially as they expand into properties that are critical to the digital economy, but the environment has changed and presents new opportunities and headwinds.This Article explores those opportunities and headwinds, and offers some thoughts on navigational tools to cut through the business and legal complexities. [ABSTRACT FROM AUTHOR]

At the heart of corporate governance are fundamental doctrines that limit court scrutiny of fiduciary and stockholder decisions: the business judgment rule limits scrutiny of informed director decisions and, as with Corwin cleansing, informed voting by “disinterested” shareholders is accorded substantial deference. Only when, for example, the motivations of a director or controlling shareholder are sufficiently suspect would either the “entire fairness” or “enhanced scrutiny” standards of review apply. How to assess such motivations, however, is underdeveloped in the case law. This Article addresses this task in three areas, relying partly on a methodology for assessing a person’s overall economic motivation flowing from the person’s financial stakes in or directly relating to the corporation. The methodology, from the analytical framework for “decoupling” (e.g., “empty voting”) introduced in 2006, deconstructs the person’s “overall economic interest” in a company’s shares (“host shares”) from such stakes by considering the net effect of the person’s: (a) host shares; (b) “coupled assets”; and (c) “related non-host assets.” First, the Article offers a re-calibration of standards of judicial review of fiduciary decisions when a fiduciary has financial stakes on both sides of the challenged transaction (as with Elon Musk in the 2022 Tesla-SolarCity merger case). Dubious outcomes flow from the traditional approach to choosing from the triad of the business judgment rule, enhanced scrutiny, and entire fairness. We show, for example, how courts use entire fairness in circumstances not meriting such review, such as where a controller’s percentage ownership stakes in the corporation and a counterparty are identical. We also offer a generalized approach methodically mapping the triad of zero, materially positive, and materially negative “overall economic interest” to the triad of standards of review. Second, the Article shows that court deference to “disinterested” shareholder decisions needs rethinking, due largely to the now overwhelmingly institutional ownership of public companies combined with the prevalence of new financial stake patterns and new organizational voting dynamics at institutions. As to new financial stake patterns, related non-host asset issues (e.g., increased index investing in conjunction with increased asset manager size) and coupled asset issues will often result in institutional investors having a zero or negative “overall economic interest” in host shares. We show this both by looking at “related non-host assets” of large asset managers not party to the 2010 CNX-T. Rowe Price case and by offering broader evidence. (These foregoing effects are independent of the usual cost/lack of payoff reasons why many believe index funds are less motivated to invest in corporate stewardship.) Rigid application of existing law would disqualify asset managers from being considered “disinterested” shareholders with surprising, likely undesirable, frequency. We propose steps to improve the integrity of shareholder voting while mitigating that undesirable prospect. We also propose a general method for determining when an institutional investor’s overall economic interest should be deemed “material.” As to organizational voting dynamics, court precedents suggest that being “disinterested” rests on the premise of a motivation to maximize the value of host shares. If institutional investors heed calls to consider non-share price-directed goals, this conceptual basis for deference is brought into question. Other new organizational voting dynamics, such as “pass-through voting,” raise mechanical complexities. The very idea of a “disinterested” shareholder is increasingly a convenient myth. Third, this Article addresses a novel and especially challenging context for assessing motivation: the “de-SPACing” of special purpose acquisition companies (SPACs). The 2023 Delman case takes the welcome step of analyzing deference to shareholder “cleansing” by relying in part on certain aspects of the decoupling framework. This Article shows how full deployment of the framework’s deconstruction methodology, however, could not only provide more comprehensive guidance as to shareholder cleansing but also provide guidance in selecting the proper standard of review of fiduciary decisions. [ABSTRACT FROM AUTHOR]

The article discusses judicial decisions related to mergers and acquisitions reported by the Annual Survey Working Group. In Crispo v. Musk, a motion was granted by the Delaware Court of Chancery to dismiss, in part, holding that Luigi Crispo did not have standing to seek an order of specific performance of a merger agreement against Elon Musk and entities he controlled. In SPay, Inc. v. Stack Media Inc., the Court denied a motion to dismiss a buyer's claims for breach of contract and others.

In this reply to Professor Bainbridge, I take the opportunity to present the American Law Institute’s Restatement of the Law of Corporate Governance to the readers of The Business Lawyer. In endeavoring to restate the law of corporate governance, we seek to provide a comprehensive and easily used synthesis primarily directed toward nonDelaware judges, lawyers, and legislators. In doing so, the project is a once-in-ageneration opportunity for the corporate law community to focus on core principles and applications. [ABSTRACT FROM AUTHOR]

The American Law Institute (ALI) has embarked on a Restatement of the Law of Corporate Governance. As with all Restatements, the purpose of the Restatement of corporate law is to clarify "the underlying principles of the common law" that have "become obscured by the ever-growing mass of decisions in the many different jurisdictions, state and federal, within the United States." Corporate law, however, does not suffer from such problems. In a majority of states, the Model Business Corporation Act provides detailed statutory guidance as to which common law functions, at most, interstitially. In addition, corporate law is virtually unique in being dominated by the law of a single jurisdiction-namely, Delaware. Given the prominence of Delaware law in this field, a restatement of corporate law is unlikely to be influential. [ABSTRACT FROM AUTHOR]

A rancorous debate is raging. Must for-profit corporations just seek profits for stockholders? Or may they pursue not just the best interests of all stakeholders, but influence public policy on controversial political issues and tilt the election process toward candidates and causes they favor? This debate has historical antecedents, as both the left and the right have long been concerned about the legitimacy of corporations using other people’s capital for political and social causes. Each understands that stockholders share only one purpose—a solid return—and have diverse political beliefs. Each understands freedom is imperiled if workplaces become subject to dictated orthodoxies. Each asks: who are CEOs to use other people’s money to advance their own idiosyncratic views of the good? But, rather than come together to forge constructive solutions, the right and left praise corporations that take policy positions they like, while condemning as illegitimate corporations that disagree with them. That’s natural but unhelpful. This article seeks to ameliorate this fractious debate threatening to politicize a business world that ought to be open to all Americans of good faith. To this end, the article maps out a non-partisan, principled conception of good corporate citizenship drawing on shared assumptions of the right and the left about the place of corporations in our society and the realities of corporate governance. That conception concentrates on how corporations’ own conduct affects the best interests of their stockholders, workers, communities of operation, consumers, taxpayers, and the environment. Seeking profit by selling quality products and services, treating all stakeholders with respect, and without externalizing costs. Supporting the basic institutions of the society upon which the corporation depends. Leaving debatable issues of politics and faith largely to their human investors, workers, and consumers to decide for themselves. Showing respect for the freedom of belief by not imposing the beliefs of corporate management on any stakeholder group. And, if taking stands on political or social issues not intrinsically connected to the company’s business, employing guardrails like approval by not just the full board, but stockholders, that create greater legitimacy and increase the likelihood that decisions will reflect consideration of all reasonable perspectives and embody a consensus view of their investors. No approach can end all controversy, but corporate citizenship of this kind will channel corporations toward exemplifying their values through their treatment of the people their business operations directly affect and thus toward shared values held by most Americans. Focusing our corporate governance accountability system on the issue over which corporate leaders and institutional investors have the most responsibility— making money the right way—is one all Americans can get behind. [ABSTRACT FROM AUTHOR]

This article examines the changing nature of judicial review of governance in American businesses. Drawing on a detailed study of all cases filed in 2018 in Delaware, the country’s dominant jurisdiction for corporate law, and a previous study of such litigation at the turn of the century, it reveals fundamental changes in corporate law issues brought to court in the twenty-first century. Twenty years ago, the chief task of the Delaware Court of Chancery, the nation’s preeminent business court (and the Delaware Supreme Court that hears all appeals from that court), was to apply fiduciary duties to resolve disputes over the governance of publicly traded corporations in an acquisition setting. Today, the Chancery Court’s ambit is far broader. Fiduciary duty litigation is still important, but alongside these cases, the chancellors are now spending more time resolving governance disputes by applying statutory provisions. In a new development for Chancery, its judges now regularly interpret contracts establishing governance in entities beyond the corporation, most prominently the limited liability company (LLC). Corporations are still important, but litigation over LLCs has sharply risen, and the court’s caseload is increasingly dominated by privately (not publicly) held firms—some corporations, some not. The court still spends most of its time resolving governance disputes within firms, but in another change, it is also being called on to resolve non-governance, commercial disputes arising between business firms, especially after an acquisition. This study has important implications for governance of contemporary business entities. It draws attention to the multiple ways that corporate governance questions are now presented to courts and the different skills judges are called upon to employ in the various settings. In addition to documenting major changes in corporate litigation over the past two decades, this article draws on its findings to make two additional contributions. First, it proposes new measures to determine the extent to which different kinds of cases heard in the Chancery Court take up different amounts of judges’ and litigants’ time and resources. Second, its findings shed new light on the long-debated question of state competition for business formation and litigation. LLCs now provide Delaware almost 30 percent of its budgetary income from entity chartering, up from the low single digits twenty years ago. The data on commercial non-governance filings suggest Delaware is competing for litigation, separate from chartering, more than it has in the past. [ABSTRACT FROM AUTHOR]

Controlling shareholders are subject to distinct legal obligations under Delaware law, and thus Delaware courts are routinely called upon to distinguish "controlling shareholders" from other corporate actors. That is an easy enough task when a person or entity has more than 50 percent of the corporate vote, but when a putative controller has less than 50 percent of the vote-and is nonetheless alleged to exercise control over corporate operations via other means-the law is shot through with inconsistency. What is needed is a contextual approach that recognizes that the meaning of control may vary depending on the purpose of the inquiry. Under Delaware doctrine, the controlling shareholder label subjects that entity to unique legal treatment along three distinct dimensions. First, controlling shareholders—unlike minority shareholders—have fiduciary duties to the corporation. Second, interested transactions with controlling shareholders—unlike interested transactions with other fiduciaries—are subject to a unique cleansing regime in order to win business judgment deference from reviewing courts. Third, when certain transactions involving sales of control are challenged in court, they may be treated as direct rather than derivative actions, even when similar transactions that do not involve control sales would be treated as purely derivative. By teasing out these three aspects of the legal framework and analyzing them separately, courts can more closely attend to the reasons why control carries special significance, and ultimately develop a more rational and consistent set of definitions. Most critically, courts may properly designate someone a controlling shareholder for some purposes, but not others. [ABSTRACT FROM AUTHOR]

This article reconsiders the dominant account of corporate law's duty of loyalty, which asserts that the courts have steadily relaxed standards of fiduciary scrutiny applied to self-dealing by corporate managers across more than a century of history to the great detriment of the shareholder interest. The account originated in Harold Marsh, Jr.'s foundational article, Are Directors Trustees? Conflict of Interest and Corporate Morality, published in The Business Lawyer in 1966. Marsh's showing of historical lassitude has been successfully challenged in a recent book by Professor David Kershaw. This article takes Professor Kershaw's critique a step further, asking whether the evolutionary erosion account continues to exert normative power in today's corporate governance context. The answer is that it does not, a result that obtains even though erosion of the standards that courts apply to management self-dealing has continued unabated ever since Marsh published in 1966, and even though there is no reason to think that management self-dealing benefits the shareholder interest. The result follows from the operation of the corporate governance system, which has assimilated and redeployed the erosion account's motivating insight that officer and director self-dealing transactions do not make cost-benefit sense from the shareholder point of view. Regulation backs up the norm of aversion. Disclosure rules make self-dealing transparent to shareholders, who have no reason to like self-dealing and who now stand ready and able to register their preferences regarding such matters in corporate boardrooms. At the same time, the requirement of a majority independent board makes self-dealing transactions by board members highly inconvenient, because self-dealing undercuts independence. The practice reflects all of this, as shown by reference to hand-collected datasets of self-dealing transactions at publicly traded companies and of litigation in respect of self-dealing transactions in the Delaware Chancery Court. The classic self-dealing transaction, although still a focal point of academic discourse on corporate fiduciary law, does not matter all that much in real world companies with dispersed shareholders. It is no longer an unsolved problem stemming from separated ownership and control. [ABSTRACT FROM AUTHOR]

The article discusses judicial decisions in 2020 that are significant to private equity and venture capital practitioners in the U.S. Topics covered include the Reith v. Lichtenstein case in which the court refused to dismiss plaintiff's breach of fiduciary duty claims, the Obasi Investment Ltd. v. Tibet Pharmaceutical Inc. which pertains to the functions of non-voting board observers, and the In re Altor Bioscience Corp. case which pertains to waivers of statutory appraisal rights.

Much has been written on the subject of abusive shareholder litigation. The last decade has witnessed at first an increase and then a dramatic spike in such suits, primarily suits filed in connection with mergers and acquisitions. Delaware courts are known for not just their deep experience in corporate lawsuits but as being doctrinal innovators. One such innovation occurred in Rales v. Blasband, 634 A.2d 927 (Del. 1993), establishing the "tools at hand" doctrine, whereby, before considering whether to grant a motion to dismiss, the court admonishes the shareholder to resort to inspection rights accorded by the Delaware General Corporation Law so as to gather facts necessary for the complaint to survive the pretrial motion. On its face, the doctrine reflects a balanced approach to the competing claims that shareholder litigation is necessary to address and discourage managerial misconduct and the belief the suits are vexatious, being brought to garner an extortionate settlement. In this article, we empirically examine how Rales has dramatically changed the composition of suits in which shareholders seek to exercise their inspection rights. We compare the composition, outcomes, and related questions surrounding such suits maintained 1981–1994 with the post-Rales period 2004–2018. We not only find that post-Rales suits entail substantially more suits involving "books and records" requests but, in tracing the results of those requests, we find that many suits maintained after using the tools at hand yield outcomes favorable to plaintiffs. Our data also support the belief that such books and records litigation is something of a surrogate for a trial on the underlying claims of wrongdoing. Thus, our data support the positive social benefits of Delaware's innovative tools at hand doctrine. Nonetheless, in the concluding section, we bring bad news. The increasing usage of private ordering to limit inspection rights of owners—stockholders, partners, and members—raises concerns that the potential benefits of the tools at hand doctrine will not be fully realized. We also reason that the Delaware Supreme Court's decision in California State Teachers' Retirement System v. Alvarez, 179 A.3d 824 (Del. 2018), likely eviscerates the tools at hand. Alvarez holds that the Delaware litigant's suit is precluded by an earlier decision by another jurisdiction that a derivative suit initiated by a different shareholder than was prosecuting the Delaware action lacked standing to sue. We reason that Alvarez is a powerful disincentive for Delaware litigants to pursue the tools at hand as the time expended in pursuing that right may enable competing slothful lawyers to take their chances with a less developed complaint in a sister jurisdiction's courts on the same claim. [ABSTRACT FROM AUTHOR]

The Securities Act of 1933 ("Securities Act") provides for concurrent federal and state jurisdiction. Securities Act claims were historically litigated in federal court, but in 2015 plaintiffs began filing far more frequently in state court, where dismissals are less common and where weaker claims are more likely to survive. Directors' and officers' insurance costs for initial public offerings ("IPOs") have since significantly increased. Today, approximately 75 percent of section 11 corporate defendants face state court proceedings. Federal forum provisions ("FFPs") respond to the migration of Securities Act claims to state court and to increased insurance costs by requiring that Securities Act claims be litigated in their traditional federal forum. In Sciabacucchi v. Salzberg, Delaware’s Court of Chancery applied “first principles” to invalidate FFPs, primarily on grounds that charter provisions may regulate only internal affairs and that Securities Act claims are always external. In so concluding, the court adopted a novel definition of “internal affairs” that is narrower than the one established by U.S. and Delaware Supreme Court precedent. It asserted that plaintiffs have a federal right to file Securities Act claims in state court and further held that Securities Act plaintiffs are not existing stockholders to whom fiduciary duties are owed when they purchase shares. The opinion requires that all actions of the Delaware legislature relating to the Delaware General Corporate Law (“DGCL”) comply with its novel “internal affairs” constraint. Sciabacucchi’s logic and conclusion are fragile. The opinion conflicts with controlling U.S. and Delaware Supreme Court precedent and relies, critically, on incorrect assumptions of fact. The court asserted that FFPs are “contrary to the federal regime” because they preclude state court litigation of Securities Act claims. However, in Rodriguez de Quijas v. Shearson/American Express, Inc., the U.S. Supreme Court held that there is no immutable right to litigate Securities Act claims in state court and enforced an agreement precluding state court Securities Act litigation. The Sciabacucchi court asserted that Securities Act plaintiffs are not existing stockholders to whom fiduciary duties are owed. But U.S. Securities and Exchange Commission filings and the pervasiveness of order splitting conclusively establish that purchasers are often existing stockholders to whom fiduciary obligations are owed and breached as a result of misleading registration statements. The court feared hypothetical extraterritorial application of the DGCL. To prevent this result, it invented a novel definition of “internal affairs” that it applied to constrain all of the legislature’s past and future activity. But the opinion nowhere addressed the large corpus of U.S. and Delaware Supreme Court precedent that already precludes extraterritorial applications of the DGCL. The court thus invented doctrine that conflicts with established precedent in an effort to solve a problem that does not exist. Sciabacucchi is additionally problematic from a policy perspective. By using Delaware law to preclude a federal practice in federal court that is permissible under federal law, the court created unprecedented tension with the federal regime. The opinion’s narrow definition of “internal affairs” invites sister states to regulate matters traditionally viewed by Delaware as internal and thereby promotes positions inimical to Delaware’s interests. By propounding its divergent definition of “internal affairs” as a categorical restriction on the General Assembly’s past and future actions, the court causes the judiciary to cross into the legislature’s lane. Moreover, data indicate that the Sciabacucchi opinion caused a statistically and economically significant decline in the stock price of recent IPO issuers with FFPs in their organic documents. In contrast, a traditional textualist approach applies dictionary definitions and the doctrine of consistent usage to preclude extensions of the DGCL beyond traditional bounds. Textualism avoids all concerns that inspire the invention of a divergent definition of “internal affairs.” Textualism does not require counterfactual assumptions, conflict with U.S. or Delaware Supreme Court precedent, cause Delaware to constrain federal practice in a manner inconsistent with federal law, or advocate policy positions inimical to Delaware’s interests. Textualism also interprets the DGCL in a manner that restricts all Delaware corporations from adopting mandatory Securities Act arbitration provisions in their organic documents. A traditional, textualist approach validates FFPs in a manner that precludes the hypothetical collateral consequences that animate Sciabacucchi’s fragile analysis, all without generating Sciabacucchi’s troubling sequelae. [ABSTRACT FROM AUTHOR]

Standards governing the validity of conflict-of-interest transactions by corporate directors or others in dominant positions have significantly evolved from the early days of strict judicial condemnation to the current statutory provisions. These provisions place great faith in and emphasis on the judgment of disinterested directors or shareholders. This evolution has not been consistent among states, given that substantial variations exist regarding both statutory provisions and judicial interpretations. To illustrate the variations, this article examines and compares the Delaware and Model Business Corporation Act standards. The variations reflect the concerns that arise when a director's fiduciary duty of loyalty conflicts with the realities and demands of the commercial world. This article examines the evolution of conflict-of-interest standards and existing variations in light of two fundamental issues: (i) whether the combination of statutory and fiduciary standards obligates directors to obtain advance approval of conflict transactions and (ii) the capacity of shareholders to challenge conflict transactions on the grounds of fairness to the corporation, even after board or shareholder approval. The article concludes that statutory and fiduciary standards obligate directors to obtain advance approval of conflict transactions and provides recommendations for addressing these two issues in a manner consistent with statutory provisions and fiduciary standards. [ABSTRACT FROM AUTHOR]

This article examines the evolution of Delaware appraisal litigation and concludes that recent precedents have created a satisfactory framework in which the remedy is most effective in the case of transactions where there is the greatest reason to question the efficacy of the market for corporate control, and vice versa. We suggest that, in effect, the developing framework invites the courts to accept the deal price as the proper measure of fair value, not because of any presumption that would operate in the absence of proof, but where the proponent of the transaction affirmatively demonstrates that the transaction would survive judicial review under the enhanced scrutiny standard applicable to fiduciary duty-based challenges to sales of corporate control. We also suggest, however, that the courts and expert witnesses should and are likely to refine the manner in which elements of value (synergies) should, as a matter of well-established law, be deducted from the deal price to arrive at an appropriate estimate of fair value. [ABSTRACT FROM AUTHOR]

In 2016, the Delaware General Assembly amended section 262 of the Delaware General Corporation Law to provide surviving corporations with the option to prepay stockholders in appraisal cases. Specifically, the amendment gives a surviving corporation the option to pay, in advance of a trial, to determine the stock's fair value, whatever amount per share that it chooses. Doing so cuts off the statutory interest on the prepaid amount, which theoretically should disincentivize investors from filing appraisal petitions solely to turn a profit from the statutory interest rate-a strategy known as "interest-rate arbitrage." But in amending the statute, the General Assembly did not specify whether the petitioning stockholders must return to the corporation any amount by which the prepayment exceeds the court's determination of fair value. The resulting ambiguity has not only caused uncertainty among litigants and costly motion practice in the Delaware Court of Chancery-a consequence, ironically, that the legislative amendment was aimed at avoiding-but has also diminished the amendment's effect on curbing interest-rate arbitrage and, more generally, appraisal arbitrage. This article explores the history behind the prepayment amendment, including the evolution of Delaware's appraisal statute and two Court of Chancery cases in which the Court foresaw the need for an effective prepayment system. This article also examines the legislative history of the 2016 amendment and other scholars' suggestions for dealing with the statutory ambiguity. Finally, the article offers a new model for legislative reform, one that retains section 262's core and advances the policy objectives that underlie Delaware's appraisal system. [ABSTRACT FROM AUTHOR]

In the controversial practice of appraisal arbitrage, activist investors buy up the shares of a corporation to be acquired by merger in order to assert appraisal rights challenging the price of the deal. The practice is controversial because the appraisal remedy is widely seen as intended to protect existing stockholders who are (or will be) forced to sell their shares in the merger. But the real puzzle is why appraisal arbitrage is profitable, given that an appraisal proceeding's goal is to determine the fair price of target shares using the same techniques of valuation used by financial professionals who advise the parties to such deals. Thus, commentators have argued that the profit derives from (1) a free option to assert appraisal rights at any time until target shares are canceled, (2) the award of prejudgment interest at a too-generous rate, and (3) the use of a too-low supply-side discount rate in the valuation of shares. As this article shows, none of these explanations has merit, but the third may be on the right track in that it has become almost standard practice among appraisal courts to reduce the discount rate for the so-called terminal period beyond five years into the future by the projected rate of inflation plus general economic growth. The fallacy in doing so is that the discount rate implicit in market prices already incorporates these factors because investors demand and expect returns commensurate therewith. Although it may be appropriate to adjust the terminal period discount rate for company-specific growth funded by the plowback of returns at a rate implicit in projected terminal period cash flow, assuming that growth will simply happen in lockstep with the economy as a whole would be incorrect. Thus, awards that are skewed to the high side by erroneous valuation practices likely encourage appraisal arbitrage. [ABSTRACT FROM AUTHOR]

In less than a decade, Delaware's legislature has overruled its courts and reshaped Delaware corporate law on two different occasions: with proxy access bylaws in 2009 and with shareholder litigation bylaws in 2015. Having two dramatic interventions in quick succession would be puzzling under any circumstances. The interventions are even more puzzling because with proxy access, Delaware's legislature authorized the use of bylaws or charter provisions that Delaware's courts had banned, and with shareholder litigation, it banned bylaws or charter provisions that the courts had authorized. This article attempts to unravel the puzzle. Starting with corporate law doctrine, I find that a doctrinal account has more explanatory power than one might initially expect. In particular, Delaware's courts appear to be zealous in protecting the discretion of corporate managers and directors, whereas the legislature on each occasion intervened to revitalize shareholder protections. But this distinction leaves a variety of questions unanswered, such as the rapidity of the legislature's response and its use of a default rule with proxy access, as compared to a mandatory shareholder litigation rule. To more fully explain the interventions, we need to consider several other factors, including the importance of protecting the credibility of Delaware's judges. The credibility concern suggests that legislative thunderbolts are unlikely to become routine because routine legislative intervention would undercut the authority of Delaware's judiciary. [ABSTRACT FROM AUTHOR]

The article discusses the importance of financial advisor engagement letters as an efficient tool to vet potential conflicts of a financial advisor. It mentions that the decision of the Delaware Court of Chancery in the case In re Rural/Metro regarding the acquisition of medical services company Rural/Metro Corp. by private equity company Warburg Pincus held RBC Capital Markets LLC with the breaching of the fiduciary duties by the directors of Rural/Metro for approving the sale of company.

The article looks at several Delaware court cases related to private equity and venture capital. The cases discussed include Cigna Health & Life Insurance Co. v. Audax Health Solutions, Inc. related to enforceability of stockholder indemnification releases, In re Orchard Enterprises, Inc. Stockholder Litigation related to the squeeze-out merger with valuation of preferred stock and the Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc. related to breach of blocking right.

The article provides an analysis of annual survey of judicial developments pertaining to mergers and acquisitions. Topics discussed include contract interpretation or fraud cases including Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, dismissal of federal securities fraud and common law fraud in Universal American Corp. v. Partners Healthcare Solutions Holdings, L.P., and formation of partnership or joint venture in Energy Transfer Partners, L.P. v. Enterprise Products Partners, LP.

Special committees of independent, disinterested directors have been widely used by corporate boards to address conflicts of interests and reinforce directors' satisfaction of their fiduciary duties in corporate transactions since the wave of increased M&A activity in the 1980s. In 1988, The Business Lawyer published an article titled The Emerging Role of the Special Committee by one of this article's co-authors, examining the emerging use of special committees of independent directors in transactions involving conflicts of interest. At that time, the Delaware courts had already begun to embrace the emergent and innovative mechanism for addressing corporate conflicts. Now, after over thirty years of scrutiny by the Delaware courts, it is clear that the special committee is a judicially recognized (and encouraged) way to address director conflicts of interest and mitigate litigation risk. This article will examine the role of the special committee in the context of conflict of interest transactions, with a particular focus on transactions involving a change of control or a controlling stockholder, from a U.S. perspective (in particular, under the laws of the state of Delaware), and will briefly consider international applications of the concepts discussed. To this end, this article will examine recent case law developments, and compare the special committee processes at the heart of two high-profile Delaware decisions, and, finally, provide guidance to corporate practitioners on the successful implementation of a special committee process. [ABSTRACT FROM AUTHOR]

This article examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. Finding the existing framework of overlapping rules and exceptions both structurally and doctrinally unsound, this article proposes a novel reconfiguration under which Delaware courts would follow three blackletter rules: (1) stockholders of the target should have standing to sue target directors to challenge a merger directly on the basis that the board failed to achieve adequate value for derivative claims; (2) a merger should eliminate target stockholders' derivative standing; and (3) stockholders of the acquiror as of the time a merger is announced should be deemed contemporaneous owners of claims acquired in the merger for purposes of derivative standing. Following these rules would restore order to the Delaware law of standing in the merger context and would advance the important public policies served by stockholder litigation in the Delaware courts. [ABSTRACT FROM AUTHOR]

A textualist interpretation of the implied private right of action under section 10(b) of the Exchange Act concludes that the right to recover money damages in an aftermarket fraud can be no broader than the express right of recovery under section 18(a) of the Exchange Act. The Act's original legislative history and recent Supreme Court doctrine are consistent with this conclusion, as is the Act's subsequent legislative history. Section 18(a), however, requires that plaintiffs affirmatively demonstrate actual "eyeball or eardrum" reliance as a precondition to recovery and does not permit a rebuttable presumption of reliance. Accordingly, if the Exchange Act is to be interpreted as a "harmonious whole," with the scope of recovery under the implied section 10(b) private right being no greater than the recovery available under the most analogous express remedy, section 18(a), then section 10 (b) plaintiffs must either demonstrate actual reliance as a precondition to recovery of damages, or the U.S. Supreme Court should revisit Basic, as suggested by four Justices in Amgen, and overturn Basic's rebuttable presumption of reliance. A textualist approach thus provides a rationale for either distinguishing or reversing Basic that avoids the complex debate over the validity of the efficient market hypothesis, an academic dispute that the Court is not optimally situated to referee. Experience also demonstrates that Basic's presumption of reliance, which is nominally rebuttable, is effectively irrebuttable once it attaches. In the context of class action litigation, because a de facto irrebutable presumption of reliance effectively eliminates the reliance requirement, and because every Justice that has ever addressed the question, whether in majority, concurrence, or dissent, agrees that reliance is an element of the section 10(b) private right of action, the continued application of the de facto irrebutable presumption of reliance creates an irreconcilable conflict between the law as applied in fact and the law as described by the Supreme Court's doctrine. This observation provides a further basis upon which to challenge Basic's continuing vitality. The implications of this analysis are potentially profound. If plaintiffs must affirmatively demonstrate actual reliance, then many section 10(b) securities fraud class actions become uncertifiable because individual questions will predominate. Private securities fraud litigation would then likely be dominated by class actions asserting violations of section 11 of the Securities Act as well as by a scrum of individual actions brought by larger investors with significant damage claims in major cases. The battle would then likely move to Congress, which could legislate a rebuttable presumption of reliance, or otherwise amend the statute to reform the securities litigation process. [ABSTRACT FROM AUTHOR]

The prevalence of settlements in class and derivative litigation challenging mergers and acquisitions in which the only payment is to plaintiffs' attorneys suggests potential systemic dysfunction arising from the increased frequency of parallel litigation in multiple state courts. After examining possible explanations for that dysfunction and the historical development of doctrines limiting parallel state court litigation--the doctrine of forum non conveniens and the "first-filed" doctrine--this article suggests that those doctrines should be revised to better address shareholder class and derivative litigation. Revisions to the doctrine of forum non conveniens should continue the historical trend, deemphasizing fortuitous and increasingly irrelevant geographic considerations, and should place greater emphasis on voluntary choice of law and the development of precedential guidance by the courts of the state responsible for supplying the chosen law. The "first-filed" rule should be replaced in shareholder representative litigation by meaningful consideration of affected parties' interests and judicial efficiency. Contents [ABSTRACT FROM AUTHOR]

Directors of Delaware corporations often rely on lawyers, economists, investment bankers, professors, and many other experts in order to exercise their managerial power consistently with their fiduciary duties. Such reliance is encouraged by section 141(e) of the General Corporation Law of the State of Delaware, which states in part that directors "shall… be fully protected" in reasonably relying in good faith on expert advice. Section 141 (e) should provide all directors of Delaware corporations a defense to liability if, in their capacity as directors, they reasonably relied in good faith on expert advice but nevertheless produced a transaction that is found to be unfair to the corporation or its stockholders, as long as the unfair aspect of the transaction arose from the expert advice. The Delaware Court of Chancery, however, has limited the full protection of section 141 (e) by confining it to disinterested directors in duty of care cases. That limitation, which is not expressed in the statute, unfairly punishes interested directors who act with an honesty of purpose and reasonably rely in good faith on expert advice because it requires them to serve as guarantors of potentially flawed expert advice. This Article concludes that Delaware courts should reconsider the application and effect of section 141(e) and allow directors, regardless of their interest in a challenged transaction, to assert section 141(e) as a defense to liability in duty of care and duty of loyalty cases if they reasonably relied in good faith on expert advice. [ABSTRACT FROM AUTHOR]

Delaware's antitakeover statute, codified in Section 203 of the Delaware corporate code, is by jar the most important antitakeover statute in the United States. When it was enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. The question has become more important in recent years because Section 203's substantive bite has increased, as Exelon's recent hostile bid for NRG illustrates. Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 and were subject to Section 203 (n = 60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid. While it remains possible that courts would nevertheless uphold Section 203's constitutionality on different grounds, the evidence would seem to suggest that the constitutionality of Section 203 is up for grabs. This Article offers specific changes to the Delaware statute that would preempt the constitutional challenge. If instead Section 203 were to fall on constitutional grounds, as Delaware's prior antitakeover statute did in 1987, it would also have implications for similar antitakeover statutes in thirty-two other U.S. states, which along with Delaware collectively cover 92% of all U.S. corporations. [ABSTRACT FROM AUTHOR]

In this article, the author discusses the views of authors Guhan Subramanian, Steven Herscovici and Brian Barbetta (SBH) on the constitutionality of the Section 23 of the Delaware General Corporation Law (DGCL). She stresses the need to address the day-to-day considerations of merger and acquisition (M&A) practice to fully understand the works of SBH. She also points out the significance of defining the meaning of "hostile" to be able to asses the issues involved.

The practice of dividing the corporate board into classes, with each class up for election in successive years, has venerable roots in corporate practice. However, it has recently come under concerted attack by institutional shareholders that fear its misuse as a takeover defense. Examining the issue from several perspectives, this Article argues that the possible misuse of the classified board as a takeover defense justifies no more than case-by-case consideration. A separate concern is that the classified board may constitute a barrier to a minority shareholder voice. While this concern has some merit, this Article argues that the classified board is a redundant barrier to a minority shareholder voice that has importance only if preceded by other reforms to enfranchise minority shareholders. [ABSTRACT FROM AUTHOR]

Did North American Catholic Education Programming Foundation, Inc. v. Gheewalla change anything? The Delaware Supreme Court ruled in 2007 that corporate directors owe no direct fiduciary duty to creditors in insolvency, but the bar seems to have met the case with a collective shrug, concluding that the preservation of a creditor's right to pursue derivatively on behalf of a distressed corporation a claim for breach of fiduciary duty leaves intact the "fiduciary duty to the corporate enterprise" theory that informed pre-Gheewalla advice. This Article posits that this general view is wrong. In the vicinity of insolvency two oft-cited principles — that a board should strive to maximize enterprise value, and that it should protect the shareholders — sometimes are in conflict. In a period where insolvency deepens, a discounted sale may maximize enterprise value, even as it cuts off a less likely, but real prospect of an equity-preserving restructure. This Article argues that "duty to the enterprise" theory is incoherent and ignores the reality of business valuation, which is that all prospects are uncertain. The necessary consequence of Gheewalla, construed in light of other relevant authorities, is that where a business strategy may generate a return for equity holders, the board must favor that strategy and reject alternatives, even if in the board's business judgment the strategy is unlikely to succeed, and alternatives, on a risk-adjusted basis, would maximize the enterprise value. [ABSTRACT FROM AUTHOR]

To address (1) the conflicts of interest that can arise in the acquisition of publicly held target corporations in various types of hostile and consensual merger and acquisition ("M&A") transactions, and (2) the risk of overpayment in major acquisitions by publicly held acquirors, Congress should require the appointment by the U.S. Securities and Exchange Commission ("SEC") of a disinterested Change of Control Board for such targets and acquirors. This Board would have complete authority over the acquisition process, and a federal uniform standard of review, the business judgment rule, would apply in determining if the Board acted properly, thereby significantly reducing litigation in M&A transactions. Many features of the Change of Control Board proposal are similar to those provided for audit committees in the Sarbanes-Oxley Act of 2002; thus, this proposal is a logical extension of those audit committee provisions. In the event Congress does not enact the Change of Control Board proposal, many of the concepts underlying the proposal should be implemented by the SEC through its rulemaking authority under the audit committee provisions. [ABSTRACT FROM AUTHOR]

After questioning the value of securities class actions, which are largely unknown outside the United States, this Article discusses 75 defenses that courts have used to dismiss securities claims. These defenses are typically raised at the motion to dismiss stage, and are important because securities class actions that survive motions to dismiss are usually settled rather than resolved on the merits. The Article provides a template for analyzing the application of each defense to securities class action complaints, and then discusses each defense and references key authorities that practitioners can turn to for further analysis. [ABSTRACT FROM AUTHOR]

Delaware's fiduciary doctrine governing going private transactions by controlling shareholders is presently in disarray. Controllers generally select between single step cash-out mergers and tender offers followed by short-form mergers to do these freezeouts, and they are subject to very different equitable standards depending on the format selected by the controller. Furthermore, the courts' longstanding commitment to applying strict scrutiny in the adjudication of freezeouts is in tension with the popular disfavor towards private class-action litigation. This disarray threatens minorities' interests in freezeouts and capital market values more generally. This Article reviews the foundations of freezeout doctrine and proposes that the Entire Fairness doctrine should apply as the standard of review in all freezeouts unless prior to accepting the controller's offer the target company's independent directors conducted an auction or market check to ascertain if better offers were available. [ABSTRACT FROM AUTHOR]

This article focuses on several proposed amendments relating to Chapter 8 and 13 of the Model Business Corporation Act in the U.S. The amendments resulted from a review of the disclosure provisions of the law. Proposed amendments include the addition to the Official Comment to section 8.30, the additions to section 13.20 and the related Official Comment, and the revision of clause 1 of subsection 13.24.

Civil liability for aiding and abetting provides a cause of action that has been asserted with increasing frequency in cases of commercial fraud, state securities actions, hostile takeovers, and, most recently, in cases of businesses alleged to be supportive of terrorist activities. The U.S. Supreme Court, in its 1994 decision in Central Bank of Denver, N.A.v. First Interstate Bank of Denver, ended decades of aiding and abetting liability in connection with federal securities actions. However, the doctrine since has flourished in suits arising from prominent commercial fraud cases, such as those concerning Enron Corporation and Parmalat, and even in federal securities cases some courts continue to impose relatively broad liability upon secondary actors. This article reviews Central Bank and its limitations, before turning to an analysis of the elements of civil liability for aiding and abetting fraud. The article then similarly identifies and analyzes the elements of liability for aiding and abetting breach of fiduciary duty, which predominantly concerns professionals, such as accountants and attorneys, that are alleged to have assisted wrongdoing by their principal. The analysis then examines aiding and abetting liability in the context of particular, frequently-occurring, factual matrices, including banking transactions, directors and officers, state securities actions, and terrorism. The article concludes by summarizing emerging principles evident from judicial decisions applying this very flexible and potent source of civil liability. [ABSTRACT FROM AUTHOR]

This article notes an overlooked advantage of state as opposed to federal regulation of corporate governance--the ability of state law to alternate between lax and stringent regulation, shifting between hard-edged rules and fuzzy standards and between strong and weak interpretations of fiduciary constraints. The authors refer to this back-and-forth regulatory methodology as "thaumatrope analytics" and argue that it has significant advantages over the federal method of inflexible governance mandates. Increased federalization of corporate law risks losing the value of the subtle state regulatory methodology to the potential disadvantage of business corporations and the economy of which they are a part. [ABSTRACT FROM AUTHOR]

The article focuses on the changes in the chapters 8 and 13 of the Model Business Corporation Act proposed by the Committee on Corporate Laws of the American Bar Association (ABA) Section of Business Law. The committee provided an additional statement to the official comment to section 8.30 which tackles the duty of disclosure that a director owes to other directors. The changes made to the section 13.20 concerns with notice of appraisal rights.