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Recent Delaware Corporate Law Updates

February 17, 2015

Court of Chancery Addresses Whether a Minority Stockholder Constitutes a Controlling Stockholder at Motion to Dismiss Stage in Recent M&A Cases
In four opinions issued within three months of one another, four different members of the Delaware Court of Chancery have considered, at the motion to dismiss procedural stage, whether allegations in a complaint were sufficient to establish that a minority stockholder constituted a controlling stockholder under Delaware law.  In In re KKR Financial Holdings LLC Shareholder Litigation, 101 A.3d 980 (Del. Ch. 2014), In re Crimson Exploration Inc. Stockholder Litigation, 2014 WL 5449419 (Del. Ch. Oct. 24, 2014), and In re Sanchez Energy Derivative Litigation, 2014 WL 6673895 (Del. Ch. Nov. 25, 2014), the Court concluded that the minority stockholder at issue did not constitute a controlling stockholder, while in In re Zhongpin Inc. Stockholders Litigation, 2014 WL 6735457 (Del. Ch. Nov. 26, 2014), the Court found that allegations that a minority stockholder controlled a company and its board of directors were sufficient to withstand a motion to dismiss. 
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Orckit Communications Ltd. v. Networks3 Inc. et al.: Court of Chancery Upholds Provision Providing for Sole Discretion "Not to Be Subject to the Implied Covenant of Good Faith and Fair Dealing"
In Orckit Communications Ltd. v. Networks3 Inc. et al., C.A. No. 9658 (Del. Ch. Jan. 28, 2015) (TRANSCRIPT), the Delaware Court of Chancery granted defendant Networks3's motion to dismiss a claim that it had wrongfully terminated an agreement to purchase patents from plaintiff Orckit.  The purchase of the patents was contingent upon the issuance of an approval by an Israeli government agency, and the agreement provided that "the terms in the ... Approval shall be satisfactory in the sole discretion (which for purposes of this condition shall not, to the extent permitted by law, be subject to the implied covenant of good faith and fair dealing) of  Networks3."  The Court held that, under the agreement, whether the terms of the approval were satisfactory to Networks3 was "a decision that is unreviewable in the sense that, if it is timely taken, the defendant could then ... terminate."
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Cigna Health & Life Insurance Company v. Audax Health Solutions, Inc.:  Court of Chancery Invalidates Claims Release and Indemnification Provisions in Private Company Merger     
In Cigna Health & Life Insurance Company v. Audax Health Solutions, Inc., 2014 WL 6784491 (Del. Ch. Nov. 26, 2014), the Delaware Court of Chancery found invalid features of a private company merger agreement that required stockholders, as a condition to receiving their merger consideration, to submit a letter of transmittal agreeing to provide a release of all claims against the acquirer and that further required stockholders to indemnify, for an indefinite period of time, the acquirer for claims arising from the seller's breach of representations and warranties.
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Merion Capital LP v. BMC Software, Inc. and In re Appraisal of Ancestry.com, Inc.:  Court of Chancery Rejects Challenges to Standing of Appraisal Arbitrageurs to Petition for Appraisal
In two opinions issued the same day, the Delaware Court of Chancery addressed standing requirements under Delaware's appraisal statute, Section 262 of the General Corporation Law of the State of Delaware.  In both Merion Capital LP v. BMC Software, Inc., 2015 WL 67586 (Del. Ch. Jan. 5, 2015), and In re Appraisal of Ancestry.com, Inc., 2015 WL 66825 (Del. Ch. Jan. 5, 2015), the Court found that a 2007 amendment to the appraisal statute did not impose a "share-tracing" requirement on an appraisal petitioner's right to demand appraisal of shares acquired after the record date for determining the stockholders entitled to vote on a merger.  In so doing, the Court rejected a potential obstacle to so-called "appraisal arbitrageurs" that seek to use Delaware's appraisal process to capitalize on potentially undervalued transactions by purchasing shares of the target company's stock after announcement of a merger. 
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In re Comverge, Inc. Shareholders Litigation: Court of Chancery Declines to Dismiss Claims that Termination Fee Together with Bridge Financing Agreement Precluded Alternative Offers
In In re Comverge, Inc. Shareholders Litigation, 2014 WL 6686570 (Del. Ch. Nov. 25, 2014), the Delaware Court of Chancery granted in part the defendants' motion to dismiss a post-closing stockholder challenge to the acquisition of Comverge, Inc. ("Comverge") by H.I.G. Capital, L.L.C. ("HIG"), which acquisition the Court had previously declined to enjoin.  The plaintiffs alleged that Comverge's board of directors (the "Board") breached its fiduciary duties by: (i) failing to bring suit against HIG for an alleged breach of a non-disclosure agreement ("NDA") between the parties; (ii) conducting a flawed sale process that failed to maximize value for Comverge's stockholders; and (iii) agreeing to preclusive deal protection measures that prevented Comverge from soliciting alternative bidders.  The plaintiffs also claimed that HIG had aided and abetted the Board in breaching its fiduciary duties.
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Quadrant Structured Products Company, Ltd. v. Vertin: Court of Chancery Declines to Extend Contemporaneous Ownership Requirement to Derivative Claims of Creditors Against Insolvent Corporation and Dismisses Claims Against Board of Directors Related to "Risk-On" Business Strategy
In Quadrant Structured Products Company, Ltd. v. Vertin, 102 A.3d 155 (Del. Ch. Oct. 1, 2014), the Delaware Court of Chancery held that the contemporaneous ownership requirement of Section 327 of the General Corporation Law of the State of Delaware (the "DGCL") does not apply to corporate creditors for purposes of determining whether a creditor has standing to bring derivative claims against the board of directors of an insolvent corporation.  The Court also declined to dismiss the creditor's fiduciary duty and fraudulent transfer claims related to certain transactions between the corporation and its controlling stockholder, but granted the motion to dismiss with respect to fiduciary duty claims related to the decision of the board of directors to pursue a "risk-on" business strategy that allegedly favored junior creditors over more senior creditors. 
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Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd.:  Court of Chancery Interprets "Ordinary Course" Covenant and Holds that Business Disruption Prevents Merger Target from Complying with Merger Covenants
In Cooper Tire & Rubber Company v. Apollo (Mauritius) Holdings Pvt. Ltd, 2014 WL 5654305 (Del. Ch. Oct. 31, 2014), the Delaware Court of Chancery found that Cooper Tire & Rubber Company ("Cooper") had not satisfied all of the conditions to closing its merger with Apollo (Mauritius) Holdings Pvt. Ltd ("Apollo") as of the trial date, and thus was likely barred from seeking a $112 million reverse termination fee under the merger agreement.
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