Delaware Corporate Law Update

Updates on Delaware Corporate Law by Evan O. Williford, Esq., Delaware Corporate Litigation Attorney.

No Standing For Stockholder Squeezed Out Before Books and Records Suit

On February 27, the Court of Chancery in Weingarten v. Monster Worldwide, Inc. held as a matter of first impression that a stockholder cashed out in a merger lacked standing when he served a books and records demand under 8 Del. C. § 220, but did not sue, before the merger closed.

The Court sidestepped policy arguments by applying the “unambiguous language” of the statute, which requires a stockholder to “first establish” that “[s]uch stockholder is a stockholder”.  The Court held that the statute thus “made clear that only those who are stockholders at the time of filing have standing to invoke this Court’s assistance under Section 220.”

The Court distinguished two other Court of Chancery cases where plaintiffs had been squeezed out after – not before – filing their Section 220 complaints.

For lawyers representing aggrieved holders of stock in a company soon to merge, the lesson of Weingarten is clear.  Serve the demand and file suit before the merger closes – or risk dismissal for lack of standing.

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Filed under: Court of Chancery, Section 220 Books and Records, Standing

Close Board Ties And A Shared Airplane Eliminate Independence

Earlier this month Chief Justice Strine authored an opinion (Sandys v. Pincus) holding that close ties among certain board members, including co-owning an airplane, caused key directors to be non-independent.  Therefore, the Delaware Supreme Court reversed Chancery’s grant of a motion to dismiss derivative claims for plaintiff not having demanded that the board bring them.

Plaintiff alleged that top managers and directors of Zynga Inc. breached their fiduciary duties by selling stock while in possession of non-public information which, when it became public later, caused Zynga’s stock price to drop some 74%.  After quickly concluding three of Zynga’s nine directors were interested or non-independent, Sandys primarily concerns three additional directors:  Ellen Siminoff, William Gordon, and John Doerr.

Plaintiff alleged that Siminoff and her husband co-owned an airplane with interested director Pincus (Zynga’s Chairman, controlling stockholder, and former CEO) and that she was a “close family friend” of that director.  The Court criticized plaintiff for not getting more information about the relationship, either in a books and records lawsuit plaintiff had previously filed against Zynga or simply from a search engine such as “the tool provided by the company whose name has become a verb”.  Nevertheless, the Court held Siminoff lacked independence because joint plane ownership was “suggestive of the type of very close personal relationship that, like family ties, one would expect to heavily influence a human’s ability to exercise impartial judgment.”

Plaintiff alleged a number of facts about Gordon and Doerr including that (1) both are partners in Kleiner Perkins, a venture capital firm that controls 9.2% of Zynga’s stock; (2) Kleiner Perkins invested in a company co-founded by Pincus’ wife; and (3) Kleiner Perkins had invested in and obtained board seats at another company with another interested director.  Moreover, the board had determined Gordon and Doerr non-independent for purposes of rules promulgated by the NASDAQ stock exchange.  The Court again criticized plaintiffs for not seeking additional information including the reasons for the NASDAQ determination.  Nevertheless, it ruled Gordon and Doerr non-independent where alleged facts suggest directors belong to “networks [that] arise of repeat players who cut each other into beneficial roles in various situations” and where the board itself has determined them non-independent.  Conversely, it held that plaintiffs need not plead a “detailed calendar of social interactions”.

Justice Valihura authored a (uncommon though certainly not unheard of) dissent.  As to Gordon and Doerr, Valihura cited the lack of pled facts on the size or materiality of the ties or the relevant reasons for the NASDAQ determination.  As to Siminoff, Valihura pointed to plaintiff’s own description of the shared airplane as evidencing a “business” relationship as insufficient to result in non-independence.

Key take-aways:

  • The Court did not announce a new standard on when close business or personal ties result in non-independence. Nevertheless, Sandys could lead to Delaware courts being more willing to hold directors non-independent in close cases involving specific pleaded facts that reasonably suggest possible bias.
  • It behooves all lawyers to use search engines in light of the massive amount of information available online, including before filing complaints. The Court cautions lawyers to use them to find information of a “reliable” nature such as “articles in reputable newspapers and journals, postings on official company websites, and information on university websites”.
  • The appeal concerned a motion to dismiss ruling using a somewhat plaintiff-friendly standard. Delaware courts will be more skeptical as to whether – after trial – a plaintiff has proven a director non-independent for purposes of invoking the stringent entire fairness standard.
  • Plaintiffs seeking pre-lawsuit books and records should consider asking for information about director independence if that issue is potentially relevant.

Filed under: Delaware Supreme Court, Demand Futility, Derivative Actions, Director Independence, Fiduciary Duties, Section 220 Books and Records

Good Things (Sometimes) Come To Those Who Wait: Two Recent Cases Show Pros And Cons To Seeking Books and Records Before Suing

When considering stockholder litigation in Chancery, one of the decisions plaintiffs face is whether to (1) sue immediately or (2) seek books and records under 8 Del. C. § 220 hoping for documents to help survive a motion to dismiss.  This summer, two cases where plaintiffs took the latter route had very different outcomes.

In August, the Court in In re Investors Bancorp, Inc. Stockholder Litigation considered cross motions to appoint lead plaintiffs in a case attacking director compensation as self-interested.  One plaintiff served a books and records request, obtained documents, and filed a complaint twice as long as the other.  While the Court complimented all counsel as “highly competent,” it placed decisive weight on the significant additional information the former uncovered.  For instance, in arguing that the compensation was a self-interested quid pro quo scheme, the latter solely used temporal proximity while the former cited board minutes.  The Court found that the information added by the former counsel was “not fluff;” rather, the former used documents “including board and compensation committee meeting minutes, to provide meaningful, additional factual support for their allegations.”

In June, however, the Court held a complaint filed after litigating a Section 220 action was precluded by the dismissal of another similar complaint two years earlier (Bensoussan).  The Court responded to plaintiff’s argument that the original plaintiff was an inadequate representative by ruling it was reluctant to judge “inadequacy based on the contents of documents obtained in response to a Section 220 demand because that approach ‘encourages hindsight review of conduct’”.  (A plaintiff in such a situation may also contend, whether or not based upon additional books and records, that the claims in the later suit are substantively different from the ones in the prior suit.)  The Court cited two other Delaware cases with similar outcomes.

Thus, as one of the “tools at hand” a books and records demand is a double-edged sword: it may lead to a superior complaint or a precluded one.  In determining whether to make such a demand plaintiffs’ counsel should carefully consider and monitor, among other things: (1) the likelihood of other similar complaints being filed; (2) the likelihood of uncovering evidence that could make the difference on a motion to dismiss (a surviving plaintiff can of course seek merits discovery); and (3) the speed with which the demand will procure helpful documents.  (As the Court in Investors Bancorp noted, a plaintiff faced with a slow demand response can always decide to abandon it and file a merits suit anyway.)

Filed under: Court of Chancery, Derivative Actions, Preclusion, Section 220 Books and Records

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Disclaimer

Delaware Corporate Law Update solely reflect the views of Evan Williford of The Williford Firm, LLP. Its purpose is to provide general information concerning Delaware law; no representation is made about the accuracy of any information contained herein, and it may or may not be updated to reflect subsequent relevant events. This website is not intended to provide legal advice. It does not form any attorney-client relationship and it is not a substitute for one.