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M&A, Stockholder Cases to Watch in Delaware Courts in 2022

Jan. 28, 2022, 9:00 AM

Corporate practitioners have much to anticipate in 2022 as the Delaware Supreme Court and Court of Chancery resolve pending cases that will inform the judgment of litigation and transactional attorneys.

Cases ripe for decision in 2022 include a Court of Chancery decision involving whether a minority stockholder nonetheless is a “controlling stockholder.” In addition, the Delaware Supreme Court will consider whether a stockholder seeking books and records may rely upon hearsay evidence to demonstrate at trial that it has one or more proper purposes, or whether admissible testimony by the stockholder is required.

The Delaware Supreme Court also will decide whether a party who terminates a merger agreement extinguishes its rights to pursue claims of pre-termination breach.

Controlling Stockholder Status

First in line is In re Tesla Motors Inc. Stockholder Litigation. After a Jan. 18 post-trial argument, Vice Chancellor Joseph R. Slights will determine whether Elon Musk is liable to Tesla Motors for harm caused by his alleged breach of fiduciary duty in Tesla’s acquisition of Solar City, a solar power systems manufacturer and installer in which Elon Musk owned a significant interest.

Among the issues to be decided are whether Elon Musk, a 22% stockholder of Tesla, was the controlling stockholder of Tesla despite his ownership of less than a majority of the voting power. Even if the court were to determine that he was a controlling stockholder, such that the entire fairness standard of review applies, the court will then determine whether the process and price by which the merger was accomplished was fair. A decision is expected by the end of April.

A second case involving the determination of controlling stockholder status is pending for oral argument on March 9 in the Delaware Supreme Court, In re GGP Inc. Stockholder Litig. The case involves the appeal of a Court of Chancery decision dismissing claims that a merger transaction resulted from actionable breaches by a controlling stockholder, Brookfield Property Partners LP in Brookfield’s acquisition of GGP (the merger).

The court determined that plaintiffs, three stockholders of GGP, failed to plead sufficiently that Brookfield and its affiliates, who owned 35.3% of GGP, exercised actual control over GGP either by dominating GGP during the negotiation of the merger or by exercising general control over GGP’s business.

The court found that with no controlling stockholder and insufficient claims that a stockholder vote was coerced or not fully informed, the case was required to be dismissed under Corwin v. KKR Financial Holdings. A decision from the Delaware Supreme Court is expected by June 30.

Another Delaware Supreme Court case of interest, NVIDIA Corp. v. City of Westland Police & Fire Retirement System. The case involves whether a stockholder seeking books and records to investigate alleged mismanagement may satisfy its trial burden to show that it has one or more proper purposes by presenting only out-of-court hearsay statements concerning its purposes.

The Court of Chancery determined that the stockholder’s demand letter and interrogatory responses sufficed to state a proper purpose. The court rejected the respondent-corporation’s argument that the complaining stockholder was required to testify concerning her purposes.

The court also determined that a petitioner for books and records can rely on statements from a federal securities complaint, even where the district court had dismissed the complaint, because the “credible basis” standard for a Section 220 demand is lower than the standard to plead a securities complaint. Oral argument is scheduled for March 9.

Termination of Merger Agreement

Finally, transactional attorneys will be interested in the Delaware Supreme Court’s determination of an appeal of a Court of Chancery decision brought by a seller who terminated a merger agreement. The Court of Chancery held that the seller’s exercise of a termination right in its merger agreement extinguished its rights to sue for pre-termination breaches.

The termination clause at-issue barred any claims relating to “the obligations of the parties”—and contained no exclusion for willful breaches or fraud. That case, Yatra Online Inc. v. Ebix Inc., is scheduled for argument on March 23.

We expect that, like last year, 2022 will continue the trend of litigation arising from ongoing Covid-19-related uncertainty and disruption, such as broken-deal cases.

This year likely also will continue a trend of stockholders’ increased resort to exercising information rights, such as under Section 220 of the Delaware General Corporation Law, to investigate potential claims before filing suit.

The years-long trend of litigation relating to alleged controlling stockholder transactions, Caremark claims concerning fiduciary oversight and monitoring of business risks, and post-closing M&A disputes (such as for indemnification and fraud), also is likely to continue.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Lewis Lazarus is a partner at Morris James LLP in Wilmington, Del., and focuses on corporate governance and commercial matters in the Delaware Court of Chancery. He tries cases arising out of mergers and acquisitions, including those involving the entire fairness standard of review, appraisal, books and records actions, actions to compel annual meetings, and actions to determine the rightful managers of a Delaware entity.

Tyler O’Connell is a partner at Morris James LLP and represents companies, members of management, and investors in business disputes before the Delaware courts. He also counsels directors, officers and managers of Delaware business entities in connection with transactions that involve litigation risk.