This week, I want to call attention to two recent Delaware decisions involving disputes over the meaning of contractual language in merger agreements, because I find the purity of the interpretive questions posed to be aesthetically pleasing. 

First up, we have Schneider National Carriers v. Kuntz, where the court denied cross motions for summary judgment on the grounds that the contract was ambiguous.  Schneider acquired all of the stock of W&S in exchange for upfront cash payments and earnouts pegged to meeting certain annually-increasing EBITDA targets over the following three years.  As is common in earnout arrangements, Schneider agreed to certain operating covenants, the most critical of which was a covenant that Schneider would, during each Measurement Period, “cause one or more of the Acquired Companies to acquire, in the aggregate, not less than sixty (60) class 8 tractors.”

The question for the court was whether this language meant that Schneider should actually grow the total number of tractors by 60, or could those 60 include replacements for tractors that were retired?  If the latter, Schneider was in compliance; if the former, not so much, because Schneider retired more tractors than it acquired.  In the end – as one…

In Juul Labs v. Grove, Vice Chancellor Laster held that inspection rights are a matter of internal affairs, and therefore California’s Section 1601, which grants inspection rights to shareholders of California corporations and foreign corporations with headquarters in California, is invalid as applied to Delaware corporations.

There are a lot of policy implications here, because Juul arose in the context of a private company that required shareholders to waive their inspection rights under Delaware law.  Assuming Delaware treats that waiver as valid – and Laster did not reach that question – critical sources of information could be denied to private company investors.  And, as I previously blogged about the Juul dispute, if Delaware finds such contractual waivers valid, the next step is for companies to insert them into their charters and bylaws.  If that’s valid – and after Salzberg v. Sciabacucci, it could be – it would mean that 220 inspection rights could be left a functional dead letter for both private and public companies.

But actually, the interesting part here for me is the procedural aspect.  Now, the exact contours of the internal affairs doctrine have always been unclear – see, e.g., Mohsen Manesh, The …

Gabriel Rauterberg has just posted a fascinating new paper, The Separation of Voting and Control: The Role of Contract in Corporate Governance.  It’s about shareholder agreements, and in particular, the fact that they are surprisingly common not only in private companies, but also in public companies.  These agreements typically involve a founder and/or institutional investors like private equity funds, and contain various provisions related to corporate control, such as promises to support certain director nominees, and veto power over various types of corporate actions.  As Rauterberg explains, shareholder agreements grant the parties far more freedom to order their arrangements than do bylaws and charter provisions; corporate constitutive documents, for example, could not guarantee board seats for specific nominees.

Rauterberg points out that these raise interesting questions under Delaware law, especially with respect to whether these agreements improperly end-run around mandatory corporate governance provisions.  This is particularly so when the corporation itself is a party to the agreement, and the board is bound to take certain actions, like recommend a particular board nominee to shareholders or include a nominee on a particular committee.  As he puts it:

The tapestry of corporate law draws fundamental contrasts – between control rights and

…

I’m finding the district court’s decision in Marcu v. Cheetah Mobile, 2020 WL 4016645 (S.D.N.Y. July 16, 2020) fascinating, not because it’s wrong on the law – it isn’t, in my view, at least with respect to its falsity determination – but because it illustrates the artificiality of a lot of securities fraud litigation.

Cheetah Mobile is a Chinese company that develops apps that used to be downloadable from Google Play.  It went public on the NYSE in 2014, and quickly developed a reputation for poor quality products that used intrusive advertisements and interfered with the functioning of users’ phones.  In 2017, a short-seller accused it of fabricating revenue and clicks, and in 2018, Buzzfeed exposed that 7 of its 18 apps were engaged in a type of clickfraud scheme that improperly credited Cheetah Mobile with referrals to other apps.  Google removed the offending apps, and earlier this year, apparently fed up with Cheetah’s behavior, booted it from its platform entirely.

A putative class of Cheetah investors brought Section 10(b) claims shortly after the Buzzfeed expose, alleging that Cheetah misled investors about its business practices.  The district court dismissed the case in large part because the plaintiff…

A few of us have blogged about benefit corporations here from time to time; they’re a controversial business form, in part because there are disputes about whether they actually are materially different from the ordinary corporate form, and in part because of flaws in states’ adopting legislation.

The basic issue here is that, as we all know, the business judgment rule is robust enough that corporate directors are perfectly free, as a practical matter, to pursue a stakeholder-oriented mission without the need of any special form.  The reason they do not has little to do with their formal legal obligations, and everything to do with the market for corporate control: If directors do not put shareholders first, their companies may become ripe for a takeover and they may be voted out of office.

In theory, benefit corporations could solve a shareholder collective action problem. Let’s assume, as some theorize, that given the choice, many shareholders would actually prefer not to maximize their own welfare but instead to share those gains with other stakeholders.  The problem is, they may experience defection in their own ranks.  Over time, some shareholders may change their minds and prefer to keep all excess profits; or…

The Delaware Supreme Court has, shall we say, an uneven relationship with the concept of market efficiency.

For many years, it entirely ignored or even disdained the concept.  See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc, 2018 WL 922139, at *30 n.305 (Del. Ch. Feb. 15, 2018).  However, beginning with DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Court began to endorse the concept in the context of appraisal proceedings, though the significance it placed on efficiency was not entirely clear.  When Vice Chancellor Laster relied entirely on market efficiency to value shares for appraisal purposes, the Delaware Supreme Court rejected his analysis, emphasizing that market price is but one aspect of an appraisal valuation, and that “informational” market efficiency is not equivalent to “fundamental value” efficiency.

The Delaware Supreme Court’s new decision in Fir Tree Value Master Fund LP et al. v. Jarden Corporation seems to muddy the waters further.

Originally, VC Slights held that a target’s market price was the best evidence of standalone value, mainly because the other potential measures were lacking.  The deal price was flawed because the target CEO had arguably run…

It seems we’re all talking about VC Laster’s recent opinion in In re Dell Technologies Class V Stockholder Litigation.  Stefan posted about Laster’s taxonomy of coercion earlier this week; for me, I want to focus on another aspect of the case, the one that Stephen Bainbridge latched onto as indicative of his “director primacy” view.

The basic set up in Dell was that controlling shareholders – Michael Dell and Silver Lake – engineered a transaction whereby Dell would redeem Class V stock from its holders, and they wanted to cleanse the deal using Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) procedures to ensure it would receive business judgment review.  To that end, they conditioned the transaction on special committee approval and unaffiliated shareholder approval.  Dissatisfied stockholders sued, claiming that despite those efforts, the MFW conditions were not satisfied, and, for the purposes of a 12(b)(6) motion, Laster agreed. 

Laster actually found that, as alleged, the departures from MFW were many and varied, but there’s one aspect in particular I want to focus on, namely, the curious role of the “stockholder volunteers.”  After months of negotiation, the special committee reached a deal with…