Special committees in Delaware have an important role for cleansing various kinds of conflicted transactions, everything from negotiating controlling shareholder deals to vetting derivative lawsuits.  There is no rule regarding committee size; the Board can populate a committee with as many or as few people as it wants.

That said, Delaware caselaw suggests that courts will be somewhat suspicious of special committees consisting of only one member.  That member must be “’like Caesar’s wife… above reproach.” Gesoff v. IIC Industries, 902 A.2d 1130 (Del. Ch. 2006).  In Gesoff, VC Lamb stated that a single member special committee would get “a higher level of scrutiny,” and noted that in that case, the special committee member deferred too much to a controlling shareholder – something that might not have happened if a “moderating influence,” via a second member, had been available.

Since then, however, a couple of decisions have blessed the actions of single-member special committees.

And then came the Delaware Supreme Court’s decision in In re Match Group Derivative Litigation, which held that – at least when a corporation attempts to cleanse a controlling shareholder transaction – all special committee members, and not just a majority of them, must be independent.

Which raises the question: in controlling shareholder situations, should boards create committees of one?

Independence is assessed after the fact, and especially in recent years – as the Delaware courts have become more nuanced in their analysis – it’s not always obvious who will count as independent after the fact.  The more members you add to a committee, the more chance that, later, a court will determine one of them was not independent.

And though there’s a lot of language in Delaware opinions about gimlet eyes being cast on single-member committees, it’s not exactly clear what the discount rate is.

Anyway, this is obviously an issue in Tornetta v. Musk; there, the “ratification” procedure involved a committee of one, and it’s not clear how Chancellor McCormick will approach the matter.  There are a lot of different directions she could go – she could say that ratification simply isn’t possible, she could say that Musk was only a controlling shareholder for the purposes of the original package and not for the ratification, or anywhere in between.  But Tornetta is an unusual situation in a lot of ways; I’m wondering what the calculus will be going forward for more traditional transactions.

In an opinion released earlier today, Judge Kernodle of the Eastern District of Texas has stayed the rule from going into effect.  

Although I have not had time to sit and digest it at length, Chevron‘s demise plays a significant role.  Consider this passage:

In reviewing agency action under the APA, “[c]ourts must exercise their independent judgment in deciding whether an agency has acted within its statutory authority” and should “set aside any [] action inconsistent with the law as they interpret it.” Loper Bright, 144 S. Ct. at 2261, 2273; see also Chamber, 885 F.3d at 369 (“A regulator’s authority is constrained by the authority that Congress delegated it by statute.”). A court should no longer defer to an agency’s interpretation of a statute but should decide for itself “whether the law means what the agency says.” Loper Bright, 144 S. Ct. at 2261 (overruling Chevron U.S.A. Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837 (1984)).

The Court thus owes no deference to DOL’s interpretation of ERISA, but rather “begins with the text” of the statute—as all courts do. E.g., Ross v. Blake, 578 U.S. 632, 638 (2016); United States v. Lauderdale Cnty., 914 F.3d 960, 961 (5th Cir. 2019); see also Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992) (“[A] legislature says in a statute what it means and means in a statute what it says there.”). In doing so, the Court applies the “fundamental canon of statutory construction” that the words “should be interpreted as taking their ordinary meaning at the time Congress enacted the statute.” E.g., New Prime Inc. v. Oliveira, 586 U.S. 105, 113 (2019) (cleaned up); see also ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 69–77 (2012) (“The ordinarymeaning rule is the most fundamental semantic rule of interpretation.”); Loper Bright, 144 S. Ct. at 2266 (“[E]very statute’s meaning is fixed at the time of enactment.” (quoting Wis. Cent. Ltd. v. United States, 585 U.S. 274, 284 (2018))). The Court, moreover, must examine “the language and design of the statute as a whole.” E.g., K Mart Corp. v. Cartier, Inc., 486 U.S. 281, 291 (1988); see also Bustamante-Barrera v. Gonzales, 447 F.3d 388, 397 (5th Cir. 2006) (Courts “must read the statute as a whole, so as to give effect to each of its provisions without rendering any language superfluous.”).

This text could be cut and pasted into almost any decision reviewing an agency’s rule.

The opinion also rejects the idea that people giving their life’s savings to a financial adviser actually do indeed trust the adviser.  It follows the 5th Circuit to say that these relationships, unless ongoing, are simple ordinary arms-lengths market transactions.  It also finds that any adviser getting a commission cannot be a fiduciary. 

In November 2021, Hertz authorized a buyback of its stock.  The effect of the buyback to was transform CK Amarillo from a 39% stockholder – who also had board seats – into a 56% stockholder.

Public stockholders of Hertz sued, alleging that the Hertz directors violated their fiduciary duties by transferring control of Hertz to CK Amarillo, without requiring that CK Amarillo pay a control premium.

One critical question was: Is this claim direct or derivative?

Normally, claims arising out of stock buybacks are derivative claims.  And normally, when a stockholder continues to hold shares in the entity, and nothing has changed about those share characteristics, and the stockholder was not asked to vote on anything, claims arising out of corporate action are derivative.  And just recently, the Delaware Supreme Court decided Brookfield Asset Management, Inc. v. Rosson, 261 A.3d 1251 (Del. 2021), where it held that if a company sells new shares to a controlling stockholder on the cheap, the claim is derivative, not direct – overruling Gentile v. Rossette, 906 A.2d 91 99 (Del. 2006), which held the claim is both.

But, as I argued in my paper, The Three Faces of Control, Brookfield also implied that claims would in fact be direct if the corporate action caused someone who wasn’t a controller to become one, or if the corporate action gave new control rights to someone who hadn’t had them before.  I wrote:

This appears to have been a rather backhanded way of holding that, if an equity issuance did result in a shift from an uncontrolled status to a controlled one, shareholders would be permitted to bring claims for breach of fiduciary duty directly, rather than derivatively….

Additionally, the Brookfield court also seemed to have endorsed the notion that equity issuances might give rise to direct claims even if they did not result in the creation of a new controlling shareholder, so long as they ended up redistributing specific control rights away from the public shareholders

On June 20, in a bench ruling in Cascia v. Farmer, 2023-0520, Chancellor McCormick preliminarily agreed, holding that the plaintiffs could sue both directly and derivatively.  She stated that she might revisit matters later in the case, but for the purposes of a motion to dismiss:

Brookfield appeared to leave open the possibility that a transfer of control might give rise to dual-natured claims. The Court expressly stated in Brookfield that Gentile was overruled only “[t]o the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest.”

The high court also noted, again, that there was no “practical need for the Gentile carve-out” in part because other legal theories “provide a basis for a direct claim for stockholders to address fiduciary duty violations in a change of control context.” Here, plaintiff’s case is about the harm resulting from a change of control….

Look, I recognize that this is a clarification of Brookfield that I don’t know that our Court has given before. And at base, I’m unwilling to reach a definitive ruling on this factual and legal issue at the pleading stage.  But you-all will have litigation ahead and many opportunities to convince me otherwise. At this stage, given the pleading-friendly standard we apply to plaintiffs, I’m denying the motion to dismiss the direct claims ….

So, obviously, I think this is the correct decision, but in the wake of SB 313, it’s more than that.

Suppose a board hands new control rights to someone via the use of a stockholder agreement. Under my interpretation of Brookfield, which Chancellor McCormick has now tentatively endorsed at least in part, challenges to that action may, at least on some occasions, be brought directly rather than derivatively. And it will be interesting to watch courts untangle when the rights are significant enough to be one or the other.