In a May 31, 2024 opinion, the Delaware Court of Chancery denied a motion to dismiss a complaint challenging the sale of a public company with a controlling private equity sponsor to an unrelated, arms-length buyer, finding that the sale was potentially tainted by conflicts of interest.[1] In particular, the court found that it was reasonably conceivable that the private equity sponsor’s receipt of an early termination payment under a tax receivable agreement put into place upon the target company’s initial public offering was a material non-ratable benefit, which may have led the sponsor to push for a sale (which would trigger the early termination payment), even if remaining a standalone company would have been better for the minority stockholders. The opinion also touches on important issues relating to financial advisors’ advice in connection with such a sale. While tax receivable agreements (“TRAs”) are common in sponsor-backed and “Up-C” IPOs, this case highlights a rarely considered issue involving these agreements, and the need for careful navigation of related potential conflicts of interest in a sale process where a private equity sponsor, and TRA beneficiary, continues to control the public company.
Continue Reading Delaware Chancery Court Finds Private Equity Sponsor’s Tax Receivable Agreement Potentially Led to Conflicted Sale ProcessMark E. McDonald
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Delaware Supreme Court Provides Important Guidance on Application of MFW Framework to Controlling Stockholder Transactions
By Mark E. McDonald, James Hu & Arjan Heir on
On April 4, 2024, the Delaware Supreme Court issued its decision on a stockholder suit challenging the fairness of IAC/InterActiveCorp’s separation from its controlled subsidiary, Match Group, Inc.[1] In this decision, the Delaware Supreme Court provided clarity and guidance on two important issues involving the application of the MFW framework.
Continue Reading Delaware Supreme Court Provides Important Guidance on Application of MFW Framework to Controlling Stockholder TransactionsDelaware Court of Chancery Invalidates Common Provisions in Stockholder Agreements
With a stroke of the pen, the Delaware Court of Chancery invalidated commonplace provisions in scores of stockholder agreements relating to public corporations and likely many more relating to private corporations. In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company (“Moelis”)[1], Vice Chancellor J. Travis Laster, struck down an entire package of stockholder veto rights and held that provisions in a stockholder agreement purporting to restrict the size of the board of directors, requiring the board to recommend in favor of a stockholder nominee, requiring the board to fill any vacancy on the board with a stockholder nominee or to include a stockholder nominated director on committees of the board, are all facially invalid as a matter of Delaware law. Vice Chancellor Laster noted that many of these provisions would have been valid if set out in the corporation’s certificate of incorporation, rather than in the stockholder agreement.
Continue Reading Delaware Court of Chancery Invalidates Common Provisions in Stockholder AgreementsBringing an End to “Derivative” Section 14(a) Claims – Without Waiting for the Supreme Court to Weigh In
By Mark E. McDonald & Roger A. Cooper on
Much has been written lately about a circuit split on the question whether a company’s forum selection bylaw mandating shareholder derivative lawsuits be brought in Delaware state court trumps a federal lawsuit asserting a derivative claim under Section 14(a) of the Securities Exchange Act of 1934 (which can only be asserted – if at all – in federal court). The Seventh Circuit answered this question “no”[1] while the Ninth Circuit sitting en banc answered “yes,”[2] in both cases over vigorous dissents. Many have speculated that the U.S. Supreme Court may weigh in to resolve this clear circuit split.
Continue Reading Bringing an End to “Derivative” Section 14(a) Claims – Without Waiting for the Supreme Court to Weigh InDelaware Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary Duties
By John A. Kupiec & Mark E. McDonald on
In a recent decision, the Delaware Court of Chancery grappled with the question whether—and to what extent—claims for breach of fiduciary duty can be waived ex ante in a corporate shareholder agreement. Specifically, in New Enterprise Associates 14 LP v. Rich, the court denied a motion to dismiss claims for breach of fiduciary duties brought against directors and controlling stockholders of Fugue, Inc. (the “Company”) by sophisticated private fund investors who had agreed to an express waiver of the right to bring such claims.[1] Importantly, the court found that fiduciary duties in a corporation can be tailored by parties to a shareholders agreement who are sophisticated, and were validly waived by the voting agreement in this case (which specifically addressed the type of transaction at issue). The court, however, held that public policy prohibits contracts from insulating directors or controlling stockholders from tort or fiduciary liability in a case of intentional wrongdoing, which the court found was plausibly alleged in this case. The court’s opinion has implications for sophisticated investors in venture capital and other private transactions involving Delaware corporations. The opinion cautions against overreliance on express contractual waivers, on the one hand, while also serves as a reminder that at least in some circumstances sophisticated parties can contract around default legal principles (including fiduciary duties), even with respect to corporations.
Continue Reading Delaware Chancery Court Highlights Tension Between Freedom of Contract and Corporate Fiduciary DutiesCorwin Cleansing Denied In Action For Post-Closing Injunctive Relief Under Unocal
By Mark E. McDonald & Nicholas DiStefano on
On May 1, 2023, the Delaware Court of Chancery addressed an unsettled question under Delaware law—whether a fully informed, uncoerced vote of disinterested stockholders (so-called “Corwin cleansing”[1]) can be applied to defeat claims to enjoin defensive measures under Unocal Corp. v. Mesa Petroleum Co.
Continue Reading Corwin Cleansing Denied In Action For Post-Closing Injunctive Relief Under UnocalDelaware Chancery Court’s Mindbody Decision – Lessons for Private Equity Buyers in Take-Private Transactions
By John A. Kupiec, Mark E. McDonald & Yuan He on
In a recent opinion addressing breaches of fiduciary duties and disclosure violations in connection with a take-private of Mindbody, Inc. by Vista Equity Partners, the Delaware Court of Chancery reinforced the significance (to both buyers and sellers) of avoiding conflicts in a sell-side process and ensuring all material facts are disclosed to the target’s board …