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The Delaware courts have issued several noteworthy decisions in recent weeks that should have an impact on practice and stockholder litigation. Below is a brief summary of these decisions, which involved the following issues:

  • The breach of a capitalization representation in a merger agreement and the resulting ability of the buyer to terminate the deal
  • The Tesla and Oracle litigations alleging, respectively, that Elon Musk and Larry Ellison were controllers and improperly caused those companies to acquire SolarCity and NetSuite
  • The “MFW” framework to cleanse controlling stockholder conflicts—and whether the Delaware Supreme Court will revisit that framework

HControl Holdings LLC v. Antin Infrastructure Partners S.A.S (May 29, 2023) (Chancellor McCormick)

In this decision, the Delaware Court of Chancery permitted a buyer to terminate a merger agreement in a roughly $250 million private company deal over a breach of a capitalization representation (the “cap rep”). The cap rep provided that all equity securities and phantom equity of the selling company and its subsidiaries were listed on a schedule, and the conditions in the merger agreement flatly provided that the cap rep would be “true and correct in all respects” with no “de minimis” qualifier or the like. Between signing and closing of the merger, a former consultant to the selling company whom the Court of Chancery described as a “colorful character and a skilled shakedown artist” materialized and claimed, with some credibility, that the selling company had, years ago, contractually agreed in a software development agreement to give him “5% ownership” in a significant subsidiary of the company. Following a month of back and forth among him, the selling company, and the buyer, and the former consultant’s refusal to settle with the selling company for $300,000, the buyer—which appeared to be unsettled by several of the facts before it—ultimately terminated the merger agreement based on, among other things, a breach of the cap rep.  

The Court of Chancery agreed that the contractual promise between the selling company and former consultant was “phantom equity”—an undefined term in the merger agreement—and permitted the buyer to terminate based on a breach of the cap rep. Although the amount at issue was small, the court emphasized the flatness of the cap rep and the lack of a de minimis qualifier. That issue was the pivotal dispute in the case, but the decision also addressed several other interesting issues. For one, another former employee also materialized and claimed he held options—which would be “equity interests,” a defined term, under the merger agreement. The court engaged in a lengthy analysis of his claim, but ultimately concluded from the evidence that the buyer did not prove that the selling company had actually granted options to the former employee. Second, the selling company also executed on a plan to dissolve the subsidiary at issue in the primary dispute in the case—which prompted the buyer to claim that the selling company breached interim operating covenants, though the court, parsing the covenants, rejected that claim. Finally, the court rejected a claim by the selling company that the buyer had failed to use best efforts in refusing to close the deal, concluding that the buyer acted in good faith throughout the ordeal and was not obligated to engage in self-sacrifice with respect to the representations it negotiated. Although the facts in this case were colorful, the case reinforces the contractarian approach the Delaware courts take to merger agreements and the manner in which cap reps, depending on their wording, can scuttle a deal.  

In re Match Group, Inc. Derivative Litigation (May 30, 2023) (Delaware Supreme Court)

In this order, the Delaware Supreme Court decided that it would entertain briefing to determine whether to overrule Court of Chancery precedent with regard to an important issue involving the so-called “MFW” framework. In particular, the Court of Chancery, in multiple decisions, has determined that in various transactions or decisions in which a controlling stockholder has a conflict of interest—including M&A, executive compensation, a recapitalization, and a financing transaction—the difficult entire fairness standard of judicial review applies, and the parties can only restore the protection of the business judgment rule by having the transaction or decision approved by both an independent board committee and minority stockholders, with each approval obtained in particular ways.  

In this order, the Delaware Supreme Court determined that, even though the issue was not raised below, it would hear briefing on whether that rule should apply only to controlling stockholder squeeze-outs of the minority and if proper use of either an independent board committee process or a disinterested stockholder approval could restore the protection of the business judgment rule in all other types of controlling stockholder conflict transactions. The Delaware Supreme Court specified that all briefing on the issue will be concluded by September, so a decision should follow several months thereafter. Interestingly, in the Oracle decision described below, Vice Chancellor Sam Glasscock also noted in a couple footnotes that the Delaware Supreme Court had not yet weighed in on that issue. 

In re Tesla Motors, Inc. Stockholder Litigation (June 6, 2023) (Delaware Supreme Court) and In re Oracle Corporation Derivative Litigation (May 12, 2023) (Vice Chancellor Sam Glasscock)

In two headline decisions, the Delaware Supreme Court and the Court of Chancery separately resolved litigations asserting that controlling stockholders, without using the “MFW” framework, forced through an acquisition of a company in which the controlling stockholders had an interest. 

First, in the litigation brought by Tesla stockholders over that company’s acquisition of SolarCity, the Delaware Supreme Court largely affirmed the decision of the Court of Chancery (rendered over a year ago) that, assuming Elon Musk was a controller and had a conflict of interest, the acquisition of SolarCity was entirely fair based on the price paid and various elements of the Tesla board’s process. Accordingly, the transaction survived the entire fairness standard of review. Second, in the litigation brought by Oracle stockholders over that company’s acquisition of NetSuite, the Court of Chancery, in a post-trial decision, rejected the stockholders’ claims. The court concluded that although Larry Ellison had an interest in both companies and was potentially a controlling stockholder of Oracle, his potential control was situational: he no longer exercised general control over Oracle, and although he retained enough influence to impact a particular board decision if he so chose, he had adequately removed himself from the board’s decision-making, and an effective special committee process was put in place by the board. Accordingly, he did not possess control for purposes of the NetSuite acquisition, and the Oracle board ran an independent process to vet the acquisition.