April 12, 2018

Delaware: Shareholder Litigation Isn’t Going Away

We’ve previously blogged about how Trulia, Corwin & recent appraisal cases have contributed to an exodus of M&A litigation from Delaware. However, this Morris James blog says that shareholder litigation in the Diamond State isn’t going away anytime soon. This excerpt lays out the reasons for that conclusion:

Here are some of the reasons why stockholder litigation will continue in Delaware. First, Delaware continues to insist that full disclosure is necessary to obtain the benefits of the “Corwin protection.” On Feb. 20, the Delaware Supreme Court in Appel v. Berkman, (C.A. 316, 2017) held that Corwin did not apply when the proxy materials failed to disclose that the chairman of the board had declined to vote for the merger because he believed it was not a good deal. That decision arguably changed prior law that mere opinions of a director need not be disclosed. This shows that Corwin protection is not automatically invoked.

Second, Delaware continues to permit broad stockholder rights of inspection of corporate records. While that right is conditional on a showing of a proper purpose, that showing has been characterized as involving the “lowest possible burden of proof.” Thus, just as recently as Feb. 22, in KT4 Partners v. Palantin Technologies, (Del. Ch. C.A. 2017-0177-JRS), the Court of Chancery upheld inspection rights as a way to compensate for the corporation’s failure to otherwise properly communicate with stockholders. While admittedly there were other reasons to permit the inspection sought, KT4 does show how broad that right is in practice. Broad inspection rights may permit litigants to adequately plead enough facts to support a stockholder’s rights to litigate claims in Delaware.

Third, Delaware law on stockholder litigation still provides favorable treatment of many claims, including requiring the close scrutiny of transactions involving conflicted directors. As held on Feb. 6, 2018, in In re PLX Technology Stockholders Litigation, (Del. Ch. C.A. No. 9880-VCL) (Order), the Court of Chancery declined to grant summary judgment because the Delaware law was still unsettled on the standard of review to be used in such cases. There is room for plaintiffs to win their case.

John Jenkins