May 18, 2023

Corwin Cleansing: A No Go for Injunctive Relief Under Unocal

In a recent opinion in In re Edgio, Inc. Stockholders Litigation, (Del. Ch.; 5/23), Vice Chancellor Zurn held that Corwin cleansing can’t apply to claims for post-closing injunctive relief under Unocal. Here are the facts of the case as summarized by this Cleary blog:

Limelight was approached by Apollo to discuss the potential combination of Limelight with Edgecast, Inc. (“Edgecast”). Edgecast’s parent company, College Parent, L.P. (“College Parent”), was owned approximately 90% by Apollo funds and 10% by Verizon Communications, Inc. Following a period of negotiation and due diligence, in March 2022, the parties executed a purchase agreement pursuant to which Limelight would acquire Edgecast in exchange for newly issued Limelight common stock, which would result in College Parent owning 35% of Limelight’s outstanding common stock after the closing of the transaction (the “Acquisition”). In connection with the Acquisition, the parties agreed on a form of stockholders’ agreement (the “Stockholders’ Agreement”) that would govern the terms of College Parent’s investment following the closing. Nasdaq listing rules required Limelight to obtain stockholder approval for the issuance of the stock consideration in the Acquisition. In advance of the vote, the Company issued a proxy statement that summarized the Acquisition and Stockholders’ Agreement (which was also publicly filed), including the provisions that would become the subject of the litigation. On June 9, 2022, the Company’s stockholders voted overwhelmingly in favor of the stock issuance. At closing of the Acquisition one week later, the parties entered into the Stockholders’ Agreement.

After the closing, two Company stockholders filed suit in Chancery Court against the Company and its Board of Directors (the “Board”), claiming the Stockholders’ Agreement included defensive measures that created a significant and enduring stockholder block designed to entrench the Board and shield it from stockholder activism.

Vice Chancellor Zurn denied the defendants’ motion to dismiss:

In reaching its decision, the Court found that certain voting commitments and transfer restrictions in a stockholders’ agreement between Limelight Networks, Inc. (n/k/a Edgio, Inc.) (“Limelight” or the “Company”) and its 35% stockholder were defensive measures that, at least for purposes of ruling on a motion to dismiss, it was reasonable to infer were implemented in order entrench Limelight’s directors against a perceived threat of shareholder activism. As a result, the Court reviewed the challenged provisions with enhanced scrutiny under Unocal.

. . .V.C. Zurn found that “a careful reading of Corwin’s text and other authorities compels the conclusion that Corwin was not intended to cleanse a claim to enjoin a defensive measure under Unocal enhanced scrutiny.” The Court pointed to language in Corwin itself, limiting its holding to post-closing damages claims, as reiterated by the Delaware Supreme Court in Morrison v. Berry. V.C. Zurn also noted that Corwin left untouched earlier Delaware Supreme Court precedent, In re Santa Fe, that appears to suggest a stockholder vote cannot cleanse claims for injunctive relief brought under Unocal. Finally, the Court asserted that applying Corwin to claims for injunctive relief would not serve Corwin’s underlying public policy rationale of allowing stockholders to make free and informed choices based on the economic merits of a transaction.

Meredith Ervine