Four Delaware rulings from 2021 that could shape M&A litigation

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A person enters the Delaware Supreme Court in Dover, Delaware, U.S., June 10, 2021. REUTERS/Andrew Kelly

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  • Major 2021 rulings affect derivative suit standards, shareholder rights and activism

(Reuters) - This year was full of activity in Delaware state courts, which made significant rulings that will affect shareholders' actions in mergers and acquisitions-related lawsuits.

Here are four Delaware rulings from 2021 that attorneys say have influenced M&A litigation.

BROOKFIELD DECISION

In September, Delaware’s top court, overturning its own 2006 precedent, ruled that claims a deal was an overpayment or diluted shareholder value can only be brought on behalf of the company by shareholders in a derivative suit, not as a direct claim.

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Shareholders in derivative lawsuits, unlike in direct claims, are limited to suing over conduct that harmed the company as a whole and can only sue board members in their capacity as directors.

These lawsuits are more procedurally challenging than direct claims, as they require shareholders to ask the board of directors to bring a lawsuit before filing one of their own or prove such a demand on the board would be fruitless.

The Brookfield ruling "removed an avenue that plaintiffs have used to try to avoid having to make a demand on the board or meet the rigorous requirements of pleading demand futility," said Renee Zaytsev, the co-chair of Thompson Hine’s securities and shareholder litigation practice.

The ruling has already resulted in plaintiffs and defendants in M&A-related litigation voluntarily dropping direct claims.

The case is Brookfield Asset Management Inc v. Rosson, Supreme Court of Delaware, No. 406-2020.

For Brookfield: John Neuwirth, Stefania Venezia and Amanda Pooler of Weil, Gotshal & Manges; and Kevin Abrams of Abrams & Bayliss.

For appellees: Steven Purcell and Douglas Julie of Purcell Julie & Lefkowitz; Jeremy Friedman and David Tejtel of Friedman Oster & Tejtel; Ned Weinberger of Labaton Sucharow; and Peter Andrews and Craig Springer of Andrews & Springer.

ZUCKERBERG RULING

The same week as the Brookfield ruling, the Delaware Supreme Court adopted a new three-part test for shareholder derivative lawsuits to determine whether a company's board members are impartial enough to sue on its behalf.

The so-called "Zuckerberg ruling" came in a case filed by Facebook Inc. shareholders opposing a 2016 company stock reclassification plan.

Directors lose impartiality if they meet any of the test's criteria: receiving a personal benefit from the misconduct alleged in the suit, being dependent on someone who benefited, or facing substantial risk of liability from shareholders’ claims.

In derivative suits challenging the fairness of acquisitions, Delaware judges generally assess directors' independence from the acquirer to determine if boards took the needed steps to avoid conflicts of interest in the deals.

The Delaware Chancery Court has already employed the Zuckerberg ruling to dismiss M&A-related cases, including a suit against firms Apollo Global Management Inc and Riverstone Holdings LLC.

The case is United Food and Commercial Workers Union and Participating Food Industry Employers Tristate Pension Fund v. Mark Zuckerberg et al, Delaware Supreme Court, No. 404-2020.

For the shareholders: Robert Schubert and Willem Jonckheer of Schubert Jonckheer & Kolbe; and James Miller of Miller Shah

For the board: William Savitt, Ryan McLeod and Anitha Reddy of Wachtell, Lipton, Rosen & Katz

For Zuckerberg: George Garvey and Laura Lin of Munger, Tolles & Olson

AUTHENTIX INVESTORS RULING

Also in September, Delaware's top court affirmed a decision rejecting a bid by former Authentix Inc investors to revalue their merger consideration as part of private equity firm Blue Water Energy's 2017 acquisition of the authentication technology company.

The Delaware Supreme Court said it was denying the appeal to revive the investors' 2017 appraisal petition because they waived their appraisal rights in a shareholder contract.

A majority of justices agreed with Vice Chancellor Sam Glasscock III’s earlier finding that Delaware law broadly allows rights waived if the contract provision is “clear and unambiguous.”

In dissent, Justice Karen Valihura wrote that Glasscock’s ruling was the first time that a Delaware court said that a stockholders agreement provision waiving appraisal rights for common stockholders was enforceable under Delaware law. She disagreed the waiver was clear enough to be enforced.

THE WILLIAMS COS POISON PILL DECISION

The Delaware Supreme Court agreed with a lower court in November there are certain limits on the measures a company’s board can use to preemptively prevent hostile takeovers and stymie shareholder activism.

Chancellor Kathaleen McCormick had blocked oil pipeline company The Williams Cos Inc.'s board from using a poison pill with a 5% trigger that it adopted to stave off shareholder activism amid COVID-19 and an oil bidding war.

Poison pills are used to prevent shareholders from buying up the majority or all of a company's stock without the board or other shareholders' approval.

A Bernstein Litowitz Berger & Grossmann attorney representing the Williams shareholders who sued said the case marked the first time the Delaware courts had reviewed a pill with a 5% trigger that wasn't used to protect a company's net operating losses from tax code limitations.

The case is The Williams Companies, Inc v. Wolosky, Delaware Supreme Court, No. 139-2021.

For The Williams Cos: Andrew Ditchfield, Brian Burnovski and Mari Byrne of Davis Polk & Wardwell

For the shareholders: Mark Lebovitch and Gregory Varallo of Bernstein Litowitz Berger & Grossmann; Jeremy Friedman and David Tejtel of Friedman Oster & Tejtel

Read more:

Del. Supreme Court ditches dicey precedent on shareholders’ direct claims

Dela. Supreme Court tightens test for demand futility in derivative lawsuits

Del. Supreme Court affirms ruling on Williams Cos poison pill

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Sierra Jackson reports on legal matters in major mergers and acquisitions, including deal work, litigation and regulatory changes.