Q4 2021 Quarterly Corporate / M&A decisions updates

Hogan Lovells

Below is our Corporate / M&A decisions update covering decisions in the fourth quarter of 2021. This update is designed to highlight selected important M&A, corporate, and commercial court decisions on a quarterly basis.

To close out 2021, the Delaware courts issued a number of notable opinions on important shareholder and corporate governance issues. Notably, after sustaining several Caremark claims, the Delaware Court of Chancery dismissed a derivative lawsuit against Marriott’s board of directors that alleged a Caremark claim predicated on a data security breach. The Delaware courts also analyzed attorneys’ fees as a corporate benefit, determined what standard to apply to board action where shareholders failed to comply with an advance notice bylaw, conducted a demand futility analysis under the Zuckerberg test, and examined indemnification rights in an M&A deal.

Brief summaries of these key decisions appear below with links to more robust discussions.

Rosenbaum v. CytoDyn: Noncompliance with advance notice bylaw can block shareholders’ board nominees

In Rosenbaum v. CytoDyn Inc., C.A. No. 2021-0728-JRS (Del. Ch. Oct. 13, 2021), the Delaware Court of Chancery declined to apply the Blasius enhanced scrutiny standard to an incumbent board’s rejection of shareholders’ proposed board nominees based on noncompliance with an advance notice bylaw. The court also refused to apply the business judgment rule, instead applying equitable principles to evaluate whether the advance notice bylaw, as applied, afforded the shareholders a fair opportunity to nominate director candidates. Applying these principles, the court upheld the board’s decision, finding no inequitable conduct where the board had reasonably rejected shareholders’ nomination notice.

Please click HERE for a more detailed discussion of this case.

Blue Cube Spinco v. Dow Chemical: Indemnification allegation sufficient for breach of contract claim

In Blue Cube Spinco LLC v. The Dow Chemical Company, C.A. No. N21C-01-214 PRW CCLD (Del. Sup. Ct. Sept. 29 2021), the Delaware Superior Court found that an M&A buyer had adequately alleged breach of contract claims for a seller’s failure to indemnify the buyer for losses relating to a building code violation allegedly caused by pre-closing modifications to a property. The court held that the buyer had alleged potentially covered losses even though the property was being conveyed on an “as is” and “where is” basis. The court found that the contractual disclaimer was ambiguous and could not be interpreted without discovery because the disclaimer also contained an exception stating it did not apply to the extent it was inconsistent with other provisions. The court also rejected the seller’s argument that some of the buyer’s damages claims were barred by a consequential damages exclusion, holding that the claim could proceed so long as there were allegations of at least some covered damages.

Please click HERE for a more detailed discussion of this case.

Firemen’s Ret. Sys. of St. Louis v. Sorenson: No Caremark liability for data breach

In Firemen’s Ret. Sys. of St. Louis v. Sorenson, C.A. No. 2019-0965-LWW (Del. Ch. Oct. 5, 2021), the Delaware Court of Chancery dismissed a derivative lawsuit against Marriott executives and directors for breaches of the duty of loyalty following a cyberattack that exposed the personal information of up to 500 million guests. Finding that the board’s “flawed effort” to address data security risks in its reservation database was not a deliberate failure to act in the face of red flags or knowledge of positive law violations, the Court of Chancery found that the allegations did not meet the high bar required to state a Caremark claim and that demand was not excused. The court emphasized that, while corporate governance standards must evolve to address the growing risks posed by cybersecurity threats, those threats do not “lower the high threshold that a plaintiff must meet to plead a Caremark claim.”

Please click HERE for a more detailed discussion of this case.

Hollywood Firefighters’ Pension Fund v. Malone: Award of attorneys’ fees as corporate benefit

In Hollywood Firefighters’ Pension Fund v. Malone Inc., C.A. No. 2020-0880-SG (Del. Ch. Nov. 18, 2021), the Delaware Court of Chancery awarded a US$9.35 million mootness fee on the ground that a preliminary injunction stipulation (the PI Stipulation) conferred three distinct corporate benefits. Specifically, the court found that the PI Stipulation cured the disproportionate voting power held by two managers, increased the information disclosed to investors about the proposed merger, and prevented the managers from retaining excessive voting control over the post-merger company. In conducting its analysis, the court chose to base its analysis on past precedent, rather than expert testimony provided by the parties. This case highlights the factors considered in the determination of an award for mootness fees and illustrates the detailed analysis Delaware courts apply when assigning a concrete valuation to corporate benefits.

Please click HERE for a more detailed discussion of this case.

AB Stable v. MAPS Hotels: Pandemic changes to hotel operations breach ordinary course covenant

In AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, et al., No. 71, 2021 (Del. Dec. 8, 2021), the Delaware Supreme Court, sitting en banc, affirmed a Court of Chancery judgment finding that a hotel owner violated its ordinary course covenant in a US$5.8 billion Sale and Purchase Agreement by making “drastic changes to its hotel operations” in response to the COVID-19 pandemic. The court held that the seller’s obligation to conduct its hotel business “only in the ordinary course of business consistent with past practice in all material respects” meant that the seller had to run the business consistent with its “operational history” irrespective of what other reasonable hotel operators were doing. The court also held that the agreement’s MAE clause did not modify the ordinary course covenant, even if it allocated pandemic risks to the buyer as the seller claimed, because MAE clauses address valuation risk, not operational changes.

Please click HERE for a more detailed discussion of this case.

In re Kraft Heinz Company Derivative Litigation: Plaintiffs fail to plead demand futility

In re Kraft Heinz Company Derivative Litigation addresses demand futility in a case involving an insider stock sale. 3G Capital, Inc., a 24.2 percent shareholder in Kraft Heinz, sold 7 percent of its stake in August 2018 after the company removed certain stock restrictions. Kraft Heinz reported poor results in the third and fourth quarters of 2018, causing the stock to drop. Shareholders filed derivative suits, alleging that 3G knew of the poor financial results when it traded and that the board of Kraft Heinz breached its fiduciary duties in allowing the trade. The Delaware Court of Chancery dismissed the complaint on demand futility grounds, finding a majority of the board to be disinterested and independent after a director-by-director analysis. This case provides a practical application of the new Zuckerberg demand futility test and insight into how Delaware courts may view potentially biasing factors, such as personal relationships and voting agreements between large shareholders.

Please click HERE for a more detailed discussion of this case.

Authored by Ryan M. Philp, David R. Michaeli, Allison M. Wuertz, Jon M. Talotta, Michael C. Hefter, and William M. Regan.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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