The Delaware judiciary in the fourth quarter of 2019 digested a pair of unique shareholder demands for company records, further shaping access to boards' books and records and the stockpiles of documents collected by special litigation committees.
The quarter also saw former Chief Justice Leo E. Strine Jr. officially retire. Delaware's senate rearranged chairs on the highest courts to accommodate his departure, approving Justice Collins J. Seitz Jr. as Justice Strine's successor and confirming Vice Chancellor Tamika Montgomery-Reeves for Justice Seitz's briefly vacant seat on the five-member body.
Here, Law360 outlines some of the biggest mergers and acquisitions-related developments in Delaware over that three-month span that lawyers need to know.
Doc Denial Shows Limits of Books and Records Requests
The Delaware Chancery Court in November shot down a "novel" bid by an activist investor affiliate to obtain records to help with a proxy fight over a purportedly flawed 11-figure deal, suggesting that despite the increasing flow of Section 220 requests there are limits to what the court will allow.
Vice Chancellor Joseph R. Slights III on Nov. 14 issued a 22-page opinion denying a bid by High River LP, an affiliate of renowned activist investor Carl Icahn, for certain records relating to Occidental Petroleum Corp.'s $55 billion purchase of Anadarko Petroleum.
The vice chancellor rejected the plaintiffs' argument that the court should "recognize a new, or at least expanded, rule" under Section 220 of Delaware General Corporation Law.
Under Section 220, an investor can have the Chancery Court compel a company to turn over records if it can show a proper purpose, such as investigating corporate wrongdoing, and that the additional disclosures are necessary.
The case comes as more and more Section 220 claims are making their way through the Chancery Court, providing more opportunity for case law to shape the section of Delaware corporate law.
"Section 220 is being used more by stockholders, and they are pushing the case law forward. Because of this, the courts are having more frequent opportunities to develop the case law," said Edward Micheletti, a Skadden Arps Slate Meagher & Flom LLP litigation partner.
In this case, Icahn's affiliated entities sought to "inspect books and records relating to targeted, board-level business decisions that are questionable, but not actionable" for the purpose of communicating with other stockholders "in furtherance of a potential, bona fide proxy contest," according to the opinion.
Granting such a request would be a "novel application of Section 220," Vice Chancellor Slights said, but it was not one he was comfortable granting in this case.
"The law regarding whether a stockholder's desire to communicate with other stockholders is a proper purpose to justify inspection is, at best, murky," Vice Chancellor Slights said.
Citing case law, the vice chancellor also noted that Section 220 "is an 'important part of the corporate governance landscape in Delaware[,]' but 'it would invite mischief to open corporate management to indiscriminate fishing expeditions.'"
The decision shows that while the Chancery Court has been generally receptive to Section 220 cases, there are limits to when they will force companies to hand over additional documents to investors.
"Against that background — an increasing amount of 220 activity and what seems like a greater receptiveness by the Chancery Court to order more companies to hand over documents to investors — this case draws a line," said Roger Cooper, a Cleary Gottlieb Steen & Hamilton LLP litigation partner.
Vice Chancellor Slights also noted in the opinion that although there have been occasions when documents obtained in a Section 220 request were used in a proxy contest, the court did not find "any Delaware decision where Chancery has compelled a company to allow inspection of books and records when the stockholder's only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest."
It clarifies that Section 220 can't simply be used to help bolster a potential proxy contest.
"The decision is helpful confirmation that books and records demands cannot be used by activists to get more information than is publicly disclosed by the company to use in an activist campaign," said Matthew Solum, a Kirkland & Ellis LLP senior litigation partner.
Icahn's chances were likely harmed by the plethora of disclosures already surrounding Occidental's planned takeover of Anadarko and the related financing transactions to support the acquisition, making it hard to argue that additional disclosures were necessary.
"In my mind that was the driving factor here ultimately in terms of the court just denying outright the books and records demand, because of all of that disclosure and essentially a failure by the plaintiff in the case to identify why additional materials pursuant to 220 were necessary and essential in order for the stockholder to accomplish his purpose," Micheletti said.
Although the vice chancellor declined the request, he said the court remains receptive to similar cases in the future. He ruled that there could be an occasion when the court would grant a request seeking documents to aid a proxy fight but "after carefully considering the evidence and the arguments of counsel, however, I am satisfied this is not that 'right case.'"
"Vice Chancellor Slights noted that he was denying the 220 demand in that action because it was not the 'right case,' but that statement leaves the door open for cases where they might have a stronger showing related to proxy fights," said Elizabeth Sloan, a Ballard Spahr LLP litigation partner.
With that door left open, practitioners will be curious to see — either in this case or another — if the Delaware Supreme Court will weigh in on this matter.
"It's ripe for Supreme Court clarification," Micheletti said.
The case is High River LP et al. v. Occidental Petroleum Corp., case number 2019-0403, in the Court of Chancery of the State of Delaware.
Court Gives Shareholders Rare Doc Rights in Deal Dispute
The Delaware Chancery Court, in a largely unprecedented ruling in December, found that a stockholder group pursuing a derivative suit over a big-ticket transaction should get substantial access to documents gathered by the company's own special litigation committee.
Vice Chancellor Sam Glasscock's Dec. 4 decision sets the stage for a handoff of much of the more than 1 million records Oracle Corp.'s SLC obtained or received access to after it was formed in early 2018 to investigate claims originally raised in two consolidated Oracle stockholder suits stemming from the company's $9.3 billion purchase of NetSuite Inc.
The decision is a unique one. Although cases in 1988 and 2009 had some similarities, the vice chancellor said, "neither case mentions a discovery quandary similar to what is presented by the parties here," and neither involved an SLC finding that a stockholder plaintiff should take control of the case.
"This case is unprecedented in many ways and will likely continue to be so in the future given that the court has to wrestle with and will likely continue to wrestle with issues regarding the special litigation committee's process and privilege issues," Sloan said.
The investor suit at hand was sidelined for more than a year while the Oracle-formed independent SLC examined the claims, which sought damages on behalf of the company rather than directly for shareholders. The records the SLC compiled, the vice chancellor concluded, were valuable litigation assets in the suit, which was launched for the company's benefit.
"In my view, it would be, at least in part, against Oracle's best interests to allow the lead plaintiff to proceed with the litigation asset stripped of all value created by the SLC," the vice chancellor wrote.
Investors sued Oracle's directors in May 2017 and July 2017 in cases that have since been consolidated, accusing board members of breaching their fiduciary duties by agreeing to acquire NetSuite in a deal that disproportionately benefited founder Larry Ellison, who effectively controlled both Oracle and NetSuite.
The merger agreement called for a $109 per-share price, 60% higher than the $67.36 per-share market price on June 27, 2016, creating allegedly huge windfalls for NetSuite stockholders, including Ellison.
By August, the SLC concluded that mediation was unsuccessful, a settlement was unlikely, and the case would likely be reviewed under an entire fairness standard rather than the business judgment standard. Entire fairness places the burden on those who were sued to show that the price in a disputed transaction was fair and arrived at through a fair process.
"I'II note that the lead plaintiff and the defendants have identified no case pertinent to the issues here, where a special litigation committee has found that it is in the best interests of the corporation for a particular derivative plaintiff to proceed with the litigation," the vice chancellor said in a footnote to the 62-page decision.
Although the vice chancellor's decision fell well short of a total release order, it called for the release of some documents for good cause that Oracle shared with the SLC but considered attorney-client privileged.
"In these circumstances, I find that privileged communications given by Oracle to the SLC, and relied upon by the SLC in concluding that litigation by the lead plaintiff is in the corporate interest, must be produced to the lead plaintiff," the vice chancellor wrote.
Individual parties named in the suit, however, must be given an opportunity to review the documents before their release, the vice chancellor said, among other rulings, and the stockholder lacks a supportable right to the SLC's own privileged communications with its attorney.
"It's certainly precedent-setting that the judge ordered the production of privileged documents the special litigation committee received and relied upon ... to the plaintiffs who are now taking over the case," Solum said.
The case is In re: Oracle Corp. Derivative Litigation, case number 2017-0337, in the Court of Chancery of the State of Delaware.