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John Stigi is a partner in the Business Trial Practice Group, leader of the firm's Securities Enforcement and Litigation Team, and Office Managing Partner of the firm's Century City office.

In Coster v. UIP Companies, Inc., No. 49-2020, 2021 WL 2644094 (Del. June 28, 2021), the Delaware Supreme Court reversed a Court of Chancery ruling, No. 2018-0440-KSJM, 2020 WL 429906 (Del. Ch. Jan. 28, 2020) (McCormick, V.C.), that members of a board of directors did not breach their fiduciary duties when they approved a transaction with an “inequitable purpose” because the process and substance of the transaction were “entirely fair” to the aggrieved stockholder.  The Court held that even though the board’s action passed Delaware’s rigorous “entire fairness” review, the Court of Chancery should have further considered whether the board acted for inequitable reasons or for the primary purpose of interfering with the stockholder’s statutory or voting rights.  As the Supreme Court explained, “inequitable action does not become permissible simply because it is legally possible.”  Coster provides an important reminder to board members that ensuring a transaction is “entirely fair” does not necessarily shield directors from liability if the directors acted in bad faith or for the “primary purpose of thwarting” a stockholder’s franchise rights.

Continue Reading Delaware Supreme Court Holds That Surviving “Entire Fairness” Review is Not Conclusive of a Breach of Fiduciary Duty Claim Where Directors Acted Inequitably

In Shareholder Representative Services LLC v. Albertsons Companies, Inc., 2021 WL 2311455 (Del. Ch. June 7, 2021), the Delaware Court of Chancery (Slights, V.C.) provided key guidance on mergers and acquisitions (“M&A”) earnout disputes regarding contractual earnout language, the applicability of the implied covenant of good faith and fair dealing, extra-contractual discussions and promises and post-closing behavior of the acquirer.  This opinion serves as a reminder to M&A transaction parties on important drafting concepts in earnouts, as well as how to conduct themselves during the negotiations and earnout period.
Continue Reading Delaware Court of Chancery Decision Provides Guidance on M&A Earnouts

In In re WeWork Litigation, 2020 Del. Ch. LEXIS 270 (Del. Ch. Aug. 21, 2020) (Bouchard, C.), the Delaware Court of Chancery considered an issue of first impression:  Does the management of a Delaware corporation have the unilateral authority to preclude a director from obtaining the corporation’s privileged information?  The Court held it cannot.  The directors of Delaware corporations are entitled to share in legal advice the corporation receives and, subject to limited exceptions not at issue in WeWork, cannot be prevented from accessing the corporation’s privileged information.
Continue Reading Delaware Court of Chancery Clarifies that Management Cannot Unilaterally Curtail a Director’s Access to Corporation’s Privileged Information

In Heinze v. Tesco Corp., No. 19-20298, 2020 WL 4814094 (5th Cir. Aug. 19, 2020), the United States Court of Appeals for the Fifth Circuit affirmed the dismissal of a putative class action suit under Section 14(a) of the Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78(b) alleging that defendant Tesco Corporation (“Tesco”), former members of Tesco’s board of directors and Nabors Industries, Ltd. (“Nabors”) omitted material information from a proxy statement issued in connection with Nabors’ acquisition of Tesco in 2017.  Applying the heightened pleading standard of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4, et seq., the Court held that plaintiffs failed to show how the omitted facts were necessary to make the statements therein not false or misleading.  Heinze marks a significant victory for companies facing Section 14(a) shareholder litigation over merger-related proxy statements, reaffirming the PSLRA’s specificity requirements as well as its safe harbor provision shielding companies from liability over certain forward-looking statements and projections.
Continue Reading Fifth Circuit Affirms Dismissal of Section 14(a) Complaint For Failure to Plead Facts Demonstrating Alleged Omissions from Proxy Statement Were Misleading

In Juul Labs, Inc. v. Grove, 2020 Del. Ch. LEXIS 264 (Del. Ch. Aug. 13, 2020) (Laster, V.C.), the Delaware Court of Chancery held that the “internal affairs doctrine” bars a stockholder of a Delaware corporation headquartered in a foreign jurisdiction from seeking to inspect corporate books and records pursuant to the statutory law of that foreign jurisdiction.  The stockholder is limited instead to the inspection rights and remedies under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220.  This decision has the potential to provide greater certainty to Delaware corporations headquartered in other states that Delaware law will govern all aspects of stockholders’ rights, although it remains to be seen whether the courts of those other states will enforce Delaware law in a similarly limiting fashion.
Continue Reading Delaware Court of Chancery Applies the Internal Affairs Doctrine to Deny Stockholder Inspection Rights Under a Foreign State’s Law

In Fir Tree Value Master Fund, LP v. Jarden Corp., No. 454-2019, 2020 WL 3885166 (Del. July 9, 2020), the Delaware Supreme Court affirmed a Delaware Court of Chancery (Slights, V.C.) appraisal decision that adopted the respondent corporation’s unaffected market price as fair value, squarely rejecting petitioners’ argument that, as a matter of Delaware law, a corporation’s unaffected stock price can never equate to fair value.  Under the appraisal statute, when determining the fair value of the shares on the closing date of the merger, the trial judge shall take into account “all relevant factors.”  The Delaware Supreme Court’s decision makes clear that a corporation’s unaffected market price alone can be a “relevant factor” indicating fair value in mergers.
Continue Reading Delaware Supreme Court Affirms Appraisal Award Using Corporation’s Unaffected Market Price As Fair Value

Merger agreements involving acquisitions of private companies often contain terms creating post-merger obligations or “earnouts” in favor of certain classes of selling stockholders.  To address potential claims that may arise from such post-merger arrangements, selling stockholders typically designate a “shareholder representative” to handle such claims on their behalf pursuant to specifically delineated rights and duties.  In Fortis Advisors, LLC v. Allergan W.C. Holding, Inc., 2020 Del. Ch. LEXIS 181 (Del. Ch. May 14, 2020) (Zurn, V.C.), the Delaware Court of Chancery addressed the scope of such rights and duties in the context of a discovery dispute.  The Court considered the shareholder representative to be distinct from the selling stockholders on whose behalf the representative is acting, such that the selling stockholders were not deemed to be “parties” to a claim pursued by the representative.  Thus, in a letter ruling, the Court held that the defendant could obtain discovery of the selling stockholders only through third-party discovery, not through party discovery directed to the shareholder representative.  The Court based its decision on a strict reading of the terms of the agreements establishing the shareholder representative and negotiated information rights contained therein.
Continue Reading Delaware Court of Chancery Strictly Construes Right to Discovery of Stockholders Represented By a Contractually Created “Shareholder Representative”

In Rubenstein v. Int’l Value Advisers, LLC, No. 19-560-CV, 2020 WL 2549507 (2d Cir. May 20, 2020), the United States Court of Appeals for the Second Circuit affirmed a district court’s decision holding that an investor was not a member of a “group” of corporate insiders for purposes of short-swing profit liability under Section 16(b) of the Securities Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78p(b).  In affirming, the Second Circuit determined that the investor’s investment management agreement delegating discretionary authority to an advisor was not an agreement with the “issuer,” and that an investment advisor’s client does not become an insider group member simply because the advisor files a Schedule 13D.  The decision provides helpful guidance regarding the extremely narrow limits of Section 16(b) liability, and shields passive investors who merely delegate management authority over their portfolios to investment advisors.
Continue Reading Second Circuit Holds That Investors Who Delegate Discretionary Authority to Investment Advisors are not Members of a “Group” for Purposes of Section 16(b) Liability

Rule 23.1 of the Delaware Court of Chancery Rules requires a plaintiff asserting a shareholder derivative action to plead “with particularity the efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the directors or comparable authority and the reasons for the plaintiff’s failure to obtain the action or for not making the effort” (emphasis added).  In Elburn v. Albanese, 2020 Del. Ch. LEXIS 156 (Del. Ch. Apr. 21, 2020), the Delaware Court of Chancery (Slights, V.C.), addressed the “fundamental,” but rarely asked, “question of what is required to plead a fact ‘with particularity’ under Rule 23.1.”  In addressing this question, the Court applied authority interpreting the particularity requirement set forth in Rule 9(b) of the Court of Chancery Rules holding that the standard is met so long as the plaintiff pleads particularized facts sufficient to apprise the defendants of the basis for the claim.  The Court declined to require the pleading of “so-called ‘newspaper facts’—who, what, when, where and how” —in all cases under Rule 23.1, holding that even under Rule 9(b) such details are not required in all cases.  The Court’s analysis in Elburn recognizes that a shareholder plaintiff’s burden to plead specific facts varies depending on the plaintiff’s reasonable access to the facts underlying his or her theory of demand futility.
Continue Reading Delaware Court of Chancery Addresses Pleading ‘With Particularity’ Under Rule 23.1

In Sciabacucchi v. Salzberg, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court reversed a Delaware Court of Chancery (Laster, V.C.) decision declaring invalid a federal forum selection provision in a Delaware corporation’s charter or bylaws.  The federal forum selection provision was intended to require claims by investors under the Securities Act of 1933 (“1933 Act”) to be brought solely in federal court, thereby avoiding the likelihood of defending duplicate, concurrent state and federal court 1933 Act claims.  The Delaware Supreme Court’s decision provides clear guidance to companies preparing for securities offerings for implementing a tool to limit the cost of defending duplicative 1933 Act litigation.
Continue Reading Delaware Supreme Court Confirms That Federal Forum Provision Is Facially Valid, Reversing Court of Chancery

In Jensen v. iShares Trust, 2020 Cal. App. LEXIS 61 (Cal. App. Jan. 23, 2020), a rare state court decision addressing claims under the Securities Act of 1933 (“1933 Act”), the California Court of Appeal rejected plaintiffs-appellants’ attempt to evade the “tracing” requirement under Section 11, 15. U.S.C. § 77k, which provides standing only to those plaintiffs who can trace their shares purchased in a secondary market transaction to an initial offering made under a misleading registration statement.  Appellants argued that they were not subject to the tracing requirement because the respondent, an open-end management investment company, also was governed under the Investment Company Act of 1940 (“ICA”), 15 U.S.C § 80a, et. seq., which appellants argued extends standing to purchasers no matter how or from whom their shares were purchased.  The Court rejected the argument, unequivocally reaffirming that the 1933 Act is focused only on initial public offerings and other primary market transactions, and so any claims brought thereunder must satisfy its strict standing (i.e., tracing) requirements.
Continue Reading California State Court Declines to Expand Standing for Claims Under 1933 Act