Which Choice of Law?

Which choice of law provision prevails when a Delaware Corporation reincorporates in Nevada restructured under an agreement governed by New York Law and then mergers with another Delaware Corporation? The Delaware Court of Chancery in Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P. held that the internal affairs doctrine, though not so straightforward, dictated that choice of law was determined by the specific document controlling each respective action. The case involved a restructuring and merger between AHP, a Delaware corporation, and Highland Capital Management, a Delaware hedge fund. Prior to the merger, AHP entered into a restructuring agreement reincorporating AHP as a Nevada corporation. After many more steps in the restructuring agreement AHP would merge with Highland on approval of the board and stockholders. The plaintiffs alleged that Highland, owning 48% of AHP stock and 80% of their debt, was a controlling stockholder thereby owing the stockholders a fiduciary duty. The plaintiffs also alleged breach of fiduciary duty and aiding and abetting breach of fiduciary duty against an AHP director.

The court held the claims against the director were controlled by the restructuring agreement, construed under Delaware law. The court also held, that the actions for recommending the merger, after reincorporation in Nevada, were governed by Nevada law. Under these rules, the court denied Highland’s motion for summary judgment. The court then applied Nevada law in dismissing the claims against the director, as the events took place after reincorporation in Nevada. In applying Nevada law, the court looked to Delaware law and which required the plaintiffs to assert their claims against at least half of the directors who made the decision. Since they only alleged claims against one director, the allegations failed.

Recent Delaware Decsion Holds That in Absence of Contractual Provision, Buyer in M&A Deal Holds Privilege

In Great Hill Equity Partners v. SIG Equity Growth Fund, the Delaware Chancery Court was faced with the question of who owns the attorney-client privilege where one law firm represents both buyer and seller in a corporate merger.  In that case, after the acquisition, the buyer of the corporate entity brought a fraud claim against the seller.  In support of that claim, buyer sought to use communications it found on a computer between seller and its counsel in the sale.  The merger agreement did not specify who owned the computer, the communications contained on it, or the attorney-client privilege attached to such communications.  Delaware's merger statute states that all rights and privileges of the acquired company devolve to the surviving company (unless of course otherwise specified).  This case makes clear the need for sellers to retain by contract the privilege with respect to pre-merger communications.

California Court of Appeal Clarifies Rights of Dissenting Shareholders in "Common Control" Merger

Corporations Code Section 1312 addresses the rights of minority dissenting shareholders in a short form merger context.  The statute in subsection (a) states, and the California Supreme Court has long held, that minority shareholders who dissent from a merger vote have no right to rescind the merger or sue for damages; however, the shareholders may institute an appraisal proceeding and obtain the fair value of their shares. Until the recent decision in Busse v. United Panam Financial Corp. (http://www.metnews.com/sos.cgi?0114//G046805), no reported decision dealt with subsection (b) of Section 1312 which addresses circumstances where merger partners are under common control.  The case first addressed whether in fact an individual with 40% voting control of the entity being acquired who also held the position of Chairman of the Board held common control.  The Court concluded that those facts coupled with some allegations of control over other directors and admissions from public statements about the individual's ability to control the corporation's activities were enough to allege control.  The Court then reached the critical question:  what rights did the minority dissenting shareholders have?   The Court held that they (1) could seek rescission, or (2) could sell their shares through an appraisal proceeding.  They could not, however, sue for damages under breach of fiduciary duty and other similar claims.  Thus, in common control situations, dissenters have more expansive rights but they are still substantially limited by Section 1312.

A Cautionary Tale of Venture Capital Financing

The Delaware Chancery Court recently addressed claims by the founder and four other programmers who helped create a successful start-up business.  But, the founder and the other programmers raised funds from venture capitalists who diluted their interests, took control of the board, and left the founder and the key programmers with a paltry $36,000 after the VCs sold the company for $82 million.  The Chancery Court's opinion is cautionary tale for start-ups looking for VC funding -- and a roadmap for claims that might be brought against overly voracious VCs.  It is worth a read (http://courts.delaware.gov/opinions/download.aspx?ID=186730).

Do Derivative Plaintiffs Have to Make a Books and Records Demand in Delaware?

The Delaware Supreme Court has long pressed shareholder plaintiffs in derivative suits to make a pre-suit books and records demand under 8 Delaware Code Secion 220.  In In re Freemont McMoRan Copper & Gold Derivative Litigation (http://www.delawarebusinesslitigation.com/uploads/file/Freeport%20McMoRan%20letter%20op%202%2014%202013.pdf), however, would-be derivative plaintiffs in the context of a merger and acquisition sought to stay a derivative action by other plaintiffs.  The basis of the stay request was that the would-be plaintiffs had made a books and records demand under Section 220.  They feared that the case brought by others without the benefit of the book and records, if unsuccessful, would preclude their later derivative suit.  The Chancery Court held that the case should proceed, reasoning that the merger was scheduled to close in a matter of weeks and that the expediency necessitated by that schedule outweighed the legitimate concern about obtaining the books and records and the possible res judicata effects of other plaintiffs proceeding without the books and records.  The Delaware Supreme Court this week declined to take up the matter.  The upshot seems to be that, in the face of an impending merger, the need for speed outweighs the need for plaintiffs to obtain pre-suit books and records.  If the derivative suit without the books and records fail yet the Section 220 demand uncovers additional facts, the Delaware courts will be keft with a messy issue of res judicata (and one the Delaware Supreme Court will speak on in the impending Allergan decision).