Annual Meetings–When Your Stockholders Cannot Actually Meet

As I write this post safely ensconced—and properly “socially-distanced”—in my home office, the annual rites of spring march on oblivious to the disruption caused by a global pandemic. The bulbs outside my window are in full-bloom, trees are budding out, and spindly-legged foals gambol about in their paddocks. Corporate annual meetings (another rite of spring), however, are not so immune. Millions of stockholders of Delaware corporations are currently under some form of “stay-at-home” restrictions, and applicable guidelines from health officials limit gatherings to no more than 5-10 people, each of which have to be at least 6 feet away from one another.  These safety protocols, while necessary, make it essentially impossible to convene annual stockholders’ meetings as has been traditional–in person.

In this time of extreme disruption, Delaware corporations may continue to carry on the critical business attended to at the annual meeting of stockholders by taking advantage of the flexibility granted by the Delaware General Corporation Law (“DGCL”) to conduct such annual meetings “virtually” via electronic means. Moreover, as described below, Delaware corporations may also be given the freedom to delay their annual meetings until the biological dangers of in-person meetings have passed.

“Virtual” Annual Meetings

Section 211 of the DGCL was amended at the turn of this century to authorize corporations to hold annual meetings of stockholders “by means of remote communication” so long as it was not prohibited by the corporation’s charter or bylaws and was approved by the board of directors. Section 211 further gives the board sole discretion to adopt guidelines and procedures that would allow stockholders (or proxy-holders) to utilize “means of remote communications” such that they may:

1) participate in the stockholders’ meeting, and;

2) be deemed present in person and vote at a meeting of stockholders, provided that:

(i) the company implements reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder,

(ii) the company implements reasonable measures to provide its stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with the proceedings, and

(iii) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action will be maintained by the company.

Corporations considering utilizing the freedom offered by Section 211 to conduct their annual meetings virtually should consult their governing documents to determine whether such meetings would be prohibited, and if not prohibited, the board of directors should establish proper procedures to ensure compliance with Section 211. If a virtual meeting is, however prohibited by the governing documents, and that prohibition is contained in the company’s bylaws, then the board of directors may have the power to amend the bylaws to allow annual meetings to be conducted by remote means.

Delayed Annual Meetings

To the extent a Delaware corporation has already given notice of an “in-person” annual meeting, another option may be to delay the convening of such a gathering until it is both safe and permitted by local orders. To the extent a company decides to delay its annual meeting, among the issues that might need to be addressed are: (a) federal securities laws and regulations related to notices and solicitations of proxies (recent SEC guidance on this front is addressed here), and (b) Delaware state-law matters related to the timing of annual meetings. For instance, DGCL Section 211 mandates that a corporation convene an annual meeting no later than 13 months since the last annual meeting or the last time directors were elected by written consent. Thus, a delayed annual meeting could run afoul of this timing constraint.

As of this morning, however, it appears that the Delaware State Bar Association (“DSBA”) is working on emergency proposals for the Governor and the General Assembly that would, if presented and adopted, (a) make clear in DGCL Section 110(a) that a pandemic or epidemic is a type of emergency that could trigger a board’s ability to adopt emergency bylaws, and (b) give the board of directors broad powers regarding the timing of and method of convening an annual meeting of stockholders beyond those discussed above. These proposed measures are currently making their way through the DSBA committee process.

These are rapidly-evolving times, so stay tuned for future developments on this front.

Delaware Governor Closes Nonessential Businesses Until May 15, 2020

On March 22, 2020, Delaware Governor John Carney issued his Fourth and Fifth Modifications of the Declaration of a State of Emergency for the State of Delaware Due to a Public Health Threat, pursuant to which he has ordered the closure of nonessential business and commercial establishments in Delaware (Nonessential Business Closure Order). The order takes effect on Tuesday, March 24, 2020, at 8:00 a.m. and remains in effect “until after May 15, 2020, or the public health threat of COVID-19 has been eliminated… .” Violations of the Nonessential Business Closure Order constitute a criminal offense.

While essential businesses—as defined in the governor’s order and highlighted below—may continue to operate, such businesses must continue to comply with certain health-protecting guidelines and measures promulgated by the Centers for Disease Control and Prevention (CDC) or the Delaware Department of Health and Social Services’ Division of Public Health (DPH). Among the measures essential businesses are required to observe while they remain open for employees and customers are the following: (a) implementing flexible and nonpunitive sick-leave policies; (b) excluding employees who are actively exhibiting signs of illness or have had close contact with persons diagnosed with, or suspected of having COVID-19; and (c) the adoption and encouragement of certain personal hygiene and property sanitizing practices.

The Nonessential Business Closure Order appears to be fairly liberal in adopting Delaware’s definition of what businesses or industries are considered essential businesses. To that end, businesses that employ or utilize workers in the following general areas are considered essential businesses and may remain operational to provide functions critical to the day-to-day needs of Delaware’s citizens:

    • Healthcare/Public Health: Not surprisingly, the list of workers related to the healthcare/public health industry is quite broad and not only includes those persons directly responsible for providing healthcare services, but also workers and businesses that are critical to the support of such healthcare functions.
    • Law Enforcement, Public Safety, First Responders
    • Food and Agriculture: Here, too, the list of essential functions broadly captures a wide swath of the food and agriculture segment to ensure that this critical industry remains functional. Thus, the directive generally declares as essential workers and businesses critical to the production of, distribution of and the sale of food and beverage products not only for human consumption, but also for pets and livestock.
    • Energy: This industrial category is broken down into the following subcategories: (a) electricity industry; (b) petroleum industry (including transport, storage, refining, distribution and sales); and (c) natural gas and propane.
    • Water and Wastewater
    • Transportation and Logistics: This category broadly covers persons and businesses needed to move goods and services, as well as to maintain the assets used in transportation and logistics activities.
    • Public Works
    • Communications and Information Technology
    • Other Community-Based Government Operations and Essential Functions: This category covers workers such as: (a) election personnel; (b) weather forecasters; (c) educators; and (d) hotel workers, among others.
    • Manufacturing: This category broadly encompasses “Workers necessary for the manufacturing of materials, goods, products, or similar distribution.”
    • Hazardous Materials
    • Financial Services and Insurance
    • Chemical
    • Defense Industrial Base
    • Construction: This category includes both the persons engaging in the construction and repair of residential and nonresidential structures and the businesses that supply materials and hardware to those trades.
    • Necessary Products Retailers: This category lists a number of necessary products that include: (a) medical and hygiene supplies; (b) dry goods; (c) agricultural supplies; (d) pet and animal food supplies; (e) hardware; (f) products and equipment needed to work from home; (g) alcohol, beer and wine; and (h) “any other household consumer products or other products necessary to maintain the safety, sanitation, and essential operations of residences.”
    • Necessary Retail and Service Establishments: This category lists 26 types of necessary retail and service establishments that include: (a) businesses that sell to or supply such businesses; (b) plumbers, electricians, exterminators, etc.; (c) lawn and garden retail facilities; (d) marinas; (e) child care facilities; (f) professional services such a legal and accounting; (g) hotels and taxis; and (h) pet sitters.
    •   Open Air Recreation Facilities

 

 

 

 

The Nonessential Business Closure Order also contains a list of types of businesses that are considered nonessential businesses, which includes places such as casinos, racetracks, sporting facilities, theaters and concert halls, among others. This list appears to cover a number of facilities in which large numbers of people might ordinarily gather together.

To determine the specific status of a specific type of business or worker, the state of Delaware has published an industry status list, in which the industries named above are broken down into their four-digit North American Industry Classification System (NAICS) code. The industry classification list states—by code number—which types of businesses may or may not operate (or operate with certain listed restrictions) during the time the order is in force. Moreover, in a set of FAQs published by the state, it is noted that if a business has more than one NAICS code, “[y]ou may follow the instructions for the least restrictive NAICS code your business is classified under.”

Delaware’s Nonessential Business Closure Order appears to broadly define essential businesses in a manner that will allow many aspects of Delaware’s manufacturing, commercial and business landscape to continue to operate, giving Delaware citizens the most normal day-to-day life possible, without unnecessary restrictions, in these challenging circumstances.

About Duane Morris:    If you have questions regarding how the Nonessential Business Closure Order might affect your business, please contact Sharon L. Caffrey, Richard L. Renck, any of the attorneys in our Wilmington office, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are in regular contact.     

 

Duane Morris has created a COVID-19 Strategy Team to help companies plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.

Delaware Supreme Court Addresses Confidentiality of Corporate Books and Records in Statutory Inspections

On August 7, 2019, the Supreme Court of Delaware issued an opinion making clear that  no presumption exists under Delaware law that the corporate books and records a stockholder inspects pursuant to 8 Del. C. 220 will be entitled to confidentiality restrictions.  That said, the Supreme Court also made clear that the Court of Chancery remains fully empowered to condition statutory inspections of corporate books and records on the entry of a reasonable confidentiality order, and expressed its expectation that “the targets of Section 220 demands will often be able to demonstrate that some degree of confidentiality is warranted where they are asked to produce nonpublic information” for inspection.

In Tiger v. Boast Apparel, Inc. (a/k/a BAI Capital Holdings, Inc.), No. 23, 2019 (Aug. 7, 2019), the Supreme Court affirmed the Court of Chancery’s entry of a confidentiality order governing an inspection of books and records pursuant to Section 220 of the DGCL as being within the “range of reasonableness” for such restrictions.  It disagreed, however, with the trial court’s “formulation of the principles governing confidentiality in the Section 220 inspection context . . . .”

First, as noted above, the Supreme Court rejected the notion that the books and records of a corporation subject to a statutory inspection demand were entitled to a presumption of confidentiality.  This clarification by the Supreme Court countered what it found to be a recent trend in Court of Chancery decisions applying such a presumption that appeared based–either directly or indirectly–on an insecure foundation of earlier case law and/or reference to a widely-regarded treatise on Delaware corporate law.  The Supreme Court reiterated that the Court of Chancery retained the discretion to determine whether confidentiality restrictions are appropriate in a given case, and in exercising that discretion, “must assess and compare the benefits and harms when determining the initial degree and duration of confidentiality.”

Second, the Supreme Court held that when addressing the duration of confidentiality restrictions, “an indefinite period of confidentiality protection should be the exception and not the rule,” and that a stockholder need not demonstrate “exigent circumstances” in order for the court to grant such restrictions for a time period shorter than indefinite confidentiality.

As the Supreme Court notes in a footnote, this opinion is not unlike another recent ruling of the Court in which it “rejected the notion that jurisdictional use restrictions were a ‘norm’ in Section 220 production agreements.”  The takeaway from this recent Section 220 jurisprudence is that stockholders and corporations retain wide latitude in negotiating the terms of a statutory inspection, and should the Court of Chancery become involved, it retains broad discretion in imposing reasonable restrictions and conditions on such a statutory inspection.

Delaware Court of Chancery Weighs In on Federal Computer Fraud and Abuse Act

When employees leave their employment and take with them their former employer’s confidential information, the ensuing litigation often contains a claim against the former employee for violations of the Computer Fraud and Abuse Act (the “CFAA”).  This was so in the recent decision by the Court of Chancery in the case AlixPartners, LLP, et al. v. Benichou, C.A. No. 2018-0600-KSJM (May 10, 2019).   In a matter of first impression for the state courts of Delaware, the Court of Chancery was asked to interpret and apply the CFAA’s provision creating liability for any person who “intentionally accesses a computer without authorization, or exceeds authorized access, and thereby obtains  . . . information form any protected computer.”

In this case, the complaint alleges that the former employee downloaded company confidential information to a personal hard drive on two occasions–once before his resignation and a second time after he was given a notice of his dismissal and was no longer performing work for the employer.  At issue were the terms “without authorization” and “exceeds authorized access” of the CFAA, and how they might apply to this factual scenario.

In ruling, the Court of Chancery discussed in detail the split in authority on the application of those terms into a “broad” approach and a “narrow” approach.  Under the more broad interpretation, courts have found that conduct might violate the CFAA where a person has accessed “a computer or information in violation of  one’s use obligations,” which will often involve an examination of the person’s intent or use of such information.  The Court, however, applied principles of statutory construction and adopted the more narrow approach to the application of this provision of the CFAA.  Under that interpretation, the Court held that the terms “without authorization” and “exceeds authorized access” apply “only when an individual accesses a computer or information on that computer without permission.  The statute does not impose liability for misusing information to which the individual had authorized access.”

Given this ruling, the Court dismissed the CFAA claims against the former employee related to first instance of downloading of files (when he was authorized to access the files), but allowed the claims related to the second instance–after he was allegedly no longer authorized to access the company’s computer system–to proceed.

Ultimately, while the Court ruled that claims under the CFAA may not be available to address situations where persons who are technically authorized to access computers or information have nonetheless misused that information, that misuse of data may still very well violate certain contractual duties of use and non-disclosure or other state law causes of action (for instance, under an applicable Uniform Trade Secrets Act).

A Minute about Minutes–Part II

A few years ago we highlighted on this blog an opinion where the Court of Chancery’s analysis turned, in part, on its impression of the quality of the corporate minutes at issue.  As we also noted in that post, the drafting of corporate minutes is an art rather than a science.

While counsel to Delaware corporations may debate the level of detail that should be included in minutes of meetings of the board of directors or committees of the board, the Court of Chancery has recently noted that for the minutes to be deemed an accurate portrayal of the conduct of such meetings, there must be evidence that they were created, reviewed and approved roughly contemporaneously with the meeting.   In FrontFour Capital Group LLC, et al. v. Taube, et al., C.A. No. 2019-0100-KSJM, at p. 25, n. 98 (March 11, 2019), the Vice Chancellor did not view the minutes of the meetings of a Special Committee reviewing a transaction “as contemporaneous evidence or give them presumptive weight” where there was evidence that the minutes were not finalized until months after the meetings occurred and after litigation was filed.

As this opinion makes clear, when judicial officers are asked to review minutes as a contemporaneous memorialization of the actions taken at meetings of boards of directors, they will look to see whether the minutes were, indeed, created contemporaneously with the actions–when memories are fresh and likely unclouded by later events.  Therefore, it remains a worthwhile practice for boards (or their committees) to ensure that their minutes are drafted, reviewed and approved by the next meeting of the body.

Delaware Supreme Court Issues Additional Guidance on Scope of Section 220 Inspections

In the case KT4 Partners LLC v. Palantir Technologies, Inc., No. 281, 2018 (Jan. 29, 2019), the Supreme Court of Delaware provided additional guidance as to two issues that can arise in disputes over statutory inspections of books and records demanded by stockholders.  First, the court clarified when the scope of an inspection being demanded might include email communications of officers and directors of the corporation.  Second, the court addressed the fact-specific inquiry involved in determining whether a forum-use restriction would be placed on the stockholder’s future use of the fruits of an inspection in litigation.

On the issue of whether email communications are properly within the scope of a statutory inspection under Section 220 of the DGCL, the Supreme Court reiterated that the analysis depends on the facts and circumstances present, but that the bar remains fairly high for a stockholder to show that such documents are necessary for the purpose they have articulated in their demand for inspection. Here, the Supreme Court also took the opportunity to put a finer point on the legal standard stockholders, corporations, and the trial court should apply to determine the proper scope of an inspection of books and records.  While at various times the decisions of the courts have used the terms “necessary” or “essential” or “sufficient,” in this opinion the Supreme Court holds that the scope of documents subject to inspection are those “that are essential and sufficient to the stockholder’s stated purpose,”  that is, “the court must give the petitioner everything that is essential, but stop at what is sufficient” (internal quotations omitted).  The Supreme Court went on to find that in this case, the Court of Chancery should have permitted the inspection of electronic communications because the company did not have other, more formal board-level documents to memorialize the actions that were the target of the inspection.  As the court concluded:  “Ultimately, if a company observes traditional formalities, such as documenting its actions through board minutes, resolutions and official letters, it will likely be able to satisfy a Sec. 220 petitioner’s needs solely by producing those books and records.  But if a company instead decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which Sec. 220 entitles them.”

The Supreme Court also addressed when it is appropriate for a stockholder’s use of the information from a statutory inspection be limited to the potential for bringing litigation in a specific jurisdiction–often Delaware as the state of incorporation.  The court reiterated that (a) “the Court of Chancery must be cautious about limiting the jurisdiction in which a petitioner can use in litigation the books and records it receives from a Sec. 220 action,” and (b) the circumstances when such restrictions are appropriate “must be justified by case-specific factors” (internal quotations omitted).  The most important of those case-specific factors continues to be whether the subject corporation’s bylaws or charter contains a forum-selection clause limiting litigation by stockholders addressing the internal affairs of the corporation to the courts of Delaware.

Director Access to Corporate Books and Records

The Court of Chancery recently affirmed the long-standing principle that directors of Delaware corporations are vested with “virtually unfettered rights to inspect books and records” of the company they serve.  Schnatter v. Papa John’s Int’l., Inc. C.A. No. 2018-0542-AGB (Jan. 15, 2019).  The Chancellor went on to reiterate that a director of a Delaware corporation that makes a demand to inspect the books and records of the corporation pursuant to Sec. 220 of the Delaware General Corporation Law should generally have “access at least equal to that of the remainder of the board.”

Directors of a company make a prima facie case for a statutory inspection of books and records where they show that: (a) they are a director, (b) they have demanded an inspection, and (c) the demanded inspection has been refused.  Upon that showing, the company will then bear the burden of proving that the director making the demand for inspection was for an improper purpose–that is, the director’s “motives are improper, or that they are in derogation of the interest of the corporation. . . .”

Resolving Contractual Disputes With “An Expert Not An Arbitrator”

The Delaware courts have been asked several times in the last few years to interpret contracting parties’ intent when they have relegated certain disputes to “an expert not an arbitrator” as a form of alternative dispute resolution.  On January 29, 2019, the Court of Chancery issued the latest opinion on this topic in Ray Beyond Corp. v. Trimaran Fund Mgt., LLC, C.A. No. 2018-0497-KSJM., and reiterated that such language will be construed as limiting the ADR professional’s jurisdiction to deciding “factual disputes within the decision maker’s expertise.”

In this case, the decision maker was to be an independent accountant, and thus, the court found that the clause at issue was to delegate factual disputes regarding calculation disputes to that “expert” but that legal disputes were reserved for the courts to decide as judicial officers.

The takeaway from these decisions continues to be a lesson in “words matter.”  If contracting parties wish certain disputes that might arise be decided by someone other than through litigation in courts, they should carefully spell out the authority of the persons resolving those disputes.  “Experts” will likely be relegated to deciding factual matters within their expertise, while “arbitrators” will likely be found to exercise judicial-like functions.

You Better Answer Me! What to Do When Facing a Partial Motion to Dismiss

By: Oderah C. Nwaeze & Mackenzie M. Wrobel

Once a complaint has been filed, defendants have a finite period of time to decide what to do next. Among the list of options are: (a) ignore it (the U.S. is overly litigious anyways); (b) answer the allegations; (c) move to dismiss; or (d) cower in fear and settle immediately. More often than not, defendants choose option (c).

The reality of moving to dismiss, however, is that the moving party often lacks a credible basis for dismissing the entire complaint. As a result, defendants frequently file a partial motion to dismiss on the day that a responsive pleading is due under the court’s rules (or some other date that the parties have agreed to file and serve a response). In circumstances where a plaintiff has filed a partial motion to dismiss, the parties usually — without formal agreement — focus their efforts on the partial motion, ignoring the fact that as of the deadline to file a responsive pleading, the defendant has not answered those allegations that are beyond the scope of the partial motion to dismiss. According to a recent decision from the Delaware Court of Chancery, that approach is a mistake. While the rules of civil procedure excuse a defendant from answering allegations that are subject to a partial motion to dismiss, nothing in the rules shields the defendant from failing to answer those allegations unrelated to the motion to dismiss in a timely manner.

Continue reading You Better Answer Me! What to Do When Facing a Partial Motion to Dismiss

Delaware’s War Against the “Boilerplate [Objection] Plague” Goes National

By: Oderah C. Nwaeze & Mackenzie M. Wrobel

In almost every lawsuit, as part of the discovery process, the parties will exchange information relevant to the claims and defenses at issue.  Discovery, however, is rarely as easy or collaborative as it should be.  To the contrary, parties routinely will refuse to produce materials responsive to well-tailored discovery requests without offering anything more than rote, unspecific responses to explain their tenuous positions.  In most cases, the objecting party ultimately will produce the requested documents, but only after forcing its opponent to waste time and money exchanging correspondence and participating in meet and confers.  Recognizing this unnecessary strain on resources, Delaware courts have spent the better part of a decade waging a not-so-quiet war on boilerplate objections.

Leading the charge on that front are jurists from the Delaware Court of Chancery, who refuse to allow parties to withhold discovery based on the limited details found in formulaic objections.  See Transcript of Motion to Compel Argument, Lake Treasure Hldgs. Ltd. v. Foundry Hill GP, C.A. No. 6546-VCL (Sept. 11, 2012) (“Lake Tr. at __”); Transcript of Motion to Compel Argument, Glidepath, Ltd., et al. v. Beumer Corp. et al., C.A. No. 12220-VCL (Del. Ch. Oct. 6, 2016) (“Glidepath Tr. at __”).  The Court has emphasized that the point of discovery responses is for the objecting party to detail for its adversary “what [it is] planning not to do” and why.  Lake Tr. at 22.  Otherwise, parties will waste time and money engaging in letter writing campaigns in order to flesh out objections that should have been described in the “first response.”  Lake Tr. at 22; see also Hammer v. Howard Medical, Inc., 2017 WL 1167550 (Del. Super. Feb. 14, 2017) (Stokes, J.) (granting a motion for sanctions, fees, costs against an objecting party for the continued use of general “irrelevant” or “not applicable” objections to interrogatories despite the requesting party’s efforts to seek clarification through correspondence and motion practice).

Continue reading Delaware’s War Against the “Boilerplate [Objection] Plague” Goes National