Michael Gonen – Page 2 – Duane Morris Delaware Business Law

June 28, 2023June 29, 2023 by Michael Gonen

Court of Chancery: Taking a Public Stance is a Business Decision

This past Tuesday, the Court of Chancery held that causing a corporation to take a public stance on a matter of public controversy is a business decision for which the Board of Directors is protected by the business judgment rule in Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023). This decision confirms the broad discretion Delaware fiduciary law extends to a disinterested Board of Directors to consider environmental, social, and governance (“ESG”) factors in building the firm’s long-term value.

The plaintiff stockholder sought corporate records relating to the Board’s decision to cause Disney to publicly criticize Florida House Bill 1557, alleging that the decision led the Florida state government to enact unfavorable legislation leading to a loss of corporate profits and value. The company furnished some records, but withheld others, after which the stockholder filed an inspection demand under Section 220. After trial, V.C. Will found for the corporation for several independently-sufficient reasons, but devoted the bulk of the opinion to one: “choosing to speak (or not speak) on public policy issues is an ordinary business decision,” subject to business judgment rule protection, and thus “the plaintiff has not provided a credible basis from which to infer possible wrongdoing.”

The Court ruled that directors’ outside involvement with non-profit political advocacy organizations did not suggest that their decision-making was conflicted. Likewise, the Court reasoned that even if the Florida state government had threatened reprisal against the company for opposing the bill — a proposition the stockholder claimed but which the Court did not accept — the decision of how to weigh such a threat against the company’s employee- and customer-relations imperatives was entrusted to the Board in its exercise of business judgment.

The Board had formally deliberated on how to react to public outcry over a Florida state legislative enactment. The course of action they chose is therefore a quintessential business decision balancing competing factors falling squarely within the Board’s business judgment. How the Board decided to proceed is thus not subject to judicial review, nor to stockholder review (except, presumably, insofar as it affects the stockholders’ own voting decisions in future elections) and is therefore entitled to the protection of the business judgment rule. Thus, by extension, the Section 220 demand must fail because:

Such an inspection would not be reasonably related to the plaintiff’s interests as a Disney stockholder; it would intrude upon the rights of directors to manage the business of the corporation without undue interference.

May 25, 2023 by Michael Gonen

More on the Enforceability of Anti-Suit Covenants

We wrote about Vice Chancellor Laster’s decision in New Enterprise Associates 14, L.P. v. Rich, C.A. No. 2022-0406-JTL a few weeks ago. For a more comprehensive discussion of this landmark decision, please find a full Alert on the Duane Morris website.

May 3, 2023May 5, 2023 by Michael Gonen

Chancery Finds Stockholders’ Covenant Not to Sue for Breach of Fiduciary Duty of Loyalty Partially Enforceable

The Court of Chancery on Tuesday held that stockholders’ covenants not to sue for breach of fiduciary duty are enforceable subject to public policy limitations in New Enterprise Associates 14, L.P. v. Rich, C.A. 2022-0406-JTL. Conducting a deep-dive into the history and philosophical underpinnings of fiduciary law, the Court reasoned that specific, limited, and reasonable covenants not to sue are valid, but that Delaware abhors pre-dispute waivers of suit for intentional harms. The Court laid out a two-part test, sure to join the corporate practitioner’s lexicon of eponymous capital-t Tests swiftly:

First, the provision must be narrowly tailored to address a specific transaction that otherwise would constitute a breach of fiduciary duty. The level of specificity must compare favorably with what would pass muster for advance authorization in a trust or agency agreement, advance renunciation of a corporate opportunity under Section 122(17), or advance ratification of an interested transaction like self-interested director compensation. If the provision is not sufficiently specific, then it is facially invalid.

. . .

Next, the provision must survive close scrutiny for reasonableness. In this case, many of the non-exclusive factors suggested in Manti point to the provision being reasonable. Those factors include (i) a written contract formed through actual consent, (ii) a clear provision, (iii) knowledgeable stockholders who understood the provision’s implications, (iv) the Funds’ ability to reject the provision, and (v) the presence of bargained-for consideration.

Finding the covenant at issue passed the test, the Court held the covenant enforceable subject to Delaware’s policy against exculpating intentional harms. To invoke that policy, and thereby avoid the covenant and obtain damages, a plaintiff must plead and prove that the fiduciaries acted in a manner contrary to the company’s best interest in “bad faith,” a more stringent standard than even recklessness.

Critical to the Court’s analysis was the anti-suit covenant’s placement in a stockholder-level agreement. As the Court explained in an over-1200-word footnote discussing different conceptions of the fundamental nature of the corporate form, the covenant’s contractual placement means it merely “addresses a stockholder right appurtenant to the shares that the Funds owned as their private property” without raising the logical, practical, and normative difficulties arising from placement in the corporation’s constitutive documents, i.e. the bylaws or charter.

March 22, 2023December 12, 2024 by Michael Gonen

Court of Chancery Refuses to Blue Pencil “Facially Unenforceable” Non-Compete Agreement

A few weeks ago, we wrote about a decision where the Court of Chancery denied injunctive enforcement to a non-compete agreement because the agreement was likely void under Alabama law, and Alabama’s much closer relationship to the labor market at issue overcame an otherwise-valid choice-of-law clause pointing to Delaware. This week, the Court of Chancery has once again found a non-compete agreement unenforceable in Intertek Testing Services NA, Inc. v. Jeff Eastman, 2022-0853-LWW (March 16, 2023), this time ruling that it was overly broad and ineligible for judicial narrowing under Delaware law.

New York-based Intertek purchased Alchemy Investment Holdings, Inc., a Texas-based workforce management services business of which Eastman was a stockholder-CEO in 2018. The acquisition agreement included a clause restricting a group of people, including Eastman, from competing with Alchemy “anywhere in the world” for five years from the date of transaction. More than two years later, Eastman’s son formed a company which provides services to clients in the cannabis industry analogous to Alchemy’s offerings. Eastman is a director and investor in his son’s company. Intertek filed suit, and Eastman moved to dismiss.

Vice Chancellor Will reasoned that while Delaware will enforce broad restrictive covenants accompanying the sale of a business, even including international restrictions, the covenants must still be “tailored to the competitive space reached by the seller and serve the buyer’s legitimate economic interests.” Because the global scope exceeded Alchemy’s at-most-nationwide market, the clause at issue was overbroad and thus “facially unenforceable.” The Court further refused on equitable grounds to “blue pencil” a more reasonable alternative geographic scope, citing prior Delaware cases which discussed the troubling incentivization to overreach that the Court creates when it permits a sophisticated employer/buyer to narrow an otherwise-overbroad clause post hoc.

Because the Vice Chancellor also found no well-pleaded allegations that Eastman breached the non-solicitation or confidentiality provisions of the agreement, she granted Eastman’s motion and dismissed the action.