The Delaware Business Court Insider recently published my analysis of a decision of the Court of Chancery where the court declined to apply a Delaware choice of law provision in a dispute related to restrictive covenants where the application of Delaware law would thwart an express policy of the state (here, Alabama) with the greater interest in the dispute. That article may be read here.
Contract Drafters: Consider the Scope of Your Consent to Jurisdiction Clauses!
A new decision from Delaware’s Court of Chancery highlights how transactional lawyers are granted wide latitude to seek, by contract, to invoke the jurisdiction of Delaware’s renowned business and commercial courts, where jurisdiction might not otherwise lie, through the use of a consent to jurisdiction clause in a contract or agreement. But in doing so, practitioners should consider carefully how the parties will ultimately define the scope and reach of such consent. In ActiGraph Holdings, LLC, et al. v. Cyntech, Inc. et al., C.A. No. 2021-0507-KSJM (February 14, 2023), the Chancellor found that a consent to jurisdiction clause in a purchase agreement for the sale of a business (a Florida LLC) did not subject the former CEO of the sold business to the jurisdiction of the Delaware courts for purposes of claims of breach of fiduciary duty in the management and affairs of the Florida LLC.
The pertinent language in the consent to jurisdiction clause stated: “Each party hereby irrevocably submits to the jurisdiction of the Court of Chancery of the state of Delaware or any federal court of competent jurisdiction in the state of Delaware, solely in respect of the interpretation and enforcement of the provisions of this agreement and of the documents referred to in this agreement . . . .” (emphasis added by Court) The Court held that the the emphasized language in the consent to jurisdiction clause did not cover claims for breach of fiduciary duty, and therefore found that the Court did not have personal jurisdiction over the former CEO (a Florida resident) for such claims.
Clarity at Last? Court of Chancery Confirms Corporate Officers Owe Oversight Duties
Since Chancellor William T. Allen’s seminal ruling in In re Caremark International Inc. Derivative Litigation, the question of the duties owed by corporate officers, not directors, has remained unclear. For years, practitioners, academics and the courts have grappled with this question and others. Recently, Vice Chancellor J. Travis Laster answered some of these questions and provided long-needed clarity, holding that corporate officers “owe a fiduciary duty of oversight as to matters within their areas of responsibility.” While this opinion provides answers to the questions many have been asking, it also raises concerns.
To read the full Alert, visit the firm website.
Seek (In Delaware), and Ye Shall Find Corporate Books and Records
The right of a stockholder of a Delaware corporation to inspect the books and records of the company is codified in Section 220 of the Delaware General Corporation Law. In recent years, and for a number of reasons, stockholders have been exercising this inspection right in ever increasing numbers (I have four clients addressing demands to inspect books and records as I write). A recent decision of the Court of Chancery (Juul Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL) is worth highlighting–less for the substantive law related to Section 220 inspections of books and records and more its discussion of certain “gatekeeping” matters related to litigation to enforce these stockholder inspection rights.
The noteworthy holdings and outcomes in the Juul Labs decision are the following:
- Because Juul Labs is a Delaware corporation, and a demand by a stockholder to inspect the books and records of a corporation are a matter of internal affairs for that entity, the stockholder could not use a similar California statute (even though Juul’s principal place of business is in California) as a basis upon which to demand the inspection of books and records;
- A stockholder of a Delaware corporation must look solely to 8 Del. C. Sec. 220 for its statutory rights to inspect the books and records of a Delaware corporation in which they own shares; and
- The court left open the question whether a stockholder of a Delaware corporation can contractually waive the statutory rights to inspection of books and records granted by Section 220.
Thus, while it is clear that Delaware corporations and their legal advisors can take greater comfort that disputes over stockholder access to corporate books and records can and will be heard in Delaware, the broader question of whether Delaware corporations can affirmatively contract with their stockholders to limit or obviate such inspection rights remains to be answered.
Yet Another Minute About Minutes
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The minutes of corporate board meetings are, candidly, too often treated as an afterthought. This can lead to the official records being deemed not much of a record at all when later reviewed. Indeed, a reviewing court might even draw certain inferences based on what it finds, or does not find, in the minutes. I have discussed in this blog several times (here and here) certain nuances that go into the craft that is drafting a set of board minutes that properly memorialize the directors’ fealty to their roles as fiduciaries.
A recent opinion from the Court of Chancery demonstrates why, even at the time of setting the agenda for a board meeting, the corporate secretary should be cognizant of how that meeting will be memorialized in the corporate books and records. In an April 27, 2020, Memorandum Opinion in Hughes v. Hu, et al., C.A. No. 2019-0112-JTL, the Vice Chancellor drew certain plaintiff-friendly, pleadings-stage inferences in ruling on a motion to dismiss based on what was–and more importantly, what was not–included in the corporate board minutes regarding the topics in dispute (this Blog addressed the substantive matters in dispute here).
Critical to the court’s analysis was that prior to filing his complaint, the stockholder plaintiff had exercised his rights under Section 220 of the Delaware General Corporation Law to examine the books and records of the company. While the company had produced for inspection some books and records, the company stipulated that “any remaining materials requested by Plaintiff either do not exist or had been withheld on privilege grounds.” Thus, the court held that “if the Company failed to produce a document that it would reasonably be expected to possess if a particular event had occurred, then the plaintiff is entitled to a reasonable inference that the event did not occur.”
The court used that holding as the basis for drawing a number of inferences in the plaintiff’s favor based on what was not included in or with the corporate minutes. For instance, in multiple instances where the corporate minutes referred to a document or presentation that the directors purportedly reviewed, but where no copy of such document was produced for inspection with the minutes in the Section 220 proceedings, the court inferred that such materials did not exist, and therefore were not reviewed by the directors in carrying out their duties.
Moreover, the court also drew substantive inferences in plaintiff’s favor of the anticipated contents of documents referenced in the minutes but not appended to or presented with the such minutes. For instance, a set of minutes stated that the Audit Committee approved a “Policy of Related-Party Transactions Relating to JV Shareholder,” but no such policy had been presented with the corporate books and records for inspection by the stockholder. Thus, the court held: “It is reasonable to infer at the pleading stage that the policy did not place meaningful restrictions on management.”
Finally, it is worth noting that the court also highlighted in multiple places throughout the opinion the overall landscape presented by the corporate books and records. Specifically, the court noted relatively long gaps between meetings of the audit committee, the types of tasks the directors were purportedly undertaking at such meetings, and the actual length of the meetings themselves. For example, the court held it was “reasonable to infer that with the Audit Committee having not met for almost a year, there was no possible way that the Audit Committee could have fulfilled all of the responsibilities it was given under the Audit Committee Charter during a fifty-minute meeting.”
This opinion sheds light on the potential issues that might arise where corporate secretaries (or their counsel) have allowed the task of recording minutes of board meetings to become a mere footnote in the process of keeping accurate and meaningful corporate books and records. Based on this opinion, corporate record-keepers might:
- In setting the agenda, give thought to how the meeting is going to flow with an eye to what the written minutes will ultimately record for history. That is, consider the order in which topics are discussed, the relative nature and materiality of each discussion topic, and the time reasonably necessary for the directors to effectively educate themselves about that matter, discuss it, and take action. The minutes should then reflect and record this flow of information, debate, consideration, and action by the directors.
- Consider what documents or presentations will be provided to the directors for review and discussion and whether such materials should be provided to the directors in advance of the meeting.
- Give thought to what materials–if any–will be appended to minutes in the official books and records of the company.
Drafting minutes that properly record the material events in the life of a board of directors is an art more than a science, but like the classical orders of ancient art and architecture, the gloss from judicial decisions of the courts can define characteristics of minutes that bring that art to life in ways that unmistakably portrays director behavior fully complying with fiduciary norms.
Delaware Governor Issues Emergency Order Regarding Corporate Annual Meetings
I recently discussed on this page how the 2020 corporate annual meeting season was facing its own challenges in the midst of the global pandemic and worldwide orders against the congregation of persons, and discussed the potential use of virtual annual meetings being conducted remotely by electronic communications as a means to overcome such challenges. On the evening of April 6, 2020, the Governor of the State of Delaware issued his Tenth Modification to the Covid-19 State of Emergency, which contained provisions fostering a Delaware corporation’s ability to react where it had already called and noticed an annual meeting of stockholders to be held in-person.
The Tenth Modification of the Covid-19 State of Emergency permits Delaware corporations subject to the reporting requirements of Section 13(a) and 15(d) of the Securities Exchange Act of 1934, and who have already given notice of an in-person annual meeting of stockholders, to either (a) convene the meeting as scheduled but via electronic “virtual” means or (b) adjourn the meeting to another date to be held remotely via electronic means by both (i) making a public filing with the SEC giving notice of such changes to the convening of the meeting, and (ii) publishing the notice on the company’s website.
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:
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- 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).