Q2 2023 Quarterly Corporate / M&A decisions updates

Slack v. Pirani: Supreme Court says no Section 11 liability for untraceable shares in direct listing

In Slack Technologies, LLC v. Pirani, the Supreme Court declined to redefine the term “such security” in the Securities Act of 1933 to encompass untraceable, unregistered shares from direct listings. This decision, which the Supreme Court itself noted was not “particularly novel,” reaffirms the majority of lower court decisions that had similarly required traceability. In this particular matter, because the plaintiff did not prove that the shares he had purchased were registered, he did not demonstrate traceability to the registration statement at issue. As a result, the Supreme Court reversed the decision of the U.S. Court of Appeals for the Ninth Circuit, which had denied the defendants’ motion to dismiss on this ground.

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Lee v. Fisher: Ninth Circuit enforces forum selection clause to bar derivative action

In Lee v. Fisher, No. 21-15923 (9th Cir. 2023), an en banc panel of the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s dismissal of a shareholder derivative action against The Gap, Inc. Plaintiff Noelle Lee alleged that the forum selection clause in The Gap’s bylaws violated the Securities Exchange Act of 1934, Delaware General Corporation Law, and public policy by requiring that all derivative actions be brought in the Delaware Court of Chancery. The Ninth Circuit found the clause enforceable and, as a result, split with the Seventh Circuit, which declined to enforce a similar forum selection clause in Seafarers Pension Plan ex rel. Boeing Co. v. Bradway, F.4th 714 (7th Cir. 2022).

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New Enterprise Associates: Stockholders’ advance waiver of fiduciary duty claims is enforceable

In New Enterprise Associates 14. v. Rich, the court held that a covenant not to sue in a voting agreement executed by sophisticated stockholders was facially enforceable even though it limited claims for breach of fiduciary duties. The court found that fiduciary duties in Delaware can be tailored in advance to permit specific actions that might otherwise constitute a breach of fiduciary duty, especially if the limitations are included in a stockholder agreement concerning stockholder rights. The court’s analysis rejected several arguments, including that the duty of loyalty is too important to waive, enforcing the duty of loyalty is essential to corporations, and allowing advance waiver of the duty of loyalty blurs the line between corporations and LLCs. The court did, however, find that public policy does not permit contractual exculpation for tort liability based on intentional wrongdoing, and so denied the motion to dismiss because the claims involved facts suggesting bad faith.

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Delaware court holds Corwin does not cleanse claims based on “enduring alleged entrenchment devices”

In In re Edgio Stockholders Litigation, No. 2022-0624-MTZ (Del. Ch. May 1, 2023) the Delaware Court of Chancery, in denying a motion to dismiss, evaluated a stockholder action to enjoin a transaction in light of one party’s adoption of measures restricting investors’ voting and transfer rights as part of a potential business combination. The Court declined to apply Corwin cleansing despite the approval of a fully informed, uncoerced majority of stockholders, due to the nature of the claims. Instead, the court held that plaintiffs sufficiently alleged facts to infer that the defensive measures in the deal were designed to entrench the board, such that Unocal’s enhanced scrutiny applied at the pleading stage of this action for injunctive relief. This case helps Delaware corporations considering implementing defensive measures to better understand the consequences of such measures.

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Authored by Jon Talotta, Allison, Wuertz, Maura Allen, Jason Chohonis, Elizabeth Cochrane, Patience Tyne, Suraya Swaroop, and Jocelyn Hassel.