Wagner v. BRP: The Court of Chancery extends its Moelis stockholders agreement jurisprudence

In Wagner v. BRP Group Inc., the Delaware Court of Chancery further developed its jurisprudence regarding the validity of stockholders agreements that vest significant control rights in minority stockholders instead of a corporation’s board of directors. The court, applying and extending the reasoning in its opinion in Moelis & Co. earlier this year, found that certain pre-approval rights vested in a corporation’s founder pursuant to a stockholders agreement were invalid under Sections 142 and 242 of the Delaware General Corporation Law. Delaware’s recent passage of Section 122(18) of the DGCL overrules these opinions, except with respect to litigation filed before August 1, 2024.

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In re Cognizant Technology: Third Circuit adopts de novo review for failure to plead demand futility

In In re Cognizant Technology Solutions Corporation Derivative Litigation, the United States Court of Appeals for the Third Circuit, sitting en banc, overruled its prior decision in Blasband v. Rales that applied an abuse-of-discretion standard to its review of district court dismissals of shareholder derivative actions based on demand futility. The Third Circuit adopted a de novo standard, joining the Delaware Supreme Court and the First, Second, Sixth, Seventh, Eighth and Tenth Circuits. The Third Circuit found the de novo standard to be proper because “whether demand is futile is not a matter of one’s discretion, but instead depends only on whether the plaintiff adequately pleaded the state-law requirements. That being so, it hardly makes sense to review whether a district court has abused discretion that it does not have.” In the matter at hand, the Third Circuit ultimately affirmed the dismissal of the action for failure to adequately allege demand futility.

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Trifecta v. WCG: Delaware considers whether extra-contractual promises can support fraud claim

In Trifecta Multimedia Holdings v. WCG Clinical Services, the Delaware Court of Chancery analyzed claims related to an M&A transaction involving an earn-out component. Earn-outs are a common feature of M&A transactions and purchase agreements, whereby a portion of the purchase price is contingent upon the earnings of the business following the transaction. Buyers will often make extra-contractual promises to sellers about how they will operate the business post-closing to meet the earnings necessary for earn-out payment. Buyers are wary of drafting specific promises into the purchase agreement to maintain flexibility over the operations of the acquired business. In Trifecta, the court denied the defendant’s motion to dismiss, finding that certain extra-contractual promises were specific enough to form the basis for a fraud claim, while others were inactionable puffery. The court also analyzed whether the implied covenant of good faith and fair dealing could provide relief.

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Delaware Court of Chancery dismisses “De-SPAC” merger claims at motion to dismiss stage

In In re Hennessy Capital Acquisition Corp. IV Stockholder Litigation, the Delaware Court of Chancery for the first time dismissed breach of fiduciary duty claims against directors involved in a merger with a special purpose acquisition company (SPAC) under the “entire fairness” standard. This decision will help to serve as roadmap for defending against disclosure claims arising in the SPAC context.

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BuzzFeed II: Court enforces arbitration clauses in employment agreements with pre-SPAC entity

In BuzzFeed Media Enterprises, Inc. v. Anderson, No. 2023-0377, 2024 WL 2187054 (Del. Ch. May 15, 2024) (BuzzFeed II), the Delaware Court of Chancery held that BuzzFeed Media Enterprises (BME) was bound by arbitration agreements with former employees who could provide evidence of such agreements. Even though the AAA mass arbitration rules did not exist when BME’s predecessor signed the employment agreements, the Court of Chancery held that such rules applied to the arbitrations initiated after such rules took effect. However, for a relatively small number of employees who could not furnish copies of their arbitration agreements, the court denied the motion to dismiss, finding that they could not show by “clear and convincing” evidence that they had agreements to arbitrate with BME.

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