In re Massey Energy Co. Derivative & Class Action Litigation; Sciabacucchi v. Liberty Broadband Corp.; Lavin v. West Corp.: Recent Court of Chancery Decisions Define Limitations of Corwin Defense
March 8, 2018
Publication| Corporate Transactions| Corporate & Chancery Litigation
Since the Delaware Supreme Court decision in Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the Delaware courts have grappled with the effect of the so-called Corwin defense (i.e., that fully informed, uncoerced approval of a transaction by the disinterested stockholders will restore business judgment review) in a variety of different circumstances. In three recent decisions, the Delaware Court of Chancery has imposed limitations on the applicability of the Corwin defense. First, in In re Massey Energy Co. Derivative & Class Action Litigation, 160 A.3d 484 (Del. Ch. 2017), the Court held that the Corwin defense was inapplicable to fiduciary claims for pre-merger conduct that was not specifically ratified by a stockholder vote in connection with a merger. Then, in Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152 (Del. Ch. May 31, 2017), the Court, ruling on a motion to dismiss, found that the requirements of Corwin had not been met because the stockholder vote on the transaction at issue was “structurally coercive.” And finally, in Lavin v. West Corp., 2017 WL 6728702 (Del. Ch. Dec. 29, 2017), the Court held that the Corwin defense cannot be used to prevent an otherwise properly supported demand for inspection of books and records pursuant to Section 220 of the General Corporation Law of the State of Delaware.
In Massey, Massey Energy Co. was acquired by Alpha Natural Resources, Inc. in a 2011 transaction that was approved by a majority of Massey’s stockholders. At the time of the merger, the Massey board of directors was subject to derivative litigation alleging Caremark claims related to alleged failures of oversight by the board in connection with a deadly mine explosion in 2010. After the merger closed, the defendants asserted that the claims in the pre-merger Caremark litigation should be dismissed under Corwin, arguing that stockholder approval of the merger in effect ratified the pre-merger conduct of the Massey board of directors. The Court held that the Corwin defense was inapplicable to the pre-merger conduct, reasoning that Corwin was “never intended to serve as a massive eraser, exonerating corporate fiduciaries for any and all of their actions or inactions preceding their decision to undertake a transaction for which stockholder approval is obtained.” The Court stated that, in order for a transaction to receive a “cleansing” effect under Corwin, there must be a “far more proximate relationship” between the transaction for which stockholder approval is sought and the nature of the claims to be cleansed as a result of the stockholder vote.
In Liberty, Charter Communications, Inc. sought stockholder approval of the acquisition by Charter of two media communications companies. The stockholders were also asked to approve the issuance of equity to Charter’s largest stockholder, Liberty Broadband Corporation, ostensibly to raise capital to partially finance the acquisition, and a voting proxy agreement pursuant to which Liberty obtained the right to vote additional shares in the post-transaction company. In the proxy statement related to the deal, Charter expressly conditioned the consummation of the acquisition on obtaining stockholder approval of the Liberty share issuance and the voting proxy agreement. After a majority of the disinterested stockholders approved the acquisition, the Liberty share issuance and the voting proxy agreement, plaintiffs brought fiduciary duty claims against the Charter board of directors and Liberty with respect to the Liberty share issuance and the voting proxy agreement for allegedly structuring the transaction in a manner that benefited Liberty to the detriment of Charter’s other stockholders. The defendants argued that, under Corwin, the business judgment rule applied to the entire series of transactions and under that standard the complaint must be dismissed.
In analyzing the Corwin defense, the Court of Chancery focused on whether the stockholder vote had been coerced. Although the Court determined that Liberty ultimately did not constitute a controlling stockholder under the circumstances, the Court noted that if a controlling stockholder had stood on both sides of the transaction, the inherent coercion posed by the controller would render stockholder approval insufficient to cleanse the transaction under Corwin. Nevertheless, the Court concluded that the manner in which Charter had proposed the related transactions to the stockholders for approval was structurally coercive. The Court found that, for purposes of a motion to dismiss, the plaintiffs had adequately pled that the Liberty share issuance and the voting proxy agreement were unfair and that the Charter stockholders were required to approve them in order to obtain the benefits of the acquisition. Because the Charter stockholders were unable to evaluate the economic merits of the Liberty share issuance and the voting proxy agreement on their own, the Court determined that the stockholder vote on those items was coercive and the prerequisites of the Corwin defense had not been met.
In Lavin, the plaintiff submitted a demand to inspect West Corporation’s books and records for “potential wrongdoing and mismanagement” following stockholder approval of a merger of West with an affiliate of Apollo Global Management. West rejected the plaintiff’s demand on the basis that the plaintiff had not alleged a proper purpose. West argued that, under Corwin, stockholder approval had effectively “cleansed” the underlying transaction and, accordingly, the only possible proper purpose for a demand under the business judgment rule would be investigation of a waste claim, which had not been included as a purpose of the plaintiff’s demand.
The Court found Corwin inapplicable in a Section 220 proceeding on both procedural and public policy grounds. Procedurally, the Court reasoned that the applicability of a merit-based defense such as Corwin depends on nuanced factual and legal questions (such as whether the stockholder vote was fully informed and uncoerced) that are inappropriate for determination by the Court in a summary Section 220 proceeding. From a public policy perspective, the Court noted that Delaware courts frequently encourage plaintiffs to use Section 220 to fully investigate the merits of their claims prior to filing a complaint. The Court held that applying Corwin in this context would limit the most valuable of the plaintiff’s “tools at hand” to investigate potential claims and would ultimately deprive the Court of information that could assist it in making an informed decision as to whether a viable breach of fiduciary duty claim exists in the underlying proceeding.