The SLG Team Protects Your Business and Investments During Delaware Corporate Governance Disputes
Corporate governance dictates who makes decisions, how profits are distributed, who distributes them, and what happens when things go wrong. While corporate bylaws and contracts can mitigate many disputes, they are not perfect. When the people who run a company disagree with the people who own it, the fallout often moves from the boardroom to the courtroom.
At Shlansky Law Group, our Delaware corporate governance disputes attorneys have many years of experience in the high-pressure environment of Delaware corporate law. Our team regularly steps in to protect the rights of directors and investors when the stakes are at their highest.
If you or your company are dealing with boardroom deadlock or a shareholder lawsuit, contact our team today at 347.378.6990.
The Reality of Corporate Governance Conflicts
People start businesses with shared goals. Over time, those goals shift. A founder might want to reinvest every dollar into research and development. A private equity investor might want to slash costs and prepare the company for a quick sale.
When these competing visions collide, Delaware’s general corporation law (DGCL) provides the rulebook for resolving the conflict. Unlike alternative entities (such as LLCs and LPs), which rely heavily on customized contracts, traditional corporations are bound by the rigid framework of the DGCL. This framework imposes strict rules on how boards operate and outlines specific, unyielding fiduciary duties that directors owe to the corporation and its stockholders.
When someone believes those duties have been breached, litigation follows. These are not simple breach of contract cases. They involve deep dives into financial models, board meeting minutes, and the directors’ personal motivations. They require lawyers who understand business strategy as well as the law.
Whom We Represent in Delaware Governance Disputes
Boards of Directors and Individual Officers
Being a corporate director comes with a target on your back. When a company’s stock price drops, or a major transaction fails, shareholders inevitably look for someone to blame. They usually point at the board.
We defend directors and officers against claims alleging breaches of their fiduciary duties of care and loyalty. Often, we rely on the business judgment rule. This is a legal presumption that in making a business decision, the directors acted on an informed basis, in good faith, and in the honest belief that the action was taken in the best interests of the company. If we can prove that the business judgment rule applies, the court will not second-guess the board’s decision, even if that decision ultimately lost money.
However, defending these claims requires proving the board followed the right processes. We dig into the details to show that our clients asked the right questions, hired competent advisors, and acted without conflicts of interest.
Special Litigation Committees
Sometimes a board is accused of wrongdoing, and the company has to decide whether to sue its own directors. Because the board cannot make that decision objectively, they form a special litigation committee. This committee consists of independent directors who had no part in the challenged transaction.
We represent these committees and conduct independent investigations into the alleged wrongdoing. We review thousands of documents, interview witnesses, and ultimately advise the committee on whether to pursue the lawsuit in the corporation’s best interests. This requires absolute objectivity and a deep understanding of how the Delaware courts evaluate committee independence.
Investors and Stockholders
Shareholders hand over their money with the expectation that management will act in their best interests. When directors engage in self-dealing, authorize excessive executive compensation, or agree to sell the company for an unfairly low price, investors suffer.
We represent institutional investors, hedge funds, and marginalized minority shareholders. We help them force transparency through targeted records demands, and we take management to court when they abuse their power. We know how to spot the signs of a board that has stopped working for its owners.
The Corporate Entity
In many governance disputes, the corporation itself is named as a nominal defendant. The company has an interest in the outcome of the litigation, even if the primary fight is between the shareholders and the board. We represent the corporate entity to ensure its operations are protected and its assets are not wasted during the litigation process.
Common Types of Corporate Governance Litigation
Shareholder Litigation: Direct vs. Derivative Claims
There are two types of litigation that courts commonly see:
- Direct lawsuit. This occurs when one shareholder suffers an injury separate from the others. A common example is a company refusing to accept votes from that particular shareholder when electing the board. Since the harm directly affects just them, this is called a direct lawsuit.
- Derivative lawsuit. In these cases, the shareholder brings a suit in the company’s name against a third party. Often, this third party will be a director or officer of the very same company. These are complex because they lead to an odd situation in which a company sues its own leadership. A common example is when board members embezzle money from the company.
Caremark Claims and Oversight Failures
One of the most dangerous types of derivative lawsuits for directors is a Caremark claim. These arise when a company suffers a massive corporate trauma, such as a severe regulatory fine, a catastrophic product failure, or a criminal indictment.
The shareholders sue the board, claiming the directors failed to implement proper reporting systems or ignored glaring red flags that the company was breaking the law. These claims are notoriously difficult to win, as directors are protected from liability for simple negligence. However, if the plaintiff can show the board consciously ignored its oversight duties, the directors face personal liability. We know how to defend boards against these aggressive claims by documenting the compliance systems they had in place.
Entity Control Disputes
Sometimes the fight is simply about who gets to sit in the captain’s chair. Control disputes often erupt during proxy contests, where activist investors try to persuade shareholders to vote out the current board and install their own candidates.
These fights become incredibly bitter. Management might try to delay the annual meeting to buy time, or they might adopt a “poison pill” to prevent an aggressive investor from buying up too much stock.
Under Section 225 of the DGCL, the Delaware Court of Chancery has the power to determine the rightful directors and officers of a corporation. These proceedings are fast and focused. The court does not care about the company’s overall business strategy; it only concerns itself with whether the election was conducted legally and whether the votes were counted correctly. We represent both entrenched management, trying to defend their positions, and activist investors, trying to force a change in leadership.
Mergers and Acquisitions (M&A) Issues
More money changes hands in Delaware M&A litigation than anywhere else in the country. When a company agrees to be bought, shareholders frequently file lawsuits claiming the board left money on the table.
If a company is being sold for cash, the board’s duties change. Under a legal doctrine known as Revlon, the board is no longer supposed to protect the long-term corporate strategy. Their only job is to act as auctioneers and get the highest possible price for the shareholders. We litigate whether the board conducted a fair auction, whether it favored a buyer who promised to keep management employed, and whether it disclosed all material information to shareholders before the vote.
We also handle “busted deal” litigation. This happens when a buyer agrees to purchase a company, but gets cold feet before the closing date. The buyer will claim that the target company has suffered a “material adverse effect” and will try to walk away. The target company will sue to force the buyer to close the transaction. These cases require extensive economic analysis and move at breakneck speed.
Appraisal Rights Actions
Under Section 262 of the DGCL, shareholders who vote against a merger have the right to demand that the court determine the “fair value” of their shares. This is known as an appraisal action.
The shareholders argue that the deal price was too low and present expert financial models to prove the company was worth more. The company argues the deal price was exactly right, or perhaps even too high. The judge has to act as a financial referee, tearing apart discounted cash flow models and comparable company analyses to find the true value of the stock. Our attorneys work closely with leading financial economists to build airtight valuation models for our clients.
Frequently Asked Questions
Why are most international corporate governance disputes litigated in the Delaware Court of Chancery?
Delaware is the corporate capital of the world. More than 60% of Fortune 500 companies are incorporated in Delaware. Because a corporation’s internal affairs are governed by the law of the state where it is incorporated, disputes involving those companies naturally flow to Delaware.
The court has over 230 years of experience, meaning they have a wide body of prior decisions to draw upon. If you have a dispute about a specific type of preferred stock voting right, chances are a Delaware judge has already ruled on something similar. This vast body of case law allows businesses to accurately assess their legal risks before they take action. Predictability lowers the cost of doing business, which is exactly what international markets demand.
How does Delaware view “conflict transactions?”
A conflict transaction occurs when a director or controlling shareholder stands on both sides of a deal, or expects to receive a personal financial benefit that the other minority shareholders will not receive. A common example is a controlling shareholder deciding to buy out the remaining public investors and take the company private.
Delaware courts view these transactions with suspicion, as there is a clear conflict of interest. Normally, boards are protected by the business judgment rule (BJR). This rule protects corporate directors and officers from liability when they make business decisions, provided those decisions are made (1) in good faith, (2) with reasonable care, and (3) in the company’s best interest. The BJR’s protection is so strong that even courts will rarely interfere with a board’s business decisions.
When it comes to conflict transactions, however, the BJR largely goes out the window. Instead, those with the conflicts bear the burden of demonstrating that the transaction was fair. Oftentimes, they do this by setting up independent special committees to negotiate the deal and/or requiring minority shareholders to approve it. This can shift the burden back to those who claim the deal was unfair.
What is the Delaware General Corporation Law (DGCL)?
Delaware’s general corporation law is Delaware’s state statute that governs Delaware corporations from formation to dissolution. It has strict statutory requirements that clearly define how a corporation is to be run. For example, it dictates how dividends can be paid and the basic mechanics of shareholder voting.
What makes the DGCL unique among corporation law statutes in other states is that it is updated annually. Delaware has a team of corporate lawyers who monitor the decisions from the Chancery Court and receive feedback from the business community. This means that if a court ruling creates unintended consequences not intended by the state legislature, the DGCL can be amended quickly to fix the issue.
Secure Your Investments and Company with the SLG Team
Whether you are a minority investor fighting for transparency or a business partner attempting to get past a crippling operational deadlock, you need legal support from a highly experienced team that is intimately familiar with Delaware corporate governance disputes.
At SLG, we provide the knowledgeable and aggressive legal representation required to win in the settlement conference room and the courtroom. We know the statutes, the case law, and the court.
Do not let a corporate dispute ruin your investment or your company. Call SLG today at 347.378.6990 to schedule a confidential consultation with our Delaware law litigation team.
