As Berger Harris continues to weather the onslaught of COVID-19 and the resulting disruptions to the financial and business sectors, our thoughts are first-and-foremost with our families, co-workers, colleagues, friends and communities. We hope that all of you remain safe and healthy during these uncertain times.
As we endure the current lockdown, we thought it might be helpful to communicate a few of the legal issues that are top-of-mind at Berger Harris from a Delaware corporate and commercial litigation perspective:
- Chancery Court Remains Responsive: Despite many changes in protocol, including judges working from home, the Delaware Court of Chancery and Superior Court remain open and highly responsive. We recently participated in a 3-hour telephonic hearing in which newly sworn-in Vice Chancellor Paul A. Fioravanti addressed multiple motions with the diligence and acumen that defines the Court (please call me if you’d like more detail on the new VC). Additionally, at the end of March, the Vice Chancellor Laster determined that the Court could assert jurisdiction over claims that were subject to a NY forum- selection clause, after finding that NY courts were not positioned to avert irreparable harm because they were closed due to COVID-19 and the tests for Delaware personal and subject matter jurisdiction were otherwise satisfied. Conduent Business Services, LLC v. Skyview Capital LLC, C.A. No. 2020-0232-JTL, transcript (Del. Ch. Mar. 30, 2020).
- A Return of “Busted Merger” Cases: With the recent major market correction and resulting liquidity crisis, it is unsurprising that several pending M&A transactions are encountering substantial barriers to closing, which appears to be sparking a return of “busted merger” litigation we experienced during the 2007-08 financial melt-down. Attached are two complaints filed in Chancery in the last two weeks relating to imperiled deals (only one of which concerns an MAE clause). At the Tulane Corporate Law Institute conference in early March (just before the lockdown), Vice Chancellor Slights directed attention to the test for a MAC laid out by former Vice Chancellor Lamb in his 2008 decision in Huntsman: “whether there has been an adverse change in the target's business that is consequential to the company's long-term earnings power over a commercially reasonable period, which one would expect to be measured in years rather than months.” Hexion Specialty Products, Inc. v. Huntsman Corp., 965 A.2d 715, 738 (Del. Ch. 2008) (emphasis added). While the duration of COVID-19’s impact on various enterprises’ long-term earnings power is still unclear, this measuring stick may be difficult to meet. Of course, much will ride on the specific language of the MAC/MAE clause at issue.
- Assignment for the Benefit of Creditors: If a Delaware entity becomes insolvent, Delaware law provides an alternative to a costly, drawn-out bankruptcy. A debtor can make an Assignment for the Benefit of Creditors (ABC), a liquidation mechanism. An ABC may allow a debtor to assign its assets to creditors free and clear of unsecured debt. The ABC may also allow the business to wind down in an orderly manner, simultaneously minimizing potential liability for directors and officers. In an ABC, the debtor assigns its assets to an assignee who is then charged with liquidating the businesses assets and paying creditors. In certain circumstances, it may be advisable to create a new Delaware limited liability company to act as the assignee, which can insulate potential liability and claims by debtors. While each situation is different and requires its own analysis, an ABC may provide an affordable and expedient way to liquidate an insolvent business.
- Fiduciary Oversight: While it is unlikely that a court would find corporate managers in breach of their oversight and control duties – otherwise known as Caremark duties – for COVID-19-related consequences, in the future directors and officers would be well-advised to adopt some sort of board-level catastrophic-loss-prevention mechanism, not only to safeguard against any potential Caremark claims (and related books-and-records demands), but also to protect the long-term sustainability of the enterprise. Caremark claims have long been considered one of the most difficult fiduciary-duty actions to maintain, but were recently given new life in Marchand v. Barnhill, 212 A.3d 805 (Del. Supr. 2019). A well-functioning “risk, compliance and sustainability” board committee, supported by business consultants and experts, can fulfill management’s Caremark duties relatively easily and minimize risk to the enterprise in the process. Put to its maximum use, such a committee can also dramatically increase the bona fides of an enterprise’s ESG program and garner multifaceted tangible and intangible returns.
Finally, like most law firms, Berger Harris has directed its attorneys and staff to work remotely to the maximum extent possible until the danger passes. Accordingly, while we are doing our best to field telephone traffic, calls to the firm’s general number may be diverted to our staff directory. My extension and cell number are listed below in case you need to reach me.
Again, we hope that you and your loved ones remain safe and healthy over the coming weeks and months. Please feel free to contact me with any questions or concerns.