The Nice List: Rounding Up Some Notable SCOTUS and Delaware Decisions in 2024

2024 brought several important decisions of the U.S. Supreme Court (SCOTUS) and the courts of the state of Delaware concerning how corporations, their boards of directors and officers interact with investors, regulators and other stakeholders. In this fourth installment of Season's Readings, we look back at a handful of significant decisions that will no doubt impact corporate decision-making in 2025 and beyond. Perhaps notably – but intentionally – absent from this roundup is new ink spilled on SCOTUS decisions ending Chevron deference in its Loper Bright decision and Corner Post, already well-covered by our HK colleagues.

• Delaware Supreme Court Expands Availability of Business Judgment Protection to Properly Structured Conflicts Transactions But Tightens Rules. In a case arising out of the proposed separation of Match.com from IAC Interactive,¹ the Delaware Supreme Court found that, if done right, the framework for obtaining business judgment rule protection for conflicted squeeze-out mergers announced in MFW.² can apply to any transaction where insiders receive a nonratable benefit (i.e., stand on both sides of the deal). Unfortunately for defendants, the court tightened the requirements for obtaining MFW In this regard, MFW provided that a controlling stockholder or another insider who stands to benefit from a proposed transaction in which he or she receives benefits unavailable to other stockholders can obtain business judgment protection if, from the outset, a fully empowered and independent committee of the board negotiates on behalf of the corporation, and the transaction is approved in a fully informed and noncoercive vote by a majority of the shareholders who do not receive the benefit. In IAC, the proposed transaction benefited the founders, and an independent committee was created; however, though the committee as a whole was independent, a minority of its members were determined not to be independent of the founders. The court found this was not sufficient and reiterated that each member of the committee needs to be fully independent. A key takeaway is that Delaware courts will carefully interrogate each of the elements of MFW, and deals must be structured to comply as strictly as possible with all of its elements to obtain business judgment rule protection.³

• Delaware Supreme Court Strikes Advance Notice Bylaw Enacted and Used by Board to Block Stockholders' Ability to Nominate and Vote for Insurgent Directors. In Kellner v. AIM ImmunoTech Inc.,⁴ the Delaware Supreme Court struck down several advance notice bylaw provisions as breaching the directors' duty of loyalty because they were found to have unreasonably thwarted stockholders' ability to nominate and elect insurgent directors in a proxy fight. Advance notice bylaws are common tools used by corporations to limit how and when stockholders can nominate candidates for the board of directors and ensure that stockholders receive relevant information about any such candidates. In the era of activist shareholder-led proxy fights, some corporations have used such bylaws to limit the ability of activists to wage proxy fights. Here, the court recognized the important purpose of such bylaws but noted that they cannot be used to thwart the stockholder franchise or entrench the incumbent board of directors. The court found that such bylaws can be challenged for 1) facial invalidity – whether the bylaw violates Delaware law or is inconsistent with the corporation's certificate of incorporation or addresses an improper subject matter, and 2) enforceability – whether the bylaw is enforceable under the circumstances. Facial validity challenges require that a plaintiff show that the bylaw is unenforceable under any circumstance. Challenges to enforceability turn on the way in which the bylaw was passed or applied. If the bylaw was passed for an improper purpose or is being used for an improper purpose (such as blocking stockholders from voting for the candidates of their choice), it can be struck down even if facially valid. The court noted a long line of Delaware decisions holding that simply because an inequitable act is technically legal, it is not shielded from challenge. Here, the court went through each of the bylaws and found in many instances, they were not only invalid on their face or as applied, but several were, in the court's view, entirely indecipherable, overly long and imposed "endless" and "unintelligible" burdens on stockholders wishing to nominate a candidate. The decision is important because it reinforces that there are limits on the creative use of advance notice bylaws to entrench incumbent directors.⁵

• Supreme Court Limits Use of In-House Administrative Courts (That the SEC Has Mostly Stopped Using for Litigation Anyway). In a 6-3 decision in SEC v. Jarkesy,⁶ SCOTUS held that when the SEC seeks civil penalties for securities fraud, the Seventh Amendment to the U.S. Constitution requires that the defendant have a right to a trial by jury. Despite enabling legislation that allowed the SEC to use in-house administrative law judges (and the SEC's push to lean into that process in prior years), SCOTUS in Jarkesy held that securities fraud claims were derived from common-law fraud claims and, therefore, legal in nature. As a result, the SEC's actions were "in the nature of an action at common law … and adjudication by an Article III court is mandatory."⁷ Though this case has deservedly received significant attention for its likely impact on myriad agencies' own in-house administrative processes, it may turn out that Jarkesy will not have a significant impact on civil fraud damages claims, as the SEC has filed its litigated actions in federal district court in recent years. For instance, according to the SEC, the agency in fiscal year (FY) 2024 brought 424 of 583 total actions as administrative proceedings and only 159 actions in federal district court. Jarkesy, however, closes the door on such claims and raises the prospect that it could be extended to other cases brought before SEC in-house judges.⁸

• SCOTUS Hears Argument on Requirements to Plead Securities Fraud, Then Dismisses Claims. In a closely watched private civil securities fraud class action against microchip maker NVIDIA, SCOTUS heard oral argument on Nov. 14, 2024.⁹ At issue: whether under the Private Securities Litigation Reform Act, a class plaintiff must identify specific internal company documents that contradict the public statements of the defendants. Over the past 20 years, as SCOTUS and lower courts have heightened the requirements for pleading a federal securities fraud claim, it has become commonplace for plaintiffs to hire private investigators and seek out confidential informants with access to internal company documents that call into doubt the public statements of the corporation and its officers or tend to show their level of alleged scienter. In NVIDIA, the plaintiffs alleged the company and its CEO downplayed the significance of crypto mining to its chip business. When that market faltered and the company's stock price dropped, the plaintiffs sued. The defendants moved to dismiss because, among other things, the plaintiffs did not cite to contradictory internal documents as part of their complaint. At oral argument, a majority of the Justices appeared skeptical of the defendants' claim that such citations were required to meet the pleading burden. That skepticism won out apparently, as earlier this week SCOTUS dismissed the company's appeal as improvidently granted, without further explanation.¹⁰ The case will move forward toward trial.

Notes

¹ In re Match Group, Inc. Deriv. Litig., 315 A.3d 446, 473 (Del. 2024).

² In re MFW S'holders Litig., 67 A.3d 496, 532 (Del. Ch. 2013), aff'd sub nom. Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).

³ Match Group, 315 A.3d at 473.

⁴ 320 A.3d 239, 266 (Del. 2024).

⁵ Id. at 267.

⁶ 144 S. Ct. 2117, 2139 (2024).

⁷ Id. at 2132.

⁸ Id. at 2126.

⁹ E. Ohman J:or Fonder AB v. NVIDIA Corp., 81 F. 4th 918 (9th Cir. 2023).

¹⁰ NVIDIA Corp. v. E. Ohman J:or Fonder AB, 604 U.S. __ (2024).