Delaware Court of Chancery Provides New Guidance for Seeking Interim Distributions in Connection with Corporate Dissolution under Sections 280-282 of the DGCL
By Rafael Zahralddin, Lewis Brisbois
The Delaware Court of Chancery recently denied a request by a corporation for an interim distribution prior to final payment of creditors under the corporate dissolution process of sections 280 and 281 of the Delaware General Corporation Law. In re Anavrin, Inc. C.A. No. 2022-0197-JTL, Order 1 of 2 (Del.Ch. Aug. 16, 2022). Sections 280, 281, and 282 of the Delaware General Corporation Law comprise the statutory framework for an orderly corporate dissolution that provides finality for directors and the various constituencies owed payment, including unknown creditors. A corporation can either seek the Court’s assistance under 280 and 281(a) or use the unsupervised process under section 281(b), all of which shield directors from liability from post-dissolution lawsuits. Under the court-supervised process, the corporation will “smoke out claims, pay off claims in accordance with statutory priorities, and establish reserves for contingent claims.” Territory of U.S.V.I. v. Goldman Sachs & Co., 937 A.2d 760, 798 (Del. Ch. 2007), aff’d, 956 A.2d 32 (Del. 2008).
Vice Chancellor Travis Laster previously broke new ground with his decision in In re Altaba, 2020-0413-JTL, where he found that a company had met the high burden to make an interim distribution. Section 280 and 281(a) of the DGCL do not contemplate an interim distribution. However, the Court found that in certain rare circumstances, interim distributions could be available after a full evidentiary hearing. Applying the summary judgment standard, Vice Chancellor Laster found that the Altaba movant had established that a distribution was warranted because (i) business operations had ceased three years prior to the request, (ii) the buyer of the assets was assuming or indemnifying the corporation for many obligations (including some of the objecting creditors), and (iii) the movant proved that both the individual reserves and the overall reserves, which could be reallocated, could cover any overruns.
In denying the interim relief in Anavrin, however, Vice Chancellor Laster distinguished the circumstances in Anavrin from Altaba and provided a clear directive to the movant (and future movants). First, the resolution of claims amounts and the basis for reserves had to be supported with evidence as the high standard of a final judgment is contemplated by the statute. It follows that any Court-created remedies had to meet a similar exacting evidentiary hurdle, which the Court reiterated was akin to a summary judgment standard. Second, the Court, citing to Section 280(c), made it clear that this was not a matter in which the Court would defer to business judgment of the movant corporation or its directors, as the statute makes it clear that the Court has to make the determination. The Court also indicated that the evidentiary record would be better received by the Court if it consisted of a “business-oriented explanation, rather than documents that sound like lawyers wrote them.”
Construction Industry Laborers Pension Fund v. Bingle
By Alex B. Haims, Young Conaway Stargatt & Taylor LLP
In Construction Industry Laborers Pension Fund v. Bingle, Vice Chancellor Glasscock granted a motion to dismiss a derivative suit brought by stockholders of SolarWind Corporation (the “Company”) following a cyberattack on the Company’s The Plaintiffs alleged that the Company’s Board of Directors (the “Board”) breached their oversight duties under Caremark by failing to adequately address potential cybersecurity risks leading up to the attack, which caused the stock to drop The Court explained that to sustain a claim under Caremark, Plaintiffs must plead a lack of oversight “so extreme that it represents a breach of the duty of loyalty,” which requires “pleading of scienter, demonstrating bad In dismissing the suit, the Court held that while the Board’s reporting system was “subpar” and “failed to prevent a large corporate trauma,” the Plaintiffs were unable to plead specific facts for the Court “to infer bad faith liability” under
The Court highlighted that the Board put in place “at least a minimal reporting system about corporate risk, including cybersecurity,” by establishing two subcommittees responsible for cybersecurity oversight following the Company’s 2018 IPO, including one which was briefed on cybersecurity inThe Plaintiffs alleged that the subcommittee’s failing to report to the full Board following the briefing was an example of the Board failing to act in the face of a “red However, the Court held that the briefing was an “instance of oversight,” and while the subcommittee’s failure to report was “far from ideal,” it was not enough to establish liability under Caremark without specific allegations of what information the members
Accordingly, this case, along with the Court of Chancery’s decision in Firemen’s Retirement System of St. Louis on behalf of Marriott International, Inc. v. Sorenson, which also dismissed derivative claims in the context of cybersecurity breaches, emphasizes the difficult standard that Plaintiffs face in pleading Caremark claims in Delaware in this