CURRENT MONTH (July 2021)
Business Litigation and Dispute Resolution
The Ninth Circuit Affirms Denial of a Non-Signatory's Motion to Compel Arbitration
by Leslie Berkoff, Moritt Hock & Hamroff LLP
In a July 2021 decision the US Court of Appeals for the Ninth Circuit again affirmed a denial of a non-signatory’s motion to compel arbitration. Setty v. Shrinivas Sugandhalaya LLP, Case No.18-35573 (9th Cir. July 7, 2021) (Nelson, J.) (Bea, J., dissenting).
In this new decision, the Ninth Circuit found that federal rather than Indian law should be applied and focused on the New York Convention which promotes “the need for uniformity in the application of international arbitration agreements.” The Court found that “federal substantive law” should be applied in cases involving the New York Convention when determining the arbitrability of federal claims by or against non-signatories. The Ninth Circuit concluded that while a non-signatory could compel arbitration in a New York Convention case, the dispute had to be tied or derived from an agreement containing an arbitration clause. In the instant case, the Ninth Circuit found that the claims asserted had “no relationship with the partnership deed containing the arbitration agreement at issue in this appeal.” As such, the Court determined that the subject matter of the dispute was not intertwined with the arbitration agreement and thus the doctrine of equitable estoppel was not applicable.
In rendering its decision the Ninth Circuit looked to an earlier Supreme Court decision, GE Energy Power Conversion France SAS, Corp. v. Outokumpu Stainless USA, LLC, No. 18-1048, 2020 WL 2814297 (June 1, 2020), wherein the Supreme Court had held that in certain circumstances, even non-signatories to an agreement may compel arbitration of international disputes. The Ninth Circuit noted that while the Supreme Court in GE Energy had “specifically concluded” that “the New York Convention does not conflict with enforcement of arbitration agreements by non-signatories under domestic-law equitable estoppel doctrines,” the Supreme Court had also noted that the New York Convention was never intended to “set a ceiling that tacitly precludes the use of domestic law to enforce arbitration agreements.” Moreover, the Supreme Court had not determined whether GE Energy could enforce the arbitration clauses under principles of equitable estoppel, nor did it determine which body of law governed. In fact, the Supreme Court had also recognized that courts of numerous contracting states to the New York Convention permit non-signatories to compel arbitration under their domestic laws.
While not authorized in the instant case, these decisions clearly do not preclude non-signatories in the right circumstances to take advantage of arbitration clauses in related agreements.
Delaware Supreme Court Holds Entire Fairness Not Enough to Save Dilutive Stock Sale
Even if a transaction satisfies the entire fairness standard—the most rigorous standard of review under Delaware corporate law—it may still be invalidated if undertaken for the inequitable purpose of thwarting a stockholder’s voting rights, as the Supreme Court of Delaware recently held in Coster v. UIP Companies, Inc., 2021 WL 2644094 (Del. June 28, 2021).
Marion Coster and Steven Schwat each owned 50% of UIP Companies, Inc., whose three directors included Schwat and Peter Bonnell. When Coster entered into negotiations to sell her stake in UIP, she soon clashed with the directors over the adequacy of documents provided to her in connection with that sale. Coster responded by shifting her focus to changing the composition of the board.
After multiple failed attempts by Coster and Schwat to agree upon a new board, the two 50% stockholders were at a stalemate. When Coster asked the Delaware Court of Chancery to appoint a custodian to break the deadlock, the directors diluted Coster’s 50% stake by selling Bonnell one-third of UIP, at a price derived by a valuation consultant.
Thereafter, Coster filed an action to cancel the sale. Following trial, the Court of Chancery held that a majority of the directors were interested in the sale, and thus bore the burden of proving entire fairness, which requires proof that the sale was the product of a fair process and resulted in a fair price. The Court also found that the board “obviously desired to eliminate [Coster’s] ability to block stockholder action” and was “significantly motivated by a desire to moot” the action to appoint a custodian. The Court of Chancery found, however, that, because the valuation was credible and the process was fair, the sale satisfied Delaware’s most rigorous standard of review. Therefore, any consideration of a less rigorous standard was deemed unnecessary.
On appeal, the Delaware Supreme Court disagreed with this approach, explaining that “inequitable action does not become permissible simply because it is legally possible.” Instead, the Supreme Court held that, under the principles espoused in Schnell v. Chris-Craft Industries, Inc., 285 A.2d 437 (Del. 1971), and Blasius Industries, Inc. v. Atlas Corporation, 564 A.2d 651 (Del. Ch. 1988), if the board had approved the sale “for inequitable reasons, or in good faith but for the primary purpose of interfering with Coster’s voting rights . . . without a compelling reason to do so,” the sale could not withstand judicial scrutiny, even if it satisfied the entire fairness standard. The Supreme Court thus remanded the case for further consideration.
With Mixed Results, Court of Chancery Applies Cornerstone in Latest Chapter of Oracle Litigation
In In re Oracle Corporation Derivative Litigation, 2021 WL 2530961 (Del. Ch. June 21, 2021), the Court of Chancery considered allegations that Lawrence Ellison, Oracle Corporation’s founder and 37.8% stockholder, used his control of Oracle to force an acquisition of NetSuite, Inc., another Ellison-founded company in which he and his affiliates held a 44.8% stake. In the context of deciding several individuals’ motions to dismiss, the Court dismissed claims against two of Oracle’s officer-directors while allowing claims to proceed against an outside director.
As the Court of Chancery found, because officer and director Mark Hurd acted in his capacity as an Oracle officer when instructed to approach NetSuite about a potential transaction and when he expressed a commitment to “retaining NetSuite’s organization,” he could not be exculpated for breaches of the duty of care. However, while Hurd allegedly received instructions to pursue disloyal actions with respect to the transaction, the Court found no allegation that he acted on such instructions. The Court further rejected claims that Hurd withheld material information from the special committee, finding that either the special committee already knew or should have known the relevant information or that any such withholding was not done knowingly. Accordingly, the claims against Hurd were dismissed.
Next, the Court found officer-director Jeffrey Henley acted as a director when attending a board meeting where the potential acquisition was discussed and when working to “crush” competition from NetSuite. The Court thus applied the two-part test set forth in In re Cornerstone Therapeutics Inc., Stockholder Litigation, 115 A.3d 1173 (Del. 2015), to assess the duty of loyalty claim against Henley: namely, a director has breached the duty of loyalty when he or she both “(a) lacked independence from an interested party, and (b) ‘acted to advance’ the self-interest of the same interested party.” While the Court had previously found that Henley (along with Hurd and James) was not independent, it found Henley’s vote to direct management to pursue a potential transaction and his alleged withholding of specialized knowledge about NetSuite’s competition with Oracle did not advance Ellison’s interests. The Court therefore dismissed the claims against Henley.
On the other hand, the Court held that the claims against outside director Renée James met the second prong of Cornerstone because, as chair of the special committee, James had taken an active role in the transaction and knew of the competitive leverage Oracle held over NetSuite. Thus, it was reasonably conceivable that James had acted to advance Ellison’s interests by securing the deal at an inflated price. Accordingly, the Court concluded that the claims against James survived her motion to dismiss them.