By Gustavo F. Bruckner and Danielle Sharon
On December 6, 2024, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery granted final approval to a groundbreaking settlement in In re Qurate Retail, Inc. Derivative Litigation, C.A. No. 2021-1116-SG (Del. Ch.). This stockholder derivative action, brought on behalf of Qurate Retail, Inc., alleged that certain senior executives and board members engaged in self-dealing transactions that benefited company insiders at the expense of stockholders. Pomerantz, serving as Co-Counsel, helped negotiate a settlement that implements critical governance reforms designed to restore corporate accountability at Qurate.
Class action securities litigations are brought by stockholders on behalf of a group, or “class,” of similarly defrauded investors and usually seek recovery of financial losses due to fraud. They often result in direct monetary compensation for stockholders. Stockholder derivative actions, on the other hand, are brought on behalf of the corporation by stockholders against the directors of a corporation for the benefit of the corporation and its stockholders in order to remedy a harm to the corporation. Often, these suits seek to compel changes in corporate governance. The Qurate case aimed to rectify structural governance failures that allowed insiders to extract unfair benefits. The settlement delivered significant corporate governance changes, including the reinstatement of a critical call right that Qurate’s predecessor had originally paid $150 million for in 1998, along with new safeguards against unchecked insider control. These reforms will provide lasting benefits to the company and its investors, ensuring greater oversight and preventing similar issues in the future.
What Makes This Case Unique
The case centered around a rare and impactful series of transactions that raised fundamental questions about the corporate governance of Qurate, a leading multi-platform retailer. Specifically, it involved the controversial 2021 transactions between Qurate senior executives, Gregory B. Maffei, CEO and President, and Dr. John C. Malone, a controlling stockholder, which effectively consolidated control of the company in the hands of insiders by stripping Qurate of a crucial call right that had been acquired for $150 million in 1998. This eliminated Qurate’s ability to reclaim control of shares, representing a major shift in corporate control dynamics.
What attracted Pomerantz to the case was the opportunity to challenge this blatant conflict of interest and restore fundamental governance mechanisms that protect stockholders. The case was also emblematic of broader corporate governance concerns, particularly in companies with dual-class stock structures where insiders have disproportionate control, leaving public stockholders at a disadvantage. The case offered a significant opportunity not only to seek justice for stockholders but also to establish important reforms that would serve as a model for good governance.
Understanding Derivative Suits and Books and Records Demands
A derivative lawsuit is brought by a stockholder on behalf of a corporation against its executives, board members, or other insiders when they have allegedly engaged in misconduct that harms the company. These cases seek remedies that benefit the company directly when its board of directors fails to take appropriate action to address alleged wrongdoing.
Before filing a derivative suit, stockholders frequently issue a books and records demand, a legal request under most states’ laws that grants stockholders the right to inspect certain internal corporate documents to investigate potential misconduct. In this case, stockholders obtained valuable internal documents that strengthened their claims against Qurate’s leadership.
The Case: How Pomerantz Took Action
Pomerantz pursued this case after uncovering a series of transactions that raised serious concerns about cor¬porate governance at Qurate. The litigation focused on a 2021 transaction in which Malone, Qurate’s controlling stockholder, transferred his super-voting Series B shares to his long-time business associate, Maffei. This move, plaintiffs alleged, was orchestrated to consolidate control in the hands of insiders and effectively deprived Qurate of the ability to reclaim those shares through an existing call right. Specifically, the 2021 transaction involving Qurate triggered an accelerated vesting of Maffei’s options under his employment agreement, which would have provided him with substantial benefits unavailable to other stock¬holders.
The complaint alleged that these transactions:
• Eliminated a Valuable Corporate Right – Qurate’s predecessor had paid $150 million in 1998 for the ability to repurchase the controlling Series B shares under certain conditions. The 2021 transactions stripped Qurate of this right without adequate stockholder consideration.
• Benefited Insiders at the Expense of Stockholders – The transfer of control from Malone to Maffei did not provide any benefit to the company or its investors but instead entrenched management’s authority and en¬riched Maffei.
• Violated Fiduciary Duties – By approving and facilitat¬ing these transactions, certain Qurate board members breached their fiduciary duties by prioritizing insider interests over those of public stockholders.
Procedural History: A Complex and Hard-Fought Case
After making a books and records request and reviewing confidential internal documents, the action was initiated on December 28, 2021, when plaintiffs filed a derivative complaint on behalf of Qurate in the Delaware Court of Chancery.
• Motion to Dismiss Granted in Part and Denied in Part – Defendants moved to dismiss the case, arguing that the board’s actions were legally permissible. While the Court dismissed claims against certain directors who were found not to have been directly involved in the alleged misconduct, it upheld the claims against the key figures, including Malone and Maffei, ruling that plaintiffs had sufficiently alleged breaches of fiduciary duty as to those directors.
• Demand Futility Argument – In derivative suits, plain¬tiffs must typically demonstrate demand futility, meaning they must show that asking the company’s board for per¬mission to take action would have been pointless be¬cause members of the board were likely conflicted. One particularly unusual but helpful development in the case was the appearance of a photo on social media depict¬ing Malone on a private cruise alongside a purportedly uninterested board member. This evidence played a pivotal role in establishing demand futility, as it visually demonstrated the influence of conflicted insiders over the board. The image provided tangible proof that key decision-makers were not independent, further sup¬porting claims that insiders improperly influenced the transactions. This allowed the case to proceed without requiring plaintiffs to first seek board permission before taking action.
• Extensive Discovery and Negotiations – Over the course of litigation, Pomerantz engaged in rigorous discovery, uncovering key evidence that supported the claims of self-dealing and improper governance. This included obtaining internal communications, board meeting minutes and financial records that demonstrated the potential conflicts of interest inherent in the transactions.
The Settlement: Major Wins for Stockholders
The settlement delivered meaningful governance reforms to protect Qurate’s stockholders and ensure that similar improper interested transactions do not occur in the future.
Key settlement terms include:
• Restoration of the Call Right
1. Qurate successfully reinstated a call right over Maffei’s Series B shares, ensuring the company has a mechanism to reclaim control in certain circumstances.
2. The new call right closely mirrors the original 1998 agreement, allowing Qurate to recapture these shares under defined conditions.
3. This provision restores balance to Qurate’s corporate structure, preventing insiders from consolidating excessive control.
• Independent Oversight of Insider Transactions
4. Future material transactions involving Malone or Maffei must be reviewed and approved by an independent board committee.
5. This ensures that stockholder interests are prioritized over insider benefits and enhances overall corporate transparency.
Board Composition Reform
6. Malone agreed not to seek reelection after his term ends in 2025,
which alleviates concerns about concentrated control and potential conflicts of interest.
7. This reform reduces the likelihood of corporate decisions being
unduly influenced by a single controlling stockholder.
These reforms, while non-monetary, are significant governance changes, ensuring a more equitable decision-making process for all Qurate stockholders.
Court Commentary on the Settlement
Vice Chancellor Glasscock praised the settlement, stating:
• “The chances of a really lucrative cash award after trial were limited, and so it appears to me to be not only fair, but a very commendable settlement.”
• “These [therapeutic benefits] are so neatly tailored to the situation that brought us all here that I have got to congratulate the parties for coming up with them.”
Pomerantz’s Commitment to Stockholders
Pomerantz’s Corporate Governance team has long been at the forefront of stockholder rights litigation, advocating for corporate accountability and transparency.
The Qurate settlement establishes a precedent for corporate governance reforms in similar cases. The requirement that insider transactions undergo independent scrutiny is an essential safeguard, ensuring that public companies remain accountable to all stockholders, not just controlling insiders.