Delaware Business Litigation Report

Chancery Dismisses Caremark Action Based on Insufficient Allegations of Bad Faith

Clem v. Skinner, et al., C.A. 2021-0240-LWW (Del. Ch. Feb. 19, 2024)
This Caremark decision involved the retail pharmacy company, Walgreens, and concerned billing practices for a particular insulin pen product that gave rise to unnecessary refill reminders and overbilling, which led to a government investigation and a whistleblower lawsuit. A stockholder plaintiff brought this related derivative action against Walgreens' directors and officers. The Court of Chancery easily disposed of the claims under Rule 23.1 for failure to allege demand futility. According to the Court, the plaintiff's allegations demonstrated that Walgreens' board fulfilled its oversight duty by enacting a board-level monitoring system and by responding to red flags. Indeed, soon after learning of the whistleblower action, the company considered and remedied the problem through software changes. And the plaintiff's contention that the board's actions “came too late and did too little” was “incompatible with bad faith—a necessary component of any Caremark claim.” Notably, the Court expressed some concern about the uptick of Caremark suits, cautioning that “more harm than good comes about if Caremark claims are reflexively filed” whenever an alleged defect is discovered or investigated.

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Chancery Denies Attorneys’ Fees for Appointment of New Directors Following Assertion of Derivative Claims

In re Oracle Corp. Deriv. Litig., Consol. C.A. No. 2017-0337-SG (Del. Ch. Feb. 7, 2024)
Under the mootness rule, a stockholder plaintiff can be awarded attorneys’ fees when the plaintiff’s litigation efforts result in the defendants taking action that results in a corporate benefit. In this case, following the stockholder-plaintiffs’ assertion of derivative claims, new independent directors were appointed by the corporation to serve on a special litigation committee to investigate the merits of the litigation. Although the underlying derivative claims were rejected after trial, the plaintiffs argued that the appointment of new directors nonetheless created a corporate benefit and, in fact, resulted in Oracle’s board having at least as many independent directors as supposedly non-independent directors. The Court disagreed, however, and held that the plaintiffs were not entitled to a mootness fee. The Court reasoned that the appointment of the new directors was not a significant benefit because the board was determined to have acted properly in the transaction that gave rise to the underlying lawsuit. Furthermore, the stockholder-plaintiffs did not seek the appointment of independent directors as part of the lawsuit. Therefore, the Court denied the plaintiffs’ request for attorneys’ fees.

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Chancery Upholds Challenge to TripAdvisor’s Conversion from a Delaware Corporation into a Nevada Entity

Palkon v. Maffei, C.A. 2023-0449-JTL (Del. Ch. Feb. 20, 2024)
This decision arose out of TripAdivor’s conversion from a Delaware corporation into a Nevada corporation. The company’s CEO and Chair had voting control and approved the conversion. The board did not condition the transaction on special committee approval or a majority of the minority stockholder vote. The plaintiff challenged the conversion on the grounds that the CEO and the board approved it to secure litigation protections for themselves under Nevada law more favorable than under Delaware law. More ›

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Chancery Invokes the Implied Covenant to Invalidate Shareholder Rights Plan

Whitestone REIT Operating Partnership L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW (Del. Ch. Jan. 25, 2024)
In Delaware, the implied covenant of good faith and fair dealing is inherent in all contracts and ensures that the “fruits of the bargain” are not frustrated by arbitrary or unreasonable action. More ›

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Delaware Supreme Court Upholds Forfeiture for Competition Provision in Partnership Agreement

Cantor Fitzgerald, L.P., v. Ainslie, No. 162, 2023 (Del. Jan. 29, 2024)
Here, a limited partnership agreement authorized the partnership to withhold distributions owed to a partner who withdraws from the partnership and engages in specified competitive activities. The partnership attempted to enforce the agreement and several former partners sued in Delaware. At the trial court level, the Court of Chancery scrutinized the provision using the standard for non-compete covenants and found the provision overbroad and unreasonable and thus invalid on policy grounds. On appeal, the Delaware Supreme Court reversed and remanded. The Supreme Court held that forfeiture for competition provisions in partnership agreements should not be reviewed for reasonableness. Rather, they should “enjoy … deference on equal footing with any other bargained-for-term in a limited partnership agreement.” The Supreme Court’s reasoning largely turned on the express policy of the Delaware limited partnership statute (DRULPA) to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.

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Chancery Excuses Condition in Stockholder Agreement When Company Caused its Non-Occurrence

Chordia v. Lee, C.A. No. 2023-0382-NAC (Del. Ch. Jan. 4, 2024)
In this case, as part of a sale of a majority interest, a stockholder agreement granted the founders the ability to designate members to the board of directors so long as at least one founder remained at the company as an officer or employee. The agreement also granted the board the ability to hire and fire executive employees, but did not allow the board to terminate non-executive employees. In addition, the stockholder’s agreement required that the company use reasonable efforts to ensure the rights in the agreement remained effective for the founders’ benefit. More ›

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Chancery Invalidates Elon Musk’s $55.8 Billion Pay Package

Tornetta v. Musk, et al., C.A. 2018-0408-KSJM (Del. Ch. Jan. 30, 2024)
Stockholders of Tesla, Inc. brought a derivative action against Elon Musk and six individual Tesla directors, alleging that the directors breached their fiduciary duties by awarding Musk performance-based stock options in January 2018 with a potential $55.8 billion maximum value and $2.6 billion grant date fair value. Following a trial, the Court of Chancery held that the defendants failed to meet their burden to prove the fairness of the compensation plan and granted the plaintiffs’ request to rescind the plan in its entirety. More ›

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Chancery Addresses Pleading-Stage Arguments for Dismissal in LLC Dispute

Principal Growth Strategies LLC v. AGH Parent LLC, C.A. 2019-0431-JTL (Del. Ch. January 25, 2024)
This decision provides helpful guidance to practitioners to address pleading-stage arguments for dismissal. The plaintiff asserted fiduciary claims against the controller and manager of a Delaware LLC, who allegedly engineered an asset-swap transaction at the expense of the LLC. The Court of Chancery largely denied the motions to dismiss. More ›

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Chancery Confirms Bad Faith Pleading Standard for Officer Caremark Claims

Segway Inc. v. Hong Cai, C.A. No. 2022-1110-LWW (Del. Ch. Ct. Dec. 14, 2023)
The Caremark doctrine recognizes the duty of oversight for directors of Delaware corporations. Under In re McDonald's Corp. Stockholder Derivative Litigation, 289 A.3d 343 (Del. Ch. Jan. 26, 2023), corporate officers, and not just directors, owe a duty of oversight, at least within the scope of each officer’s responsibilities. This decision confirms that the same pleading standard – one requiring bad faith – applies to officer oversight claims. Here, the plaintiff brought such a claim against its former president arising out of declining sales of the company's transportation devices and an increase in accounts receivable. More ›

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Chancery Finds Amendment to LLC Agreement Invalid for Want of Manager’s Involvement

DiDonato v. Campus Eye Management, LLC, C.A. No. 2023-0671-LWW (Del. Ch. Jan. 31, 2024)
In governance disputes among LLC constituencies, the operating agreement is the beginning and often end point. This action involved a challenged amendment to an LLC agreement, which provided in relevant part: “[t]he Agreement may be amended, modified, waived or supplemented by the Manager with the written consent of all Members.” The Court found this language was unambiguous and expressly required the manager to be involved in any amendment. In doing so, the Court declined to read the provision – which was the only one in the contract addressing amendments – as permissive and allowing other forms of amendment. Considering the provision, the Court also declined to invoke Section 18-302(f) of the LLC Act, which allows amendments with approval of all members, finding that section applies only where the LLC agreement lacks a mechanism for amendments.

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Chancery Clarifies Controlling Stockholder Fiduciary Duties in Sears Litigation

In re Sears Hometown and Outlet Stores, Inc. S’holder Litig., C.A. No. 2019-0798-JTL (Del. Ch. Jan. 24, 2024)
Here, a special committee of the board supported a plan to liquidate the company’s floundering business segment and continue operating its more promising business segment. The company’s controlling stockholder opposed the plan and took action to prevent its implementation. He first adopted a bylaw that created hurdles to the plan’s approval. He then replaced two of the three directors serving on the special committee who most favored the plan. He ultimately agreed to acquire the minority stockholders’ interests in a squeeze-out transaction negotiated with the remaining special committee member.  More ›

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Chancery Dismisses Caremark Oversight Claims

In Re ProAssurance Corp. Stockholder Derivative Litig., Consol. C.A. No. 2022-0034-LWW (Del. Ch. Oct. 2, 2023)
Claims against corporate fiduciaries for breaches of the duty of oversight are colloquially referred to as “Caremark” claims. This decision exemplifies why Caremark claims are among the most difficult to prosecute and “should be reserved for extreme events.” More ›

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Chancery Decides Scope of Expert’s Authority in Valuation Dispute Resolution Mechanism

Paul v. Rockpoint Group LLC, C.A. 2018-0907-JTL (Del. Ch. Jan. 29, 2024)
This dispute arose from a disagreement over the authority of an appraiser to include legal assertions and extrinsic evidence in his valuation. The underlying dispute stemmed from the departure of a co-founder from a limited liability company. The parties' LLC Agreement established a dispute resolution mechanism to determine the value of the co-founder's share if a subsequent qualifying transaction occurred. More ›

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Chancery Orders LLC’s Dissolution as Sanction

Kaufman v. DNARx LLC, C.A. No. 2022-0968-KSJM; C.A. No. 2022-0982-KSJM (Del. Ch. Dec. 29, 2023) (ORDER)
The Court of Chancery has broad power to address litigation misconduct. This sanctions order arose out of litigation concerning a loan to a start-up Delaware LLC in the medical research field. The litigation misconduct by the defendant LLC included lying, destroying evidence, and ignoring numerous court orders. Finding the defendant’s actions egregious and deplorable, the Court entered an extreme sanction—dissolution of the LLC and a liquidation process overseen by a court-appointed receiver.

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Chancery Strikes Unclean Hands Defense Lacking Sufficient Nexus to the Claims

Pilot Corp. v. Abel, C.A. No. 2023-0813-MTZ (Del. Ch. Dec. 13, 2023)
Here, the plaintiff claimed that the adoption of pushdown accounting constituted a change to accounting rights that triggered a right to consent under the relevant operating agreement. The defendants asserted that the plaintiff had unclean hands because the plaintiff had manipulated earnings to alter valuation of a put right. The Court found the unclean hands defense inapplicable because the plaintiff’s claims were narrow and did not have an immediate direct relation the defense.

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