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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 534 posts by Albert J. Carroll.
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 ›
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 ›
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.
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 ›
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 ›
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 ›
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.
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.
Chancery Declines to Shift Costs to Derivative Plaintiffs
In re Oracle Corp. Deriv. Litig., C.A. No. 2017-0337-SG (Del. Ch. Dec. 28, 2023)
By rule, the prevailing party in Court of Chancery litigation is entitled to shift costs to the losing party, subject to the Court’s discretion. Here, in an unordinary derivative action, the Court declined to shift the costs of the prevailing individual defendants to the derivative plaintiffs. The plaintiffs had overcome a motion to dismiss, which led to the appointment of a special litigation committee by the company’s board. While the special committee had the power to seek dismissal, the committee determined that the derivative plaintiffs should be allowed to prosecute the claims on the company’s behalf. The plaintiffs ultimately lost after trial. As a result, the individual defendants were entitled to indemnification by the company, including for costs. The Court cited these circumstances as grounds for invoking equity to decline shifting costs via rule to the derivative plaintiffs.
Chancery Dismisses Double-Derivative Claims for Failure To Plead Demand Futility
City of Hialeah Emps. Ret. Sys. v. Insight Venture Partners, C.A. No. 2022-0846-MTZ (Del. Ch. Dec. 28, 2023)
A venture capital fund invested in two different entities. One of the entities then acquired the other. In the two months following the deal announcement, the acquirer’s stock fell by thirty percent, as markets remained relatively flat. The plaintiff brought six double-derivative claims, alleging that the acquirer’s directors had breached their fiduciary duty by overpaying for the target, and that the venture capital fund was the acquirer’s de facto controller and had benefitted itself via the acquisition at the acquirer’s expense. More ›
Chancery Denies Application for Preliminary Injunction After Finding Restrictive Covenants Arose from Breach of Fiduciary Duty and Were Facially Unreasonable
Sunder Energy, LLC v. Jackson, C.A. No. 2023-0988-JTL (Del. Ch. Nov. 22, 2023)
The head of sales for a company that sold residential solar power systems nationwide resigned from his position after signing an independent contractor agreement with a corporate competitor. His former employer—headquartered in Utah and incorporated in Delaware—filed an action in Delaware seeking injunctive relief and enforcement of the restrictive covenants in its limited liability company agreement. More ›
Chancery Finds Defendants Were Bound by Voting Agreement to Follow Board’s Recommendation
Texas Pacific Land Corp. v. Horizon Kinetics LLC, C.A. No. 2022-1066-JTL (Del. Ch. Dec. 1, 2023)
In this post-trial opinion, the plaintiffs argued that a voting agreement required that the defendants follow the board’s recommendation regarding a charter amendment to increase the corporation’s authorized shares. In opposition, the defendants argued that exceptions to the voting agreement allowed them to vote against the proposal, despite the board’s recommendation, if it related to a merger, acquisition, recapitalization, or other corporate transaction requiring a stockholder vote. The Court of Chancery found that portions of the voting agreement were ambiguous, and after considering certain course of performance extrinsic evidence, concluded that the defendants were required to follow the board’s recommendation because the defendants failed to show that the proposal fell under a contractual exception. As a remedy, the Court deemed the shares as voted in support of the proposal under the Court’s equitable power to treat as done that which in good conscious ought to be done. Notably, in reaching its conclusion, the Court enforced a clause in the agreement that excluded the consideration of the parties’ drafting history.
Delaware Supreme Court Affirms Busted-Deal Decision and Attorneys’ Fees for Contingency Fee Based Representation
Energy Transfer LP v. The Williams Companies, Inc., No. 391, 2022 (Del. Oct. 10, 2023)
Busted-deal litigation is commonplace in Delaware and often requires Delaware courts to interpret provisions in merger agreements obligating parties to work towards closing and granting one party or the other fees in the event of a breach and failed deal, e.g., break-up fees or reimbursement fees. Here, in a decade-long busted deal suit, the Court of Chancery had found that the plaintiff had fulfilled its contractual obligations and the defendant, therefore, was not entitled to a break-up fee that would have exceeded $1.5 billion. The trial court also found that the defendant owed the plaintiffs approximately $410 million in reimbursement fees and $85 million in attorneys' fees under the merger agreement. On appeal, the Delaware Supreme Court affirmed each finding, examining the at-issue provisions and the trial court's determinations. Notably, on the attorneys' fees issue, the Supreme Court agreed with the trial court that the contingency fee nature of the plaintiff's representation did not warrant a finding of unreasonableness. While most decisions addressing the reasonableness of contractual fee awards have dealt with hourly fee representations, the Court found nothing inherently unreasonable about enforcing a contractual fee-shifting arrangement to cover a contingent fee award.
Chancery Largely Denies Books-and-Records Inspection Exploring Dividend Potential
Greenlight Capital Offshore Partners, LTD., v. Brighthouse Financial Inc., C.A. No. 2022-1067-LWW (Del. Ch. Nov. 20, 2023)
Valuation is a well-established proper purpose to inspect corporate books and records. While each case turns on its own facts, in general the availability of public information to satisfy a valuation demand will result in a relatively narrow court-ordered inspection. Here, the plaintiff conceded the availability of public information for valuation purposes, but sought more to help it speculate regarding the company’s dividend potential, after recent extraordinary dividends at the subsidiary level caused the stock price to jump. While dividend capacity may be relevant to valuation, the Court of Chancery largely denied the inspection, finding the requested information too removed from the company’s current value and thus not necessary and essential to the plaintiff’s valuation purpose.
Chancery Awards Mootness Fee Applying Recently Adopted Standard
Assad v. Botha, et al., C.A. No. 2022-0691-LWW (Del. Ch. Oct. 30, 2023)
Here, Vice Chancellor Will awarded a $100,000 mootness fee for “material—and unremarkable—disclosures” following the recently heightened mootness fee standard announced in Anderson v. Magellan Health, Inc. (analyzed here), authored by Chancellor McCormick. Magellan announced that the Court would award mootness fees for supplemental disclosure only where such disclosures are “material,” not merely “helpful,” and such fees, if awarded, may be lower than those awarded historically. This opinion represents one of the first decisions applying Magellan, and awarded $100,000 where plaintiffs sought $850,000.