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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 538 posts by Albert J. Carroll.
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.
Chancery Holds that LLC Agreement Did Not Confer Jurisdiction Over Contract and Tort Claims
Ramco Asset Mgmt. LLC v. USA Rare Earth, LLC, C.A. No. 2022-0665-SG (Del. Ch. Oct. 20, 2023)
Plaintiffs brought claims alleging improper dilution of their equity interests when transferring their holdings in an Australian rare-earth mining company to a Delaware limited liability company. Their claims included breach of fiduciary duty, fraud, breach of contract, and conspiracy. All five defendants moved to dismiss for failure to state a claim and on forum non conveniens grounds, and four of the five moved to dismiss for lack of personal jurisdiction. More ›
Chancery Concludes Accountant Provision in Stock Purchase Agreement Calls for Expert Determination Rather than Arbitration
ArchKey Intermediate Holdings Inc. v. Mona, C.A. No. 2021-0383-JTL (Del. Ch. Oct. 3, 2023)
Parties to a stock purchase agreement disputed post-closing price adjustments. The agreement called for an independent accountant to resolve such disputes and referred to the accountant as an “arbitrator.” As the parties litigated in the Court of Chancery, the purchaser moved to compel arbitration so that an independent accountant could resolve all disputes the seller raised. The seller contended that the agreement’s accountant provision called for an expert determination rather than an arbitration. More ›
Supreme Court Upholds Contractual Voidness Provision in LLC Agreement
Holifield v. XRI Investment Holdings, LLC, No. 407, 2022 (Del. Sept. 7, 2023)
This decision concerned the disputed transfer of a member's LLC units. Below, the Court of Chancery held that the disputed transfer was invalid because it violated the LLC agreement's terms governing transfers. The trial court also held that, under CompoSecure II, the transfer was incurably void, and thus beyond affirmative defenses like acquiescence, because the LLC agreement's “void" language provided for that outcome. However, in dicta, the trial court invited the Supreme Court to revisit its ruling in CompoSecure II, which upheld contractual voidness provisions in the alternative entity context. On appeal, the Supreme Court declined the invitation and ruled that CompoSecure II was correctly decided citing, inter alia, contractual freedom in the LLC context and the doctrine of stare decisis.
Chancery Upholds Removal of Board Members
Barbey v. Cerego, Inc., C.A. No. 2022-0107-PAF (Del. Ch. Sept. 29, 2023)
This decision considered the proper constitution of the board of directors of a Delaware corporation, Cerego, Inc., under Section 225 of the DGCL after directors were removed following a corporate inversion whereby Cerego became a subsidiary of its wholly owned subsidiary, Cerego Japan, Inc. (“CJ”), a Japanese entity. More ›
Chancery Denies Specific Performance in De-SPAC Transaction Based on Difficulty of Enforcement and Plaintiff’s Inequitable Conduct
26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., CA No. 2023-0128-JTL (Del. Ch. September 7, 2023)
Even where the parties have contractually agreed that specific performance is the preferred remedy for a breach, the decision whether to award that relief nevertheless remains within the Court of Chancery's discretion. In this decision, addressing the availability of specific performance, the Court assumed without deciding that the defendant target of a SPAC had not used its reasonable best efforts to close the transaction in breach of the agreement, that the SPAC was ready, willing, and able to close, and that money damages were an inadequate remedy at law. More ›
Chancery Upholds Written Consent Based on Signer’s Sophistication and Opportunity to Inspect
REM OA Holdings LLC v. Northern Gold Holdings LLC, C.A. No. 2022-0582-LWW (Del. Ch. Sep. 20, 2023)
Delaware is a contractarian state and the presumption is that parties are bound by their agreements. That presumption applies with even greater force when the parties are sophisticated and engage in arms-length negotiations. In this case, the defendant, a 50% member of an LLC, challenged a $10 million financing agreement entered into by the LLC’s other 50% member. That arrangement allowed the lender to purchase an interest in the company. In challenging the agreement, the defendant member argued that the plaintiff did not provide him with the term sheet for the transaction. In this decision, the Court of Chancery upheld the transaction, reasoning that, while the defendant member did not receive the term sheet, the consent for the loan that he signed repeatedly referenced the term sheet, the defendant was a sophisticated party with counsel, and he had the opportunity to inspect the consent and inquire about the term sheet as a matter of basic diligence. The Court also rejected numerous other defenses to enforceability.
Chancery Refuses to Impose Additional Conditions on Voluntary Dismissal of Claims Subject to Advancement
Sal Gilbertie, et al. v. Dale Riker, et al., C.A. No. 2020-1018-LWW (Del. Ch.)
The Delaware Court of Chancery frequently hears advancement disputes, wherein officers or directors of Delaware entities seek to enforce their right to the ongoing payment of legal fees in the defense of claims brought against them. Sometimes, as in this case, a plaintiff entity moves to voluntarily dismiss its claims rather than to pay the freight for both sides. Here, the plaintiffs sought to dismiss the pending claims subject to advancement with prejudice after the Court granted the defendants advancement in a separate action. The defendants opposed the plaintiffs’ motion and sought to impose additional conditions on any dismissal under the Court of Chancery rule governing voluntary, court-approved dismissals, including conditions related to advancement and a finding that the defendants had prevailed on the merits. The Court rejected the defendants’ requests because the advancement relief could be considered under the controlling Fitracks order, and any characterization was premature given the remaining counterclaims. Thus, the Court granted the voluntary motion to dismiss without any conditions.
Chancery Refuses to Enforce Nationwide Noncompete
Centurion Service Group, LLC v. Wilensky, C.A. No. 2023-0422-MTZ (Del. Ch. Aug. 31, 2023)
In Frontline Techs Parent LLC v. Murphy, C.A. 2023-0546-LWW (Del. Ch. Aug. 23, 2023), the Court of Chancery recently declined a subsidiary’s attempt to enforce a non-compete provision benefitting the parent. A week later, in Centurion, the Court likewise declined to enforce a non-compete, this time based on its unreasonably broad scope. Though the Court ultimately applied a Delaware choice-of-law provision, Centurion highlights that Delaware courts do not blindly apply such clauses “when doing so would circumvent the public policy of another state that has a greater interest in the matter.” The decision also reinforces that Delaware courts scrutinize non-competes and are hesitant to “blue pencil” overly broad terms to recraft them as reasonable – instead, Delaware courts tend to decline to enforce them altogether. Here, the at-issue non-compete prevented the former employee from engaging in any business directly or indirectly engaged in Centurion’s business, any business competitive with Centurion’s business, or any business competitive with any business Centurion planned to engage in at any time during the employee’s employment, for a period of two years after his termination date, anywhere in the United States. The Court found these terms unreasonable, explaining that the geographic scope and duration taken together “casts a limitless net over [defendant] in both scope of geography and scope of conduct,” and taking particular issue with the language covering any field the company “planned to enter.”
Chancery Limits Section 220 Books-and-Records Production to Formal Board Materials
In re Zendesk, Inc. Section 220 Litigation, C.A. No. 2023-0454-BWD (Del. Ch. Aug. 25, 2023)
The background of this books-and-records decision involved a failed acquisition, a strategic review, a proxy contest, and a decision to sell the company at a price below an offer rejected just a few months prior. The plaintiff-shareholders' inspection purpose was to investigate alleged board wrongdoing in connection with the transaction’s approval. The company voluntarily produced formal board materials. But, contending there were information gaps, the plaintiffs also wanted informal board materials, including emails among directors, as well as documents and emails at the officer level. In its post-trial decision, the Court of Chancery found that while the plaintiffs had stated a proper purpose, they did not show entitlement to documents beyond the formal board materials already provided. Citing produced materials, including board minutes and presentations, and the Court found the formal board materials were sufficient to satisfy the shareholders' inspection purpose. As the Court explained, Section 220 inspections “are not tantamount to ‘comprehensive discovery,’" and entitle shareholders only to the “essential” responsive records.
Chancery Finds Defendants Liable for Fraud Based on the Failure to Disclose Internal Billing Practices
NetApp Inc. v. Cinelli, C.A. No. 2020-1000-LWW (Del. Ch. Aug. 2, 2023)
This decision arose out of the sale of the company Cloud Jumper to NetApp, Inc. The seller’s management had been recording internal software use as revenue in its unaudited financial statements but never disclosed this practice to the buyer in the sale’s process. In this post-trial opinion, in addition to breaches of contract, the Court of Chancery held that the defendants were liable for fraud because they failed to disclose internal billing practices that created the appearance of higher company revenue. The Court reasoned that this failure constituted common law fraud because the defendants had a duty to speak regarding the billing practice, there was circumstantial evidence that they had scienter to commit fraud due to their knowledge of the internal billing practice, and the plaintiffs relied on the financial data that reflected the billing practice when considering whether to pursue the deal. The decision also reflects a detailed analysis of damages and expert testimony related to the misrepresentations.
Chancery Upholds Claims Against LLC Officers and Others Arising from Squeeze-Out of Minority Unitholders
Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, C.A. No. 2022-0718-JTL (Del. Ch. Aug. 9, 2023)
An Indiana corporation reorganized via bankruptcy into a Delaware LLC, and a senior note holder negotiated for nearly 90 percent of the equity. The LLC agreement required that at least one member of the five-member board of managers be independent. It prohibited the controller from acquiring additional shares or squeezing out the minority without approval of the majority of independent managers or a majority of votes cast by minority unitholders. It also required the controller to provide notice of a proposed squeeze-out so that minority unitholders would have the option to challenge the fairness of the transaction unless it had received approval from a majority of the minority or a minority-approved independent manager. More ›