About This Blog

Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

Morris James Blogs

Links

Chancery Finds “Constellation” of Personal and Professional Relations Between Directors and Controlling Stockholder Excuses Demand

In re BGC Partners, Inc. Derivative Litig., Consol. C.A. No. 2018-0722-AGB (Del. Ch. Sept. 30, 2019).

A stockholder plaintiff seeking to bring a derivative claim on behalf of a corporation must first demand authorization from the board of directors or allege why making such a demand would be futile due to the board’s assumed partiality under the alleged facts and circumstances.  One way of establishing demand futility is alleging with particularity significant personal or professional ties to an interested party, like a conflicted controlling stockholder.  BGC Partners illustrates the type and degree of relationships that may excuse the pre-suit demand requirement and overcome a motion to dismiss under Court of Chancery Rule 23.1.  This is a developing area of Delaware law, arguably involving a heightened sensitivity to the significance of personal relationships.  As BGC Partners observes, the Delaware Supreme Court has reversed Court of Chancery findings of director independence in the demand futility context three times in the past four years. More ›

Delaware Superior Court Finds Purchase Agreement Language Limits the Scope of Possible Claims Concerning Earn-Out Dispute

Posted In CCLD, Earn-Out

Collab9, LLC v. En Pointe Technologies Sales, LLC, C.A. No. N16C-12-032 (MMJ) (CCLD) (Del. Super. Sept. 17, 2019).

Under an asset purchase agreement (“APA”), the purchaser (“PCM”) acquired substantially all of the assets of the “En Pointe” business from the seller (“Collab9”).  The APA provided for an earn-out payment, calculated upon a percentage of En Pointe’s Adjusted Gross Profit over several years.  The APA provided that the purchaser “shall have sole discretion with regard to all matters relating to the operation of the Business.”  The agreement further disclaimed any express or implied obligation on the part of the purchaser to take any action, or omit to take any action, to maximize the earn-out amount, and stated that the purchaser “owes no duty, as a fiduciary or otherwise” to the seller.  The APA also contained a clear combined integration and anti-reliance provision. More ›

Chancery Rejects Attempt to Allege Gentile v. Rossette Direct Claims for Dilutive Preferred Stock Issuances

Silverberg v. Padda, C.A. No. 2017-0250-KSJM (Del. Ch. Sept. 19, 2019).

The Court of Chancery held that plaintiff common stockholders’ fiduciary duty claims challenging the company’s overpayment for dilutive preferred stock issuances were derivative in nature because plaintiffs failed to adequately plead the existence of a controller or control group that benefited at the expense of the minority stockholders.  The Court evaluated the common stockholders’ arguments under the standard set forth by Gentile v. Rossette, 906 A.2d 91 (Del. 2006), which provides that minority stockholders may seek direct relief for dilution claims when a controller or control group benefits at the expense of the minority stockholders’ economic and voting rights.  Gentile requires that a plaintiff plead facts sufficient to establish that a control group’s members are connected in some “legally significant way” and work together toward a shared goal, such as voting or other decision making.  The Court also relied upon Dubroff v. Wren Holdings, which emphasized that the existence of a control group does not require a formal contract, but there must be some indicia of an actual agreement that amounts to more than mere parallel interests among the group members.  More ›

Chancery Construes LLC Agreement as Imposing Only the Managerial Duty to Act in Good Faith and Dismisses Claims for Failure to Plead Bad Faith

MKE Holdings v. Schwartz, C.A. No. 2018-0729-SG (Del. Ch. Sept. 26, 2019).

Under Delaware law, the managers of a limited liability company owe the entity and its members the traditional common law fiduciary duties of care and loyalty.  But parties may eliminate or modify those duties under the LLC’s operating agreement and impose contractual duties instead.  When they do so, Delaware courts will analyze any challenged conduct of the manager against those contractual duties.  Here, the Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good faith belief that their conduct was in or not opposed to the LLC’s best interests. More ›

Chancery Upholds Caremark Claim Based on Alleged Failure to Adequately Monitor Biopharmaceutical Company’s Clinical Trials

In Re Clovis Oncology, Inc. Derivative Litigation, C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019).

The Delaware courts have observed that a Caremark claim for failure of oversight against a board is among the most difficult to sustain.  Nonetheless, a set of particularized allegations showing serious oversight shortcomings regarding a mission-critical topic will succeed, as illustrated by the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, 212 A. 3d 805 (Del. 2019).  Clovis is the latest example. More ›

Chancery Applies Entire Fairness Review to Executive Compensation Decision Benefiting Controller Despite Stockholder Approval, Declining to Dismiss Claims Involving Tesla’s Elon Musk

Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Sept. 20, 2019).

Under Delaware law, executive compensation decisions by a corporation’s board of directors generally are entitled to deferential judicial review, and even more so when approved by the stockholders.  On the other hand, Delaware law generally imposes heightened scrutiny in the form of entire fairness review for transactions uniquely benefiting a corporation’s controlling stockholder, relying on the inherent coercion that accompanies control.  So what standard of review applies when an executive compensation decision benefits the company’s controlling stockholder and the stockholders approve it? More ›

Chancery Finds Prospective Purchaser May Pursue Breach Claims Against Target Despite Termination Fee Payment

Genuine Parts Company v. Essendant Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019).

Termination fee provisions are commonplace buy-side protection in M&A transactions intended to recoup a failed prospective purchaser’s otherwise sunk costs.  They can also provide substantial sell-side protection when drafted as an exclusive remedy.  But, as this decision illustrates, the level of protection depends on each contract’s specific terms.        More ›

Chancery Court Offers Guidance on Arbitration Provision Carve-Outs

The Innovation Institute, LLC v. St. Joseph Health Source, Inc., C.A. No. 2019-0156 JRS (Del. Ch. Aug. 28, 2019).

Despite the plaintiff’s request for specific performance and an arbitration provision that carved-out equitable claims, the Court of Chancery stayed the action and deferred to the arbitrator the decision on arbitrability.  The limited liability company operating agreement at issue contained a mandatory arbitration provision that referred all disputes to arbitration “[e]xcept to the extent that a party is entitled to equitable relief…” and incorporated the AAA arbitration rules.  In reaching his decision, the Vice Chancellor evaluated the arbitration provision under the standard set forth in James & Jackson, LLC v. Willie Gary, LLC, and clarified in McLaughlin v. McCannWillie Gary set forth a two-part test to determine whether the parties agreed to submit the issue of arbitrability to an arbitrator:  the arbitration provision must (1) resolve all disputes; and (2) incorporate rules that permit an arbitrator to determine arbitrability.  McLaughlin later clarified Willie Gary by cautioning against an overly narrow reading of the first prong of Willie Gary, ruling that courts should only determine arbitrability when the carve-out is so “obviously broad and substantial” that it overcomes the presumption in favor of permitting the arbitrator to decide arbitrability.  The Vice Chancellor concluded that the scope of the equitable relief carve-out in the operating agreement was not “so obviously broad and substantial as to overcome the heavy presumption” that the parties intended to submit the issue of arbitrability to an arbitrator to decide whether their dispute is subject to arbitration under the arbitration provision. The Court therefore held the equitable carve-out did not apply to enable the Court to decide arbitrability.    

Chancery Court Confirms a Stockholder May Contractually Waive Appraisal Rights

Posted In Appraisal

Manti Holdings, LLC v. Authentix Acquisition Co., Inc., C.A. No. 2017-0887 SG (Del. Ch. Aug 14, 2019).

In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., the Court of Chancery held that a contract provision limiting or waiving future appraisal rights may be enforceable as a matter of law.  The Court had previously ruled that the petitioner stockholders had waived their right to an appraisal in a stockholders agreement.  On re-argument, the Court was asked to determine whether the petitioners could, as a matter of law under the Delaware General Corporation Law (“DGCL”), waive their appraisal rights.  Because Section 262 of the DGCL confers a statutory right to appraisal upon shareholders, the petitioners argued that the provision of the stockholders agreement purporting to waive appraisal rights was not enforceable.  Relying upon its prior precedent concerning waiver of statutory rights, the Court explained that a contractual relinquishment of appraisal rights was permissible when the contract language is clear and unambiguous and the record reflects that the petitioners were sophisticated investors who were fully informed and represented by counsel when they signed the stockholders agreement.              

Court of Chancery Finds Agreements Unenforceable for Lack of Assent, Dismisses Remaining Claims for Lack of Personal Jurisdiction

Eagle Force Holdings, LLC v. Campbell, C.A. No. 10803-VCMR (Del. Ch. Aug. 29, 2019).

Parties to a contract must provide evidence of an overt manifestation of assent for a contract to be enforceable under Delaware law. Upon remand from the Delaware Supreme Court, the Court of Chancery found such assent to be lacking and dismissed the remaining claims for lack of personal jurisdiction. More ›

Delaware Supreme Court Clarifies: No Presumption of Confidentiality for Documents Produced Pursuant to a Books and Records Request

Tiger v. Boast Apparel, Inc., C.A. No. 23, 2019 (Del. Aug. 7, 2019).

The Delaware Supreme Court held that documents produced pursuant to a request for books and records under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. More ›

Court of Chancery Dissolves Limited Partnership Upon Finding General Partner Unable To Achieve Its Business Purpose

GMF ELCM Fund L.P. v. ELCM HCRE GP LLC, C.A. No. 2018-0840-SG (Del. Ch. Aug. 7, 2019).

The equitable remedy of dissolution is extraordinary.  Given the extraordinary record before it, and the abundance of evidence that the general partner could not operate the business, the Court granted plaintiffs’ petition for dissolution. More ›

Chancery Again Defers to Deal Price in Appraisal

Posted In M&A

In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. Nos. 12736-VCL (Del. Ch. Aug. 12, 2019).

Merger IconIn Columbia Pipeline Group, the Court of Chancery applied the appraisal precepts established by the recent appellate precedent in DFC, Dell and Aruba to conclude that the deal price was a persuasive indicator of fair value.  After framing the current state of appraisal law and thoroughly examining the sales process, the Court found that the merger was the result of an arms-length transaction with a third party, and contained sufficient indicia of a fair process to conclude that the deal price was a reliable indicator of fair value.  In support of its finding that the sales process was fair, the Court also pointed to the lack of conflicts at the board level, the acquiring company’s due diligence, and that the target company contacted other potential buyers that all failed to pursue a merger. Additionally, the Court found that the target company extracted multiple price increases during the deal-negotiation process, and that no other bidders emerged during the post-signing phase, which is a factor that the Supreme Court emphasized in analyzing the fairness of the deal process in Aruba.   More ›

Chancery Addresses the Implied Covenant in an At-Will Employment Relationship and Delaware’s Statutory Restriction on Physicians’ Non-Competes

Dunn v. Fastmed Urgent Care, C. A. No. 2018-0934 MTZ (Del. Ch. Aug. 30, 2019).

This case arises out of a physician’s sale of his limited liability company interest, and his subsequent attempts to enforce oral promises outside of – and sometimes in conflict with – written agreements governed by Delaware law.  In granting the defendants’ motions to dismiss for failure to satisfy pleading standards, the Court addressed two potentially noteworthy issues.  More ›

'Scott v. DST Systems': Court Rejects Mootness Fee for Target’s Supplemental Disclosures Explaining Valuation Analyses

Disclosure-only settlements of M&A class actions have received increased scrutiny since decisions like the Delaware Court of Chancery’s 2016 Trulia opinion and the U.S. Court of Appeals for the Seventh Circuit’s Walgreens decision from later that year. Those decisions critiqued the then-prevalent practice of stockholder-plaintiffs bringing M&A strike suits and then quickly exchanging broad, classwide releases for supplemental disclosures of questionable value and fee awards to plaintiffs counsel under the “corporate benefit” doctrine. As a result, the path to quickly resolving M&A class actions has shifted toward individual plaintiffs agreeing to dismiss their claims without prejudice to other class members in exchange for supplemental disclosures and mootness fees under the “corporate benefit” doctrine. The U.S. District Court for the District of Delaware’s recent decision in Scott v. DST Systems, (D. Del. Aug. 23, 2019), should be of great interest to parties facing such issues, particularly defendants who wish to moot a disclosure-based lawsuit without paying fees to plaintiffs counsel. More ›