Delaware Business Litigation Report

Delaware Superior Court Holds That Attorney-Client Privilege Was Retained By Seller Post-Merger

Biomerieux, Inc. v. Rhodes, C.A. No. N23C-10-067 (Del. Super. May 9, 2024).
The default rule in Delaware is that the attorney-client privilege transfers from the target corporation to the surviving corporation in a merger. This rule was established by the Court of Chancery’s leading decision in Great Hill Equity Partners IV, LP v. SIG Growth Fund I, LLLP, where the Court found that, under Section 259 of the Delaware General Corporation Law, the attorney client privilege was a “privilege” whose ownership transferred to the surviving corporation, by Section 259’s express terms. This decision from the Delaware Superior Court’s Complex Commercial Litigation Division demonstrates that parties can contract around the default rule by agreement. Here, the parties’ merger agreement provided that the attorney-client privilege “regarding” the merger agreement would remain with the sellers. Accordingly, the Court granted the seller-defendants’ motion to strike the buyer-plaintiffs’ use of an email containing the seller-defendants’ counsel’s legal advice “regarding” the merger agreement. The Court reasoned that, under the terms of the parties’ agreement, the attorney-client privilege remained with the seller-defendants and, thus, the buyer-plaintiffs were not entitled to use the privileged email.

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Chancery Holds Plaintiff Fails to Meet Rule 23.1 Pleading Standard, Dismisses Action Arising From T-Mobile Data Hack

Harper v. Sievert, C.A. No. 2022-0819-SG (Del. Ch. May 31, 2024).
A stockholder plaintiff brought derivative claims alleging that current and former directors of T-Mobile US, Inc. were liable for aggregating customers’ data in a manner that made it more vulnerable to hacking. The plaintiff alleged that the company’s parent, a German telecommunications company, coerced the board to aggregate customers’ data to facilitate the parent’s own machine learning and artificial intelligence projects. The plaintiff alleged this put the data at greater risk for hacking, which subsequently occurred, resulting in significant liabilities for T-Mobile. The Defendants argued that the plaintiffs failed to allege with particularity under Rule 23.1 that the demand was futile. The defendants did not dispute for purposes of the motion that a majority of the board lacked independence from the parent. The Court accordingly focused on whether the Plaintiffs sufficiently alleged that the Defendants caused the parent to receive a non-ratable benefit from the alleged misconduct. The Court held that the plaintiff had failed to do so, because the complaint did not state with particularity how the parent benefited from the alleged plan or any steps the parent took to implement the plan. The complaint also did not allege any particular board action or decision about aggregating customers’ data at T-Mobile. Notably, the plaintiff did not make a books and records demand prior to bringing suit, and instead relied upon public information. The Court dismissed the action for failure to plead with particularity why a demand would be futile.

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Court of Chancery Denies Post-Trial Motions Seeking to Enjoin Tesla Defendants

Tornetta v. Musk, C.A. No. 2018-0408-KSJM (Del. Ch. May 28, 2024)
Following the Court of Chancery’s post-trial opinion concerning Elon Musk’s compensation from Tesla (summarized here), Tesla submitted stockholder proposals to ratify Musk’s compensation package and to move Tesla’s state of incorporation to Texas. Concerned that the defendants would use these proposals to avoid enforcement of the Court’s prior decision, the plaintiffs moved to enjoin the defendants from litigating this action or issues relating to the action outside of Delaware, requested a constructive trust over the common stock underlying certain options, and sought to reorder the normal sequence of events and order a final implementing order to ensure that the post-trial opinion was enforceable. The defendants opposed and argued that Tesla would still be a Delaware corporation at the time of the vote, that success of the ratification proposal would not affect any liability incurred prior to the conversion, a final implementing order was unnecessary, and the idea that the defendants would seek to avoid the Court’s jurisdiction was speculative. The Court interpreted the defendants’ positions as certifying that they did not intend to litigate any matter related to this action outside Delaware, that litigation relating to the ratification proposal would be subject to a Delaware forum selection provision, the defendants would not argue that the Court’s post-trial opinion was not enforceable based on the lack of an implementing order alone, and that the defendants would not argue that recission is unachievable solely as a result of a successful vote on the proposal to re-domesticate in Texas. Based on these representations, the Court denied the plaintiffs’ motions.

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Delaware Supreme Court Reverses MFW Dismissal Due to Inadequate Disclosures Regarding Special Committee’s Advisors’ Material Conflicts

City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc., No. 305, 2023 (Del. May 1, 2024).
The Delaware Supreme Court’s decision in Khan v. M & F Worldwide Corp. (“MFW”) established a cleansing process for a corporation’s transactions with a controlling stockholder: “(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” If all those elements are met, the transaction is reviewed under the deferential business judgment standard. More ›

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Chancery Grants Motion to Dismiss Breach of Fiduciary Duty Claims Against Officers in Controlling Stockholder Transaction Subject to Entire Fairness Review

Kormos v. Playtika Hldg. UK II Ltd., C.A. 2023-0396-SG (Del. Ch. May 3, 2024)
In this decision involving breach of fiduciary duty claims against two officers, the Court granted the individual defendants’ motions to dismiss for failure to state a claim. In a prior decision, the Court found the transaction, which involved a corporation’s self-tender offer providing non-pro rata benefits to a controlling stockholder, was subject to the entire fairness standard of review. Although the two officer-defendants presumably lacked independence from the controlling stockholder, the Court focused on the complaint’s failure to plead sufficient, non-conclusory facts of wrongdoing by the officers. While the plaintiff alleged conclusorily they had engaged in “unauthorized” communications with the controlling stockholder, the complaint also alleged that the board had directed management to assist the controlling stockholder with exploring potential transactions to sell some of its shares. The alleged communications also did not violate the plain terms of a special committee’s subsequent guidelines on communications with the controlling stockholder. The complaint also alleged that the communications at-issue were reported to the special committee, without suggesting that the committee found any fault with them. The complaint also failed to allege that the officers played a role in structuring the terms of the transaction that allegedly unfairly benefited the controller. In dismissing the claims, the Court explained it was not enough for the plaintiff to allege the officers lacked independence. Rather, to state a claim against them, the plaintiff must also allege facts supporting the officer-defendants actually “worked to advance the controller’s interest in detriment to [the corporation].” 

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Chancery Addresses Acquirer’s Request For Joint Tortfeasor Settlement Credit

In re Columbia Pipeline Grp. Inc. Merger Litig., Consol. C.A. No. 2018-0484-JTL (Del. Ch. May 15, 2024)
In this post-trial decision, the Court addressed an acquirer’s responsibility for damages suffered by a stockholder class when the acquirer had been found liable for aiding and abetting breaches of fiduciary duties by certain of the target’s officers. The officers had previously settled, and, under the Delaware Uniform Contribution Among Tortfeasors Act, the acquirer was entitled to a credit against its liability equal to the greater of the settlement amount or the proportionate share of the officers’ responsibility. The acquirer blamed the officers for defects in the sale process, arguing that the officers had breached their fiduciary duties and were the primary wrongdoers. The Court disagreed, however, reasoning that both the buyer and officers had committed wrongs causing the damages. The buyer had violated a standstill agreement in several respects and improperly obtained confidential information to secure an advantage over other potential bidders. As a result, the buyer and officers were both equally responsible, and the buyer was entitled to a 50% credit, which was larger than the amount the officers settled for. In regard to responsibility for disclosure violations, the Court noted that the buyer had an affirmative contractual obligation to correct misstatements in the proxy statement. The Court reasoned that, for issues where the buyer knew as much as the sell-side fiduciaries, the buyer’s allocation would be 50%. Where the buyer had no knowledge, it would bear no responsibility. Where the buyer had some knowledge, it would bear one-third of the responsibility. Where the buyer was on inquiry notice, it would bear one-quarter of the responsibility. Ultimately, the Court held that the buyer was entitled to a 58% credit for the disclosure claims, which exceeded the amount paid in settlement. The remedies provided for the sale process and disclosure claims were non-cumulative, so the buyer was only liable for the larger amount. 

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Chancery Determines Certain Suits and Investigations Against Amazon Were Insufficient to Meet Credible Basis Standard to Inspect Corporate Books and Records

Wong Leung Revocable Tr. v. Amazon.com Inc., C.A. No. 2023-1251-BWD (Del. Ch. May 1, 2024)
In order to inspect books and records under Section 220 of the Delaware General Corporation Law, a stockholder-plaintiff must establish that they have a proper purpose. To establish a proper purpose of investigating suspected corporate wrongdoing, a stockholder must present some credible evidence from which the Court can infer that wrongdoing may have occurred. In this case, after a previous decision denying a prior books and records request to investigate wrongdoing in connection with Amazon.com’s alleged anticompetitive business practices (discussed here), a stockholder-plaintiff again sought books and records based on recent investigations and an FTC complaint against Amazon. However, the Court held that the FTC complaint was insufficient to meet the credible basis standard to establish a proper purpose as it only included allegations, and did not include evidence of wrongdoing, such as exhibits. The Court similarly reasoned that the settlement of an earlier government investigation did not establish any wrongdoing, and the plaintiff provided no basis to suspect that there would be a violation of the settlement agreement. The Court also reasoned that a fine imposed by a European regulator was insufficient to meet the standard, as the fine was still on appeal, the amount was not large in the context of Amazon’s business, and the record contained no details regarding the alleged wrongdoing on which the fine was based. Accordingly, the Court denied the stockholder-plaintiff’s books and records request.

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Chancery Enforces Arbitration Provisions for Former Employees’ Claims Against the Company’s Successor

Buzzfeed Media Enterprises, Inc. v. Anderson, C.A. 2023-0377-MTZ (Del. Ch. May 15, 2024).
The Court of Chancery held that arbitration provisions in employment contracts between a company and its former employees were enforceable against the company’s successor-in-interest via a merger. The successor asserted that the Court had jurisdiction over the employees’ claims because the arbitration provisions did not delegate to an arbitrator the duty to decide whether a dispute was covered by the arbitration provisions, i.e., substantive arbitrability, and the employees may not force the company to participate in a mass-claims arbitration. The Court found, however, that the language of the agreements indicated the parties’ intent to delegate the substantive arbitrability issue to an arbitrator. The Court explained that the parties had agreed to arbitrate generally all disputes, which reinforced the presumption that substantive arbitrability was for an arbitrator to decide. The Court noted that the carveouts for arbitration were not so broad or substantial to overcome the presumption arising from the delegation of generally all disputes to arbitration. Turning to the issue of mass arbitration, the Court found that the parties had consented to mass arbitration. The Court reasoned that the parties agreed to arbitrate under the rules that apply in form and effect at the time any arbitral demand was filed. The Court pointed out that when the parties agreed to the American Arbitration Association’s substantive rules, they also consented to the supplementary rules, such as the mass-claims arbitration rules. Thus, an agreement to delegate substantive arbitrability may include mass arbitrations. Accordingly, the Court enforced the arbitration provisions and dismissed the successor’s claims in favor of arbitration.

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Chancery Determines Pharmaceutical Company Complied with Merger Agreement’s Requirement To Use Commercially Reasonable Efforts

Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Apr. 30, 2024)
Stockholder representatives of an acquired corporation brought claims alleging that defendants had failed to use contractually-required commercially reasonable efforts to commercialize an acquired drug asset for a particular use. Under the terms of the merger agreement, the acquirer had paid $250 million in immediate consideration, agreed to a framework for milestone payments following regulatory approval for two separate uses, and retained discretion for operating the post-merger business, subject to a requirement that it use defined “commercially reasonable efforts” to develop and commercialize the drug for each use. Ultimately, after engaging regulatory authorities and deeming there to be dim prospects for success for one use, the acquirer did not persist in securing regulatory approval and bringing the drug to market for that purpose, and therefore did not reach the milestones associated with that use. More ›

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Chancery Determines LLC Agreement Required Payment to Remove Manager

Soleimani v. Hakkak, C.A. No. 2023-0948-LWW (Del. Ch. Apr. 12, 2024)
The defendants attempted to remove a manager-employee of several limited liability companies. The manager filed suit, and the parties moved for summary judgment regarding the removal’s effectiveness. The Court of Chancery determined that the relevant contracts’ unambiguous language required the defendants to first have made certain payments to the manager to remove him. The Court explained that the defendants had a right to remove the manager, but that right to terminate did not necessarily mean the termination is unconditional or immediate. The contracts’ unambiguous language established a condition precedent: the defendants could remove the manager once they removed him as an employee, provided that they first paid him the fair market value of his interest. Under ambiguous contractual language, completing that payment was a condition precedent to effective removal, not a post-removal requirement. The defendants’ failure to make the payments rendered their attempt to remove the manager ineffective.

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Court of Chancery Dismisses ABC Proceeding for Failure to Comply with Statute

In re Windmil Therapeutics Inc., C.A. No. 2023-1294-PAF (Del. Ch. Mar. 13, 2024)
This case dealt with the voluntary assignment for the benefit of creditors under 10 Del. C. § 7381, et seq. The ABC statute requires several actions, including the filing of an inventory, which has typically involved the assignee filing a motion for two appraisers. After the appraisal has been provided, the statute requires that the Court fix a bond. Due to the fact that these proceedings may be ex parte and lack transparency, Delaware courts have issued rulings requiring more details from assignees and establishing firm deadlines that are not present in the ABC statute. In this case, the assignee violated the statute by failing to file an inventory within 30 days of the execution of the assignment. Furthermore, the assignee sought to seek approval of a bond prior to the appointment of appraisers, and one of the appraisals was unsigned and marked as a draft. Therefore, because of these statutory violations, the Court dismissed the ABC proceeding.

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Chancery Declines to Exercise Equitable Jurisdiction in a Contract Action to Compel the Release of Funds Held in Escrow

Graciano v. Abode Healthcare, Inc., C.A. No. 2022-0728-SG (Del. Ch. Mar. 4, 2024)
The Court of Chancery declined to exercise subject matter jurisdiction in connection with a seller’s contractual rights under a purchase agreement. The plaintiff argued that his contract claim required an equitable remedy to recover funds from an escrow fund. The Court held that a declaratory judgment, together with the plaintiff’s instruction to the escrow agent, was the only judicial action required under the agreement.  More ›

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Chancery Finds Challenge to Stockholders Agreement Both Timely and Ripe

West Palm Beach Firefighters' Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024)
Here, the Court of Chancery declined to apply equitable defenses to bar a challenge to a stockholders' agreement three years after it was disclosed and before any claims for breach of fiduciary duties arising from the agreement were asserted. The underlying dispute involved the plaintiff's challenge to governance terms of a stockholders' agreement under Section 141(a) of the Delaware General Corporation Law. The defendant company claimed that the plaintiff brought the suit both too late and too early. The defendant argued that the action was untimely because the plaintiff waited three years after the agreement was disclosed to sue. The Court explained that when analyzing timeliness, it must assume that the plaintiff’s claim is valid. If the plaintiff were proven correct and the challenged agreement held void, then equitable defenses, like laches, would not apply, as equitable defenses cannot validate a void act. Regardless, the Court found no unreasonable delay and no prejudice to the defendant, considering the facts of this case. The Court also analyzed the challenged acts as an ongoing violation, reviewed through either the continuing wrong method or the separate accrual method to determine when the violation occurred. Under both methods, the suit was timely. Further, the Court found no extraordinary circumstances that would justify applying laches. The defendant also claimed that the plaintiff should have to wait for a breach of fiduciary duty to occur before bringing the suit. The Court disagreed, reasoning that even though the plaintiff could bring a fiduciary duty claim in the future based on the conduct associated with the agreement’s challenged provisions, a facial challenge to the agreement’s legality presented a separate and ripe question of law.

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Chancery Awards Attorneys’ Fees to the Prevailing Party

Malkani v. Cunningham, C.A. 2020-1004-SG (Del. Ch. Feb. 28, 2024)
In this decision involving a contractual fee-shifting provision, both parties argued that they were entitled to fee-shifting as the prevailing parties. The Court held that the prevailing party was the party who succeeded in the overall litigation. More ›

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Chancery Rejects Breach of Fiduciary Duty Claim Based On Diversified Investor Model

McRitchie v. Zuckerberg, et al., C.A. No. 2022-0890-JTL (Del. Ch. April 30, 2024)
Delaware follows the "single-firm model,” meaning that a director of a corporation owes duties to the stockholders as investors in that corporation. The plaintiffs here brought claims based on a different theory—the "diversified investor model," wherein directors owe duties to the corporation and its stockholders as diversified equity investors. Under this model, rational investors are seen as having diversified investments, and their returns are maximized when the economy as a whole improves. Thus, to comply with their fiduciary duties under this model, directors must manage the corporation based on what would be best for the economy as a whole rather than what would be best for the firm.  More ›

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