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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 20 posts from April 2015.
In this precedent-setting decision, the Court upholds the right of an assignee of an LLC interest to petition for its dissolution. The LLC Act itself limits a dissolution petition to managers or members, but drawing on precedent upholding the broad powers of a court of equity, the Court holds that an equitable remedy exists that permits an assignee to also seek dissolution.
A repeat issue with using the LLC form of entity is trying to figure out what the LLC agreement means. This decision is another example of the Court sorting through conflicting interpretations that must have surprised at least one of the parties. As such it is a useful, if limited by its facts, primer on proper interpretation.
This is another decision explaining the pleading requirements to meet the standards to show demand is excused under Aronson v. Lewis. General allegations that the directors some how have a self-interest in the underlying decision or that their decision was too unreasonable to be in good faith just are not sufficient to meet those standards.
It is often difficult to decide if an interlocutory opinion is appealable. This decision well explains the governing law on when the Court will permit such an appeal.
The buyer’s rights under a stock purchase agreement sometimes seem in conflict. This decision resolves such a conflict by holding that under the terms of the agreement, the purchase price adjustment process trumps the buyer’s right to indemnification.
This is another decision that confirms that the implied covenant that the parties will act in good faith and deal fairly with one another is not available to expand the parties’ contract rights. The covenant is a gap filler, not a replacement for what was agreed to in the contract.
While the test for books and records inspection to check on possible wrongdoing is very liberal, it is not without its limits. This decision permits inspection, if limited, even when the alleged wrongdoing is at the level of a subsidiary whose conduct might have reasonably escaped the attention of the parent board.
While not a corporate case, this decision is useful in explaining how to prove a party acted in bad faith so as to be outside the exculpation provisions of a trust or Sec. 102(b)(7). Basically, if the conduct is so bad that it is only explainable by having been done in bad faith, that will establish such a claim. The examples cited by the Master are good illustrations of such conduct.
In Choupak v. Rivkin, C.A. No. 7000-VCL (Del. Ch. April 6, 2015), the Delaware Court of Chancery concluded after a trial that the defendant and counterclaim-plaintiff, Vladimir Rivkin, forged documents, lied about exercising options, verified interrogatory responses and pleadings that he knew contained falsehoods, and testified falsely in deposition and at trial. The court found that Rivkin’s conduct was motivated by his desire to profit from a 2011 sale by merger of Intermedia.net Inc., even though in 2008 he had sold his 4.4 percent equity interest in Intermedia to Intermedia’s founder, plaintiff Michael Choupak, and another Intermedia executive for $300,000. The court noted that had Rivkin prevailed on his claim that he was entitled to an additional 4 percent of the equity through preferred shares, he would have received over $5 million in damages based on the 2011 merger sale price of $127.5 million. The details of the facts that led the court to reach its findings are distressing but of wider import are the court’s application of traditional contract principles in ruling for Choupak, the court’s assessment of an equitable claim to unjust enrichment when the parties’ relationship is governed by contract, and its dicta agreeing with other Delaware decisions holding that exclusive forum-selection provisions are procedural and hence permitted in a bylaw. More ›
There is a long line of decisions that holds when the parties set out their mutual rights and obligations in a contract, only contract law governs and a breach of fiduciary duty claim cannot also be brought. That has other consequences because that also means that an aiding and abetting claim cannot be filed against third parties for helping a party breach its contract. There is no such claim under Delaware law. That is not true if the underlying claim was for breach of fiduciary duty where aiding and abetting claims are well recognized. In short, how to characterize the breach claim has real consequences insofar as suing third parties is concerned. This decision sets out this law and the issues, without resolving them, but in a helpful way.
Limited partnership agreements often only require that the general partner act with subjective good faith in doing a deal with a parent entity. That is because the standard seems an easy one to meet. But as this decision shows all too well, even that lax standard has its limits and ignoring objective evidence of unfairness will expose the GP to liability. This decision shows how to use the evidence of past transactions to establish the objective unfairness of a newer deal. Hence, it is a tale of how not to act.
The opinion is also interesting for the way it explains the duties of a fiduciary in valuing a proposal. Just because the deal is accretive from a cash flow or EPS prospective does not make it fair. That is an important point to remember.
Delaware has enacted the Delaware Rapid Arbitration Act, which is intended to address the increasing costs and delays associated with traditional arbitration of business disputes. It does so by: (1) requiring arbitration generally to be completed within 120 days of the arbitrator's acceptance of appointment (with only one extension of no more than 60 days); (2) penalizing arbitrators who fail to meet that deadline by reducing their fees substantially; (3) limiting pre-arbitration objections to the scope of the arbitration; and (4) limiting appeals of an award. While the parties to an agreement to arbitrate retain the freedom to choose much of how the arbitration is conducted, if they fail to do so, the DRAA provides the rules that apply by default. The following are the key aspects of the DRAA. More ›
Utilipath LLC v. Hayes, C.A. 9922-VCP (April 15, 2015) A non-exclusive forum selection clause in the parties' agreement means that a McWane motion asserting an improper forum is doomed to fail.
Southeastern Pennsylvania Transportation Authority v. Abbvie Inc., C.A. 10374-VCG (April 15, 2015) It is too often thought that just by alleging some wrongdoing a demand for inspection of records is sufficient. Well, this decision explains why that is wrong. The demand must state a credible basis to believe that as a result of the inspection nonexculpated conduct will be uncovered and suit filed. That is hard to do when there is a 102(b)(7) provision in the certificate of incorporation and no real breach of loyalty claim.
LG Electronics Inc. v. Interdigital Communications Inc., No. 465, 2014 (April 14, 2015) For the first time, the Delaware Supreme Court held that an arbitration proceeding qualifies as a having been first filed, warranting dismissal of a later filed suit under the McWane doctrine on forum selection. The facts here are somewhat unusual, but the decision has broad implications, particularly when the actual dispute was over the interpretation of a contract that did not have an arbitration clause.
CorpCast Episode 4: Better Know a Judge: Vice Chancellor J. Travis Laster of the Delaware Court of Chancery
On this episode of CorpCast, we’re honored to welcome Vice Chancellor J. Travis Laster of Delaware’s Court of Chancery. In addition to discussing the reasons he came to Delaware to practice law, the Vice Chancellor shares his views from the bench, including some very helpful practice points and advice for younger attorneys. Many thanks to the Vice Chancellor for joining us as our inaugural guest! More ›
Whether you can’t attend the 2015 ABA Business Law Section Spring Meeting in San Francisco or you are attending and still trying to figure out your schedule, we’re giving you a preview of the topics being covered by host Pete Ladig and others on Saturday, April 18, at 10:30 AM in their CLE panel titled 50 Ways to Leave Your Lover, err .. Business Partner: The Essentials of Business Divorce in Privately Held Entities. We’ll review the various aspects of Business Divorce, and hopefully entice you to attend to hear Kurt Heyman, Melissa Donimirski, Eric Milby, Michaela Battista Sozio and Vice Chancellor Donald F. Parsons, Jr. of the Delaware Court of Chancery discuss the issues in more detail. Follow @DECorpCast for conference updates, or contact us at CorpCast@morrisjames.com with questions or comments. We would love to hear from you! More ›
Delaware law implies a covenant of good faith and fair dealing into every contract. The Delaware Supreme Court's recent opinion in Nationwide Emerging Managers LLC v. NorthPointe Holdings LLC, No. 441, 2014 (Del. Supr., Mar. 18, 2015), makes clear, however, that the contours of the clause are quite narrow, particularly with respect to a negotiated written agreement between sophisticated parties. It may not be used by a party to obtain in court what it could not obtain at the bargaining table. More ›
Miramar Police Officers' Retirement Plan v. Murdoch, C.A. No. 9860-CB (April 7, 2015) This is an interesting decision because it deals with what is the effect of a spin-off of corporate assets on existing contracts that apply to the parties' "transferees, successors and assigns." When a different line of business is spun-off, absent clear contrary language, the spun-off entity does not assume the obligations of its former parent under such contracts.
On Feb. 11, The Wall Street Journal reported that General Motors (GM) was evaluating a potential nominee to its board from four hedge funds, collectively holding more than 34 million of GM's shares. According to the report, the potential nominee's agreement with the funds included compensation in the form of a percentage of the funds' profits from their investment in GM. The potential nominee was seeking to join GM's board to urge GM to return more cash to its shareholders and boost its stock price. One of the funds backing the potential nominee stated that GM had too much cash on its balance sheet, and needed to return more of its capital to shareholders through dividends and share buybacks. More ›