Showing 17 posts from October 2019.
Court of Chancery Orders Advancement of Fees for Former Directors and Officers who Sold their Stock in a Private Transaction
Nielsen v. EBTH, Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sept. 30, 2019).
Delaware law permits advancement of fees and expenses for officers or directors who have such rights under certificates of incorporation, bylaws, or indemnification agreements. Depending on the factual allegations of the underlying action, advancement rights can apply even for former officers and directors of a company who sold their stock in a private transaction to which the company was not a party. More ›Share
Court of Chancery Clarifies a Plaintiff’s Ability to Bind a Non-Signatory to a Forum Selection Provision
Neurvana Medical, LLC v. Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Sep. 18, 2019), reargument denied (Oct. 10, 2019).
In Neurvana Medical, LLC v. Balt USA, LLC, the Court of Chancery declined to exercise personal jurisdiction over a French company, Balt International, S.A.S., the parent of Balt USA, LLC. The Court rejected Neurvana’s argument that Balt International was so “closely related” to the asset purchase agreement at issue that the agreement’s forum selection clause bound Balt International, even though Balt International was a non-signatory. The Court also declined to assert jurisdiction over Balt International based on the assertion that Balt USA was Balt International’s agent. Thus, the Court granted Balt International’s motion to dismiss. More ›Share
Governor Announces High Court Picks
Earlier today, Governor John Carney announced his intention to nominate Justice Collins J. Seitz, Jr. to serve as the next Chief Justice of the Delaware Supreme Court. Justice Seitz will take over for departing Chief Justice Leo E. Strine, Jr. The Governor also announced his intention to nominate Vice Chancellor Tamika Montgomery-Reeves of the Court of Chancery to serve as a Justice of the Delaware Supreme Court. Click here to access the press release announcing the nominations.Share
Chancery Enforces Preferred Stock Consent Rights, and Reasons that Designee of a Corporate Stockholder Is an “Affiliate” of that Stockholder for Purposes of an “Interested Party” Clause
PWP Xerion Holdings III LLC v. Red Leaf Resources Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019).
Preferred stockholders frequently obtain the right to veto specific types of transactions. Here, plaintiff PWP Xerion Holdings III LLC (“Xerion”), a hedge fund that acquired Series A Preferred Stock in Red Leaf Resources Inc. (the “Company”), obtained consent rights for certain events, including (i) any transaction “with or for the benefit of any director or officer (or their respective affiliates)”; and (ii) any change of “the business or business plan” of the Company. In this decision, the Court of Chancery grants partial summary judgment on Xerion’s claims that the Company violated these consent rights. More ›Share
Morris James Recognized by Delaware Today Top Lawyers
Morris James is pleased to announce that 47 of its lawyers in 18 practice areas were voted by their peers as Top Lawyers in a survey conducted by Delaware Today for the November 2019 edition. Twelve attorneys in the Business, Commercial, eDiscovery, and Corporate Law categories were selected by their peers, with four of those attorneys named the top vote-getters statewide. The overall number of recognized attorneys was the highest of any Delaware law firm for the second consecutive year. More ›Share
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 ›Share
Delaware Superior Court Finds Purchase Agreement Language Limits the Scope of Possible Claims Concerning Earn-Out Dispute
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 ›Share
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 ›Share
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 ›Share
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 ›Share
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 ›Share
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 ›Share
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. McCann. Willie 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.Share
Chancery Court Confirms a Stockholder May Contractually Waive Appraisal Rights
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.Share
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 ›Share
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 ›Share
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 ›Share