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Showing 12 posts from September 2019.

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 ›

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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 ›

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'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 ›

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Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner

Wenske v. Blue Bell Creameries, Inc., C. A. No. 2017-0699-JRS (Del. Ch. Aug. 28, 2019).

In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors.  In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.” More ›

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Lewis H. Lazarus to Participate in Panel Discussion Commemorating the Landmark Case Paramount Communications, Inc. v. Time Inc.

Posted In News

Lazarus PictureMorris James partner Lewis H. Lazarus will participate in a DSBA CLE titled “The Test of Time: A 30-Year Lookback at Paramount Communications, Inc. v. Time Inc. on its 30thAnniversary.” The CLE will take place live on Thursday, September 26, 2019 at the Delaware State Bar Association.  Webcasts will be available in Kent County at the office of Morris James LLP in Dover and in Sussex County at the office of Tunnell & Raysor in Georgetown.  More ›

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Chancery Finds Plaintiffs Lost Direct and Derivative Standing After Sale of Shares

Urdan v. WR Capital Partners, LLC, C.A. No. 2018-0343-JTL (Del. Ch. Aug. 19, 2019).

It is well-settled Delaware law that the right to bring a derivative claim in the corporation’s name or a direct claim in the individual stockholder’s name is a property right associated with the ownership of shares and that those rights normally pass from a selling stockholder to the buyer.  Relatedly, Delaware law imposes two conditions for derivative standing: first, a contemporaneous ownership requirement, meaning the plaintiff must have been a stockholder at the time of the complained of wrong; and, second, a continuous ownership requirement, meaning the plaintiff must continue to be a stockholder to pursue its claims.  The rules are slightly different in the direct standing context.  In contrast to the continuous ownership requirement for derivative claims, a selling stockholder may retain the right to bring a direct claim by contract.  This decision explains and applies these concepts, finding certain stockholders lost both forms of standing when reaching a settlement, despite an apparent attempt to avoid that result in the relevant contracts. More ›

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Chancery Explains When Deal Price is a Persuasive Indicator of Fair Value in an Appraisal Proceeding

Posted In Appraisal

In re Appraisal of Stillwater Mining Co., Consol. C.A. No. 2017-0385-JTL (Del. Ch. Aug. 21, 2019).

Recent Delaware Supreme Court decisions on appraisal proceedings have stressed the pivotal importance of the deal price in establishing fair value.  In this case, the Court of Chancery faced an appraisal for a transaction in which the company’s General Counsel expressed ongoing concerns about the CEO’s potential conflict in spearheading the sale process.  That gave rise to the question:  In measuring fair value, what weight should be accorded to the deal price when there is some “hint of self-interest” that may have compromised the market check?  More ›

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Chancery Dismisses Derivative and Direct Claims Claims Upon Finding Shareholder Plaintiffs Sold Shares Without Preserving Rights to Continue to Assert Direct Claims

Lazarus PhotoIt is well-settled in Delaware that a stockholder seeking to pursue derivative claims must own shares at the time of the wrong and continuously through the life of any litigation. Similarly, direct claims based on injury to the shares generally pass to a buyer. These principles, in combination with the public policy against issuing advisory opinions, mean that stockholders who sell all their shares and any right, title and interest in those shares after initiation of litigation generally will lose their standing to assert claims based on injury sustained as a shareholder or to those shares. The Delaware Court of Chancery applied those principles in Urdan v. WR Capital, C. A. No. 2018-0343-JTL (Del. Ch. August 19, 2019) and dismissed claims of breach of fiduciary duty and self-dealing because the stockholder-plaintiffs sold all of their shares after initiation of the litigation and thus lost standing to pursue their claims both derivatively and directly.  What makes this case particularly interesting was how the court determined that plaintiffs’ effort through a settlement agreement to preserve at least the direct claims by contract was ineffective due to the failure to incorporate by reference that preservation of rights in a companion Repurchase Agreement by which plaintiffs in fact sold their shares. More ›

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Chancery Makes Post-Trial Award of $22K in Damages for $5.3 Million Fiduciary Breach Claim, and Orders an Accounting for Suspicious Expenses Totaling $235K Arising Out of Self-Dealing Transactions

Avande Inc. v. Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019).

A director of a Delaware corporation who stands on both sides of a challenged transaction must prove the entire fairness of the transaction. Such a defendant must show that the transaction was the product of both fair dealing and fair price. Where the dispute involves more than one transaction, the Court “may place on a fiduciary the burden to demonstrate the fairness of a series or group of expenditures, or may order an accounting of such expenditures.” However, the fiduciary will bear this burden only if the plaintiff, by substantial evidence, first makes a prima facie showing that the fiduciary stood on both sides of the transactions at issue. Applying Technicorp Int’L II Inc. v. Johnston, 2000 WL 713750 (Del. Ch. May 31, 2000) and its progeny, the Court in Avande ruled post-trial that plaintiff had failed to make a prima facie showing that the defendant, a former director and CEO, was self-interested in the challenged transactions. Plaintiff had challenged nearly $4.7 million dollars in transactions reported on the company’s ledger over five years (comprising roughly 45% of the company’s total expenses), asserting that the transactions were the result of the defendant’s self-dealing. However, the plaintiff was able specifically to identify only $30,500 of potentially problematic expenses (less than 1% of the disputed amounts), only one $3,500 transaction of which appeared to have personally benefitted the defendant-fiduciary, but sought to shift the burden to the defendant to prove the entire fairness of the remaining amounts. Among the factors that led the Court not to shift the burden was that Evans did not exercise exclusive control over Avande’s finances. The Court also found it was inconceivable that at least a substantial portion of the challenged amount was not the result of valid business expenses needed to operate the business over five years, and declined to shift the burden. However, the Court found that the plaintiff had demonstrated self-interest sufficient to shift the burden and that defendant had failed to prove the fairness of $235K in payments for services billed to Avande by the defendant’s wholly owned business. The Court ordered an accounting of these transactions to be conducted by a third-party chosen by the parties because it was unclear how much was paid for each service performed. Because the self-dealing transactions were subject to entire fairness, and because the defendant had not proved the fairness of the transactions at trial, the defendants were responsible for the costs of the accounting proceeding. 

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Chancery Applies California Law Despite a Delaware Choice-of-Law Provision and Dismisses a Claim for Breach of a Non-Solicitation Provision in an Employment Agreement as Unenforceable under California Law

NuVasive Inc. v. Miles, C.A. No. 2017-0720-SG (Del. Ch. Aug. 26, 2019).

When a contract, executed by parties in a foreign jurisdiction, designates Delaware law as controlling, Delaware courts must first determine whether the choice-of-law provision is enforceable. In such cases, Delaware follows the Restatement (Second) of Conflict of Laws for the conflict-of-laws analysis. Under that analysis, Delaware courts will defer to the laws of the foreign jurisdiction if that jurisdiction’s laws (1) would apply absent the Delaware choice of law provision, (2) enforcement of Delaware law over the contractual provisions at issue would conflict with fundamental policy of the foreign jurisdiction, and (3) the foreign jurisdiction has a materially greater interest in enforcement (or non-enforcement) of the provision at issue than Delaware. In NuVasive, the Court ruled that California law would apply but for the contractual choice of law provision.  In an earlier bench ruling, the Court found that California had a materially greater interest on the issue of whether a post-employment non-compete in the employment agreement was enforceable, and it voided the non-compete as violating fundamental California public policy.  In this decision, the Court determined that a one year post-employment restriction on solicitation of customers and employees also violated the fundamental public policy of California as reflected in case law interpreting its business statutes. The Court then held that California had a materially greater interest in precluding non-solicitation covenants as part of its interest in “overseeing conditions of employment relationships” than Delaware had in enforcing its “fundamental but general interest” in freedom of contract.  Accordingly, the Court granted the defendant’s motion for summary judgment to the extent the plaintiff’s claims were grounded on enforcement of non-solicitation covenants in the defendant’s employment agreement.

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Chancery Explains the Rule “Equity will not Enjoin a Libel” – and its Limited Exception

Preston Hollow Capital LLC v. Nuveen LLC, C.A. No. 2019-0169-SG (Del. Ch. Aug. 13, 2019).

The Court of Chancery in several recent decisions has addressed the limited circumstances in which it may have jurisdiction to enjoin future speech.  See, e.g., Perlman v. Vox Media, Inc., 2019 WL 2647520 (Del. Ch. Jun. 27, 2019); Organovo Hldgs., Inc. v. Dimitrov, 162 A. 3d 102 (Del. Ch. 2017).  Here, Vice Chancellor Glasscock explains the maxim “[e]quity will not enjoin a libel” and the limited potential exceptions.  In particular, and subject to constitutional free speech limitations, Chancery may enjoin future speech in the nature of “trade libel” as a remedy for a separate “non-speech” business tort over which it has jurisdiction. More ›

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Superior Court CCLD Addresses Pleading Standards for Trade Secret, Fraud and Implied Covenant Claims

Brightstar Corp. v. PCS Wireless, LLC, C.A. No. N18C-10-250 PRW CCLD (Del. Super. Ct. Aug. 7, 2019).

Brightstar and PCS, two competitors that distribute new and pre-owned mobile devices, entered into a buy/sell agreement as part of negotiations for a proposed merger and strategic alliance.  Under the buy/sell agreement, PCS purchased mobile devices from Brightstar for re-sale to third parties and was subject to a non-circumvention provision that restricted PCS from purchasing these devices from certain other suppliers.  After their merger discussions faltered, PCS terminated the agreement, and Brightstar brought suit for unpaid amounts and alleged misappropriation of pricing information.  PCS counterclaimed for, inter alia, fraud and breach of the implied covenant of good faith and fair dealing. More ›

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