Posts from 2019

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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Morris James Named a Top Workplace for Mid-sized Employers in Delaware Twelfth Consecutive Year

Morris James was named a top workplace for mid-sized employers in Delaware for the twelfth consecutive year.  This year's top workplace honor makes Morris James the only law firm in Delaware to be consistently top-ranked in the mid-sized employers category for the past twelve years. More ›

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Chancery Denies Director Access to Privileged Materials Involving Counsel to Preferred-Appointed Directors

Gilmore v. Turvo, Inc., C.A. No. 2019-0472-JRS (Del. Ch. Aug. 19, 2019).

As several Delaware decisions teach, each director, as a member of the larger deliberative body that is the board, has a fundamental right to access corporate information to carry out his or her fiduciary duties.  Thus, as a general rule, a Delaware corporation “cannot assert the privilege to deny a director access to legal advice furnished to the board during the director’s tenure.”  There are several exceptions to this rule.  More ›

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Chancery Addresses Ripeness for Indemnification Claims Concerning Tax Liabilities

Hill v. LW Buyer LLC, C. A. No. 2017-0591-MTZ (Del. Ch. July 31, 2019).

As this summary judgment decision illustrates, even where parties to a securities purchase agreement agree on a buyer’s entitlement to indemnification for future tax liabilities, absent specific language to the contrary, the buyer generally must suffer harm before such a claim will be ripe for decision.  That is because, under the ripeness doctrine, Delaware courts will decline to decide issues presenting only hypothetical harm. More ›

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Formulaic Recitations of Equitable Jurisdiction Are Not Enough for Court of Chancery Jurisdiction

Athene Life and Annuity Co. v. Am. Gen. Life Ins. Co., C.A. No. 2018-0244-SG (Del. Ch. July 31, 2019).

The Court of Chancery is a court of limited jurisdiction. It maintains subject matter jurisdiction only for (i) equitable claims, (ii) when equitable relief is sought and no adequate remedy is available at law, or (iii) where a statute confers jurisdiction.  Applying well-recognized equitable jurisdiction principles, the Court dismissed this breach of contract action.  Although Plaintiffs sought equitable relief in the form of specific performance and an injunction, their request for equitable relief was merely a “formulaic incantation” rather than substantive.  Applying a realistic assessment of the nature of the wrong alleged and the remedy available at law, the Court concluded that a legal remedy for the breach of contract claim was available in the form of a declaratory judgment and damages, and fully adequate. Normally when a court issues a declaratory judgment establishing the parties’ respective contract rights, the court will not presume that the defendant will fail to abide by the court’s ruling in the future requiring an injunction to secure performance. A real threat of continuing injury must be shown, which was absent here. More ›

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Delaware Superior Court Addresses Choice of Law Issues in the D&O Insurance Context and Requires Carriers to Cover Pfizer’s Litigation Costs

Pfizer Inc. v. Arch Insurance Co., C.A. No. N18C-01-310 PRW CCLD (Del. Super. July 23, 2019).

This case from the Delaware Superior Court discusses important D&O coverage exclusion issues that frequently arise during securities litigation.  Pfizer sought coverage from its insurers in connection with the defense and settlement of a securities action in the Southern District of New York.  Defendants, the excess insurers, denied coverage based on “related wrongful acts” exclusions in the policies.  They argued that the action “arose out of” or “shared a common nexus” with another action in the District of New Jersey such that the D&O policies’ exclusion provisions precluded coverage.  Noting that the contract interpretation result would likely be different if applying New York law rather than Delaware law, and that the policies lacked a controlling choice of law provision, the Superior Court first applied the Restatement’s “most significant relationship” test to determine which state law should apply.  Although some of the Restatement Section 188 factors tipped in favor of New York, the Court ruled that application of Delaware law was most consistent with the parties’ reasonable expectations at the time of contracting and with the Delaware choice of law precedent for D&O policies.  For such policies, under Delaware law, the state of incorporation, rather than the state where the corporation is headquartered, has the most significant relationship.  This also was consistent with the parties’ choice of Delaware law in the policies to govern arbitration or mediation of their disputes.  Applying well-settled Delaware law to the interpretation of the policy provisions, the Court found the two actions were not “fundamentally identical.”  Thus, the exclusion did not apply and the insurers were obligated to cover the costs. More ›

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Chancery Offers Guidance on When the Limitations Periods Begin to Run For Claims Concerning Breaches of Representations and Warranties and Related Indemnification

Kilcullen v. Spectro Scientific, Inc., C.A. No. 2018-0429-KSJM (Del. Ch. July 15, 2019).

Delaware law provides for a default three-year statute of limitations period for breaches of contract, generally applicable to claims for breaches of representation and warranties and related claims for indemnification concerning stock purchase agreements or assets sales. More ›

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Chancery Examines Framework of Fiduciary Disclosure Obligations in Soliciting Private Investments

Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019). 

This opinion decides a motion to dismiss fraud and related tort claims arising out of various investments against a former director and CEO and an employee of a controlling stockholder.

When the investments turned out to be worthless, the plaintiff investor brought suit for breach of fiduciary duties and common law fraud arising from information that the investor received before investing in a company controlled by a business colleague and friend.  More ›

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Chancery Determines Appraisal “Fair Value” Below Merger Consideration, Questions Judicial Notice of Valuation Scholarship

In re Appraisal of Jarden Corp., Consol. C.A. No. 12456-VCS (Del. Ch. July 19, 2019).

This decision presents another cautionary tale for stockholders of a target public company who consider seeking statutory appraisal instead of accepting the merger consideration. More ›

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Chancery Denies Motion to Dismiss Claim for Breach of Earn-Out When Unable to “Divine any Meaning” From Provision

Western Standard, LLC v. SourceHOV Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Defendant Pangea acquired BancTec through a merger agreement that provided for an earn-out to former BancTec stockholders in the event that Pangea’s controlling stockholder realized certain returns on its post-merger stock.  Plaintiff alleged that the earn-out was triggered when Pangea’s parent company became a wholly owned subsidiary of another company through a stock-for-stock transaction. More ›

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Chancery Dismisses Oversight Claims Against J.C. Penney Board

Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019).

As this Court of Chancery decision explains, the Delaware standard for imposing oversight liability on a board of directors under a Caremark theory is “exacting” and requires evidence of bad faith.  Combined with the heightened “particularized” pleading requirements of Court of Chancery Rule 23.1, stockholders face an uphill battle when pursuing an oversight theory as the basis for liability and for excusing a pre-suit demand on the board. More ›

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Chancery Decides Questions of First Impression Regarding Statutory Claims for Unlawful Dividends and Fraudulent Transfers

Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law (8 Del. C. Section 174), and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware’s Uniform Fraudulent Transfer Act, referred to as DUFTA (6 Del. C. Section 1301). In JPMorgan Chase Bank v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019), Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed three important questions of first impression concerning standing and limitations periods issues under these statutes. More ›

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