Posts from April 2020

Delaware Court of Chancery Declares Board Action Void For Equitable Reasons, Finding Corporate Directors Deceived Other Board Members into Attending Board Meeting

Palisades Growth Capital II, L.P. v. Bäcker, C.A. No. 2019-0931-JRS (Del. Ch. Mar. 26, 2020).

In keeping with longstanding Delaware precedent, the Delaware Court of Chancery recently held that it may void an action by a board of directors – even where the action is not otherwise in violation of the corporate charter or the Delaware General Corporation Law (“DGCL”) – when equity so requires. More ›

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LLC May Not Reverse Decision to Enter into Contractual Call Option Buyout Process with Members

Walsh v. White House Post Productions, LLC, C.A. No. 2019-0419-KSJM (Del. Ch. Mar. 25, 2020).  

Parties to LLC agreements often provide for buyout provisions upon specified events, such as when a member ceases to be an employee. The provisions set forth a process by which the parties agree up front to a price to acquire the departing member’s interest. In this case, the Court prohibited an LLC from withdrawing from a contractually agreed-upon process to buy its members’ shares once the LLC initiated the process. More ›

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Chancery Enforces LLC Agreement Arbitration Clause and Finds that Member’s Resignation Did Not Prevent Enforcement

360 Campaign Consulting, LLC v. Diversity Communication, LLC, C.A. No. 2019-0807-MTZ (Del. Ch. Mar. 20, 2020).

Following a dispute between the two members of a Delaware LLC, Plaintiff filed an eleven (11) count complaint against the Defendant former member, the LLC, its manager and others. Defendant moved to dismiss for lack of subject matter jurisdiction based on an arbitration provision in the LLC Agreement. The Court’s threshold question was whether it (as opposed to an arbitrator) had jurisdiction to decide whether the dispute was arbitrable, an issue otherwise known as substantive arbitrability.  More ›

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Chancery Shifts Attorneys’ Fees Under Bad-Faith Exception Based on False Statements in Plaintiff’s Complaint and Obstruction of Discovery

Bay Capital Finance, L.L.C. v. Barnes and Noble Education, Inc., C.A. No. 2019-0539-KSJM (Del. Ch. Mar. 30, 2020).

With some limited exceptions, the American Rule requires parties to pay their own attorneys’ fees in litigation. One exception permitting a court to shift fees is bad-faith litigation conduct. False or misleading statements by parties in their pleadings and abuse or obstruction of the discovery process are two examples of conduct that may support shifting fees. More ›

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Delaware Supreme Court Holds that Federal Forum Selection Clauses for Securities Cases Are Valid in Delaware Corporate Charters

Salzberg v Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020).

Reversing the Court of Chancery, the Delaware Supreme Court has concluded that federal forum selection clauses, requiring that litigation under the Securities Act of 1933 (“’33 Act”) may only be filed in federal courts, are allowable provisions in a Delaware corporation’s certificate of incorporation or bylaws.  More ›

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Chancery Finds the Common Interest Doctrine Shields Communications Between a Bankruptcy Litigation Trust and its Largest Unsecured Creditor

RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. Mar. 20, 2020). 

The common interest doctrine shields communications with a third-party from disclosure when the common interest invoked by the party asserting the privilege is in furtherance of a joint legal strategy or objective with the third-party, and not simply for a commercial purpose. More ›

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Chancery Denies Non-Member, Non-Manager’s Bid for Equitable Dissolution of LLC

SolarReserve CSP Holdings, LLC v.  Tonopah Solar Energy, LLC, C.A. 2019-0791-JRS (Del. Ch. Mar. 18, 2020).

While the Court of Chancery has recognized the concept of equitable standing to seek judicial dissolution, this case shows that equity is not a tool to rewrite the plain language of an operating agreement or to help a party regain the rights it bargained away. More ›

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Delaware Supreme Court Finds Limited Liability Partnership Agreement Chose the “Aggregate Model” and Partner Withdrawal Caused Dissolution

United States v. Sanofi-Aventis U.S. LLC, No. 256, 2019 (Del. Mar. 17, 2020).  

In this case, the Delaware Supreme Court answered three certified questions from the United States Third Circuit Court of Appeals concerning the effect of a partner’s withdrawal from a Delaware limited liability partnership formed to prosecute a qui tam action. The Court ruled that unambiguous language in the Partnership Agreement opting out of the “entity model” of partnership provided in the Delaware Revised Uniform Partnership Act meant that the partner’s withdrawal dissolved the partnership (Question 1). The Court also held that the entity that was continuing litigation through an amended complaint after the partner’s withdrawal was a new and different partnership (Question 2). Moreover, because the old entity dissolved at such an early point in the litigation, and because the partners had formed it solely to prosecute the litigation, the old partnership could not continue the litigation because to do so was inconsistent with the agreement’s requirements for a prompt liquidation (Question 3).  More ›

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The Court of Chancery Dismisses Effort to Plead Around Rule 23 in CEO's Attempt to Escape Alleged Oversight Failures

Judges and commentators frequently characterize Caremark claims (claims seeking to hold directors liable for damages resulting from grossly inadequate reporting regimes or oversight) as the most difficult kind of breach of fiduciary claim to assert with success. In a recent Court of Chancery opinion in David Shabbouei v. Laurent Potdevin, et al. and Lululemon Athletica, Inc., C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), Vice Chancellor Slights rejected the plaintiff’s effort to recharacterize what was essentially an inadequate Caremark claim into a self-interested, unfair dealing claim against the Board arising from its termination of a CEO accused of sexual misconduct. Dismissing the claim under a straight-forward Rule 23.1 analysis of demand futility, the court found the allegations did not support an inference that the Board’s decision to make a severance agreement rather than terminate the CEO for cause resulted from the Board’s desire to insulate itself from claims that it had exercised inadequate oversight over the CEO’s conduct. More ›

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Surveying the Law, Chancery Declines to Dismiss a Claim that a 35% Holder was the Controlling Stockholder of the Acquirer (as Well as the Target)

Voigt v Metcalf, C.A. No. 2018-0828-JTL (Del. Ch. Feb. 10, 2020).

This decision contains an instructive review of the factors the Court of Chancery will examine to determine whether a minority stockholder may in fact be a controlling stockholder in the circumstances of a specific transaction – an area of the law that has assumed increased importance after Corwin. More ›

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Chancery Denies Fees to Stockholder who Compelled Admittedly-Overdue Annual Meeting, But Primarily for his Own Interest in Forcing a Buyout

Martin v. Harbor Diversified, Inc., C.A. 2018-0762 SG (Del. Ch. Feb. 5, 2020).

A plaintiff who achieves a corporate benefit for the enterprise may be eligible for attorney’s fees, but he is not entitled them. Here, after trial on a paper record, the stockholder-plaintiff obtained an order directing the corporation to hold an annual meeting to elect directors (its first in eight years) and to produce certain books and records. The Court agreed that compelling an annual meeting met the minimum requirements to be eligible for a fee award, but the Court concluded that the circumstances made a fee award inequitable. More ›

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Post-Closing Earn-Out Claims Dismissed, But Fiduciary Duty Claims Against Former Director Survive

Neurvana Medical, LLC v Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Feb. 27, 2020).

Neurvana Medical, LLC (“Neurvana”) sold a medical device to Balt USA, LLC (“Balt USA”), largely for post-closing consideration if the device obtained regulatory approval. Balt USA was required to use commercially-reasonable efforts to obtain the approval, but otherwise, Balt USA had sole discretion over the process. More ›

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Chancery Sustains Breach of Fiduciary Duty Claim Against Long-Time Friend and Financial Advisor, and Addresses Double-Derivative Standing for Alternative Entities

Bamford v. Penfold, L.P., C.A. No. 2019-0005-JTL (Del. Ch. Feb. 28, 2019).

After realizing that a 2016 reorganization stripped them of their voting and other governance rights in a highly profitable limited liability company, the plaintiffs brought direct and derivative claims against their former business partner and the entities he controlled. The defendant and his entities moved to dismiss, which the Court largely denied. Of particular note were the Court’s rulings about one of the breach of fiduciary duty claims and the plaintiffs’ standing to bring double-derivative claims challenging pre-organization conduct.     More ›

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Chancery Allows Fiduciary Duty Claims to Proceed against Minority Members Who Blocked Financings in Order to Bankrupt Company and Facilitate Unfair Asset Purchase

Skye Mineral Investors, LLC v. DXS Capital (U.S.) Ltd., C.A. No. 2018-0059-JRS (Del. Ch. Feb. 24, 2020) (Slights, V.C.).

Where parties to an LLC agreement do not unambiguously disclaim fiduciary duties, then Delaware law provides by default that managers owe traditional fiduciary duties to the entity and its members. The corporate law principles relating to fiduciary duties of controlling shareholders also apply, including that a minority member who exercises actual control may owe fiduciary duties. In this decision, the Court held that plaintiffs, the majority members of an LLC, adequately alleged that minority members exercised contractual blocking rights in a manner that gave them actual control over financing decisions and then used that control to implement in bad faith a scheme to enable the minority members to acquire the LLC’s assets on the cheap. With those allegations, the Court sustained a non-exculpated claim against the minority members for direct and derivative contract- and fiduciary-based claims. More ›

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Salzburg v. Sciabaccuchi: Delaware Supreme Court Upholds Certificate of Incorporation Provisions Making Federal Courts the Exclusive Fora for Federal Securities Act Claims

In Salzburg v. Sciabaccuchi, 2020 WL 1280785, __ A. 3d __ (Del. Mar. 18, 2020), the Delaware Supreme Court upheld the facial validity under Delaware corporate law of certificate of incorporation provisions making the federal courts the exclusive fora for claims arising under the federal Securities Act of 1933, which requires corporations selling securities to make “full and fair disclosure of relevant information” in a publicly filed registration statement. Although ’33 Act claims may be brought in state or federal court, many corporations and their advisors prefer federal court due to procedural advantages, including a better ability to coordinate parallel suits filed in multiple jurisdictions. The corporations named in the suit accordingly had adopted the federal forum provisions in advance of their IPOs. More ›

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