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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 148 posts from 2021.
Chancery Addresses Indemnification Claim Turning on the Contractual Definition of a Covered Person
GMF ELCM Fund L.P., et al. v. ELCM HCRE GP LLC, et al., C.A. No. 2018-0840-SG (Del. CH. Sept. 22, 2021)
This indemnification dispute arose out of an alternative entity dissolution proceeding involving a health care business. The claimant was a former employee of an entity within the web of entities implicated in the case. He sought indemnification from several entities for his defense of third-party claims in a separate litigation, from which he was dismissed. After the liquidating trustee objected to his claim, the claimant sought to enforce his rights in the Delaware dissolution proceeding. More ›
Chancery Dismisses Derivative Claims That Private Equity Sponsors Comprised A Control Group
Patel v. Duncan, C.A. No. 2020-0418-MTZ (Del. Ch. Sept. 30, 2021)
For stockholders to comprise a control group, the alleged group members must be connected in some “legally significant way – such as by contract, common ownership, agreement or another arrangement – to work together toward a shared goal.” Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251-52 (Del. 2019). There must be “an indication of an actual agreement, although it need not be formal or written.” Id. Here, the court dismissed a claim alleging that two private equity funds comprised a control group that agreed to cause the corporation to engage in two unfair, self-interested transactions as a quid pro quo arrangement between them. Specifically, the plaintiff alleged they agreed to cause the corporation to overpay in two successive transactions in which the counterparties who benefitted unfairly were affiliates of the respective private equity funds. More ›
Chancery Examines Cornerstone Standard for Establishing Non-Exculpated Fiduciary Duty Claims
In Re BGC Partners, Inc. Derivative Litigation, Consol. C.A. No. 2018-0722-LWW (Del. Ch. Sep. 20, 2021)
A director protected by an exculpatory provision is entitled to dismissal in a breach of fiduciary duty action unless the plaintiff advances a non-exculpated claim. Under In re Cornerstone Therapeutics Inc. Shareholder Litigation, 115 A.3d 1173 (Del. 2015), to establish a non-exculpated claim plaintiff must show that a director: (1) “harbored self-interest adverse to the stockholders’ interests”; (2) “acted to advance the self-interest of an interested party from whom they could not be presumed to act independently”; or (3) “acted in bad faith.” This decision explains Cornerstone’s second prong. More ›
Delaware Court of Chancery Enjoins Arbitration, Holds It Has Subject Matter Jurisdiction to Decide Substantive Arbitrability In Face Of Competing Arbitration Provisions
AffiniPay, LLC, et al. v. West, C.A. No. 2021-0549-LWW (Del. Ch. Sept. 17, 2021)
As a general matter, Delaware courts retain jurisdiction to determine substantive arbitrability – that is, whether claims are subject to arbitration under the relevant arbitration clause. Delaware courts will defer to arbitrators’ determinations of such issues, however, where the parties’ contract reflects their “clear and unmistakable” intent to do so, a standard that may be met by, among other things, contractual language that “all disputes” are submitted to arbitration and the incorporation of official arbitration rules that empower arbitrators to decide arbitrability. Here, because the parties’ dispute implicated multiple agreements with competing and conflicting arbitration clauses assigning arbitrability to different arbitrators, the Court of Chancery retained jurisdiction to determine arbitrability. The Court granted a preliminary injunction preventing arbitration from proceeding in the arguably incorrect forum. More ›
Chancery Addresses When an Efforts Clause-Based Earnout Claim May Ripen
S’holder Representative Servs., LLC v. Alexion Pharm., Inc., C.A. No. 2020-1069-MTZ (Del. Ch. Sep. 1, 2021)
Mergers and sale agreements frequently include earn-out provisions that entitle one party to future compensation if certain business or financial goals are met within a defined period. In return, the other party often must use a defined level of effort—such as “commercially reasonable” efforts—to achieve the goals that trigger the earn-out. This case addresses a practical threshold question: If the party entitled to the earn-out believes that the other party has breached its duty to use commercially reasonable efforts, may that party sue immediately, or must that party wait until the earn-out period ends? More ›
Chancery Declines to Order Production of Privileged Document
Drachman v. BioDelivery Sciences International, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021)
Drachman addresses the attorney-client privilege, certain exceptions thereto, including the Garner doctrine, and waiver. Plaintiffs moved to compel the production of a redacted document over which defendants asserted privilege. The document in question was part of an email thread, or group of related communications, that included the advice of counsel and was produced across multiple documents with inconsistent redactions. One version of the communication “slipped through the cracks,” and was produced without redactions before being clawed back by the defendants under the confidentiality order entered in the case. More ›
Chancery Rejects MFW Defense Based on Failure to Disclose That a Conflicted Controller Participated in Arbitration Proceedings Potentially Impacting the Company’s Value
Ligos v. Isramco, Inc., C.A. No. 2020-0435-SG (Del. Ch. Aug. 31, 2021)
Under MFW, a conflicted controller transaction may get the benefit of business judgment review when conditioned on two procedural protections involving: (i) approval by an independent special committee; and (ii) approval by a fully informed, uncoerced majority of the minority stockholders. At issue in Ligos was whether the shareholders were fully informed regarding the value of an arbitration concerning certain royalties when they approved a merger. More ›
Chancery Stays Advancement Action in Favor of Pending Related Federal Action
The Harmon 1999 Descendants’ Trust v. CGH Investment Management, LLC, C.A. No. 2021-0407-KSJM (Sept. 21, 2021)
Generally, absent unusual circumstances, claims for advancement will not be stayed or dismissed in favor of prior pending litigation. At issue, in this case, was whether the plaintiff was a limited partner or agent of the partnership, which would render the plaintiff a covered person under the agreement and entitle the plaintiff to advancement. However, whether the plaintiff was a limited partner was squarely before a Virginia federal court. The Court of Chancery found that the issue of whether the plaintiff was a limited partner was “a material, factually rife, and disputed issue.” The Virginia action was also in its “penultimate phase,” with trial set less than three months away, and likely was going to resolve the issue before the Court of Chancery could rule. Therefore, the court stayed the Delaware advancement action in favor of the pending Virginia action, finding it would avoid wasting judicial resources, risking inconsistent results, and disrespecting principles of comity.
Chancery Enforces Parties’ Merger Agreement That Barred Claims Upon Termination of the Agreement
Yatra Online, Inc. v. Ebix, Inc., C.A. No. 2020-0444-JRS (Del. Ch. Aug. 30, 2021)
Agreements frequently specify how the termination of the agreement affects the parties’ rights and obligations. This case illustrates that Delaware courts generally enforce “effect of termination” provisions in merger agreements as readily as any other contract provision. More ›
Chancery Denies Motion to Dismiss in Part Because Certain Discussions Between CEO and Acquirer Were not Disclosed in Proxy When Other Similar Communications Were
Teamsters Local 237 Additional Security Benefit Fund v. Caruso, C.A. No. 2020-0620-PAF (Del. Ch. Aug. 31, 2021)
Under Revlon, a director must focus on obtaining a transaction that provides the maximum value for stockholders in a sale of control. In addition, when directors solicit stockholder approval, they must disclose fairly and fully all material information. More ›
Delaware Superior Court Holds That Claim For Gross Negligence Against Corporate Managers Is An Equitable Claim For Breach Of Fiduciary Duty Over Which It Lacks Subject Matter Jurisdiction
Techview Investments Ltd., v. Amstar Poland Property Fund I, L.P., C.A. No. N20C-11-229 EMD CCLD (Del. Super. Ct. Aug. 31, 2021)
The court's ability to hear actions is limited by their jurisdiction – both jurisdiction over parties and jurisdiction over claims. This recent decision from the Delaware Superior Court’s Complex Commercial Litigation Division provides guidance on (1) the scope of contractually granted personal jurisdiction; and (2) subject matter jurisdiction for claims of gross negligence against corporate managers in Delaware. More ›
Chancery Rejects Inadequate Disclosure Contentions and Grants Corwin Dismissal
Kihm v. Mott, C.A. No. 2020-0938-MTZ (Del. Ch. Aug. 31, 2021)
Under the Corwin doctrine, a fully informed and uncoerced approval of a board decision by the corporation’s disinterested stockholders can downgrade an otherwise heightened standard of review to deferential business judgment review and result in prompt dismissal of post-closing M&A litigation not involving a conflicted controlling stockholder. Kihm involved a merger breach of fiduciary duty challenge and an attempt to avoid Corwin cleansing based on alleged deficient disclosures in the target board’s recommendation statement to the stockholders. More ›
Chancery Dismisses Derivative Claims Alleging Insider Trading and Misleading Disclosures for Failure to Plead Demand Futility
In re Zimmer Biomet Hldgs., Inc. Deriv. Litig., C.A. No. 2019-0455-LWW (Del. Ch. Aug. 25, 2021)
Under Court of Chancery Rule 23.1, a stockholder-plaintiff may only bring a derivative suit on behalf of a company if the plaintiff (i) first makes a demand on the board to bring suit and is wrongfully refused, or (ii) adequately pleads that a demand would have been futile because the directors were incapable of impartially considering it. Here, the court granted the defendants’ motion to dismiss, because the stockholder-plaintiff failed to allege facts that a majority of the board of directors – who concededly were otherwise disinterested and independent – faced a substantial risk of personal liability. More ›
Chancery Denies Motion to Dismiss, Awaits Development of Factual Record to Rule on Laches Defense
Kim v. Coupang, LLC, C.A. No. 2020-0772-JRS (Del. Ch. Aug. 19, 2021)
If a court can rule on the affirmative defense of laches on the face of a complaint, it may grant a motion to dismiss. As this case illustrates, however, when a laches defense cannot be determined from the complaint, resolving that defense may have to await the development of the factual record. More ›
Chancery Declines to Dismiss Narrow Claims Relating to Entity’s Dissolution In Favor of Pending Related Action
Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. Aug. 24, 2021)
The Delaware courts utilize several doctrines to address motions to dismiss or stay in favor of related litigation, including McWane and Cryo-Maid, all of which turn on legal and practical considerations and the court’s discretion. This decision illustrates the application of the well-established Cryo-Maid factors to a Delaware action alleging narrow claims related to an entity’s winding-up process where the parties were engaged in long-pending litigation elsewhere. More ›
