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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 9 posts from January 2022.
Chancery Denies Books and Records Inspection Brought to Advance the Stockholder’s Interests as a Creditor
Georgia Notes 18, LLC v. Net Element, Inc., C.A. No. 2021-0246-JRS (Del. Ch. Nov. 18, 2021)
Plaintiff, a stockholder and creditor of the defendant company, demanded to inspect the company’s books and records pursuant to 8 Del. C. § 220. The company objected, arguing that the plaintiff had failed to state a proper purpose for inspection and had a primary improper purpose. The Court found in the company’s favor, determining that plaintiff sought documents for the primary improper purpose of seeking pre-litigation discovery in connection to its interests as a creditor. More ›
Chancery Dismisses Derivative Suit Involving Wayfair and Challenging Debt Issuance to Private Equity Shareholders for Failure to Make Demand
Equity-League Pension Trust Fund v. Great Hill Partners, L.P., C.A. No. 2020-0992-SG (Del. Ch. Nov. 23, 2021)
A derivative suit brought on behalf of online home goods retailer, Wayfair, challenged the issuance of $535 million in convertible debt early in the COVID-19 pandemic to certain of Wayfair’s private equity investors and their affiliates. The transaction was recommended by a transaction committee and an audit committee, and was ultimately approved by the Wayfair board. The defendants moved to dismiss under Rule 23.1 arguing that the plaintiff was required but failed to make a pre-suit demand on the Wayfair board. Plaintiff argued that demand was futile because, in addition to the four directors who were on the buy-side of the transaction and thus interested, three directors sitting on the audit committee faced a substantial likelihood of liability. Plaintiff needed to sufficiently allege that at least one of the audit committee members was conflicted to arrive at a majority of the board for demand futility purposes. Finding that plaintiff had failed to adequately plead demand futility, the Court granted the defendants’ motion to dismiss. More ›
Chancery Applies Traditional Fiduciary Principles to a SPAC in First Test of the Popular Vehicle for Private Companies to Access Public Markets under Delaware Corporate Law
A Special Purpose Acquisition Company or SPAC is a popular investment vehicle to take private companies public. A SPAC, commonly referred to as a blank check company, is a company whose stock is traded on a public market, but has no operations. Typically, the SPAC raises capital through an IPO with the singular goal of entering into a business combination with a private operating company (referred to as a de-SPAC merger), taking the private company public and giving the new public company its stock listing. A SPAC is often formed and controlled by a sponsor, whose primary job is to identify a target private operating company for the de-SPAC merger. A common feature of a SPAC is that the sponsor receives founder shares in the SPAC for a nominal capital contribution, which shares convert to substantial common shares in the new public company if a business combination with a private company is consummated within the market-standard, two-year period from the IPO. However, if no such transaction is completed within two years, the IPO proceeds are returned with interest to the public stockholders, and the SPAC winds up and liquidates, which renders worthless the sponsor’s founder shares. While these features and structure are common in SPACs, and the attendant mismatched financial incentives between the sponsor and the public stockholders in a de-SPAC merger are known to SPAC investors, this does not remedy the conflicts of interest inherent in the SPAC structure. Moreover, that a de-SPAC merger may legally comply with the DGCL does not shield the merger from application of well-established equitable fiduciary principles of Delaware corporate law. More ›
ShareChancery Dismisses Time-Barred Complaint Against Zillow
Chertok v. Zillow, Inc., C.A. No. 2019-0849-LWW (Del. Ch. Oct. 18, 2021)
Plaintiffs, a former co-founder and director of NMD Interactive (“Chertok”) and an LLC that he managed, brought a breach of contract action against Zillow seeking merger consideration and dividends in connection with Zillow’s 2013 acquisition of NMD. Over the course of six years, Zillow and plaintiffs engaged in negotiations relating to payment of consideration and dividends that Zillow continued to withhold based on plaintiffs’ alleged failure to comply with conditions in the merger agreement. Relevant to the analysis in this case, starting in 2011, NMD brought litigation unrelated to the merger against Chertok in New York federal court, which concluded in 2017. More ›
Chancery Rules That The Standard Of Proof For Contempt Motions Is The Preponderance Of The Evidence, Not Clear And Convincing Evidence
inTEAM Associates, LLC v. Heartland Payment Systems, LLC, C.A. No. 11523-VCF (Del. Ch. Oct. 29, 2021)
Court of Chancery Rule 70(b) empowers the Court to hold a party in contempt for, among other things, failing to obey an injunctive order. The standard of proof required to obtain a contempt order has not been uniformly applied. This recent decision applies the preponderance of the evidence standard, in contrast to certain decisions over the past decade applying the clear and convincing evidence standard. More ›
Chancery Holds Plaintiffs Adequately Pled Wrongful Refusal Where Board Did Not Correct Unauthorized Charter Amendments
Drachman v. Cukier, C.A. No. 2019-0728-LWW (Del. Ch. Oct. 29, 2021)
To survive a motion to dismiss in the demand refusal context, the plaintiff must allege facts that create a reasonable doubt that the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis or that the board acted in good faith, consistent with its duty of loyalty. Where the board’s response and other circumstances give rise to a reasonable inference that directors did not care about a clear, continuing violation of law, the standard for wrongful refusal may be met. More ›
Chancery Applies Plain Language of a Merger Covenant To Dismiss Acquirer’s Untimely Indemnification Claim and Deny Sellers’ Request for Detailed Annual Reports
Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., C.A. No. 2020-0217-MTZ (Del. Ch. Oct. 29, 2021)
Supernus Pharmaceuticals, Inc. acquired biotech startup Biscayne Neurotherapeutics, Inc. pursuant to a 2018 merger agreement. In 2019, Supernus submitted indemnification claim notices to Reich Consulting Group, Inc., the security holder representative for Biscayne. Subsequently, Supernus filed an indemnification action against Reich in the Court of Chancery. Following trial, plaintiff Supernus’s only remaining indemnification claim was based on a provision in the merger agreement that required Biscayne to operate in the ordinary course of business during a specific period of time (“Ordinary Course Covenant”). More ›
Presented with Documents Outside the Pleadings, Chancery Converts Motion To Dismiss to Motion for Summary Judgment and Allows Discovery
Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM (Del. Ch. Oct. 20, 2021)
While the Court may take judicial notice of the contents of materials like newspaper articles, public filings and websites for certain purposes, it generally may not do so to establish the truth of their contents. Where, as here, a party relies on documents outside the pleadings, the Court may convert a motion to dismiss into a motion for summary judgment, and therefore deny the motion. More ›
Chancery Dismisses Implied Covenant Claim For Former Stockholders’ Alleged Improper Demands That Company Take Actions To Achieve Earn-out Milestones
Pacira Biosciences, Inc. v. Fortis Advisors LLC, C.A. No. 2020-0694-PAF (Del. Ch. Oct. 25, 2021)
There generally cannot be a claim under the implied covenant of good faith and fair dealing for conduct that is addressed by the plain language of an agreement. Even when a contract is silent, the Court will not use the covenant to rewrite the contract to imply contractual provisions that a party failed to obtain at the bargaining table. More ›
