Showing 25 posts from October 2022.
Chancery Finds That Stockholder’s Broad Section 220 Demand Lacked The Precision And Plus Factors Required To Entitle Shareholder To Additional Materials
Oklahoma Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., C.A. No. 2021-0484-LLW (Del. Ch. June 1, 2022)
In reviewing the propriety of a stockholder’s Section 220 demand to inspect corporate records, Delaware courts must determine (1) whether the stockholder has stated a proper purpose; and (2) whether the requested documents are essential to the accomplishment of the proper purpose. Where the stated purpose of a Section 220 demand is to investigate alleged corporate wrongdoing which is the subject of other pending investigations or litigation, Delaware courts require one or more “plus factors” in addition to the mere pendency of an investigation or litigation to establish a credible basis to suspect wrongdoing. In this decision of the Court of Chancery, the Court held that the stockholder failed to establish the requisite plus factors and, in all events, the company had already produced sufficient records for the accomplishment of the stockholder’s purpose. More ›
Chancery Denies Bid to Dismiss Derivative Claims Amid Alleged “Gamesmanship” Regarding Composition of LLC’s Board of Managers
Schoenmann v. Irvin, C.A. 2021-0326-SG (Del. Ch. Jun. 2, 2022)
After the plaintiff filed his direct and derivative claims in April 2021, the defendants – the company and its controller – circulated in June 2021 a written consent purporting to change the composition of the company’s board of managers as of January 2021. The defendants then moved to dismiss the derivative claims on the grounds that the plaintiff did not plead demand futility with respect to the purported new board. Based on the plaintiff’s allegations, the Court agreed with the plaintiff that it was reasonably inferable that the consent was backdated. But the Court ultimately decided the matter on a different ground: even if the board composition validly changed in January 2021, equity would not reward the defendants’ gamesmanship in delaying notice of the change. Because it was reasonable to infer that the change was made in anticipation of the plaintiff’s derivative claims and to thwart them, and the plaintiff properly pleaded demand futility with respect to the board of which he had notice, the Court allowed those claims to proceed.
NetApp, Inc. v. Cinelli, Inc., C.A. No. 2020-1000-LWW (Del. Ch. June 3, 2022)
This decision clarifies discovery deadlines under the Court of Chancery rules. Plaintiff served dozens of requests for admission months after the close of discovery, arguing that such requests are not subject to discovery deadlines, but merely “a mechanism to eliminate factual disputes.” Federal courts have rendered conflicting decisions on the issue. Here, the Court of Chancery holds that requests for admission under Rule 36 are subject to discovery scheduling cut-offs because they are part of the discovery process as specified under Rule 26 and 36.
Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, C.A. No. 19C-11-92 (Del. Super. June 6, 2022)
Delaware courts generally do not permit the redaction of non-responsive material that is otherwise not privileged. Two-tiered confidentiality stipulations, allowing for highly confidential attorneys’ eyes-only designations, are available to prevent sensitive information from being widely disseminated amongst an opposing party if such disclosure is substantially likely to cause injury to the producing party and a standard confidential designation would be insufficient to prevent that injury. More ›
Chancery Dismisses Claims Seeking to Unwind Secondary Transactions that Allegedly Jeopardized Recovery for Primary Fraudulent Transfers
Burkhart v. Genworth Fin., Inc., C.A. No. 2018-0691-JRS (Del. Ch. May 10, 2022)
The plaintiffs were a putative class of policyholders and insurance agents with an interest in long-term care insurance policies written by the defendant's insurance company. Plaintiffs alleged that the company’s parent and related entities fraudulently removed assets and support from the company and impaired the company’s ability to make payments to the policyholders and agents. The plaintiffs sought to unwind the purported fraudulent transactions under Delaware’s Uniform Fraudulent Transfer Act. After failing to obtain the dismissal of the DUFTA claims, the defendants allegedly diverted assets away from the initial transferees. Plaintiffs subsequently amended their complaint to include additional DUFTA claims seeking to unwind these secondary diversions. Defendants moved to dismiss the new claims on the grounds that plaintiffs were not creditors of the transferees, and thus lacked standing, and that plaintiffs had sought improperly to unwind transactions, rather than plead a right to payment. More ›
Delaware Supreme Court Explains Appraisal Rights and Finds Disclosure Violation Relating to Pre-Closing Dividend Contingent on a Merger
In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267 (Del. July 19, 2022)
Here, the defendants organized a merger so that a large majority of the total value of the merger would be granted as a pre-closing dividend to stockholders and that the remaining amount would be granted in return for the stockholder’s shares. In the resulting litigation, stockholders argued that the defendants’ structuring of the merger unlawfully denied or diluted the stockholders’ right to seek appraisal and that the defendants’ disclosures regarding the structuring were deficient. The defendants prevailed on a motion to dismiss before the Court of Chancery. On appeal, the Delaware Supreme Court found that the dividend conditioned on the merger’s consummation was part of the merger consideration for appraisal purposes under Delaware law, that receipt of the dividend did not disqualify stockholders from seeking appraisal, and that plaintiff’s claim regarding the structure, therefore, was properly dismissed. But the Supreme Court reversed the trial court’s dismissal of the related disclosure claim. The plaintiffs alleged that the director defendants, aided and abetted by the acquirer, had deprived stockholders of their appraisal rights by improperly describing what would be subject to appraisal. The Supreme Court agreed and held that the disclosures were confusing and materially misleading. The proxy stated that stockholders were entitled only to the amount that remained after the pre-closing dividend. But this was incorrect as a matter of Delaware law, as the stockholders were also entitled to appraisal for the pre-closing dividend. Two justices dissented from the majority’s holding regarding the disclosure claim.
Delaware Supreme Court Enforces Class Vote Requirement, Reasons There Is No Insolvency Exception to Section 271 Of The Delaware General Corporation Law
Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021 (Del. June 15, 2022)
Section 271 of the Delaware General Corporation Law provides, among other things, that a majority vote of stockholders is required to sell all or substantially all of a corporation’s assets. As an issue of first impression, the Delaware Supreme Court reasoned that there is no insolvency exception to Section 271’s requirement of a stockholder majority vote. More ›
On Motion To Dismiss, Court of Chancery Holds That Alleged Disclosure Violations Were Insufficient To Rebut Corwin Protections Of A Fully Informed Stockholder Vote
Teamster Members Ret. Plan v. Randall S. Dearth et al., C.A. No. 2020-0807-MTZ (Del. Ch. May 31, 2022)
Under the Supreme Court’s decision in Corwin and its progeny, a transaction approved by a fully informed, uncoerced stockholder vote, not involving a controlling stockholder, receives business judgment rule protection. However, one sufficiently alleged disclosure deficiency is enough to put into question whether a stockholder vote is fully informed and, thus, to defeat a motion to dismiss. More ›
Chancery Dismisses Caremark Claim Against Energy Company Alleging Failure of Board Oversight Related to Fatal Pipeline Explosion
City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022)
Stockholder plaintiff filed a derivative suit on behalf of an energy company alleging that certain of the company’s former and current directors were liable for oversight failures leading to the fatal explosion of an over-pressurized gas pipeline. When the defendants moved to dismiss for failure to make a demand on the board, the plaintiff argued that demand was excused because a majority of the demand board faced a substantial likelihood of liability for oversight failures based on the following three theories of Caremark liability: (1) the board’s utter failure to implement a pipeline safety monitoring or reporting system; (2) the board’s failure to acknowledge “red flags” that put it on notice of the company’s numerous violations of pipeline safety laws; and (3) the board’s knowing encouragement of legal violations in the pursuit of corporate profit. The Court rejected all three of the plaintiff’s theories of Caremark liability and dismissed the action for failure to make a demand. The Court reasoned as follows: (1) according to the plaintiff’s own allegations, the company had set up a pipeline safety monitoring and reporting system which included a committee specifically tasked with pipeline safety that was active, therefore the plaintiff had not adequately pled “utter failure” to set up such a system; (2) any causal connection between the “red flags” identified by the plaintiff and the explosion were too tenuous to put the board on notice of the corporate trauma that occurred; and (3) plaintiff had not adequately pled that the board was “in the business” of encouraging violation of the law for profit because, according to plaintiff’s own allegations, the company actually discouraged legal violations through the formation of several committees tasked with regulatory compliance.
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022)
This motion to dismiss decision upholds a Brophy claim against an activist investor and director who was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. The Court of Chancery found it was reasonable in the circumstances to infer materiality of the expression of interest, which represented a nearly 65% premium over the company’s trading price, and that the fiduciary was motivated to act upon it. The Court also found that a merger did not eliminate the plaintiff’s standing under the contemporaneous ownership requirement. The Court rejected the defendant's argument under Primedia regarding the asserted immateriality of the value of the plaintiff’s claims in the context of the merger. As the Court explained, under Parnes, a stockholder could may assert “a direct claim challenging a merger if the facts giving rise to what otherwise would constitute a derivative claim led either to the price or the process being unfair.” Here, the plaintiff’s allegations challenged the fairness of the sale process – a process that the activist allegedly delayed to serve his own interests at the expense of the Company running a better process or remaining independent.
Diep v. Trimaran Pollo Partners, No. 313, 2021 (Del. June 28, 2022)
After the Court of Chancery denied an initial motion to dismiss, the company formed a special litigation committee (“SLC”) to investigate the claims and determine whether the company should allow the plaintiff to proceed, take over the litigation, or move to dismiss. The SLC investigated and then moved to dismiss the claims, which the Court of Chancery granted under Zapata. Among other rulings, the Supreme Court affirmed and upheld the Court of Chancery’s rejection of the plaintiff’s contention that the SLC did not meet its burden to establish the independence of the SLC members. The Supreme Court agreed with the trial court that the record did not establish that as directors the SLC members had specific knowledge of the facts and circumstances that led the Company, as nominal defendant, to join the initial motion to dismiss those claims that the SLC later was charged with investigating. Justice Valihura dissented because she believed that material issues of fact existed regarding the SLC members’ independence.
Chancery Holds That A General Partner Of A Limited Partnership Cannot Breach Fiduciary Duties It Does Not Owe
JER Hudson Group XXI LLC, et al. v. DLE Investors, LP, C.A. No. 2021-0478-MTZ (Del. Ch. May 2, 2022)
Under Delaware law, the purpose of a limited partnership and a general partner’s authority and fiduciary duties may be defined by the terms of a limited partnership agreement (“LPA”). In this post-trial decision, the Court of Chancery held, among other things, that a limited partner failed to prove fiduciary claims against a general partner because the partnership’s express purpose and the general partner’s fiduciary duties did not require it to take actions the limited partner alleged would be value-maximizing. More ›
Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. June 9, 2022)
This decision highlights the need for a nexus between legal expenses and one’s corporate capacity in the context of indemnification, as well as Delaware law’s claim-by-claim approach to indemnification. Here, the Court of Chancery denied indemnification to a former director and officer for tortious interference and defamation claims that he defeated because they concerned conduct occurring post-termination of employment. The Court also denied indemnification relating to a breach of fiduciary duty claim that the fiduciary lost but avoided most of the requested damages, finding partial indemnification would “contravene the claim-by-claim approach to indemnification consistently followed by Delaware courts.”
Superior Court Complex Commercial Litigation Division Addresses Standing Requirements For Foreign LLCs “Doing Business” In Delaware And Reaffirms That Some Preliminary Agreements Give Rise To Obligations To Negotiate A Final Agreement In Good Faith
Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, C.A. No. N20C-07-052 AML CCLD (Del. Super. Ct. May 11, 2022)
This decision addresses two points of note relating to standing for foreign limited liability companies and to the binding nature of preliminary agreements. More ›
Simon Property Group v. Regal Entertainment Group, C. A. No. N21C-01-204-MMJ (Del. Super. Ct. Jul. 6, 2022) (CCLD)
Simon Property, the landlord, sued Regal Entertainment, the tenant, for breach of a commercial lease, including Regal Entertainment’s failure to pay rent during the COVID-19 pandemic in 2020 and 2021. Regal Entertainment asserted several affirmative pandemic-related defenses. Upon Simon Property’s motion, the Court rejected Regal Entertainment’s defenses as a matter of law because the parties’ lease contained a force majeure provision broad enough to cover the pandemic events and because those provisions allocated the risk of loss to Regal Entertainment.
Coster v. UPI Companies, Inc., C.A. No. 2018-0440-KSJM (Del. Ch. May 2, 2022)
This case involved a control dispute of the defendant corporation, UPI Companies. After disputes arose between two fifty percent co-owners, one caused the company to issue long promised equity to an executive, which broke the deadlock. When the other co-owner challenged the transaction, the Court of Chancery found the stock sale satisfied the entire fairness standard and declined to invalidate it. On appeal, the Delaware Supreme Court found the trial court should have examined the sale under Schnell or Blasius. In this decision on remand, the Court of Chancery engaged in a thorough discussion of the Schnell and Blasius standards and the state of Delaware law on those tests. Applying its reading of those standards, the Court found the stock sale was not approved for inequitable purposes and had some good faith basis, and therefore was not invalid under Schnell. The Court also found that the stock sale was not primarily motivated by thwarting the co-owner’s vote, but, instead, was motivated by the best interests of the company and a desire to moot litigation that threatened it in the circumstances. The Court further found that, in any event, the company had a compelling justification for its action and an appropriately tailored response, and thus satisfied Blasius.
Superior Court Classifies Cryptocurrency as a Security and Calculates Contract Damages Based on Cryptocurrency Valuation
Diamond Fortress Techs., Inc. v. Everid, Inc., C.A. No. N21C-05-048 PRW CCLD (Del. Super. Ct. Apr. 14, 2022)
Plaintiff Diamond Fortress contracted with the defendant company to provide its software to develop a trading platform for the defendant’s cryptocurrency. In exchange, the defendant agreed to pay plaintiffs in cryptocurrency at the time that defendant made its initial coin offering and at subsequent token distribution events. After the offering and events, the defendant failed, however, to make any payments to the plaintiffs. Plaintiffs filed claims against the defendant for breach of contract, and a default judgment was entered after the defendant failed to appear or respond. After finding that defendant had repudiated and breached the contract, the Court then determined how to calculate damages resulting from breach of a contract to be paid in cryptocurrency, which involved the novel issue under Delaware law of how to classify and value cryptocurrency. More ›
In re Matter of Global Safety Labs, Inc., C.A. No. 2022-0309-JTL (Del. Ch. May 12, 2022)
This case concerned the dissolution procedures of the DGCL, specifically Section 280, which with Section 281 establishes an optional, court-supervised wind-up process that provides a safe harbor from post-dissolution liability. In this decision, the Court of Chancery faults the paucity of information the Court regularly sees in such actions, which often proceed ex parte. The Court explained that it requires more information to grant relief, including “about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.” The Court cited first-day declarations in a bankruptcy proceeding as a helpful model.
North American Leasing, Inc. v. NASDI Holdings, LLC, No. 192, 2020 (Del. Apr. 11, 2022)
Defendants acquired construction entities from plaintiffs and agreed to indemnify plaintiffs for any losses arising from performance and payment bonds on existing projects. Losses occurred in connection with one of the projects in 2017, and plaintiffs gave the defendants notice of indemnification claims for nearly $21 million. Defendants rejected the claims as untimely under the acquisition agreement, which they argued had a strict notice deadline of 2016. More ›
Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities
BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims. More ›
In re VBR Agency LLC, C.A. No. 2022-0328-JTL (Del. Ch. Apr. 20, 2022)
Petitioners often call upon the Court of Chancery to appoint receivers to settle a company’s business. As this decision describes, “[i]n recent years, the members of the court have been forced to address actions taken by custodians or receivers who obtained appointments on … scant records. In some of those situations, the custodian or receiver has taken action that caused the court to question whether the appointment should have been made, or the court has learned information that might have caused the court to decline to make the appointment in the first instance. … Delaware has a significant interest in ensuring that questionable individuals do not use judicial proceedings to gain control over Delaware entities. Delaware likewise has an interest in ensuring that its entities are not used as vehicles for improper schemes.” Here, considering these concerns, the Court declined to make an appointment, first requiring additional information beyond that in the petition. The petitioner sought an appointment allegedly for the purpose of litigation involving a defunct LLC. The Court viewed as material additional information regarding the regulatory or legal histories of the receiver and any affiliates, as well as the receiver’s specific plans for the LLC beyond the general purposes stated in the petition.
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. May 26, 2022)
In this case, an activist investor and director was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. And others at the company were alleged to have manipulated the company’s projections to justify the deal price at a lower valuation. The Court of Chancery found well-pled fiduciary duty claims against the alleged wrongdoers and aligned parties that avoided a Corwin dismissal. Among other things, the Court’s decision illustrates constellations of facts sufficient to question the independence of otherwise disinterested fiduciaries. Here, such combinations involved directors’ symbiotic relationships with an activist investor that resulted in repeat directorships in targeted companies.
Samuels v. CCUR Holdings, Inc., C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022)
Under Section 155 of the DGCL, corporations may elect either to issue stockholders fractional shares or to pay a stockholder the fair value of the fractional interest. The plaintiff-stockholder alleged that the corporation failed to pay him fair value for his fractional interest after a reverse stock split. In allowing a standalone claim under the statute to proceed, the Court reasoned that stockholders generally are permitted to assert direct statutory claims, and previous decisions addressing Section 155 did not foreclose the plaintiff’s statutory cause of action.
Garfield v. Allen, C.A. No. 2021-0420-JTL (Del. Ch. May 24, 2022)
Historically, the wrongful rejection of a demand has affected only the question of who controls a derivative claim. In this case, involving equity issuances to a director under an equity compensation plan, however, the plaintiff asserted that defendant-directors’ demand refusal constituted a separate breach of duty because the defendants did not correct an obvious violation of the plan’s plain language. Although the Court recognized that the claim was potentially problematic from a policy perspective, the Court nonetheless found that the claim rested on the established principle that a conscious failure to act is the equivalent of action. And the Court concluded that the plaintiff’s complaint established “one of the strongest possible scenarios for such a claim.” Thus, the Court reasoned, it was reasonably conceivable that the defendants’ conscious inaction in the face of the plaintiff’s demand constituted a breach of the defendants’ duties.
Superior Court Sustains Certain Contract Claims in Dispute over Post-Acquisition Operation of Resort and Timeshare Business
CRE Niagara Holdings, LLC v. Resorts Group, Inc., C.A. No. N20C-05-157 PRW CCLD (Del. Super. Ct. May 31, 2022)
After acquiring a resort and timeshare business in 2017, plaintiffs brought claims of fraudulent inducement, breach of contract, and declaratory judgment against the seller. The seller filed claims in federal courts and in New York state court, and then separately filed parallel claims as counterclaims and a third-party complaint in Delaware. The seller alleged that plaintiffs did not adhere to past practices in operating the business post-acquisition, that they made the acquisition to loot the business, and that, as a consequence, the seller suffered from a diminution in value of the payment streams from certain contracts. The plaintiffs moved to dismiss the seller’s counterclaims and third-party complaint. More ›