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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 72 posts from 2023.
Chancery Finds Defendants Liable for Fraud Based on the Failure to Disclose Internal Billing Practices
NetApp Inc. v. Cinelli, C.A. No. 2020-1000-LWW (Del. Ch. Aug. 2, 2023)
This decision arose out of the sale of the company Cloud Jumper to NetApp, Inc. The seller’s management had been recording internal software use as revenue in its unaudited financial statements but never disclosed this practice to the buyer in the sale’s process. In this post-trial opinion, in addition to breaches of contract, the Court of Chancery held that the defendants were liable for fraud because they failed to disclose internal billing practices that created the appearance of higher company revenue. The Court reasoned that this failure constituted common law fraud because the defendants had a duty to speak regarding the billing practice, there was circumstantial evidence that they had scienter to commit fraud due to their knowledge of the internal billing practice, and the plaintiffs relied on the financial data that reflected the billing practice when considering whether to pursue the deal. The decision also reflects a detailed analysis of damages and expert testimony related to the misrepresentations.
Chancery Upholds Claims Against LLC Officers and Others Arising from Squeeze-Out of Minority Unitholders
Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, C.A. No. 2022-0718-JTL (Del. Ch. Aug. 9, 2023)
An Indiana corporation reorganized via bankruptcy into a Delaware LLC, and a senior note holder negotiated for nearly 90 percent of the equity. The LLC agreement required that at least one member of the five-member board of managers be independent. It prohibited the controller from acquiring additional shares or squeezing out the minority without approval of the majority of independent managers or a majority of votes cast by minority unitholders. It also required the controller to provide notice of a proposed squeeze-out so that minority unitholders would have the option to challenge the fairness of the transaction unless it had received approval from a majority of the minority or a minority-approved independent manager. More ›
Chancery Finds Non-Compete Unenforceable by Subsidiaries Unless Identified in Agreement
Frontline Techs. Parent, LLC v. Murphy, C.A. No. 2023-0546-LWW (Del. Ch. Aug. 23, 2023)
This non-compete decision reminds drafters to pay careful attention to scope and definitions, in particular language covering the appropriate entities within the corporate family. Here, a holding company, Frontline Technologies Parent LLC, entered into equity agreements with two employees of its operating subsidiary, Frontline Technologies Group, LLC, and these agreements included non-compete provisions covering competitors of the holding company. The employees later gained employment with a competitor of the operating subsidiary. The former employees were then sued for breaching the restrictive covenants. The Court of Chancery granted the defendants’ motion to dismiss, finding that the agreement’s language did not prohibit competition with the operating subsidiary, only the holding company. As the Court explained in applying the contract’s plain language, the parent and subsidiary must “live with the restrictive covenants they agreed to.” The Court also dismissed the claims for equitable rescission, finding that no mistake of fact had occurred, and rescission was not available to “save a party from its agreement to unambiguous contract provisions that later prove disadvantageous.”
Chancery Adopts Heightened Standard for Supplemental Disclosure Mootness Fee Awards in M&A Litigation
Anderson v. Magellan Health, Inc., et al., C.A. No. 2021-0202-KSJM (Del. Ch. July 6, 2023)
This opinion clamps down on mootness fee awards for immaterial supplemental disclosures in connection with M&A transactions. It announces that future mootness fees for supplemental disclosure will only be awarded where such disclosures are “material” not merely “helpful,” and even when such fees are awarded, they may be much lower than those awarded historically. More ›
Chancery Rejects Declining-Percentage Method, Awards $266.7 Million in Attorneys’ Fees for $1 Billion Class Action Settlement
In re Dell Techs. Inc. Class V S'holders Litig., C.A. No. 2018-0816-JTL (Del. Ch. July 31, 2023, revised Aug. 22, 2023)
Stockholders filed class actions in the Court of Chancery challenging the terms of a redemption of a special class of common stock. After years of litigation and the filing of pre-trial briefs, nineteen days before trial, the parties reached a cash settlement of $1 billion. The plaintiff's counsel submitted a fee application for 28.5 percent of the common fund. Stockholders holding more than 25 percent of the class objected to the fee application and asked that the Court instead apply the declining-percentage method used for calculating fees in federal securities litigation. More ›
Chancery Orders Company to Produce Books and Records in Response to Section 220 Demand and Grants Stockholder Leave to Seek Fees and Costs
Myers v Academy Securities, Inc. C.A. No. 2023-0241-BWD (Del. Ch. July 27, 2023).
Under Section 220 of the Delaware General Corporation Law ("DGCL"), stockholders are entitled to corporate books and records if they make a valid demand on the company, have a proper purpose for conducting an inspection, and establish that each category sought is essential to that purpose. In this case, a Magistrate in Chancery found that the stockholder met his burden to receive books and records for the purpose of determining the value of his shares. The Court also recommended that the stockholder be permitted to seek his attorneys' fees and costs for the books and records action. More ›
Chancery Finds Member Breached LLC Agreement in Unilaterally Dissolving the Company
VH5 Capital, LLC v. Jeremiah Rabe, C.A. No. 2020-0315-NAC (Del. Ch. June 30, 2023)
The at-issue LLC had two members – the defendant and the plaintiff, both of whom also constituted the company's board. The company never observed any corporate formalities, including never holding any meetings or appointing a third board member, as required by the company's LLC Agreement. After operating for mere months and never earning a profit or accumulating assets, the defendant unilaterally dissolved the company. More ›
Chancery Approves Revised Class Action Settlement After Denying Initial Proposal Due to Overly Broad Release
In re AMC Entm't Holdings, Inc. S'holder Litig., Consol. C.A. No. 2023-0215-MTZ (Del. Ch. July 21, 2023)
In re AMC Entm't Holdings, Inc. S'holder Litig., Consol. C.A. No. 2023-0215-MTZ (Del. Ch. Aug. 11, 2023)
The board of directors of a company in financial distress sought to raise capital by issuing more common stock. Existing common stockholders did not approve the proposed measure. The board then issued new preferred stock with sufficient voting power to ensure the passage of board proposals to issue new common shares. Stockholders filed a class action, alleging that the board violated the Delaware General Corporation Law in creating the preferred stock and breached its fiduciary duties by diluting the common stock's voting power. More ›
Chancery Refuses to Order Specific Performance Due to Inaccurate Representations and Warranties
Restanca, LLC v. House of Lithium, Ltd., C.A. No. 2022-0690-PAF (Del. Ch. Jun. 30, 2023)
The parties seeking specific performance of an agreement must establish a clear right to performance, including that all conditions to closing have been met. In this case, a buyer refused to close on the acquisition of an electric scooter company, and the seller sought specific performance in the Court of Chancery. In its post-trial decision, the Court denied that relief because the sellers inaccurately represented that the seller’s equity holders had executed a secondary sale agreement and that the seller had delivered certain financial statements to the buyer. Because neither of those things had in fact occurred, not all conditions to closing were satisfied and the buyer could walk away from the transaction. Further, because Delaware is a pro-sandbagging jurisdiction, it did not matter whether the buyer knew (as seller argued) that representations were inaccurate, and holding seller to its representations did not create an unjust result.
Supreme Court Affirms Court of Chancery’s Decision Directing “Long Dark” Company to Produce Books and Records to a Stockholder Free of Confidentiality Restrictions
Hauppauge Digital, Inc. v. Rivest, C.A. No. 2019-0848 (Del. July 10, 2023).
Under Delaware law, once a stockholder has established a proper purpose to inspect a corporation's books and records, the Court of Chancery has the discretion to impose limitations or conditions on the Section 220 production. In this case, the Supreme Court of Delaware agreed with the Court of Chancery's decision not to impose any limitations on the production. More ›
Chancery Approves Reduced Fee Award for Derivative Settlement Based on Therapeutic Benefits
Sciabacucchi v. Howley, C.A. No. 2021-0938-LWW (Del. Ch. July 3, 2023)
A stockholder filed a derivative action alleging breach of fiduciary duty and unjust enrichment in connection with a board compensation committee’s decision to award compensation to directors. Months later, the parties reached a therapeutic settlement, including that dividend-equivalent payments to directors on their unexercised stock options would no longer be in cash; rather, they would be applied to reduce the options’ exercise price. The plaintiff valued the alleged benefit to the company at $23.8 million. In exchange for the therapeutic terms, the plaintiff released all claims. The plaintiff’s counsel sought a fee and expense award of $2.8 million, which the defendants agreed not to oppose. More ›
Chancery Finds that Acquiror Aided and Abetted Breaches of Fiduciary Duties by Exploiting Management’s Conflicts of Interest
In re Columbia Pipeline Group Merger Litig., Consol. C.A. No. 2018-0484-JTL (Del. Ch. June 30, 2023)
To establish a claim for aiding and abetting a breach of fiduciary duties, a plaintiff must show “i) the existence of a fiduciary relationship giving rise to a duty to the plaintiff, (ii) a breach of that duty by the fiduciary, (iii) knowing participation in the breach by the defendant, and (iv) damages proximately caused by the breach.” Id. at 94. The plaintiffs alleged that TransCanada, the acquirer in the merger transaction, aided and abetted a breach of fiduciary duties in the merger sale process and in disclosures to the stockholders in connection with the merger vote. More ›
Chancery Denies Books and Records Request Related to Disney’s Opposition to Florida Legislation Prohibiting LGBTQ+ Topics in Classrooms
Simeone v. The Walt Disney Company, C.A. No. 2022-1120-LWW (Del. Ch. June 27, 2023)
The Walt Disney Company opposed Florida legislation that limits instruction on sexual orientation and gender identity in Florida classrooms. The Governor of Florida responded by threatening the revocation of tax-favorable treatment for Disney. The plaintiff filed a books and records demand and then litigation, alleging that Disney's opposition to the legislation put at risk Disney's tax-favorable treatment and that Disney's directors and officers may have breached their fiduciary duties by putting their own beliefs ahead of their obligations to stockholders. More ›
Chancery Provides Additional Analysis of Primedia Claims in MFW Context
City of Dearborn Police and Fire Revised Retirement System (Chapter 23) et al. v. Brookfield Asset Management Inc., C.A. No. 2022-0097-KSJM (Del. Ch. June 21, 2023)
In a short letter decision, Chancellor McCormick supplemented an earlier decision with a more fulsome analysis of plaintiffs’ Primedia claim (a direct claim challenging a merger based on a board’s failure to obtain value for material derivative claims), which the Court had earlier decided was subject to dismissal under MFW. Under Primedia’s three-part test, to bring a derivative claim post-merger, the former stockholder must plead (1) a colorable underlying derivative claim, (2) that the value of the derivative claim was material in the context of the merger, and (3) “that the acquirer would not assert the underlying derivative claim and did not provide value for it.” Here, the Court held that Plaintiffs failed to establish Primedia’s second prong because their claims and calculations were “woefully underdeveloped[.]” Specifically, plaintiffs speculated the defendants could have been liable for the entire lost market capitalization in the years following the merger, but they could not explain how that measure of damages made sense. Other metrics, including comparing the deal price to the trading price at the time of the transaction, showed that the derivative claims were not material to the merger consideration.
Chancery Rejects “Largely Precatory” Proposed Derivative Settlement
Knight v. Miller, C.A. No. 2021-0581-LWW (Del. Ch. June 1, 2023)
Under Court of Chancery Rule 23.1(c), the Court must approve the settlement of any derivative litigation. This case provides a rare example of the Court rejecting a settlement after determining that the “give"—i.e., the substance of the settlement—did not justify the “get"— i.e., ending the litigation. More ›
