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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 308 posts by Albert J. Carroll.
Chancery Declines to Dismiss Second-Filed Delaware Action Because Delaware Forum Selection Clause Preempts McWane
Defendants brought an action in Montana state court against plaintiffs. Plaintiffs later filed this action in the Delaware Court of Chancery, alleging several claims that shared a common nucleus of operative facts with those asserted in Montana. Defendants moved to dismiss or stay the Delaware action under the McWane doctrine, which generally gives deference to a first-filed action in another jurisdiction and authorizes a dismissal or stay of a second-filed Delaware action. More ›
Superior Court Affirms Jury Verdict of Breach of Implied Covenant of Good Faith and Fair Dealing Concerning a Patent Dispute Settlement Agreement
This decision demonstrates the rare case where a breach of the implied covenant of good faith and fair dealing survived a legal challenge and resulted in a jury verdict in favor of the plaintiff. The case arose from a patent license and settlement agreement resolving a patent ownership dispute over the use of antibodies to treat Lupus. The 2008 settlement agreement gave ownership of the inventions to the defendants and obligated them to pay royalties to the plaintiff DRIT and its predecessor in interest. After paying the royalties for several years, in 2015, the defendants filed a request for a statutory disclaimer of the patent in question and notified the plaintiff that the disclaimer had the effect of eliminating any ongoing claim for royalties. This event was not addressed in the parties’ agreement, and the court in post-trial motions upheld the jury’s verdict in favor of the plaintiff on its implied covenant claim because the evidence supported findings that the defendants’ exercise of the disclaimer in these circumstances was an unusual event that the parties would not have reasonably anticipated, and the disclaimer was not a normal rational action and was taken solely for the purpose of discharging defendants’ royalty obligations. The Superior Court found that the defendants simply had not presented sufficient evidence to convince the jury that the defendants had a credible business justification for filing the disclaimer. The Superior Court also rejected a challenge to the testimony of plaintiff’s industry expert that the defendants’ rationale for use of the disclaimer fell outside normative, rational behavior in the circumstances. The court thus found that the jury reasonably could have found the defendants’ proffered justification to be pretextual and not credible.
Finally, the court granted damages in the form of royalties to DRIT from the time of the defendants’ breach to the date of the jury’s verdict, with a declaration of ongoing royalty obligations through the expiration of the patent. Going forward, the future royalty would be determined by the sales of the licensed drug. The court held that its ruling would uphold the expectation of the parties at the time of contracting, which was that DRIT would continue to receive royalties until the patent expired.
Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›
Chancery Enters Sanctions in TransPerfect Litigation for Violating Exclusive Jurisdiction Provision in Court Order
This decision arose out of the dispute between once deadlocked co-owners of TransPerfect Global that played out in the Delaware courts over several years. That heavily-litigated controversy resulted in the appointment of a Custodian by the Court of Chancery and a forced sale of the company as part of a Final Order, with one of the co-owners, Phil Shawe, prevailing as the buyer. More ›
Chancery Finds Safe Harbor Conflicts Committee Not Validly Constituted in Master Limited Partnership Dispute
The Dieckman v. Regency GP LP matter has been in the Delaware courts for several years. The Court of Chancery originally dismissed the complaint attacking a conflicted merger transaction primarily on the ground that plaintiff had failed to plead that a unitholder approval safe harbor provision contained in the limited partnership agreement was inapplicable. The Delaware Supreme Court reversed, holding that plaintiff had adequately pleaded that unitholder approval was secured by false and misleading information and, further, that approval by a Conflicts Committee was tainted by conflicts involving its members. Plaintiff amended his complaint and, following briefing on a motion to dismiss, the Court of Chancery sustained plaintiff’s claim that the General Partner had approved the transaction even though members of its board did not believe that the transaction was in the best interests of the limited partnership. More ›
Chancery Finds “Constellation” of Personal and Professional Relations Between Directors and Controlling Stockholder Excuses Demand
A stockholder plaintiff seeking to bring a derivative claim on behalf of a corporation must first demand authorization from the board of directors or allege why making such a demand would be futile due to the board’s assumed partiality under the alleged facts and circumstances. One way of establishing demand futility is alleging with particularity significant personal or professional ties to an interested party, like a conflicted controlling stockholder. BGC Partners illustrates the type and degree of relationships that may excuse the pre-suit demand requirement and overcome a motion to dismiss under Court of Chancery Rule 23.1. This is a developing area of Delaware law, arguably involving a heightened sensitivity to the significance of personal relationships. As BGC Partners observes, the Delaware Supreme Court has reversed Court of Chancery findings of director independence in the demand futility context three times in the past four years. More ›
Delaware Superior Court Finds Purchase Agreement Language Limits the Scope of Possible Claims Concerning Earn-Out Dispute
Under an asset purchase agreement (“APA”), the purchaser (“PCM”) acquired substantially all of the assets of the “En Pointe” business from the seller (“Collab9”). The APA provided for an earn-out payment, calculated upon a percentage of En Pointe’s Adjusted Gross Profit over several years. The APA provided that the purchaser “shall have sole discretion with regard to all matters relating to the operation of the Business.” The agreement further disclaimed any express or implied obligation on the part of the purchaser to take any action, or omit to take any action, to maximize the earn-out amount, and stated that the purchaser “owes no duty, as a fiduciary or otherwise” to the seller. The APA also contained a clear combined integration and anti-reliance provision. More ›
Chancery Construes LLC Agreement as Imposing Only the Managerial Duty to Act in Good Faith and Dismisses Claims for Failure to Plead Bad Faith
Under Delaware law, the managers of a limited liability company owe the entity and its members the traditional common law fiduciary duties of care and loyalty. But parties may eliminate or modify those duties under the LLC’s operating agreement and impose contractual duties instead. When they do so, Delaware courts will analyze any challenged conduct of the manager against those contractual duties. Here, the Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good faith belief that their conduct was in or not opposed to the LLC’s best interests. More ›
Chancery Upholds Caremark Claim Based on Alleged Failure to Adequately Monitor Biopharmaceutical Company’s Clinical Trials
The Delaware courts have observed that a Caremark claim for failure of oversight against a board is among the most difficult to sustain. Nonetheless, a set of particularized allegations showing serious oversight shortcomings regarding a mission-critical topic will succeed, as illustrated by the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, 212 A. 3d 805 (Del. 2019). Clovis is the latest example. More ›
Chancery Applies Entire Fairness Review to Executive Compensation Decision Benefiting Controller Despite Stockholder Approval, Declining to Dismiss Claims Involving Tesla’s Elon Musk
Under Delaware law, executive compensation decisions by a corporation’s board of directors generally are entitled to deferential judicial review, and even more so when approved by the stockholders. On the other hand, Delaware law generally imposes heightened scrutiny in the form of entire fairness review for transactions uniquely benefiting a corporation’s controlling stockholder, relying on the inherent coercion that accompanies control. So what standard of review applies when an executive compensation decision benefits the company’s controlling stockholder and the stockholders approve it? More ›
Chancery Finds Prospective Purchaser May Pursue Breach Claims Against Target Despite Termination Fee Payment
Termination fee provisions are commonplace buy-side protection in M&A transactions intended to recoup a failed prospective purchaser’s otherwise sunk costs. They can also provide substantial sell-side protection when drafted as an exclusive remedy. But, as this decision illustrates, the level of protection depends on each contract’s specific terms. More ›
It is well-settled Delaware law that the right to bring a derivative claim in the corporation’s name or a direct claim in the individual stockholder’s name is a property right associated with the ownership of shares and that those rights normally pass from a selling stockholder to the buyer. Relatedly, Delaware law imposes two conditions for derivative standing: first, a contemporaneous ownership requirement, meaning the plaintiff must have been a stockholder at the time of the complained of wrong; and, second, a continuous ownership requirement, meaning the plaintiff must continue to be a stockholder to pursue its claims. The rules are slightly different in the direct standing context. In contrast to the continuous ownership requirement for derivative claims, a selling stockholder may retain the right to bring a direct claim by contract. This decision explains and applies these concepts, finding certain stockholders lost both forms of standing when reaching a settlement, despite an apparent attempt to avoid that result in the relevant contracts. More ›
Chancery Explains When Deal Price is a Persuasive Indicator of Fair Value in an Appraisal Proceeding
Recent Delaware Supreme Court decisions on appraisal proceedings have stressed the pivotal importance of the deal price in establishing fair value. In this case, the Court of Chancery faced an appraisal for a transaction in which the company’s General Counsel expressed ongoing concerns about the CEO’s potential conflict in spearheading the sale process. That gave rise to the question: In measuring fair value, what weight should be accorded to the deal price when there is some “hint of self-interest” that may have compromised the market check? More ›
Chancery Denies Director Access to Privileged Materials Involving Counsel to Preferred-Appointed Directors
As several Delaware decisions teach, each director, as a member of the larger deliberative body that is the board, has a fundamental right to access corporate information to carry out his or her fiduciary duties. Thus, as a general rule, a Delaware corporation “cannot assert the privilege to deny a director access to legal advice furnished to the board during the director’s tenure.” There are several exceptions to this rule. More ›
As this summary judgment decision illustrates, even where parties to a securities purchase agreement agree on a buyer’s entitlement to indemnification for future tax liabilities, absent specific language to the contrary, the buyer generally must suffer harm before such a claim will be ripe for decision. That is because, under the ripeness doctrine, Delaware courts will decline to decide issues presenting only hypothetical harm. More ›