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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 538 posts by Albert J. Carroll.
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 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 Finds Derivative Plaintiffs Breached Duties in Withholding Arbitration Award of the Company
Optimiscorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2023)
As this decision explains, when stockholder plaintiffs control the derivative claims of the company, they serve as agents of the company and owe the company fiduciary duties. This dispute involved the defendant-stockholders improperly withholding an arbitration award, which was obtained as a result of their successful litigation of derivative claims on behalf of the company. Ruling on summary judgment, the Court of Chancery held that the defendants breached their fiduciary duties to the company by withholding the award. The Court found that the defendants acted as agents of the company in the derivative claims and, therefore, owed fiduciary duties to the company. The Court reasoned that the defendants, as the company's agents, were required to return the award to the company because a monetized derivative asset belongs to the company. The Court ruled that the defendants breached their duty of care by divesting the company's board of its authority to manage the award and by failing to perform their obligations as company agents. Further, by withholding the award with the intent of distributing it to themselves, their friends, and their family, the defendants also breached their duty of loyalty. In ruling so, the Court rejected the defendant's argument that the business judgment rule should apply to their actions, finding the business judgment rule is intended to apply to directors, while derivative stockholder plaintiffs are held to a simple negligence standard with respect to their duty of care and a more stringent duty of loyalty than directors.
Chancery Determines That Former Executives Are Not Entitled to Equity Awards Under Separation Agreement
SeaWorld Entm't, Inc. v. Andrews, C.A. No. 2020-0955-NAC (Del. Ch. May 19, 2023)
SeaWorld Entertainment, Inc. granted unvested equity awards to employees. Pursuant to equity agreements, the awards would vest if the company's controller sold its stock above a threshold price and if the company still employed the awardees at the time of sale. Under the terms of the underlying incentive compensation plan, the company had sole discretion to amend any term of the equity agreements, including to treat individuals differently. More ›
Superior Court Declines to Dismiss Counterclaims Based on “Interrelated Wrongful Act” Clause in D&O Coverage Dispute Arising Out of Viacom-CBS Merger
National Amusements Inc. v. Endurance American Specialty Insurance Co. (Del. Super. April 28, 2023)
In this D&O insurance coverage dispute, the plaintiffs moved to dismiss the defendant insurers' counterclaims, which contended that the "Interrelated Wrongful Acts" clause barred coverage under the present D&O policies for certain merger-related litigation initiated in 2019. That clause deemed interrelated acts a single claim and deemed them to be made in the earliest policy period in which the earliest interrelated claim was made. Defendants' theory was that the merger litigation initiated in 2019 arose from interrelated prior wrongful acts starting in 2016 when the plaintiffs were involved in a battle for corporate control, which were the subject. More ›
Following Flawed Business Acquisition, Chancery Dismisses Derivative Complaint for Failure to Plead Demand Futility
City of Coral Springs Police Officers' Pension Plan v. Dorsey, C.A. No. 2022-0091-KSJM (Del. Ch. May 9, 2023)
A terrible business decision does not ensure the Court of Chancery will sustain a derivative claim. A derivative plaintiff still must allege that a board of directors wrongfully refused a stockholder's demand to bring suit or that making a demand on the board would be futile because a majority of the board either was interested in the transaction or would face a substantial likelihood of liability for approving the transaction, or was dependent on someone who was interested or faced a substantial likelihood of liability. More ›
Entire Fairness Standard Applied to Transaction Benefitting Controllers of Controllers
Tueza v. Lindon, C.A. No. 2022-0130-SG (Del. Ch. Apr. 27, 2023)
Because controlling stockholders of Delaware corporations owe fiduciary duties to both the corporation and to its minority stockholders, the Court of Chancery will subject a transaction involving the company to entire fairness review if a controller receives a non-ratable benefit from a transaction. This case confronts a more nuanced question: Does entire fairness apply if the non-ratable benefit goes not to the controller but to a separate entity controlled by the controller's controllers? More ›
Chancery Court Again Applies Entire Fairness to Claims Challenging SPAC Transaction
Laidlaw v. GigAcquisitions2, LLC, C.A. No. 2021-0821-LWW (Del. Ch. Mar. 1, 2023)
In the aftermath of a SPAC merger, the plaintiff (a public stockholder) brought claims for breaches of fiduciary duty against the SPAC's board and sponsor, as controllers, for issuing an allegedly false and misleading proxy statement. According to the plaintiff, the proxy statement failed to disclose the net cash per share that the SPAC would contribute to the merger, which in turn misrepresented the anticipated value of post-merger shares, and that such information was material to the decisions of public stockholders whether to invest in the post-merger company or to redeem their SPAC investments. Plaintiff alleged that the sponsor and board were incentivized to minimize redemptions in order to secure returns for the sponsor, which purchased a 20% stake in the post-merger company at a nominal price. More ›
Plaintiff Overcomes Rule 23.1 In Walmart Opioids Litigation Based In Part On Over-Redacted Documents In Books And Records Productions
Ontario Provincial Council of Carpenters’ Pension Trust Fund v. Walton, C.A. No. 2021-0827-JTL (Del. Ch. Apr. 26, 2023)
To assert a derivative claim, a stockholder plaintiff must plead demand futility. The plaintiffs advanced three types of claims relating to Walmart’s distribution of opioids: a Massey Claim (i.e., affirmative law-breaking claim), a Red-Flags Claim (i.e., a species of a Caremark claim), and an Information-Systems Claim (i.e., a species of a Caremark claim). The Massey Claim asserted that Walmart’s directors and officers knew that Walmart was failing to comply with its legal obligations and made a conscious decision to prioritize profits over compliance. The Red-Flags Claim asserted that a series of red flags put Walmart’s directors and officers on notice of Walmart’s noncompliance or potential corporate trauma, but the directors and officers consciously ignored them. The Information-Systems Claim asserted that Walmart’s directors and officers knew that they had an obligation to establish a monitoring system to address a core compliance risk, but consciously failed to make a good faith effort to fulfill that obligation. More ›
Chancery Rules That Separate Accrual Periods Apply to an Information Systems Caremark Claim in Walmart Opioid Litigation
Ontario Provincial Council of Carpenters' Pension Trust Fund v. Walton, C.A. No. 2021-0827-JTL (Del. Ch. Apr. 12, 2023)
To determine the limitations period under laches, a court must determine when a claim accrued. Delaware courts have considered three different approaches to claim accrual: the discrete act approach, the separate accrual approach, and the continuing wrong approach. More ›
Chancery Relies on Unanimous Dictionary Entries To Confirm Unambiguity of Supply Agreement
Thermo Fisher Scientific PSG Corp. v. Arranta Bio MA, LLC, C.A. No. 2022-0608-NAC (Del. Ch. Apr. 4, 2023)
The plaintiff and the defendant entered into a supply agreement under which the defendant would manufacture plasmids, a central component for a variety of therapies and vaccines. The agreement included a non-compete provision that would require the defendant to pause its plasmid activities for three years if the defendant was acquired by one of the plaintiff's competitors—defined as a company deriving at least fifty percent of revenue from "biopharmaceutical" development or commercial manufacturing services. The agreement did not define the term "biopharmaceutical." Two years into the agreement, a third party acquired the defendant. The acquirer derived almost all its revenue in connection with small-molecule drugs, with almost no revenue connected to biologics. Plaintiff filed suit, alleging that the acquirer was a competitor and seeking specific performance of the non-compete provision. More ›
Chancery Finds Restrictive Covenant in Stock Purchase Agreement is Unreasonable and Unenforceable
Intertek Testing Servs. NA, Inc., C.A. No 2022-0853-LWW (Del. Ch. Mar. 16, 2023)
Delaware courts do not mechanically enforce non-competes. Instead, the non-compete must be reasonable in scope and duration and advance a legitimate economic interest of the party enforcing the covenant. More ›
Chancery Holds That Party’s Untimely Counterclaim Cannot Avoid Laches Defense By Invocation of Unclean Hands
Thomas D. Murray et al. v. Shannon Rolquin et al., C.A. No 2018-0819-KSJM (Del. Ch. Mar. 9, 2023)
In the Court of Chancery, untimely equitable claims may be time-barred by the doctrine of laches. However, a belated claimant may avoid a laches defense through a tolling theory. Here, a party attempted to excuse her delay in bringing counterclaims under a tolling theory and under a novel unclean hands theory. Post-trial, the Court was not persuaded by either theory. More ›
Chancery Declines to Modify Status Quo Order to Allow Partial Performance of Pending Settlement
In re AMC Entertainment Holdings, Inc. Stockholder Litigation, Consol. C.A. No. 2023-0215-MTZ (Del. Ch. Apr. 5, 2023)
In various contexts, upon request or stipulation, the Court of Chancery will impose status quo orders, which typically restrain corporate action pending the Court’s adjudication of disputed rights. A party seeking to modify or vacate such an order bears the burden of establishing good cause for the change. Here, following a settlement agreement between the parties, the plaintiffs sought to lift a status quo order to permit the defendant, AMC, to partially effectuate the settlement. The proposed action would alter the company’s capital structure. The litigation involved class claims, implicating Court of Chancery Rule 23, and the requirement that any class action or derivative settlement be approved by the Court following notice to the stockholders and the opportunity to object. The Court had not yet considered or approved the proposed settlement. In these circumstances, with little more than a desire for speed offered in support of the motion, the Court declined to lift the status quo order, citing the Court’s gatekeeping role in Rule 23 settlements.