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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 140 posts by Albert H. Manwaring, IV.
Chancery Dismisses Oversight Claim Based on Board’s Response to Red Flags
In re McDonald's Corp. Stockholder Derivative Litig., CA No. 2021-0324-JTL (Del. Ch. March 1, 2023)
A plaintiff can plead an oversight claim against a board by alleging particularized facts to support an inference that the directors either: (1) utterly failed to implement a reporting or information system or controls or (2) consciously failed to monitor or oversee the business and, as a result, disabled themselves from being informed of problems or risks that required their attention. A "prong-two" failure to monitor Caremark claim, or "red flags" claim, requires that the plaintiff plead that the board's information system generated red flags and that the board subsequently failed to respond and address the red flags. More ›
Chancery Finds Personal Jurisdiction Under Conspiracy Theory of Jurisdiction Based on Trust Domestication
Harris v. Harris, C.A. No. 2019-0736-JTL (Del. Ch. Jan. 16, 2023)
Under the conspiracy theory of personal jurisdiction, when defendants conspire to engage in tortious activities, the Delaware-directed acts of one co-conspirator can be attributed to the other conspirators for the purpose of establishing personal jurisdiction under Delaware’s Long-Arm Statute. Here, the plaintiffs alleged that the defendants acted in concert to support the domestication of a trust (specifically, a GRAT) in Delaware for purposes of a larger tortious scheme. Based on these allegations, the Court of Chancery found there was sufficient support to support personal jurisdiction under the conspiracy theory, or minimally to allow for jurisdictional discovery. But the Court also concluded that the discovery was unnecessary because there was evidence of spoliation, which allowed for a pleadings stage inference that the defendants were engaged in a conspiracy sufficient to support personal jurisdiction.
Chancery Denies Motion to Dismiss Finding Primedia Argument Inapplicable
In Re Orbit/FR, Inc. Stockholders Litig., C.A. No. 2018-0340-SG (Del. Ch. January 9, 2023)
In In re Primedia, Inc. S’holders Litig., 67 A.3d 455 (Del. Ch. 2013), the Court examined whether a litigation asset being pursued derivatively was extinguished by the sale of the company to a third party that had no interest in pursuing the claim and had not valued the claim as an asset in the merger. Primedia sets forth certain stringent standards to assert a claim that the merger was unfair based on such a derivative claim. More ›
Chancery Upholds Claims Post-Merger
Harris v. Harris, C.A. No. 2019-0736-JTL (Del. Ch. Jan. 6, 2023)
Delaware law allows for two exceptions to the continuous stock ownership rule for stockholders to bring and maintain standing to assert derivative claims that predate a transaction: (1) when the transaction, which would otherwise deprive the plaintiffs of standing, is essentially a reorganization that does not affect the plaintiff’s relative ownership in the post-merger enterprise; or (2) when a plaintiff stockholder loses standing based on a merger consummated for the purpose of depriving the stockholder of the ability to bring or maintain a derivative action. Stockholders with derivative claims that predate a transaction also may assert direct claims to challenge a merger by pleading that the value of the derivative claim is material in the context of the merger, that the acquirer did not assign value or provide additional consideration for the value of the derivative claim, and that the acquirer will not assert the derivative claim. More ›
Chancery Orders Stay of “Dr. J” Litigation Pending Arbitrator’s Decision on Arbitrability
Erving v. ABG Intermediate Holdings 2, LLC, C.A. No. 2021-0816-NAC (Del. Ch. Nov. 28, 2022)
Basketball legend Julius W. Erving II, also known as “Dr. J”, sold a majority interest in his trademark and other intellectual property to a brand development and marketing company. The transaction involved the creation of an LLC—in which Dr. J held a minority interest and the marketing company held a majority interest and promised to grow Dr. J’s brand. The LLC operating agreement contained a dispute resolution provision that included an exclusive arbitration clause. Several years later, Dr. J filed claims in the Court of Chancery, alleging that the defendants had wrongfully diverted funds and failed to devote reasonable efforts to grow Dr. J’s brand. Defendants moved to dismiss the action in favor of arbitration or, in the alternative, to stay the case pending an arbitrator’s decision regarding whether the dispute must be arbitrated. More ›
Chancery Dismisses Claims Against Controller and its Affiliates Based on Group Pleading and Vague, General Allegations of Claims for Breach of Fiduciary Duty
Bocock v. Innovate Corp., C.A. No. 2021-0224-PAF (Del. Ch. Oct. 28, 2022)
A holding company acquired a controlling stake in an owner/operator of low-power television stations via a stock purchase agreement. The controller then designated certain of its own affiliates’ officers and directors as officers and directors of the acquired company. More than three years later, stockholders and option holders filed a complaint alleging that the controller, its affiliates, and the officers and directors had conspired to loot the company by usurping corporate opportunities, transferring assets for insufficient consideration, and entering into agreements that drained value from the company. The claims included breach of fiduciary duty, corporate waste, aiding and abetting, conspiracy, and tortious interference. More ›
Superior Court Orders Earn-Out Payment under Ambiguous Merger Agreement after Defendant Withheld Documents in Discovery
Fortis Advisors, LLC v. Dematic Corp., C.A. No. N18C-12-104 AML CCLD (Del. Super. Dec. 29, 2022)
Defendant acquired the plaintiff's hardware and software solutions business. The merger agreement required the defendant to make contingent payments if the company achieved performance targets. The targets were based on EBITDA calculations and sales of "Company Products," which the merger agreement referred to in a disclosure schedule that contained descriptions of products’ functionalities. Under the agreement, the defendant committed to incentivizing its sales force to sell Company Products and integrating the products into its own products and services. At the end of the earn-out period, the defendant reported low sales and EBITDA. From limited documentation, the plaintiff was able to determine that defendant based its calculations only on the acquired products, not an integrated portfolio. Plaintiff filed suit for breach of contract, alleging that the defendant either failed to incentivize its sales force and integrate the products, or had failed to properly account for "Company Products" when calculating contingent payments. More ›
Chancery Rules That Delisted and Long-Dark Corporation Failed To Show Harm Warranting a Confidentiality Order for Basic Financial Documents Responsive to a Books and Records Request
Rivest v. Hauppauge Digital, Inc., C.A. No. 2019-0848-PWG (Del. Ch. Sept. 1, 2022)
Plaintiff stockholder sought to inspect the books and records of a defendant company, requesting a narrow universe of annual and quarterly financial statements for closed periods in order to value his shares. For several years, including time periods after deregistering its stock from a public exchange, the defendant had not provided any financial information to stockholders or held an annual meeting. More ›
Chancery Finds Asset Purchase Agreement Required Buyer to Indemnify Seller for Liability Under State Tobacco Settlement
ITG Brands LLC v. Reynolds Am., Inc., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022)
Plaintiff acquired four cigarette brands from the defendant under an asset purchase agreement. Prior to entering into the APA, the seller had been making annual payments to the State of Florida based on the annual volume of tobacco product sales under a preexisting settlement agreement. The purchaser did not join the settlement, and the seller stopped making payments to Florida. Florida sued both parties in a Florida court over the lack of payments and obtained a judgment that the seller must continue to make settlement payments based on the purchaser’s own sales of the acquired brands. The seller and purchaser brought claims against each other in the Court of Chancery to determine which party bore responsibility for the Florida judgment. More ›
Chancery Determines Divorcee Was One Share Short of Equal Ownership Needed To Avoid Removal from Leadership of Business Empire
Haart v. Scaglia, C.A. No. 2022-0145-MTZ (Del. Ch. Aug. 4, 2022)
In public, a high-powered couple presented themselves as equal owners of an operating company, of which the wife was also the CEO and a director. After marrying, the husband transferred fifty percent of the common stock of an umbrella holding company to his wife. He also transferred to her one share shy of equal ownership of preferred stock—leaving her with 49.9995957 percent of the preferred shares. After she realized this imbalance, the wife continued to insist they were equal owners. As their marriage deteriorated, the husband used his one-share majority to remove her from leadership at the holding company and the operating company, of which the holding company was the sole member and managing member. She brought claims in the Court of Chancery, alleging equal ownership and a corporate deadlock, seeking judicial dissolution. More ›
Chancery Dismisses Claims Alleging Directors Approved Spring-Loaded Stock Options Before Press Releases on COVID-19 Vaccine Efforts
In re Vaxart, Inc. S’holder Litig., Consol. C.A. No. 2020-0767-PAF (Del. Ch. June 3, 2022)
A small biotechnology company issued a press release that connected the company to the federal government’s Operation Warp Speed program and its efforts to develop a COVID-19 vaccine. The body of the press release provided more clarity than the headline—namely, that the company had been selected to participate in a primate research study, not selected as a final recipient of funds for vaccine development. Stockholders filed suit, alleging that the company’s selection was material information that should have been disclosed in advance of the stockholders’ vote on an amendment to the company’s equity incentive plan that enabled officers to issue themselves spring-loaded stock options prior to the press release. The defendants moved to dismiss. More ›
Chancery Sustains Claims for Improper Termination of Agreements For Cause in Connection with a Joint Venture to Develop Data Centers for Amazon
W.D.C. Holdings, LLC v. IPI Partners, LLC, C.A. No. 2020-1026-JTL (Del. Ch. June 22, 2022)
Two entities entered into a joint venture to develop data centers for Amazon. One entity managed the joint venture day to day, and the other controlled the board and had removal rights under certain circumstances. When whistleblowers raised concerns of potential kickbacks and the FBI executed a search warrant on the managing entity’s CEO, the second entity issued letters seeking to remove the CEO and corporate affiliates for cause from their roles in the joint venture and to terminate certain other agreements. The managing entity filed suit to challenge its removal and its affiliates’ removal, and the termination of the other agreements. The defendants moved to dismiss. More ›
Supreme Court Reverses Chancery Approval of Litigation Settlement for Overly Broad Release and Recommends Change to Chancery Rule 23.1
Griffith v. Stein, No. 264, 2021, C.A. No. 2017-0354 (Del. Aug. 16, 2022)
The Court of Chancery denied a non-monetary settlement for derivative claims that included allegations of excessive non-employee director compensation, siding with an objector, and awarding the objector fees. Subsequently, the parties agreed to a new settlement that included a financial benefit to the corporation. The objector then renewed his objection, arguing that the settlement improperly released future claims and that the plaintiff was not an adequate representative of the corporation’s interests. The plaintiff argued that future claims could be waived because the settlement included a compensation cap, that the released claims were covered by allegations of the complaint, and that the parties were only trying to import the Delaware standard of corporate waste into their release. The Court of Chancery approved the new settlement and did not award the objector additional attorneys’ fees. The objector appealed. More ›
Chancery Declines to Order Acquirer to Make Contingent Payments after Discontinuing Development of a Medical Product
Pavel Menn v. ConMed Corp., C.A. No. 2017-0137-KSJM (Del. Ch. June 30, 2022)
Plaintiff was a representative of stockholders who had entered into a stock purchase agreement (“SPA”), in which the defendant acquired a company engaged in developing a medical product. The SPA allocated the risk of continued development via a contingent payment structure, including milestone payments and earn-out payments. The defendant agreed to use “commercially best efforts” to maximize the payments, and to accelerate the payments to the stockholders if the defendant permanently discontinued development or sale of the product, except for certain reasons, including risk of injury to patients. After making several milestone payments, the defendant discontinued development due to concerns of the risk of injury to patients. The plaintiff demanded acceleration payments and brought claims when defendant declined to make these payments. More ›
Chancery Dismisses Claims in Favor of Arbitration in Dispute over Sale of Pittsburgh Penguins
Wildfire Productions, L.P. v. Team Lemieux LLC, C.A. No. 2021-1072-PAF (Del. Ch. June 29, 2022)
The Federal Arbitration Act and the public policy of Delaware favor the resolution of disputes through arbitration. When parties contractually agree to arbitrate their disputes, Delaware courts will enforce the terms of arbitration provisions. More ›