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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Showing 55 posts by Barnaby Grzaslewicz.
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.
Supreme Court Finds Contractually Required Board Committee Determination Under Stock Option Agreements Did Not Bar Judicial Review
Terrell v. Kiromic Biopharma Inc., No. 299, 2022 (Del. May 4, 2023)
This dispute between a company and a former director involved the meaning of a stock option agreement and option grant notice. The Court of Chancery had found that, under a contractual alternative dispute resolution provision, the dispute was to be resolved in accordance with a board committee’s interpretation of the relevant documents. The trial court stayed the action for that purpose. After the committee resolved the issue in the company’s favor, the trial court promptly dismissed the complaint for lack of subject matter jurisdiction. On appeal, the Supreme Court found no error in the trial court’s stay to allow the committee’s determination in the first instance but reversed and remanded for the trial court to review the matter before dismissing the action. The Supreme Court explained that the provision “is an expert determination, not an arbitration, and because it requires the Committee to reach legal determinations, not issue findings of fact within its area of expertise, the Court of Chancery is not required to defer to the Committee's conclusions." Thus, the trial court was required to engage in a de novo interpretation of the agreements.
Chancery Examines Director’s Personal Ties and Dismisses Duty of Loyalty Claim
In re Orbit/FR, Inc. S’holders Litig., C.A. No. 2018-0340-SG (Jan. 24, 2023)
This decision involved a stockholder challenge to a merger between Orbit and its controller, Microwave Vision. A certain director who served on a special committee was alleged to have breached his fiduciary duty of loyalty in approving the transaction, arising out of his alleged conflict as an employee beholden to the controller for his job. After admitting the allegation of an employment relationship was a mistake, the plaintiff shifted to alleging the director lacked independence based on his personal relationship with another director, who served on the boards of both Orbit and Microwave Vision. The two directors had been neighbors, their children were contemporaries, and they frequently went bicycling together years earlier. On a motion to dismiss, the Court of Chancery found that these "casual sharing of interests between neighbors” did not give rise to a conflict for the at-issue director and did not support a non-exculpated duty of loyalty claim against him.
Delaware Supreme Court Affirms Delaware Choice-of-Law Ruling In Dismissal of D&O Liability Insurance Coverage Dispute
Stillwater Mining Company v. National Union Fire Insurance Company of Pittsburgh, PA et al., No. 24, 2022 (Del. Jan. 12, 2023)
This decision from Delaware Supreme Court addresses choice-of-law questions for D&O insurance contract disputes and cautions litigants to remain consistent in the positions they take before the trial court. The appellant here, an insured under a tower of directors and officers’ liability insurance policies, asserted that Delaware law applied to the claims in its original complaint for coverage of its defense costs in an appraisal action. Following a decision from the Delaware Supreme Court in another matter (In re Solera Ins. Coverage Appeals), which held that an insurer is not obligated to provide coverage for appraisal actions under a similar insurance policy, the insured amended its complaint and, in so doing, argued that Montana rather than Delaware law controlled. More ›
Chancery Finds Payment Condition, Non-Compete, and Non-Solicit Provisions Unenforceable
Ainslie et al. v. Cantor Fitzgerald, L.P., C.A. No. 9436-VCZ (Del. Ch. Jan. 4, 2023)
Under Delaware law, restrictive covenants generally are enforceable unless overly broad in the circumstances, and Delaware courts closely scrutinize them. Similarly, contractual conditions precedent generally are enforceable unless they result in a penalty, and Delaware courts construe ambiguous conditions narrowly to avoid forfeitures. In this decision from the Court of Chancery, a provision in a limited liability partnership agreement intended to discourage competitive activities by former partners was held unenforceable both because it was overly broad and resulted in a forfeiture.
More ›
Chancery Finds Plaintiff Failed To State A Non-Exculpated Claim Against Special Committee Defendants In Complaint Challenging A Merger
Ligos v. Tsuff, C.A. No. 2020-0435-SG (Del. Ch. Dec. 1, 2022)
The Delaware Supreme Court’s Cornerstone Therapeutics decision established that, although a transaction involving a controller must satisfy entire fairness review, plaintiffs seeking money damages against independent directors protected by an exculpation clause must still state a non-exculpated claim against each such director, or that director will be entitled to dismissal. In other words, to proceed against independent directors, the complaint must adequately plead that they breached the fiduciary duty of loyalty. More ›
Court of Chancery Awards Plaintiffs Attorneys’ Fees and Costs in Section 225 Action for Obtaining a Substantial Benefit for the Corporation and its Stockholders
Totta v. CCSB, LLC, C.A. No. 2021-0173-KSJM (Del. Ch. Nov. 3, 2022)
Delaware follows the “American Rule”: each party bears its own legal fees and expenses. However, there are certain exceptions. This includes the “corporate benefit exception,” where a party has obtained a substantial benefit for the corporation or its stockholders through prosecuting the lawsuit. In this recent decision from the Court of Chancery, the Court awarded attorneys’ fees and expenses to a plaintiff in a Section 225 action under the corporate benefit exception. More ›
Imposing “A Remedy Of First Impression,” Chancery Divests Party Of Stock Ownership As A Post-Judgment Contempt Sanction Under Rule 70.
In re Stream TV Networks, Inc. Omnibus Agreement Litig., C.A. No. 2020-0776-JTL (Del. Ch. Oct. 3, 2022)
Court of Chancery Rule 70 speaks to the Court’s discretion in fashioning sanctions for failure to comply with a Court order. This expressly includes the authority to divest a party of personal property over which the Court has jurisdiction. In what the Court of Chancery termed a “remedy of first impression,” the Court in this case divested a party of stock in a Delaware corporation as a sanction for failure to comply with a partial final judgment requiring it to transfer legal title of assets, including that stock, to the opposing party. More ›
Chancery Sustains M&A Fraud Claims Based On Near-Term EBITDA Projections
In re P3 Health Grp. Hldgs., LLC, C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022)
This recent decision addresses three points of interest relevant to fraud claims.
First, while fraud claims generally involve statements of fact, future projections can support a fraud claim. The statement of future projection must be sufficiently specific, and the plaintiff must plead that the projection was fraudulently conceived. In this case, the Court of Chancery found plaintiff had sufficiently pleaded a fraud claim based on a specific EBITDA projection figure for the current year in which the statement was made. According to the plaintiff, the company missed the projected EBITDA number by roughly $52 million, with a projected EBITDA of $12.7 million and actual year-end results of negative $40 million. Because it was a near-term projection, and one reasonably conceivable inference from the large difference was that the defendant knowingly made a false representation, the Court found the plaintiff sufficiently pleaded a fraud claim based on the EBITDA projection. More ›
Court of Chancery Finds That Complaint Fails To Adequately Plead Caremark Claim In Context Of SolarWinds Cybersecurity Breach
Construction Industry Laborers Pension Fund v. Bingle, C.A. No. 2021-0940-SG (Del. Ch. Sept. 6, 2022)
Under the Delaware Supreme Court’s Caremark decision and its progeny – including its most recent articulation in Marchand v. Barnhill – corporate directors who in bad faith fail to impose systems for monitoring important risks or fail to act in response to known “red flags” conceivably face monetary liability for breaching the fiduciary duty of loyalty. This decision discusses that, where Caremark claims have survived a motion to dismiss under Court of Chancery Rule 23.1, the alleged breaches generally have been in the context of violations of positive law or regulations. More ›
Chancery Suggests Alternative Approach To Contracts Providing That Prohibited Acts Are Void Ab Initio
XRI Investment Holdings LLC v. Holifield, et al., C.A. No. 2021-0619-JTL (Del. Ch. Sept. 13, 2022)
Under precedents such as CompoSecure, L.L.C. v. CardUX, LLC (Del. 2018), acts defined by an LLC agreement as “void” or “void ab initio” are incurable, whether through equity or otherwise. For the Court of Chancery in this post-trial decision, applying the CompoSecure holding prohibited the Court from giving effect to the plaintiff’s acquiescence in the transaction at-issue. While respecting and applying CompoSecure, the Court proposed an alternative approach under which equitable doctrines may militate against holding that a challenged act may never be cured. More ›
Chancery Holds That Controlling Stockholder Approving Exclusive Forum Selection Clause In Charter Amendment Impliedly Consented To Personal Jurisdiction
In Re Carvana Co. S’holders Litig., C.A. No. 2020-0415-KSJM (Del. Ch. Aug. 31, 2022)
In Delaware, parties may waive the requirement of personal jurisdiction either expressly or impliedly. The Court of Chancery applied this waiver principle in In re Pilgrim’s Corporations Derivative Litigation (2019), finding that a controlling stockholder impliedly consented to personal jurisdiction when his Board appointees approved a bylaw selecting the Court of Chancery as the exclusive jurisdiction for certain stockholder disputes. This decision extends and applies Pilgrim’s ruling to a controlling stockholder who personally voted to approve a charter amendment that granted exclusive jurisdiction in the Court of Chancery. More ›
Chancery Limits Review on Motion to Dismiss to Only Section 220 Documents Cited in Complaint and Dismisses Complaint Under MFW Doctrine
City Pension Fund for Firefighters and Police Officers in the City of Miami, v. The Trade Desk, Inc., et al., C.A. No. 2021-0560-PAF (Del. Ch. July 29, 2022)
This decision addresses certain points of interest concerning (i) the use of books and records produced pursuant to Section 220 of the DGCL in subsequent litigation, and (ii) structuring controlling stockholder transactions to facilitate business judgment review. More ›
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