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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 61 posts by Barnaby Grzaslewicz.
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 ›
Delaware Supreme Court Clarifies That There Is No Blanket Rule Requiring Dismissal Of An Overbroad Section 220 Demand And That A Proper Purpose May Be Established Through Hearsay
Nvidia Corp. v, City of Westland Police and Fire Ret. Sys., et al., No. 259, 2021 (Del. July 19, 2022)
In this decision, the Delaware Supreme Court clarified two points concerning books and records actions under Section 220 of the Delaware General Corporation Law: (i) there is no blanket rule requiring the Court of Chancery to dismiss overbroad demands; and (ii) a stockholder may establish a proper purpose under Section 220 through hearsay evidence, but this exception should not be abused. More ›
Chancery Finds That Stockholder’s Broad Section 220 Demand Lacked The Precision And Plus Factors Required To Entitle Shareholder To Additional Materials
Oklahoma Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., C.A. No. 2021-0484-LLW (Del. Ch. June 1, 2022)
In reviewing the propriety of a stockholder’s Section 220 demand to inspect corporate records, Delaware courts must determine (1) whether the stockholder has stated a proper purpose; and (2) whether the requested documents are essential to the accomplishment of the proper purpose. Where the stated purpose of a Section 220 demand is to investigate alleged corporate wrongdoing which is the subject of other pending investigations or litigation, Delaware courts require one or more “plus factors” in addition to the mere pendency of an investigation or litigation to establish a credible basis to suspect wrongdoing. In this decision of the Court of Chancery, the Court held that the stockholder failed to establish the requisite plus factors and, in all events, the company had already produced sufficient records for the accomplishment of the stockholder’s purpose. More ›
Delaware Supreme Court Enforces Class Vote Requirement, Reasons There Is No Insolvency Exception to Section 271 Of The Delaware General Corporation Law
Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021 (Del. June 15, 2022)
Section 271 of the Delaware General Corporation Law provides, among other things, that a majority vote of stockholders is required to sell all or substantially all of a corporation’s assets. As an issue of first impression, the Delaware Supreme Court reasoned that there is no insolvency exception to Section 271’s requirement of a stockholder majority vote. More ›
On Motion To Dismiss, Court of Chancery Holds That Alleged Disclosure Violations Were Insufficient To Rebut Corwin Protections Of A Fully Informed Stockholder Vote
Teamster Members Ret. Plan v. Randall S. Dearth et al., C.A. No. 2020-0807-MTZ (Del. Ch. May 31, 2022)
Under the Supreme Court’s decision in Corwin and its progeny, a transaction approved by a fully informed, uncoerced stockholder vote, not involving a controlling stockholder, receives business judgment rule protection. However, one sufficiently alleged disclosure deficiency is enough to put into question whether a stockholder vote is fully informed and, thus, to defeat a motion to dismiss. More ›
Chancery Holds That A General Partner Of A Limited Partnership Cannot Breach Fiduciary Duties It Does Not Owe
JER Hudson Group XXI LLC, et al. v. DLE Investors, LP, C.A. No. 2021-0478-MTZ (Del. Ch. May 2, 2022)
Under Delaware law, the purpose of a limited partnership and a general partner’s authority and fiduciary duties may be defined by the terms of a limited partnership agreement (“LPA”). In this post-trial decision, the Court of Chancery held, among other things, that a limited partner failed to prove fiduciary claims against a general partner because the partnership’s express purpose and the general partner’s fiduciary duties did not require it to take actions the limited partner alleged would be value-maximizing. More ›
Superior Court Complex Commercial Litigation Division Addresses Standing Requirements For Foreign LLCs “Doing Business” In Delaware And Reaffirms That Some Preliminary Agreements Give Rise To Obligations To Negotiate A Final Agreement In Good Faith
Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, C.A. No. N20C-07-052 AML CCLD (Del. Super. Ct. May 11, 2022)
This decision addresses two points of note relating to standing for foreign limited liability companies and to the binding nature of preliminary agreements. More ›
Chancery Sustains Fiduciary Duty Claims Arising From Option Grants At Pandemic-Low Price
Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022)
In mid-March 2020, at a time when the COVID-19 pandemic caused the corporation’s stock price to trade at a periodic low, the corporation’s compensation committee awarded stock options to themselves and other directors and officers. Addressing the defendants’ motion to dismiss, the Court reasoned that the circumstances did not support an inference of bad faith. Nevertheless, because the compensation committee members received options and thus were personally interested in determining their terms, such claims were subject to entire fairness review. Similarly, option grants to certain directors who together also were the corporation’s controlling stockholders would be subject to entire fairness review as involving non-ratable benefits to a controller. The Court rejected, however, the stockholder-plaintiffs’ theory that certain officer-defendants breached their fiduciary duty of loyalty by receiving the awards. Surveying prior cases, the Court reasoned that to sustain such a claim, the circumstances would have to be such that the recipient acted with scienter (i.e., in “bad faith”) by receiving the compensation at-issue. Finally, given that the awards potentially resulted from breaches of fiduciary duty by the director-defendants, the Court sustained at the pleading stage a claim that all recipients were unjustly enriched.
Chancery Parses Claims and Issues Subject to Mandatory Advancement Obligations
Krauss v. 180 Life Sciences Corp., C.A. No. 2021-0714-VCW (Del. Ch. Mar. 7, 2022).
The plaintiff was a former director and officer of a SPAC who became involved in litigation following its business combination. The certificate of incorporation and bylaws provided for mandatory advancement. Regarding several subpoenas to the plaintiff and her affiliated companies, although only one was brought “by reason of the fact” of her service as a director or officer, the Court granted advancement based on her counsel’s good faith certification for all work would have been done if there was only the one covered subpoena, even if such work also helped with her responses to non-covered subpoenas. The plaintiff’s affirmative defenses to a fiduciary duty action similarly were covered. Her compulsory counterclaims there also were covered. In so holding, the Court reasoned that, although the certificate of incorporation stated board approval was required for advancement in connection with certain litigation activities initiated by the indemnitee, the bylaws contained no such requirement. Certain counterclaims for breaches of registration rights agreements were not compulsory and were personal in nature, however, and so were not subject to advancement. The plaintiff was entitled to fees-on-fees proportionate to her success and pre-judgment interest from the date she provided invoices evidencing those costs; although the invoices redacted various time entries, her counsel certified that she did not seek advancement for those amounts.
Chancery Finds Enforcement of Advance Notice Bylaw Was Lawful and Equitable
Strategic Investment Opportunities, LLC v. Lee Enterprises, No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022)
This case reflects that incumbent directors’ decision to enforce an advance notice bylaw generally will be upheld where a stockholder’s nomination materials do not comply with the bylaw’s plain terms and enforcement is not inequitable in the circumstances. Here, directors rejected an activist stockholder’s nominees for election because of non-compliance with certain requirements of an advance notice bylaw, specifically that nominations (i) must be made by the record holder (here, Cede & Co.), and (ii) must include information on a form required by the company. Given the context – the defense of a proxy contest – the Court proceeded to review whether the decision to enforce the bylaw complied with the directors’ fiduciary duties, applying enhanced scrutiny under Unocal and Blasius. Because the bylaw was adopted on a “clear day,” because it served valid corporate purposes and because the board did not engage in any manipulative conduct impeding the stockholder’s ability to comply with the bylaw, the Court held that the board’s decision to uphold the bylaw was valid.