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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
- October 30, 2020
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Showing 91 posts by R. Eric Hacker.
Chancery Holds Unocal Claims for Injunctive Relief are not Subject to Corwin Cleansing
In re Edgio, Inc. Stockholder Litigation, C.A. No. 2022-0624-MTZ (Del. Ch. May 1, 2023)
Under Corwin, a fully informed, uncoerced vote of the disinterested stockholders can shift the standard of judicial review for certain transactions from heightened scrutiny to the business judgment rule. But there are some transactions that Corwin cannot cleanse. Here, at the motion to dismiss stage, the Court declined to apply the Corwin doctrine to a Unocal claim seeking to enjoin certain alleged defensive measures taken by the company's board. 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 ›
Chancery Resolves Dispute About Competing Forum Selection and Arbitration Provisions
Fairstead Cap. Mgmt. LLC v. Blodgett, C.A. No. 2022-0673-JTL (Del. Ch. Jan. 6, 2023)
This case highlights the difficulties that can arise when relationships are governed by contracts with competing forum selection and arbitration provisions. Two LLCs brought claims against a former principal for breach of the respective LLC agreements, both of which contained Delaware forum selection clauses. In response, the principal sought an injunction barring the LLCs from proceeding outside of arbitration because the principal’s employment agreement contained a broad arbitration provision that encompassed all of the parties’ disputes. More ›
Chancery Concludes Section 18-110 of the LLC Act Does Not Permit Standalone Books and Records Claims When Company Management Is Undisputed
Cardinale v. Feingold, 2023 WL 142510 (Del. Ch. Jan. 10, 2023)
In a dispute about the manager of a limited liability company, Section 18-110 of the LLC Act grants the Court of Chancery the statutory authority to order the production of books and records “relating to the issue.” Here, the plaintiff sought a declaration that he was the sole manager of six companies and also an order directing the defendants to turn over the companies’ books and records. The defendants, who had recently resigned as managers, confirmed that the plaintiff was the companies’ sole manager and asked the Court to dismiss the remainder of the action for lack of jurisdiction. The Court agreed. Because the identity of the companies’ manager was undisputed, the Court concluded it no longer had jurisdiction under Section 18-110 to order the production of books and records.
Citing MFW, Court of Chancery Dismisses Merger Challenge
Smart Local Unions and Councils Pension Fund v. BridgeBio Pharma, Inc., C.A. No. 2021-1030-PAF (Del. Ch. Dec. 29, 2022)
Typically, the “entire fairness” standard of review applies to any transaction in which a controlling stockholder acquires the outstanding minority shares. But, under the MFW framework, the more lenient business judgment standard of review may apply if the controller can establish that, among other things, an independent, fully-empowered special committee met its duty of care to negotiate a fair price for the shares and also that an informed, uncoerced majority of the minority stockholders approved the transaction. More ›
Chancery Sides With Board in Dispute Over Stockholder’s Compliance With Advanced Notice Bylaws to Nominate Directors
Jorgl v. AIM ImmunoTech, Inc., 2022-0669-LWW (Del. Ch. Oct. 28, 2022)
The Court of Chancery rejected a stockholder’s bid for a preliminary mandatory injunction directing the board of AIM ImmunoTech, Inc. to include his nominees on the ballot of potential directors. The dispute centered on whether the board had wrongfully rejected the stockholder’s nominees based upon the board’s suspicion that the stockholder had not complied with the company’s advanced notice bylaws requiring the stockholder to disclose “all arrangements or understandings” with any of his nominees. Because evidence suggested that the stockholder and his nominees may have been part of an undisclosed plan to commence a proxy contest, the stockholder could not establish at the preliminary injunction stage that the board erred as a matter of law in rejecting his nominations. The Court also concluded that the stockholder failed to establish, as a matter of law, that the board acted with an entrenchment motive in rejecting the nominations. Accordingly, the Court found that the stockholder could not meet the heavy burden necessary to obtain preliminary mandatory injunctive relief.
Chancery Trims Contract Claims in Post-Merger Dispute
In Re P3 Health Group Holdings, LLC, Consol. C.A. 2021-0518-JTL (Del. Ch. Oct. 31, 2022)
Plaintiff Hudson Vegas Investment SPV, LLC asserted various claims after its minority interest in Defendant P3 Health Group Holdings, LLC was wiped out in a business combination between P3 and a SPAC. The Court of Chancery has issued several decisions in the case; this one dealt with Hudson’s various claims for breach of P3’s LLC agreement. More ›
Equitable Fraud Claim Sufficient to Support Court of Chancery Jurisdiction
Trust Robin, Inc. v. Tissue Analytics, Inc., C.A. No. 2021-0806-SG (Del. Ch. Sep. 29, 2022)
After initially questioning its own subject matter jurisdiction in a dispute involving allegations of breach of contract and tort in connection with a services agreement, the Court of Chancery concluded that the plaintiff’s equitable fraud claim was not “simply a makeweight equitable hook” attached to its legal claims. The plaintiff sufficiently alleged a special relationship between the plaintiff and defendant, and it was possible that the plaintiff could recover for equitable, but not legal, fraud. The Court’s reasoning cited the alignment of the parties’ interests, the defendant’s control over the parties’ joint purpose by virtue of controlling certain intellectual property and other proprietary information belonging to the plaintiff, and the defendant’s alleged use of that control to engage in self-dealing. Therefore, the Court permitted the matter to proceed.
Chancery Finds Personal Jurisdiction Over Individual Who Formed Delaware Entities in Connection with a Challenged Merger Transaction
In Re P3 Health Grp. Hldgs., LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 14, 2022)
The Court of Chancery rejected an individual defendant’s challenge to Delaware’s assertion of personal jurisdiction over him. Although the defendant portrayed himself as merely a shareholder of Delaware entities (which is not in itself a basis for personal jurisdiction), the Court found that he had transacted business in the state for purposes of Delaware’s Long Arm Statute because he also formed two entities as part of a planned merger. It did not offend due process to require the individual to defend litigation related to the merger in Delaware because there was a nexus between his contacts and the claims and because he should have reasonably anticipated that Delaware would exercise jurisdiction over him in litigation arising from the merger.
Board Lacks Standing to Bring Motion to Dismiss Because It Delegated That Authority to Special Litigation Committee
Rowan v. Infinity Q Capital Mgmt., LLC, C.A. No. 2022-0176-MTZ (Del. Ch. Sep. 12, 2022)
If a conflicted board delegates all authority over derivative claims to a special litigation committee (“SLC”), then the board may lack authority separately to assert procedural defenses, including a motion to dismiss under Court of Chancery Rule 23.1. But whether a board has given up this authority depends upon the sequence and terms of the SLC’s creation. More ›
Chancery Concludes That Transaction Meets MFW Standard
In re Match Grp. Inc. Deriv. Lit., Cons. C.A. 2020-0505-MTZ (Del. Ch. Sep. 1, 2022)
Under the so-called MFW framework, a transaction with a controller is subject to business judgment review, rather than the more exacting entire fairness review, if the transaction satisfies all six procedural protections elaborated in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). In simple terms, the MFW framework mimics the two key protections that exist in a transaction with a third party by requiring an independent negotiating agent (i.e., a board committee) and approval by the majority of the non-controlling stockholders. But the standard can be difficult to meet because the failure to comply with a single condition is fatal. Nonetheless, here, the Court of Chancery concluded that the transaction satisfied all six elements of the MFW framework because the as-pled facts established that the special committee had necessary authority, that a majority of the special committee was sufficiently independent, that the special committee satisfied its duty of care in negotiating a fair price, and that the minority stockholders approved the transaction through an uncoerced and informed vote. Because the plaintiff did not plead any claim that would overcome the application of the business judgment rule, the Court dismissed the case.
Implied Covenant of Good Faith Covers Contractual Conditions “Too Obvious” to State Expressly in Indemnification Dispute
Baldwin v. New Wood Resources, LLC, App. No. 303, 2021 (Del. Aug. 16, 2022)
This appeal involved an underlying claim that Baldwin had improperly refused to repay litigation expenses advanced to him under New Wood Resource’s limited liability company agreement. The agreement provided Baldwin with indemnification so long as he acted in good faith, and it also specified a process for determining whether Baldwin had done so. One narrow issue on appeal was whether the implied covenant of good faith and fair dealing required the good faith determination itself to be conducted in good faith. Reversing the Superior Court, an en banc panel of the Supreme Court ruled that the implied covenant did apply. The Court relied upon its earlier decision in Dieckman v. Regency GP LP to restate the principle that one function of the implied covenant is to cover those contractual conditions that are "too obvious" to include expressly. That "too obvious" category included the condition that the good faith determination be made in good faith. Because New World Resources conceded this point at argument and did not make a persuasive alternative argument, the Court remanded the case.
Chancery Denies Bid to Dismiss Derivative Claims Amid Alleged “Gamesmanship” Regarding Composition of LLC’s Board of Managers
Schoenmann v. Irvin, C.A. 2021-0326-SG (Del. Ch. Jun. 2, 2022)
After the plaintiff filed his direct and derivative claims in April 2021, the defendants – the company and its controller – circulated in June 2021 a written consent purporting to change the composition of the company’s board of managers as of January 2021. The defendants then moved to dismiss the derivative claims on the grounds that the plaintiff did not plead demand futility with respect to the purported new board. Based on the plaintiff’s allegations, the Court agreed with the plaintiff that it was reasonably inferable that the consent was backdated. But the Court ultimately decided the matter on a different ground: even if the board composition validly changed in January 2021, equity would not reward the defendants’ gamesmanship in delaying notice of the change. Because it was reasonable to infer that the change was made in anticipation of the plaintiff’s derivative claims and to thwart them, and the plaintiff properly pleaded demand futility with respect to the board of which he had notice, the Court allowed those claims to proceed.
Delaware Supreme Court Affirms Dismissal Under Zapata
Diep v. Trimaran Pollo Partners, No. 313, 2021 (Del. June 28, 2022)
After the Court of Chancery denied an initial motion to dismiss, the company formed a special litigation committee (“SLC”) to investigate the claims and determine whether the company should allow the plaintiff to proceed, take over the litigation, or move to dismiss. The SLC investigated and then moved to dismiss the claims, which the Court of Chancery granted under Zapata. Among other rulings, the Supreme Court affirmed and upheld the Court of Chancery’s rejection of the plaintiff’s contention that the SLC did not meet its burden to establish the independence of the SLC members. The Supreme Court agreed with the trial court that the record did not establish that as directors the SLC members had specific knowledge of the facts and circumstances that led the Company, as nominal defendant, to join the initial motion to dismiss those claims that the SLC later was charged with investigating. Justice Valihura dissented because she believed that material issues of fact existed regarding the SLC members’ independence.
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