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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Photo of Delaware Business Litigation Report Jonathan G. Strauss
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jstrauss@morrisjames.com
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Jonathan G. Strauss is a partner in Morris James’ Business Transactions, Strategic Planning and Counseling Practice, a group that has been involved in over $50 billion in financings …

Showing 24 posts by Jonathan G. Strauss.

Chancery Addresses Civil Conspiracy Elements

Posted In Chancery

O’Gara v. Coleman, C.A. No. 2018-0708-KSJM (Del. Ch. Feb. 14, 2020).

This action arose out of corporate infighting among certain directors and investors at a nutrient-infused water company. The plaintiff, the company’s founder, brought tort and contracts claims against certain former directors and current stockholders, accusing them of wrongfully attempting to seize control of the company. The parties settled several claims, but some defendants and claims remained. In this motion to dismiss decision, the Court of Chancery addresses, inter alia, the elements of a claim for civil conspiracy and, relatedly, the conspiracy theory of jurisdiction.  More ›

Chancery Follows Recent Precedent Finding Pre-Suit Correspondence to be a Litigation Demand, Dismisses Derivative Complaint for Failure to Allege Wrongful Refusal

Dahle v. Pope, C.A. No. 2019-0136-SG (Del. Ch. Jan. 31, 2020).

Incorporating the analysis set forth in Solak ex rel Ultragenyx Pharmaceutical, Inc. v. Welch, 2019 WL 5588877 (Del. Ch. Oct. 30, 2019), the Court of Chancery again dismissed a derivative complaint under Rule 23.1 after finding that the plaintiffs’ pre-suit correspondence was a litigation demand. More ›

Chancery Further Explains the “Proper Purpose” Requirement for Section 220 Demands

Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp., C.A. No. 2019-0527-JTL (Del. Ch. Jan. 13, 2020).

Section 220 of the Delaware General Corporation Law (“DGCL”) provides stockholders seeking information for a proper purpose with the right to inspect a corporation’s books and records. This recent decision provides additional guidance by (i) rejecting a “purpose-plus-an-end” test as inconsistent with the text of Section 220 and Delaware Supreme Court precedent; and (ii) explaining that a stockholder may have a proper purpose to investigate wrongdoing regardless of whether she can show potentially viable claims against a board of directors.  More ›

Chancery Sustains Claims Against Board Chairman who Rolled Over Equity in Going-Private Transaction and Officers Who Crafted Misleading Disclosures

Posted In Fiduciary Duty, M&A

Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Dec. 31, 2019).

Plaintiff, a former stockholder of The Fresh Market, Inc. (the “Company”), brought claims arising out Apollo’s 2016 acquisition of the Company.

Because the directors benefited from exculpation under 8 Del. C. §102(b)(7), the plaintiff was required to sufficiently plead a breach of the fiduciary duty of loyalty. The Court rejected the novel argument that activist shareholders were exerting so much pressure on the board that the directors were motivated to protect their own reputations by approving a near-term sale. The Court reasoned that the directors’ reputations would be at far greater risk if they breached their duty of loyalty by orchestrating a sham auction, and that it would be irrational for them to harm their own pecuniary interests as shareholders. The Court also reasoned that, while they could have chosen other potentially value-enhancing paths, the decision to hold an auction and solicit bids from a wide field did not suggest “bad faith.”  More ›

Delaware Superior Court CCLD Disqualifies Counsel to Ensure Fairness of Litigation Process

Sun Life Assurance Company of Canada v. Wilmington Savings Fund Society, FSB, C.A. No. N18C-08-074 PRW CCLD (Del. Super. Dec. 19, 2019).

Motions to disqualify counsel rarely succeed in the Delaware courts. This decision illustrates the type of conflict that can justify disqualification based on prior representations. Plaintiff issued a life insurance policy of $6 million to an individual named Bartelstein. The policy was assigned to a trust whose beneficiary is an entity, with the moniker Ocean Gate, making Ocean Gate the policy’s ultimate beneficiary. Plaintiff filed this suit alleging the policy is void as a stranger-oriented life insurance wager on Bartelstein’s life procured for investors. The litigation gave rise to alleged conflict issues for involved counsel. More ›

Chancery Holds Plaintiffs’ Emails with Counsel on Defendants’ Server Are Privileged Due to Application of Argentine Law

Posted In Discovery, Privilege

Lynch v. Gonzalez, C.A. No. 2019-0356-MTZ (Del. Ch. Nov. 18, 2019).

The plaintiff brought suit seeking confirmation that it validly acquired from defendants a majority ownership interest and the concomitant right to manage Grupo Belleville Holdings, LLC (the “Company”), a Delaware limited liability company. The discovery motion at-issue addresses the confidentiality of emails between Plaintiff and his counsel – complicated by the fact that they are stored by a server owned and operated by the defendants. To explain, the defendants had provided the Argentina-based Company and its employees, including the plaintiff, with email addresses for the purpose of executing their job duties. The email addresses and the server on which the emails were stored were not owned by the Company, however; rather, it was known to all involved that they belonged to a separate company of the Defendants. The emails at issue were between plaintiff Lynch and two in-house Company attorneys who also provided legal advice to him on personal matters, distinct from advice they provided him in his capacity as the Company’s manager. In discovery, Lynch sought to vindicate the privilege. He moved to compel the defendants to turn over the emails, but the defendants refused. More ›

Chancery Declines to Establish New Rule Concerning Books and Records Inspections Related to Proxy Contests

High River Limited Partnership v. Occidental Petroleum Corp., C.A. No. 2019-0403-JRS (Del. Ch. Nov. 14, 2019).

Section 220 of the DGCL grants stockholders a qualified right to inspect corporate books and records “necessary and essential” to a “proper purpose.”  One recognized proper purpose is investigating potential corporate wrongdoing or mismanagement.  In such cases, the stockholder must establish a “credible basis” for the suspicion before the Court of Chancery will order inspection.  When a stockholder makes that showing, the Court has permitted use of the produced books and records to mount a proxy contest.  However, as the Court of Chancery observes in this decision, no Delaware court has compelled inspection “when the stockholder’s only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest.”  And under the facts and circumstances of this case, the Court declines to be first.   More ›

Chancery Declines to Dismiss Second-Filed Delaware Action Because Delaware Forum Selection Clause Preempts McWane

PPL Corp. v. Riverstone Holdings LLC, C.A. No. 2018-0868-JRS (Del. Ch. Oct. 23, 2019).

Defendants brought an action in Montana state court against plaintiffs.  Plaintiffs later filed this action in the Delaware Court of Chancery, alleging several claims that shared a common nucleus of operative facts with those asserted in Montana.  Defendants moved to dismiss or stay the Delaware action under the McWane doctrine, which generally gives deference to a first-filed action in another jurisdiction and authorizes a dismissal or stay of a second-filed Delaware action.  More ›

Chancery Enters Sanctions in TransPerfect Litigation for Violating Exclusive Jurisdiction Provision in Court Order

Posted In Chancery, Sanctions

In re: TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Oct. 17, 2019).

This decision arose out of the dispute between once deadlocked co-owners of TransPerfect Global that played out in the Delaware courts over several years.  That heavily-litigated controversy resulted in the appointment of a Custodian by the Court of Chancery and a forced sale of the company as part of a Final Order, with one of the co-owners, Phil Shawe, prevailing as the buyer. More ›

Chancery Applies Entire Fairness Review to Executive Compensation Decision Benefiting Controller Despite Stockholder Approval, Declining to Dismiss Claims Involving Tesla’s Elon Musk

Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Sept. 20, 2019).

Under Delaware law, executive compensation decisions by a corporation’s board of directors generally are entitled to deferential judicial review, and even more so when approved by the stockholders.  On the other hand, Delaware law generally imposes heightened scrutiny in the form of entire fairness review for transactions uniquely benefiting a corporation’s controlling stockholder, relying on the inherent coercion that accompanies control.  So what standard of review applies when an executive compensation decision benefits the company’s controlling stockholder and the stockholders approve it? More ›

Chancery Finds Prospective Purchaser May Pursue Breach Claims Against Target Despite Termination Fee Payment

Genuine Parts Company v. Essendant Inc., C.A. No. 2018-0730-JRS (Del. Ch. Sept. 9, 2019).

Termination fee provisions are commonplace buy-side protection in M&A transactions intended to recoup a failed prospective purchaser’s otherwise sunk costs.  They can also provide substantial sell-side protection when drafted as an exclusive remedy.  But, as this decision illustrates, the level of protection depends on each contract’s specific terms.        More ›

Chancery Finds Plaintiffs Lost Direct and Derivative Standing After Sale of Shares

Urdan v. WR Capital Partners, LLC, C.A. No. 2018-0343-JTL (Del. Ch. Aug. 19, 2019).

It is well-settled Delaware law that the right to bring a derivative claim in the corporation’s name or a direct claim in the individual stockholder’s name is a property right associated with the ownership of shares and that those rights normally pass from a selling stockholder to the buyer.  Relatedly, Delaware law imposes two conditions for derivative standing: first, a contemporaneous ownership requirement, meaning the plaintiff must have been a stockholder at the time of the complained of wrong; and, second, a continuous ownership requirement, meaning the plaintiff must continue to be a stockholder to pursue its claims.  The rules are slightly different in the direct standing context.  In contrast to the continuous ownership requirement for derivative claims, a selling stockholder may retain the right to bring a direct claim by contract.  This decision explains and applies these concepts, finding certain stockholders lost both forms of standing when reaching a settlement, despite an apparent attempt to avoid that result in the relevant contracts. More ›

Superior Court CCLD Addresses Pleading Standards for Trade Secret, Fraud and Implied Covenant Claims

Brightstar Corp. v. PCS Wireless, LLC, C.A. No. N18C-10-250 PRW CCLD (Del. Super. Ct. Aug. 7, 2019).

Brightstar and PCS, two competitors that distribute new and pre-owned mobile devices, entered into a buy/sell agreement as part of negotiations for a proposed merger and strategic alliance.  Under the buy/sell agreement, PCS purchased mobile devices from Brightstar for re-sale to third parties and was subject to a non-circumvention provision that restricted PCS from purchasing these devices from certain other suppliers.  After their merger discussions faltered, PCS terminated the agreement, and Brightstar brought suit for unpaid amounts and alleged misappropriation of pricing information.  PCS counterclaimed for, inter alia, fraud and breach of the implied covenant of good faith and fair dealing. More ›

Chancery Denies Motion to Dismiss Claim for Breach of Earn-Out When Unable to “Divine any Meaning” From Provision

Western Standard, LLC v. SourceHOV Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Defendant Pangea acquired BancTec through a merger agreement that provided for an earn-out to former BancTec stockholders in the event that Pangea’s controlling stockholder realized certain returns on its post-merger stock.  Plaintiff alleged that the earn-out was triggered when Pangea’s parent company became a wholly owned subsidiary of another company through a stock-for-stock transaction. More ›

Chancery Dismisses Oversight Claims Against J.C. Penney Board

Posted In Fiduciary Duty

Rojas v. Ellison, C.A. No. 2018-0755-AGB (Del. Ch. July 29, 2019).

As this Court of Chancery decision explains, the Delaware standard for imposing oversight liability on a board of directors under a Caremark theory is “exacting” and requires evidence of bad faith.  Combined with the heightened “particularized” pleading requirements of Court of Chancery Rule 23.1, stockholders face an uphill battle when pursuing an oversight theory as the basis for liability and for excusing a pre-suit demand on the board. More ›