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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 14 posts by Jonathan G. Strauss.

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 ›

Superior Court CCLD Enters Final Judgment on Penalties and Damages against Overstock.com

Posted In CCLD, Damages

French v. Overstock.com, Inc., C.A. No. N13C-06-289 PRW CCLD (Del. Super. June 28, 2019).

After a 6-day jury trial before the Complex Commercial Litigation Division of the Delaware Superior Court, a jury found that Overstock knowingly violated the Delaware False Claims and Reporting Act (“DFCRA”) by failing to report and remit dormant gift card balances to the State of Delaware.  The jury verdict was for approximately $3 million.  The Court held that under 6 Del. C. §1205(a), the DFCRA’s damages and penalties provision, Plaintiffs are entitled to an award of civil penalties, treble damages, and reasonable attorneys’ fees and costs.  After finding that there was sufficient evidence presented to support the jury’s verdict, the Court then found that the statutorily mandated treble damages were not excessive or unconstitutional because they were not disproportionate to the harm caused and to Overstock’s level of culpability.  Finally, the Court held that the proper method for calculating reasonable attorneys’ fees and costs is the lodestar method, which is the method used most often in cases involving fee-shifting statutes including federal False Claims Act cases.  Under the lodestar method, the Court multiplies the hours reasonably expended against a reasonable hourly rate that can then be adjusted to account for additional factors such as the contingent nature of the case and the quality of the attorney’s work.

Chancery Finds Unauthorized Transfer of LLC Interest Void and Denies Transferee Inspection Rights

Absalom Absalom Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR (Del. Ch. June 27, 2019).

Plaintiff was assigned a membership interest in the defendant, a Delaware limited liability company, and sought to exercise books and records inspection rights.  But the LLC’s operating agreement circumscribed its members’ ability to transfer their interests, stating that any disposition without prior written consent of all members was “null and void,” and otherwise authorized only members to inspect books and records.  According to the Court of Chancery, because the transferor never received prior written consent for the transfer to plaintiff, the transfer was void under the LLC agreement, plaintiff was not a member of the LLC, and plaintiff had no right to inspect the LLC’s books and records.  In addition, the Court relied on the Delaware Supreme Court’s decision in CompoSecure, L.L.C. v. CardUX, LLC to find that the plaintiff could not rely on equitable theories to validate the transfer.  According to the Court, equity can only validate voidable acts, not void acts.  And the LLC agreement’s plain language in this case rendered the attempted transfer void, even if it would have been only voidable under common law.

Chancery Denies Corwin Defense Based on Proxy Omissions and Sustains Claims Against Financial Advisor

Posted In Fiduciary Duty

Chester Cty. Emps.’ Ret. Fund v. KCG Holdings, Inc., C.A. No. 2017-0421-KSJM (Del. Ch. June 21, 2019).

Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), Delaware courts generally will dismiss post-closing fiduciary duty claims arising out of M&A deals when the challenged transaction was approved by a fully-informed and uncoerced majority of the company’s disinterested stockholders. Several decisions since Corwin, including this one, have denied motions to dismiss under Corwin, finding the doctrine’s prerequisites were not satisfied. This decision also is notable for sustaining a bad faith claim against directors and claims against the investment bank Jefferies.  More ›

Chancery Unseals Confidential Complaint for Failure to Comply With Court Rules

Posted In Confidentiality

The Chemours Co. v. DowDupont Inc., C.A. No. 2019-0351-SG (Del. Ch. June 7, 2019).

The Delaware courts have long tried to balance the public’s right of access to information about judicial proceedings with the legitimate needs of litigants to keep certain information confidential.  Rule 5.1 is the Court of Chancery’s codification of the standards and procedures for obtaining, maintaining, and challenging confidential treatment of court filings. Its overarching purpose is to protect the public’s right of access.  More ›

Chancery Permits Receiver to Tax Petitioner for Costs of Receivership

Longoria v. Somers, C.A. No. 2018-0190-JTL (Del. Ch. May 28, 2019).

The Court of Chancery may appoint a receiver to wind up a deadlocked corporate entity.  When that happens, the corporation normally pays the receiver’s fees and expenses.  Here, however, the entity was insolvent and unable to pay, and the Petitioner (a 50% owner) opposed contributing to the payment of certain expenses.  More ›

Chancery Sustains Stockholder Inspection Demands to Investigate Caremark Claims Arising from Facebook / Cambridge Analytica Scandal

In re Facebook Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 31, 2019).

A so-called Caremark Claim premised upon disinterested directors' failure to exercise appropriate oversight is one of the most difficult theories to litigate successfully.  Here, however, the Court of Chancery held that stockholder-plaintiffs had a sufficient “credible basis” to investigate Facebook’s documents concerning its alleged widespread but secret business practice of “whitelisting” – monetizing the personal data of Facebook users who accessed certain applications on Facebook, as well as that of their Facebook friends.  More ›

Chancery Orders Dissolution of Pharmaceutical LLC

Acela Investments LLC v. DiFalco, C.A. No. 2018-0558-AGB (Del. Ch. May 17, 2019).

Because LLCs are “creatures of contract” and the policy of the Delaware Limited Liability Company Act is to give maximum effect to the freedom of contract, parties can adopt contractual arrangements that, in the end, lead to deadlock. So, Section 18-802 of the LLC Act empowers the Court of Chancery to break a deadlock through a judicial dissolution whenever it is not “reasonably practicable to carry on the business in conformity with” the LLC agreement.

Here, the Court of Chancery ordered the judicial dissolution of an LLC in the pharmaceutical industry, Inspiron Delivery Sciences, finding it was no longer reasonably practicable to carry on the company’s business in conformity with its LLC agreement under the circumstances.  The Court found that the two founding members were deadlocked on numerous important issues, such as the company’s strategic vision, and that the LLC agreement did not provide any alternate mechanism to resolve the deadlock.  By giving the LLC members veto rights and consent rights over decisions, the parties created the possibility that they would become deadlocked; they also chose not to draft a means to resolve a potential deadlock, such as a buy-sell provision.  As the Court explained, in such instances, it is not the Court’s role to redraft the LLC agreement for “sophisticated and well-represented parties.”

Superior Court CCLD Denies Bad Faith Counterclaim Against Insurance Companies

Posted In CCLD

Arch Insurance Co. v. Murdock, C.A. No. N16C-01-104 (EMD) (CCLD) (Del. Super. May 1, 2019).

 In this matter between Dole Food Company and its Insurers, Dole sought coverage under their D&O policies for two underlying cases in the Court of Chancery and the District Court for the District of Delaware.  The Insurers refused coverage and filed this declaratory judgment action.  The Complex Commercial Litigation Division of Delaware’s Superior Court granted summary judgment in favor of the Insurers as to Dole’s counterclaim that the Insurers had breached the implied covenant of good faith and fair dealing in denying coverage.  Despite disputed facts, the Court held that it should not submit the question of bad faith refusal to pay Dole’s claims to a jury because the Insurers had reasonable grounds for relying on their defenses to liability.  The Court found that the Insurers had several well-reasoned arguments for denying coverage based on various clauses contained in the insurance policies, including the Fraud Exclusion, the Written Consent Provision, and the Cooperation Clause.

Superior Court CCLD Holds that Contract Defenses Can Be Applied to a Declaratory Judgment Action

Posted In CCLD

Bobcat North America, LLC v. Inland Waste Holdings, LLC, C.A. No. N17C-06-170 (PRW) (CCLD) (Del. Super. Apr. 26, 2019).

Under Delaware law, contract defenses can apply to a declaratory judgment action when the action is one based on legal rather than equitable claims.  In this matter, the Complex Commercial Litigation Division of Delaware’s Superior Court partially granted Bobcat’s partial motion for summary judgment stemming from its acquisition of a waste management business from Inland.  Bobcat sought a declaratory judgment that it was entitled to claw-back / redeem an equity payment under the parties’ purchase agreement (the “UPA”) because the necessary condition to prevent the claw-back did not occur.  Inland countered with the affirmative contract based defenses of impossibility/impracticability and prevention of performance.

Because Bobcat’s claim was based solely on a contract provision, which made it a legal claim, Inland’s contract defenses of prevention of performance and impossibility were applicable to the claim.  Nonetheless, the Court found that the UPA was unambiguous in its terms.  Inland knowingly assumed the risk that the condition preventing the claw-back might not occur and the terms of the UPA stated that if the condition did not occur, Bobcat could automatically redeem the equity.  Therefore, the Court rejected Inland’s affirmative defenses as a matter of law and granted Bobcat’s motion for summary judgment on its claim to redeem the equity payment.

Delaware Proposes Updates to Its LLC Statute Regarding Series LLCs

On April 6, the Delaware Corporation Law Section of the Delaware Bar Association proposed some major and minor amendments to the Delaware Limited Liability Company Act. If introduced in and approved by the Delaware General Assembly and the governor, one of the most significant changes will involve the provisions of the act dealing with series limited liability companies (series LLCs). The proposed amendments are intended to clarify the characteristics of series LLCs and further facilitate their use. More ›