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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 156 posts by Lewis H. Lazarus.
Chancery Rules That Moving Situs of Trust to Delaware Supports Personal Jurisdiction Under the State’s Long-Arm Statute
Harris v. Harris, C.A. No. 2019-0736-JTL (Del. Ch. Jan. 12, 2023)
Three children filed suit against their mother and her associates, alleging they had seized control of a family-owned corporation and engaged in self-dealing, including via self-serving withdrawals from a family trust. Plaintiffs asserted claims for breaches of fiduciary duty, aiding and abetting those breaches, breach of a trust agreement, and tortious interference with the trust agreement. The general counsel of the company moved to dismiss the tortious interference claim against him, including for lack of personal jurisdiction. More ›
Supreme Court Interprets an Alleged Irrevocable Proxy and Finds It Does Not Run with Shares and Bind Subsequent Owner
Daniel v. Hawkins, No. 184, 2022 (Del. Jan. 6, 2023)
Through an irrevocable proxy, the appellant held voting power for 100 shares of a partnership. The proxy had been a tool to immediately transfer the shares' voting power to the appellant, away from a beneficial owner experiencing legal troubles, to minimize the risk of tainted control harming the business pending transfer of beneficial ownership. Years later, with beneficial ownership having transferred for 75 shares, the appellee sought to purchase those shares free of the proxy. The appellant argued that the proxy was irrevocable and could not be relinquished. Appellee filed suit in the Court of Chancery, seeking a declaratory judgment that the irrevocable proxy did not apply to subsequent third-party owners. The Court of Chancery determined that the irrevocable proxy's plain language did not establish a grant of agency authority that ran with the shares. More ›
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.
Superior Court Rejects Defendant’s COVID-related Force Majeure Arguments
Simon Property Group v. Regal Entertainment Group, C. A. No. N21C-01-204-MMJ (Del. Super. Ct. Jul. 6, 2022) (CCLD)
Simon Property, the landlord, sued Regal Entertainment, the tenant, for breach of a commercial lease, including Regal Entertainment’s failure to pay rent during the COVID-19 pandemic in 2020 and 2021. Regal Entertainment asserted several affirmative pandemic-related defenses. Upon Simon Property’s motion, the Court rejected Regal Entertainment’s defenses as a matter of law because the parties’ lease contained a force majeure provision broad enough to cover the pandemic events and because those provisions allocated the risk of loss to Regal Entertainment.
Chancery Upholds Standalone Direct Claim Under DGCL Section 155 Regarding Fractional Interests
Samuels v. CCUR Holdings, Inc., C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022)
Under Section 155 of the DGCL, corporations may elect either to issue stockholders fractional shares or to pay a stockholder the fair value of the fractional interest. The plaintiff-stockholder alleged that the corporation failed to pay him fair value for his fractional interest after a reverse stock split. In allowing a standalone claim under the statute to proceed, the Court reasoned that stockholders generally are permitted to assert direct statutory claims, and previous decisions addressing Section 155 did not foreclose the plaintiff’s statutory cause of action.
Chancery Permits Novel Breach of Fiduciary Duty Claim Against Directors Who Refused Demand
Garfield v. Allen, C.A. No. 2021-0420-JTL (Del. Ch. May 24, 2022)
Historically, the wrongful rejection of a demand has affected only the question of who controls a derivative claim. In this case, involving equity issuances to a director under an equity compensation plan, however, the plaintiff asserted that defendant-directors’ demand refusal constituted a separate breach of duty because the defendants did not correct an obvious violation of the plan’s plain language. Although the Court recognized that the claim was potentially problematic from a policy perspective, the Court nonetheless found that the claim rested on the established principle that a conscious failure to act is the equivalent of action. And the Court concluded that the plaintiff’s complaint established “one of the strongest possible scenarios for such a claim.” Thus, the Court reasoned, it was reasonably conceivable that the defendants’ conscious inaction in the face of the plaintiff’s demand constituted a breach of the defendants’ duties.
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