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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 78 posts by Lewis H. Lazarus.
Appraisal of Panera Bread: Court of Chancery Again Defers to Deal Price, Denies Request for a Refund of the Amount of Synergies
JAB Holdings B.V. (“JAB”), a private company that also owns Einstein Bros., Caribou Coffee and Krispy Kreme, acquired Panera Bread Company (“Panera”) via a cash-out merger for $315.00 per share on July 18, 2017. Multiple dissenting shareholders (the “Petitioners”) filed an appraisal action, asserting that the fair value of their shares was $361.00 per share. Post-trial, the Court of Chancery disagreed with the Petitioners, ruling that the deal price minus synergies was the best evidence of fair value. This was because Panera had followed a reliable sale process and any flaws in that process did not undermine its reliability. Specifically, the Court held that, among other factors, the parties’ arm’s length negotiations, Panera’s disinterested and independent board, price increases during negotiations, the fact that no other parties bid on Panera either before or after the announcement of the merger, and the outreach that Panera did with potential buyers provided persuasive evidence of a reliable sale process. More ›
This case exemplifies the Delaware courts’ approach to examining demand futility. In 2016, Uber Technologies, Inc. (“Uber”) acquired Ottomotto LLC (“Otto”), a company started by a contingent of employees from Google’s autonomous vehicles group, in order for Uber to gain expertise in developing autonomous vehicles. The shareholder-plaintiff brought a claim, on behalf of Uber, against some of Uber’s directors. The plaintiff alleged that Uber’s directors ignored the risks presented by Otto’s alleged theft of Google’s intellectual property, which eventually led to Uber paying a settlement of $245 million to Google and terminating its employment agreement with Otto’s founder. More ›
Chancery Dismisses Stockholder Claims that a Minority Owner was a Controlling Stockholder or that a Majority of the Board was Beholden to the Minority Owner in Approving a Merger Transaction with the Minority Owner
When as here a Delaware corporation’s charter contains an exculpation provision under Section 102(b)(7) of the Delaware General Corporation Law, stockholders who bring suit against directors who approve a merger transaction must allege violations of the duty of loyalty to state a non-exculpated claim. They may state such a claim if they adequately plead that a controlling stockholder breached duties for self-interested reasons, or that a majority of the board was self-interested or beholden to the buyer. They may also attempt to state a non-exculpated claim by claiming that a majority of the board acted in bad faith. To meet this bad faith standard, a plaintiff must plead facts showing that the decision to approve the transaction lacked any rationally conceivable basis associated with maximizing stockholder value. As the Court explained, allegations of mis- or non-disclosure will not suffice unless plaintiffs plead intentional misstatements or omissions based on a “factual narrative that would allow any inferential explanation of why these fiduciaries would so abandon their duties as to engage in bad faith." (emphasis in original). More ›
Chancery Examines Computer Misuse Claims Against Former Employee and Awards Defamation Damages Against Former Employer
In one of her final opinions before joining the Delaware Supreme Court, Vice Chancellor Montgomery-Reeves addressed various statutory computer misuse claims against a former employee and awarded $100,000 in compensatory damages for the former employer’s libel and slander. In Laser Tone v. Delaware Micro-Computer, plaintiff, a photocopier company, terminated the defendant employee after he refused to sign a non-compete agreement. In its subsequent lawsuit, plaintiff claimed that the defendant stole company information and deleted certain data from his company computer and cell phone devices before departing. Certain of plaintiff’s executives then communicated to third parties that the defendant was “a thief and a drug user.” Plaintiff brought a cause of action against the defendant for violating the Delaware Misuse of Computer System Information Act (“DMCSIA”) by allegedly stealing data and deleting certain other information from company systems. The defendant counterclaimed for libel and slander, arguing that plaintiff’s communications were false and had caused him significant mental and reputational harm.
After a two-day trial on the merits, the Court of Chancery found insufficient evidence to support a majority of the plaintiff’s theories of liability, but did find that the defendant had deleted certain data from his company laptop in violation of the DMCSIA. Finding no non-speculative evidence of harm, however, the Court awarded only nominal damages. The Court also found that plaintiff failed to prove that the defendant had stolen any data. Having determined that plaintiff failed to prove the defendant was a “thief,” the Court denied plaintiff’s affirmative defense of truth and entered judgment for the defendant on his defamation counterclaims. The Court, in its discretion, awarded $100,000 in damages, basing the award on evidence that the defendant had “lost two jobs, customers, and friends; and, [because] he fear[ed] his business [was] in jeopardy.”
Chancery Denies Motion for Reargument, Finding No Change to Delaware Legal Principles for Existence of “Control Group” of Stockholders
Delaware courts recognize that a group of stockholders can constitute a “control group” when those stockholders “are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement…” and work together toward a shared goal. Sheldon v. Pinto Tech. Ventures, L.P., 2019 WL 4892348, at *4 (Del. Oct. 4, 2019) (citing Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009)). Under such circumstances, the control group stockholders may owe fiduciary duties to the corporation’s minority stockholders. Where a minority stockholder adequately pleads (1) the existence of a control group; and (2) a self-dealing breach of fiduciary duties by that control group, the minority stockholder’s claims may be both direct and derivative. Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006). In Silverberg v. Padda, Plaintiffs argued that they had alleged a direct claim by pleading that a control group of stockholders had breached fiduciary duties by approving alleged dilutive preferred stock issuances. After the Court dismissed this claim based on Plaintiffs’ failure adequately to allege a control group, as opposed to mere parallel action, Plaintiffs asserted in a motion for reargument that the Delaware Supreme Court’s recent Sheldon opinion had established a new legal principle to assess the existence of a control group. The Court disagreed, ruling that Sheldon had reaffirmed the Dubroff standard that the Court had applied in dismissing Plaintiffs’ claims. See Morris James blog post of October 14, 2019 (discussing the Court’s earlier decision). The Court re-affirmed its holding that Plaintiffs’ allegations did not suffice to allege a control group because the agreement between the allegedly controlling stockholders (1) did not relate to the challenged transaction; (2) included persons other than the purported control group members; and (3) did not bind the signatories with respect to their votes on the challenged transaction. Because the Court determined that Sheldon did not affect the Court’s holding that such allegations do not suffice to establish a control group, the Court denied Plaintiffs’ motion for reargument.
Delaware Supreme Court Finds an Insurance Policy Covering “Securities Claims” Did Not Apply to Claims for Violations of Common Law or Statutes Not Specific to the Regulation of Securities
The Delaware Supreme Court, applying principles of contract interpretation under Delaware law, held that claims of breach of fiduciary duty, unlawful dividends and fraudulent transfer were not Securities Claims reflecting a violation of any “regulation, rule or statute regulating securities” and hence the defendant’s director and officer insurance policy that covered such claims did not apply. The Supreme Court thus reversed a holding of the Delaware Superior Court that the insurance coverage applied because the claims “pertain[ed] to laws one must follow when engaging in securities transactions.” The Supreme Court held that the unambiguous plain meaning of the policy language was that the parties intended coverage only for claims arising under regulations, rules or statutes that “regulate securities.” Using that definition, the Supreme Court held that claims of breach of fiduciary duty, aiding and abetting fiduciary duty breaches, and promoter liability were not Securities Claims because they do not involve regulations, rules and statutes regulating securities. Likewise, the claim for unlawful dividends arose under statutes that regulated dividends, not securities, and the fraudulent transfer claims arose under statutes that were not “specific to transfers involving securities.” The Supreme Court rejected as overly broad Verizon’s interpretation that the phrase “regulating securities” included any “laws one must follow when engaging in securities transactions,” holding that that interpretation would encompass claims unrelated to securities and would render meaningless the limitation that coverage applied only to violations of rules or statutes “regulating securities.” The Supreme Court thus remanded the case to the Superior Court to enter judgment for the insurer-defendants.
Chancery Finds Safe Harbor Conflicts Committee Not Validly Constituted in Master Limited Partnership Dispute
The Dieckman v. Regency GP LP matter has been in the Delaware courts for several years. The Court of Chancery originally dismissed the complaint attacking a conflicted merger transaction primarily on the ground that plaintiff had failed to plead that a unitholder approval safe harbor provision contained in the limited partnership agreement was inapplicable. The Delaware Supreme Court reversed, holding that plaintiff had adequately pleaded that unitholder approval was secured by false and misleading information and, further, that approval by a Conflicts Committee was tainted by conflicts involving its members. Plaintiff amended his complaint and, following briefing on a motion to dismiss, the Court of Chancery sustained plaintiff’s claim that the General Partner had approved the transaction even though members of its board did not believe that the transaction was in the best interests of the limited partnership. More ›
Chancery Construes LLC Agreement as Imposing Only the Managerial Duty to Act in Good Faith and Dismisses Claims for Failure to Plead Bad Faith
Under Delaware law, the managers of a limited liability company owe the entity and its members the traditional common law fiduciary duties of care and loyalty. But parties may eliminate or modify those duties under the LLC’s operating agreement and impose contractual duties instead. When they do so, Delaware courts will analyze any challenged conduct of the manager against those contractual duties. Here, the Court of Chancery found the managers’ contractual duty to be a narrow one: act with a good faith belief that their conduct was in or not opposed to the LLC’s best interests. More ›
Chancery Upholds Caremark Claim Based on Alleged Failure to Adequately Monitor Biopharmaceutical Company’s Clinical Trials
The Delaware courts have observed that a Caremark claim for failure of oversight against a board is among the most difficult to sustain. Nonetheless, a set of particularized allegations showing serious oversight shortcomings regarding a mission-critical topic will succeed, as illustrated by the Delaware Supreme Court’s recent decision in Marchand v. Barnhill, 212 A. 3d 805 (Del. 2019). Clovis is the latest example. More ›
Despite the plaintiff’s request for specific performance and an arbitration provision that carved-out equitable claims, the Court of Chancery stayed the action and deferred to the arbitrator the decision on arbitrability. The limited liability company operating agreement at issue contained a mandatory arbitration provision that referred all disputes to arbitration “[e]xcept to the extent that a party is entitled to equitable relief…” and incorporated the AAA arbitration rules. In reaching his decision, the Vice Chancellor evaluated the arbitration provision under the standard set forth in James & Jackson, LLC v. Willie Gary, LLC, and clarified in McLaughlin v. McCann. Willie Gary set forth a two-part test to determine whether the parties agreed to submit the issue of arbitrability to an arbitrator: the arbitration provision must (1) resolve all disputes; and (2) incorporate rules that permit an arbitrator to determine arbitrability. McLaughlin later clarified Willie Gary by cautioning against an overly narrow reading of the first prong of Willie Gary, ruling that courts should only determine arbitrability when the carve-out is so “obviously broad and substantial” that it overcomes the presumption in favor of permitting the arbitrator to decide arbitrability. The Vice Chancellor concluded that the scope of the equitable relief carve-out in the operating agreement was not “so obviously broad and substantial as to overcome the heavy presumption” that the parties intended to submit the issue of arbitrability to an arbitrator to decide whether their dispute is subject to arbitration under the arbitration provision. The Court therefore held the equitable carve-out did not apply to enable the Court to decide arbitrability.
In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., the Court of Chancery held that a contract provision limiting or waiving future appraisal rights may be enforceable as a matter of law. The Court had previously ruled that the petitioner stockholders had waived their right to an appraisal in a stockholders agreement. On re-argument, the Court was asked to determine whether the petitioners could, as a matter of law under the Delaware General Corporation Law (“DGCL”), waive their appraisal rights. Because Section 262 of the DGCL confers a statutory right to appraisal upon shareholders, the petitioners argued that the provision of the stockholders agreement purporting to waive appraisal rights was not enforceable. Relying upon its prior precedent concerning waiver of statutory rights, the Court explained that a contractual relinquishment of appraisal rights was permissible when the contract language is clear and unambiguous and the record reflects that the petitioners were sophisticated investors who were fully informed and represented by counsel when they signed the stockholders agreement.
Court of Chancery Finds Agreements Unenforceable for Lack of Assent, Dismisses Remaining Claims for Lack of Personal Jurisdiction
Parties to a contract must provide evidence of an overt manifestation of assent for a contract to be enforceable under Delaware law. Upon remand from the Delaware Supreme Court, the Court of Chancery found such assent to be lacking and dismissed the remaining claims for lack of personal jurisdiction. More ›
Delaware Supreme Court Clarifies: No Presumption of Confidentiality for Documents Produced Pursuant to a Books and Records Request
The Delaware Supreme Court held that documents produced pursuant to a request for books and records under Section 220 of the Delaware General Corporation Law are not subject to a presumption of confidentiality. More ›
Court of Chancery Dissolves Limited Partnership Upon Finding General Partner Unable To Achieve Its Business Purpose
The equitable remedy of dissolution is extraordinary. Given the extraordinary record before it, and the abundance of evidence that the general partner could not operate the business, the Court granted plaintiffs’ petition for dissolution. More ›
Lewis H. Lazarus to Participate in Panel Discussion Commemorating the Landmark Case Paramount Communications, Inc. v. Time Inc.
Morris James partner Lewis H. Lazarus will participate in a DSBA CLE titled “The Test of Time: A 30-Year Lookback at Paramount Communications, Inc. v. Time Inc. on its 30thAnniversary.” The CLE will take place live on Thursday, September 26, 2019 at the Delaware State Bar Association. Webcasts will be available in Kent County at the office of Morris James LLP in Dover and in Sussex County at the office of Tunnell & Raysor in Georgetown. More ›