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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 Meghan A. Adams
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madams@morrisjames.com
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Meghan A. Adams is a member of the firm's Business Litigation group and focuses her practice on Corporate and Commercial Litigation. Meghan represents clients in a wide variety of …

Showing 25 posts by Meghan A. Adams.

Chancery Enjoins Unfair Merger Orchestrated by Controlling Stockholder Pending Corrective Disclosures

Under Delaware law, majority or controlling stockholders owe fiduciary duties to the company and its minority stockholders. Under certain circumstances, however, a stockholder that owns less than 50 percent of the company’s outstanding stock can be deemed a controlling stockholder and therefore subject to the same fiduciary obligations. This determination involves a fact-intensive analysis regarding the alleged controller’s dominance of the board generally, or dominance of the corporation, board or the deciding committee with respect to a challenged transaction.

The Delaware Court of Chancery recently addressed this issue in FrontFour Capital Group v. Taube, C.A. No. 2019-0100-KSJM (March 11, 2019), where the court issued a post-trial decision on the plaintiffs’ claims to enjoin a proposed combination of Medley Management (a publicly traded asset management firm) with two corporations it advised, Medley Capital Corp. and Sierra Income Corp. (the proposed transactions). In FrontFour, the court held that twin brothers Brook and Seth Taube, who collectively owned less than 15 percent of Medley Capital’s stock, were nonetheless controlling stockholders because they exercised de facto control over the Medley Capital special committee negotiating the proposed transactions, thereby triggering entire fairness review. Although the defendants failed to show that the proposed transactions were entirely fair, the court could not order the most equitable result—a sales process free from influence and onerous deal protections—because plaintiffs failed to prove that Sierra aided and abetted the breaches of fiduciary duty. Therefore, pursuant to the Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the court could not “strip an innocent third party of its contractual rights” under a merger agreement. However, the court did enjoin the stockholder vote pending corrective disclosures regarding the conflicted sales process. More ›

Chancery Declines to Find Personal Jurisdiction Over LLC Officers

CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Mar. 27, 2019).

Section 109 of the Delaware Limited Liability Company Act is an “implied consent” statute. It provides for personal jurisdiction in Delaware over (i) “managers” named in the governing LLC agreement, and (ii) persons who otherwise “participate materially” in the LLC’s management.  6 Del. C. § 18-109(a).  This recent decision is notable for holding that, based on the allegations, certain officers who performed important tasks for the LLC did not “participate materially” in its management for Section 109 purposes.  The Court pointed to precedent holding that “material participation” for Section 109 purposes requires actual control or a decision making role.  Here, one defendant was alleged to be a former manager who retained a “vice chairman” title and engaged a financial advisor on the LLC’s behalf.  The other defendant at-issue served as the company’s President and CEO and had important day-to-day responsibilities.  Such allegations fell short, however, in the circumstances alleged, where the plaintiffs’ complaint and arguments emphasized that, another defendant, who was designated as the “manager” in the governing LLC agreement, exercised “absolute control and discretion” and acted as “emperor, supreme leader and dictator for life.”  The Court reasoned such contentions precluded a finding that the two officers possessed decision making authority of their own.  Accordingly, they were not subject to personal jurisdiction under Section 109. 

Superior Court CCLD Holds that Anti-Reliance Clause Clearly Disclaimed Reliance on Extra-Contractual Representations or Implied Warranties

Affy Tapple, LLC v. ShopVisible, LLC, C.A. No. N18C-07-216 (MMJ) (CCLD) (Del. Super Mar. 7, 2019).

In agreements governed by Delaware law, a standard integration or merger clause will not bar claims for misrepresentations made to induce entry into the contract.  In order to bar such claims, the agreement must include language expressly disclaiming any reliance upon extra-contractual statements.  While there are no “magic words” that are required, the language at issue must add up to a clear disclaimer.  Here, the Complex Commercial Litigation Division of Delaware’s Superior Court considered a clause stating the plaintiff agreed “that the limited express warranties set forth in this section … are exclusive” and that the defendant “specifically disclaimed all other representations and warranties, express or implied[.]”  The Court stated this was “more than a standard integration clause.”  Reasoning that “[l]anguage indicating a clear understanding of the parties’ intent is all that is required[,]” the Court concluded this section was “drafted with sufficient clarity to establish that there was an understanding that [the claimant] could not rely upon any implied warranties, or any express warranties outside of the [agreement].”  Therefore, the Court dismissed the plaintiff’s claim for fraud in the inducement based on alleged extra-contractual representations. 

Delaware Superior Court’s Complex Commercial Litigation Division Declines to Dismiss Delaware Attorney General’s Claims Against Opioid Makers

State of Delaware ex rel. Jennings v. Purdue Pharma L.P., et al., C.A. No. N18C-01-223 MMJ CCLD (Del. Super. Feb. 4, 2019). 

In January 2018, Delaware’s Attorney General filed an action against certain opioid makers and distributors, along with pharmacy chains CVS Health Corp. and Walgreens Boots Alliance Inc.  The State alleged that the drug manufacturers lied to prescribers and patients, and encouraged high doses of the painkillers while failing to disclose accurately the risks of addiction and overdose.  As to the distributors and pharmacies, the State alleged they had duties to actively prevent opioid diversion and to report any suspicious orders.  The Court held that the State stated prima facie claims of consumer fraud and negligence against the manufacturers, reasoning that allegations that they labeled drugs in a manner inconsistent with FDA-approved uses were sufficient to survive dismissal.  The Court also held that the State met its pleading requirements for negligence and consumer fraud against the distributors, including by adequately alleging a prima facie case of reasonable foreseeability and proximate cause.  The State did not state a claim against the pharmacies, however, because the State’s comprehensive pharmacy regulatory scheme and enforcement procedures preempted the claims in the complaint. 

Court of Chancery Grants Preliminary Injunction Based on Insider’s Stock Issuances to Himself

Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Jan. 23, 2019).

This opinion addresses two bedrock issues of Delaware corporate law, specifically, proper board authorization under 8 Del. C. § 141 and directors’ fiduciary duty of loyalty.  Following other directors’ resignations, defendant George Farley was the only director as of February 2016 of plaintiff Applied Energetics (the “Company”).  Shortly after becoming the sole director, Farley executed a written consent to issue himself twenty million shares of Applied Energetics stock for $.001 per share.  No contemporaneous valuation was performed, and Farley made no attempts to ensure a fair process.  Faced with a request to enjoin Farley from selling the shares at issue, the Court of Chancery held that it was reasonably probable that Farley could not cause the Company to validly issue stock, because he was the only remaining director of a three-person board.  The Court also held it was reasonably probable that Farley will be unable to meet his burden at trial of proving the share issuances were entirely fair.  Accordingly, the Court enjoined Farley from trading the shares pending a final adjudication of their validity.  This decision also provides helpful analysis, as did prior decisions in this matter, regarding how the Court will determine the amount of bond when granting preliminary injunctive relief.

Delaware Superior Court Explains When Mutual Mistake Voids A Contract

659 Chestnut LLC v. Parke Bancorp Inc., C.A. N17-05-114 MMJ (December 6, 2018)

This is an interesting decision because it deals with the rare instance when a party can prove a mutual mistake as to a contract’s terms so as to avoid having to comply with those terms. Here both a borrower and a loan officer clearly agreed a loan could be repaid without penalty. The actual loan documents had a prepayment penalty that the borrower did not read before signing. The Court held the borrower was excused from catching that penalty clause given the assurance he had there was no prepayment penalty.

Delaware Superior Court Applies “But For” Test To Decide In What Capacity A Director Acted

Posted In CCLD

Goggin v. National Union Fire Insurance Company Of Pittsburgh, PA., C.A.. N17C-10-083-PRW-CCLD (November 30, 2018)

D & O insurance covers actions taken by a director. However, when a director acts on behalf of another entity in dealing with the insured company, it is not always easy to decide if the claim against him arises out of his role as a company director. This decision applies a “but for” test in this way. If the claim would not exist “but for” the conduct on behalf of the other, non-insured entity, then the claim is not based on the director’s conduct as a director of the insured entity and the "capacity” exclusion applies to deny coverage.  This result turns in part on the specific language of the policy that insured against conduct “solely” taken as a director.

Superior Court Holds that Judgment Creditors Required to Renew Judgments Every Five Years Under 10 Del. C. § 5072

Mergenthaler v. Triumph Mortgage Corp., C.A. No. 09C-09-203-AML (November 26, 2018)

This case with a tortured history presented an interesting issue regarding when a creditor is required to renew a judgment in the Superior Court.  The Court held that plaintiff (the judgment creditor) was required to renew the judgment after five years pursuant to 10 Del. C. § 5072.  Although the creditor did not renew its judgment within five years, the Court granted the creditor’s motion to renew the judgment retroactively because of the prior practice of not requiring such motions until ten years after a judgment’s entry, and the creditor’s failure was not attributable to his negligence because of intervening events, including a Supreme Court ruling, that occurred.

Delaware Superior Court Explains Privity Rule For Claim Preclusion

Posted In CCLD

The Washington House Condominium Association Of Owners v. Daystar Sills Inc., C.A. N15C-01-108 WCC CCLD (November 13, 2018)

This is an interesting decision because it explains when there is privity between parties so as to preclude a claim that one party has resolved previously. Briefly, there needs to be a common interest between the parties without any conflicting interest that would make the settling party an improper representative of the other party.  In this action, the Court held that because of newly discovered evidence, the Court could no longer find that the parties were in privity, and it reversed its prior decision dismissing plaintiffs’ claims against one of the defendants on res judicata grounds.

Delaware Supreme Court Reverses Superior Court in Holding that Insured’s Claim Barred by the Statute of Limitations

Homeland Ins. Co. of New York v. CorVel Corp., No. 60, 2018 (Del. Nov. 20, 2018)

CorVel filed a complaint in the Delaware Superior Court in May 2015 arising out of a settlement of the underlying actions in January 2011.  The Supreme Court held that CorVel’s bad faith claim began to run in 2011, when CorVel settled an underlying arbitration and related class action.  Because CorVel did not file suit until January 2011, the applicable three-year statute of limitations barred CorVel’s claim.  The Supreme Court held that once CorVel could plead the necessary elements of a prima facia claim under Lousiana’s Bad Faith Statue, the cause of action accrued for purposes of Delaware’s statute of limitations.  In doing so, the Supreme Court held that it was not necessary for CorVel to actually obtain a ruling that the Homeland policy covered the claims before it could proceed with its bad faith action.

Federal District Court Explains PSLRA Requirements For Lead Plaintiff and Counsel

Posted In Securities

Wigginton v. Advance Auto Parts Inc., CA 18-212 MN (D. Del. November 2, 2018)

This is an excellent review of how the District Court will analyze the requirements of the PSLRA in selecting the lead plaintiff and lead counsel in a securities litigation. Briefly, the plaintiff with the most at stake should take the lead with its chosen counsel so long as it is qualified by past experience to do so. That such a plaintiff may have acted in 5 or more other securities cases is not disqualifying.

Delaware Superior Court Explains When Implied Covenants Triggered

The GWO Litigation Trust v. Sprint Solutions Inc., C.A. N17C-06-356 PRW CCLD (October 25, 2018)

While every contract has an implied covenant requiring the parties to act fairly and in good faith, it is not always easy to know how that applies in a given case. This decision is a good example of how the court will approach that issue. It finds that the contract impliedly limited the right of a party to compete with an entity it had formed with another party to exploit a business opportunity.

Superior Court of Delaware CCLD Finds 6 Del. C. 1-308 Permits Parties to Reserve Their Rights Without Pleading Duress

Posted In CCLD

Huntsman International LLC v. Dow Chemical Co., C.A. No. N17C-11-242-WCC-CCLD (Del. Super. Oct. 3, 2018)

In this decision by the Complex Commercial Litigation Division, the Court held, for the first time, that under 6 Del. C. 1-308, a party may make a payment with a reservation of rights under without having to plead duress.  The Court held that this section was designed to permit parties to a contract – like the plaintiff here – to continue performance even while a dispute between parties is unresolved.  In doing so, the Court held that Section 1-308 superseded the Supreme Court’s decision in Western Natural Gas Company v. Cities Service Gas Company, 201 A.2d 164 (Del. 1964) in that respect. 

Delaware Superior Court Narrows Jurisdiction In Mass Tort Litigation

Posted In Jurisdiction

In Re: TALC Product Liability Litigation, C.A. N17C-03-054 TAL (September 10, 2018)

This is an important decision that applies recent United States Supreme Court jurisdiction cases to a non-resident’s Delaware complaint. While the opinion carefully reviews a string of such cases ending with Bristol-Meyers Squibb Co. v. Superior Court of California that is worth reading, the bottom line is that it holds that a non-resident of Delaware cannot bring a tort claim against a non-Delaware entity unless she can show its actions in Delaware that directly lead to her injury. This may effectively end the past practice of filing mass tort litigation in the Delaware Superior Court on behalf of non-residents of Delaware, at least against non-Delaware entities.

Delaware Superior Court Explains When Expert Opinion Is Admissible

Posted In Daubert/Experts

The State of Delaware v. Card Complaint LLC, C.A. N13C-06-289 PRW CCLD (August 29, 2018)

This is an excellent summary of the law governing the admissibility of an expert opinion. It is particularly useful in dealing with non-scientific opinions that are based on experience in an industry.