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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- Chancery Finds Plaintiff Failed To State A Non-Exculpated Claim Against Special Committee Defendants In Complaint Challenging A Merger
- Chancery Finds Stockholder Conferred a Substantial Corporate Benefit by Challenging the Joint Vote of Two Classes of Common Stock under Section 242(b)(2) of the DGCL
- Court of Chancery Awards Plaintiffs Attorneys’ Fees and Costs in Section 225 Action for Obtaining a Substantial Benefit for the Corporation and its Stockholders
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Showing 32 posts by Samuel E. Bashman.
Delaware Supreme Court Overturns $700 Million Award in Master Limited Partnership Litigation
Boardwalk Pipeline Partners L.P. v. Bandera Master Fund LP, C.A. No. 2018-0372 (Del. Dec. 19, 2022)
Delaware Master Limited Partnerships (MLPs) can structure their organization to permit maximum flexibility, including eliminating fiduciary duties and limiting investor rights to the four corners of the MLP agreement. At issue in this case was whether the partnership's general partner properly exercised a call right to take the partnership private. Under the partnership agreement, the general partner could exercise this right if it received an opinion from counsel acceptable to the general partner that certain changes in regulation would have a specific effect on the business. More ›
Superior Court Finds that Non-Recourse Provision Does Not Bar Fraud Claims Against Non-Seller Defendants
Amerimark Interactive LLC v. Amerimark Holdings, C.A. No. N21C-12-175 MMJ CCLD (Del. Super. Nov. 3, 2022)
This decision discusses and applies numerous rules governing fraud claims under Delaware law. For instance, an anti-reliance provision eliminates extra-contractual fraud claims while preserving intra-contractual fraud claims, and a non-recourse provision limits the entities and people against whom a claim can be brought. And, in Online HealthNow, Inv. v. CIP OCL Investments, LLC, 2021 WL 3557857 (Del. Ch. 2021), the Court of Chancery determined that a non-recourse provision did not bar claims against a non-signatory party. Here, the Superior Court applied Online HealthNow and held that fraud claims against non-seller defendants who allegedly were knowingly complicit in contractual fraud were not barred by the non-recourse and anti-reliance provisions of the agreement at issue.
Chancery Denies Member Status to Individual Not Admitted By Members in Accordance With LLC Agreement
Riverside Risk Advisors LLC v. Chao, C.A. No. 2019-0789-KSJM (Del. Ch. Oct. 26, 2022)
The LLC Act generally provides that someone is admitted as an LLC member as provided in the LLC agreement. Here, the plaintiff sued seeking declaratory relief that the defendant, a former employee, was not a member of the LLC and that a 2015 agreement was the LLC’s governing document, rather than an earlier agreement. The Court of Chancery ruled in the plaintiff’s favor, finding that the defendant was not a member because, under the LLC agreement, written consent of all members was required for admission, and the defendant needed to agree to be bound by the agreement in writing. But neither of these steps occurred. The Court also held that the 2015 agreement was the current operative agreement for the LLC despite not being approved by the defendant, because, as required by the previous LLC agreement, it was approved by all members, which the defendant was not.
Chancery Denies Preliminary Injunction For Overly Broad Restrictive Covenants
Kodiak Building Partners LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022)
Delaware courts review noncompete and nonsolicitation agreements to ensure that they “(1) are reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.” And Delaware law recognizes that an acquirer has a legitimate economic interest in protecting what it purchases, including the purchased company’s assets goodwill. Here, the plaintiff argued that it not only had a legitimate business interest in protecting the goodwill of the company it purchased, but also had a legitimate business interest in protecting its other businesses, including those that pre-dated the acquisition, and, as a result, could restrict a former employee from participating in industries relating to any of those businesses. The Court of Chancery disagreed, finding that the plaintiff’s legitimate economic interest did not extend to goodwill and competitive spaces acquired in other transactions with other companies in different industries. The Court also found that the scope of the noncompete and nonsolicitation covenants at issue were unreasonable, ruling that the provisions’ geographical scope was unreasonably broad, as they covered areas surrounding the plaintiff’s subsidiaries, rather than only areas related to the acquired company. The Court, therefore, declined to enter a preliminary injunction, finding the plaintiff did have a reasonable likelihood of success on the merits. In reaching this conclusion, the Court held that the employee’s promise not to challenge the reasonableness of his restrictive covenants within the relevant contract could not circumvent the Court’s mandate to review those covenants for reasonableness.
Chancery Relies on Inconsistencies Between Board Materials and Proxy Statement to Order Books and Records Production
Hightower v. Sharpspring, Inc., C.A. No. 2021-0720-KSJM (Del. Ch. Aug. 31, 2022)
Once a plaintiff establishes a proper purpose under Section 220 of the DGCL, the Court of Chancery must determine the scope of the books and records inspection, which is those documents that are essential and sufficient for the stockholder’s stated purpose. Often, where the inspection relates to possible mismanagement or wrongdoing at the corporation regarding a specific transaction, the production of formal board materials will be sufficient for the stockholder’s needs. Here, however, the Court found that a plaintiff exploring a transaction involving a conflict demonstrated a need for documents beyond formal board materials, relying on inconsistencies between the board minutes and the proxy statement for the merger, which could be reconciled only with additional information. The Court awarded the plaintiff access to both informal board materials as well as officer-level materials not shared with the board in several defined categories.
Delaware Supreme Court Explains Appraisal Rights and Finds Disclosure Violation Relating to Pre-Closing Dividend Contingent on a Merger
In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267 (Del. July 19, 2022)
Here, the defendants organized a merger so that a large majority of the total value of the merger would be granted as a pre-closing dividend to stockholders and that the remaining amount would be granted in return for the stockholder’s shares. In the resulting litigation, stockholders argued that the defendants’ structuring of the merger unlawfully denied or diluted the stockholders’ right to seek appraisal and that the defendants’ disclosures regarding the structuring were deficient. The defendants prevailed on a motion to dismiss before the Court of Chancery. On appeal, the Delaware Supreme Court found that the dividend conditioned on the merger’s consummation was part of the merger consideration for appraisal purposes under Delaware law, that receipt of the dividend did not disqualify stockholders from seeking appraisal, and that plaintiff’s claim regarding the structure, therefore, was properly dismissed. But the Supreme Court reversed the trial court’s dismissal of the related disclosure claim. The plaintiffs alleged that the director defendants, aided and abetted by the acquirer, had deprived stockholders of their appraisal rights by improperly describing what would be subject to appraisal. The Supreme Court agreed and held that the disclosures were confusing and materially misleading. The proxy stated that stockholders were entitled only to the amount that remained after the pre-closing dividend. But this was incorrect as a matter of Delaware law, as the stockholders were also entitled to appraisal for the pre-closing dividend. Two justices dissented from the majority’s holding regarding the disclosure claim.
Chancery Upholds Brophy Claim and Finds Post-Merger Direct Standing Based On Process Challenge
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022)
This motion to dismiss decision upholds a Brophy claim against an activist investor and director who was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. The Court of Chancery found it was reasonable in the circumstances to infer materiality of the expression of interest, which represented a nearly 65% premium over the company’s trading price, and that the fiduciary was motivated to act upon it. The Court also found that a merger did not eliminate the plaintiff’s standing under the contemporaneous ownership requirement. The Court rejected the defendant's argument under Primedia regarding the asserted immateriality of the value of the plaintiff’s claims in the context of the merger. As the Court explained, under Parnes, a stockholder could may assert “a direct claim challenging a merger if the facts giving rise to what otherwise would constitute a derivative claim led either to the price or the process being unfair.” Here, the plaintiff’s allegations challenged the fairness of the sale process – a process that the activist allegedly delayed to serve his own interests at the expense of the Company running a better process or remaining independent.
Chancery Finds Officer Breached the Duty of Loyalty By Working With Competitors
Metro Storage Int’l LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. May 4, 2022)
The duty of loyalty requires that the corporation’s interests take precedence over any personal interest possessed by a director, officer, or controlling shareholder that is not shared by the stockholders generally. Relevant here, the plaintiffs alleged that the defendant had breached his fiduciary duty of loyalty by consulting for another company while he was an officer, failing to disclose that he was consulting for another company, usurping a financial opportunity, and misusing confidential information. The Court of Chancery found that the evidence supported all of these allegations. In particular, the Court found that the defendant breached his duty of loyalty by spending substantial time performing consulting work for another company when he had agreed to devote his full time to the plaintiff company. The Court reasoned that while an officer generally may work for an independent business so long as this work does not violate his fiduciary duties, the defendant had misappropriated company resources because he had agreed to spend his full time working for the company and this time was a resource that belonged to the company.
Chancery Declines to Grant Equitable Standing When Other Stockholders Had Standing to Enforce Corporate Rights
SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May 13, 2022)
Under Section 327 of the DGCL, a stockholder must hold stock at the time of the alleged wrong to have standing to pursue a derivative claim. Under the equitable standing doctrine, however, standing may be recognized in equity to prevent a “complete failure of justice.” Here, the plaintiffs acquired the stock after some of the alleged wrongs in their complaint took place but argued that the equitable standing doctrine allowed one of them to raise these claims. The Court of Chancery observed that the doctrine has applied when alternative avenues of remedying the harm were foreclosed. Importantly, however, the Delaware courts generally have declined to invoke it when other avenues theoretically exist, such as the existence of other potential plaintiffs with standing to pursue the claims at issue. Applying that reasoning here, the Court ruled that it would not grant equitable standing because other non-party stockholders would have standing to pursue these claims.
Chancery Denies Indemnification to Director After Examining Settlement Agreement
Huret v. Mondobrain, Inc., C.A. No. 2021-0208-SG (Del. Ch. Apr. 27, 2022)
Under Section 145(c) of the DGCL, a director that has been successful on the merits or otherwise in defending a covered proceeding is entitled to indemnification. When determining success, Delaware law asks whether the indemnitee has avoided an adverse result, and generally does not look behind that result. Here, the plaintiff sought indemnification for derivative claims resolved by a settlement agreement, which also resolved claims brought by the plaintiff in French litigation. The Court examined the settlement agreement as a whole and found the plaintiff was not successful in the derivative action against him, and thus not entitled to indemnification. In settling the outstanding claims, the plaintiff did not admit guilt or make any settlement payment. However, he agreed to resign from the board, which was relief the stockholder originally sought, and he also agreed to release his own claims for money damages, which were in excess of the money damages sought for the derivative claims against him.
Chancery Resolves Section 225 Dispute and Declines to Invalidate Written Consents
Zhou v. Deng, C.A. No. 2021-0026-JRS (Del. Ch. Apr. 6, 2022)
When deciding a summary proceeding regarding a disputed corporate office under Section 225 of the DGCL, the Court of Chancery may consider whether an election, appointment, or removal was tainted by fraud, deceit, or breach of contract. This decision involves the Court considering such defenses to the defendants’ removal and replacement as directors. Here, the Court declined to invalidate the challenged written consents based on allegations of breaches of fiduciary duty, breaches of contract, and fraud. The Court, for instance, rejected the breach of contract defense concerning stock purchases because the breach was already remedied in another action by an award of damages and the sale contract had not been rescinded.
Chancery Upholds Claims Against Controller’s Family Member
In re Straight Path Communications Inc. Consol. Stockholder Litig., C.A. No. 2017-0486-SG (Del. Ch. Feb. 17, 2022)
This summary judgment decision arose out of a transaction involving the company Straight Path. Straight Path’s controller had sold company assets to another company controlled by his family, IDT, for an allegedly inadequate price. One of the assets was an indemnification claim against IDT, which used to be Straight Path’s parent company, for indemnification rights arising following Straight Path’s spin-off. Straight Path thereafter was sold to Verizon, eliminating derivative standing for the company’s stockholders to challenge derivatively the asset sale to IDT. Straight Path’s controller allegedly leveraged his control to wrest that indemnification claim from the company’s stockholders prior to the Verizon transaction. Stockholders brought direct claims against the family members and an affiliated trust in this action. Their claims previously survived dismissal, and in this decision their claims survived summary judgment. More ›
Chancery Upholds Claim for the Appointment of a Receiver
Zaslansky v. FZ Holdings, C.A. No. 2021-0168-KSJM (Del. Ch. Feb. 8, 2022)
This order denying a motion to dismiss addresses the circumstances in which the Court of Chancery may appoint a receiver for an allegedly insolvent corporation under 8 Del. C. § 291. In determining whether to grant a petition to appoint a receiver for an insolvent corporation, the Court must determine whether the corporation is insolvent and whether the appointment of a neutral third party is necessary to protect the insolvent corporation’s creditors or shareholders. Here, the company had negative income, the petitioners alleged that the company commingled personal debt with company debt, and that the company selectively repaid some allegedly affiliated creditors without paying others, all making it reasonably conceivable that the facts may support a receiver appointment.
Chancery Stays Case So That Committee of Company May Decide Whether It Has Power to Interpret Alternate Dispute Resolution Provision of Agreement
Terrell v. Kiromic Biopharma, Inc., C. A. No. 2021-0248-MTZ (Del. Ch. Jan. 20, 2022)
When an alternative dispute resolution (“ADR”) provision is an arbitration provision, presumptively the Court may consider the scope of the provision absent “clear and unmistakable” evidence to the contrary. When an ADR provision is not an arbitration provision, however, the Court applies contract interpretation principles to determine who – as between the Court or the person or body specified in the provision – may construe its scope. More ›
Chancery Holds that Corporation Cannot Rely on Its Stock Ledger to Deny A Stockholder Inspection Rights When it is Aware of and Concedes the Stockholder’s Status
Knott Partners L.P. v. Telepathy Labs, Inc., C.A. No. 2021-0583-SG (Del. Ch. Nov. 23, 2021)
To seek corporate records under section 220 of the DGCL, the plaintiff must demonstrate that it is a stockholder. Generally, a corporation can rely on its stock ledger to determine who is a stockholder of record. This case confirmed, however, that a corporation may not rely on its stock ledger to deprive a stockholder of inspection rights when the corporation was aware of the stockholder’s status but failed to update its stock ledger to reflect that. More ›
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