Showing 17 posts by Samuel E. Bashman.
Chancery Holds Plaintiffs Adequately Pled Wrongful Refusal Where Board Did Not Correct Unauthorized Charter Amendments
Drachman v. Cukier, C.A. No. 2019-0728-LWW (Del. Ch. Oct. 29, 2021)
To survive a motion to dismiss in the demand refusal context, the plaintiff must allege facts that create a reasonable doubt that the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis or that the board acted in good faith, consistent with its duty of loyalty. Where the board’s response and other circumstances give rise to a reasonable inference that directors did not care about a clear, continuing violation of law, the standard for wrongful refusal may be met. More ›
Chancery Dismisses Implied Covenant Claim For Former Stockholders’ Alleged Improper Demands That Company Take Actions To Achieve Earn-out Milestones
Pacira Biosciences, Inc. v. Fortis Advisors LLC, C.A. No. 2020-0694-PAF (Del. Ch. Oct. 25, 2021)
There generally cannot be a claim under the implied covenant of good faith and fair dealing for conduct that is addressed by the plain language of an agreement. Even when a contract is silent, the Court will not use the covenant to rewrite the contract to imply contractual provisions that a party failed to obtain at the bargaining table. More ›
Genworth Fin., Inc. Consol. Deriv. Litig., C.A. No. 11901-VCS (Del. Ch. Sept. 29, 2021)
In a demand futility analysis, Delaware courts have traditionally applied the Rales and Aronson decisions. However, the Delaware Supreme Court recently adopted the Zuckerberg test. Under this new three-part test, Delaware courts ask: (1) whether the director received a material personal benefit from the alleged misconduct of the litigation demand; (2) whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and (3) whether the director lacks independence from someone who received a material benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are subject to the litigation demand. More ›
Chancery Rejects MFW Defense Based on Failure to Disclose That a Conflicted Controller Participated in Arbitration Proceedings Potentially Impacting the Company’s Value
Ligos v. Isramco, Inc., C.A. No. 2020-0435-SG (Del. Ch. Aug. 31, 2021)
Under MFW, a conflicted controller transaction may get the benefit of business judgment review when conditioned on two procedural protections involving: (i) approval by an independent special committee; and (ii) approval by a fully informed, uncoerced majority of the minority stockholders. At issue in Ligos was whether the shareholders were fully informed regarding the value of an arbitration concerning certain royalties when they approved a merger. More ›
The Harmon 1999 Descendants’ Trust v. CGH Investment Management, LLC, C.A. No. 2021-0407-KSJM (Sept. 21, 2021)
Generally, absent unusual circumstances, claims for advancement will not be stayed or dismissed in favor of prior pending litigation. At issue, in this case, was whether the plaintiff was a limited partner or agent of the partnership, which would render the plaintiff a covered person under the agreement and entitle the plaintiff to advancement. However, whether the plaintiff was a limited partner was squarely before a Virginia federal court. The Court of Chancery found that the issue of whether the plaintiff was a limited partner was “a material, factually rife, and disputed issue.” The Virginia action was also in its “penultimate phase,” with trial set less than three months away, and likely was going to resolve the issue before the Court of Chancery could rule. Therefore, the court stayed the Delaware advancement action in favor of the pending Virginia action, finding it would avoid wasting judicial resources, risking inconsistent results, and disrespecting principles of comity.
Chancery Denies Motion to Dismiss in Part Because Certain Discussions Between CEO and Acquirer Were not Disclosed in Proxy When Other Similar Communications Were
Teamsters Local 237 Additional Security Benefit Fund v. Caruso, C.A. No. 2020-0620-PAF (Del. Ch. Aug. 31, 2021)
Under Revlon, a director must focus on obtaining a transaction that provides the maximum value for stockholders in a sale of control. In addition, when directors solicit stockholder approval, they must disclose fairly and fully all material information. More ›
Chancery Grants Anti-Suit Injunction, Holds Non-Signatory Subsidiary is Bound by Stock Purchase Agreement’s Forum Selection Clause
Fla. Chem. Co., LLC v. Flotek Indus., Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021).
Under Delaware law, a forum selection clause may be enforceable against a non-signatory if the non-signatory has a significantly close relationship to the agreement, either as an intended third-party beneficiary or under a theory of estoppel, and the claim subject to the forum selection provision arises from the non-signatory’s standing relating to the agreement. In regard to the last element, some Delaware cases have suggested what the court here called a “same agreement rule” – requiring that claims against the non-signatory arise from the same agreement that contains the forum selection provision. This case rejects the “same agreement” rule and holds a non-signatory may be bound even though its claims were not brought under the agreement containing the forum selection clause, provided that they are otherwise within the clause’s reach. More ›
Chancery Explains Standards of Review for Receiver Determinations and Shifts Fees and Expenses in Dissolution
In re Dissolution of Jeffco Management, LLC, C.A. No. 2018-0027-PAF (Del. Ch. Aug. 16, 2021)
When the Court of Chancery appoints a receiver to effectuate a company’s dissolution, certain determinations are subject to de novo review and others are given a more deferential review depending on the nature of each determination. Here, the court appointed a receiver to effectuate the relevant LLC’s dissolution based on a deadlock between the two members. Upon review of the record, the receiver found that one of the members had a negative capital account balance and decided to distribute the company’s assets in-kind to the other member with a positive capital account balance. The member with the negative account balance challenged that decision based on various objections. More ›
Chancery Grants Special Litigation Committee’s Zapata Motion, Finds Committee Was Sufficiently Independent and Reasonable
Diep v. Sather, C.A. No. 12760-CM (Del. Ch. July 30, 2021)
Under Zapata, when analyzing a motion to dismiss by a special litigation committee, the court evaluates whether the committee was independent, acted in good faith, and had a reasonable basis for its conclusions. The court then applies its own independent business judgment to determine whether dismissal is in the best interest of the corporation. Here, the plaintiff challenged the independence of the special litigation committee and the reasonableness of its investigation and findings. More ›
Implied Covenant of Good Faith and Fair Dealing Saves Employee’s Claim for Improper Termination Under Company’s LLC Agreement
Smith v. Scott, C.A. No. 2020-0263-JRS (Del. Ch. Apr. 23, 2021)
The Delaware LLC Act provides that fiduciary duties may be expanded or limited by the provisions of an LLC agreement. If the agreement is silent, then traditional corporate fiduciary duties apply. However, if the agreement unambiguously disclaims fiduciary duties, then the only duties that exist are those specified contractually in the LLC agreement and the implied covenant of good faith and fair dealing. More ›
Chancery Finds Subject Matter Jurisdiction for Case Seeking Specific Performance of a Non-Disclosure Agreement
Endowment Research Grp., LLC v. Wildcat Venture Partners, LLC, C.A. No. 2019-0627-KSJM (Del. Ch. Mar. 5, 2021)
The Court of Chancery may have subject matter jurisdiction if one or more of plaintiff’s claims are equitable in nature, the plaintiff requests equitable relief or a statute confers subject matter jurisdiction. In determining whether a plaintiff seeks equitable relief, the Court looks beyond what the plaintiff nominally seeks and instead assesses whether a legal remedy is available and fully adequate. At issue here was plaintiff’s request for specific performance of a non-disclosure agreement. The Court denied a defendant’s motion to dismiss for lack of subject matter jurisdiction because, inter alia, claims for breach of confidentiality and non-disclosure agreements lend themselves to equitable remedies, the value of the confidential information would be difficult to quantify and the breach would continue indefinitely without equitable relief. The Court noted as well that the parties stipulated in the non-disclosure agreement that a breach of the agreement would cause irreparable harm, and that money damages are not an adequate remedy. The defendant failed to show that the pleaded facts plainly established that this statement was untrue.
Chancery Finds It Reasonably Conceivable that Judicial Dissolution May Be Warranted When LLC’s Deadlock Provision Failed
Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. Mar. 30, 2021)
On application from a member or manager of an LLC, the Court of Chancery may dissolve an LLC whenever it is not reasonably practicable for the LLC to carry on the business in conformity with the LLC agreement. Several factors may suggest a lack of reasonable practicability, including that the members are deadlocked at the board level, the operating agreement gives no means for navigating around the deadlock, and due to the financial conditions of the LLC, there is effectively no business to operate. In this case, the Court held that the petitioner adequately pled board deadlock and ongoing negative financial performance due to the parties’ inability to agree. In rejecting the respondent’s argument that the parties’ “I cut; you choose” deadlock procedure precluded a judicial decree of dissolution, based on the pleaded facts, the Court found that it was reasonably conceivable that the deadlock procedure had broken down irretrievably. Because the contractual procedure did not mandate a price, pricing formula, or a closing timeline and the plaintiff adequately alleged that the parties were not dealing with each other in good faith and in a commercially reasonable manner, it was reasonably conceivable that judicial dissolution might be warranted. The Court therefore denied the respondent’s motion to dismiss.
Chancery Holds that Plaintiff Cannot Recover Cash It Mistakenly Failed to Sweep from its Former Subsidiary’s Account Prior to Closing
Deluxe Entm’t Servs. Inc. v. DLX Acquisition Corp., C.A. No. 2020-0618-MTZ (Del. Ch. Mar. 29, 2021)
Delaware adheres to the objective theory of contracts and enforces the parties’ intentions as reflected in the four corners of an agreement. This is particularly true for sophisticated parties, whom Delaware law presumes are bound by the terms they negotiated. In this case, the plaintiff and defendant entered into an agreement where the plaintiff sold all of the outstanding shares of one of its subsidiaries to the defendant. Plaintiff alleged that, prior to the sale, it failed to sweep funds from the subsidiary’s bank accounts to which it was entitled under the purchase agreement. The Court rejected that claim in granting the defendant’s motion for judgment on the pleadings, in part because the agreement required the transfer of all assets except those explicitly excluded. The disputed cash neither was explicitly excluded, nor was it identified as among the wrongfully transferred assets the agreement required to be returned under a “wrong pocket” provision. Similarly, the Court rejected a claim for breach of the implied covenant of good faith and fair dealing because the parties’ agreement included a provision regarding an unintended asset transfer that did not address the disputed cash. Plaintiff’s alternative argument seeking reformation failed as well because plaintiff failed to plead with particularity mutual or unilateral mistake.
In a post-trial opinion in this books-and-records action pursuant to 8 Del. C. § 220, the Court of Chancery granted a stockholder’s demand to inspect the records of Bloom Energy Corporation (“Bloom”) for the purpose of investigating mismanagement and wrongdoing respecting Bloom’s alleged financial and other misstatements concerning the performance of its self-described clean, sustainable and green energy alternative. The inspection demand drew heavily from a thoroughly researched report published by a short seller, Hindenburg Research (the “Hindenburg Report”), which concluded that “Bloom’s technology is not sustainable, clean, green, or remotely profitable." The publication of the Hindenburg Report prompted Bloom to file a Form 8-K with the SEC responding to the report and in a separate filing Bloom eventually acknowledged that it had misstated its financials in some respects in prior reporting periods. More ›Share
Chancery Dismisses Derivative Breach of Contract Claim Against Directors for Alleged Violations of Certificate of Incorporation
A corporate charter represents a contractual agreement between the corporation and its stockholders. In Lacey, the Court of Chancery addressed whether a breach of contract claim for damages based on an alleged violation of a provision in the certificate of incorporation could be brought derivatively against director defendants. More ›Share