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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 33 posts by K. Tyler O'Connell.
Chancery Imposes Rule 15(aaa)’s Requirement – Amend or Risk Dismissal with Prejudice – on Cases Transferred from the Superior Court
Rule 15(aaa), a rule unique to the Court of Chancery, requires plaintiffs faced with a motion to dismiss for failure to state a claim to either: (i) amend their complaint; or (ii) stand on their pleading and risk dismissal with prejudice. In this case, the plaintiffs initially brought suit in the Superior Court of Delaware, which does not have a corollary to Rule 15(aaa). Before the Superior Court, defendants moved to dismiss the plaintiffs’ complaint on personal and subject matter jurisdictional grounds, as well as for failure to state a claim. More ›
As the Court of Chancery observes in this opinion, “equity favors the vigilant, not those who slumber on their rights.” Here, the Court applies the equitable doctrine of “laches” to dismiss claims brought beyond the statute of limitations at law, at which point prejudice to the defendant is presumed.
The plaintiff, a former director, brought suit in 2017 claiming that in 2005, he was promised but never received certain founder’s shares, and later, under a 2006 stock option plan, he was promised additional shares. Although the Court of Chancery recognized that a laches defense is fact intensive, the Court determined that it was clear from the face of the complaint that the plaintiff was aware by 2007 that the company denied his claim to any founder’s shares, including because he was provided capitalization tables not reflecting any such shares. More ›
Under the “corporate benefit doctrine,” litigants whose efforts result in a substantial benefit to a Delaware corporation or its stockholders generally are entitled to an award of their attorneys’ fees and expenses. This opinion emphasizes that the doctrine is a flexible one based on the Court of Chancery’s prerogative to do equity in each case.
Here, the Court considers and denies a fee application by stockholder-plaintiffs who challenged a defective short-form merger. The basis for the plaintiffs’ claims included technical errors in the language of certain corporate instruments that resulted in a reverse stock split with a ratio much larger than intended (2,500 to 1, rather than 50 to 1). That, in turn, resulted in the merger receiving less than the required stockholder approval. When the corporation attempted to ratify the defective corporate acts under Section 204 of the DGCL and sought judicial validation under Section 205, the plaintiffs opposed it. Plaintiffs ultimately lost on the issue at trial. Although the end-result—removing a cloud over the merger’s validity—could be considered a “benefit” resulting from the plaintiffs’ litigation efforts, the Court denied their subsequent fee application. According to the Court, in particular, it would be inequitable to reward plaintiffs for conferring a benefit they opposed.
Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), deferential business judgment review governs mergers between a controlling stockholder and the controlled corporation when the deal is conditioned “ab initio” on two procedural safeguards. Those are approval by (i) a special committee of independent directors, and (ii) an uncoerced, informed majority-of-the-minority stockholders’ vote. The reasoning goes, with so-called “MFW conditions” in place at the outset, a controller cannot dictate the economic terms or unduly influence the stockholder vote, thus ameliorating the concerns otherwise justifying the more exacting “entire fairness” review. More ›
This derivative action arose out of Uber’s acquisition of a self-driving vehicle firm named Otto, which involved former Google employees. Google sued Otto and Uber for alleged intellectual property infringement, resulting in Uber settling the dispute for $245 million. The plaintiff sued Uber’s directors for the acquisition, claiming they should have known better than to rely on their CEO’s promotions of the deal and his representations regarding the company’s due diligence findings under the circumstances.
This decision grants the defendants’ motion to dismiss under Court of Chancery Rule 23.1 pre-suit demand-on-the-board grounds. Applying recognized legal principles for that analysis, the Court held that the complaint lacked the necessary particularized allegations showing that pre-suit demand on the board would have been futile. In this regard, the plaintiffs’ allegations and argument had focused on the directors’ failure to inform themselves of specific due diligence findings rather than relying on management’s discussions of those issues, citing management’s alleged history of causing the company to engage in other misconduct as a supposed “red flag.” According to the Court, however, plaintiff alleged at most an exculpated duty of care claim, not a breach of the duty of loyalty. Central to the Court’s reasoning was the absence of other known misconduct involving the type of misconduct at-issue in the acquisition—the misappropriation of intellectual property. According to the Court, a board’s alleged awareness of an executive’s supposed bad character “is not a sufficient red flag … to convert a plain vanilla duty of care allegation into a persuasive pleading of bad faith on the part of the directors.” Under Delaware law, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”
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 Finds Court of Chancery Lacks Jurisdiction Over Dispute, Despite Forum Selection Clause in Agreement
Delaware law is clear that, while Courts will generally respect parties’ contractual choice of forum, a forum selection clause cannot confer jurisdiction or venue where it otherwise is not available. The contract at issue in this action, which arose out of stock purchase agreement in which plaintiff agreed to convey all of its issued and outstanding shares of a subsidiary to defendant, provided for exclusive jurisdiction in the Court of Chancery, or if the Court of Chancery lacked subject matter jurisdiction, the United States District Court for the District of Delaware. If the District of Delaware lacked jurisdiction, the venue would be in “any court of competent jurisdiction sitting in the State of Delaware[.]”
When the plaintiff filed suit in the Complex Commercial Litigation Division of Delaware’s Superior Court, the defendant argued that the parties’ dispute regarding post-closing tax matters should instead be filed in the Delaware Court of Chancery pursuant to 6 Del. C. § 18-111 (providing subject matter jurisdiction in the Court of Chancery to interpret and enforce LLC agreements and “any other instrument, document, agreement or certificate contemplated by … this chapter”). More ›
Superior Court CCLD Holds that Anti-Reliance Clause Clearly Disclaimed Reliance on Extra-Contractual Representations or Implied Warranties
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.
Under the well-known Corwin doctrine, when a transaction not subject to the entire fairness standard of review is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies. Corwin's cleansing effect applies not just to affirmative votes in favor of long-form mergers, but also to acceptance of tender offers for medium-form mergers, like the merger in this case. This Corwin dismissal is notable for its unique facts—the target's substantial blockholder (34%) with voting control (84.5%). But, as this decision explains, the mere existence of a controlling stockholder does not give rise to entire fairness review and take a case outside of Corwin. For that to happen, the transaction must also involve some sort of disabling conflict for the controller. Here, the complaint lacked specific factual allegations to sustain the plaintiffs' theory that the controller had an emergency liquidity need and thus received a unique benefit from tendering. In this regard, the Court found insufficient plaintiffs’ conclusory contention that the controller needed to liquidate his position as part of his estate planning and wealth management strategy following his retirement because his holdings made up most of his net worth.
Chancery Finds Controlling Stockholder Impliedly Consented to Jurisdiction Through Board’s Adoption of Delaware Forum-Selection Bylaw
Stockholders that control Delaware corporations find themselves subject to fiduciary duties. According to this Court of Chancery decision, in certain situations, they also might find themselves subject to personal jurisdiction in Delaware in connection with the controlled-corporation’s adoption of a Delaware forum-selection bylaw. Past Delaware cases have found that, by expressly consenting to a Delaware forum for disputes, parties may also be deemed to have impliedly consented to personal jurisdiction here. But this decision is the first to find implied consent by a controlling stockholder through the controlled-corporation’s adoption of a forum-selection bylaw. More ›
Chancery Declines to Extend Rent-A-Center Merger Agreement, But Questions Request for Termination Fee
The merger agreement at issue in this case included provisions permitting extensions or terminations to account for potential closing delays. Relevant here, the agreement allowed either party to terminate after a particular deadline if the other party had not timely exercised its right to extend the contract. The target exercised that right to terminate after the acquirer inadvertently failed to extend. This litigation ensued, with the acquirer making various equity-based arguments to prevent the target’s termination. More ›
Delaware courts generally respect and enforce forum selection provisions in contracts. It is often disputed whether or not certain contracting parties or parties related to contracting parties are subject to such provisions. That fight becomes more complicated when it is not a single contract but multiple related contracts at issue. This decision, dealing with a stock purchase agreement and related production facility leases, wades into these sometimes choppy waters. It addresses several doctrines in this area, including how Delaware courts interpret forum selection provisions, when Delaware courts read related contemporaneous agreements as a single agreement, when Delaware courts apply equitable estoppel in the context of forum selection provisions, and when non-signatories can enforce forum selection provisions against signatories.
This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger. Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation. The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%. Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price. By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value. When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger. More ›
Court of Chancery Explains Interplay of Laches Defense, the Statute of Limitations and “Extraordinary Circumstances” Excusing Late Filings
As this decision explains, the Court of Chancery will apply the equitable doctrine of laches (untimeliness) at the pleadings stage to dismiss a claim when it is clear on a claim’s face that it is untimely and equity would not be offended by dismissing it. This is especially true where the claims at issue are common law claims for common law remedies, but were filed after the statute of limitations provided by law. The decision also explains the burden to plead facts sufficient to toll the statute of limitations under Delaware law, as well as when “unusual conditions” or “extraordinary circumstances” might excuse late-filed claims, with discussion of the factors Delaware courts consider in making that assessment. Here, the claims found to be untimely were the defendants’ counterclaims. While the Court dismissed those claims, it also explained that Delaware law allowed defendants to rely on the underlying allegations in support of an affirmative defense to offset any damages award in the plaintiffs’ favor under the circumstances.
High Court Holds that Conflicting Contract Provisions Governing Agreement’s “Term” Create Ambiguity and Require Denial of Summary Judgment
The parties disputed the termination date of two related agreements through which CITGO agreed to ship oil using the plaintiff trucking company, with CITGO arguing for an earlier termination date. On appeal from a decision granting summary judgment in CITGO’s favor, the Delaware Supreme Court reversed and remanded the matter. Applying de novo review, the high court found that the two related contracts governing the transaction had conflicting terms and therefore were ambiguous with respect to the termination date. Although a provision in one agreement clearly set a one-year term – which the lower court found dispositive – the agreements read as a whole were ambiguous. In particular, the same contract with a one-year term (i) contemplated renewals, (ii) required 60 days’ notice for a termination and (iii) also provided for a review of pricing terms 60 days prior to the one-year period. That contract also provided (confusingly) that it would remain in effect until the termination of the second, related contract, which had a later default termination date. The Supreme Court also observed that avoiding an abrupt termination made sense in the commercial circumstances given the magnitude of the endeavor. In light of the resulting ambiguity, the Supreme Court reasoned it was appropriate to consider extrinsic evidence, which included internal CITGO emails indicating that it understood the contract to continue beyond the one-year term. The Court accordingly reversed and remanded the case for a trial on the issue of the agreements’ disputed term. More ›