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Photo of Delaware Business Litigation Report K. Tyler O'Connell
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toconnell@morrisjames.com
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Tyler O’Connell is a partner in the Corporate and Commercial Litigation group. He represents companies, members of management and investors in business disputes before the …

Showing 63 posts by K. Tyler O'Connell.

Chancery Rejects Attempt to Allege Gentile v. Rossette Direct Claims for Dilutive Preferred Stock Issuances

Silverberg v. Padda, C.A. No. 2017-0250-KSJM (Del. Ch. Sept. 19, 2019).

The Court of Chancery held that plaintiff common stockholders’ fiduciary duty claims challenging the company’s overpayment for dilutive preferred stock issuances were derivative in nature because plaintiffs failed to adequately plead the existence of a controller or control group that benefited at the expense of the minority stockholders.  The Court evaluated the common stockholders’ arguments under the standard set forth by Gentile v. Rossette, 906 A.2d 91 (Del. 2006), which provides that minority stockholders may seek direct relief for dilution claims when a controller or control group benefits at the expense of the minority stockholders’ economic and voting rights.  Gentile requires that a plaintiff plead facts sufficient to establish that a control group’s members are connected in some “legally significant way” and work together toward a shared goal, such as voting or other decision making.  The Court also relied upon Dubroff v. Wren Holdings, which emphasized that the existence of a control group does not require a formal contract, but there must be some indicia of an actual agreement that amounts to more than mere parallel interests among the group members.  More ›

Chancery Again Defers to Deal Price in Appraisal

Posted In M&A

In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. Nos. 12736-VCL (Del. Ch. Aug. 12, 2019).

Merger IconIn Columbia Pipeline Group, the Court of Chancery applied the appraisal precepts established by the recent appellate precedent in DFC, Dell and Aruba to conclude that the deal price was a persuasive indicator of fair value.  After framing the current state of appraisal law and thoroughly examining the sales process, the Court found that the merger was the result of an arms-length transaction with a third party, and contained sufficient indicia of a fair process to conclude that the deal price was a reliable indicator of fair value.  In support of its finding that the sales process was fair, the Court also pointed to the lack of conflicts at the board level, the acquiring company’s due diligence, and that the target company contacted other potential buyers that all failed to pursue a merger. Additionally, the Court found that the target company extracted multiple price increases during the deal-negotiation process, and that no other bidders emerged during the post-signing phase, which is a factor that the Supreme Court emphasized in analyzing the fairness of the deal process in Aruba.   More ›

Chancery Addresses the Implied Covenant in an At-Will Employment Relationship and Delaware’s Statutory Restriction on Physicians’ Non-Competes

Dunn v. Fastmed Urgent Care, C. A. No. 2018-0934 MTZ (Del. Ch. Aug. 30, 2019).

This case arises out of a physician’s sale of his limited liability company interest, and his subsequent attempts to enforce oral promises outside of – and sometimes in conflict with – written agreements governed by Delaware law.  In granting the defendants’ motions to dismiss for failure to satisfy pleading standards, the Court addressed two potentially noteworthy issues.  More ›

'Scott v. DST Systems': Court Rejects Mootness Fee for Target’s Supplemental Disclosures Explaining Valuation Analyses

Disclosure-only settlements of M&A class actions have received increased scrutiny since decisions like the Delaware Court of Chancery’s 2016 Trulia opinion and the U.S. Court of Appeals for the Seventh Circuit’s Walgreens decision from later that year. Those decisions critiqued the then-prevalent practice of stockholder-plaintiffs bringing M&A strike suits and then quickly exchanging broad, classwide releases for supplemental disclosures of questionable value and fee awards to plaintiffs counsel under the “corporate benefit” doctrine. As a result, the path to quickly resolving M&A class actions has shifted toward individual plaintiffs agreeing to dismiss their claims without prejudice to other class members in exchange for supplemental disclosures and mootness fees under the “corporate benefit” doctrine. The U.S. District Court for the District of Delaware’s recent decision in Scott v. DST Systems, (D. Del. Aug. 23, 2019), should be of great interest to parties facing such issues, particularly defendants who wish to moot a disclosure-based lawsuit without paying fees to plaintiffs counsel. More ›

Blue Bell Creameries: Chancery Finds Zapata Committee to Address Derivative Claims is not Available to Conflicted General Partner

Wenske v. Blue Bell Creameries, Inc., C. A. No. 2017-0699-JRS (Del. Ch. Aug. 28, 2019).

In Zapata v. Maldonado, 430 A.2d 779 (Del. 1981), the Delaware Supreme Court established that, even where a derivative plaintiff adequately pleads demand futility, a corporation may retain control over derivative claims by delegating authority to a committee of independent directors.  In this recent decision, the Court of Chancery applied principles of agency law to hold that, at least without prior authorization in a limited partnership agreement, a conflicted corporate general partner generally may not make a similar delegation, because the general partner is a “principal” who inherently retains control over its committee, the “agent.” More ›

Chancery Makes Post-Trial Award of $22K in Damages for $5.3 Million Fiduciary Breach Claim, and Orders an Accounting for Suspicious Expenses Totaling $235K Arising Out of Self-Dealing Transactions

Avande Inc. v. Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019).

A director of a Delaware corporation who stands on both sides of a challenged transaction must prove the entire fairness of the transaction. Such a defendant must show that the transaction was the product of both fair dealing and fair price. Where the dispute involves more than one transaction, the Court “may place on a fiduciary the burden to demonstrate the fairness of a series or group of expenditures, or may order an accounting of such expenditures.” However, the fiduciary will bear this burden only if the plaintiff, by substantial evidence, first makes a prima facie showing that the fiduciary stood on both sides of the transactions at issue. Applying Technicorp Int’L II Inc. v. Johnston, 2000 WL 713750 (Del. Ch. May 31, 2000) and its progeny, the Court in Avande ruled post-trial that plaintiff had failed to make a prima facie showing that the defendant, a former director and CEO, was self-interested in the challenged transactions. Plaintiff had challenged nearly $4.7 million dollars in transactions reported on the company’s ledger over five years (comprising roughly 45% of the company’s total expenses), asserting that the transactions were the result of the defendant’s self-dealing. However, the plaintiff was able specifically to identify only $30,500 of potentially problematic expenses (less than 1% of the disputed amounts), only one $3,500 transaction of which appeared to have personally benefitted the defendant-fiduciary, but sought to shift the burden to the defendant to prove the entire fairness of the remaining amounts. Among the factors that led the Court not to shift the burden was that Evans did not exercise exclusive control over Avande’s finances. The Court also found it was inconceivable that at least a substantial portion of the challenged amount was not the result of valid business expenses needed to operate the business over five years, and declined to shift the burden. However, the Court found that the plaintiff had demonstrated self-interest sufficient to shift the burden and that defendant had failed to prove the fairness of $235K in payments for services billed to Avande by the defendant’s wholly owned business. The Court ordered an accounting of these transactions to be conducted by a third-party chosen by the parties because it was unclear how much was paid for each service performed. Because the self-dealing transactions were subject to entire fairness, and because the defendant had not proved the fairness of the transactions at trial, the defendants were responsible for the costs of the accounting proceeding. 

Chancery Applies California Law Despite a Delaware Choice-of-Law Provision and Dismisses a Claim for Breach of a Non-Solicitation Provision in an Employment Agreement as Unenforceable under California Law

NuVasive Inc. v. Miles, C.A. No. 2017-0720-SG (Del. Ch. Aug. 26, 2019).

When a contract, executed by parties in a foreign jurisdiction, designates Delaware law as controlling, Delaware courts must first determine whether the choice-of-law provision is enforceable. In such cases, Delaware follows the Restatement (Second) of Conflict of Laws for the conflict-of-laws analysis. Under that analysis, Delaware courts will defer to the laws of the foreign jurisdiction if that jurisdiction’s laws (1) would apply absent the Delaware choice of law provision, (2) enforcement of Delaware law over the contractual provisions at issue would conflict with fundamental policy of the foreign jurisdiction, and (3) the foreign jurisdiction has a materially greater interest in enforcement (or non-enforcement) of the provision at issue than Delaware. In NuVasive, the Court ruled that California law would apply but for the contractual choice of law provision.  In an earlier bench ruling, the Court found that California had a materially greater interest on the issue of whether a post-employment non-compete in the employment agreement was enforceable, and it voided the non-compete as violating fundamental California public policy.  In this decision, the Court determined that a one year post-employment restriction on solicitation of customers and employees also violated the fundamental public policy of California as reflected in case law interpreting its business statutes. The Court then held that California had a materially greater interest in precluding non-solicitation covenants as part of its interest in “overseeing conditions of employment relationships” than Delaware had in enforcing its “fundamental but general interest” in freedom of contract.  Accordingly, the Court granted the defendant’s motion for summary judgment to the extent the plaintiff’s claims were grounded on enforcement of non-solicitation covenants in the defendant’s employment agreement.

Chancery Explains the Rule “Equity will not Enjoin a Libel” – and its Limited Exception

Preston Hollow Capital LLC v. Nuveen LLC, C.A. No. 2019-0169-SG (Del. Ch. Aug. 13, 2019).

The Court of Chancery in several recent decisions has addressed the limited circumstances in which it may have jurisdiction to enjoin future speech.  See, e.g., Perlman v. Vox Media, Inc., 2019 WL 2647520 (Del. Ch. Jun. 27, 2019); Organovo Hldgs., Inc. v. Dimitrov, 162 A. 3d 102 (Del. Ch. 2017).  Here, Vice Chancellor Glasscock explains the maxim “[e]quity will not enjoin a libel” and the limited potential exceptions.  In particular, and subject to constitutional free speech limitations, Chancery may enjoin future speech in the nature of “trade libel” as a remedy for a separate “non-speech” business tort over which it has jurisdiction. More ›

Superior Court CCLD Addresses Pleading Standards for Trade Secret, Fraud and Implied Covenant Claims

Brightstar Corp. v. PCS Wireless, LLC, C.A. No. N18C-10-250 PRW CCLD (Del. Super. Ct. Aug. 7, 2019).

Brightstar and PCS, two competitors that distribute new and pre-owned mobile devices, entered into a buy/sell agreement as part of negotiations for a proposed merger and strategic alliance.  Under the buy/sell agreement, PCS purchased mobile devices from Brightstar for re-sale to third parties and was subject to a non-circumvention provision that restricted PCS from purchasing these devices from certain other suppliers.  After their merger discussions faltered, PCS terminated the agreement, and Brightstar brought suit for unpaid amounts and alleged misappropriation of pricing information.  PCS counterclaimed for, inter alia, fraud and breach of the implied covenant of good faith and fair dealing. More ›

Formulaic Recitations of Equitable Jurisdiction Are Not Enough for Court of Chancery Jurisdiction

Athene Life and Annuity Co. v. Am. Gen. Life Ins. Co., C.A. No. 2018-0244-SG (Del. Ch. July 31, 2019).

The Court of Chancery is a court of limited jurisdiction. It maintains subject matter jurisdiction only for (i) equitable claims, (ii) when equitable relief is sought and no adequate remedy is available at law, or (iii) where a statute confers jurisdiction.  Applying well-recognized equitable jurisdiction principles, the Court dismissed this breach of contract action.  Although Plaintiffs sought equitable relief in the form of specific performance and an injunction, their request for equitable relief was merely a “formulaic incantation” rather than substantive.  Applying a realistic assessment of the nature of the wrong alleged and the remedy available at law, the Court concluded that a legal remedy for the breach of contract claim was available in the form of a declaratory judgment and damages, and fully adequate. Normally when a court issues a declaratory judgment establishing the parties’ respective contract rights, the court will not presume that the defendant will fail to abide by the court’s ruling in the future requiring an injunction to secure performance. A real threat of continuing injury must be shown, which was absent here. More ›

Chancery Examines Framework of Fiduciary Disclosure Obligations in Soliciting Private Investments

Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019). 

This opinion decides a motion to dismiss fraud and related tort claims arising out of various investments against a former director and CEO and an employee of a controlling stockholder.

When the investments turned out to be worthless, the plaintiff investor brought suit for breach of fiduciary duties and common law fraud arising from information that the investor received before investing in a company controlled by a business colleague and friend.  More ›

Chancery Determines Appraisal “Fair Value” Below Merger Consideration, Questions Judicial Notice of Valuation Scholarship

Posted In Appraisal, M&A

In re Appraisal of Jarden Corp., Consol. C.A. No. 12456-VCS (Del. Ch. July 19, 2019).

This decision presents another cautionary tale for stockholders of a target public company who consider seeking statutory appraisal instead of accepting the merger consideration. More ›

Chancery Denies Motion to Dismiss Claim for Breach of Earn-Out When Unable to “Divine any Meaning” From Provision

Western Standard, LLC v. SourceHOV Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Defendant Pangea acquired BancTec through a merger agreement that provided for an earn-out to former BancTec stockholders in the event that Pangea’s controlling stockholder realized certain returns on its post-merger stock.  Plaintiff alleged that the earn-out was triggered when Pangea’s parent company became a wholly owned subsidiary of another company through a stock-for-stock transaction. More ›

Chancery Decides Questions of First Impression Regarding Statutory Claims for Unlawful Dividends and Fraudulent Transfers

Enforcement mechanisms available to creditors of Delaware corporations may include, inter alia, claims against directors to recover unlawful dividends under Section 174 of the Delaware General Corporation Law (8 Del. C. Section 174), and fraudulent transfer claims against the corporation and transferees including, where Delaware law applies, under Delaware’s Uniform Fraudulent Transfer Act, referred to as DUFTA (6 Del. C. Section 1301). In JPMorgan Chase Bank v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019), Chancellor Andre G. Bouchard of the Delaware Court of Chancery addressed three important questions of first impression concerning standing and limitations periods issues under these statutes. More ›

CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262

CCLD Holds that D&O Policy’s Duty to Defend “Securities Claims” Extends to Appraisal Proceedings under 8 Del. C. § 262, that Pre-Judgment Interest on an Appraisal Award May be a Covered “Loss” and that a Breach of Consent-to-Defense Clause does not Bar Coverage Absent Prejudice to Insurer

Solera Holdings, Inc. v. XL Specialty Ins. Co., N18C-08-315 AML CCLD (Del. Super. Ct. Jul. 31, 2019).

The Complex Commercial Litigation Division of Delaware’s Superior Court has become a leading venue for complex insurance coverage disputes.  This decision addresses D&O insurers’ denial of coverage for over $13 million spent defending an appraisal proceeding under 8 Del. C. § 262, as well as $38.4 million in pre-judgment interest on the appraisal award.  More ›