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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 77 posts by K. Tyler O'Connell.

Chancery Finds Proper Purpose in Books and Records Demand to Investigate Potential Wrongdoing in CBS-Viacom Merger, Orders Narrowed Inspection that Includes Electronic Documents

Bucks Cty. Employees Ret. Fund v. CBS Corp., C.A. No. 2019-0820-JRS (Del. Ch. Nov. 25, 2019).

A stockholder seeking books and records in Delaware states a proper purpose for inspection by demonstrating a credible basis to suspect that fiduciaries engaged in wrongdoing. So long as the documents sought are necessary and essential to that purpose, the Court of Chancery will order inspection. The Court generally will not, however, require a broad production of electronic documents akin to plenary discovery. More ›

Chancery Construes Sellers’ APA Contractual Representations Concerning Customer Relationships and Changes in the Business, Finds No Breach

Julius v. Accurus Aerospace Corp., C.A. No. 2017-0632-MTZ (Del. Ch. Oct. 31, 2019).

This case serves as a cautionary tale when sellers’ representations in a purchase agreement fail to fully protect against the business risks in question.  According to the Court, this approach encourages contracting parties to allocate risks and draft agreements with precision.  This principle also aligns with Delaware’s pro-contractarian policy to enforce strictly the terms of parties’ agreements, especially when sophisticated parties at arm’s-length negotiate those agreements. More ›

Chancery Finds Request for “Corrective Action” to be a Litigation Demand, Dismisses Derivative Claims for Failure to Plead Wrongful Refusal

Solak v. Welch, et al., C.A. No. 2018-0810-KSJM (Del. Ch. Oct. 30, 2019).

Under the Delaware Supreme Court’s decision in Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990), a stockholder who makes a demand upon the board to address potential wrongdoing concedes that the board may properly decide whether to cause the corporation to bring suit.  That concession makes it more difficult to satisfy pleading standards in a later derivative suit.  In this recent decision, the Court of Chancery reviewed the law in this area and concluded that – despite a disclaimer to the contrary – the plaintiff’s pre-suit letter was a litigation demand. More ›

Chancery Examines Partnership Agreement Allowing Deference to General Partner’s Decisions While Acting in its Individual Capacity and Instances in Which a Tortious Interference Claim can Extend to a General Partner’s Controllers

Posted In LP Agreements

Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019).

The Court of Chancery held that plaintiff former common unitholders failed to state a claim for breach of fiduciary duties in connection with the general partner’s alleged wrongful exercise of its call right to purchase all of the common units after the price of those units plummeted following the general partner’s public announcement of its intent to exercise the call right.  The governing limited partnership agreement established different duties and standards of conduct depending upon whether the general partner was acting in an individual capacity or in an official capacity as the general partner.  The Court reasoned that because the general partner was acting in its individual capacity in the exercise of its call right, the most deferential standard of conduct provided for in the partnership agreement, which eliminated the general partner’s duty to the limited partner common unitholders and the partnership, applied to this allegedly conflicted transaction.  The Court noted that the plaintiffs’ request to apply the partnership agreement’s more heightened standard of conduct to the exercise of the call right misapplied Delaware Supreme Court precedent set forth in Allen v. El Paso Pipeline GP Co., L.L.C., 2015 WL 813053, at *1 (Del. Feb. 26, 2015).  In Allen, the Supreme Court interpreted a nearly identical partnership agreement provision, and based on that provision, ruled that the general partner’s ability to act in its individual capacity “parallels the ability of a corporate fiduciary to exercise rights that are not held or exercised in a fiduciary capacity.”  More ›

Chancery Refuses to Reform Operating Agreement to Impose Class Voting Requirements Not Contained in the Plain Language of the Agreement

Posted In LLC Agreements

JJS, Ltd. v. Steelpoint CP Holdings, LLC, C.A. No. 2019-0072-KSJM (Del. Ch. Oct. 11, 2019).

The Court of Chancery held that plaintiff common unitholders of an LLC failed to state a claim for breach of the operating agreement and failed to adequately plead reformation in connection with their challenge to an asset sale that resulted in the senior preferred unitholder receiving the entirety of the sale consideration.  Applying fundamental tenets of contract interpretation, the Court reasoned that the plain language of the operating agreement only required a majority vote of the combined total of preferred and common unit holders, and not a majority vote of each separate class of preferred and common unitholders, to approve the asset sale.  The Court also rejected the plaintiffs’ claim for reformation to impose a separate voting class requirement that was contained in a term sheet that preceded the operating agreement, but was ultimately omitted from the final operating agreement.  In analyzing the reformation claim, the Court relied upon West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 3247992 (Del. Ch. Oct. 6, 2009), in which the plaintiffs unsuccessfully sought reformation based upon a unilateral mistake that a contract amendment did not comport with a prior memorandum of understanding.  The Court found that the common unitholders reformation claim was insufficient for the same reasons relied upon by the Court in West Willow-Bay: (i) the term sheet was not binding; (ii) even a cursory review of the voting provision in the operating agreement would have put the plaintiffs on notice that it differed from the term sheet; and (iii) it was not apparent that the voting provision in the operating agreement was unacceptable to the plaintiffs.  Accordingly, the Court dismissed both the plaintiffs’ claim for breach of the operating agreement and their alternative claim for reformation.        

Chancery Rejects Claim that Books and Records Demand was “Pretextual,” Finds Sufficient Overlap Between Demand Letter and Plaintiff’s Purpose

Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019).

A stockholder-plaintiff seeking a corporation’s books and records must have a genuine proper purpose, and cannot rely simply on a lawyer-crafted demand letter to justify her request.  There must be alignment between a plaintiff’s books and records demand and her own stated interest in seeking books and records.  In this recent decision, the Court of Chancery considers and rejects an attempt by a defendant-corporation to argue that a books and records demand was really driven by plaintiff’s counsel, and that the plaintiff lacked any genuine proper purpose. More ›

Delaware Supreme Court Provides Additional Guidance on Pleading Direct Claims Against Controllers and Control Groups

Sheldon v. Pinto Technology Ventures, L.P., No. 81, 2019 (Del. Oct. 4, 2019).

The Delaware Supreme Court affirmed the Court of Chancery’s dismissal of an alleged direct claim for dilution of the voting and economic interests of plaintiff stockholders because they failed to adequately plead that several venture capital firms constituted a “control group.”  The Court began its analysis with a review of the standard for a controller or control group under Delaware law.  In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), the Court ruled that multiple stockholders can constitute a control group if they are connected in some legally significant way, such as by contract or other agreement, or working together towards a shared goal.  The Court noted the guideposts that define a “control group” established by In re Hansen Medical, Inc. Stockholders Litigation, 2018 WL 3025525 (Del. Ch. June 18, 2018) and van der Fluit v. Yates, 2017 WL 5953514 (Del. Ch. Nov. 30, 2017). More ›

Chancery Denies Motion for Reargument, Finding No Change to Delaware Legal Principles for Existence of “Control Group” of Stockholders

Silverberg v. Padda, C.A. No. 2017-0250-KSJM (Del. Ch. Oct. 18, 2019)

Delaware courts recognize that a group of stockholders can constitute a “control group” when those stockholders “are connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement…” and work together toward a shared goal.  Sheldon v. Pinto Tech. Ventures, L.P., 2019 WL 4892348, at *4 (Del. Oct. 4, 2019) (citing Dubroff v. Wren Hldgs., LLC, 2009 WL 1478697, at *3 (Del. Ch. May 22, 2009)).  Under such circumstances, the control group stockholders may owe fiduciary duties to the corporation’s minority stockholders.  Where a minority stockholder adequately pleads (1) the existence of a control group;  and (2) a self-dealing breach of fiduciary duties by that control group, the minority stockholder’s claims may be both direct and derivative. Gentile v. Rossette, 906 A.2d 91, 99-100 (Del. 2006).  In Silverberg v. Padda, Plaintiffs argued that they had alleged a direct claim by pleading that a control group of stockholders had breached fiduciary duties by approving alleged dilutive preferred stock issuances.  After the Court dismissed this claim based on Plaintiffs’ failure adequately to allege a control group, as opposed to mere parallel action,  Plaintiffs asserted in a motion for reargument that the Delaware Supreme Court’s recent Sheldon opinion had established a new legal principle to assess the existence of a control group.  The Court disagreed, ruling that Sheldon had reaffirmed the Dubroff standard that the Court had applied in dismissing Plaintiffs’ claims.  See Morris James blog post of October 14, 2019 (discussing the Court’s earlier decision).  The Court re-affirmed its holding that Plaintiffs’ allegations did not suffice to allege a control group because the agreement between the allegedly controlling stockholders (1) did not relate to the challenged transaction; (2) included persons other than the purported control group members; and (3) did not bind the signatories with respect to their votes on the challenged transaction.  Because the Court determined that Sheldon did not affect the Court’s holding that such allegations do not suffice to establish a control group, the Court denied Plaintiffs’ motion for reargument.

Delaware Supreme Court Finds an Insurance Policy Covering “Securities Claims” Did Not Apply to Claims for Violations of Common Law or Statutes Not Specific to the Regulation of Securities

In re Verizon Ins. Coverage Appeals, Nos. 558, 560, 561 (Del. Oct. 31, 2019).

The Delaware Supreme Court, applying principles of contract interpretation under Delaware law, held that claims of breach of fiduciary duty, unlawful dividends and fraudulent transfer were not Securities Claims reflecting a violation of any “regulation, rule or statute regulating securities” and hence the defendant’s director and officer insurance policy that covered such claims did not apply. The Supreme Court thus reversed a holding of the Delaware Superior Court that the insurance coverage applied because the claims “pertain[ed] to laws one must follow when engaging in securities transactions.”  The Supreme Court held that the unambiguous plain meaning of the policy language was that the parties intended coverage only for claims arising under regulations, rules or statutes that “regulate securities.” Using that definition, the Supreme Court held that claims of breach of fiduciary duty, aiding and abetting fiduciary duty breaches, and promoter liability were not Securities Claims because they do not involve regulations, rules and statutes regulating securities.  Likewise, the claim for unlawful dividends arose under statutes that regulated dividends, not securities, and the fraudulent transfer claims arose under statutes that were not “specific to transfers involving securities.”  The Supreme Court rejected as overly broad Verizon’s interpretation that the phrase “regulating securities” included any “laws one must follow when engaging in securities transactions,” holding that that interpretation would encompass claims unrelated to securities and would render meaningless the limitation that coverage applied only to violations of rules or statutes “regulating securities.”  The Supreme Court thus remanded the case to the Superior Court to enter judgment for the insurer-defendants.

Chancery Denies Former Derivative Plaintiff Standing to Challenge Merger That Extinguished Derivative Claims

Morris v. Spectra Energy P’tners (DE) GP, LP, C.A. No. 2019-0097-SG (Del. Ch. Sept. 30, 2019).

When a stockholder derivative claim is extinguished in a merger, the former derivative plaintiff may have standing to contest the merger directly on the ground that the entity’s fiduciaries permitted a material litigation asset to be extinguished in the merger process without value to the stockholders. In the well-known precedent In re Primedia Stockholders Litigation, 67 A. 3d 455 (Del. Ch. 2013), the Court of Chancery established a three part standing test: 1) Was the underlying claim viable? 2) Was its value material in light of the merger consideration? 3) Did the company fail to receive value for the claim in the merger because the buyer would not be willing to pursue it? Applying this test, here the Court ruled that the former unitholder and derivative plaintiff lacked standing to attack the merger and dismissed the claim.  More ›

Chancery Blocks Natural Gas IPO

Posted In LLC Agreements

Williams Field Services Group, LLC v. Caiman Energy, C.A. No. 2019-0350-JTL (Del. Ch. Sept. 25, 2019).

This case again illustrates the contractual nature of Delaware alternative entities and the important interpretive role the courts perform construing alternative entity agreements when internal governance disputes arise. The case arose out of the parties’ competing requests for declaratory judgment regarding Caiman Energy II, LLC’s (“Caiman”) limited liability agreement (“LLC Agreement”). The Defendants, including Caiman and EnCap Capital Management (“EnCap”), argued that the provisions of the LLC Agreement grant EnCap plenary power with respect to a Qualified IPO, including the ability to change the definition of a Qualified IPO and to modify the procedures the contracting parties would otherwise have to take relating to a Qualified IPO. EnCap asserted that it could implement an Up-C IPO using its authority to effect a Qualified IPO. An Up-C IPO refers to a transaction whereby a limited liability company (“LLC”), which is taxed as a pass-through entity, performs an IPO through a holding company that has an interest in the LLC. Plaintiff Williams Field Services Group, LLC (“Williams”) contended that the Encap proposed Up-C IPO was inconsistent with the terms of the LLC Agreement.  More ›

Court of Chancery Orders Advancement of Fees for Former Directors and Officers who Sold their Stock in a Private Transaction

Posted In Advancement

Nielsen v. EBTH, Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sept. 30, 2019).

Delaware law permits advancement of fees and expenses for officers or directors who have such rights under certificates of incorporation, bylaws, or indemnification agreements.  Depending on the factual allegations of the underlying action, advancement rights can apply even for former officers and directors of a company who sold their stock in a private transaction to which the company was not a party. More ›

Court of Chancery Clarifies a Plaintiff’s Ability to Bind a Non-Signatory to a Forum Selection Provision

Neurvana Medical, LLC v. Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Sep. 18, 2019), reargument denied (Oct. 10, 2019).

In Neurvana Medical, LLC v. Balt USA, LLC, the Court of Chancery declined to exercise personal jurisdiction over a French company, Balt International, S.A.S., the parent of Balt USA, LLC.  The Court rejected Neurvana’s argument that Balt International was so “closely related” to the asset purchase agreement at issue that the agreement’s forum selection clause bound Balt International, even though Balt International was a non-signatory.  The Court also declined to assert jurisdiction over Balt International based on the assertion that Balt USA was Balt International’s agent.  Thus, the Court granted Balt International’s motion to dismiss. More ›

Chancery Enforces Preferred Stock Consent Rights, and Reasons that Designee of a Corporate Stockholder Is an “Affiliate” of that Stockholder for Purposes of an “Interested Party” Clause

Posted In Preferred Stock

PWP Xerion Holdings III LLC v. Red Leaf Resources Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019).

Preferred stockholders frequently obtain the right to veto specific types of transactions.  Here, plaintiff PWP Xerion Holdings III LLC (“Xerion”), a hedge fund that acquired Series A Preferred Stock in Red Leaf Resources Inc. (the “Company”), obtained consent rights for certain events, including (i) any transaction “with or for the benefit of any director or officer (or their respective affiliates)”; and (ii) any change of “the business or business plan” of the Company.  In this decision, the Court of Chancery grants partial summary judgment on Xerion’s claims that the Company violated these consent rights.    More ›

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 ›