About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Showing 13 posts by Kathleen A. Murphy.
Delaware Supreme Court Provides Additional Guidance on Pleading Direct Claims Against Controllers and Control Groups
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 Rejects Attempt to Allege Gentile v. Rossette Direct Claims for Dilutive Preferred Stock Issuances
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 ›
Despite the plaintiff’s request for specific performance and an arbitration provision that carved-out equitable claims, the Court of Chancery stayed the action and deferred to the arbitrator the decision on arbitrability. The limited liability company operating agreement at issue contained a mandatory arbitration provision that referred all disputes to arbitration “[e]xcept to the extent that a party is entitled to equitable relief…” and incorporated the AAA arbitration rules. In reaching his decision, the Vice Chancellor evaluated the arbitration provision under the standard set forth in James & Jackson, LLC v. Willie Gary, LLC, and clarified in McLaughlin v. McCann. Willie Gary set forth a two-part test to determine whether the parties agreed to submit the issue of arbitrability to an arbitrator: the arbitration provision must (1) resolve all disputes; and (2) incorporate rules that permit an arbitrator to determine arbitrability. McLaughlin later clarified Willie Gary by cautioning against an overly narrow reading of the first prong of Willie Gary, ruling that courts should only determine arbitrability when the carve-out is so “obviously broad and substantial” that it overcomes the presumption in favor of permitting the arbitrator to decide arbitrability. The Vice Chancellor concluded that the scope of the equitable relief carve-out in the operating agreement was not “so obviously broad and substantial as to overcome the heavy presumption” that the parties intended to submit the issue of arbitrability to an arbitrator to decide whether their dispute is subject to arbitration under the arbitration provision. The Court therefore held the equitable carve-out did not apply to enable the Court to decide arbitrability.
In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., the Court of Chancery held that a contract provision limiting or waiving future appraisal rights may be enforceable as a matter of law. The Court had previously ruled that the petitioner stockholders had waived their right to an appraisal in a stockholders agreement. On re-argument, the Court was asked to determine whether the petitioners could, as a matter of law under the Delaware General Corporation Law (“DGCL”), waive their appraisal rights. Because Section 262 of the DGCL confers a statutory right to appraisal upon shareholders, the petitioners argued that the provision of the stockholders agreement purporting to waive appraisal rights was not enforceable. Relying upon its prior precedent concerning waiver of statutory rights, the Court explained that a contractual relinquishment of appraisal rights was permissible when the contract language is clear and unambiguous and the record reflects that the petitioners were sophisticated investors who were fully informed and represented by counsel when they signed the stockholders agreement.
In 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 Offers Guidance on When the Limitations Periods Begin to Run For Claims Concerning Breaches of Representations and Warranties and Related Indemnification
Delaware law provides for a default three-year statute of limitations period for breaches of contract, generally applicable to claims for breaches of representation and warranties and related claims for indemnification concerning stock purchase agreements or assets sales. More ›
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 ›
Court of Chancery Addresses Stockholder Standing to Enforce Corporate Contracts, Declines to Dismiss Claim for Breach of Anti-Takeover Protections Akin to Section 203 of the DGCL
Section 203 of the Delaware General Corporation Law, an anti-takeover statute, prohibits a target from entering into a business combination with an acquirer for three years from the date that the acquirer first obtains 15% or more of the target’s stock, unless the target’s board pre-approves the transaction crossing the 15% threshold. Here, to avoid Section 203’s three-year anti-takeover period, an acquirer sought pre-approval of its acquisition of a 48% block of shares. The target’s board agreed, but on the condition that the acquirer enter into an agreement that retained Section 203’s three-year standstill period for one year. A stockholder-plaintiff later brought suit arguing the acquirer failed to comply with the one-year standstill, and thus breached the agreement. It also argued the acquirer’s breach of the agreement to shorten Section 203’s three-year standstill period to one year in effect revived the longer period, such that the merger was void ab initio under the DGCL. When the defendants moved to dismiss claiming the stockholder-plaintiff lacked standing to enforce the target corporation’s agreement with the acquirer, the Court held that the stockholder sufficiently alleged it had standing as an intended third-party beneficiary. The Court reasoned that provisions of the Delaware General Corporation Law have been likened to a contract that stockholders may enforce by suing directly. Section 203 in particular was enacted to benefit stockholders by limiting hostile takeovers and encouraging fair, non-coercive acquisition offers. Here, the target’s agreement with the acquirer adopted those protections for the same apparent purpose of directly benefitting stockholders. More ›
A recent Delaware Supreme Court Order emphasizes the risks associated with the presumptions of public access to court filings and the requirements of Court of Chancery Rule 5.1, which governs the sealing of documents filed with the Court. Rule 5.1 requires a public version of any document filed under seal, with asserted confidential information redacted, to be filed within a certain number of days. At the trial court level, after ruling that the complaint must be unsealed because the parties’ initial completely-redacted public version failed to comply with Rule 5.1, the Vice Chancellor invited the parties to file a motion for reargument with a revised redacted version of the complaint for his consideration. Instead of moving for reargument, defendants filed an application for certification of an interlocutory appeal to the Delaware Supreme Court on the ground that the complaint was subject to confidential arbitration. In accord with the Court of Chancery, the Delaware Supreme Court denied the interlocutory appeal request, ruling that the issue did not meet the standards for certification because the sole issue on appeal was the parties’ compliance with Rule 5.1, and not whether the complaint was subject to confidential arbitration. The Supreme Court noted that the parties potentially could have avoided the claimed irreparable harm caused by unsealing the complaint if they had moved for reargument with a revised redacted version of the complaint that complied with Rule 5.1.
The absolute litigation privilege is an affirmative defense that bars claims arising from statements made in the course of a judicial proceeding. Here, the Delaware Court of Chancery addressed the scope of the absolute litigation privilege in response to a request for an injunction to bar defendant from prospectively disparaging plaintiff in other litigation. The agreements governing an investment by defendant in the plaintiff’s funds contained confidentiality and non-disparagement clauses. A falling out between the parties resulted in years of protracted litigation in Illinois and Delaware. This Court of Chancery action for breach of confidentiality and non-disparagement clauses in the controlling agreements is based on information disclosed in the prior actions. More ›
The federal Computer Fraud and Abuse Act (“CFAA”) carries both civil and criminal penalties for unauthorized access to protected computers. The Court of Chancery recently decided an issue of first impression in Delaware regarding the CFAA’s scope in connection with a suit by AlixPartners against a former partner for allegedly misusing the company’s confidential information and trade secrets.
Plaintiffs were two entities making up AlixPartners, a global restructuring firm, and the defendant was managing partner of the Paris office before joining a competitor. Defendant allegedly downloaded confidential client information onto his personal data device, both before and after his discharge, and later provided it to his new employer. Litigation ensued and the defendant sought dismissal of the plaintiffs’ claim under the CFAA. Dismissal of that claim turned on whether the defendant was potentially liable under the CFAA for: (i) misusing information obtained from a computer he was authorized to access (the “Broad Approach”); or (ii) unauthorized access to the plaintiffs’ computers (the “Narrow Approach”). More ›
Delaware law, under 8 Del. C. § 145, allows for a corporation to agree in corporate documents or contracts to advance legal fees and expenses arising out of one’s service to the company. Aiming to bolster quality leadership, Delaware’s policy is to construe advancement provisions broadly in favor of advancement. Parties also utilize advancement provisions in the LLC context. Different from the corporate context, the foundational principle underlying an LLC relationship is the freedom of contract—the idea that parties are free to arrange their dealings as they choose. Overlaying this important principle is the notion developed under Delaware case law that, while the contract is paramount in the LLC context, structural choices might result in a court importing ideas from an analogous body of law, like corporate law. This recent Court of Chancery opinion recognizes and illustrates that notion when dealing with claimed advancement rights, explaining “parties are free to contract into corporate case law (or not) when they create LLCs, and courts will respect that choice.” More ›
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 ›