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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 16 posts by Matthew F. Lintner.
Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›
Court of Chancery Clarifies a Plaintiff’s Ability to Bind a Non-Signatory to a Forum Selection Provision
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
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 ›
Delaware Superior Court Finds Purchase Agreement Language Limits the Scope of Possible Claims Concerning Earn-Out Dispute
Under an asset purchase agreement (“APA”), the purchaser (“PCM”) acquired substantially all of the assets of the “En Pointe” business from the seller (“Collab9”). The APA provided for an earn-out payment, calculated upon a percentage of En Pointe’s Adjusted Gross Profit over several years. The APA provided that the purchaser “shall have sole discretion with regard to all matters relating to the operation of the Business.” The agreement further disclaimed any express or implied obligation on the part of the purchaser to take any action, or omit to take any action, to maximize the earn-out amount, and stated that the purchaser “owes no duty, as a fiduciary or otherwise” to the seller. The APA also contained a clear combined integration and anti-reliance provision. More ›
Chancery Explains When Deal Price is a Persuasive Indicator of Fair Value in an Appraisal Proceeding
Recent Delaware Supreme Court decisions on appraisal proceedings have stressed the pivotal importance of the deal price in establishing fair value. In this case, the Court of Chancery faced an appraisal for a transaction in which the company’s General Counsel expressed ongoing concerns about the CEO’s potential conflict in spearheading the sale process. That gave rise to the question: In measuring fair value, what weight should be accorded to the deal price when there is some “hint of self-interest” that may have compromised the market check? More ›
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 ›
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
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 ›
Chancery Dismisses Merger Challenge Concerning Board’s Delegation of Merger Negotiations and Management’s Undisclosed Compensation Discussions
The ultimate responsibility for considering a merger falls on the board to carry out consistent with each director's fiduciary duties. But management usually takes the lead role in negotiating with the counterparty. It is not uncommon for stockholder plaintiffs to make hay out of a board allowing potentially conflicted members of management to pick up that mantle. Sometimes those circumstances support a claim for breach of fiduciary duty and sometimes they do not. This motion to dismiss decision addresses claims in that context, with the Court of Chancery finding the case falls in the latter category. More ›
Chancery Rejects Second Plaintiff’s Attempt to Correct Pleading Deficiencies Following Dismissal of Aiding and Abetting Claim
Under Delaware law, stating a claim for aiding and abetting a breach of fiduciary duty requires sufficiently alleging knowing participation by the non-fiduciary. That is not an insignificant pleading standard, as this letter opinion illustrates in rejecting a second bite at the apple by a different plaintiff. More ›
Chancery Holds Tension Between “Bespoke” Provision Governing Post-Closing Conduct and a Boilerplate Survival Clause Requires Consideration of Parol Evidence
The founders of Cablevision Systems Corp., the Dolan family, in connection with a $17.7 billion acquisition of that entity by Altice Europe N.V. and Altice USA Inc., obtained a commitment in the Merger Agreement affirming that Altice would operate a particular group of regional cable news channels (News12 Networks LLC) “substantially in accordance with the existing News12 business plan … through at least the end of plan year 2020[.]” When Altice proceeded to lay off News12 employees after the merger, the Dolan family filed an action in the Court of Chancery for specific performance. More ›
Advancement Available for Post-Separation Misuse of Confidential Information Obtained “By Reason of the Fact” of Corporate Service
Former directors and officers may be entitled to advancement for post-separation conduct if that conduct is "by reason of the fact" of the directors' and officers' corporate service. In response to claims brought by former directors and officers for payments due under the parties' separation agreement, the company counterclaimed that the petitioners had breached non-compete obligations under the agreement and had improperly used the company's confidential information. The petitioners then sought advancement under the company's charter (which incorporated DGCL Section 145’s “by reason of the fact” standard), but the company contended no advancement was necessary because the complained-of conduct followed petitioners' separation from the company. The Court of Chancery reviewed its past decisions on this issue, beginning with Brown v. LiveOps, Inc., 903 A.2d 324 (Del. Ch. 2006). The Court ultimately concluded that the case upon which the company relied – Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460 (Del. Ch. Aug. 31, 2015) – was "difficult to harmonize" with the others. Those other cases stand for the principle that allegations of misusing confidential information obtained “by reason of the fact” of former directors’ and officers’ service to the company may trigger advancement rights – even if the alleged misuse occurs after separation and in violation of the directors' and officers' personal agreements with the company. Consequently, the Court held that the petitioners were entitled to advancement for any counterclaims "where the underlying acts depended on or utilized confidential information [the petitioners] obtained by reason of their service at [the company.]" By contrast, they were not entitled to advancement to defend against post-separation violations of their personal contractual obligations that had no alleged "nexus or causal connection to [the petitioners'] service” – such as by engaging in an allegedly competing business, soliciting employees and unlawfully accessing the company’s computer systems – all of which allegedly occurred without any use of confidential information obtained while in service at the company.
Delaware Supreme Court Revives Fiduciary Duty Claims in Derivative Lawsuit Concerning Blue Bell’s Listeria Outbreak
As this decision illustrates, while Delaware law imposes a high bar for pleading demand futility and fiduciary oversight claims under what is known as a Caremark theory, the standards are not insurmountable. After Blue Bell Creameries faced a deadly listeria outbreak, recall, and temporary shutdown a few years ago, a stockholder plaintiff sued in the Delaware Court of Chancery alleging breaches of fiduciary duties by two key executives and its board of directors. The stockholder’s derivative claims concerned management’s alleged failure to respond appropriately to food safety issues and the board’s alleged failure to implement any food safety reporting system or to inform itself about the company’s food safety compliance. More ›
Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.
Merger Agreement’s Preservation of Privilege for Pre-Merger Communications Found to be Adequate, Notwithstanding that the Surviving Company Took Possession of E-Mails
This decision confirms that, in a post-merger dispute between an acquirer and the selling stockholders, broad contractual language can prevent a waiver of the acquired company's privileged pre-merger communications, even if the surviving company takes physical possession of the communications. RSI Holdco, LLC acquired Radixx Systems International, Inc. in 2016, and the merger agreement designated Shareholder Representative Services LLC as representative of Radixx's selling shareholders. As part of the merger, RSI Holdco acquired Radixx’s computers and email servers, which contained 1200 pre-merger emails between Radixx and its counsel; Radixx had not excised or segregated the communications from other data. However, the merger agreement contained a detailed provision that (1) preserved Radixx’s privilege, (2) assigned it the representative of selling stockholders, (3) required the parties to take steps to ensure that the privilege remained in effect, and (4) prevented RSI Holdco from relying on the privileged communications in post-merger litigation. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Court had found that privilege transferred to the surviving company in a merger as a matter of law pursuant to section 259 of the DGCL because (i) the parties did not address privilege in the merger agreement, and (ii) because the at-issue communications were turned over. Great Hill cautioned future parties to "use their contractual freedom" to exclude privileged communications from the transferred assets. Here, the Court rejected RSI Holdco's argument that the failure to excise the communications waived privilege in this circumstance, and the Court noted that even if the privilege had been waived, the merger agreement still prevented RSI Holdco from relying on the communications in the litigation. Thus, the Court concluded that the sellers "heeded the Great Hill court's advice" and found the detailed provision in the merger agreement preserved the privilege attached to the pre-merger communications.
In the limited liability company context, LLC agreements sometimes provide for a buyout of a member deciding to withdraw its investment. Coming in many forms, such provisions give rise to potential valuation issues. This decision arises in that setting.
In a decision driven by unique facts, the Court of Chancery relied upon the plaintiff's proposed valuation from an unconsummated deal to value a professional services company with “erratic and sparse” cash flows. The Court concluded that the company’s business model rendered both an asset accumulation method and a discounted cash flow method inappropriate. More ›