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Showing 237 posts in Chancery.

Chancery Finds Officer Breached the Duty of Loyalty By Working With Competitors

Posted In Chancery, Fiduciary Duty


Metro Storage Int’l LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. May 4, 2022)

The duty of loyalty requires that the corporation’s interests take precedence over any personal interest possessed by a director, officer, or controlling shareholder that is not shared by the stockholders generally. Relevant here, the plaintiffs alleged that the defendant had breached his fiduciary duty of loyalty by consulting for another company while he was an officer, failing to disclose that he was consulting for another company, usurping a financial opportunity, and misusing confidential information. The Court of Chancery found that the evidence supported all of these allegations. In particular, the Court found that the defendant breached his duty of loyalty by spending substantial time performing consulting work for another company when he had agreed to devote his full time to the plaintiff company. The Court reasoned that while an officer generally may work for an independent business so long as this work does not violate his fiduciary duties, the defendant had misappropriated company resources because he had agreed to spend his full time working for the company and this time was a resource that belonged to the company.

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Citing Novel Issues of Delaware Law, Chancery Declines to Dismiss Stockholder Class Action in Favor of First-Filed Securities Action


Lordstown Motors Corp. Stockholders Litig., CA. No. 2021-1066-LWW (Del. Ch. Mar. 7, 2022)
The Court of Chancery denied the defendants’ McWane motion to stay the case in favor of a first-filed federal securities action.  Because first-filed status matters less in representative actions, McWane correspondingly applies with less force.  Here, among the relevant factors, the Court of Chancery action involved novel Delaware legal issues, including the intersection of fiduciaries duty law and SPACs.  And the claims were not a mere rebranding as breaches of fiduciary duty of securities law claims based on allegedly misleading statements.  Thus, the Court concluded that Delaware’s substantial interest in providing guidance in emerging areas of Delaware law outweighed any practical or comity concerns that might otherwise warrant a stay.

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Chancery Declines to Grant Equitable Standing When Other Stockholders Had Standing to Enforce Corporate Rights

Posted In Chancery, DGCL, Standing


SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May 13, 2022)
Under Section 327 of the DGCL, a stockholder must hold stock at the time of the alleged wrong to have standing to pursue a derivative claim. Under the equitable standing doctrine, however, standing may be recognized in equity to prevent a “complete failure of justice.”  Here, the plaintiffs acquired the stock after some of the alleged wrongs in their complaint took place but argued that the equitable standing doctrine allowed one of them to raise these claims. The Court of Chancery observed that the doctrine has applied when alternative avenues of remedying the harm were foreclosed.  Importantly, however, the Delaware courts generally have declined to invoke it when other avenues theoretically exist, such as the existence of other potential plaintiffs with standing to pursue the claims at issue. Applying that reasoning here, the Court ruled that it would not grant equitable standing because other non-party stockholders would have standing to pursue these claims.

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Court Rejects Franchisor’s Attempt Based on Business Effects of COVID-19 to Escape Contractual Obligation to Purchase Franchisee’s Assets

Posted In Breach of Contract, Chancery, M&A, MAEs


Level 4 Yoga, LLC v. CorePower Yoga, LLC, C.A. No. 2020-0249-JRS (Del. Ch. March 1, 2022)
In this post-trial decision, the Court of Chancery awarded specific performance to Plaintiff/franchisee who sought to enforce Defendant/franchisor’s exercise of its contractual right to purchase Plaintiff’s assets, which included yoga studios in several states.  Defendant exercised its right as of May 2019 but then delayed, and ultimately purported to back out, after the COVID-19 pandemic took hold in early 2020.  The Court granted specific performance based upon the specific language of the parties’ agreement, finding Defendant failed to prove either a Material Adverse Effect or a violation of the ordinary course covenant when Plaintiff temporarily closed its yoga studios in response to COVID-19.  Among other reasons, the seller was the franchisee, the buyer was the franchisor, and the seller had followed the buyer’s instructions concerning the operation of franchises.  The Court also noted that the parties’ agreement contained no closing conditions or an express right to terminate.

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Chancery Finds AT&T Failed to Satisfy Entire Fairness Review in a Freeze-Out of Minority Partners in Local Spectrum Partnership


In re Cellular Telephone P’ship Litig., Coordinated C.A. No. 6885-VCL (Del. Ch. Mar. 9, 2022)
A controller that stands on both sides of a freeze-out transaction has the burden to prove that its acquisition was entirely fair to minority partners in terms of the acquisition’s process and price. The freeze-out of minority partners at an opportune time for the controller may not satisfy entire fairness review. More ›

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Chancery Sustains Fiduciary Duty Claims Arising From Option Grants At Pandemic-Low Price


Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022)
In mid-March 2020, at a time when the COVID-19 pandemic caused the corporation’s stock price to trade at a periodic low, the corporation’s compensation committee awarded stock options to themselves and other directors and officers. Addressing the defendants’ motion to dismiss, the Court reasoned that the circumstances did not support an inference of bad faith. Nevertheless, because the compensation committee members received options and thus were personally interested in determining their terms, such claims were subject to entire fairness review. Similarly, option grants to certain directors who together also were the corporation’s controlling stockholders would be subject to entire fairness review as involving non-ratable benefits to a controller. The Court rejected, however, the stockholder-plaintiffs’ theory that certain officer-defendants breached their fiduciary duty of loyalty by receiving the awards. Surveying prior cases, the Court reasoned that to sustain such a claim, the circumstances would have to be such that the recipient acted with scienter (i.e., in “bad faith”) by receiving the compensation at-issue. Finally, given that the awards potentially resulted from breaches of fiduciary duty by the director-defendants, the Court sustained at the pleading stage a claim that all recipients were unjustly enriched. 

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Chancery Parses Claims and Issues Subject to Mandatory Advancement Obligations

Posted In Advancement & Indemnification, Chancery


Krauss v. 180 Life Sciences Corp., C.A. No. 2021-0714-VCW (Del. Ch. Mar. 7, 2022).
The plaintiff was a former director and officer of a SPAC who became involved in litigation following its business combination. The certificate of incorporation and bylaws provided for mandatory advancement. Regarding several subpoenas to the plaintiff and her affiliated companies, although only one was brought “by reason of the fact” of her service as a director or officer, the Court granted advancement based on her counsel’s good faith certification for all work would have been done if there was only the one covered subpoena, even if such work also helped with her responses to non-covered subpoenas. The plaintiff’s affirmative defenses to a fiduciary duty action similarly were covered. Her compulsory counterclaims there also were covered. In so holding, the Court reasoned that, although the certificate of incorporation stated board approval was required for advancement in connection with certain litigation activities initiated by the indemnitee, the bylaws contained no such requirement. Certain counterclaims for breaches of registration rights agreements were not compulsory and were personal in nature, however, and so were not subject to advancement. The plaintiff was entitled to fees-on-fees proportionate to her success and pre-judgment interest from the date she provided invoices evidencing those costs; although the invoices redacted various time entries, her counsel certified that she did not seek advancement for those amounts.

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Chancery Adjusts Deal Price to Account for Synergies and Post-Signing Change in Value in Statutory Appraisal of Investment Bank

Posted In Appraisal, Chancery


BCIM Strategic Value Master Fund, LP v. HFF, Inc., C.A. No. 2019-0558-JTL (Del. Ch. Feb. 2, 2022)
In a statutory appraisal proceeding, Delaware courts may rely upon the deal price adjusted for net synergies as the most persuasive evidence of fair value provided the transaction process contains sufficient indicia of reliability. More ›

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Chancery Finds Enforcement of Advance Notice Bylaw Was Lawful and Equitable

Posted In Advance Notice Bylaws, Chancery


Strategic Investment Opportunities, LLC v. Lee Enterprises, No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022)
This case reflects that incumbent directors’ decision to enforce an advance notice bylaw generally will be upheld where a stockholder’s nomination materials do not comply with the bylaw’s plain terms and enforcement is not inequitable in the circumstances. Here, directors rejected an activist stockholder’s nominees for election because of non-compliance with certain requirements of an advance notice bylaw, specifically that nominations (i) must be made by the record holder (here, Cede & Co.), and (ii) must include information on a form required by the company. Given the context – the defense of a proxy contest – the Court proceeded to review whether the decision to enforce the bylaw complied with the directors’ fiduciary duties, applying enhanced scrutiny under Unocal and Blasius. Because the bylaw was adopted on a “clear day,” because it served valid corporate purposes and because the board did not engage in any manipulative conduct impeding the stockholder’s ability to comply with the bylaw, the Court held that the board’s decision to uphold the bylaw was valid. 

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Chancery Sustains Direct Claims For Diversion Of Merger Consideration

Posted In Advance Notice Bylaws, Chancery


Blue v. Fireman
, C.A. No. 2021-0268-MTZ (Del. Ch. Feb. 28, 2022)
This case illustrates circumstances in which allegedly improper pre-merger transactions that divert merger consideration from stockholders may be considered direct challenges to a merger, rather than derivative claims, thus permitting a former stockholder to continue to pursue them after closing.  Here, in the run-up to a merger, a large creditor with a proxy representing 85% of the corporation’s voting power sought and obtained beneficial amendments to its notes and warrants.  The amendments had the alleged effect of diverting $40 million of $130 million total merger consideration from the stockholders and to the creditor.  Reviewing Parnes v. Bally and its progeny, the Court reasoned that the claims were direct because merger consideration allegedly was diverted, with a material effect on the merger’s price and fairness, in transactions allegedly involving breaches of fiduciary duty.  Accordingly, the Court denied the defendants’ motion to dismiss premised on a lack of derivative standing.

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Chancery Applies Privilege Rules in Business Negotiations Context

Posted In Chancery, eDiscovery, Privilege


Twin Willows, LLC v. Pritzkur, C.A. No. 2020-0199-PWG (Del. Ch. Feb. 28, 2022)
This decision involved a Master in Chancery applying well-settled rules on the attorney-client privilege, common interest, and work product doctrines. Respondent Pritzkur was appointed to serve as partition trustee for owners and tasked with selling the property. Pritzkur negotiated a sale agreement that was ultimately assigned to Petitioner Twin Willows. The agreement was not fully performed, and Twin Willows moved to compel production of communications between Pritzkur and the owners. Pritzkur asserted both common interest privilege and attorney work product. More ›

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Chancery Finds it Lacks Discretion to Decline Jurisdiction Over a Case Where Jurisdiction Exists Under Section 111 of the DGCL

Posted In Chancery, DGCL, Subject Matter Jurisdiction


S’holders Rep. Serv. LLC v. DC Capital Partners Fund II, L.P., C.A. No. 2021-0465-KSJM (Del. Ch. Feb. 14, 2022)
While the Court of Chancery has exclusive subject matter jurisdiction over claims and remedies sounding in equity, Section 111 of the DGCL grants the Court concurrent, non-exclusive jurisdiction in cases involving the interpretation of certain corporate instruments—regardless of whether those claims or the relief sought are equitable in nature. In DC Capital Partners, the plaintiff elected to bring legal (rather than equitable) claims involving the interpretation of stock purchase agreements in the Court of Chancery pursuant to Section 111’s concurrent subject matter jurisdiction. The defendants argued that because the claims did not otherwise fall within the Court’s subject matter jurisdiction, and because Section 111 provides for concurrent rather than exclusive jurisdiction, the Court had the discretion to decline to hear the case. Specifically, the defendants noted that Section 111 provides that certain claims “may” be brought in the Court of Chancery and argued that this permissive language provided the Court with the discretion not to hear such claims. The Court rejected the defendants’ contention, finding that the discretion to bring a claim in the Court of Chancery pursuant to Section 111 belongs to the plaintiff, not the Court. Therefore, the Court held that once a plaintiff elects to bring a claim in Chancery authorized under Section 111, the Court lacks the discretion to decline to hear the case based on subject matter jurisdiction.

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Chancery Denies Indemnification to Director After Examining Settlement Agreement

Posted In Advancement & Indemnification, Chancery


Huret v. Mondobrain, Inc., C.A. No. 2021-0208-SG (Del. Ch. Apr. 27, 2022)
Under Section 145(c) of the DGCL, a director that has been successful on the merits or otherwise in defending a covered proceeding is entitled to indemnification. When determining success, Delaware law asks whether the indemnitee has avoided an adverse result, and generally does not look behind that result. Here, the plaintiff sought indemnification for derivative claims resolved by a settlement agreement, which also resolved claims brought by the plaintiff in French litigation. The Court examined the settlement agreement as a whole and found the plaintiff was not successful in the derivative action against him, and thus not entitled to indemnification. In settling the outstanding claims, the plaintiff did not admit guilt or make any settlement payment. However, he agreed to resign from the board, which was relief the stockholder originally sought, and he also agreed to release his own claims for money damages, which were in excess of the money damages sought for the derivative claims against him. 

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Chancery Resolves Section 225 Dispute and Declines to Invalidate Written Consents

Posted In Chancery, Control Disputes


Zhou v. Deng, C.A. No. 2021-0026-JRS (Del. Ch. Apr. 6, 2022)
When deciding a summary proceeding regarding a disputed corporate office under Section 225 of the DGCL, the Court of Chancery may consider whether an election, appointment, or removal was tainted by fraud, deceit, or breach of contract. This decision involves the Court considering such defenses to the defendants’ removal and replacement as directors. Here, the Court declined to invalidate the challenged written consents based on allegations of breaches of fiduciary duty, breaches of contract, and fraud. The Court, for instance, rejected the breach of contract defense concerning stock purchases because the breach was already remedied in another action by an award of damages and the sale contract had not been rescinded.

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Chancery Denies Petition to Appoint Custodian to Revive Abandoned Delaware Corporation for Use as Blank Check Company

Posted In Chancery, Custodians


In re Forum Mobile, C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022)
In Forum Mobile, the Court of Chancery denied a petition to appoint a custodian pursuant to DGCL Section 226(a)(3). The petitioner sought to revive an abandoned and defunct Delaware corporation for use as a blank check company. Specifically, the petitioner sought to effectuate a reverse merger of the defunct company with a new business, allowing the new business to access public markets without implementing the formal IPO process. Holding that “the plain language of Section 226(b) does not contemplate that a custodian appointed under Section 226(a)(3) could revivify a corporation,” the Court denied the petition, reasoning that custodians appointed pursuant to Section 226(a)(3) are limited to “liquidating the affairs of the abandoned corporation and distributing its assets.”  More ›

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