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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Showing 376 posts in Chancery.
Chancery Finds Wholly Generic Objections to Discovery Requests Result in Waiver and Fee-Shifting
Bocock v. Innovate Corp., C.A. No. 2021-0224-PAF (Del. Ch. Dec. 6, 2023)
In this recent letter opinion, Vice Chancellor Fioravanti considered whether the plaintiffs’ failure to provide specific objections to discovery requests in a timely manner resulted in the waiver of those objections. More ›
Chancery Finds that Non-Settling Defendants Waived their Right to Seek a Settlement Credit Under DUCATA
In re Mindbody Inc. S’holder Litig., Consol. C.A. 2019-0442-KSJM (Del. Ch. Nov 15, 2023)
The Delaware Uniform Contribution Among Tortfeasors Act (“DUCATA”) establishes the legal framework applicable when plaintiffs release only some joint tortfeasors through settlement. DUCATA creates a right of contribution among joint tortfeasors and specifies that an ultimate damages award against non-settling defendants can be reduced by amounts received in settlement from other joint tortfeasors. In this fiduciary duty action challenging the fairness of a merger, the Court ruled that, despite a settlement of claims against certain defendants, the non-settling defendants waived their right to seek a damages reduction. More ›
Chancery Largely Denies Books-and-Records Inspection Exploring Dividend Potential
Greenlight Capital Offshore Partners, LTD., v. Brighthouse Financial Inc., C.A. No. 2022-1067-LWW (Del. Ch. Nov. 20, 2023)
Valuation is a well-established proper purpose to inspect corporate books and records. While each case turns on its own facts, in general the availability of public information to satisfy a valuation demand will result in a relatively narrow court-ordered inspection. Here, the plaintiff conceded the availability of public information for valuation purposes, but sought more to help it speculate regarding the company’s dividend potential, after recent extraordinary dividends at the subsidiary level caused the stock price to jump. While dividend capacity may be relevant to valuation, the Court of Chancery largely denied the inspection, finding the requested information too removed from the company’s current value and thus not necessary and essential to the plaintiff’s valuation purpose.
Chancery Awards Mootness Fee Applying Recently Adopted Standard
Assad v. Botha, et al., C.A. No. 2022-0691-LWW (Del. Ch. Oct. 30, 2023)
Here, Vice Chancellor Will awarded a $100,000 mootness fee for “material—and unremarkable—disclosures” following the recently heightened mootness fee standard announced in Anderson v. Magellan Health, Inc. (analyzed here), authored by Chancellor McCormick. Magellan announced that the Court would award mootness fees for supplemental disclosure only where such disclosures are “material,” not merely “helpful,” and such fees, if awarded, may be lower than those awarded historically. This opinion represents one of the first decisions applying Magellan, and awarded $100,000 where plaintiffs sought $850,000.
Chancery Holds that LLC Agreement Did Not Confer Jurisdiction Over Contract and Tort Claims
Ramco Asset Mgmt. LLC v. USA Rare Earth, LLC, C.A. No. 2022-0665-SG (Del. Ch. Oct. 20, 2023)
Plaintiffs brought claims alleging improper dilution of their equity interests when transferring their holdings in an Australian rare-earth mining company to a Delaware limited liability company. Their claims included breach of fiduciary duty, fraud, breach of contract, and conspiracy. All five defendants moved to dismiss for failure to state a claim and on forum non conveniens grounds, and four of the five moved to dismiss for lack of personal jurisdiction. More ›
Chancery Decision Explains Availability of Reformation as a Targeted Remedy
AECOM, et al. v. SCCI Nat’l Hldgs., Inc., C.A. No. 2022-0727-MTZ (Del. Ch. Sept. 27, 2023)
Although the Court of Chancery frequently resolves contractual disputes, it grants contractual reformation only when “intervention [is necessary] to ensure the deal is what the parties agreed upon.” This pleadings-stage decision provides insight into the Court’s approach to reformation because the Court found that one claim supported reformation but the other did not. More ›
Chancery Concludes Accountant Provision in Stock Purchase Agreement Calls for Expert Determination Rather than Arbitration
ArchKey Intermediate Holdings Inc. v. Mona, C.A. No. 2021-0383-JTL (Del. Ch. Oct. 3, 2023)
Parties to a stock purchase agreement disputed post-closing price adjustments. The agreement called for an independent accountant to resolve such disputes and referred to the accountant as an “arbitrator.” As the parties litigated in the Court of Chancery, the purchaser moved to compel arbitration so that an independent accountant could resolve all disputes the seller raised. The seller contended that the agreement’s accountant provision called for an expert determination rather than an arbitration. More ›
Spoliation of Email and Texts Leads to Adverse Inferences and Fee Shifting
Gener8 LLC v. Castanon, 2022-0246-LWW (Del. Ch. Sept. 29, 2023)
This dispute concerned a non-compete agreement that the plaintiffs alleged the defendant breached by establishing a competing business. The defendant denied the existence of relevant texts and email communications, when in fact he intentionally withheld and deleted them. In discovery, he claimed no relevant communications existed on his phone, citing that he was not a “big texter.” The defendant testified to this at trial, and pled ignorance of both the operations of the competing enterprise and any discussions or communications to that effect. However, other parties produced text messages including the defendant, making clear that he had in fact sent many texts concerning these subjects. More ›
Chancery Upholds Removal of Board Members
Barbey v. Cerego, Inc., C.A. No. 2022-0107-PAF (Del. Ch. Sept. 29, 2023)
This decision considered the proper constitution of the board of directors of a Delaware corporation, Cerego, Inc., under Section 225 of the DGCL after directors were removed following a corporate inversion whereby Cerego became a subsidiary of its wholly owned subsidiary, Cerego Japan, Inc. (“CJ”), a Japanese entity. More ›
Chancery Denies Specific Performance in De-SPAC Transaction Based on Difficulty of Enforcement and Plaintiff’s Inequitable Conduct
26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., CA No. 2023-0128-JTL (Del. Ch. September 7, 2023)
Even where the parties have contractually agreed that specific performance is the preferred remedy for a breach, the decision whether to award that relief nevertheless remains within the Court of Chancery's discretion. In this decision, addressing the availability of specific performance, the Court assumed without deciding that the defendant target of a SPAC had not used its reasonable best efforts to close the transaction in breach of the agreement, that the SPAC was ready, willing, and able to close, and that money damages were an inadequate remedy at law. More ›
Chancery Upholds Written Consent Based on Signer’s Sophistication and Opportunity to Inspect
REM OA Holdings LLC v. Northern Gold Holdings LLC, C.A. No. 2022-0582-LWW (Del. Ch. Sep. 20, 2023)
Delaware is a contractarian state and the presumption is that parties are bound by their agreements. That presumption applies with even greater force when the parties are sophisticated and engage in arms-length negotiations. In this case, the defendant, a 50% member of an LLC, challenged a $10 million financing agreement entered into by the LLC’s other 50% member. That arrangement allowed the lender to purchase an interest in the company. In challenging the agreement, the defendant member argued that the plaintiff did not provide him with the term sheet for the transaction. In this decision, the Court of Chancery upheld the transaction, reasoning that, while the defendant member did not receive the term sheet, the consent for the loan that he signed repeatedly referenced the term sheet, the defendant was a sophisticated party with counsel, and he had the opportunity to inspect the consent and inquire about the term sheet as a matter of basic diligence. The Court also rejected numerous other defenses to enforceability.
Chancery Finds Defendant Officer Usurped Corporate Opportunity for His Own Competing Venture
Sorrento Therapeutics, Inc. v. Mack, C.A. No. 2021-0210-PAF (Del. Ch. September 1, 2023)
Under the corporate opportunity doctrine, an officer or director may not take a corporate opportunity for himself if "(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation.” Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154-55 (Del. 1996). In this post-trial opinion, the Court of Chancery held that a co-founder and former CEO who stayed on as President following his sale of the company to a strategic acquirer breached his fiduciary duties by usurping its corporate opportunities. While the defendant argued the company lacked the resources to pursue the opportunity, the Court reasoned that there was "no structural or situational barrier" to the company obtaining the capital needed. The Court did not credit the defendant's argument that the company was not likely to pursue the opportunities. The Court also explained that the corporate opportunity "test focuses on the company's ability to pursue the opportunity, not the board's likelihood of actually deciding to do so." The Court also found that the third prong was met because the opportunities were in the same line of business in which the company operated, but the defendant had usurped them for his own venture. It accordingly found the defendant liable and ordered supplemental briefing regarding the appropriate remedies.
Chancery Refuses to Impose Additional Conditions on Voluntary Dismissal of Claims Subject to Advancement
Sal Gilbertie, et al. v. Dale Riker, et al., C.A. No. 2020-1018-LWW (Del. Ch.)
The Delaware Court of Chancery frequently hears advancement disputes, wherein officers or directors of Delaware entities seek to enforce their right to the ongoing payment of legal fees in the defense of claims brought against them. Sometimes, as in this case, a plaintiff entity moves to voluntarily dismiss its claims rather than to pay the freight for both sides. Here, the plaintiffs sought to dismiss the pending claims subject to advancement with prejudice after the Court granted the defendants advancement in a separate action. The defendants opposed the plaintiffs’ motion and sought to impose additional conditions on any dismissal under the Court of Chancery rule governing voluntary, court-approved dismissals, including conditions related to advancement and a finding that the defendants had prevailed on the merits. The Court rejected the defendants’ requests because the advancement relief could be considered under the controlling Fitracks order, and any characterization was premature given the remaining counterclaims. Thus, the Court granted the voluntary motion to dismiss without any conditions.
Chancery Refuses to Enforce Nationwide Noncompete
Centurion Service Group, LLC v. Wilensky, C.A. No. 2023-0422-MTZ (Del. Ch. Aug. 31, 2023)
In Frontline Techs Parent LLC v. Murphy, C.A. 2023-0546-LWW (Del. Ch. Aug. 23, 2023), the Court of Chancery recently declined a subsidiary’s attempt to enforce a non-compete provision benefitting the parent. A week later, in Centurion, the Court likewise declined to enforce a non-compete, this time based on its unreasonably broad scope. Though the Court ultimately applied a Delaware choice-of-law provision, Centurion highlights that Delaware courts do not blindly apply such clauses “when doing so would circumvent the public policy of another state that has a greater interest in the matter.” The decision also reinforces that Delaware courts scrutinize non-competes and are hesitant to “blue pencil” overly broad terms to recraft them as reasonable – instead, Delaware courts tend to decline to enforce them altogether. Here, the at-issue non-compete prevented the former employee from engaging in any business directly or indirectly engaged in Centurion’s business, any business competitive with Centurion’s business, or any business competitive with any business Centurion planned to engage in at any time during the employee’s employment, for a period of two years after his termination date, anywhere in the United States. The Court found these terms unreasonable, explaining that the geographic scope and duration taken together “casts a limitless net over [defendant] in both scope of geography and scope of conduct,” and taking particular issue with the language covering any field the company “planned to enter.”
Chancery Limits Section 220 Books-and-Records Production to Formal Board Materials
In re Zendesk, Inc. Section 220 Litigation, C.A. No. 2023-0454-BWD (Del. Ch. Aug. 25, 2023)
The background of this books-and-records decision involved a failed acquisition, a strategic review, a proxy contest, and a decision to sell the company at a price below an offer rejected just a few months prior. The plaintiff-shareholders' inspection purpose was to investigate alleged board wrongdoing in connection with the transaction’s approval. The company voluntarily produced formal board materials. But, contending there were information gaps, the plaintiffs also wanted informal board materials, including emails among directors, as well as documents and emails at the officer level. In its post-trial decision, the Court of Chancery found that while the plaintiffs had stated a proper purpose, they did not show entitlement to documents beyond the formal board materials already provided. Citing produced materials, including board minutes and presentations, and the Court found the formal board materials were sufficient to satisfy the shareholders' inspection purpose. As the Court explained, Section 220 inspections “are not tantamount to ‘comprehensive discovery,’" and entitle shareholders only to the “essential” responsive records.
