Showing 267 posts in Fiduciary Duty.
Chancery Dismisses Claims Against Controller and its Affiliates Based on Group Pleading and Vague, General Allegations of Claims for Breach of Fiduciary Duty
Bocock v. Innovate Corp., C.A. No. 2021-0224-PAF (Del. Ch. Oct. 28, 2022)
A holding company acquired a controlling stake in an owner/operator of low-power television stations via a stock purchase agreement. The controller then designated certain of its own affiliates’ officers and directors as officers and directors of the acquired company. More than three years later, stockholders and option holders filed a complaint alleging that the controller, its affiliates, and the officers and directors had conspired to loot the company by usurping corporate opportunities, transferring assets for insufficient consideration, and entering into agreements that drained value from the company. The claims included breach of fiduciary duty, corporate waste, aiding and abetting, conspiracy, and tortious interference. More ›
Chancery Dismisses Caremark Claim Against Energy Company Alleging Failure of Board Oversight Related to Fatal Pipeline Explosion
City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022)
Stockholder plaintiff filed a derivative suit on behalf of an energy company alleging that certain of the company’s former and current directors were liable for oversight failures leading to the fatal explosion of an over-pressurized gas pipeline. When the defendants moved to dismiss for failure to make a demand on the board, the plaintiff argued that demand was excused because a majority of the demand board faced a substantial likelihood of liability for oversight failures based on the following three theories of Caremark liability: (1) the board’s utter failure to implement a pipeline safety monitoring or reporting system; (2) the board’s failure to acknowledge “red flags” that put it on notice of the company’s numerous violations of pipeline safety laws; and (3) the board’s knowing encouragement of legal violations in the pursuit of corporate profit. The Court rejected all three of the plaintiff’s theories of Caremark liability and dismissed the action for failure to make a demand. The Court reasoned as follows: (1) according to the plaintiff’s own allegations, the company had set up a pipeline safety monitoring and reporting system which included a committee specifically tasked with pipeline safety that was active, therefore the plaintiff had not adequately pled “utter failure” to set up such a system; (2) any causal connection between the “red flags” identified by the plaintiff and the explosion were too tenuous to put the board on notice of the corporate trauma that occurred; and (3) plaintiff had not adequately pled that the board was “in the business” of encouraging violation of the law for profit because, according to plaintiff’s own allegations, the company actually discouraged legal violations through the formation of several committees tasked with regulatory compliance.
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022)
This motion to dismiss decision upholds a Brophy claim against an activist investor and director who was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. The Court of Chancery found it was reasonable in the circumstances to infer materiality of the expression of interest, which represented a nearly 65% premium over the company’s trading price, and that the fiduciary was motivated to act upon it. The Court also found that a merger did not eliminate the plaintiff’s standing under the contemporaneous ownership requirement. The Court rejected the defendant's argument under Primedia regarding the asserted immateriality of the value of the plaintiff’s claims in the context of the merger. As the Court explained, under Parnes, a stockholder could may assert “a direct claim challenging a merger if the facts giving rise to what otherwise would constitute a derivative claim led either to the price or the process being unfair.” Here, the plaintiff’s allegations challenged the fairness of the sale process – a process that the activist allegedly delayed to serve his own interests at the expense of the Company running a better process or remaining independent.
Diep v. Trimaran Pollo Partners, No. 313, 2021 (Del. June 28, 2022)
After the Court of Chancery denied an initial motion to dismiss, the company formed a special litigation committee (“SLC”) to investigate the claims and determine whether the company should allow the plaintiff to proceed, take over the litigation, or move to dismiss. The SLC investigated and then moved to dismiss the claims, which the Court of Chancery granted under Zapata. Among other rulings, the Supreme Court affirmed and upheld the Court of Chancery’s rejection of the plaintiff’s contention that the SLC did not meet its burden to establish the independence of the SLC members. The Supreme Court agreed with the trial court that the record did not establish that as directors the SLC members had specific knowledge of the facts and circumstances that led the Company, as nominal defendant, to join the initial motion to dismiss those claims that the SLC later was charged with investigating. Justice Valihura dissented because she believed that material issues of fact existed regarding the SLC members’ independence.
Chancery Holds That A General Partner Of A Limited Partnership Cannot Breach Fiduciary Duties It Does Not Owe
JER Hudson Group XXI LLC, et al. v. DLE Investors, LP, C.A. No. 2021-0478-MTZ (Del. Ch. May 2, 2022)
Under Delaware law, the purpose of a limited partnership and a general partner’s authority and fiduciary duties may be defined by the terms of a limited partnership agreement (“LPA”). In this post-trial decision, the Court of Chancery held, among other things, that a limited partner failed to prove fiduciary claims against a general partner because the partnership’s express purpose and the general partner’s fiduciary duties did not require it to take actions the limited partner alleged would be value-maximizing. More ›
Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities
BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims. More ›
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. May 26, 2022)
In this case, an activist investor and director was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. And others at the company were alleged to have manipulated the company’s projections to justify the deal price at a lower valuation. The Court of Chancery found well-pled fiduciary duty claims against the alleged wrongdoers and aligned parties that avoided a Corwin dismissal. Among other things, the Court’s decision illustrates constellations of facts sufficient to question the independence of otherwise disinterested fiduciaries. Here, such combinations involved directors’ symbiotic relationships with an activist investor that resulted in repeat directorships in targeted companies.
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.
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.
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 ›
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.
In re Straight Path Communications Inc. Consol. Stockholder Litig., C.A. No. 2017-0486-SG (Del. Ch. Feb. 17, 2022)
This summary judgment decision arose out of a transaction involving the company Straight Path. Straight Path’s controller had sold company assets to another company controlled by his family, IDT, for an allegedly inadequate price. One of the assets was an indemnification claim against IDT, which used to be Straight Path’s parent company, for indemnification rights arising following Straight Path’s spin-off. Straight Path thereafter was sold to Verizon, eliminating derivative standing for the company’s stockholders to challenge derivatively the asset sale to IDT. Straight Path’s controller allegedly leveraged his control to wrest that indemnification claim from the company’s stockholders prior to the Verizon transaction. Stockholders brought direct claims against the family members and an affiliated trust in this action. Their claims previously survived dismissal, and in this decision their claims survived summary judgment. More ›
Chancery Dismisses Complaint Against LLC Directors Based on Specific Terms of the Operating Agreement and Laches
Erisman v. Zaitsev, C.A. No. 2020-0903-JRS (Del. Ch. Dec. 29, 2021)
Under Delaware law, parties to limited liability company agreements have the freedom to alter or eliminate fiduciary duties, and to eliminate liability for breaches of contractual and fiduciary duties. Here, the Court of Chancery dismissed LLC members’ complaint because, among other reasons, the Operating Agreement (i) replaced default common law fiduciary duties with a contractual standard that limited director liability to claims in which directors did not rely on the terms of the Operating Agreement in good faith; and (ii) it further provided that the directors were not liable for money damages unless they failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, derived an improper personal benefit, or breached their duty of loyalty to the company. More ›
Chancery Revived a Dismissed Claim after Discovery Revealed a Desire for Liquidity that Resulted in a Divergent Interest in M&A Sale Process
In re Mindbody, Inc., S’holder Litig., Cons. C.A. No. 2019-0442-KSJM (Del. Ch. Dec. 9, 2021)
A desire for liquidity can result in a divergent interest sufficient to plead fiduciary duty claims against a defendant protected by an exculpatory charter provision. More ›
Chancery Sustains Claims for Controlling Stockholders’ Breach of Fiduciary Duties, But Dismisses Claim to Void Transaction under DGCL Section 205
Amgine Techs. (US), Inc. v. Miller, C.A. No. 2020-0537-JRS (Del. Ch. Nov. 29, 2021)
This case involves the Court of Chancery’s consideration of various Rule 12 arguments for dismissal advanced by defendants – alleged controlling stockholders who assigned certain of the corporation’s intellectual property to another entity they owned, and who allegedly caused the corporation to enter into a stockholders’ agreement that gave them preferential terms. More ›