Delaware Business Litigation Report

Chancery Sustains Claims for Improper Termination of Agreements For Cause in Connection with a Joint Venture to Develop Data Centers for Amazon

W.D.C. Holdings, LLC v. IPI Partners, LLC, C.A. No. 2020-1026-JTL (Del. Ch. June 22, 2022)
Two entities entered into a joint venture to develop data centers for Amazon. One entity managed the joint venture day to day, and the other controlled the board and had removal rights under certain circumstances. When whistleblowers raised concerns of potential kickbacks and the FBI executed a search warrant on the managing entity’s CEO, the second entity issued letters seeking to remove the CEO and corporate affiliates for cause from their roles in the joint venture and to terminate certain other agreements. The managing entity filed suit to challenge its removal and its affiliates’ removal, and the termination of the other agreements. The defendants moved to dismiss.

Applying the plaintiff-friendly reasonable conceivability standard at the pleadings stage, the Court held that the well-pled facts supported a reasonable inference that the CEO was not aware of any kickbacks, and thus, a for-cause event had not occurred. The Court reasoned that the inference that the CEO was not aware of a kickback scheme meant his conduct did not constitute the gross negligence, willful misconduct, or fraud that would be required to constitute a for-cause event. The Court rejected the defendants’ argument that the issuance of an FBI search warrant was a sufficient basis to conclude a crime had been committed and that a for-cause event existed, explaining that the for-cause language in the joint venture agreement did not include such preliminary steps in the criminal justice process. The Court also pointed to a series of plaintiffs’ allegations that supported the inference that the defendants had created a pretext to terminate the plaintiffs and had a financial incentive for such termination. Accordingly, the Court concluded that the plaintiffs had stated a claim that the defendants improperly exercised their termination and removal rights in order to obtain control over the joint venture.  

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