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Post-Closing Earn-Out Claims Dismissed, But Fiduciary Duty Claims Against Former Director Survive

Neurvana Medical, LLC v Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Feb. 27, 2020).

Neurvana Medical, LLC (“Neurvana”) sold a medical device to Balt USA, LLC (“Balt USA”), largely for post-closing consideration if the device obtained regulatory approval. Balt USA was required to use commercially-reasonable efforts to obtain the approval, but otherwise, Balt USA had sole discretion over the process.

After the device failed to obtain approval, Neurvana sued Balt USA claiming that Balt USA breached its obligation to use commercially-reasonable efforts, as well as what the Court described as “a boatload of other contractual and tort claims.” Additionally, Neurvana sued two executives over the underlying sale transaction. Neurvana alleged that its former board chairman (“Ferrera”), who was simultaneously the COO of Balt USA, breached his duty of loyalty in negotiating the transaction on Neurvana’s behalf.  Neurvana also alleged that Balt USA’s CEO (“Girin”) aided Ferrera’s breach.

Ferrera and Girin moved to dismiss on personal jurisdiction grounds, and all defendants moved to dismiss for failure to state a claim under Chancery Rule 12(b)(6). 

The Court rejected Ferrera’s jurisdictional challenge but granted Girin’s. Ferrera resigned as Neurvana’s chairman midway through the underlying transaction. Ferrera conceded that he was subject to personal jurisdiction for acts while he was chairman of Neurvana under § 18-109 of the Delaware LLC Act. However, he argued he was not subject to jurisdiction for his conduct after he resigned. Although the Court recognized that former directors generally owe no fiduciary duties, the Court concluded that Neurvana’s claims about Ferrera’s post-resignation conduct were “sufficiently related” to the pre-resignation claims so as to allow the Court to exercise jurisdiction over them. 

As to Girin, the Court concluded that Neurvana had not properly plead an aiding and abetting claim that would bring him within the Court’s jurisdiction. Citing Istituto Bancario SpA v. Hunter Engineering Co., 449 A.2d 210 (Del. 1982) and subsequent decisions, the Court noted that in order to allege a “conspiracy” under this theory of jurisdiction, Neurvana needed to properly plead both a breach of fiduciary duty against Ferrera and also a claim for aiding and abetting that breach against Girin. Neurvana failed because it did not plead sufficient facts for the Court to conclude that Girin knowingly participated in the alleged breach, or even that Girin and Ferrera communicated during that period of time. Thus, the Court dismissed as to Girin.

The Court also dismissed Neurvana’s various claims against Balt USA. As to the primary claim, the Court noted that Neurvana’s complaint alleged no facts tied to the parties’ contractual definition of commercially-reasonable efforts, which was a seller-friendly, objective standard that looked to the conduct of other companies in the industry. This distinguished the case from Himawan v. Cephalon, Inc., 2018 WL 6822708 (Del. Ch. Dec. 28, 2018), which involved a similar contractual standard, but where the plaintiffs had pleaded facts about how other industry participants acted in similar circumstances. As to the remainder of Neurvana’s various contractual claims, the Court found that they were pleaded in a conclusory fashion or that the claims had no basis in the parties’ agreement. And its fraud claim failed to meet the heightened pleading requirements of Chancery Rule 9(b) by failing to identify any false representations with particularity. Similarly, its tortious interference with prospective business relations claim failed to identify any specific opportunity or business relationship that Balt USA allegedly disrupted.

At the end, the only claims that survived were those for breach of fiduciary duty against Ferrera. According to Neurvana, Ferrera inserted himself into the negotiations purportedly on behalf of Neurvana, but allegedly in order to benefit Balt USA, despite his dual roles with Neurvana and Balt USA. Additionally, Ferrera had his long-time attorney negotiate the deal allegedly to Neurvana’s detriment. Based on these allegations, the Court concluded that Neurvana stated a claim for breach of fiduciary duty regarding Ferrera’s pre-resignation conduct. 

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