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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.

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Chancery Rejects Challenge to Financing Made Open to All Investors, Reasons the LLC Operating Agreement Allows Self-Interested Conduct, so any Claims Must Assert Bad Faith

MKE Holdings Ltd. v. Schwartz, C.A. No. 2018-0729-SG (Del. Ch. Jan. 29, 2020).

Verdesian Life Sciences, LLC is an agricultural company focused upon rolling up various companies with proprietary plant health technologies. All members of the Board of Managers of Verdesian were appointed by Paine Schwartz Partners, LLC (“Paine”), a private equity firm that owned over seventy percent of the Class A Units of the company. Paine also benefited from a management agreement that entitled it to receive certain management fees tied to acquisitions. The LLC Operating Agreement required the Managers to perform their duties in good faith and in a manner they reasonably believed to be in or not opposed to the best interests of Verdesian. However, the Operating Agreement also allowed Managers and Members to “consider only such interests and factors as such Manager or Member desires, including its, his or her own interests” when facing discretionary decisions. The Court of Chancery concluded that the Operating Agreement “directs the Managers to operate in good faith and with ordinary care and effectively exculpates Managers for conflicted, negligent and other detrimental decisions … so long as taken in good faith.” More ›

Chancery Finds Liquidated Damages Clause for Breach of Non-Compete Unenforceable

Lyons Ins. Agency, Inc. v. Wark, C.A. No. 2017-0348-SG (Del. Ch. Jan. 28, 2020). 

In this decision on cross-motions for summary judgment, the Delaware Court of Chancery held that a liquidated damages clause for a breach of a covenant not to compete in an employment contract (the “Non-Compete”) was unenforceable on public policy grounds. The Court noted that while Delaware will enforce a non-compete that is “reasonably tied to the interests of the employer,” liquidated damages clauses that are “untethered to the losses caused by ex-employee competition,” are unenforceable contractual penalties. More ›

Delaware Court of Chancery Grants Motion to Dismiss Disclosure Claims Because Hedge Fund had Sufficient Information to Consider Corporation’s Self-Tender Offer

Chatham Asset Mgmt., LLC v. Papanier, C.A. No. 2017-0088-AGB (Del. Ch. Jan. 13, 2020).

The directors of a Delaware corporation that makes a self-tender offer must disclose all material facts. A fact is material if there is a substantial likelihood that a reasonable stockholder would consider it important in deciding whether to tender. More ›

Court of Chancery Finds Possibility of Actual Control and the Doctrine of Inherent Coercion Preclude Summary Judgment Based on Disinterested Stockholder Approval

The standard of review and who has the burden of proof are important issues in any trial of stockholder litigation. One instance where entire fairness is the standard of review is a merger where a controlling stockholder is on both sides of the transaction. Since the Delaware Supreme Court’s Kahn v. Lynch decision in 1994, Delaware law in that circumstance has mandated an entire fairness standard of review with the burden on the controlling stockholder and the proponents of the transaction to prove that the transaction was fair. But what happens when, after discovery, Plaintiffs fail to adduce evidence that a purported controlling stockholder in fact coerced the minority stockholders into approving the transaction? The Court of Chancery answered that question in In Re Tesla Motors, Inc. Stockholder Litigation, Cons. C.A. No. 12711-VCS (February 4, 2020), holding that disputed issues of fact remain to be resolved as to whether Elon Musk, as the owner of 22.1% of Tesla’s shares, was a controlling stockholder. The possibility that he might be a controlling stockholder invokes the potential for inherent coercion and therefore prevents summary judgment based on an informed Corwin-cleansing vote of a majority of the disinterested stockholders. More ›

Chancery Denies Attempt to Use Mediation Communications to Supplement Mediation Term Sheet

Posted In Chancery, Mediation

Starkman v. O’Rourke, C.A. 2018-0901-KSJM (Del. Ch. Jan. 14, 2019) (ORDER).

Parties who resolve a case through a mediation conducted under Court of Chancery Rule 174 should include all material provisions in any mediation term sheet. As the Order in Starkman demonstrates, Rule 174 provides no opportunity for a party to introduce mediation communications to assert that a signed mediation agreement does not accurately reflect the parties’ discussions. More ›

Delaware Supreme Court Explains That Litigants Seeking Application of Foreign Law Have Burden To Establish its Substance

Germaninvestments AG v. Allomet Corp., No. 291, 2019 (Del. Jan. 27, 2020). 

In reversing the Court of Chancery’s decision that Austrian law applied to the interpretation of whether a forum selection clause was permissive or mandatory, the Delaware Supreme Court ruled that, to the extent prior decisions were unclear on the issue, a party seeking the application of foreign law in a Delaware court has the burden not only of raising the issue of the applicability of foreign law under court rules, but also, of establishing the substance of the foreign law to be applied.    More ›

Delaware Superior Court Distinguishes Between Affirmative and Negative Covenants in Earnout Dispute

Posted In CCLD, Earn-Out

Quarum v. Mitchell Int’l, Inc., C.A. No. N19C-03-087 AML CCLD (Del. Super. Jan. 21, 2020).

Under Delaware law, parties may structure covenants in an earnout agreement as affirmative (mandating action) or negative (prohibiting action). Given the important differences in the obligations these types of covenants impose, as illustrated by this decision, parties should carefully consider the contractual language in drafting. More ›

Supreme Court Affirms Dismissal of Uber Derivative Action for Failure to Plead Demand Futility

Mcelrath v. Kalanick, No. 181-2019 (Del. Jan. 13, 2020). 

This case exemplifies the Delaware courts’ approach to examining demand futility. In 2016, Uber Technologies, Inc. (“Uber”) acquired Ottomotto LLC (“Otto”), a company started by a contingent of employees from Google’s autonomous vehicles group, in order for Uber to gain expertise in developing autonomous vehicles. The shareholder-plaintiff brought a claim, on behalf of Uber, against some of Uber’s directors. The plaintiff alleged that Uber’s directors ignored the risks presented by Otto’s alleged theft of Google’s intellectual property, which eventually led to Uber paying a settlement of $245 million to Google and terminating its employment agreement with Otto’s founder. More ›

CCLD Finds that Statute of Limitations for Tortious Interference Claim was Tolled until Key Documents Relating to the Alleged Scheme were Released

BTIG, LLC v. Palantir Technologies, Inc., C.A. No. N19C-08-314 EMD CCLD (Del. Sup. Ct. Jan. 3, 2020).

In this decision denying a motion to dismiss, the Superior Court’s Complex Commercial Litigation Division found that the plaintiff sufficiently alleged facts to toll the statute of limitations under the “time of discovery” rule, which is also known as the doctrine of “inherently unknowable injury.” More ›

Delaware Supreme Court Finds That Stockholder Failed to Satisfy Unambiguous Requirements of Advance Notice Bylaw

Blackrock Credit Allocation Income Tr., et al. v. Saba Capital Master Fund, Ltd., No. 297, 2019 (Del. Jan. 13, 2020).

The Delaware Supreme Court reversed the Court of Chancery’s decision requiring two closed-end trusts (together, the “Trusts”) to count the votes of Saba Capital Master Fund, Ltd’s (“Saba”) slate of dissident nominees at the Trusts’ respective annual meetings. The Supreme Court ruled that Saba’s nominations were ineligible because Saba had failed to respond to the Trusts’ request for supplemental information within the clear and unambiguous 5 day compliance deadline in the Trusts’ advance notice bylaws (the “Bylaws”).  More ›

Chancery Further Explains the “Proper Purpose” Requirement for Section 220 Demands

Lebanon County Employees’ Retirement Fund v. AmerisourceBergen Corp., C.A. No. 2019-0527-JTL (Del. Ch. Jan. 13, 2020).

Section 220 of the Delaware General Corporation Law (“DGCL”) provides stockholders seeking information for a proper purpose with the right to inspect a corporation’s books and records. This recent decision provides additional guidance by (i) rejecting a “purpose-plus-an-end” test as inconsistent with the text of Section 220 and Delaware Supreme Court precedent; and (ii) explaining that a stockholder may have a proper purpose to investigate wrongdoing regardless of whether she can show potentially viable claims against a board of directors.  More ›

Chancery Declines to Apply Corwin Where a Stockholder-Plaintiff Adequately Alleged the Existence of a “Control Group”

Garfield v. BlackRock Mortgage Ventures, LLC, C.A. No. 2018-0917-KSJM (Del. Ch. Dec. 20, 2019).

Under Delaware law, when a controlling stockholder benefits personally from the transaction in a manner not shared by minority stockholders, a stockholder vote does not trigger Corwin and restore the protections of the business judgment rule. This decision considers whether a stockholder-plaintiff sufficiently alleged a “control group” to avoid Corwin deference. More ›

Chancery Rejects Challenge to Delaware as Proper Venue in Books and Records Action

Stanco v. Rallye Motors Holding, LLC, C.A. No. 2019-0751-SG (Del. Ch. Dec. 23, 2019). 

Delaware courts generally respect contractual forum selection provisions. When it comes to Delaware LLCs, however, the Delaware statute expressly precludes a non-managing member from waiving its right to a Delaware forum for proceedings involving the LLC’s internal affairs.  6 Del. C. § 18-109(d). And, in general, any waiver of rights must encompass knowledge of the right and clearly expressed intent to relinquish it. This case discusses the interplay between these rules. More ›

Uber Board Was Disinterested and Independent to Assess a Pre-Suit Demand for Acquisition of Google Program

Uber Technologies’ board approved the acquisition of Google’s more mature autonomous vehicle program. The transaction was high risk and flawed from its inception, ending in embarrassment after Uber learned that key employees hired from Google had misappropriated Google’s proprietary information in the autonomous vehicle program. Uber issued $245 million in its stock to settle Google’s misappropriation claims. An Uber stockholder brought derivative claims against the Uber directors who approved the acquisition of Google’s autonomous vehicle program. More ›

Chancery Dismisses Stockholder Claims that a Minority Owner was a Controlling Stockholder or that a Majority of the Board was Beholden to the Minority Owner in Approving a Merger Transaction with the Minority Owner

In re: Essendant, Inc. Stockholder Litigation, C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019).

When as here a Delaware corporation’s charter contains an exculpation provision under Section 102(b)(7) of the Delaware General Corporation Law, stockholders who bring suit against directors who approve a merger transaction must allege violations of the duty of loyalty to state a non-exculpated claim. They may state such a claim if they adequately plead that a controlling stockholder breached duties for self-interested reasons, or that a majority of the board was self-interested or beholden to the buyer. They may also attempt to state a non-exculpated claim by claiming that a majority of the board acted in bad faith. To meet this bad faith standard, a plaintiff must plead facts showing that the decision to approve the transaction lacked any rationally conceivable basis associated with maximizing stockholder value. As the Court explained, allegations of mis- or non-disclosure will not suffice unless plaintiffs plead intentional misstatements or omissions based on a “factual narrative that would allow any inferential explanation of why these fiduciaries would so abandon their duties as to engage in bad faith." (emphasis in original). More ›