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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Morris James Blogs
Delaware Superior Court CCLD Clarifies When a Plaintiff is on Inquiry Notice to Bring a Claim for Limitations Period Purposes
Even in circumstances where a statutory limitations period can be tolled, tolling typically will cease once a plaintiff may be charged with inquiry notice of its potential claims. In this dispute brought against the biopharmaceutical company AstraZeneca arising out of database subscription arrangement, the Complex Commercial Litigation Division of the Delaware Superior Court held that defendant AstraZeneca was entitled to summary judgment because the plaintiff Ocimum Biosolutions had inquiry notice of its claims for breach of contract and misappropriation of trade secrets more than three years before commencing suit. More ›
Material adverse effect clauses provide a form of buy-side protection in merger agreements. These often are complex provisions permitting the buyer to avoid closing under the right circumstances, usually involving an actual or reasonably expected serious business deterioration. Channel Medsystems represents the latest decision from the Delaware courts interpreting and applying a material adverse effect clause. Here, the Court of Chancery held that a buyer’s termination of a merger agreement was invalid because the fraudulent conduct of an officer of the seller, which rendered certain contractual representations materially false, did not have, nor was reasonably expected at the time of termination to have, a material adverse effect on the seller. More ›
Chancery Addresses Discovery and Privilege Implications of Oracle Special Litigation Committee’s Decision to Defer to Stockholder-Plaintiff’s Prosecution of Derivative Claims
In this decision, the Delaware Court of Chancery considered the implications of a decision by a special litigation committee of Oracle Corporation to cede control of derivative claims to a stockholder-plaintiff – including whether that decision required the production of Oracle’s privileged documents that were provided to the committee and its counsel. More ›
Chancery Holds Plaintiffs’ Emails with Counsel on Defendants’ Server Are Privileged Due to Application of Argentine Law
The plaintiff brought suit seeking confirmation that it validly acquired from defendants a majority ownership interest and the concomitant right to manage Grupo Belleville Holdings, LLC (the “Company”), a Delaware limited liability company. The discovery motion at-issue addresses the confidentiality of emails between Plaintiff and his counsel – complicated by the fact that they are stored by a server owned and operated by the defendants. To explain, the defendants had provided the Argentina-based Company and its employees, including the plaintiff, with email addresses for the purpose of executing their job duties. The email addresses and the server on which the emails were stored were not owned by the Company, however; rather, it was known to all involved that they belonged to a separate company of the Defendants. The emails at issue were between plaintiff Lynch and two in-house Company attorneys who also provided legal advice to him on personal matters, distinct from advice they provided him in his capacity as the Company’s manager. In discovery, Lynch sought to vindicate the privilege. He moved to compel the defendants to turn over the emails, but the defendants refused. More ›
Chancery Enforces Delaware Forum Selection Clause and Examines the Limited Circumstances Where a Foreign Nation May Divest Delaware Courts of Jurisdiction
In AlixPartners, the Court of Chancery confirmed its jurisdiction to adjudicate disputes relating to the internal affairs of a Delaware limited liability partnership and explained the limited circumstances in which foreign law may divest the Court of subject matter jurisdiction. The suit arose when an employer, the global business advisory firm AlixPartners, which operated as a limited liability partnership, sued an employee, who also held partnership interests, for breaches of the relevant LLP Agreement, Equity Agreement, and Employment Agreement. Pursuant to the LLP and Equity Agreements, the employee had received equity in two partnerships formed under Delaware law by AlixPartners. More ›
Venture Capital Firms Did Not Constitute a Control Group Barring Stockholder Direct Claims for Dilution
To avoid demand futility and standing requirements for a derivative claim, the plaintiff stockholders in Sheldon v. Pinto Technology Ventures, No. 81, 2019 (Del. Oct. 4, 2019) attempted to plead a direct claim for dilution of their voting and economic interests by alleging that several venture capital firms constituted a “control group” of stockholders under Gentile.
Dilution claims are “classically derivative” under Delaware corporate law. In Gentile v. Rossette, 906 A.2d 91 (Del. 2006), the Delaware Supreme Court recognized an exception that dilution claims can be both derivative and direct in character when: “a stockholder having majority or effective control causes the corporation to issue ‘excessive’ shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and the exchange causes an increase in the percentage of the outstanding shares owned by the controlling stockholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.” More ›
Chancery Examines Computer Misuse Claims Against Former Employee and Awards Defamation Damages Against Former Employer
In one of her final opinions before joining the Delaware Supreme Court, Vice Chancellor Montgomery-Reeves addressed various statutory computer misuse claims against a former employee and awarded $100,000 in compensatory damages for the former employer’s libel and slander. In Laser Tone v. Delaware Micro-Computer, plaintiff, a photocopier company, terminated the defendant employee after he refused to sign a non-compete agreement. In its subsequent lawsuit, plaintiff claimed that the defendant stole company information and deleted certain data from his company computer and cell phone devices before departing. Certain of plaintiff’s executives then communicated to third parties that the defendant was “a thief and a drug user.” Plaintiff brought a cause of action against the defendant for violating the Delaware Misuse of Computer System Information Act (“DMCSIA”) by allegedly stealing data and deleting certain other information from company systems. The defendant counterclaimed for libel and slander, arguing that plaintiff’s communications were false and had caused him significant mental and reputational harm.
After a two-day trial on the merits, the Court of Chancery found insufficient evidence to support a majority of the plaintiff’s theories of liability, but did find that the defendant had deleted certain data from his company laptop in violation of the DMCSIA. Finding no non-speculative evidence of harm, however, the Court awarded only nominal damages. The Court also found that plaintiff failed to prove that the defendant had stolen any data. Having determined that plaintiff failed to prove the defendant was a “thief,” the Court denied plaintiff’s affirmative defense of truth and entered judgment for the defendant on his defamation counterclaims. The Court, in its discretion, awarded $100,000 in damages, basing the award on evidence that the defendant had “lost two jobs, customers, and friends; and, [because] he fear[ed] his business [was] in jeopardy.”
Chancery Finds Proper Purpose in Books and Records Demand to Investigate Potential Wrongdoing in CBS-Viacom Merger, Orders Narrowed Inspection that Includes Electronic Documents
A stockholder seeking books and records in Delaware states a proper purpose for inspection by demonstrating a credible basis to suspect that fiduciaries engaged in wrongdoing. So long as the documents sought are necessary and essential to that purpose, the Court of Chancery will order inspection. The Court generally will not, however, require a broad production of electronic documents akin to plenary discovery. More ›
Chancery Declines to Establish New Rule Concerning Books and Records Inspections Related to Proxy Contests
Section 220 of the DGCL grants stockholders a qualified right to inspect corporate books and records “necessary and essential” to a “proper purpose.” One recognized proper purpose is investigating potential corporate wrongdoing or mismanagement. In such cases, the stockholder must establish a “credible basis” for the suspicion before the Court of Chancery will order inspection. When a stockholder makes that showing, the Court has permitted use of the produced books and records to mount a proxy contest. However, as the Court of Chancery observes in this decision, no Delaware court has compelled inspection “when the stockholder’s only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest.” And under the facts and circumstances of this case, the Court declines to be first. More ›
Chancery Construes Sellers’ APA Contractual Representations Concerning Customer Relationships and Changes in the Business, Finds No Breach
This case serves as a cautionary tale when sellers’ representations in a purchase agreement fail to fully protect against the business risks in question. According to the Court, this approach encourages contracting parties to allocate risks and draft agreements with precision. This principle also aligns with Delaware’s pro-contractarian policy to enforce strictly the terms of parties’ agreements, especially when sophisticated parties at arm’s-length negotiate those agreements. More ›
Delaware law sets a high bar to sufficiently plead a Caremark claim for failure of board oversight, especially when the plaintiff must satisfy the heightened pleading requirements for establishing demand futility under Court of Chancery Rule 23.1. To overcome those hurdles, a plaintiff must plead with particularity that the board of directors either (i) utterly failed to implement any reporting or information systems or controls to address the risk that ultimately manifested, or (ii) having implemented such safeguards, consciously failed to oversee their operation and thereby disabled themselves from being informed of the risk that ultimately manifested. For either Caremark prong, the plaintiff must sufficiently plead bad faith, essentially that the directors knew they were not discharging their fiduciary duties. More ›
Chancery Finds Request for “Corrective Action” to be a Litigation Demand, Dismisses Derivative Claims for Failure to Plead Wrongful Refusal
Under the Delaware Supreme Court’s decision in Spiegel v. Buntrock, 571 A.2d 767 (Del. 1990), a stockholder who makes a demand upon the board to address potential wrongdoing concedes that the board may properly decide whether to cause the corporation to bring suit. That concession makes it more difficult to satisfy pleading standards in a later derivative suit. In this recent decision, the Court of Chancery reviewed the law in this area and concluded that – despite a disclaimer to the contrary – the plaintiff’s pre-suit letter was a litigation demand. More ›
Chancery Examines Partnership Agreement Allowing Deference to General Partner’s Decisions While Acting in its Individual Capacity and Instances in Which a Tortious Interference Claim can Extend to a General Partner’s Controllers
The Court of Chancery held that plaintiff former common unitholders failed to state a claim for breach of fiduciary duties in connection with the general partner’s alleged wrongful exercise of its call right to purchase all of the common units after the price of those units plummeted following the general partner’s public announcement of its intent to exercise the call right. The governing limited partnership agreement established different duties and standards of conduct depending upon whether the general partner was acting in an individual capacity or in an official capacity as the general partner. The Court reasoned that because the general partner was acting in its individual capacity in the exercise of its call right, the most deferential standard of conduct provided for in the partnership agreement, which eliminated the general partner’s duty to the limited partner common unitholders and the partnership, applied to this allegedly conflicted transaction. The Court noted that the plaintiffs’ request to apply the partnership agreement’s more heightened standard of conduct to the exercise of the call right misapplied Delaware Supreme Court precedent set forth in Allen v. El Paso Pipeline GP Co., L.L.C., 2015 WL 813053, at *1 (Del. Feb. 26, 2015). In Allen, the Supreme Court interpreted a nearly identical partnership agreement provision, and based on that provision, ruled that the general partner’s ability to act in its individual capacity “parallels the ability of a corporate fiduciary to exercise rights that are not held or exercised in a fiduciary capacity.” More ›
Chancery Refuses to Reform Operating Agreement to Impose Class Voting Requirements Not Contained in the Plain Language of the Agreement
The Court of Chancery held that plaintiff common unitholders of an LLC failed to state a claim for breach of the operating agreement and failed to adequately plead reformation in connection with their challenge to an asset sale that resulted in the senior preferred unitholder receiving the entirety of the sale consideration. Applying fundamental tenets of contract interpretation, the Court reasoned that the plain language of the operating agreement only required a majority vote of the combined total of preferred and common unit holders, and not a majority vote of each separate class of preferred and common unitholders, to approve the asset sale. The Court also rejected the plaintiffs’ claim for reformation to impose a separate voting class requirement that was contained in a term sheet that preceded the operating agreement, but was ultimately omitted from the final operating agreement. In analyzing the reformation claim, the Court relied upon West Willow-Bay Court, LLC v. Robino-Bay Court Plaza, LLC, 2009 WL 3247992 (Del. Ch. Oct. 6, 2009), in which the plaintiffs unsuccessfully sought reformation based upon a unilateral mistake that a contract amendment did not comport with a prior memorandum of understanding. The Court found that the common unitholders reformation claim was insufficient for the same reasons relied upon by the Court in West Willow-Bay: (i) the term sheet was not binding; (ii) even a cursory review of the voting provision in the operating agreement would have put the plaintiffs on notice that it differed from the term sheet; and (iii) it was not apparent that the voting provision in the operating agreement was unacceptable to the plaintiffs. Accordingly, the Court dismissed both the plaintiffs’ claim for breach of the operating agreement and their alternative claim for reformation.
Chancery Declines to Dismiss Second-Filed Delaware Action Because Delaware Forum Selection Clause Preempts McWane
Defendants brought an action in Montana state court against plaintiffs. Plaintiffs later filed this action in the Delaware Court of Chancery, alleging several claims that shared a common nucleus of operative facts with those asserted in Montana. Defendants moved to dismiss or stay the Delaware action under the McWane doctrine, which generally gives deference to a first-filed action in another jurisdiction and authorizes a dismissal or stay of a second-filed Delaware action. More ›