Delaware Business Litigation Report

Court of Chancery Dismisses ABC Proceeding for Failure to Comply with Statute

In re Windmil Therapeutics Inc., C.A. No. 2023-1294-PAF (Del. Ch. Mar. 13, 2024)
This case dealt with the voluntary assignment for the benefit of creditors under 10 Del. C. § 7381, et seq. The ABC statute requires several actions, including the filing of an inventory, which has typically involved the assignee filing a motion for two appraisers. After the appraisal has been provided, the statute requires that the Court fix a bond. Due to the fact that these proceedings may be ex parte and lack transparency, Delaware courts have issued rulings requiring more details from assignees and establishing firm deadlines that are not present in the ABC statute. In this case, the assignee violated the statute by failing to file an inventory within 30 days of the execution of the assignment. Furthermore, the assignee sought to seek approval of a bond prior to the appointment of appraisers, and one of the appraisals was unsigned and marked as a draft. Therefore, because of these statutory violations, the Court dismissed the ABC proceeding.

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Chancery Declines to Exercise Equitable Jurisdiction in a Contract Action to Compel the Release of Funds Held in Escrow

Graciano v. Abode Healthcare, Inc., C.A. No. 2022-0728-SG (Del. Ch. Mar. 4, 2024)
The Court of Chancery declined to exercise subject matter jurisdiction in connection with a seller’s contractual rights under a purchase agreement. The plaintiff argued that his contract claim required an equitable remedy to recover funds from an escrow fund. The Court held that a declaratory judgment, together with the plaintiff’s instruction to the escrow agent, was the only judicial action required under the agreement.  More ›

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Chancery Finds Challenge to Stockholders Agreement Both Timely and Ripe

West Palm Beach Firefighters' Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024)
Here, the Court of Chancery declined to apply equitable defenses to bar a challenge to a stockholders' agreement three years after it was disclosed and before any claims for breach of fiduciary duties arising from the agreement were asserted. The underlying dispute involved the plaintiff's challenge to governance terms of a stockholders' agreement under Section 141(a) of the Delaware General Corporation Law. The defendant company claimed that the plaintiff brought the suit both too late and too early. The defendant argued that the action was untimely because the plaintiff waited three years after the agreement was disclosed to sue. The Court explained that when analyzing timeliness, it must assume that the plaintiff’s claim is valid. If the plaintiff were proven correct and the challenged agreement held void, then equitable defenses, like laches, would not apply, as equitable defenses cannot validate a void act. Regardless, the Court found no unreasonable delay and no prejudice to the defendant, considering the facts of this case. The Court also analyzed the challenged acts as an ongoing violation, reviewed through either the continuing wrong method or the separate accrual method to determine when the violation occurred. Under both methods, the suit was timely. Further, the Court found no extraordinary circumstances that would justify applying laches. The defendant also claimed that the plaintiff should have to wait for a breach of fiduciary duty to occur before bringing the suit. The Court disagreed, reasoning that even though the plaintiff could bring a fiduciary duty claim in the future based on the conduct associated with the agreement’s challenged provisions, a facial challenge to the agreement’s legality presented a separate and ripe question of law.

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Chancery Awards Attorneys’ Fees to the Prevailing Party

Malkani v. Cunningham, C.A. 2020-1004-SG (Del. Ch. Feb. 28, 2024)
In this decision involving a contractual fee-shifting provision, both parties argued that they were entitled to fee-shifting as the prevailing parties. The Court held that the prevailing party was the party who succeeded in the overall litigation. More ›

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Court of Chancery Dismisses Aiding And Abetting Fraud Claim Against Corporate Officers And Directors On Grounds That A Corporation Cannot Conspire With Itself

Urvan v. AMMO, Inc., Consol. C.A. No. 2023-0470 PRW (Del. Ch. Feb. 27, 2024, corrected Mar. 14, 2024)
It is an axiom of Delaware law that a corporation acts through its human agents. This principle informs the causes of action available to would-be plaintiffs against a corporation and its human actors. This case follows the familiar fact pattern where, following a merger, a seller brings a variety of claims against the merged entity and its officers and directors. The plaintiff asserted an aiding and abetting fraud claim against the officers and directors of the company. The officers and directors moved to dismiss the aiding and abetting claim, arguing the intra-corporate conspiracy doctrine generally bars these types of claims because a corporation cannot conspire with itself or its agents. The exception to the general rule is when an “officer steps out of her corporate role and acts pursuant to personal motives.” Reviewing the allegations in the complaint, the Court found that the plaintiff failed to plead sufficient facts to establish that the officers and directors had acted out of their own personal motivations. The Court rejected the plaintiff’s conclusory argument that they participated in making misrepresentations in the merger agreement to hide their past wrongdoing; rather, the Court reasoned that in entering the transaction and making those representations “it seems apparent they were trying to get [the corporation] a favorable deal[.]” Thus, the Court dismissed the aiding and abetting claim.

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Chancery Invalidates Provisions of Stockholder Agreement Under Section 141 of the DGCL, Finding Agreement Impermissibly Granted Board-Level Decision-Making to Founder

West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024)
One day before a company’s shares began trading publicly, the founder and three affiliates entered into a stockholder agreement with the company. The agreement required the board to obtain pre-approval from the founder for eighteen categories of board action, to take various steps to ensure the founder could select a majority of the board even if he held less than a majority of the company’s outstanding voting power, and to form committees only if they contained designees of the founder proportionate to the number of his designees on the board. More ›

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Chancery Denies Motion to Dismiss Challenge to Microsoft-Activision Merger Where it Was Reasonably Conceivable that the Board Violated Section 251 of the DGCL

AP-Fonden v. Activision Blizzard Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024)
This case arose from a stockholder-plaintiff’s challenge to a merger whereby Microsoft acquired Activision Blizzard. Activision’s board met to approve the merger and approved a draft merger agreement. However, this draft agreement did not include (i) a disclosure letter, which was mentioned 45 times in the draft agreement; (ii) disclosure schedules, which were still being negotiated; (iii) the amount of consideration; or (iv) the surviving corporation’s certificate of incorporation. The agreement as-approved also did not address the issue of dividends that Activision would be permitted to pay while the deal was pending; when it approved the merger agreement, the board delegated the dividend issue to an ad hoc committee of the board. The full board did not review the merger agreement after this meeting, and the final version executed the next day included several changes from the draft agreement, including the dividend provision agreed to by Microsoft and the ad hoc committee. More ›

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Court of Chancery Dismisses Derivative Claims Under Rule 23.1 When Plaintiff Failed to Show that Board Members Faced a Substantial Risk of Liability in Failing to Prevent Personal Use of Company Property

Conte v. Greenberg, C.A. No. 2022-0633-MTZ (Del. Ch. Feb. 2, 2024)
In examining whether a pre-suit demand upon the board of directors would be futile, the Court will examine on a director-by-director basis (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand, and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand. In this case, the plaintiff alleged that the board faced a substantial risk of liability for failing to impose meaningful restrictions on certain executives’ alleged personal use of corporate airplanes, and also for issuing misleading disclosures. The Court disagreed, however, reasoning that even if directors failed to prevent the personal use of the airplane, that alone did not amount to bad faith, because the risk was contained. The Court reasoned the plaintiff’s claim related solely to the “misuse of two corporate assets by discrete individuals, as compared to a widespread operational deficiency.” Furthermore, the Court held that the directors were not at a substantial risk of liability for disclosure claims, because the proxy statement disclosed that certain executives had used the plane for personal use, and the failure to include the several details or characterizations upon which the plaintiff insisted were not material omissions in the context of the proxy statement. The Court accordingly granted the defendants’ motion to dismiss for failure to plead demand futility. 

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Court of Chancery Addresses Interplay of Attorney-Defendants’ Confidentiality Obligations and Discovery Duties

In re Harris FRC Corp. Merger and Appraisal Litig., C.A. No. 2019-0736-JTL (Del. Ch. February 19, 2024)
Attorney rules for professional conduct across all jurisdictions include a general obligation of confidentiality regarding client information. But what happens when the duty of confidentiality runs into an attorney's duty, as a case party, to produce discovery? This decision from the Court of Chancery provides some insight. More ›

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Chancery Finds Egregious Conduct in Books and Records Action Justifying Fee-Shifting Against Corporation

PVH Polymath Venture Holdings Ltd. v. TAG Fintech Inc., C.A. No. 2023-0502-BWD (Del. Ch. Jan. 26, 2024)
Under the “bad faith” exception to the American Rule, Delaware courts will consider shifting fees when aggressive litigation strategies amount to “glaringly egregious” conduct. Here, the Court found the defendant-corporation’s extraordinary attempts to resist a stockholder’s books and records demand under 8 Del. C. § 220 (“Section 220”) warranted requiring the corporation to pay the stockholder-plaintiffs’ attorneys’ fees and expenses.  More ›

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Failure to Preserve Mobile Data Leads to Multiple Sanctions in the Court of Chancery

Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. Jan. 26, 2024)
As more business is conducted via personal mobile devices, modern eDiscovery practice in Delaware generally involves the preservation of custodial mobile data. The failure to preserve relevant data while under a duty to do so may lead to the Court imposing sanctions. More ›

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Superior Court Dismisses Aiding and Abetting Claim Against Officers

RGIS International Transition Holdco LLC v. Retail Services WIS Corp., C.A. No. N21C-12-077 (Del. Super. February 13, 2024)
Under Delaware law, a corporation generally cannot conspire with its own officers, directors, or agents, nor can those individuals aid and abet a tort committed by the corporation. There is a “personal motivation exception” to this general rule, under which an agent can be liable for conspiring with or aiding and abetting the corporation when acting outside of that agent’s corporate role or pursuant to personal motivations.  More ›

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Chancery Dismisses Caremark Action Based on Insufficient Allegations of Bad Faith

Clem v. Skinner, et al., C.A. 2021-0240-LWW (Del. Ch. Feb. 19, 2024)
This Caremark decision involved the retail pharmacy company, Walgreens, and concerned billing practices for a particular insulin pen product that gave rise to unnecessary refill reminders and overbilling, which led to a government investigation and a whistleblower lawsuit. A stockholder plaintiff brought this related derivative action against Walgreens' directors and officers. The Court of Chancery easily disposed of the claims under Rule 23.1 for failure to allege demand futility. According to the Court, the plaintiff's allegations demonstrated that Walgreens' board fulfilled its oversight duty by enacting a board-level monitoring system and by responding to red flags. Indeed, soon after learning of the whistleblower action, the company considered and remedied the problem through software changes. And the plaintiff's contention that the board's actions “came too late and did too little” was “incompatible with bad faith—a necessary component of any Caremark claim.” Notably, the Court expressed some concern about the uptick of Caremark suits, cautioning that “more harm than good comes about if Caremark claims are reflexively filed” whenever an alleged defect is discovered or investigated.

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Delaware Supreme Court Affirms That the Right to Sue Corporate Officers is Not a “Power” Within the Meaning of DGCL Section 242(b)(2)

In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. 2023-1007-LWW (Del. Ch. January 17, 2024)
DGCL Section 242(b)(2) requires approval by each class of stock to amend a corporate charter, where the amendment alters or changes – adversely – the powers, preferences, or special rights of a class of stock. Here, the Delaware Supreme Court was asked to determine whether a charter amendment affecting the right to sue implicated "powers" of a certain class of stockholders, such that the amendment required approval by all classes of stock. Affirming the Court of Chancery below, the Delaware Supreme Court held that the right to sue is not a “power” within the meaning of Section 242(b)(2), and, thus, the charter amendment did not require approval by all classes of stock. More ›

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Chancery Denies Attorneys’ Fees for Appointment of New Directors Following Assertion of Derivative Claims

In re Oracle Corp. Deriv. Litig., Consol. C.A. No. 2017-0337-SG (Del. Ch. Feb. 7, 2024)
Under the mootness rule, a stockholder plaintiff can be awarded attorneys’ fees when the plaintiff’s litigation efforts result in the defendants taking action that results in a corporate benefit. In this case, following the stockholder-plaintiffs’ assertion of derivative claims, new independent directors were appointed by the corporation to serve on a special litigation committee to investigate the merits of the litigation. Although the underlying derivative claims were rejected after trial, the plaintiffs argued that the appointment of new directors nonetheless created a corporate benefit and, in fact, resulted in Oracle’s board having at least as many independent directors as supposedly non-independent directors. The Court disagreed, however, and held that the plaintiffs were not entitled to a mootness fee. The Court reasoned that the appointment of the new directors was not a significant benefit because the board was determined to have acted properly in the transaction that gave rise to the underlying lawsuit. Furthermore, the stockholder-plaintiffs did not seek the appointment of independent directors as part of the lawsuit. Therefore, the Court denied the plaintiffs’ request for attorneys’ fees.

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