Delaware Business Litigation Report

Court of Chancery Orders Dissolution Upon End of Term

In re Nextmedia Investors LLC, C.A. 4067-VCS (May 6, 2009)

This is an interesting case, because it upholds the right of a member of an LLC to have it dissolved at the end of the term set for its existence in the LLC Agreement even when more than 90% of the members want it to continue. In the current recession, many limited purpose investment funds are seeking to extend the term of their existence, because they have not been able to find an investment for their member or stockholders' money. When the LLC agreement or the corporate certificate of incorporation limits how long the entity may exist without making an investment of its funds, management may try to extend the life of the entity by amending its governing instrument. However, at least in the case of an LLC, when the LLC agreement says that all members must consent to extending the entity's existence, the court will uphold that requirement.

This decision reflects the primacy of contract law in the LLC context. The result may have been different for a Delaware corporation where a requirement for unanimous voting by stockholders is probably not valid.

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Court of Chancery Limits Turning Contracts Into Fiduciary Duties

Nemec v. Shrader, C.A. 3878-CC (April 30, 2009)

A contract right does not create a fiduciary duty. Here the plaintiffs had a contract that gave their former employer the right to buy back company stock at book value. The employer did so on the eve of a big transaction, greatly increasing the company's book value. The Court held that plaintiffs' contract did not give them the right to insist that the company hold off on stock redemption until the big deal was done.

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Chancellor Warns of the Perils of Inaction

Tooley v. AKA Financial Inc., C.A. 18414-CC (April 29, 2009)

While it is well known that the failure to prosecute a class action may lead to the case being dismissed, many practitioners just do not believe in the need to move a case along or risk losing it. Here, the Chancellor of the Delaware Court of Chancery sends a clear message that delay in litigating a case will lead to the dismissal of the claims in the future.

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Corporation's Ability to Take Advantage of Corporate Opportunity an Issue of Material Fact

Norman v. Elkin, C.A. No. 06-005-JJF (D. Del. Apr. 28, 2009)

The district court denied motions for summary judgment for claims of breach of contract, usurpation of corporate opportunities, breaches of fiduciary duty, breach of the duty of disclosure, conversion and misappropriation, and fraudulent representation.  In their motion, the defendants responded to the plaintiff’s usurpation of corporate opportunity and misappropriation claim by arguing that the claim failed as matter of law, because the defendant corporation did not have the financial capability to participate in an auction for certain licenses. The district court cited the Court of Chancery’s standard for establishing that a corporation is financially unable to take advantage of a corporate opportunity. “[S]uch financial inability must amount to insolvency to the point where the corporation is practically defunct.” The district court agreed with the plaintiff that a reasonable jury could find that the defendant was not practically defunct and could have raised funds necessary to participate in the auction.

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Court of Chancery Explains Scope of Representation Clauses

Ivize of Milwaukee, LLC v. Compex Litigation Support LLC, C.A. 3158-VCL (April 22, 2009)

While a statement may not be a lie unless the speaker knows he has failed to tell the truth, a contractual representation does not require knowledge that it is false for it to be actionable if untrue. This decision then puts to rest the argument that scienter is needed to prove a breach of a contractual representation.

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Spear Complaint Not Fatally Speculative

Spear Pharm. Inc. v. William Blair & Co. LLC, C.A No. 07-821-JJF (D. Del. Apr. 27 2009)

The district court denied motions to dismiss the complaint and found the Supreme Court’s decision in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) instructive. In Twombly, the Supreme Court considered whether a complaint that alleged conspiracy to restrain trade, in violation of the Sherman Antitrust Act, but lacked factual context suggesting an agreement, as distinct from identical, independent action, should be dismissed. The district court concluded that, under Twombly and Third Circuit precedent, the complaint was not “fatally speculative” and should not be dismissed. Unlike the Twombly complaint, where the allegations mentioned no specific time, place, or person involved in the alleged conspiracies, the Spear complaint cited an individual, a time frame, and a temporal sequence of events supporting the allegations.

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District Court Denies Motion for Summary Judgment Based on Void Ab Initio Defense

Lynch v. Coinmaster USA, Inc., C.A. No. 06-365-JJF (D. Del. Mar. 30, 2009)

In this opinion, the court denied a broad application of the ultra vires doctrine. Seeking damages for breach of an employment agreement with Coinmaster USA, Inc., the plaintiff claimed that he was owed outstanding monthly pay, a termination fee, profits, and stock options. Moving for summary judgment, the defendants argued, inter alia, that the agreement was void ab initio in light of the plaintiff’s pre-existing employment agreement with Coinmaster Gaming PLC, a company related to Coinmaster USA, Inc. The defendants cited Solomon v. Armstrong, 747 A.2d 1098 (Del. Ch. 1999), noting that ultra vires acts are void ab initio. Although the court was not entirely clear on the defendants’ position, the court ascertained that the defendants were arguing that the plaintiff, by contracting with Coinmaster USA, Inc. for additional compensation, breached the Coinmaster Gaming PLC agreement and, hence, breached a fiduciary duty to Coinmaster PLC. Under Solomon, the defendants claimed that such a contract is ultra vires and, therefore, void ab initio.     

Rejecting the defendants' argument, the court found that the Coinmaster USA, Inc. agreement was not void ab initio. Delaware law severely restricts the categories of claimants who can raise the ultra vires defense. The defendants cited no cases, and the court could not identify any authority, suggesting that such a contract was ultra vires and, hence, void ab initio merely because it conflicts with a contract involving a third party. Finding that Solomon does not stand for this proposition, the court denied the defendants’ motion for summary judgment with respect to the plaintiff’s breach of contract claim.  

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Court of Chancery Holds When There Is No Contribution There Is No Fee

In re William Lyon Homes Shareholders Litigation, C.A. No. 2015-VCN (Del Ch. April 4, 2009)

This decision deals with when a plaintiff may receive a fee when a merger price is increased after he files suit and then his case is mooted. The general rule applied here is that while the defense has the burden of proving the plaintiff did not contribute to the increased price, when the merger consideration was increased without any help from the plaintiff, there is no fee. In short, no help, no fee.

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The 21st Tulane Corporate Law Institute Begins Tomorrow

Here is the brochure for the program, which takes place April 2-3.  The panelists are among the most respected and knowledgeable legal minds and financial experts involved in corporate law and M&A, including Chief Justice Myron T. Steele and Justice Jack B. Jacobs of the Delaware Supreme Court and Vice Chancellors Leo E. Strine, Jr., Stephen P. Lamb, and Donald F. Parsons, Jr., of the Delaware Court of Chancery.      

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Court of Chancery Upholds Right of "Beneficial" Member to Sue in LLC Case

Mickman v. American International Processing LLC, C.A. No. 3869-VCP (Del. Ch. April 1, 2009)

In the case of an LLC, unlike with a Delaware corporation, the statutory definitions of who may seek court relief have not been broadened. Generally, only a member or manager has those rights, and membership is determined by the LLC operating agreement. This decision holds that a plaintiff may prove she is a member entitled to enforce membership rights by extrinsic evidence, such as a tax return listing her as a member.

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Court of Chancey Explains Class Release Rules

In re Countrywide Corporation Shareholders Litigation, C.A. No. 3464-VCN (Del. Ch. March 31, 2009)

This decision provides an excellent outline of what claims may be released in a class action settlement. Here the objectors to the settlement had a damage claim unique to them but that the proposed settlement would have released. The Court held that the objectors needed to be given the right to opt out of the settlement or the release that was part of the settlement must be more limited so as to not affect their rights in their individual claim.

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Delaware Supreme Court Limits Revlon and Defines Good Faith, Again

Lyondell Chemical Company v. Ryan, C.A. 401, 2008 (Del Sup March 25, 2009)

In this expected reversal of a decision by the Court of Chancery, the Supreme Court has again defined what constitutes "bad faith." The reversal was expected because of the unusual action of the Supreme Court in taking an interlocutory appeal from a decision denying summary judgment . The trial court's decision was considered controversial by some, although the critics exaggerated its significance, as the trial court itself explained when it had refused to certify the appeal.

First, the Supreme Court decided that Revlon duties did not come into play when the Board had rejected a merger proposal. No surprise there, and this is largely a technical point.

Second, the Court repeated, more forcefully than in the past, that only when a disinterested board "knowingly and completely failed to undertake their responsibilities" will it be said to act in bad faith. This means that grossly negligent conduct is not bad faith when there is no scienter involved.

Most significantly, in this case there was no real evidence that the Board knew what it was doing was wrong. It had competent legal and financial advisers, the merger price was a good one, and a "fiduciary out" clause permitted at least some possibility of a competing offer.

Saint Louis University law professor Matt Bodie offers an interesting view on the decision over at the PrawfsBlawg.

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Court of Chancery Limits Use of Interested Directors' Votes

Sutherland v. Sutherland, C.A. No. 2399-VCL (Del. Ch. March 23, 2009)

This decision is a good outline of the effect of Section 144 of the Delaware General Corporation Law ("DGCL") that permits transactions to be judged on their merits, even if they are with interested directors. After explaining that law, the Court went on to hold that a certificate of incorporation provision that permitted interested directors' votes to be used to invoke the business judgment rule would be in violation of the DGCL and, thus, invalid.

This is important, because it means that, at least in a Delaware corporation, there are limits on what exculpation can be provided to directors in a certificate of incorporation. The law may well be different in an LLC or LP, of course.

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Court of Chancery Explains Scope of Exculpation Clause

Addy v. Piedmonte, C.A. 3571-VCP (Del. Ch. March 18, 2009)

It is now common to include a clause in contracts asserting that a buyer has not relied on anything she was told and instead has only relied on her own investigation and the promises contained in her written contract. Sellers then seek to defeat fraud claims by arguing that the buyer is barred from showing reliance on anything not exactly in the contract between the parties. Courts do enforce these provisions as they have a legitimate place in private ordering.

Here, the Court explains the limits of these exculpation clauses. Even sophisticated parties dealing with a purely commercial matter with the time to investigate may be able to state a claim for fraud despite such an exculpation clause. Briefly, it depends on how bad the lying seems to the court. This case reeks of a scheme to defraud an investor, and the Court was concerned that it would further the scheme if it dismissed the claim because of the exculpation clause. Note, however, that the plaintiff still has to prove he relied on what he claims was a false statement in the face of language in the contract that he was not relying on matters outside the contract itself. Somehow it seems, if he got past the motion to dismiss, he has a good shot at prevailing.

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District Court Denies Partial Summary Judgment on Breach of Implied Covenant of Good Faith and Fair Dealing Claim

Zwanenberg Food Group (USA) Inc. v. Tyson Refrigerated Processed Meats, Inc., Civ. No. 08-329-LPS (D. Del. Feb. 27, 2009).

United States Magistrate Judge Leonard P. Stark denied Tyson Refrigerated Processed Meats, Inc.’s (“Tyson”) motion for partial summary judgment of Zwanenberg Food Group (USA) Inc.’s (“ZFG”) contract-based claim that Tyson breached the implied covenant of good faith and fair dealing.

Both Tyson and ZFG are producers and manufacturers of canned meats and other food products. Pursuant to the contract at issue, ZFG purchased from Tyson inventory and equipment used to manufacture canned luncheon meat for private label customers. Wal-Mart Stores, Inc. (“Wal-Mart”) was Tyson’s largest customer for the goods it produced using the assets that were sold to ZFG. Tyson and ZFG, without the involvement of Wal-Mart, executed an Asset Purchase Agreement (“APA”) and the deal closed. More ›

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