Chancery Declines to Find Personal Jurisdiction Over LLC Officers
CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Mar. 27, 2019).
Section 109 of the Delaware Limited Liability Company Act is an “implied consent” statute. It provides for personal jurisdiction in Delaware over (i) “managers” named in the governing LLC agreement, and (ii) persons who otherwise “participate materially” in the LLC’s management. 6 Del. C. § 18-109(a). This recent decision is notable for holding that, based on the allegations, certain officers who performed important tasks for the LLC did not “participate materially” in its management for Section 109 purposes. The Court pointed to precedent holding that “material participation” for Section 109 purposes requires actual control or a decision making role. Here, one defendant was alleged to be a former manager who retained a “vice chairman” title and engaged a financial advisor on the LLC’s behalf. The other defendant at-issue served as the company’s President and CEO and had important day-to-day responsibilities. Such allegations fell short, however, in the circumstances alleged, where the plaintiffs’ complaint and arguments emphasized that, another defendant, who was designated as the “manager” in the governing LLC agreement, exercised “absolute control and discretion” and acted as “emperor, supreme leader and dictator for life.” The Court reasoned such contentions precluded a finding that the two officers possessed decision making authority of their own. Accordingly, they were not subject to personal jurisdiction under Section 109.
ShareSuperior Court CCLD Finds Court of Chancery Lacks Jurisdiction Over Dispute, Despite Forum Selection Clause in Agreement
Delaware law is clear that, while Courts will generally respect parties’ contractual choice of forum, a forum selection clause cannot confer jurisdiction or venue where it otherwise is not available. The contract at issue in this action, which arose out of stock purchase agreement in which plaintiff agreed to convey all of its issued and outstanding shares of a subsidiary to defendant, provided for exclusive jurisdiction in the Court of Chancery, or if the Court of Chancery lacked subject matter jurisdiction, the United States District Court for the District of Delaware. If the District of Delaware lacked jurisdiction, the venue would be in “any court of competent jurisdiction sitting in the State of Delaware[.]”
When the plaintiff filed suit in the Complex Commercial Litigation Division of Delaware’s Superior Court, the defendant argued that the parties’ dispute regarding post-closing tax matters should instead be filed in the Delaware Court of Chancery pursuant to 6 Del. C. § 18-111 (providing subject matter jurisdiction in the Court of Chancery to interpret and enforce LLC agreements and “any other instrument, document, agreement or certificate contemplated by … this chapter”). More ›
ShareSuperior Court CCLD Holds that Anti-Reliance Clause Clearly Disclaimed Reliance on Extra-Contractual Representations or Implied Warranties
Affy Tapple, LLC v. ShopVisible, LLC, C.A. No. N18C-07-216 (MMJ) (CCLD) (Del. Super Mar. 7, 2019).
In agreements governed by Delaware law, a standard integration or merger clause will not bar claims for misrepresentations made to induce entry into the contract. In order to bar such claims, the agreement must include language expressly disclaiming any reliance upon extra-contractual statements. While there are no “magic words” that are required, the language at issue must add up to a clear disclaimer. Here, the Complex Commercial Litigation Division of Delaware’s Superior Court considered a clause stating the plaintiff agreed “that the limited express warranties set forth in this section … are exclusive” and that the defendant “specifically disclaimed all other representations and warranties, express or implied[.]” The Court stated this was “more than a standard integration clause.” Reasoning that “[l]anguage indicating a clear understanding of the parties’ intent is all that is required[,]” the Court concluded this section was “drafted with sufficient clarity to establish that there was an understanding that [the claimant] could not rely upon any implied warranties, or any express warranties outside of the [agreement].” Therefore, the Court dismissed the plaintiff’s claim for fraud in the inducement based on alleged extra-contractual representations.
ShareChancery Applies Corwin Doctrine to Medium-Form Merger Absent Controller Conflict
English v. Narang, C.A. No. 2018-0221-AGB (Del. Ch. Mar. 20, 2019).
Under the well-known Corwin doctrine, when a transaction not subject to the entire fairness standard of review is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies. Corwin's cleansing effect applies not just to affirmative votes in favor of long-form mergers, but also to acceptance of tender offers for medium-form mergers, like the merger in this case. This Corwin dismissal is notable for its unique facts—the target's substantial blockholder (34%) with voting control (84.5%). But, as this decision explains, the mere existence of a controlling stockholder does not give rise to entire fairness review and take a case outside of Corwin. For that to happen, the transaction must also involve some sort of disabling conflict for the controller. Here, the complaint lacked specific factual allegations to sustain the plaintiffs' theory that the controller had an emergency liquidity need and thus received a unique benefit from tendering. In this regard, the Court found insufficient plaintiffs’ conclusory contention that the controller needed to liquidate his position as part of his estate planning and wealth management strategy following his retirement because his holdings made up most of his net worth.
Meghan A. Adams Presents at ABA Business Law Section’s Spring Meeting
Morris James attorney Meghan Adams will present on the Delaware Court of Chancery’s decision in Klein v. H.I.G. Capital, L.L.C., 2018 WL 6719717 (Del. Ch. Dec. 19, 2018) at the ABA’s Private Equity and Venture Capital Jurisprudence Subcommittee meeting in Vancouver, BC on March 29, 2019.
Meghan A. Adams is a member of the firm's Business Litigation group and focuses her practice on Corporate and Commercial Litigation. She represents clients in a wide variety of matters in the Delaware Court of Chancery, Delaware Superior Court, Complex Commercial Litigation Division, Supreme Court of Delaware and the District of Delaware, including in the areas of corporate governance, complex commercial litigation, stockholder litigation, fiduciary duties, limited liability company and limited partnership disputes, officer and director indemnity and breach of contract. Meghan is currently the Chair of the Partnerships and Alternative Business Entities Subcommittee of the Business Law Section of the American Bar Association. She was also recently nominated to become a Fellow of the American Bar Foundation.
To view our summary of the Chancery Court opinion, click here.
ShareMorris James Attorney Ed McNally Named to JD Supra Readers’ Choice Awards
Morris James is pleased to announce that attorney Edward M. McNally has been recognized in JD Supra's fourth-annual Readers’ Choice Awards. The award recognizes popular authors (from among 50,000) for the visibility and engagement their thought leadership earned them last year. Mr. McNally has been recognized for the second consecutive year in the category of Mergers and Acquisitions. More ›
Chancery Finds Controlling Stockholder Impliedly Consented to Jurisdiction Through Board’s Adoption of Delaware Forum-Selection Bylaw
Stockholders that control Delaware corporations find themselves subject to fiduciary duties. According to this Court of Chancery decision, in certain situations, they also might find themselves subject to personal jurisdiction in Delaware in connection with the controlled-corporation’s adoption of a Delaware forum-selection bylaw. Past Delaware cases have found that, by expressly consenting to a Delaware forum for disputes, parties may also be deemed to have impliedly consented to personal jurisdiction here. But this decision is the first to find implied consent by a controlling stockholder through the controlled-corporation’s adoption of a forum-selection bylaw. More ›
ShareChancery Declines to Extend Rent-A-Center Merger Agreement, But Questions Request for Termination Fee
The merger agreement at issue in this case included provisions permitting extensions or terminations to account for potential closing delays. Relevant here, the agreement allowed either party to terminate after a particular deadline if the other party had not timely exercised its right to extend the contract. The target exercised that right to terminate after the acquirer inadvertently failed to extend. This litigation ensued, with the acquirer making various equity-based arguments to prevent the target’s termination. More ›
ShareChancery Addresses Scope of Contractual Forum Selection Provisions
Plaze, Inc. v. Callas, C.A. No. 2018-0721-TMR (Del. Ch. Feb. 28, 2019).
Delaware courts generally respect and enforce forum selection provisions in contracts. It is often disputed whether or not certain contracting parties or parties related to contracting parties are subject to such provisions. That fight becomes more complicated when it is not a single contract but multiple related contracts at issue. This decision, dealing with a stock purchase agreement and related production facility leases, wades into these sometimes choppy waters. It addresses several doctrines in this area, including how Delaware courts interpret forum selection provisions, when Delaware courts read related contemporaneous agreements as a single agreement, when Delaware courts apply equitable estoppel in the context of forum selection provisions, and when non-signatories can enforce forum selection provisions against signatories.
ShareChancery Enjoins Unfair Merger Pending Corrective Disclosures, But Declines to Order a “Go Shop”
FrontFour Capital Grp. LLC v. Taube, C.A. No. 2019-0100-KSJM (Del. Ch. Mar. 11, 2019)
This decision involves an increasingly rare occurrence in Delaware: an expedited pre-closing fiduciary duty challenge to a proposed merger. Specifically, stockholders challenged a proposed combination of a publicly traded asset management firm (Medley Management) with two corporations that it advises pursuant to management agreements: Medley Capital Corporation and Sierra Income Corporation. The proposed transaction involved Sierra acquiring Medley Management, which is majority owned by the Taube brothers, and Medley Capital, of which the Taube brothers owned less than 15%. Medley Management stockholders were to receive cash and stock representing a 100% premium to its trading price. By contrast, Medley Capital stockholders were to receive only shares of Sierra stock providing no premium against its net asset value. When a Medley Capital investor brought suit in early February, the parties agreed to an expedited trial four weeks after the filing of the case, prior to a March 11 stockholder vote on the merger. More ›
ShareCourt of Chancery Explains Interplay of Laches Defense, the Statute of Limitations and “Extraordinary Circumstances” Excusing Late Filings
Winklevoss Capital Fund, LLC v. Shaw, C.A. No. 2018-0398-JRS (Del. Ch. Mar. 1, 2019)
As this decision explains, the Court of Chancery will apply the equitable doctrine of laches (untimeliness) at the pleadings stage to dismiss a claim when it is clear on a claim’s face that it is untimely and equity would not be offended by dismissing it. This is especially true where the claims at issue are common law claims for common law remedies, but were filed after the statute of limitations provided by law. The decision also explains the burden to plead facts sufficient to toll the statute of limitations under Delaware law, as well as when “unusual conditions” or “extraordinary circumstances” might excuse late-filed claims, with discussion of the factors Delaware courts consider in making that assessment. Here, the claims found to be untimely were the defendants’ counterclaims. While the Court dismissed those claims, it also explained that Delaware law allowed defendants to rely on the underlying allegations in support of an affirmative defense to offset any damages award in the plaintiffs’ favor under the circumstances.
ShareLitigation Attorneys Kirsten A. Zeberkiewicz and Erin E. Larson Join Morris James LLP
Morris James is pleased to announce Kirsten A. Zeberkiewicz has joined the firm’s Corporate and Commercial Litigation group and Erin E. Larson has joined its Intellectual Property Litigation practice. "The addition of these new attorneys reflects Morris James’ ongoing commitment to developing and advancing lawyers who have achieved the highest levels of professional accomplishment," said Keith Donovan, Managing Partner of Morris James LLP.
Kirsten A. Zeberkiewicz focuses her practice on litigation involving corporations and alternative entities formed under Delaware law. She handles corporate governance and complex commercial litigation matters involving fiduciary duty claims, contract disputes, M&A challenges, and summary proceedings in the Delaware Court of Chancery and the Delaware Supreme Court. Prior to joining Morris James, Kirsten gained trial and litigation experience at a New York AmLaw100 firm. Kirsten earned her J.D. from the University of Pennsylvania Law School, cum laude, in 2002. She holds a B.A., magna cum laude, from Pennsylvania State University.
Erin E. Larson focuses her practice on patent litigation and counseling clients in all aspects of practice in the U.S. District Court for the District of Delaware. She is currently working on numerous ANDA and patent litigation cases, spanning a wide range of technologies. Erin is a First Lieutenant in the U.S. Army Reserves, where she coordinates personnel services. Erin earned her J.D. from the University of North Carolina School of Law where she served as Editor-in-Chief of the North Carolina Journal of Law & Technology. She holds a B.S. in Chemistry from Villanova University.
ShareHigh Court Holds that Conflicting Contract Provisions Governing Agreement’s “Term” Create Ambiguity and Require Denial of Summary Judgment
Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., No. 185,2018 (Del. Mar. 7, 2019).
The parties disputed the termination date of two related agreements through which CITGO agreed to ship oil using the plaintiff trucking company, with CITGO arguing for an earlier termination date. On appeal from a decision granting summary judgment in CITGO’s favor, the Delaware Supreme Court reversed and remanded the matter. Applying de novo review, the high court found that the two related contracts governing the transaction had conflicting terms and therefore were ambiguous with respect to the termination date. Although a provision in one agreement clearly set a one-year term – which the lower court found dispositive – the agreements read as a whole were ambiguous. In particular, the same contract with a one-year term (i) contemplated renewals, (ii) required 60 days’ notice for a termination and (iii) also provided for a review of pricing terms 60 days prior to the one-year period. That contract also provided (confusingly) that it would remain in effect until the termination of the second, related contract, which had a later default termination date. The Supreme Court also observed that avoiding an abrupt termination made sense in the commercial circumstances given the magnitude of the endeavor. In light of the resulting ambiguity, the Supreme Court reasoned it was appropriate to consider extrinsic evidence, which included internal CITGO emails indicating that it understood the contract to continue beyond the one-year term. The Court accordingly reversed and remanded the case for a trial on the issue of the agreements’ disputed term. More ›
ShareChancery Denies Books-and-Records Inspection Due to Lack of 'Credible Suspicion'
Stockholders who seek to inspect the books and records of a Delaware corporation to investigate mismanagement merely have to demonstrate a “credible suspicion” that officers or directors have breached their fiduciary duties. That low standard means that in most instances either companies themselves or courts respond to narrowly tailored requests by producing, or ordering produced, necessary and specific information to enable a stockholder to investigate alleged wrongdoing.
Recently, the scope of permissible inspection has extended to emails, leading some commentators to become concerned that the courts have tilted the playing field too much in favor of stockholders. As the recent case of Hoeller v. Tempur Sealy International, C.A. No. 2018-0336-JRS, demonstrates, however, the Delaware courts will not permit a stockholder any inspection if he cannot demonstrate a credible suspicion of cognizable wrongdoing, and the mere allegation that a company unexpectedly lost a major customer does not suffice to raise a credible suspicion of fiduciary wrongdoing. More ›
ShareCourt of Chancery Addresses Personal Jurisdiction and Negligent Misrepresentation Claims Involving Accounting Firm KPMG
Otto Candies LLC v. KPMG LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Feb. 28, 2019) (Zurn, V.C.).
This decision grants a motion to dismiss by accounting firm KPMG on jurisdictional and substantive grounds in litigation involving creditors and bondholders of a KPMG client. The plaintiffs claimed fraud by the company and its bank. They sued several KPMG entities, and sought over $1 billion in damages, claiming they relied to their detriment on KPMG’s audits. While the decision involved various interesting aspects, two are particularly noteworthy. More ›
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