Posts from 2018

Court of Chancery Holds That Notice and an Opportunity To Be Heard Are Not Prerequisites to Dismissing an LLC Manager “For Cause”

A&J Capital, Inc. v. Law Office of Krug, C.A. No. 22018-0240-JRS (Del. Ch. July 18, 2018)

This decision holds that, absent contrary language in an LLC operating agreement, members do not need to provide notice and an opportunity to respond before dismissing a manager “for cause.” Note that the law governing when a corporate director can be dismissed “for cause” may require notice and an opportunity to contest the allegations against him. More ›

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Court of Chancery Explains Burden Needed to Support Inspection for Suspected Wrongdoing

Barnes v. Sprouts Farmers Market Inc., C.A. No. 2017-0735-MTZ (Del. Ch. July 18, 2018)

An investor seeking books and records for the purpose of investigating wrongdoing or mismanagement must establish a “credible basis” from which to infer such conduct may have occurred. This Master in Chancery report well demonstrates how the Court of Chancery analyzes a books and records demand for such a purpose. The decision discusses several important principles. First, the credible basis standard is very low, requiring only some evidence to suggest misconduct. Second, proving a credible basis is not the same thing as proving actual misconduct. Thus, as the other side of that same coin, the Court generally will not consider defenses that go to the merits of whether wrongdoing actually occurred. Third, the Court will analyze the action before it and not necessarily be influenced by a decision in another court regarding similar allegations.

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High Court Again Denies 'Corwin' Deference Due to Material Omissions Concerning Sale Process

Earlier this year, the Delaware Supreme Court held that Corwin deference was not warranted where a recommendation statement to stockholders disclosed that a founder and board chairman abstained from recommending in favor of an M&A transaction, but omitted certain facts evident from meeting minutes, such as his disappointment with the company’s management and the transaction price, and his view that it was not the right time to sell. See Appel v. Berkman, 180 A.3d 1055 (Del. 2018).   More ›

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Court Of Chancery Stays Control Dispute Involving Kentucky Retirement Systems In Favor of Kentucky Plenary Action

In Re Bay Hills Emerging Partners I L.P., C.A. No. 2018-0234-JRS (Del. Ch. July 2, 2018) 

This decision deals with the oft encountered problem of a race to different courthouses by counterparties.  What makes this decision readworthy is the context: a summary control dispute involving a Delaware alternative entity, one invested in by a Kentucky state agency (Kentucky Retirement Systems).  While the Court of Chancery may choose to not stay its hand in favor of even an earlier-filed plenary action in the control dispute context, that is by no means a blanket rule.  This is an instance where the Court of Chancery cited its inherent discretionary authority to issue a stay sua sponte in the interests of comity and the orderly and efficient administration of justice.  Among the factors supporting the Court’s decision to stay its hand in favor of a contemporaneously-filed plenary action involving the same parties and issues in Kentucky state court were Kentucky consent-to-forum and choice of law clauses in the parties’ contract.

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Court of Chancery Denies Director Access to Records in the Redstone-CBS Corp. Dispute

In re CBS Corporation, C.A. No. 2018-0342-AGB (Del. Ch. July 13, 2018)

It is well settled that members of the board of directors are entitled to essentially unfettered access to the corporation’s records to carry out their fiduciary duties.  But, as this decision illustrates, it could be a different story when it comes to privileged matters.  While directors generally are entitled to privileged records as well, should sufficient adversity exist between the director and the corporation on one or more issues, access may be denied for those issues.  This decision arising out of the highly-publicized power struggle at CBS involving the Redstone family and a proposed Viacom deal reviews and applies the precedent in this area to find the corporation properly withheld certain categories of records.

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Court of Chancery Explains Difference Between Experts and Arbitrators Under Delaware Law

Penton Business Media Holdings LLC v. Informa PLC, C.A. No. 2017-0847-JTL (Del. Ch. July 9, 2018)

This decision explains the difference between agreeing to have a dispute decided by an expert rather than an arbitrator.  The distinction is important because it may determine what the third-party adjudicator can review before reaching a decision, what questions it may address, and what role a court might play.  For example, an expert may be confined to reviewing only a selected set of documents without resort to extrinsic types of evidence.  That might not be what one party expected or desires.  But it is a possible result under Delaware law, where the distinction is recognized, unlike in some other jurisdictions.  In short, it is best to be specific about the exact type of adjudicator you want in your contract’s alternative dispute resolution provisions if your contract is governed by Delaware law.

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Court Of Chancery Upholds Contract Claim Based On The Standard Of Conduct In An Agreement

Wenske v. Blue Bell Creameries Inc., C.A. 2017-0699-JRS (July 6, 2018)

When the parties to a LLP agree on the standard of conduct the general partner should follow, its failure to live up to that standard is a breach of the parties’ agreement. Here the parties agreed the general partner would use industry practices in managing the business and when it failed to monitor the business to ensure those practices were followed, it was liable to the limited partners for the damages that resulted. The use of a somewhat vague standard of how the business should be conducted is therefore risky.

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Court Of Chancery Permits Validation Of Defective Merger

The Cirillo Family Trust v. Moezinia, C.A. 10116-CB (Del. Ch. July 11, 2018)

This is an interesting decision for three reasons. First, it gives a good discussion of when defective corporate acts can be cured under Section 205 of the DGCL. Even a defective merger is possibly subject to Section 205. Second, it has a good outline of when advice of counsel is a good defense to allegations of director liability. Third, it permits a claim to go forward against corporate officers. This is a good reminder that the Delaware exculpation statute does not apply to officers.

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Court of Chancery Imposes Over $20 Million in Damages on Investment Fund and Its Manager

Basho Technologies Holdco B LLC v. Georgetown Basho Investors LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018)

This notable decision issued by the Court of Chancery holds an investment fund and its manager liable for over $20 million essentially for destroying a Delaware entity’s value.  The litigation arises out of a once promising technology company’s downfall into liquidation.  The facts involved an investor that leveraged a series of preferred investments into negative control and used that control to secure a self-dealing financing unfavorable to the company, while simultaneously turning away much needed financing opportunities threatening its control.  The investor hoped to position the company for a prompt sale in which it would reap the benefits, but that did not pan out, and the company went under.  More ›

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Court of Chancery Requires Bad Faith Disclosure Violations for Demand Futility

Ellis v. Gonzalez, C.A. No. 2017-0342-SG (Del. Ch. July 10, 2018)

The pre-suit demand on the board requirement for derivative litigation usually is not excused solely by a sufficiently pled disclosure violation.  Rather, as held in this decision and recently in Steinberg v. Bearden, 2018 WL 2434558 (Del. Ch. May 30, 2018), to excuse demand on an independent, disinterested, and duty-of-care-exculpated board on the basis that the directors face a substantial risk of liability for a disclosure violation, the complaint must sufficiently plead the disclosure violation was the product of bad faith.  Absent sufficient non-conclusory facts on this point, the complaint will be dismissed.

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Delaware Supreme Court Reverses Corwin Dismissal and Stresses Importance of Disclosures

Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018, revised July 27, 2018)

Corwin holds that approval of a transaction by a fully-informed, uncoerced majority of the disinterested stockholders invokes the deferential business judgment standard of review for a post-closing damages action, making the transaction almost certainly immune from further judicial scrutiny.  This is an important decision for its discussion of the “informed” approval prerequisite to a Corwin defense.  This aspect of Corwin turns on thoroughly-developed standards under Delaware law regarding what is or is not material to the stockholders' decision-making. In that way, the decision is not novel.  Yet, because a disclosure violation may prevent what would otherwise be an early dismissal of a breach of fiduciary duty action against directors for damages, the issue is of heightened importance post-Corwin.  In the Court’s own words, this case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.”  Here, the material undisclosed facts concerned a founder’s early dealings with the private equity buyer, pressure on the board, and the degree that this influence may have impacted the sale process structure.  The stockholder plaintiffs’ arguments were aided substantially by documents obtained in connection with a pre-suit books and records demand. That is another area of increased importance post-Corwin, given the unavailability of a Corwin defense in that setting and the ability to obtain documents that might help one plead around a later Corwin defense.

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Does Delaware Insist on “Controller” Accountability?

Once again, the Delaware courts are being accused of improperly favoring management in stockholder litigation.  Those accusations have periodically surfaced over at least the last 45 years, since Professor Cary’s famous (or infamous”) “race to the bottom” article in the Yale Law Journal.  The recent claims of bias might be dismissed as just the rantings of disgruntled plaintiffs’ attorneys.  But, there are better rebuttals to those accusations than the all-too-common name calling that seems so popular lately.

Here is just one reason why the Delaware courts continue to fulfill their role of monitoring the management of Delaware corporations.  In a series of recent decisions, the Court of Chancery has held that even a less-than-50% stockholder may be deemed to control a corporation.  As a result, such a “controller” must prove any self-dealing transaction is entirely fair to the company.  This exacting standard of review by the court involves just the kind of close scrutiny the critics of Delaware argue is appropriate to protect stockholders. More ›

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Court of Chancery Awards Damages for Breach of a Director’s Duty of Loyalty

When friends go into business, their ties may fray if the business experiences difficulty and the parties have different views of how to proceed and who is responsible. If the principals are directors of a Delaware corporation, however, their duty of loyalty requires them to eschew self-interest and to do what is best for the corporation and its stakeholders. Moreover, when conflict arises, vague promises among friends do not supplant the requirements for binding agreements. More ›

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Court Of Chancery Explains When Claim Is Direct And Survives A Merger

In re Straight Path Communications Inc. Consolidated Stockholder Litigation, C.A. No. 2017-0486-SG (Del. Ch. June 25, 2018)

When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger. More ›

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Court Of Chancery Enforces Agreement To Waive Corporate Opportunity Claims

Alarm.Com Holdings Inc. v. ABS Capital Partners Inc., C.A. 2017-0583-JTL (June 15, 2018)

Under 8 Del C. Section 122(17) a corporation may waive any claim that a corporate opportunity was wrongfully taken by a fiduciary. Private equity firms frequently invest in companies in the same line of business. When that investor also puts a director on the board of its investment, a potential conflict of interest may arises when that director obtains confidential information that may be useful to the other company the investor has invested in the same line of business. This decision holds that a trade secret claim under the Delaware Uniform Trade Secret Act is precluded by the type of waiver permitted by Section 122(17). Thus, investors may invest in competing companies if they get the protection provided by this section of the Delaware General Corporation Law.

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