Chancery Addresses Earn-Out Dispute Involving Alleged Breaches of Fiduciary Duty and the Implied Covenant

Glidepath Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. Feb. 21, 2019).

Contingent payments based on an acquired business’s future performance are a frequent feature in M&A transactions. In this case, after selling control, the seller remained a minority member for a time period. Two holdings are noteworthy. More ›

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Delaware Corporate and Commercial Case Law Year in Review - 2018

This top ten list summarizes significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past calendar year 2018. The article was originally published in Transaction Advisors.

The cases selected either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware. 

One: City of North Miami Beach General Employees’ Retirement Plan v. Dr. Pepper Snapple Group Inc., 189 A.3d 188 (Del. Ch. June 1, 2018) (Bouchard, Chancellor)

This decision arose out of a merger involving the Dr. Pepper and Keurig companies. In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with the target absorbing that subsidiary. That is how Dr. Pepper and Keurig structured their deal. The result was Dr. Pepper stockholders getting cash but retaining their stock, and Keurig’s stockholders getting a controlling interest in Dr. Pepper. Certain Dr. Pepper stockholders sued in the Court of Chancery, asserting that they had appraisal rights to a judicially-determined fair value in connection with the deal under Section 262 of the Delaware General Corporation Law (DGCL), which were being violated. More ›

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Chancery Addresses Pre-Suit Demand Refusal Standard for Special Committees

City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, C.A. No. 2017-0341-KSJM (Del. Ch. Feb. 12, 2019).

Under Delaware law, stockholders who wish to pursue a derivative claim on the corporation’s behalf face an important decision—whether to make a pre-suit demand on the board to handle the suit itself, or bring the suit oneself and plead that the board cannot disinterestedly and independently consider a pre-suit demand under the circumstances. Neither path is easy.  More ›

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Chancery Dismisses Books and Records Action Based on Pending Plenary Action

CHC Investments LLC v. Firstsun Capital Bancorp, C.A. No. 2018-0610-KSJM (Del. Ch. Jan. 24, 2019).

One proper purpose for a books and records inspection under Section 220 of the Delaware General Corporation Law is to investigate potential plenary claims. But what happens when the stockholder seeks records under Section 220 after it already initiated its plenary claims on the same subject? Shouldn’t investigations, by their nature, precede a charge? And may Section 220 be used as an end-around discovery rules in the pending plenary action? This decision addresses these issues, discusses the relevant Delaware precedent, and explains that, “although there is no bright-line rule prohibiting stockholders from using Section 220 to investigate pending plenary claims, Delaware courts have enforced those inspection demands in special circumstances only.”  Special circumstances may include where the plenary complaint was dismissed without prejudice, with leave to amend. No special circumstances were present in this books and records action, so the Court of Chancery dismissed it.

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Delaware Superior Court’s Complex Commercial Litigation Division Declines to Dismiss Delaware Attorney General’s Claims Against Opioid Makers

State of Delaware ex rel. Jennings v. Purdue Pharma L.P., et al., C.A. No. N18C-01-223 MMJ CCLD (Del. Super. Feb. 4, 2019). 

In January 2018, Delaware’s Attorney General filed an action against certain opioid makers and distributors, along with pharmacy chains CVS Health Corp. and Walgreens Boots Alliance Inc.  The State alleged that the drug manufacturers lied to prescribers and patients, and encouraged high doses of the painkillers while failing to disclose accurately the risks of addiction and overdose.  As to the distributors and pharmacies, the State alleged they had duties to actively prevent opioid diversion and to report any suspicious orders.  The Court held that the State stated prima facie claims of consumer fraud and negligence against the manufacturers, reasoning that allegations that they labeled drugs in a manner inconsistent with FDA-approved uses were sufficient to survive dismissal.  The Court also held that the State met its pleading requirements for negligence and consumer fraud against the distributors, including by adequately alleging a prima facie case of reasonable foreseeability and proximate cause.  The State did not state a claim against the pharmacies, however, because the State’s comprehensive pharmacy regulatory scheme and enforcement procedures preempted the claims in the complaint. 

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Chancery Addresses the Arbitration Versus “Expert” Determination Distinction in Acquisition Agreement

Agiliance Inc. v. Resolver SOAR LLC, C.A. No. 2018-0389-TMR (Del. Ch. Jan. 25, 2019).

Purchase agreements in M&A transactions often include alternative dispute resolution mechanisms.  It similarly is not uncommon for parties to debate whether their agreement contemplates arbitration or an “expert” determination.  There is a distinction between the two under Delaware law, and it is important.  In particular, it dictates what role a court can play, such as in determining the scope of the non-judicial adjudicator’s authority in the first instance. The Court of Chancery thoroughly addressed the issue last year in Penton Business Media Holdings, LLC v. Informa PLC, 2018 WL 3343495 (Del. Ch. July 9, 2018). This is another decision on that topic, one reading the parties’ contract as requiring arbitration, not an expert determination, citing the contract’s references to the process as “arbitration.”   

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Delaware Supreme Court Addresses Emails and Jurisdictional Use Conditions in Books and Records Actions

KT4 Partners LLC v. Palantir Technologies Inc., No. 281, 2018 (Del. Jan. 29, 2019) (Strine, Chief Justice).

Two prevailing questions for books and records inspections under Section 220 of the Delaware General Corporation Law are what records can I get, and what can I do with them? This decision from the Delaware Supreme Court addresses both issues. More ›

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Chancery Addresses Lawyer-Driven Effort Defense to Books and Records Inspection

Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp., C.A. No. 2017-0910-MTZ (Del. Ch. Jan. 25, 2019).

It is sometimes fair to characterize plaintiff-side representative litigation in the corporate context as lawyer-driven. This decision is notable because it addresses how that dynamic might affect a stockholder’s right to inspect corporate books and records under Section 220 of the Delaware General Corporation Law. The right to access records is not a license to fish. A stockholder can get necessary records, for a proper purpose—one that is in fact the stockholder’s true and primary purpose. That is where a lawyer’s involvement might make a difference. The purposes stated by counsel might not align with the stockholder’s actual motivations. More ›

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Court of Chancery Grants Preliminary Injunction Based on Insider’s Stock Issuances to Himself

Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Jan. 23, 2019).

This opinion addresses two bedrock issues of Delaware corporate law, specifically, proper board authorization under 8 Del. C. § 141 and directors’ fiduciary duty of loyalty.  Following other directors’ resignations, defendant George Farley was the only director as of February 2016 of plaintiff Applied Energetics (the “Company”).  Shortly after becoming the sole director, Farley executed a written consent to issue himself twenty million shares of Applied Energetics stock for $.001 per share.  No contemporaneous valuation was performed, and Farley made no attempts to ensure a fair process.  Faced with a request to enjoin Farley from selling the shares at issue, the Court of Chancery held that it was reasonably probable that Farley could not cause the Company to validly issue stock, because he was the only remaining director of a three-person board.  The Court also held it was reasonably probable that Farley will be unable to meet his burden at trial of proving the share issuances were entirely fair.  Accordingly, the Court enjoined Farley from trading the shares pending a final adjudication of their validity.  This decision also provides helpful analysis, as did prior decisions in this matter, regarding how the Court will determine the amount of bond when granting preliminary injunctive relief.

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Court Rejects Use of the Implied Covenant of Good Faith and Fair Dealing to Preserve LLC Members’ Exit Sale Rights

The implied covenant of good faith and fair dealing inheres in all contracts governed by Delaware law. In some circumstances, the implied covenant may apply to fill “gaps” in an agreement consistent with the parties’ reasonable expectations at the time of contracting. Delaware courts have held, however, that implying terms in this manner should be a cautious enterprise.

The Delaware Supreme Court’s recent decision in Oxbow Carbon & Minerals Holdings v. Crestview-Oxbow Acquisition, __ A.3d __, 2019 WL 237360 (Del. Jan. 17, 2019) emphasizes that implying terms as a “gap filler” is “a limited and extraordinary remedy” that does not protect sophisticated parties from the harsh operation of contract provisions in circumstances the parties could have anticipated. Specifically, the Supreme Court held that minority members of a limited liability company had no recourse to the implied covenant when the admission of new members reset certain capital return requirements that had to be satisfied before the minority members had the right to liquidate their investments through a sale of the company. The Supreme Court did so notwithstanding the Delaware Court of Chancery’s finding that, had the issue been identified and addressed at the time the new members were admitted, the minority members would not have agreed to that result. More ›

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Temporary Stopgaps Extend Federal Court Operations Through January 31st

The Administrative Office of the U.S. Courts estimates that federal court operations will remain funded through Jan. 31, 2019. The extension has been achieved by deferring non-critical operating costs and the usage of court filing fees and other available funds.

Court System Notices

• US Courts: Judiciary Has Funds to Operate Through Jan. 31
• DE District Court: Notice Regarding Court Operations During Lapse in Appropriations
• DE Bankruptcy Court: Notice Regarding Court Operations During Lapse in Appropriations

Litigation and filings will continue in Delaware during the federal government shutdown. If you have questions, please contact our Director of Client Relations Dawn Sheiker (302.888.6804; dsheiker@morrisjames.com).

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Chancery Addresses Books and Records Demand Under Section 220 by Papa John’s Founder

Schnatter v. Papa John’s Int’l, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019). 

As a general matter, under Section 220 of the DGCL, directors of a Delaware corporation enjoy the right to virtually unfettered access to the corporation’s books and records so they can exercise their fiduciary duties.  In this recent post-trial decision, the Court of Chancery addressed a request by Papa John’s founder and longtime spokesperson, John Schnatter, to inspect documents and communications leading up to the formation of a special committee that decided to terminate certain relationships with him following remarks construed as racial in nature.  While the parties resolved most of their disputes consensually, the remaining issues turned largely upon the Court’s factual finding that Schnatter sincerely wished to investigate potential mismanagement in connection with the committee’s decision to distance the company from him.  Particularly noteworthy, after considering recent precedents in this area, the Court ordered the production of communications relating to this issue that may be found in the other directors’ personal email accounts or on personal devices.  Also notable, in light of all the circumstances, the Court declined to find a separate action for breach of fiduciary duty filed by Schnatter in his capacity as a stockholder was a basis for denying inspection in his capacity as a director.

 

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Chancery Declines to Dismiss Claim that Acquirer Failed to Use “Commercially Reasonable Efforts” to Reach Earn-out Milestones

Himawan v. Cephalon, Inc., C.A. No. 2018-075-SG (Del. Ch. Dec. 28, 2018). 

Parties in M&A transactions commonly include efforts clauses, like the obligation to use best efforts, commercially reasonable efforts, etc., to some end.  Delaware law enforces such covenants and views them as creating affirmative duties.  Exactly what duties an efforts clause creates is contextual, however, and courts sometimes wrestle with how to apply them.  Parties on occasion try to bring clarity to their contract by defining what they intend their particular efforts clause to mean, like the parties attempted in this case. More ›

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