About This Blog
Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
Subscribe to Blog
JDSupra RSS
Join us on LinkedIn
Follow us on TwitterTopics
Top Posts
Top News
- February 19, 2021
- October 30, 2020
- April 1, 2024
Archives
Morris James Blogs
Showing 148 posts from 2019.
Chancery Finds Unauthorized Transfer of LLC Interest Void and Denies Transferee Inspection Rights
Absalom Absalom Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR (Del. Ch. June 27, 2019).
Plaintiff was assigned a membership interest in the defendant, a Delaware limited liability company, and sought to exercise books and records inspection rights. But the LLC’s operating agreement circumscribed its members’ ability to transfer their interests, stating that any disposition without prior written consent of all members was “null and void,” and otherwise authorized only members to inspect books and records. According to the Court of Chancery, because the transferor never received prior written consent for the transfer to plaintiff, the transfer was void under the LLC agreement, plaintiff was not a member of the LLC, and plaintiff had no right to inspect the LLC’s books and records. In addition, the Court relied on the Delaware Supreme Court’s decision in CompoSecure, L.L.C. v. CardUX, LLC to find that the plaintiff could not rely on equitable theories to validate the transfer. According to the Court, equity can only validate voidable acts, not void acts. And the LLC agreement’s plain language in this case rendered the attempted transfer void, even if it would have been only voidable under common law.
ShareAdvancement Available for Post-Separation Misuse of Confidential Information Obtained “By Reason of the Fact” of Corporate Service
Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. Jun. 26, 2019).
Former directors and officers may be entitled to advancement for post-separation conduct if that conduct is "by reason of the fact" of the directors' and officers' corporate service. In response to claims brought by former directors and officers for payments due under the parties' separation agreement, the company counterclaimed that the petitioners had breached non-compete obligations under the agreement and had improperly used the company's confidential information. The petitioners then sought advancement under the company's charter (which incorporated DGCL Section 145’s “by reason of the fact” standard), but the company contended no advancement was necessary because the complained-of conduct followed petitioners' separation from the company. The Court of Chancery reviewed its past decisions on this issue, beginning with Brown v. LiveOps, Inc., 903 A.2d 324 (Del. Ch. 2006). The Court ultimately concluded that the case upon which the company relied – Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5135460 (Del. Ch. Aug. 31, 2015) – was "difficult to harmonize" with the others. Those other cases stand for the principle that allegations of misusing confidential information obtained “by reason of the fact” of former directors’ and officers’ service to the company may trigger advancement rights – even if the alleged misuse occurs after separation and in violation of the directors' and officers' personal agreements with the company. Consequently, the Court held that the petitioners were entitled to advancement for any counterclaims "where the underlying acts depended on or utilized confidential information [the petitioners] obtained by reason of their service at [the company.]" By contrast, they were not entitled to advancement to defend against post-separation violations of their personal contractual obligations that had no alleged "nexus or causal connection to [the petitioners'] service” – such as by engaging in an allegedly competing business, soliciting employees and unlawfully accessing the company’s computer systems – all of which allegedly occurred without any use of confidential information obtained while in service at the company.
ShareDelaware Supreme Court Reminds Counsel of Obligation to Prevent Clients’ Abusive Deposition Misconduct
“Depositions are court proceedings, and counsel defending the deposition have an obligation to prevent their deponent from impeding or frustrating a fair examination.” After reversing and remanding a contractual dispute involving popular Broadway shows back to the Court of Chancery on unrelated grounds, the Delaware Supreme Court included an Addendum to its opinion reprimanding an out-of-state attorney for permitting his client to engage in abusive deposition misconduct. During the deposition, Carole Shorenstein Hays, a prominent theater producer, repeatedly provided answers characterized by the Supreme Court as ridiculous, problematic, flagrantly evasive, nonresponsive, and flippant. Among other things, Hays claimed not to know whether she earned a university degree, claimed not to measure time in hours, refused to answer myriad straightforward questions, and made unprompted speeches in which she likened herself to Judy Garland and the deposition to a “piece of theatre that’s being recorded.” While no Delaware attorney for Hays attended the deposition, the two attorneys representing her were both admitted pro hac vice and made no attempt to stop her misconduct. The Court of Chancery had previously awarded attorneys’ fees and costs for this bad faith misconduct, and that ruling was not challenged on appeal. The Supreme Court felt compelled, however, to address the situation. The Supreme Court reasoned that, faced with such conduct, the deponent’s counsel “cannot simply be a spectator and do nothing.” In addition, “Delaware counsel moving the admission of out of state counsel pro hac vice also bear responsibility in such a situation. They must ensure that the attorney being admitted reviews the Principles of Professionalism for Delaware Lawyers, but they must also ensure that the out-of-state counsel understands what is expected of them in managing deposition proceedings outside the courthouse so that the litigation process is not abused.” In light of restrictions Delaware court rules and precedent impose on conferring with a client-deponent during the deposition, the Supreme Court advised that these points “should be addressed beforehand in the deposition preparation.”
ShareCourt of Chancery Holds it Lacks Subject Matter Jurisdiction over Defamation Claims
Unlike most U.S. states and the federal legal system, Delaware retains the historic distinction between courts of law and courts of equity. In the absence of a statute granting it jurisdiction over specific claims, the Delaware Court of Chancery has subject matter jurisdiction only where a complaint (i) states an equitable claim, or (ii) seeks an equitable remedy in circumstances where there is no adequate remedy at law. Here, the Court of Chancery held that it lacks subject matter jurisdiction to adjudicate defamation claims. Specifically, entrepreneur and inventor Stephen G. Perlman and his companies asserted claims of defamation against Vox Media, Inc., and requested relief that included a mandatory injunction requiring the removal of the offending articles from Vox’s websites, a public retraction, and compensatory damages. In response to Vox’s motion for summary judgment, the Court followed its recent decision in Organovo Hlds., Inc. v. Dimitrov, 162 A.3d 102 (Del. Ch. 2017) (Laster, V.C.) and concluded that “in connection with a claim for defamation, the Court of Chancery, in all instances, lacks subject matter jurisdiction to adjudicate the questions of whether a defendant made a false statement about the plaintiff and whether it did so with actual malice.” (emphasis added). Organovo explained that these factual questions have historically been reserved for juries rather than judges, and these determinations are best suited for adjudication by a court of law. Plaintiffs’ effort to couple their defamation claims with requests for equitable relief in the form of an injunction directed at past defamatory statements did not confer equitable jurisdiction, because declaratory relief and money damages generally are adequate remedies at law for defamation claims. The Court explained that equity will intervene to provide injunctive relief only in situations where the defamation claim has been adjudicated in a court of law and legal relief has failed to preclude ongoing publication or is otherwise inadequate. Accordingly, because it lacked subject matter jurisdiction, the Court dismissed the plaintiffs’ claims, but gave the plaintiffs the option to transfer the case to Delaware’s Superior Court, a court of law.
ShareDelaware Supreme Court Highlights Risks Involved in Court Rules Governing Confidential Filings
DowDuPont Inc. v. The Chemours Co., C.A. No. 2019-0351 (Del. June 26, 2019).
A recent Delaware Supreme Court Order emphasizes the risks associated with the presumptions of public access to court filings and the requirements of Court of Chancery Rule 5.1, which governs the sealing of documents filed with the Court. Rule 5.1 requires a public version of any document filed under seal, with asserted confidential information redacted, to be filed within a certain number of days. At the trial court level, after ruling that the complaint must be unsealed because the parties’ initial completely-redacted public version failed to comply with Rule 5.1, the Vice Chancellor invited the parties to file a motion for reargument with a revised redacted version of the complaint for his consideration. Instead of moving for reargument, defendants filed an application for certification of an interlocutory appeal to the Delaware Supreme Court on the ground that the complaint was subject to confidential arbitration. In accord with the Court of Chancery, the Delaware Supreme Court denied the interlocutory appeal request, ruling that the issue did not meet the standards for certification because the sole issue on appeal was the parties’ compliance with Rule 5.1, and not whether the complaint was subject to confidential arbitration. The Supreme Court noted that the parties potentially could have avoided the claimed irreparable harm caused by unsealing the complaint if they had moved for reargument with a revised redacted version of the complaint that complied with Rule 5.1.
ShareChancery Denies Corwin Defense Based on Proxy Omissions and Sustains Claims Against Financial Advisor
Under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), Delaware courts generally will dismiss post-closing fiduciary duty claims arising out of M&A deals when the challenged transaction was approved by a fully-informed and uncoerced majority of the company’s disinterested stockholders. Several decisions since Corwin, including this one, have denied motions to dismiss under Corwin, finding the doctrine’s prerequisites were not satisfied. This decision also is notable for sustaining a bad faith claim against directors and claims against the investment bank Jefferies. More ›
ShareChancery Declines to Dismiss Derivative Claim Challenging Compensation of Goldman Sachs Directors
Stein v. Blankfein, C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019).
Recently, the Delaware Supreme Court held in In re Investors Bancorp, Inc. Stockholder Litigation, 177 A.3d 1208 (Del. 2017) that stockholder approval of director self-compensation plans will shift the standard of review from entire fairness to business judgment only where the stockholders approve a plan that does not involve future director discretion in setting the compensation amounts. In Stein, the Court of Chancery applies Investors Bancorp and declines to dismiss a disloyal compensation claim, notwithstanding that the terms of the challenged compensation plans sought to absolve the directors of self-dealing claims and even though the plaintiff attacked only the compensation amount, not the process by which it was determined. More ›
ShareChancery Finds Company Exceeds Authority Under Advance Notice Bylaw
Delaware courts construe advance notice by-laws against the drafter in favor of stockholder electoral rights. In this case, the defendants had advance notice by-laws that permitted the company to request additional information for certain purposes after receiving notice of a dissident slate of directors, and required a response within 5 days. Pursuant to that by-law, defendants had sent a questionnaire with over 90 questions to the dissident slate. When the dissidents did not supply the requested information within 5 days, defendants advised that their failure to comply resulted in their nominations being defective. The stockholder supporting the dissident slate sued and asked the Court of Chancery to find the nominations complied with the advance notice by-law and to require that the dissidents be freely presented and votes for them counted. Construing the by-law at issue, the Court held that the plaintiff had established that a portion of questions asked exceeded the permissible scope of information requests under the by-laws. Thus, the failure to answer them was not a basis for finding the nominations invalid. The Court therefore ordered that the nominations be presented and that defendants count votes cast for the dissident slate.
ShareDelaware Supreme Court Revives Fiduciary Duty Claims in Derivative Lawsuit Concerning Blue Bell’s Listeria Outbreak
Marchand v. Barnhill, No. 533, 2018 (Del. June 19, 2019).
As this decision illustrates, while Delaware law imposes a high bar for pleading demand futility and fiduciary oversight claims under what is known as a Caremark theory, the standards are not insurmountable. After Blue Bell Creameries faced a deadly listeria outbreak, recall, and temporary shutdown a few years ago, a stockholder plaintiff sued in the Delaware Court of Chancery alleging breaches of fiduciary duties by two key executives and its board of directors. The stockholder’s derivative claims concerned management’s alleged failure to respond appropriately to food safety issues and the board’s alleged failure to implement any food safety reporting system or to inform itself about the company’s food safety compliance. More ›
ShareOfficer and Director Entitled to Mandatory Indemnification Regardless of Circuitous Path to Victory
Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019).
Even when an indemnitee takes a circuitous path to victory, the indemnitee is entitled to indemnification under 8 Del. C. § 145(c) for litigation expenses if the indemnitee is ultimately successful “on the merits or otherwise.” Brown, an officer and director of Rite Aid, sought indemnification under § 145(c), as well as the corporate bylaws and charter, for litigation that spanned from 2002 to 2016 in Pennsylvania. Brown prevailed against Rite Aid in the Pennsylvania litigation on technical defenses. Despite this outcome, Rite Aid sought to limit the amounts to those attributable to Brown's successful technical defense and to exclude amounts attributable to several years of other unsuccessful defenses. But the Court continued its long-standing practice of "look[ing] strictly at the outcome of the underlying action" to determine whether an indemnitee is "successful on the merits or otherwise" under § 145(c). Under this "simple rubric for success," Brown avoided a "personally negative result," so he was entitled to indemnification.
ShareMerger Agreement’s Preservation of Privilege for Pre-Merger Communications Found to be Adequate, Notwithstanding that the Surviving Company Took Possession of E-Mails
This decision confirms that, in a post-merger dispute between an acquirer and the selling stockholders, broad contractual language can prevent a waiver of the acquired company's privileged pre-merger communications, even if the surviving company takes physical possession of the communications. RSI Holdco, LLC acquired Radixx Systems International, Inc. in 2016, and the merger agreement designated Shareholder Representative Services LLC as representative of Radixx's selling shareholders. As part of the merger, RSI Holdco acquired Radixx’s computers and email servers, which contained 1200 pre-merger emails between Radixx and its counsel; Radixx had not excised or segregated the communications from other data. However, the merger agreement contained a detailed provision that (1) preserved Radixx’s privilege, (2) assigned it the representative of selling stockholders, (3) required the parties to take steps to ensure that the privilege remained in effect, and (4) prevented RSI Holdco from relying on the privileged communications in post-merger litigation. In Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, 80 A.3d 155 (Del. Ch. 2013), the Court had found that privilege transferred to the surviving company in a merger as a matter of law pursuant to section 259 of the DGCL because (i) the parties did not address privilege in the merger agreement, and (ii) because the at-issue communications were turned over. Great Hill cautioned future parties to "use their contractual freedom" to exclude privileged communications from the transferred assets. Here, the Court rejected RSI Holdco's argument that the failure to excise the communications waived privilege in this circumstance, and the Court noted that even if the privilege had been waived, the merger agreement still prevented RSI Holdco from relying on the communications in the litigation. Thus, the Court concluded that the sellers "heeded the Great Hill court's advice" and found the detailed provision in the merger agreement preserved the privilege attached to the pre-merger communications.
ShareDelaware Superior Court Finds Civil Investigation Demand Triggers Insurer’s Duty to Defend Insured
Conduent State Healthcare v. AIG Specialty, C. A. No. N18C-12-074 MMJ (Del. Super. June 24, 2019).
Addressing an issue for which there is a split in authority, the Delaware Superior Court held that a Civil Investigative Demand (“CID”) initiated by government authorities will trigger an insurer’s duty to defend and indemnify an insured. After plaintiff Conduent State Healthcare came under investigation for Medicaid fraud, defendant AIG declined to advance defense costs, arguing that the investigation, by itself, did not constitute an insurable claim under plaintiff’s policy. The Superior Court held that the policy language providing coverage for a “Claim alleging a Wrongful Act” extended to the CID. The Court rejected the argument that “investigating an unlawful act by the insured, is different from alleging an unlawful act,” finding that to be a distinction without a difference. The Court relied upon insurance contract interpretation principles and construed the policy against its drafter, holding that the duty to defend and indemnify should be interpreted broadly in favor of coverage.
ShareChancery Finds Former Limited Partner Lacks Standing to Seek Books and Records
Greenhouse v. Polychain Fund I LP, C.A. No. 2018-0214-JRS (Del. Ch. May 29, 2019).
Seeking to inspect an entity’s books and records to value an investment typically is a proper purpose. But a plaintiff must have standing to demand inspection. More ›
ShareChancery Addresses the Direct and Derivative Claim Distinction and Demand Futility in the LLC Context
Stone & Paper Investors LLC v. Blanch, C.A. No. 2018-0394-TMR (Del. Ch. May 31, 2019).
Plaintiff sued Defendants, who were supposed to manage the parties’ limited liability company, directly and derivatively for breaching the LLC agreement, and derivatively for breaching their fiduciary duties. In this decision, the Court of Chancery denies Defendants’ motion to dismiss and addresses, among other things, the direct versus derivative claim distinction under the Tooley test and demand futility under the Aronson v. Lewis test in the LLC context. Here, the LLC managers were deemed interested because they stood on both sides of the challenged transactions—i.e., the allegations that they stole millions from the LLC for themselves, for their other companies, for one of their spouses, and for one of their spouses’ companies. Thus, demand was futile as to the derivative claims, which also adequately stated viable causes of action under less stringent Rule 12(b)(6) standards.
ShareChancery Finds Advancement Decision Not Immediately Appealable When Reasonableness Disputes Remain
Sider v. Hertz Global Holdings Inc., C.A. No. 2019-0237-KJSM (Del. Ch. Jun 17, 2019).
Prior to this ruling, no Delaware opinion had addressed the question of whether decisions granting entitlement to advancement rights are immediately appealable even though disputes remain as to the reasonableness of the fees. This ruling finds the answer normally should be “no.” More ›
Share
