Posts from 2019

Chancery Unseals Confidential Complaint for Failure to Comply With Court Rules

The Chemours Co. v. DowDupont Inc., C.A. No. 2019-0351-SG (Del. Ch. June 7, 2019).

The Delaware courts have long tried to balance the public’s right of access to information about judicial proceedings with the legitimate needs of litigants to keep certain information confidential.  Rule 5.1 is the Court of Chancery’s codification of the standards and procedures for obtaining, maintaining, and challenging confidential treatment of court filings. Its overarching purpose is to protect the public’s right of access.  More ›

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Chancery Addresses Earn-Out Dispute and Referee Process

Windy City Investments Holdings LLC v. Teachers Insurance and Annuity Association of America f/k/a Teachers Insurance and Annuity Association-College Retirement Equities Fund, C. A. No. 2018-0419-MTZ (Del. Ch. May 31, 2019).

Claims seeking to enforce earn-outs are frequent. Parties often contractually agree that earn-out disputes are subject to an expert determination, rather than litigation in a judicial forum, and courts often dismiss disputes on that basis. This case arises in the somewhat familiar scenario where the parties’ dispute concerns contractual provisions related to, but not subject to, that expert determination, and thus falls within a court’s purview. More ›

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Chancery Permits Receiver to Tax Petitioner for Costs of Receivership

Longoria v. Somers, C.A. No. 2018-0190-JTL (Del. Ch. May 28, 2019).

The Court of Chancery may appoint a receiver to wind up a deadlocked corporate entity.  When that happens, the corporation normally pays the receiver’s fees and expenses.  Here, however, the entity was insolvent and unable to pay, and the Petitioner (a 50% owner) opposed contributing to the payment of certain expenses.  More ›

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Chancery Finds Adequately Pled Breach of Fiduciary Duty Based on Course of Disruptive Conduct

Klein v. Wasserman, C. A. No. 2017-0643-KSJM (Del. Ch. May 29, 2019).

The typical claim for breach of fiduciary duty arises out of a single transaction or event, or several closely-related transactions or events.  Still, as the Klein decision illustrates, there are circumstances in which the Court of Chancery will find an adequately stated breach of fiduciary duty claim arising out of a course of disruptive conduct. More ›

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Chancery Sustains Stockholder Inspection Demands to Investigate Caremark Claims Arising from Facebook / Cambridge Analytica Scandal

In re Facebook Inc. Section 220 Litig., C.A. No. 2018-0661-JRS (Del. Ch. May 31, 2019).

A so-called Caremark Claim premised upon disinterested directors' failure to exercise appropriate oversight is one of the most difficult theories to litigate successfully.  Here, however, the Court of Chancery held that stockholder-plaintiffs had a sufficient “credible basis” to investigate Facebook’s documents concerning its alleged widespread but secret business practice of “whitelisting” – monetizing the personal data of Facebook users who accessed certain applications on Facebook, as well as that of their Facebook friends.  More ›

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Court of Chancery Enforces the Absolute Litigation Privilege

Ritchie CT Opps, LLC v. Huizenga Managers Fund, LLC, C.A. No. 2018-0196-SG (Del. Ch. May 30, 2019).

The absolute litigation privilege is an affirmative defense that bars claims arising from  statements made in the course of a judicial proceeding.  Here, the Delaware Court of Chancery addressed the scope of the absolute litigation privilege in response to a request for an injunction to bar defendant from prospectively disparaging plaintiff in other litigation.  The agreements governing an investment by defendant in the plaintiff’s funds contained confidentiality and non-disparagement clauses.  A falling out between the parties resulted in years of protracted litigation in Illinois and Delaware.  This Court of Chancery action for breach of confidentiality and non-disparagement clauses in the controlling agreements is based on information disclosed in the prior actions. More ›

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Chancery Awards Advancement to Member Under Operating Agreement Provision

Delaware corporate law allows for a corporation to agree in its organizational documents or contracts to advance legal fees and expenses in defense of actions, arising from a person’s service to the company. To encourage quality leadership of companies, the policy under Delaware law is to broadly construe indemnity and advancement provisions in favor of permitting advancement. In its recent decision in Freeman Family v. Park Avenue Landing, C.A. No. 2018-0683-TMR (Del. Ch. April 30, 2019), the Delaware Court of Chancery determined whether a member of a limited liability company was entitled to advancement under the indemnity and advancement provisions of its operating agreement. The operating agreement imposed a duty on the plaintiff to use its best efforts in its capacity as member to either exchange certain real property or have it developed. In the underlying New Jersey suit, for which advancement was sought, the defendant company challenged the plaintiff member’s call rights based on the member’s alleged failure to use its best efforts concerning the property under the operating agreement. More ›

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Chancery Upholds Austrian Forum Selection Clause

Germaninvestments Ag. and Herrling v. Allomet Corporation and Yanchep LLC, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019).

As this case illustrates, Delaware courts generally respect and enforce forum selection clauses, even those excluding Delaware, when, under the law governing the parties’ agreement, the parties validly choose another jurisdiction.  Plaintiffs, a Swiss holding company and its largest equity owner, Richard Herrling (“Herrling”), brought an action in the Delaware Court of Chancery to enforce a Restructuring and Loan Agreement (“R&L Agreement”) entered into with defendants, Allomet Corporation and Yanchep LLC (jointly “Defendants”).  The R&L Agreement contemplated the formation of a new Austrian holding company to implement a joint venture between Plaintiffs and Defendants to carry out the business of Allomet.  Under the R & L Agreement, Herrling had advanced certain loans to keep the Allomet Corporation solvent while the parties completed negotiations for the joint venture.  After the parties could not agree on the terms for the full legal implementation of the joint venture, Herrling walked away from the negotiations.  He and the Swiss holding company to which he had transferred his interest in the Austrian holding company then filed a complaint for breach of contract in the Court of Chancery seeking specific performance of the R&L Agreement. More ›

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Delaware Superior Court CCLD Dismisses Breach of Contract Action for Failure to State a Claim

P&TI Acquisition Co. v. Morgenthaler Partners VII, LP, C.A. No. N18C-08-059 AML CCLD (Del. Super. May 9, 2019).

Plaintiff P&TI Acquisition Co. brought a breach of contract action asserting that Defendants violated a 2012 stock purchase agreement (“SPA”). The SPA governed various assets Defendants, including PhilTem Holdings, Inc. and a PhilTem subsidiary (collectively “PhilTem”), sold to the Plaintiff. It prohibited Defendants and their “Affiliates” from soliciting or employing any PhilTem employees before February 2017. The SPA defined “Affiliate” as a party that controls, is controlled by, or is under common control with any defendant, and “Control” was defined as the power to direct or cause the direction of the management and policies of an Affiliate.  Plaintiff alleged that the Defendants caused an affiliate to solicit for employment a PhilTem CEO and a CFO as early as 2014. More ›

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Chancery Orders Dissolution of Pharmaceutical LLC

Acela Investments LLC v. DiFalco, C.A. No. 2018-0558-AGB (Del. Ch. May 17, 2019).

Because LLCs are “creatures of contract” and the policy of the Delaware Limited Liability Company Act is to give maximum effect to the freedom of contract, parties can adopt contractual arrangements that, in the end, lead to deadlock. So, Section 18-802 of the LLC Act empowers the Court of Chancery to break a deadlock through a judicial dissolution whenever it is not “reasonably practicable to carry on the business in conformity with” the LLC agreement.

Here, the Court of Chancery ordered the judicial dissolution of an LLC in the pharmaceutical industry, Inspiron Delivery Sciences, finding it was no longer reasonably practicable to carry on the company’s business in conformity with its LLC agreement under the circumstances.  The Court found that the two founding members were deadlocked on numerous important issues, such as the company’s strategic vision, and that the LLC agreement did not provide any alternate mechanism to resolve the deadlock.  By giving the LLC members veto rights and consent rights over decisions, the parties created the possibility that they would become deadlocked; they also chose not to draft a means to resolve a potential deadlock, such as a buy-sell provision.  As the Court explained, in such instances, it is not the Court’s role to redraft the LLC agreement for “sophisticated and well-represented parties.”

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Chancery Adopts Narrow Interpretation of the Computer Fraud and Abuse Act

AlixPartners LLP v. Benichou, C.A. No. 2018-0600-KSJM (Del. Ch. May 10, 2019).

The federal Computer Fraud and Abuse Act (“CFAA”) carries both civil and criminal penalties for unauthorized access to protected computers.  The Court of Chancery recently decided an issue of first impression in Delaware regarding the CFAA’s scope in connection with a suit by AlixPartners against a former partner for allegedly misusing the company’s confidential information and trade secrets. 

Plaintiffs were two entities making up AlixPartners, a global restructuring firm, and the defendant was managing partner of the Paris office before joining a competitor.  Defendant allegedly downloaded confidential client information onto his personal data device, both before and after his discharge, and later provided it to his new employer.  Litigation ensued and the defendant sought dismissal of the plaintiffs’ claim under the CFAA.  Dismissal of that claim turned on whether the defendant was potentially liable under the CFAA for: (i) misusing information obtained from a computer he was authorized to access (the “Broad Approach”); or (ii) unauthorized access to the plaintiffs’ computers (the “Narrow Approach”). More ›

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Superior Court Complex Commercial Litigation Division Holds Settlements Arising out of Dole Stockholder Litigations Constitute “Loss” Under Insurance Policies  

Arch Insurance Co. v. Murdock, C.A. No. N16C-01-104 (EMD)(CCLD) (Del. Super. May 7, 2019).

After trial and an adverse judgment in the amount for $148 million for breach of the duty of loyalty in a going private merger In re Dole Food Co., Inc. S’holder Litig., C.A. No. 8703-VCL (Del. Ch.), the liable defendants David Murdock, Dole Food Company, Inc. and DFC Holdings, LLC settled the claims by having Murdock pay the full award plus interest. The defendants then were sued by six of their excess insurance carriers, seeking a declaratory judgment that they did not have to fund the settlement. Among other reasons, the insurers asserted that the settlement payment representing the actual fair value of the merger consideration did not constitute a “Loss” under the policy. Defendants counterclaimed seeking declaratory judgment that the insurers breached the policies by refusing to pay for the Court of Chancery settlement as well as the settlement in San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc., No. 1:15-CV-01140 (D. Del.).  This decision grants in part and denies in part the parties’ cross-motions for summary judgment.  Applying the rules of interpretation applicable to insurance policies, a unique and complex type of contract, the Court determined the settlement payments constituted a “Loss” covered within the policies but genuine issues of material fact remained as to whether the insureds breached a written consent provision and a cooperation clause in the policies.

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Delaware Supreme Court Overturns Nominal Damages Award and Explains the “Efficient Breach” Theory

Leaf Invenergy Co. v. Invenergy Renewables LLC, No. 308, 2018 (Del. May 2, 2019).

Limited Delaware case law exists on the “efficient breach” theory.  A new Delaware Supreme Court ruling examines that theory and confirms it is not a bar to recovery or an avenue for modifying damages calculations.  Rather, efficient breach is the legal concept that a party might find an intentional breach to be economically advantageous if the breach’s benefits exceed the damages it might owe.  Efficient breach aside, the task of Delaware courts is to interpret contracts to fulfill parties’ shared expectations at time of contracting.  That is a concept the Supreme Court emphasized when reversing the Court of Chancery’s nominal damages award in this case. More ›

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Delaware Superior Court Ruling Provides Guidance for Pre-Trial Motion Practice and Trial Preparation

In re Bracket Holding Corp. Litig., Consol. C.A. No. N15C-02-233 WCC CCLD.

In this decision arising out of the Defendants’ Motions in Limine, the Superior Court’s Complex Commercial Litigation Division provides useful insight regarding pre-trial motion practice and trial preparation.  By way of brief background, in 2013, plaintiff purchased a pharmaceutical services provider from defendants.  The securities purchase agreement (SPA) included express representations and warranties related to financial statements.  Over the course of several months after purchase, plaintiff discovered what it alleges were improper accounting practices that constituted fraud and that had caused it to overpay for the provider to the tune of $50 million. More ›

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Chancery Addresses Valuation Issues Arising From LLC Member’s Withdrawal

Smith v. Promontory Financial Group, LLC, C.A. No. 11255-VCG (Del. Ch. April 30, 2019).

In the limited liability company context, LLC agreements sometimes provide for a buyout of a member deciding to withdraw its investment.  Coming in many forms, such provisions give rise to potential valuation issues.  This decision arises in that setting.

In a decision driven by unique facts, the Court of Chancery relied upon the plaintiff's proposed valuation from an unconsummated deal to value a professional services company with “erratic and sparse” cash flows. The Court concluded that the company’s business model rendered both an asset accumulation method and a discounted cash flow method inappropriate. More ›

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