Posts from 2019

Superior Court CCLD Denies Bad Faith Counterclaim Against Insurance Companies

Arch Insurance Co. v. Murdock, C.A. No. N16C-01-104 (EMD) (CCLD) (Del. Super. May 1, 2019).

 In this matter between Dole Food Company and its Insurers, Dole sought coverage under their D&O policies for two underlying cases in the Court of Chancery and the District Court for the District of Delaware.  The Insurers refused coverage and filed this declaratory judgment action.  The Complex Commercial Litigation Division of Delaware’s Superior Court granted summary judgment in favor of the Insurers as to Dole’s counterclaim that the Insurers had breached the implied covenant of good faith and fair dealing in denying coverage.  Despite disputed facts, the Court held that it should not submit the question of bad faith refusal to pay Dole’s claims to a jury because the Insurers had reasonable grounds for relying on their defenses to liability.  The Court found that the Insurers had several well-reasoned arguments for denying coverage based on various clauses contained in the insurance policies, including the Fraud Exclusion, the Written Consent Provision, and the Cooperation Clause.

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Superior Court CCLD Holds that Contract Defenses Can Be Applied to a Declaratory Judgment Action

Bobcat North America, LLC v. Inland Waste Holdings, LLC, C.A. No. N17C-06-170 (PRW) (CCLD) (Del. Super. Apr. 26, 2019).

Under Delaware law, contract defenses can apply to a declaratory judgment action when the action is one based on legal rather than equitable claims.  In this matter, the Complex Commercial Litigation Division of Delaware’s Superior Court partially granted Bobcat’s partial motion for summary judgment stemming from its acquisition of a waste management business from Inland.  Bobcat sought a declaratory judgment that it was entitled to claw-back / redeem an equity payment under the parties’ purchase agreement (the “UPA”) because the necessary condition to prevent the claw-back did not occur.  Inland countered with the affirmative contract based defenses of impossibility/impracticability and prevention of performance.

Because Bobcat’s claim was based solely on a contract provision, which made it a legal claim, Inland’s contract defenses of prevention of performance and impossibility were applicable to the claim.  Nonetheless, the Court found that the UPA was unambiguous in its terms.  Inland knowingly assumed the risk that the condition preventing the claw-back might not occur and the terms of the UPA stated that if the condition did not occur, Bobcat could automatically redeem the equity.  Therefore, the Court rejected Inland’s affirmative defenses as a matter of law and granted Bobcat’s motion for summary judgment on its claim to redeem the equity payment.

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The Delaware Superior Court CCLD Dismisses Insurance Coverage Claims Against Non-Resident Defendants but Declines to Stay Litigation Against Delaware Insurers in Favor of Contemporaneously Filed New York Action

AR Capital, LLC et al. v. XL Specialty Insurance Company, et al., C.A. No. N19C-01-024 (MMJ) (CCLD).

It is axiomatic that in order for a Delaware court to exercise general personal jurisdiction over a defendant, that defendant must either be incorporated or have their principal place of business in Delaware.  If there is no general personal jurisdiction, then there must be specific personal jurisdiction.  Moreover, under Delaware’s familiar standard in governing whether an action should be stayed in favor of a first-filed action, the Court will review the competing actions to determine whether the actions were contemporaneously filed (and will apply traditional forum non conveniens factors pursuant to General Food Corp. v. Cryo-Maid, Inc., 198 A.2d 681, 684 (Del. 1964)) or whether the foreign action is truly first-filed (thereby applying the standard set forth in McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 281 (Del. 1970)).  The “contemporaneous” determination is important because if the actions are filed contemporaneously, the movant seeking dismissal has the burden to prove that litigating in Delaware would cause “overwhelming hardship.”  More ›

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Chancery Awards Advancement to LLC Member Applying Corporate Law Precedent

Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019).

Delaware law, under 8 Del. C. § 145, allows for a corporation to agree in corporate documents or contracts to advance legal fees and expenses arising out of one’s service to the company.  Aiming to bolster quality leadership, Delaware’s policy is to construe advancement provisions broadly in favor of advancement.  Parties also utilize advancement provisions in the LLC context.  Different from the corporate context, the foundational principle underlying an LLC relationship is the freedom of contract—the idea that parties are free to arrange their dealings as they choose.  Overlaying this important principle is the notion developed under Delaware case law that, while the contract is paramount in the LLC context, structural choices might result in a court importing ideas from an analogous body of law, like corporate law.  This recent Court of Chancery opinion recognizes and illustrates that notion when dealing with claimed advancement rights, explaining “parties are free to contract into corporate case law (or not) when they create LLCs, and courts will respect that choice.”  More ›

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Delaware Supreme Court Explains MFW’s Timing Requirement

When challenged, transactions involving a corporation and its conflicted controlling stockholder invoke Delaware’s rigorous form of judicial scrutiny, known as entire fairness review.  But not always.  With the right procedural protections in place, at the right time, even they can get the benefit of Delaware’s default deferential analysis, known as business judgment review.  Business judgment review usually equates to an early dismissal in litigation. More ›

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Chancery Imposes Rule 15(aaa)’s Requirement – Amend or Risk Dismissal with Prejudice – on Cases Transferred from the Superior Court

Otto Candies, LLC v. KPMG, LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Apr. 25, 2019)

Rule 15(aaa), a rule unique to the Court of Chancery, requires plaintiffs faced with a motion to dismiss for failure to state a claim to either:  (i) amend their complaint; or (ii) stand on their pleading and risk dismissal with prejudice.  In this case, the plaintiffs initially brought suit in the Superior Court of Delaware, which does not have a corollary to Rule 15(aaa).  Before the Superior Court, defendants moved to dismiss the plaintiffs’ complaint on personal and subject matter jurisdictional grounds, as well as for failure to state a claim.  More ›

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Decade-long Failure to Pursue Claim for Founder’s Shares Results in Laches Dismissal

Forman v. CentrifyHealth, Inc., C.A. No. 2018-0287-JRS (Del. Ch. Apr. 25, 2019)

As the Court of Chancery observes in this opinion, “equity favors the vigilant, not those who slumber on their rights.”  Here, the Court applies the equitable doctrine of “laches” to dismiss claims brought beyond the statute of limitations at law, at which point prejudice to the defendant is presumed.

The plaintiff, a former director, brought suit in 2017 claiming that in 2005, he was promised but never received certain founder’s shares, and later, under a 2006 stock option plan, he was promised additional shares.  Although the Court of Chancery recognized that a laches defense is fact intensive, the Court determined that it was clear from the face of the complaint that the plaintiff was aware by 2007 that the company denied his claim to any founder’s shares, including because he was provided capitalization tables not reflecting any such shares.  More ›

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Chancery Enforces LLC Agreement’s California Forum Selection Clause For Advancement Claim

Li v. LoanDepot.com, LLC, C.A. No. 2019-0026-JTL (Del. Ch. Apr. 24, 2019).

Delaware law permits parties conducting their business as limited liability companies to include mandatory arbitration or forum selection clauses in their LLC agreements, even those naming a forum outside of Delaware.  And the State’s public policy supports enforcing contracts, including forum selection clauses, unless specifically prohibited by statute or upon a showing of fraud or overreaching.  There is an important statutory exception in this context.  Under Delaware’s LLC statute, 6 Del. C. § 18-109(d), other than for arbitration, a non-managing member of an LLC cannot waive its right to sue in the Delaware courts for matters relating to the LLC’s “organization or internal affairs.” More ›

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Delaware Supreme Court Rejects Stock Price Appraisal Award in Aruba Networks

Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Del. Apr. 17, 2019).

In a closely-followed appeal from the Court of Chancery’s appraisal decision in the Aruba Networks case, the Delaware Supreme Court reversed the trial court’s fair value award of $17.13 per share and directed that the court-below enter judgment at the deal-price-less-synergies value of $19.10 per share.  The Supreme Court found that the lower court abused its discretion when, because of the difficulty of estimating the amount of the buyer’s synergy value in the $24.67 deal price, it determined that Aruba’s pre-announcement, “unaffected” stock price was the best evidence of fair value.  In so ruling, the Supreme Court provides important guidance about how to account for synergies arising from the expectation of the merger when determining the “fair value” of a going concern under Delaware’s appraisal statute in Section 262 of the DGCL. More ›

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Chancery Declines to Award Fees to Stockholders Who Opposed “Corporate Benefit”

Almond v. Glenhill Advisors LLC, C.A. No. 10477-CB (Del. Ch. Apr. 10, 2019). 

Under the “corporate benefit doctrine,” litigants whose efforts result in a substantial benefit to a Delaware corporation or its stockholders generally are entitled to an award of their attorneys’ fees and expenses.  This opinion emphasizes that the doctrine is a flexible one based on the Court of Chancery’s prerogative to do equity in each case. 

Here, the Court considers and denies a fee application by stockholder-plaintiffs who challenged a defective short-form merger.  The basis for the plaintiffs’ claims included technical errors in the language of certain corporate instruments that resulted in a reverse stock split with a ratio much larger than intended (2,500 to 1, rather than 50 to 1).  That, in turn, resulted in the merger receiving less than the required stockholder approval.  When the corporation attempted to ratify the defective corporate acts under Section 204 of the DGCL and sought judicial validation under Section 205, the plaintiffs opposed it.  Plaintiffs ultimately lost on the issue at trial.  Although the end-result—removing a cloud over the merger’s validity—could be considered a “benefit” resulting from the plaintiffs’ litigation efforts, the Court denied their subsequent fee application.  According to the Court, in particular, it would be inequitable to reward plaintiffs for conferring a benefit they opposed.

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Chancery Enjoins Unfair Merger Orchestrated by Controlling Stockholder Pending Corrective Disclosures

Under Delaware law, majority or controlling stockholders owe fiduciary duties to the company and its minority stockholders. Under certain circumstances, however, a stockholder that owns less than 50 percent of the company’s outstanding stock can be deemed a controlling stockholder and therefore subject to the same fiduciary obligations. This determination involves a fact-intensive analysis regarding the alleged controller’s dominance of the board generally, or dominance of the corporation, board or the deciding committee with respect to a challenged transaction.

The Delaware Court of Chancery recently addressed this issue in FrontFour Capital Group v. Taube, C.A. No. 2019-0100-KSJM (March 11, 2019), where the court issued a post-trial decision on the plaintiffs’ claims to enjoin a proposed combination of Medley Management (a publicly traded asset management firm) with two corporations it advised, Medley Capital Corp. and Sierra Income Corp. (the proposed transactions). In FrontFour, the court held that twin brothers Brook and Seth Taube, who collectively owned less than 15 percent of Medley Capital’s stock, were nonetheless controlling stockholders because they exercised de facto control over the Medley Capital special committee negotiating the proposed transactions, thereby triggering entire fairness review. Although the defendants failed to show that the proposed transactions were entirely fair, the court could not order the most equitable result—a sales process free from influence and onerous deal protections—because plaintiffs failed to prove that Sierra aided and abetted the breaches of fiduciary duty. Therefore, pursuant to the Supreme Court’s decision in C & J Energy Services v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, 107 A.3d 1049 (Del. 2014), the court could not “strip an innocent third party of its contractual rights” under a merger agreement. However, the court did enjoin the stockholder vote pending corrective disclosures regarding the conflicted sales process. More ›

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Delaware Supreme Court Rejects MFW Defense Because of Delay in Safeguards

Olenik v. Lodzinksi, No. 392, 2018 (Del. Apr. 5, 2019).

Under Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014), deferential business judgment review governs mergers between a controlling stockholder and the controlled corporation when the deal is conditioned “ab initio” on two procedural safeguards. Those are approval by (i) a special committee of independent directors, and (ii) an uncoerced, informed majority-of-the-minority stockholders’ vote. The reasoning goes, with so-called “MFW conditions” in place at the outset, a controller cannot dictate the economic terms or unduly influence the stockholder vote, thus ameliorating the concerns otherwise justifying the more exacting “entire fairness” review. More ›

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Chancery Ends Trip for Uber Derivative Lawsuit

McElrath v. Kalanick, C.A. No. 2017-0888-SG (Del. Ch. Apr. 1, 2019).

This derivative action arose out of Uber’s acquisition of a self-driving vehicle firm named Otto, which involved former Google employees.  Google sued Otto and Uber for alleged intellectual property infringement, resulting in Uber settling the dispute for $245 million.  The plaintiff sued Uber’s directors for the acquisition, claiming they should have known better than to rely on their CEO’s promotions of the deal and his representations regarding the company’s due diligence findings under the circumstances.

This decision grants the defendants’ motion to dismiss under Court of Chancery Rule 23.1 pre-suit demand-on-the-board grounds.  Applying recognized legal principles for that analysis, the Court held that the complaint lacked the necessary particularized allegations showing that pre-suit demand on the board would have been futile.  In this regard, the plaintiffs’ allegations and argument had focused on the directors’ failure to inform themselves of specific due diligence findings rather than relying on management’s discussions of those issues, citing management’s alleged history of causing the company to engage in other misconduct as a supposed “red flag.”  According to the Court, however, plaintiff alleged at most an exculpated duty of care claim, not a breach of the duty of loyalty.  Central to the Court’s reasoning was the absence of other known misconduct involving the type of misconduct at-issue in the acquisition—the misappropriation of intellectual property.  According to the Court, a board’s alleged awareness of an executive’s supposed bad character “is not a sufficient red flag … to convert a plain vanilla duty of care allegation into a persuasive pleading of bad faith on the part of the directors.”  Under Delaware law, “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties.”

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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. 

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Superior Court CCLD Finds Court of Chancery Lacks Jurisdiction Over Dispute, Despite Forum Selection Clause in Agreement

Sun Life Assurance Co. of Can. – U.S. Ops. Hldgs., Inc. v. Grp. One Thousand One, LLC, f/k/a Del. Life Hldgs., LLC, C.A. No. N18C-07-173 (AML) (CCLD) (Del. Super. Mar. 29, 2019).

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 ›

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