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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 116 posts from 2022.
Superior Court Complex Commercial Litigation Division Addresses Standing Requirements For Foreign LLCs “Doing Business” In Delaware And Reaffirms That Some Preliminary Agreements Give Rise To Obligations To Negotiate A Final Agreement In Good Faith
Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, C.A. No. N20C-07-052 AML CCLD (Del. Super. Ct. May 11, 2022)
This decision addresses two points of note relating to standing for foreign limited liability companies and to the binding nature of preliminary agreements. More ›
Superior Court Rejects Defendant’s COVID-related Force Majeure Arguments
Simon Property Group v. Regal Entertainment Group, C. A. No. N21C-01-204-MMJ (Del. Super. Ct. Jul. 6, 2022) (CCLD)
Simon Property, the landlord, sued Regal Entertainment, the tenant, for breach of a commercial lease, including Regal Entertainment’s failure to pay rent during the COVID-19 pandemic in 2020 and 2021. Regal Entertainment asserted several affirmative pandemic-related defenses. Upon Simon Property’s motion, the Court rejected Regal Entertainment’s defenses as a matter of law because the parties’ lease contained a force majeure provision broad enough to cover the pandemic events and because those provisions allocated the risk of loss to Regal Entertainment.
Chancery Applies Schnell and Blasius Review and Upholds Deadlock-Breaking Stock Issuance
Coster v. UPI Companies, Inc., C.A. No. 2018-0440-KSJM (Del. Ch. May 2, 2022)
This case involved a control dispute of the defendant corporation, UPI Companies. After disputes arose between two fifty percent co-owners, one caused the company to issue long promised equity to an executive, which broke the deadlock. When the other co-owner challenged the transaction, the Court of Chancery found the stock sale satisfied the entire fairness standard and declined to invalidate it. On appeal, the Delaware Supreme Court found the trial court should have examined the sale under Schnell or Blasius. In this decision on remand, the Court of Chancery engaged in a thorough discussion of the Schnell and Blasius standards and the state of Delaware law on those tests. Applying its reading of those standards, the Court found the stock sale was not approved for inequitable purposes and had some good faith basis, and therefore was not invalid under Schnell. The Court also found that the stock sale was not primarily motivated by thwarting the co-owner’s vote, but, instead, was motivated by the best interests of the company and a desire to moot litigation that threatened it in the circumstances. The Court further found that, in any event, the company had a compelling justification for its action and an appropriately tailored response, and thus satisfied Blasius.
Superior Court Classifies Cryptocurrency as a Security and Calculates Contract Damages Based on Cryptocurrency Valuation
Diamond Fortress Techs., Inc. v. Everid, Inc., C.A. No. N21C-05-048 PRW CCLD (Del. Super. Ct. Apr. 14, 2022)
Plaintiff Diamond Fortress contracted with the defendant company to provide its software to develop a trading platform for the defendant’s cryptocurrency. In exchange, the defendant agreed to pay plaintiffs in cryptocurrency at the time that defendant made its initial coin offering and at subsequent token distribution events. After the offering and events, the defendant failed, however, to make any payments to the plaintiffs. Plaintiffs filed claims against the defendant for breach of contract, and a default judgment was entered after the defendant failed to appear or respond. After finding that defendant had repudiated and breached the contract, the Court then determined how to calculate damages resulting from breach of a contract to be paid in cryptocurrency, which involved the novel issue under Delaware law of how to classify and value cryptocurrency. More ›
Chancery Orders Additional Information to Consider Dissolution Petition
In re Matter of Global Safety Labs, Inc., C.A. No. 2022-0309-JTL (Del. Ch. May 12, 2022)
This case concerned the dissolution procedures of the DGCL, specifically Section 280, which with Section 281 establishes an optional, court-supervised wind-up process that provides a safe harbor from post-dissolution liability. In this decision, the Court of Chancery faults the paucity of information the Court regularly sees in such actions, which often proceed ex parte. The Court explained that it requires more information to grant relief, including “about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.” The Court cited first-day declarations in a bankruptcy proceeding as a helpful model.
Delaware Supreme Court Interprets Deadline for Bringing Indemnification Claims
North American Leasing, Inc. v. NASDI Holdings, LLC, No. 192, 2020 (Del. Apr. 11, 2022)
Defendants acquired construction entities from plaintiffs and agreed to indemnify plaintiffs for any losses arising from performance and payment bonds on existing projects. Losses occurred in connection with one of the projects in 2017, and plaintiffs gave the defendants notice of indemnification claims for nearly $21 million. Defendants rejected the claims as untimely under the acquisition agreement, which they argued had a strict notice deadline of 2016. More ›
Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities
BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims. More ›
Chancery Requires Fuller Disclosure for Receiver Appointment
In re VBR Agency LLC, C.A. No. 2022-0328-JTL (Del. Ch. Apr. 20, 2022)
Petitioners often call upon the Court of Chancery to appoint receivers to settle a company’s business. As this decision describes, “[i]n recent years, the members of the court have been forced to address actions taken by custodians or receivers who obtained appointments on … scant records. In some of those situations, the custodian or receiver has taken action that caused the court to question whether the appointment should have been made, or the court has learned information that might have caused the court to decline to make the appointment in the first instance. … Delaware has a significant interest in ensuring that questionable individuals do not use judicial proceedings to gain control over Delaware entities. Delaware likewise has an interest in ensuring that its entities are not used as vehicles for improper schemes.” Here, considering these concerns, the Court declined to make an appointment, first requiring additional information beyond that in the petition. The petitioner sought an appointment allegedly for the purpose of litigation involving a defunct LLC. The Court viewed as material additional information regarding the regulatory or legal histories of the receiver and any affiliates, as well as the receiver’s specific plans for the LLC beyond the general purposes stated in the petition.
Chancery Addresses Fiduciary Duty Claims Involving Activist Investor
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. May 26, 2022)
In this case, an activist investor and director was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. And others at the company were alleged to have manipulated the company’s projections to justify the deal price at a lower valuation. The Court of Chancery found well-pled fiduciary duty claims against the alleged wrongdoers and aligned parties that avoided a Corwin dismissal. Among other things, the Court’s decision illustrates constellations of facts sufficient to question the independence of otherwise disinterested fiduciaries. Here, such combinations involved directors’ symbiotic relationships with an activist investor that resulted in repeat directorships in targeted companies.
Chancery Upholds Standalone Direct Claim Under DGCL Section 155 Regarding Fractional Interests
Samuels v. CCUR Holdings, Inc., C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022)
Under Section 155 of the DGCL, corporations may elect either to issue stockholders fractional shares or to pay a stockholder the fair value of the fractional interest. The plaintiff-stockholder alleged that the corporation failed to pay him fair value for his fractional interest after a reverse stock split. In allowing a standalone claim under the statute to proceed, the Court reasoned that stockholders generally are permitted to assert direct statutory claims, and previous decisions addressing Section 155 did not foreclose the plaintiff’s statutory cause of action.
Chancery Permits Novel Breach of Fiduciary Duty Claim Against Directors Who Refused Demand
Garfield v. Allen, C.A. No. 2021-0420-JTL (Del. Ch. May 24, 2022)
Historically, the wrongful rejection of a demand has affected only the question of who controls a derivative claim. In this case, involving equity issuances to a director under an equity compensation plan, however, the plaintiff asserted that defendant-directors’ demand refusal constituted a separate breach of duty because the defendants did not correct an obvious violation of the plan’s plain language. Although the Court recognized that the claim was potentially problematic from a policy perspective, the Court nonetheless found that the claim rested on the established principle that a conscious failure to act is the equivalent of action. And the Court concluded that the plaintiff’s complaint established “one of the strongest possible scenarios for such a claim.” Thus, the Court reasoned, it was reasonably conceivable that the defendants’ conscious inaction in the face of the plaintiff’s demand constituted a breach of the defendants’ duties.
Superior Court Sustains Certain Contract Claims in Dispute over Post-Acquisition Operation of Resort and Timeshare Business
CRE Niagara Holdings, LLC v. Resorts Group, Inc., C.A. No. N20C-05-157 PRW CCLD (Del. Super. Ct. May 31, 2022)
After acquiring a resort and timeshare business in 2017, plaintiffs brought claims of fraudulent inducement, breach of contract, and declaratory judgment against the seller. The seller filed claims in federal courts and in New York state court, and then separately filed parallel claims as counterclaims and a third-party complaint in Delaware. The seller alleged that plaintiffs did not adhere to past practices in operating the business post-acquisition, that they made the acquisition to loot the business, and that, as a consequence, the seller suffered from a diminution in value of the payment streams from certain contracts. The plaintiffs moved to dismiss the seller’s counterclaims and third-party complaint. More ›
Chancery Enforces LLC Members’ Right to Approve Amendments to LLC Agreement
Zohar III Ltd. v. Stila Styles LLC, C.A. No. 2021-0384-JRS (Del. Ch. May 26, 2022)
This decision arises out of control disputes involving the portfolio companies of the entity Zohar III – here, the limited liability company Stila Styles LLC. Stila Styles’ Manager had approved via written consent a transaction that purported to create new units, with those new units controlling who served as the LLC’s Manager. The LLC agreement did authorize the Manager to create new units. But it generally authorized amendment or modification of the agreement “only by the Members.” Because the transaction effectively amended the LLC agreement by taking away certain Members’ rights respecting the Manager role, and the Manager did not obtain the Members’ approval, the Manager’s written consent approving the transaction was invalid and the transaction was void.
Chancery Finds Officer Breached the Duty of Loyalty By Working With Competitors
Metro Storage Int’l LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. May 4, 2022)
The duty of loyalty requires that the corporation’s interests take precedence over any personal interest possessed by a director, officer, or controlling shareholder that is not shared by the stockholders generally. Relevant here, the plaintiffs alleged that the defendant had breached his fiduciary duty of loyalty by consulting for another company while he was an officer, failing to disclose that he was consulting for another company, usurping a financial opportunity, and misusing confidential information. The Court of Chancery found that the evidence supported all of these allegations. In particular, the Court found that the defendant breached his duty of loyalty by spending substantial time performing consulting work for another company when he had agreed to devote his full time to the plaintiff company. The Court reasoned that while an officer generally may work for an independent business so long as this work does not violate his fiduciary duties, the defendant had misappropriated company resources because he had agreed to spend his full time working for the company and this time was a resource that belonged to the company.
Citing Novel Issues of Delaware Law, Chancery Declines to Dismiss Stockholder Class Action in Favor of First-Filed Securities Action
Lordstown Motors Corp. Stockholders Litig., CA. No. 2021-1066-LWW (Del. Ch. Mar. 7, 2022)
The Court of Chancery denied the defendants’ McWane motion to stay the case in favor of a first-filed federal securities action. Because first-filed status matters less in representative actions, McWane correspondingly applies with less force. Here, among the relevant factors, the Court of Chancery action involved novel Delaware legal issues, including the intersection of fiduciaries duty law and SPACs. And the claims were not a mere rebranding as breaches of fiduciary duty of securities law claims based on allegedly misleading statements. Thus, the Court concluded that Delaware’s substantial interest in providing guidance in emerging areas of Delaware law outweighed any practical or comity concerns that might otherwise warrant a stay.
