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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Showing 116 posts from 2022.
Chancery Dismisses Complaint Against LLC Directors Based on Specific Terms of the Operating Agreement and Laches
Erisman v. Zaitsev, C.A. No. 2020-0903-JRS (Del. Ch. Dec. 29, 2021)
Under Delaware law, parties to limited liability company agreements have the freedom to alter or eliminate fiduciary duties, and to eliminate liability for breaches of contractual and fiduciary duties. Here, the Court of Chancery dismissed LLC members’ complaint because, among other reasons, the Operating Agreement (i) replaced default common law fiduciary duties with a contractual standard that limited director liability to claims in which directors did not rely on the terms of the Operating Agreement in good faith; and (ii) it further provided that the directors were not liable for money damages unless they failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, derived an improper personal benefit, or breached their duty of loyalty to the company. More ›
Chancery Dismisses Derivative Action Arising from $1.2 Billion Stock Sale Based on Plaintiffs’ Failure to Plead Demand Futility
In re Kraft Heinz Co. Deriv. Litig., Cons. C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021)
The Court of Chancery dismissed an insider-trading action on the grounds that plaintiffs failed to plead that a majority of a company’s board was not disinterested or independent. By way of background, an investment firm held 24 percent of a publicly-traded Delaware company and rights to three seats on an eleven-member board. At an August 2018 meeting, the board received information that the company likely would miss annual financial targets. Four days later, the investment firm sold nearly a third of its stake, for more than $1.2 billion. The stock sale occurred after the investment firm provided the company with a statement that the firm was not in possession of any material, nonpublic information, and after the company’s board approved lifting insider restrictions that permitted the firm to sell the shares. Three months later, the company disclosed disappointing financial results, and the stock price dropped significantly. More ›
Chancery Issues Preliminary Injunction To Bar Arbitration on the Grounds that no Agreement was Formed
Hologram, Inc. v. Caplan, C.A. No. 2021-0736-KSJM (Del. Ch. Dec. 14, 2021)
The Court of Chancery issued a preliminary injunction barring arbitration because the parties had never reached an agreement that included arbitration. By way of background, two former high-school classmates agreed in principle to begin a company. One would own ninety percent of the shares and serve as president and CEO, and the other would own ten percent of the shares in exchange for providing ideas and business opportunities. The president sent paperwork to his former classmate via email, including a restricted stock purchase agreement that proposed a vesting period for shares, required specific terms for acceptance, and included an arbitration provision. The former classmate responded with a request to change the shares to non-vesting. Over the ensuing months, the two could not agree on final terms, and the specific terms of acceptance (including in-person execution and payment) were never met. Nearly eight years later, as the company raised a $65 million Series B investment, the former classmate suddenly reached out to inquire about his ownership status. He subsequently filed a private arbitration demand against the company in Illinois. The company responded by filing a Delaware action seeking a declaration that the arbitration was improper because no agreement had been reached between the parties in connection with the claims made by the former classmate. The company moved for a preliminary injunction to prevent the continuation of the Illinois arbitration. More ›
Chancery Finds Lack of Personal Jurisdiction Over Delaware Corporate Officers Based on Due Process Considerations
In re Bam International, LLC v. The MSBA Group Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021)
Two officers of a Delaware corporation were sued for alleged tortious interference with an escrow agreement between the Delaware corporation employing the officers and the plaintiff (another Delaware corporation). The plaintiff also brought a breach of contract claims against the Delaware corporation and other entity defendants. The two officers moved to dismiss for lack of personal jurisdiction arguing that, other than their status as officers of a Delaware corporation, they had no relationship with Delaware. The officers further noted that they were not signatories to the contract at issue, which, in any event, was only connected to Delaware by choice of law and forum clauses. Plaintiff contended that the officer defendants, as fiduciaries of a Delaware entity, had implicitly consented to jurisdiction pursuant to 10 Del. C. § 3114(b). More ›
Chancery Defers Substantive Arbitrability Question to Arbitrator
Hagler v. Evolve Acquisition LLC, et al., C.A. No. 2021-0431-SG (Del. Ch. Dec. 28, 2021)
A party to a purchase agreement filed an arbitration relating to certain indemnities for alleged breaches of representations and warranties in the agreement. A few months later, another party to the purchase agreement filed an action in the Delaware Court of Chancery seeking a declaratory judgment relating to the same financial figures at issue in the arbitration and seeking an injunction (and other relief). The defendant in the Court of Chancery action moved to dismiss for lack of subject matter jurisdiction, claiming that the arbitration provision in the purchase agreement deprived the Court of jurisdiction and that any questions about arbitrability were for the arbitrator. Plaintiff argued that there was a broad equity carve-out from arbitration in the purchase agreement, which indicated that substantive arbitrability was an issue for the Court, not for the arbitrator. More ›
Court of Chancery Holds That Exclusive Remedy Provisions Alone Are Not Enough To Bar Fraud Claims Based On Extra-Contractual Statements
Fortis Advisors LLC v. Johnson & Johnson, C.A. No. 2020-0881-LLW(Del. Ch. Dec. 13, 2021)
Delaware public policy respects freedom of contract, but it is also intolerant of fraud. These dueling policy aims are often pitted against one another in the context of complex commercial transactions, where the contracting parties agree to allocate risk – including limitations on the information relied on in entering the transaction. Delaware courts have struck a balance: contractual disclaimers of reliance are permitted, but they must be express and limited to the other party’s extra-contractual statements. Here, the Court of Chancery considered whether an exclusive remedies provision was alone sufficient to disclaim reliance on extra-contractual statements. More ›
Chancery Revived a Dismissed Claim after Discovery Revealed a Desire for Liquidity that Resulted in a Divergent Interest in M&A Sale Process
In re Mindbody, Inc., S’holder Litig., Cons. C.A. No. 2019-0442-KSJM (Del. Ch. Dec. 9, 2021)
A desire for liquidity can result in a divergent interest sufficient to plead fiduciary duty claims against a defendant protected by an exculpatory charter provision. More ›
Delaware Supreme Court Affirms that Seller’s Change of Business Operations in Response to the COVID-19 Pandemic Excused Buyer’s Obligation to Close
AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, No. 71-2021 (Del. Dec. 8, 2021)
This Supreme Court decision affirms the Court of Chancery’s decision below (reported here) that a buyer’s obligation to purchase a $5.8 billion group of hotel properties was excused due to the seller’s failure to comply with a covenant that, between signing and closing, it would operate “only in the ordinary course of business, consistent with past practice in all material respects.” More ›
Chancery Strictly Applies Statutory Standing Requirement to Dismiss Books and Records Action by Former Stockholder Who Filed Hours After Effective Time of Merger
(Previously published in ABA's Business Law Today)
Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021)
In this decision, the Delaware Court of Chancery applied Section 220(c) of the Delaware General Corporation Law to dismiss a books and records complaint filed shortly after an event that, under the terms of a merger agreement, caused the plaintiff’s shares to be canceled. More ›
Chancery Holds that Corporation Cannot Rely on Its Stock Ledger to Deny A Stockholder Inspection Rights When it is Aware of and Concedes the Stockholder’s Status
Knott Partners L.P. v. Telepathy Labs, Inc., C.A. No. 2021-0583-SG (Del. Ch. Nov. 23, 2021)
To seek corporate records under section 220 of the DGCL, the plaintiff must demonstrate that it is a stockholder. Generally, a corporation can rely on its stock ledger to determine who is a stockholder of record. This case confirmed, however, that a corporation may not rely on its stock ledger to deprive a stockholder of inspection rights when the corporation was aware of the stockholder’s status but failed to update its stock ledger to reflect that. More ›
Chancery Sustains Claims for Controlling Stockholders’ Breach of Fiduciary Duties, But Dismisses Claim to Void Transaction under DGCL Section 205
Amgine Techs. (US), Inc. v. Miller, C.A. No. 2020-0537-JRS (Del. Ch. Nov. 29, 2021)
This case involves the Court of Chancery’s consideration of various Rule 12 arguments for dismissal advanced by defendants – alleged controlling stockholders who assigned certain of the corporation’s intellectual property to another entity they owned, and who allegedly caused the corporation to enter into a stockholders’ agreement that gave them preferential terms. More ›
Chancery Dismisses Derivative Action Based On Alleged Liability Under DGCL § 174 For Stock Repurchases and Dividends
In re The Chemours Co. Deriv. Litig., C.A. 2020-0786-SG (Del. Ch. Nov. 1, 2021)
Broadly speaking, Sections 160 and 173 of the DGCL prohibit a corporation from repurchasing stock or issuing dividends if doing so would exceed the corporation’s surplus. Both Sections 160 and 173 are enforceable under Section 174, which provides that directors “under whose administration” a “willful or negligent” violation of Section 160 or 173 occurs are “jointly and severally liable” to the corporation. Here, the Court of Chancery rejected a challenge to dividend and stock repurchases premised upon directors’ alleged incorrect assessment of potential environmental liabilities. More ›
Chancery Awards $9.5 Million Mootness Fee for Reduction of Voting Control and Other Benefits
Hollywood Firefighters Pension Fund v. Malone, C.A. 220-0880-SG (Nov. 8, 2021)
A plaintiff may be entitled to a mootness fee if it shows that its action had merit and produced a corporate benefit. This case outlines the Court of Chancery’s analysis in valuing non-monetary benefits and, in turn, the appropriate mootness fee. More ›
Chancery Rules that Multiple Egregious Discovery Abuses Lead to the Ultimate Sanction
DG BF, LLC v. Ray, C.A. No. 2020-0459-MTZ (Del. Ch. Nov. 19, 2021)
Delaware courts may impose sanctions on parties that refuse to comply with court orders or neglect their own discovery obligations. Possible sanctions may include, among other things, monetary penalties, an instruction of adverse inference, or the ultimate sanction of default judgment against the offending party. These sanctions are imposed to remedy the wrongs at-issue and to deter abusive discovery conduct. More ›
Chancery Finds Former Directors Bringing Wrongful Termination Claims Were Not Entitled to all Privileged Communications During Their Board Tenures, and Shifts Some Fees for Inadequate Privilege Logs
SerVaas v. Ford Smart Mobility LLC, C.A. No. 2020-0909-LWW (Del. Ch. Nov. 9, 2021)
With limited exceptions, directors normally have “unfettered” access to corporate information. This decision indicates, however, that the same may not hold true for former directors who do not challenge their removal as directors and who seek documents for reasons unrelated to their prior board service. Here, the Court of Chancery denied a motion to compel by two former directors who challenged the termination of their employment, and who sought in discovery all of the documents the corporation withheld as a privilege from their time as directors. More ›
