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 59 posts from 2024.
Chancery Determines Pharmaceutical Company Complied with Merger Agreement’s Requirement To Use Commercially Reasonable Efforts
Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Apr. 30, 2024)
Stockholder representatives of an acquired corporation brought claims alleging that defendants had failed to use contractually-required commercially reasonable efforts to commercialize an acquired drug asset for a particular use. Under the terms of the merger agreement, the acquirer had paid $250 million in immediate consideration, agreed to a framework for milestone payments following regulatory approval for two separate uses, and retained discretion for operating the post-merger business, subject to a requirement that it use defined “commercially reasonable efforts” to develop and commercialize the drug for each use. Ultimately, after engaging regulatory authorities and deeming there to be dim prospects for success for one use, the acquirer did not persist in securing regulatory approval and bringing the drug to market for that purpose, and therefore did not reach the milestones associated with that use. More ›
Chancery Determines LLC Agreement Required Payment to Remove Manager
Soleimani v. Hakkak, C.A. No. 2023-0948-LWW (Del. Ch. Apr. 12, 2024)
The defendants attempted to remove a manager-employee of several limited liability companies. The manager filed suit, and the parties moved for summary judgment regarding the removal’s effectiveness. The Court of Chancery determined that the relevant contracts’ unambiguous language required the defendants to first have made certain payments to the manager to remove him. The Court explained that the defendants had a right to remove the manager, but that right to terminate did not necessarily mean the termination is unconditional or immediate. The contracts’ unambiguous language established a condition precedent: the defendants could remove the manager once they removed him as an employee, provided that they first paid him the fair market value of his interest. Under ambiguous contractual language, completing that payment was a condition precedent to effective removal, not a post-removal requirement. The defendants’ failure to make the payments rendered their attempt to remove the manager ineffective.
Court of Chancery Dismisses ABC Proceeding for Failure to Comply with Statute
In re Windmil Therapeutics Inc., C.A. No. 2023-1294-PAF (Del. Ch. Mar. 13, 2024)
This case dealt with the voluntary assignment for the benefit of creditors under 10 Del. C. § 7381, et seq. The ABC statute requires several actions, including the filing of an inventory, which has typically involved the assignee filing a motion for two appraisers. After the appraisal has been provided, the statute requires that the Court fix a bond. Due to the fact that these proceedings may be ex parte and lack transparency, Delaware courts have issued rulings requiring more details from assignees and establishing firm deadlines that are not present in the ABC statute. In this case, the assignee violated the statute by failing to file an inventory within 30 days of the execution of the assignment. Furthermore, the assignee sought to seek approval of a bond prior to the appointment of appraisers, and one of the appraisals was unsigned and marked as a draft. Therefore, because of these statutory violations, the Court dismissed the ABC proceeding.
Chancery Declines to Exercise Equitable Jurisdiction in a Contract Action to Compel the Release of Funds Held in Escrow
Graciano v. Abode Healthcare, Inc., C.A. No. 2022-0728-SG (Del. Ch. Mar. 4, 2024)
The Court of Chancery declined to exercise subject matter jurisdiction in connection with a seller’s contractual rights under a purchase agreement. The plaintiff argued that his contract claim required an equitable remedy to recover funds from an escrow fund. The Court held that a declaratory judgment, together with the plaintiff’s instruction to the escrow agent, was the only judicial action required under the agreement. More ›
Chancery Finds Challenge to Stockholders Agreement Both Timely and Ripe
West Palm Beach Firefighters' Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024)
Here, the Court of Chancery declined to apply equitable defenses to bar a challenge to a stockholders' agreement three years after it was disclosed and before any claims for breach of fiduciary duties arising from the agreement were asserted. The underlying dispute involved the plaintiff's challenge to governance terms of a stockholders' agreement under Section 141(a) of the Delaware General Corporation Law. The defendant company claimed that the plaintiff brought the suit both too late and too early. The defendant argued that the action was untimely because the plaintiff waited three years after the agreement was disclosed to sue. The Court explained that when analyzing timeliness, it must assume that the plaintiff’s claim is valid. If the plaintiff were proven correct and the challenged agreement held void, then equitable defenses, like laches, would not apply, as equitable defenses cannot validate a void act. Regardless, the Court found no unreasonable delay and no prejudice to the defendant, considering the facts of this case. The Court also analyzed the challenged acts as an ongoing violation, reviewed through either the continuing wrong method or the separate accrual method to determine when the violation occurred. Under both methods, the suit was timely. Further, the Court found no extraordinary circumstances that would justify applying laches. The defendant also claimed that the plaintiff should have to wait for a breach of fiduciary duty to occur before bringing the suit. The Court disagreed, reasoning that even though the plaintiff could bring a fiduciary duty claim in the future based on the conduct associated with the agreement’s challenged provisions, a facial challenge to the agreement’s legality presented a separate and ripe question of law.
Chancery Awards Attorneys’ Fees to the Prevailing Party
Malkani v. Cunningham, C.A. 2020-1004-SG (Del. Ch. Feb. 28, 2024)
In this decision involving a contractual fee-shifting provision, both parties argued that they were entitled to fee-shifting as the prevailing parties. The Court held that the prevailing party was the party who succeeded in the overall litigation. More ›
Court of Chancery Dismisses Aiding And Abetting Fraud Claim Against Corporate Officers And Directors On Grounds That A Corporation Cannot Conspire With Itself
Urvan v. AMMO, Inc., Consol. C.A. No. 2023-0470 PRW (Del. Ch. Feb. 27, 2024, corrected Mar. 14, 2024)
It is an axiom of Delaware law that a corporation acts through its human agents. This principle informs the causes of action available to would-be plaintiffs against a corporation and its human actors. This case follows the familiar fact pattern where, following a merger, a seller brings a variety of claims against the merged entity and its officers and directors. The plaintiff asserted an aiding and abetting fraud claim against the officers and directors of the company. The officers and directors moved to dismiss the aiding and abetting claim, arguing the intra-corporate conspiracy doctrine generally bars these types of claims because a corporation cannot conspire with itself or its agents. The exception to the general rule is when an “officer steps out of her corporate role and acts pursuant to personal motives.” Reviewing the allegations in the complaint, the Court found that the plaintiff failed to plead sufficient facts to establish that the officers and directors had acted out of their own personal motivations. The Court rejected the plaintiff’s conclusory argument that they participated in making misrepresentations in the merger agreement to hide their past wrongdoing; rather, the Court reasoned that in entering the transaction and making those representations “it seems apparent they were trying to get [the corporation] a favorable deal[.]” Thus, the Court dismissed the aiding and abetting claim.
Chancery Dismisses DGCL Breaches Styled as Fiduciary Duty Claims
Sykes v. Touchstream Technologies Inc., C.A. No. 2022-0861-SG (Del. Ch. March 27, 2024)
The Delaware General Corporation Law (“DGCL”), certificates of incorporation, and bylaws together constitute multi-party contracts among the directors, officers, and stockholders of the corporation. As parties to those contracts, stockholders have direct standing to sue for their enforcement. Here, alongside several other claims, plaintiffs attempted to fashion claims based on the board’s purported violation of sections of the DGCL as a breach of fiduciary duty. Specifically, plaintiffs alleged that the company’s directors had breached their fiduciary duties through violations of Section 211 of the DGCL for failing to hold an annual meeting and Section 220 of the DGCL for failing to produce books and records. The Court found that, in styling the claims as a breach of fiduciary duty, plaintiffs had improperly attempted to “bootstrap a fiduciary claim out of a legal claim.” The Court further noted that plaintiffs could have attempted to vindicate their statutory rights via claims for breach of the DGCL. But, because it was framed as a breach of fiduciary duty, plaintiffs failed to state a claim. Accordingly, the Court dismissed the plaintiffs' breach of fiduciary duty claims.
Chancery Invalidates Provisions of Stockholder Agreement Under Section 141 of the DGCL, Finding Agreement Impermissibly Granted Board-Level Decision-Making to Founder
West Palm Beach Firefighters’ Pension Fund v. Moelis & Co., C.A. No. 2023-0309-JTL (Del. Ch. Feb. 23, 2024)
One day before a company’s shares began trading publicly, the founder and three affiliates entered into a stockholder agreement with the company. The agreement required the board to obtain pre-approval from the founder for eighteen categories of board action, to take various steps to ensure the founder could select a majority of the board even if he held less than a majority of the company’s outstanding voting power, and to form committees only if they contained designees of the founder proportionate to the number of his designees on the board. More ›
Chancery Denies Motion to Dismiss Challenge to Microsoft-Activision Merger Where it Was Reasonably Conceivable that the Board Violated Section 251 of the DGCL
AP-Fonden v. Activision Blizzard Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024)
This case arose from a stockholder-plaintiff’s challenge to a merger whereby Microsoft acquired Activision Blizzard. Activision’s board met to approve the merger and approved a draft merger agreement. However, this draft agreement did not include (i) a disclosure letter, which was mentioned 45 times in the draft agreement; (ii) disclosure schedules, which were still being negotiated; (iii) the amount of consideration; or (iv) the surviving corporation’s certificate of incorporation. The agreement as-approved also did not address the issue of dividends that Activision would be permitted to pay while the deal was pending; when it approved the merger agreement, the board delegated the dividend issue to an ad hoc committee of the board. The full board did not review the merger agreement after this meeting, and the final version executed the next day included several changes from the draft agreement, including the dividend provision agreed to by Microsoft and the ad hoc committee. More ›
Court of Chancery Dismisses Derivative Claims Under Rule 23.1 When Plaintiff Failed to Show that Board Members Faced a Substantial Risk of Liability in Failing to Prevent Personal Use of Company Property
Conte v. Greenberg, C.A. No. 2022-0633-MTZ (Del. Ch. Feb. 2, 2024)
In examining whether a pre-suit demand upon the board of directors would be futile, the Court will examine on a director-by-director basis (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand, and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand. In this case, the plaintiff alleged that the board faced a substantial risk of liability for failing to impose meaningful restrictions on certain executives’ alleged personal use of corporate airplanes, and also for issuing misleading disclosures. The Court disagreed, however, reasoning that even if directors failed to prevent the personal use of the airplane, that alone did not amount to bad faith, because the risk was contained. The Court reasoned the plaintiff’s claim related solely to the “misuse of two corporate assets by discrete individuals, as compared to a widespread operational deficiency.” Furthermore, the Court held that the directors were not at a substantial risk of liability for disclosure claims, because the proxy statement disclosed that certain executives had used the plane for personal use, and the failure to include the several details or characterizations upon which the plaintiff insisted were not material omissions in the context of the proxy statement. The Court accordingly granted the defendants’ motion to dismiss for failure to plead demand futility.
Court of Chancery Addresses Interplay of Attorney-Defendants’ Confidentiality Obligations and Discovery Duties
In re Harris FRC Corp. Merger and Appraisal Litig., C.A. No. 2019-0736-JTL (Del. Ch. February 19, 2024)
Attorney rules for professional conduct across all jurisdictions include a general obligation of confidentiality regarding client information. But what happens when the duty of confidentiality runs into an attorney's duty, as a case party, to produce discovery? This decision from the Court of Chancery provides some insight. More ›
Chancery Finds Egregious Conduct in Books and Records Action Justifying Fee-Shifting Against Corporation
PVH Polymath Venture Holdings Ltd. v. TAG Fintech Inc., C.A. No. 2023-0502-BWD (Del. Ch. Jan. 26, 2024)
Under the “bad faith” exception to the American Rule, Delaware courts will consider shifting fees when aggressive litigation strategies amount to “glaringly egregious” conduct. Here, the Court found the defendant-corporation’s extraordinary attempts to resist a stockholder’s books and records demand under 8 Del. C. § 220 (“Section 220”) warranted requiring the corporation to pay the stockholder-plaintiffs’ attorneys’ fees and expenses. More ›
Failure to Preserve Mobile Data Leads to Multiple Sanctions in the Court of Chancery
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. Jan. 26, 2024)
As more business is conducted via personal mobile devices, modern eDiscovery practice in Delaware generally involves the preservation of custodial mobile data. The failure to preserve relevant data while under a duty to do so may lead to the Court imposing sanctions. More ›
Superior Court Dismisses Aiding and Abetting Claim Against Officers
RGIS International Transition Holdco LLC v. Retail Services WIS Corp., C.A. No. N21C-12-077 (Del. Super. February 13, 2024)
Under Delaware law, a corporation generally cannot conspire with its own officers, directors, or agents, nor can those individuals aid and abet a tort committed by the corporation. There is a “personal motivation exception” to this general rule, under which an agent can be liable for conspiring with or aiding and abetting the corporation when acting outside of that agent’s corporate role or pursuant to personal motivations. More ›
