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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 6 posts from June 2024.
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 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 ›
