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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Morris James Blogs
Showing 4 posts from September 2024.
Delaware Superior Court Holds That Attorney-Client Privilege Was Retained By Seller Post-Merger
Biomerieux, Inc. v. Rhodes, C.A. No. N23C-10-067 (Del. Super. May 9, 2024).
The default rule in Delaware is that the attorney-client privilege transfers from the target corporation to the surviving corporation in a merger. This rule was established by the Court of Chancery’s leading decision in Great Hill Equity Partners IV, LP v. SIG Growth Fund I, LLLP, where the Court found that, under Section 259 of the Delaware General Corporation Law, the attorney client privilege was a “privilege” whose ownership transferred to the surviving corporation, by Section 259’s express terms. This decision from the Delaware Superior Court’s Complex Commercial Litigation Division demonstrates that parties can contract around the default rule by agreement. Here, the parties’ merger agreement provided that the attorney-client privilege “regarding” the merger agreement would remain with the sellers. Accordingly, the Court granted the seller-defendants’ motion to strike the buyer-plaintiffs’ use of an email containing the seller-defendants’ counsel’s legal advice “regarding” the merger agreement. The Court reasoned that, under the terms of the parties’ agreement, the attorney-client privilege remained with the seller-defendants and, thus, the buyer-plaintiffs were not entitled to use the privileged email.
Chancery Holds Plaintiff Fails to Meet Rule 23.1 Pleading Standard, Dismisses Action Arising From T-Mobile Data Hack
Harper v. Sievert, C.A. No. 2022-0819-SG (Del. Ch. May 31, 2024).
A stockholder plaintiff brought derivative claims alleging that current and former directors of T-Mobile US, Inc. were liable for aggregating customers’ data in a manner that made it more vulnerable to hacking. The plaintiff alleged that the company’s parent, a German telecommunications company, coerced the board to aggregate customers’ data to facilitate the parent’s own machine learning and artificial intelligence projects. The plaintiff alleged this put the data at greater risk for hacking, which subsequently occurred, resulting in significant liabilities for T-Mobile. The Defendants argued that the plaintiffs failed to allege with particularity under Rule 23.1 that the demand was futile. The defendants did not dispute for purposes of the motion that a majority of the board lacked independence from the parent. The Court accordingly focused on whether the Plaintiffs sufficiently alleged that the Defendants caused the parent to receive a non-ratable benefit from the alleged misconduct. The Court held that the plaintiff had failed to do so, because the complaint did not state with particularity how the parent benefited from the alleged plan or any steps the parent took to implement the plan. The complaint also did not allege any particular board action or decision about aggregating customers’ data at T-Mobile. Notably, the plaintiff did not make a books and records demand prior to bringing suit, and instead relied upon public information. The Court dismissed the action for failure to plead with particularity why a demand would be futile.
Court of Chancery Denies Post-Trial Motions Seeking to Enjoin Tesla Defendants
Tornetta v. Musk, C.A. No. 2018-0408-KSJM (Del. Ch. May 28, 2024)
Following the Court of Chancery’s post-trial opinion concerning Elon Musk’s compensation from Tesla (summarized here), Tesla submitted stockholder proposals to ratify Musk’s compensation package and to move Tesla’s state of incorporation to Texas. Concerned that the defendants would use these proposals to avoid enforcement of the Court’s prior decision, the plaintiffs moved to enjoin the defendants from litigating this action or issues relating to the action outside of Delaware, requested a constructive trust over the common stock underlying certain options, and sought to reorder the normal sequence of events and order a final implementing order to ensure that the post-trial opinion was enforceable. The defendants opposed and argued that Tesla would still be a Delaware corporation at the time of the vote, that success of the ratification proposal would not affect any liability incurred prior to the conversion, a final implementing order was unnecessary, and the idea that the defendants would seek to avoid the Court’s jurisdiction was speculative. The Court interpreted the defendants’ positions as certifying that they did not intend to litigate any matter related to this action outside Delaware, that litigation relating to the ratification proposal would be subject to a Delaware forum selection provision, the defendants would not argue that the Court’s post-trial opinion was not enforceable based on the lack of an implementing order alone, and that the defendants would not argue that recission is unachievable solely as a result of a successful vote on the proposal to re-domesticate in Texas. Based on these representations, the Court denied the plaintiffs’ motions.
Delaware Supreme Court Reverses MFW Dismissal Due to Inadequate Disclosures Regarding Special Committee’s Advisors’ Material Conflicts
City of Sarasota Firefighters’ Pension Fund v. Inovalon Holdings Inc., No. 305, 2023 (Del. May 1, 2024).
The Delaware Supreme Court’s decision in Khan v. M & F Worldwide Corp. (“MFW”) established a cleansing process for a corporation’s transactions with a controlling stockholder: “(i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.” If all those elements are met, the transaction is reviewed under the deferential business judgment standard. More ›
