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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 546 posts by Albert J. Carroll.
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.
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 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 ›
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 ›
Chancery Dismisses Caremark Action Based on Insufficient Allegations of Bad Faith
Clem v. Skinner, et al., C.A. 2021-0240-LWW (Del. Ch. Feb. 19, 2024)
This Caremark decision involved the retail pharmacy company, Walgreens, and concerned billing practices for a particular insulin pen product that gave rise to unnecessary refill reminders and overbilling, which led to a government investigation and a whistleblower lawsuit. A stockholder plaintiff brought this related derivative action against Walgreens' directors and officers. The Court of Chancery easily disposed of the claims under Rule 23.1 for failure to allege demand futility. According to the Court, the plaintiff's allegations demonstrated that Walgreens' board fulfilled its oversight duty by enacting a board-level monitoring system and by responding to red flags. Indeed, soon after learning of the whistleblower action, the company considered and remedied the problem through software changes. And the plaintiff's contention that the board's actions “came too late and did too little” was “incompatible with bad faith—a necessary component of any Caremark claim.” Notably, the Court expressed some concern about the uptick of Caremark suits, cautioning that “more harm than good comes about if Caremark claims are reflexively filed” whenever an alleged defect is discovered or investigated.
Delaware Supreme Court Affirms That the Right to Sue Corporate Officers is Not a “Power” Within the Meaning of DGCL Section 242(b)(2)
In re Fox Corporation/Snap Inc. Section 242 Litigation, C.A. 2023-1007-LWW (Del. Ch. January 17, 2024)
DGCL Section 242(b)(2) requires approval by each class of stock to amend a corporate charter, where the amendment alters or changes – adversely – the powers, preferences, or special rights of a class of stock. Here, the Delaware Supreme Court was asked to determine whether a charter amendment affecting the right to sue implicated "powers" of a certain class of stockholders, such that the amendment required approval by all classes of stock. Affirming the Court of Chancery below, the Delaware Supreme Court held that the right to sue is not a “power” within the meaning of Section 242(b)(2), and, thus, the charter amendment did not require approval by all classes of stock. More ›
Chancery Upholds Challenge to TripAdvisor’s Conversion from a Delaware Corporation into a Nevada Entity
Palkon v. Maffei, C.A. 2023-0449-JTL (Del. Ch. Feb. 20, 2024)
This decision arose out of TripAdivor’s conversion from a Delaware corporation into a Nevada corporation. The company’s CEO and Chair had voting control and approved the conversion. The board did not condition the transaction on special committee approval or a majority of the minority stockholder vote. The plaintiff challenged the conversion on the grounds that the CEO and the board approved it to secure litigation protections for themselves under Nevada law more favorable than under Delaware law. More ›
Chancery Invokes the Implied Covenant to Invalidate Shareholder Rights Plan
Whitestone REIT Operating Partnership L.P. v. Pillarstone Capital REIT, C.A. No. 2022-0607-LWW (Del. Ch. Jan. 25, 2024)
In Delaware, the implied covenant of good faith and fair dealing is inherent in all contracts and ensures that the “fruits of the bargain” are not frustrated by arbitrary or unreasonable action. More ›
Delaware Supreme Court Upholds Forfeiture for Competition Provision in Partnership Agreement
Cantor Fitzgerald, L.P., v. Ainslie, No. 162, 2023 (Del. Jan. 29, 2024)
Here, a limited partnership agreement authorized the partnership to withhold distributions owed to a partner who withdraws from the partnership and engages in specified competitive activities. The partnership attempted to enforce the agreement and several former partners sued in Delaware. At the trial court level, the Court of Chancery scrutinized the provision using the standard for non-compete covenants and found the provision overbroad and unreasonable and thus invalid on policy grounds. On appeal, the Delaware Supreme Court reversed and remanded. The Supreme Court held that forfeiture for competition provisions in partnership agreements should not be reviewed for reasonableness. Rather, they should “enjoy … deference on equal footing with any other bargained-for-term in a limited partnership agreement.” The Supreme Court’s reasoning largely turned on the express policy of the Delaware limited partnership statute (DRULPA) to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.
Chancery Invalidates Elon Musk’s $55.8 Billion Pay Package
Tornetta v. Musk, et al., C.A. 2018-0408-KSJM (Del. Ch. Jan. 30, 2024)
Stockholders of Tesla, Inc. brought a derivative action against Elon Musk and six individual Tesla directors, alleging that the directors breached their fiduciary duties by awarding Musk performance-based stock options in January 2018 with a potential $55.8 billion maximum value and $2.6 billion grant date fair value. Following a trial, the Court of Chancery held that the defendants failed to meet their burden to prove the fairness of the compensation plan and granted the plaintiffs’ request to rescind the plan in its entirety. More ›
Chancery Addresses Pleading-Stage Arguments for Dismissal in LLC Dispute
Principal Growth Strategies LLC v. AGH Parent LLC, C.A. 2019-0431-JTL (Del. Ch. January 25, 2024)
This decision provides helpful guidance to practitioners to address pleading-stage arguments for dismissal. The plaintiff asserted fiduciary claims against the controller and manager of a Delaware LLC, who allegedly engineered an asset-swap transaction at the expense of the LLC. The Court of Chancery largely denied the motions to dismiss. More ›
Chancery Confirms Bad Faith Pleading Standard for Officer Caremark Claims
Segway Inc. v. Hong Cai, C.A. No. 2022-1110-LWW (Del. Ch. Ct. Dec. 14, 2023)
The Caremark doctrine recognizes the duty of oversight for directors of Delaware corporations. Under In re McDonald's Corp. Stockholder Derivative Litigation, 289 A.3d 343 (Del. Ch. Jan. 26, 2023), corporate officers, and not just directors, owe a duty of oversight, at least within the scope of each officer’s responsibilities. This decision confirms that the same pleading standard – one requiring bad faith – applies to officer oversight claims. Here, the plaintiff brought such a claim against its former president arising out of declining sales of the company's transportation devices and an increase in accounts receivable. More ›
Chancery Finds Amendment to LLC Agreement Invalid for Want of Manager’s Involvement
DiDonato v. Campus Eye Management, LLC, C.A. No. 2023-0671-LWW (Del. Ch. Jan. 31, 2024)
In governance disputes among LLC constituencies, the operating agreement is the beginning and often end point. This action involved a challenged amendment to an LLC agreement, which provided in relevant part: “[t]he Agreement may be amended, modified, waived or supplemented by the Manager with the written consent of all Members.” The Court found this language was unambiguous and expressly required the manager to be involved in any amendment. In doing so, the Court declined to read the provision – which was the only one in the contract addressing amendments – as permissive and allowing other forms of amendment. Considering the provision, the Court also declined to invoke Section 18-302(f) of the LLC Act, which allows amendments with approval of all members, finding that section applies only where the LLC agreement lacks a mechanism for amendments.