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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.
Court Of Chancery Explains When Claim Is Direct And Survives A Merger
When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger. More ›
ShareCourt of Chancery Finds Breach of Fiduciary Duty By Director Selfishly Opposing Cure of Defective Corporate Acts
When a corporation accidentally issues defective stock or takes some other defective corporate act, Delaware law offers avenues to cure under the right set of circumstances. See 8 Del. C. §§ 204, 205. As this decision shows, a director who self-interestedly stands in the way of that cure by attempting to impose selfish conditions breaches his fiduciary duty of loyalty and may be liable for damages. Even if the director later comes around, extra costs incurred from his obstinacy may be charged to him.
ShareCourt of Chancery Awards Fees Under the Corporate Benefit Doctrine in Director Qualifications Bylaw Dispute
Full Value Partners L.P. v. Swiss Helvetia Fund Inc., C.A. No. 2017-0303-AGB (Del. Ch. June 7, 2018)
A representative plaintiff who confers a non-monetary benefit on the represented class will be entitled to an award of attorneys’ fees and expenses under the right set of circumstances. Delaware does not follow the frequently-adopted lodestar method. Rather, it employs a more flexible approach known as the Sugarland factors, which may or may not result in a market hourly-rate. In this decision, the plaintiff conferred such a benefit and earned a handsome reward under the circumstances. Where the company allegedly was selectively enforcing its director qualifications bylaw, the plaintiff was able to seat a director that the board originally opposed and effectively prevented the company from using the bylaw improperly going forward in one respect. For this preservation of shareholder voting rights, the Court entered a fee award of $300,000, equating to a roughly $1,500 hourly-rate.
ShareCourt of Chancery Enforces Broad Director-Like Books and Records Rights in the LLC Context
Obeid v. Gemini Real Estate Advisors LLC, C.A. No. 2017-0510-JTL (Del. Ch. June 5, 2018)
To facilitate the proper exercise of one’s fiduciary duties, the right of directors to inspect a corporation’s books and records is broad, often referred to as unfettered. The right of managers to inspect an LLC’s books and records generally is equivalent, subject to modification in the LLC agreement. A significant showing is required to avoid a fiduciary’s inspection on the basis that is not for a proper purpose, i.e., any purpose reasonably related to the inspector’s fiduciary status. The company must put forward concrete evidence that the fiduciary will violate duties and use the information to harm it. Without such a showing, the Court generally does not assume the role of questioning the fiduciary’s business judgment about the records he needs to do his job. This decision is an example of the LLC failing to prove the manager lacked a proper purpose for his inspection, with the backdrop of much friction and other litigation among the LLC’s several managers.
ShareCourt of Chancery Explains Contract, Fraud, and Fiduciary Duty Standards in Contingent Deal Price Dispute
Edinburgh Holdings Inc. v. Education Affiliates Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018)
It is common for parties to an acquisition to structure some portion of the purchase price as contingent on the acquired company’s post-close performance. With some frequency, a party dissatisfied with the resulting payment sues for breach of contract and may point the finger at those in charge during the relevant period for measurement. Out of this particular example comes reminders on well-settled standards for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of fiduciary duty. For instance, the implied covenant may be deployed as a defense to a breach of contract claim based on one party preventing the other’s performance, but it may not be used as an affirmative claim to override a contract’s express terms. Further, Delaware law does not permit bootstrapping fraudulent inducement claims onto contract claims by alleging that a party never intended to perform its obligations. Additionally, predictions about future performance generally cannot be the basis for fraud. Finally, Delaware courts will dismiss a breach of fiduciary duty claim that is entirely duplicative of a breach of contract claim.
ShareCourt Of Chancery Explains Contract Reformation Law In Earn-Out Context
Glidepath Limited v. Beumer Corporation, C.A. No. 1220-VCL (Del. Ch. June 4, 2018)
This decision addresses two contracting parties’ divergent expectations relating to whether a delayed closing affected the agreement’s earn-out period. The parties failed to alter the contract to adjust the earn-out period after a delayed closing had the effect of starting the period prior to closing. The negatively-affected party argued in favor of reforming the earn-out period to take into account the delayed closing. As the Court explains, however, reformation under Delaware law requires clear and convincing proof of a mutual mistake in drafting a document or unilateral mistake that is known to the other party who remains silent. Both circumstances were absent here.
ShareCourt Of Chancery Holds That Dr. Pepper And Keurig Reverse Triangular Merger Does Not Trigger Appraisal Rights
In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with that subsidiary then being absorbed by the target. That is how the Dr. Pepper and Keurig companies structured their deal. Dr. Pepper would be the resulting parent company, with Dr. Pepper’s stockholders gaining cash but retaining their stock, and with Keurig’s stockholders gaining a controlling interest in Dr. Pepper. Certain Dr. Pepper stockholders sued claiming that they had appraisal rights to a judicially-determined fair value in connection with the transaction under Section 262 of the DGCL, which were being violated. More ›
ShareCourt Of Chancery Dismisses Derivative Complaint Alleging Disclosure Violations
Steinberg v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018)
This is an interesting decision for its discussion of when pre-suit demand on the board is not excused for a derivative complaint alleging the directors made improper disclosures to stockholders. Applying the well-known Rales test for demand futility, the Court’s focus here was on the absence of particularized allegations from which it was reasonable to infer that a majority of the directors deliberately caused the corporation to issue certain allegedly misleading statements. When that is the case in a suit relying on a bad faith claim, the board doesn’t face a substantial threat of personal liability capable of excusing demand.
ShareCourt Of Chancery Denies Post-Affirmance Request To Increase Fee Award
The Marilyn Abrams Living Trust v. Pope Investments LLC, C.A. No. 12829-VCL (Del. Ch. May 29, 2018)
When a party wins an attorneys’ fee award under the bad faith exception to the American Rule, and the final award is affirmed on appeal, may it also seek fees for successfully defending the appeal back in the trial court? May the same party seek to increase the original award back in the trial court when it inadvertently omitted some trial-court fees the first time around? More ›
ShareCourt Of Chancery Stresses Proper Procedure When Relying On A Contractual Safe Harbor In The MLP Context
In Re Energy Transfer Equity, L.P. Unitholder Litigation, C.A. No. 12197-VCG (Del. Ch. May 17, 2018)
Conflicted transactions are commonplace in the master limited partnership (MLP) context. The entity’s operating agreement usually authorizes conflicted transactions that are “fair and reasonable” to the entity, or some similar phrase. The same agreements often provide one or more safe harbors capable of creating a presumption of fairness and reasonableness, such as using a conflicts committee process. This decision teaches, among other things, that if managers want to take advantage of such a safe harbor, proper process matters. If, for example, a conflicts committee is not properly formed, its approval will not insulate the transaction from judicial review nor avoid potential liability for the conflicted managers. Technicalities matter and it is best to start all over again if a flaw is identified rather than trying to rewrite history.
ShareCourt of Chancery Defends Aruba Networks Appraisal Decision
This opinion arises out of the appraisal proceeding relating to Hewlett-Packard’s purchase of Aruba Networks. The case led to two notable opinions, so far. More ›
ShareCourt of Chancery Declines To Restrain Controller In Proposed Viacom-CBS Deal
Arising out of the highly-publicized dispute over the proposed transaction involving CBS and Viacom, each controlled by the Redstones, this decision is both front-page newsworthy and legally significant. CBS and Viacom used to be one entity but split. The Redstones retained voting control in each through a dual-class voting structure. Later, the Redstones began pushing to merge the entities once again and both entities formed special committees to consider the proposal. More ›
ShareCourt Of Chancery Applies LLC Contractual Fiduciary Duty
MHS Capital LLC v. Goggin, C.A. No. 2017-0449-SG (May 10, 2018)
Alternative entity agreements may eliminate common law fiduciary duties and often do, supplanting them with contractual fiduciary duties. These frequently include an obligation to act “in good faith” or “in the best interests of the company,” broadly or in certain circumstances. Thus, even with fiduciary duty exculpation clauses in LLC agreements, managers may still find themselves exposed to a member’s allegations that they failed to satisfy their standard of conduct, as this decision illustrates. This decision also is interesting for its discussion of the potential impact of bankruptcy court sale orders on the Court of Chancery’s ability to enter equitable relief.
ShareCourt of Chancery Explains What Is A Proper Claim Reserve When Dissolving
Capone v. LDH Management Holdings LLC, C.A. No. 11687-VCG (April 25, 2018)
Under the LLC Act, as with the DGCL, an entity planning to dissolve and distribute its assets is required to set aside some reserve of assets to pay all known claims. Failure to set aside sufficient assets may result in revocation of the entity’s certificate of cancellation, thereby reviving the entity, as happened in this case. This decision explains when claims are “known” by the entity (i.e., the entity has actual knowledge of the claims) and how the entity may value those claims for purposes of retaining sufficient assets to potentially satisfy them. Importantly, the reserve need not match all potential damages dollar-for-dollar. The value of claims may be discounted based on their lack of merit, for example.
ShareCourt Of Chancery Addresses Conflicted Transaction And Secondary Liability
RCS Creditor Trust v. Schorsch, C.A. No. 2017-178-SG (Del. Ch. Apr. 5, 2018)
This is an interesting decision for two reasons. First, it distinguishes between classic self-dealing claims and tag-along challenges to business decisions. Just because a plaintiff successfully pleads that a controller is looting a company in some respects, does not mean all allegedly-related challenges will survive dismissal. Second, it explores when an alternative theory of secondary liability or a claim for unjust enrichment may accompany a sufficiently plead breach of fiduciary duty.
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