Albert J. Carroll

Court Of Chancery Explains When A Minority Stockholder Has Control

In re Tesla Motors Inc. Stockholder Litigation, C.A. No. 12711-VCS (Del. Ch. Mar. 28, 2018)

Under Delaware law, a controlling stockholder need not be a majority stockholder. Rather, a controlling stockholder might be a group of aligned stockholders who together hold a majority.  Or, as in this case, it might be a minority but substantial stockholder who practically has and exercises board-level control with respect to the challenged transaction.  The presence of a controller is an important factor in litigation, including because, as here, it might prevent defendants from achieving a prompt dismissal of a post-closing fiduciary duty action based on stockholder approval under the well-known Corwin decision.  In this case, the factors relevant to finding control by the roughly 22% minority stockholder (i.e., Elon Musk) at the motion to dismiss stage included: (1) the individual’s history of eliminating opposition; (2) the board’s lack of safeguards to prevent his control over the company’s consideration and negotiation of the self-interested transaction; (3) a board packed with members interested in the transaction or beholden to him; and (4) public disclosures portraying him as in control.

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Court Of Chancery Explains Expanded Jurisdiction Under Director Consent Statute

LVI Group Investments LLC v. NCM Group Holdings LLC, C.A. No. 12067-VCG (Del. Ch. Mar. 28, 2018)

In Hazout v. Tsang Mun Ting, 134 A.3d 274 (Del. 2016), the Delaware Supreme Court expanded the basis for personal jurisdiction over nonresident directors and officers of Delaware corporations under 10 Del. C. § 3114, the so-called director consent statute.  Hazout overruled long-standing Court of Chancery precedent that narrowly construed Section 3114’s “necessary or proper party” clause to actions alleging the director or officer had breached a fiduciary duty owed to the corporation.  This decision is notable because it explains and applies Section 3114’s expanded scope.  

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Court of Chancery Applies Revlon to a Warrant to Buy

Carr v. New Enterprise Associates, Inc., C.A. No. 2017-0381-AGB (Del. Ch. Mar. 26, 2018)

This decision addresses a host of interesting topics.  First, it declines to invoke the so-called step-transaction doctrine under which the Court treats the steps in a series of formally separate but substantially-linked transactions involving the transfer of property as a single transaction.  Second, it declines to apply the mootness doctrine in a challenge to an unexercised warrant.  Third, it wrestles with deciding whether challenges to a financing and a warrant issuance are direct or derivative claims.  Fourth, it address the pre-suit demand on the board requirement.  Fifth, it finds a sufficiently pled claim of aiding and abetting a breach of fiduciary duty.  Sixth, it decides that intermediate scrutiny (i.e., Revlon) may apply when a party is granted an option to acquire a company under a warrant.  Finally, it applies Cornerstone to dismiss exculpated directors from a money damages action where the complaint failed to adequately plead a duty of loyalty claim against them.

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Court Of Chancery Explains When Directors Lack Independence To Consider Pre-Suit Demand

In Re Oracle Corporation Derivative Litigation, C.A. No. 2017-037-SG (Del. Ch. Mar. 19, 2018)

Delaware law requires a derivative plaintiff to make a pre-suit demand on the board unless excused as futile.  Because some level of social and business ties are common among the director-class and because such ties to an interested party is one potential path to successfully alleging a director lacks independence to impartially consider a pre-suit demand, such relationships are an oft litigated topic in the demand context.  Frequently, such connections even when considered collectively are found not to rise to a level negating a director’s ability to consider a demand.  But, as this decision explains, sometimes they are.  While each director-by-director assessment is a highly-factual question, this case is a worthwhile read to understand the type and magnitude of relationships that might call into doubt one’s independence.

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Court Of Chancery Awards Nominal Damages For Breach Of Fiduciary Duty

The Ravenswood Investment Company LP v. The Estate Of Bassett S. Winmill, C.A. No. 3730-VCS (Del. Ch. Mar. 21, 2018)

It is easy to assume that some form of meaningful relief must be available when a fiduciary bears the burden of proving a self-dealing transaction is entirely fair, but fails to carry it.  But that is not always true, as this decision shows.  For instance, as happened here, if stock options were issued for inadequate consideration, the plaintiff still needs to prove actual damages or that rescission would be appropriate under the circumstances.  A failure to do so could foreclose meaningful relief and result in only nominal damages.  We can put it no better than the Court did: “[T]here is [an] important lesson to be learned from this case.  While this court endeavors always to remedy breaches of fiduciary duty, especially breaches of the duty of loyalty, and has broad discretion in fashioning such remedies, it cannot create what does not exist in the evidentiary record, and cannot reach beyond that record when it finds the evidence lacking.  Equity is not a license to make stuff up.”

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Court of Chancery Enforces Section 145 Indemnification Rights of Subrogee

Meyers v. Quiz-Dia LLC, C.A. No. 9878-VCL (Del. Ch. Mar. 16, 2018)

This is an interesting indemnification decision for its handling of subrogation rights in the indemnification context, one involving former Quiznos officers.  First, it holds that, generally speaking, when a party who may be secondarily liable for indemnifiable litigation costs covers the indemnitee’s litigation costs, it may then recover those costs from the party who is primarily liable.  Second, it questions whether the “volunteer” exception can apply to subrogation rights in the Section 145 indemnification context.  Third, it holds that the Court will enforce fee-sharing arrangements among defendants such that the indemnitee can only recover its pro rata proportion of the fees.  Fourth, it enforces such a limitation on a subrogee, such that the subrogee cannot recover more than the indemnitee could have recovered. Fifth, it holds that a subrogee has the same right to fees-on-fees that the indemnitee would have if it had been the party seeking indemnification.

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Delaware Corporate and Commercial Case Law Year In Review – 2017

Morris James attorneys Lewis Lazarus, Albert Manwaring and Albert Carroll authored an article published in Transaction Advisors titled Delaware Corporate and Commercial Case Law Year in Review – 2017. The article summarizes ten significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past year, including matters such as appraisal rights, duties in the master limited partnership context, director compensation awards, and preclusion in shareholder derivative litigation.  Continue reading for the full article. More ›

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Court of Chancery Rejects Conspiracy Theory of Jurisdiction At Summary Judgment Stage

Reid v. Siniscalchi, C.A. No. 2874-VCS (January 30, 2018)

The facts underlying this summary judgment decision are rather remarkable.  The case is long-pending, and involved years of jurisdictional discovery granted for the purpose of allowing the plaintiff to explore its pleading-stage theory of personal jurisdiction under the so-called conspiracy theory.  The gist of that theory is that a Delaware court can exercise personal jurisdiction over all co-conspirators when one commits an act in the State that is central to carrying out the conspiracy.  It is a theory oft-invoked but rarely satisfied.  And, as this decision demonstrates, it is a theory that could be subject to some abuse by a clever litigant.  In this case, the evidence ultimately showed that the plaintiff misled the Court by claiming to be the victim of a Delaware-based conspiracy, when, in fact, the plaintiff was the architect of the very wrongdoing used to advance his conspiracy theory.  Thus, some ten years into the litigation, the non-resident defendant was dismissed from the case based on a lack of personal jurisdiction.   

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Delaware Supreme Court Gives Preclusive Affect To Prior Dismissal In Wal-Mart Derivative Litigation

California State Teachers Retirement System v. Alvarez, No. 295, 2016 (Del. Jan. 25, 2018)

This is an important decision clarifying the rules regarding the preclusive effect a dismissal of a derivative suit may have on a similar suit pending or brought later in Delaware.  This litigation saga involving a bribery scandal at Wal-Mart took some interesting turns, ping-ponging between the Delaware Court of Chancery and the Delaware Supreme Court.  More ›

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Court Of Chancery Explains Inspection Rights Under An LLC Agreement

Aloha Power Company LLC v. Regenesis Power LLC, C.A. 12697-VCMR (Dec. 22, 2017)

This books and records decision addresses inspection rights granted under an LLC agreement. It also is useful as a reminder that a mere decline in an entity’s performance is not a sufficient proper purpose supporting inspection.  While the “credible basis” standard for suspecting mismanagement is low, it is not that low.

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Court Of Chancery Explains When A Prediction Is A Misleading Disclosure

Chatham Asset Management LLC v. Papanier, C.A. No. 2017-0088-AGB (Dec. 22, 2017)

It is often said that a mere prediction of some future event cannot be misleading because such predictions are speculations that cannot be relied upon. However, as this decision points out, stating something is “possible” when it is impossible is misleading and actionable as a disclosure violation.

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Court Of Chancery Determines When A Proxy Is Irrevocable And When It Has Jurisdiction To Decide Equitable Ownership In A Section 225 Case

Zohar II 2005-1 Limited v. FSAR Holdings Inc., C.A. No. 12946-VCS (Nov. 30, 2017)

This is an important decision for two reasons. First, it determines when a proxy is irrevocable under Delaware law. To be irrevocable under Section 212 of the DGCL, the proxy must be coupled with an interest. While the “interest” requirement is quite broad, the “coupled” requirement is more strict. The “interest” involved must be held by the person or entity receiving the proxy in order to be “coupled.” Thus, when the proxy is in favor of “X”, but the “interest” supporting the grant of the proxy is for “Y”, the proxy is not irrevocable. This prevents a proxy holder from voting in a way that may be inconsistent with the proxy’s purpose. More ›

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Court Of Chancery Applies Corwin And Test For Control

Peter Van Der Fluit v. Yates, C.A. No. 12553-VCMR (Nov. 30, 2017)

Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.

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Court Of Chancery Rejects Attorney-Driven Books And Records Demand

Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-VCL (Nov. 13, 2017)

This decision has potential far-reaching consequences for shareholder-plaintiff litigation. As is well known, some entrepreneurial plaintiff-side corporate law firms advertise that they are “investigating” matters following a corporation’s report of some misfortune. That is done to attract a stockholder as a potential client. They then use that client’s status as a stockholder of the corporation to bring suit or, often, to demand an inspection under Section 220 of the DGCL of the books and records they need to support a well-pled complaint. This decision holds that when the demand is really generated by the law firm, and not the client, inspection will be denied for failure of an actual “proper purpose.” The case turned on its facts showing that the client had no real interest in what the law firm wanted to investigate. While some will argue that problem may be cured by a better “informed” client, that perhaps is too cynical. We shall see if this decision makes it harder for such plaintiff-side firms to bring such cases in the future.

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Court Of Chancery Explains Limitations Period In Equity

Bioveris Corporation v. Meso Scale Diagnostics, C.A. No. 8692-VCMR (Nov. 2, 2017)

Some assume that a statute of limitations will not apply in the Court of Chancery. But as this decision illustrates, that is an oversimplification. The Court of Chancery may well use the same statute of limitations period applicable in an action at law, by analogy, under the equitable doctrine of laches.  This is especially true when the claim is a legal one seeking legal relief.  This decision also illustrates an important point regarding claim accrual.  When a claim arises out of an obligation to make a series of payments over time, it is possible the Court will start to run the laches period from the first non-payment. In other words, subsequent non-payments might not constitute a new claim with a new limitations period or otherwise lengthen the time period to sue.

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