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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 Requires Fuller Disclosure for Receiver Appointment
In re VBR Agency LLC, C.A. No. 2022-0328-JTL (Del. Ch. Apr. 20, 2022)
Petitioners often call upon the Court of Chancery to appoint receivers to settle a company’s business. As this decision describes, “[i]n recent years, the members of the court have been forced to address actions taken by custodians or receivers who obtained appointments on … scant records. In some of those situations, the custodian or receiver has taken action that caused the court to question whether the appointment should have been made, or the court has learned information that might have caused the court to decline to make the appointment in the first instance. … Delaware has a significant interest in ensuring that questionable individuals do not use judicial proceedings to gain control over Delaware entities. Delaware likewise has an interest in ensuring that its entities are not used as vehicles for improper schemes.” Here, considering these concerns, the Court declined to make an appointment, first requiring additional information beyond that in the petition. The petitioner sought an appointment allegedly for the purpose of litigation involving a defunct LLC. The Court viewed as material additional information regarding the regulatory or legal histories of the receiver and any affiliates, as well as the receiver’s specific plans for the LLC beyond the general purposes stated in the petition.
Chancery Addresses Fiduciary Duty Claims Involving Activist Investor
Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. May 26, 2022)
In this case, an activist investor and director was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. And others at the company were alleged to have manipulated the company’s projections to justify the deal price at a lower valuation. The Court of Chancery found well-pled fiduciary duty claims against the alleged wrongdoers and aligned parties that avoided a Corwin dismissal. Among other things, the Court’s decision illustrates constellations of facts sufficient to question the independence of otherwise disinterested fiduciaries. Here, such combinations involved directors’ symbiotic relationships with an activist investor that resulted in repeat directorships in targeted companies.
Chancery Upholds Standalone Direct Claim Under DGCL Section 155 Regarding Fractional Interests
Samuels v. CCUR Holdings, Inc., C.A. No. 2021-0358-PAF (Del. Ch. May 31, 2022)
Under Section 155 of the DGCL, corporations may elect either to issue stockholders fractional shares or to pay a stockholder the fair value of the fractional interest. The plaintiff-stockholder alleged that the corporation failed to pay him fair value for his fractional interest after a reverse stock split. In allowing a standalone claim under the statute to proceed, the Court reasoned that stockholders generally are permitted to assert direct statutory claims, and previous decisions addressing Section 155 did not foreclose the plaintiff’s statutory cause of action.
Chancery Permits Novel Breach of Fiduciary Duty Claim Against Directors Who Refused Demand
Garfield v. Allen, C.A. No. 2021-0420-JTL (Del. Ch. May 24, 2022)
Historically, the wrongful rejection of a demand has affected only the question of who controls a derivative claim. In this case, involving equity issuances to a director under an equity compensation plan, however, the plaintiff asserted that defendant-directors’ demand refusal constituted a separate breach of duty because the defendants did not correct an obvious violation of the plan’s plain language. Although the Court recognized that the claim was potentially problematic from a policy perspective, the Court nonetheless found that the claim rested on the established principle that a conscious failure to act is the equivalent of action. And the Court concluded that the plaintiff’s complaint established “one of the strongest possible scenarios for such a claim.” Thus, the Court reasoned, it was reasonably conceivable that the defendants’ conscious inaction in the face of the plaintiff’s demand constituted a breach of the defendants’ duties.
Superior Court Sustains Certain Contract Claims in Dispute over Post-Acquisition Operation of Resort and Timeshare Business
CRE Niagara Holdings, LLC v. Resorts Group, Inc., C.A. No. N20C-05-157 PRW CCLD (Del. Super. Ct. May 31, 2022)
After acquiring a resort and timeshare business in 2017, plaintiffs brought claims of fraudulent inducement, breach of contract, and declaratory judgment against the seller. The seller filed claims in federal courts and in New York state court, and then separately filed parallel claims as counterclaims and a third-party complaint in Delaware. The seller alleged that plaintiffs did not adhere to past practices in operating the business post-acquisition, that they made the acquisition to loot the business, and that, as a consequence, the seller suffered from a diminution in value of the payment streams from certain contracts. The plaintiffs moved to dismiss the seller’s counterclaims and third-party complaint. More ›
Chancery Enforces LLC Members’ Right to Approve Amendments to LLC Agreement
Zohar III Ltd. v. Stila Styles LLC, C.A. No. 2021-0384-JRS (Del. Ch. May 26, 2022)
This decision arises out of control disputes involving the portfolio companies of the entity Zohar III – here, the limited liability company Stila Styles LLC. Stila Styles’ Manager had approved via written consent a transaction that purported to create new units, with those new units controlling who served as the LLC’s Manager. The LLC agreement did authorize the Manager to create new units. But it generally authorized amendment or modification of the agreement “only by the Members.” Because the transaction effectively amended the LLC agreement by taking away certain Members’ rights respecting the Manager role, and the Manager did not obtain the Members’ approval, the Manager’s written consent approving the transaction was invalid and the transaction was void.
Chancery Finds Officer Breached the Duty of Loyalty By Working With Competitors
Metro Storage Int’l LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. May 4, 2022)
The duty of loyalty requires that the corporation’s interests take precedence over any personal interest possessed by a director, officer, or controlling shareholder that is not shared by the stockholders generally. Relevant here, the plaintiffs alleged that the defendant had breached his fiduciary duty of loyalty by consulting for another company while he was an officer, failing to disclose that he was consulting for another company, usurping a financial opportunity, and misusing confidential information. The Court of Chancery found that the evidence supported all of these allegations. In particular, the Court found that the defendant breached his duty of loyalty by spending substantial time performing consulting work for another company when he had agreed to devote his full time to the plaintiff company. The Court reasoned that while an officer generally may work for an independent business so long as this work does not violate his fiduciary duties, the defendant had misappropriated company resources because he had agreed to spend his full time working for the company and this time was a resource that belonged to the company.
Citing Novel Issues of Delaware Law, Chancery Declines to Dismiss Stockholder Class Action in Favor of First-Filed Securities Action
Lordstown Motors Corp. Stockholders Litig., CA. No. 2021-1066-LWW (Del. Ch. Mar. 7, 2022)
The Court of Chancery denied the defendants’ McWane motion to stay the case in favor of a first-filed federal securities action. Because first-filed status matters less in representative actions, McWane correspondingly applies with less force. Here, among the relevant factors, the Court of Chancery action involved novel Delaware legal issues, including the intersection of fiduciaries duty law and SPACs. And the claims were not a mere rebranding as breaches of fiduciary duty of securities law claims based on allegedly misleading statements. Thus, the Court concluded that Delaware’s substantial interest in providing guidance in emerging areas of Delaware law outweighed any practical or comity concerns that might otherwise warrant a stay.
Chancery Declines to Grant Equitable Standing When Other Stockholders Had Standing to Enforce Corporate Rights
SDF Funding LLC v. Fry, C.A. No. 2017-0732-KSJM (Del. Ch. May 13, 2022)
Under Section 327 of the DGCL, a stockholder must hold stock at the time of the alleged wrong to have standing to pursue a derivative claim. Under the equitable standing doctrine, however, standing may be recognized in equity to prevent a “complete failure of justice.” Here, the plaintiffs acquired the stock after some of the alleged wrongs in their complaint took place but argued that the equitable standing doctrine allowed one of them to raise these claims. The Court of Chancery observed that the doctrine has applied when alternative avenues of remedying the harm were foreclosed. Importantly, however, the Delaware courts generally have declined to invoke it when other avenues theoretically exist, such as the existence of other potential plaintiffs with standing to pursue the claims at issue. Applying that reasoning here, the Court ruled that it would not grant equitable standing because other non-party stockholders would have standing to pursue these claims.
Supreme Court Finds Enforceable Preliminary Agreement
Cox Communications v. T-Mobile, No. 340, 2021 (Del. Mar. 3, 2022)
Delaware courts have a “general aversion” to enforcing agreements to agree. But Delaware law also recognizes enforceable preliminary agreements that create an obligation to try to negotiate a final agreement on all material terms in good faith. Here, two companies, Cox Communications and T-Mobile, disputed whether a particular provision of a settlement agreement was enforceable and to what extent. The provision related to Cox partnering with a mobile network provider and generally obligated Cox to negotiate with T-Mobile. Those negotiations failed, Cox partnered with Verizon, and this suit resulted. The Court of Chancery entered an injunction that enforced the provision by prohibiting Cox from partnering with another provider besides T-Mobile. On appeal, the Delaware Supreme Court vacated the injunction and reversed, finding the provision left open several material terms of a future definitive agreement, was not itself an enforceable agreement, and instead was a “Type II” preliminary agreement that obligated the parties to negotiate open items in good faith. The Supreme Court remanded the case for a determination of whether the parties fulfilled that obligation.
Chancery Applies Privilege Rules in Business Negotiations Context
Twin Willows, LLC v. Pritzkur, C.A. No. 2020-0199-PWG (Del. Ch. Feb. 28, 2022)
This decision involved a Master in Chancery applying well-settled rules on the attorney-client privilege, common interest, and work product doctrines. Respondent Pritzkur was appointed to serve as partition trustee for owners and tasked with selling the property. Pritzkur negotiated a sale agreement that was ultimately assigned to Petitioner Twin Willows. The agreement was not fully performed, and Twin Willows moved to compel production of communications between Pritzkur and the owners. Pritzkur asserted both common interest privilege and attorney work product. More ›
Chancery Finds it Lacks Discretion to Decline Jurisdiction Over a Case Where Jurisdiction Exists Under Section 111 of the DGCL
S’holders Rep. Serv. LLC v. DC Capital Partners Fund II, L.P., C.A. No. 2021-0465-KSJM (Del. Ch. Feb. 14, 2022)
While the Court of Chancery has exclusive subject matter jurisdiction over claims and remedies sounding in equity, Section 111 of the DGCL grants the Court concurrent, non-exclusive jurisdiction in cases involving the interpretation of certain corporate instruments—regardless of whether those claims or the relief sought are equitable in nature. In DC Capital Partners, the plaintiff elected to bring legal (rather than equitable) claims involving the interpretation of stock purchase agreements in the Court of Chancery pursuant to Section 111’s concurrent subject matter jurisdiction. The defendants argued that because the claims did not otherwise fall within the Court’s subject matter jurisdiction, and because Section 111 provides for concurrent rather than exclusive jurisdiction, the Court had the discretion to decline to hear the case. Specifically, the defendants noted that Section 111 provides that certain claims “may” be brought in the Court of Chancery and argued that this permissive language provided the Court with the discretion not to hear such claims. The Court rejected the defendants’ contention, finding that the discretion to bring a claim in the Court of Chancery pursuant to Section 111 belongs to the plaintiff, not the Court. Therefore, the Court held that once a plaintiff elects to bring a claim in Chancery authorized under Section 111, the Court lacks the discretion to decline to hear the case based on subject matter jurisdiction.
Chancery Denies Indemnification to Director After Examining Settlement Agreement
Huret v. Mondobrain, Inc., C.A. No. 2021-0208-SG (Del. Ch. Apr. 27, 2022)
Under Section 145(c) of the DGCL, a director that has been successful on the merits or otherwise in defending a covered proceeding is entitled to indemnification. When determining success, Delaware law asks whether the indemnitee has avoided an adverse result, and generally does not look behind that result. Here, the plaintiff sought indemnification for derivative claims resolved by a settlement agreement, which also resolved claims brought by the plaintiff in French litigation. The Court examined the settlement agreement as a whole and found the plaintiff was not successful in the derivative action against him, and thus not entitled to indemnification. In settling the outstanding claims, the plaintiff did not admit guilt or make any settlement payment. However, he agreed to resign from the board, which was relief the stockholder originally sought, and he also agreed to release his own claims for money damages, which were in excess of the money damages sought for the derivative claims against him.
Chancery Resolves Section 225 Dispute and Declines to Invalidate Written Consents
Zhou v. Deng, C.A. No. 2021-0026-JRS (Del. Ch. Apr. 6, 2022)
When deciding a summary proceeding regarding a disputed corporate office under Section 225 of the DGCL, the Court of Chancery may consider whether an election, appointment, or removal was tainted by fraud, deceit, or breach of contract. This decision involves the Court considering such defenses to the defendants’ removal and replacement as directors. Here, the Court declined to invalidate the challenged written consents based on allegations of breaches of fiduciary duty, breaches of contract, and fraud. The Court, for instance, rejected the breach of contract defense concerning stock purchases because the breach was already remedied in another action by an award of damages and the sale contract had not been rescinded.
Chancery Denies Petition to Appoint Custodian to Revive Abandoned Delaware Corporation for Use as Blank Check Company
In re Forum Mobile, C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022)
In Forum Mobile, the Court of Chancery denied a petition to appoint a custodian pursuant to DGCL Section 226(a)(3). The petitioner sought to revive an abandoned and defunct Delaware corporation for use as a blank check company. Specifically, the petitioner sought to effectuate a reverse merger of the defunct company with a new business, allowing the new business to access public markets without implementing the formal IPO process. Holding that “the plain language of Section 226(b) does not contemplate that a custodian appointed under Section 226(a)(3) could revivify a corporation,” the Court denied the petition, reasoning that custodians appointed pursuant to Section 226(a)(3) are limited to “liquidating the affairs of the abandoned corporation and distributing its assets.” More ›