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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 144 posts by Albert H. Manwaring, IV.
Chancery Dismisses Complaint Against LLC Directors Based on Specific Terms of the Operating Agreement and Laches
Erisman v. Zaitsev, C.A. No. 2020-0903-JRS (Del. Ch. Dec. 29, 2021)
Under Delaware law, parties to limited liability company agreements have the freedom to alter or eliminate fiduciary duties, and to eliminate liability for breaches of contractual and fiduciary duties. Here, the Court of Chancery dismissed LLC members’ complaint because, among other reasons, the Operating Agreement (i) replaced default common law fiduciary duties with a contractual standard that limited director liability to claims in which directors did not rely on the terms of the Operating Agreement in good faith; and (ii) it further provided that the directors were not liable for money damages unless they failed to act in good faith, engaged in intentional misconduct or a knowing violation of the law, derived an improper personal benefit, or breached their duty of loyalty to the company. More ›
Chancery Dismisses Derivative Action Arising from $1.2 Billion Stock Sale Based on Plaintiffs’ Failure to Plead Demand Futility
In re Kraft Heinz Co. Deriv. Litig., Cons. C.A. No. 2019-0587-LWW (Del. Ch. Dec. 15, 2021)
The Court of Chancery dismissed an insider-trading action on the grounds that plaintiffs failed to plead that a majority of a company’s board was not disinterested or independent. By way of background, an investment firm held 24 percent of a publicly-traded Delaware company and rights to three seats on an eleven-member board. At an August 2018 meeting, the board received information that the company likely would miss annual financial targets. Four days later, the investment firm sold nearly a third of its stake, for more than $1.2 billion. The stock sale occurred after the investment firm provided the company with a statement that the firm was not in possession of any material, nonpublic information, and after the company’s board approved lifting insider restrictions that permitted the firm to sell the shares. Three months later, the company disclosed disappointing financial results, and the stock price dropped significantly. More ›
Chancery Issues Preliminary Injunction To Bar Arbitration on the Grounds that no Agreement was Formed
Hologram, Inc. v. Caplan, C.A. No. 2021-0736-KSJM (Del. Ch. Dec. 14, 2021)
The Court of Chancery issued a preliminary injunction barring arbitration because the parties had never reached an agreement that included arbitration. By way of background, two former high-school classmates agreed in principle to begin a company. One would own ninety percent of the shares and serve as president and CEO, and the other would own ten percent of the shares in exchange for providing ideas and business opportunities. The president sent paperwork to his former classmate via email, including a restricted stock purchase agreement that proposed a vesting period for shares, required specific terms for acceptance, and included an arbitration provision. The former classmate responded with a request to change the shares to non-vesting. Over the ensuing months, the two could not agree on final terms, and the specific terms of acceptance (including in-person execution and payment) were never met. Nearly eight years later, as the company raised a $65 million Series B investment, the former classmate suddenly reached out to inquire about his ownership status. He subsequently filed a private arbitration demand against the company in Illinois. The company responded by filing a Delaware action seeking a declaration that the arbitration was improper because no agreement had been reached between the parties in connection with the claims made by the former classmate. The company moved for a preliminary injunction to prevent the continuation of the Illinois arbitration. More ›
Chancery Revived a Dismissed Claim after Discovery Revealed a Desire for Liquidity that Resulted in a Divergent Interest in M&A Sale Process
In re Mindbody, Inc., S’holder Litig., Cons. C.A. No. 2019-0442-KSJM (Del. Ch. Dec. 9, 2021)
A desire for liquidity can result in a divergent interest sufficient to plead fiduciary duty claims against a defendant protected by an exculpatory charter provision. More ›
Chancery Sustains Claims for Controlling Stockholders’ Breach of Fiduciary Duties, But Dismisses Claim to Void Transaction under DGCL Section 205
Amgine Techs. (US), Inc. v. Miller, C.A. No. 2020-0537-JRS (Del. Ch. Nov. 29, 2021)
This case involves the Court of Chancery’s consideration of various Rule 12 arguments for dismissal advanced by defendants – alleged controlling stockholders who assigned certain of the corporation’s intellectual property to another entity they owned, and who allegedly caused the corporation to enter into a stockholders’ agreement that gave them preferential terms. More ›
Chancery Finds General Partner Breached Partnership Agreement in Exercising Call Right, and Awards Limited Partners Nearly $700 Million in Damages
Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021)
If a partnership agreement requires an opinion of counsel as a condition precedent, such opinion must be rendered in subjective good faith under Delaware law, As Boardwalk Pipeline Partners illustrates, a court applying Delaware law may reject such an opinion as rendered in bad faith if the counsel and the requesting party involved coordinate to develop counterfactual assumptions designed to generate a desired result for the requesting party. More ›
Chancery Applies Traditional Fiduciary Principles to a SPAC in First Test of the Popular Vehicle for Private Companies to Access Public Markets under Delaware Corporate Law
A Special Purpose Acquisition Company or SPAC is a popular investment vehicle to take private companies public. A SPAC, commonly referred to as a blank check company, is a company whose stock is traded on a public market, but has no operations. Typically, the SPAC raises capital through an IPO with the singular goal of entering into a business combination with a private operating company (referred to as a de-SPAC merger), taking the private company public and giving the new public company its stock listing. A SPAC is often formed and controlled by a sponsor, whose primary job is to identify a target private operating company for the de-SPAC merger. A common feature of a SPAC is that the sponsor receives founder shares in the SPAC for a nominal capital contribution, which shares convert to substantial common shares in the new public company if a business combination with a private company is consummated within the market-standard, two-year period from the IPO. However, if no such transaction is completed within two years, the IPO proceeds are returned with interest to the public stockholders, and the SPAC winds up and liquidates, which renders worthless the sponsor’s founder shares. While these features and structure are common in SPACs, and the attendant mismatched financial incentives between the sponsor and the public stockholders in a de-SPAC merger are known to SPAC investors, this does not remedy the conflicts of interest inherent in the SPAC structure. Moreover, that a de-SPAC merger may legally comply with the DGCL does not shield the merger from application of well-established equitable fiduciary principles of Delaware corporate law. More ›
ShareChancery Applies Plain Language of a Merger Covenant To Dismiss Acquirer’s Untimely Indemnification Claim and Deny Sellers’ Request for Detailed Annual Reports
Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., C.A. No. 2020-0217-MTZ (Del. Ch. Oct. 29, 2021)
Supernus Pharmaceuticals, Inc. acquired biotech startup Biscayne Neurotherapeutics, Inc. pursuant to a 2018 merger agreement. In 2019, Supernus submitted indemnification claim notices to Reich Consulting Group, Inc., the security holder representative for Biscayne. Subsequently, Supernus filed an indemnification action against Reich in the Court of Chancery. Following trial, plaintiff Supernus’s only remaining indemnification claim was based on a provision in the merger agreement that required Biscayne to operate in the ordinary course of business during a specific period of time (“Ordinary Course Covenant”). More ›
Presented with Documents Outside the Pleadings, Chancery Converts Motion To Dismiss to Motion for Summary Judgment and Allows Discovery
Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM (Del. Ch. Oct. 20, 2021)
While the Court may take judicial notice of the contents of materials like newspaper articles, public filings and websites for certain purposes, it generally may not do so to establish the truth of their contents. Where, as here, a party relies on documents outside the pleadings, the Court may convert a motion to dismiss into a motion for summary judgment, and therefore deny the motion. More ›
Delaware Supreme Court Overrules Gentile, Resolving Tension in Legal Test To Determine Whether a Claim Is Direct or Derivative
Brookfield Asset Mgmt., Inc. v. Rosson, No. 406, 2020 (Del. Sept. 20, 2021)
Seeking to bring clarity to the issue of whether a claim is direct or derivative—a potentially outcome-determinative issue—the Delaware Supreme Court overturned its own precedent in Gentile v. Rossette, 906 A.2d 91 (Del. 2006). More ›
Chancery Addresses Indemnification Rights Following CEO’s Partial Success On Underlying Claims, Including Success Based on Technicalities
Evans v. Avande, Inc. , C. A. No. 2018-0454-LWW (Del. Ch. Sept. 23, 2021)
The departure of a company’s CEO was contentious. After his termination, the company filed an action in the Court of Chancery, alleging that the CEO had breached his duty of loyalty, sought a declaratory judgment that his removal was valid and effective, and further asserted claims for tortious interference, defamation, and conversion against the CEO. After trial, the Court concluded that the CEO had breached his duty of loyalty but that the company had failed to brief, and therefore had waived, its claims for declaratory judgment, tortious interference, defamation, and conversion. On the basis of mandatory indemnification rights in the company’s charter and bylaws, the CEO filed a complaint in the Court of Chancery seeking indemnification for his fees incurred defending against the company’s suit. More ›
Chancery Dismisses Derivative Claims Alleging Insider Trading and Misleading Disclosures for Failure to Plead Demand Futility
In re Zimmer Biomet Hldgs., Inc. Deriv. Litig., C.A. No. 2019-0455-LWW (Del. Ch. Aug. 25, 2021)
Under Court of Chancery Rule 23.1, a stockholder-plaintiff may only bring a derivative suit on behalf of a company if the plaintiff (i) first makes a demand on the board to bring suit and is wrongfully refused, or (ii) adequately pleads that a demand would have been futile because the directors were incapable of impartially considering it. Here, the court granted the defendants’ motion to dismiss, because the stockholder-plaintiff failed to allege facts that a majority of the board of directors – who concededly were otherwise disinterested and independent – faced a substantial risk of personal liability. More ›
Chancery Denies Motion to Dismiss, Awaits Development of Factual Record to Rule on Laches Defense
Kim v. Coupang, LLC, C.A. No. 2020-0772-JRS (Del. Ch. Aug. 19, 2021)
If a court can rule on the affirmative defense of laches on the face of a complaint, it may grant a motion to dismiss. As this case illustrates, however, when a laches defense cannot be determined from the complaint, resolving that defense may have to await the development of the factual record. More ›
Applying Plain Contract Language, Chancery Awards $147 Million in Damages to Start-Up Company for Breach of Joint Venture Agreement
Symbiont.io, Inc. v. Ipreo Hldgs., LLC, C.A. No. 2019-0407-JTL (Del. Ch. Aug. 13, 2021)
Delaware is a pro-contractarian state. When fashioning an award for a breach of contract, a Delaware court can consider: (1) the bargained-for damages remedy; (2) whether at the time of contracting the damages from a breach would be uncertain or incapable of accurate calculation; and (3) whether the amount contractually called for would be unconscionable. More ›
Superior Court CCLD Dismisses Complaint Seeking Insurance Coverage for Appraisal Proceeding
Jarden, LLC v. ACE Am. Ins. Co., C.A. No. N20C-03-112 AML CCLD (Del. Super. July 30, 2021)
Director and corporate liability insurance coverage is determined by the specific language of the insurance policies. Last year, the Delaware Supreme Court held that an appraisal claim under 8 Del. C. § 262 was not a “securities claim” because it was not a claim for a “violation of law[,]” as required under that policy’s definition. See In re Solera Ins. Coverage Appeals, 240 A.3d 1121 (Del. 2020). This case addressed similar issues under somewhat different policy language. More ›