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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Showing 66 posts by Barnaby Grzaslewicz.
Chancery Holds That A General Partner Of A Limited Partnership Cannot Breach Fiduciary Duties It Does Not Owe
JER Hudson Group XXI LLC, et al. v. DLE Investors, LP, C.A. No. 2021-0478-MTZ (Del. Ch. May 2, 2022)
Under Delaware law, the purpose of a limited partnership and a general partner’s authority and fiduciary duties may be defined by the terms of a limited partnership agreement (“LPA”). In this post-trial decision, the Court of Chancery held, among other things, that a limited partner failed to prove fiduciary claims against a general partner because the partnership’s express purpose and the general partner’s fiduciary duties did not require it to take actions the limited partner alleged would be value-maximizing. More ›
Superior Court Complex Commercial Litigation Division Addresses Standing Requirements For Foreign LLCs “Doing Business” In Delaware And Reaffirms That Some Preliminary Agreements Give Rise To Obligations To Negotiate A Final Agreement In Good Faith
Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, C.A. No. N20C-07-052 AML CCLD (Del. Super. Ct. May 11, 2022)
This decision addresses two points of note relating to standing for foreign limited liability companies and to the binding nature of preliminary agreements. More ›
Chancery Sustains Fiduciary Duty Claims Arising From Option Grants At Pandemic-Low Price
Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. Apr. 27, 2022)
In mid-March 2020, at a time when the COVID-19 pandemic caused the corporation’s stock price to trade at a periodic low, the corporation’s compensation committee awarded stock options to themselves and other directors and officers. Addressing the defendants’ motion to dismiss, the Court reasoned that the circumstances did not support an inference of bad faith. Nevertheless, because the compensation committee members received options and thus were personally interested in determining their terms, such claims were subject to entire fairness review. Similarly, option grants to certain directors who together also were the corporation’s controlling stockholders would be subject to entire fairness review as involving non-ratable benefits to a controller. The Court rejected, however, the stockholder-plaintiffs’ theory that certain officer-defendants breached their fiduciary duty of loyalty by receiving the awards. Surveying prior cases, the Court reasoned that to sustain such a claim, the circumstances would have to be such that the recipient acted with scienter (i.e., in “bad faith”) by receiving the compensation at-issue. Finally, given that the awards potentially resulted from breaches of fiduciary duty by the director-defendants, the Court sustained at the pleading stage a claim that all recipients were unjustly enriched.
Chancery Parses Claims and Issues Subject to Mandatory Advancement Obligations
Krauss v. 180 Life Sciences Corp., C.A. No. 2021-0714-VCW (Del. Ch. Mar. 7, 2022).
The plaintiff was a former director and officer of a SPAC who became involved in litigation following its business combination. The certificate of incorporation and bylaws provided for mandatory advancement. Regarding several subpoenas to the plaintiff and her affiliated companies, although only one was brought “by reason of the fact” of her service as a director or officer, the Court granted advancement based on her counsel’s good faith certification for all work would have been done if there was only the one covered subpoena, even if such work also helped with her responses to non-covered subpoenas. The plaintiff’s affirmative defenses to a fiduciary duty action similarly were covered. Her compulsory counterclaims there also were covered. In so holding, the Court reasoned that, although the certificate of incorporation stated board approval was required for advancement in connection with certain litigation activities initiated by the indemnitee, the bylaws contained no such requirement. Certain counterclaims for breaches of registration rights agreements were not compulsory and were personal in nature, however, and so were not subject to advancement. The plaintiff was entitled to fees-on-fees proportionate to her success and pre-judgment interest from the date she provided invoices evidencing those costs; although the invoices redacted various time entries, her counsel certified that she did not seek advancement for those amounts.
Chancery Finds Enforcement of Advance Notice Bylaw Was Lawful and Equitable
Strategic Investment Opportunities, LLC v. Lee Enterprises, No. 2021-1089-LWW (Del. Ch. Feb. 14, 2022)
This case reflects that incumbent directors’ decision to enforce an advance notice bylaw generally will be upheld where a stockholder’s nomination materials do not comply with the bylaw’s plain terms and enforcement is not inequitable in the circumstances. Here, directors rejected an activist stockholder’s nominees for election because of non-compliance with certain requirements of an advance notice bylaw, specifically that nominations (i) must be made by the record holder (here, Cede & Co.), and (ii) must include information on a form required by the company. Given the context – the defense of a proxy contest – the Court proceeded to review whether the decision to enforce the bylaw complied with the directors’ fiduciary duties, applying enhanced scrutiny under Unocal and Blasius. Because the bylaw was adopted on a “clear day,” because it served valid corporate purposes and because the board did not engage in any manipulative conduct impeding the stockholder’s ability to comply with the bylaw, the Court held that the board’s decision to uphold the bylaw was valid.
Chancery Sustains Direct Claims For Diversion Of Merger Consideration
Blue v. Fireman, C.A. No. 2021-0268-MTZ (Del. Ch. Feb. 28, 2022)
This case illustrates circumstances in which allegedly improper pre-merger transactions that divert merger consideration from stockholders may be considered direct challenges to a merger, rather than derivative claims, thus permitting a former stockholder to continue to pursue them after closing. Here, in the run-up to a merger, a large creditor with a proxy representing 85% of the corporation’s voting power sought and obtained beneficial amendments to its notes and warrants. The amendments had the alleged effect of diverting $40 million of $130 million total merger consideration from the stockholders and to the creditor. Reviewing Parnes v. Bally and its progeny, the Court reasoned that the claims were direct because merger consideration allegedly was diverted, with a material effect on the merger’s price and fairness, in transactions allegedly involving breaches of fiduciary duty. Accordingly, the Court denied the defendants’ motion to dismiss premised on a lack of derivative standing.
Court of Chancery Dismisses Thinly-Pleaded Breach of LPA Claim and Breach of Fiduciary Duty Claim Disclaimed by LPA and Foreclosed by Corwin
Ryan v. Buckeye Partners L.P. et al., C.A. No. 2021-0432-JRS (Del. Ch. Feb. 9, 2021)
Delaware is a notice pleading jurisdiction. But, even under this forgiving standard, the Court of Chancery Rule 8 still requires that the pleadings give defendants notice of the claims asserted against them. This recent decision from the Court of Chancery found that Plaintiff’s breach of a limited partnership agreement (“LPA”) claim failed to put Defendants on notice of even what provisions were allegedly breached. The Court also held that Plaintiff’s breach of fiduciary duty claims was deficient because the LPA disclaimed traditional fiduciary duties and, in all events, the claims were foreclosed by a fully informed vote under Corwin. More ›
CCLD Finds Claims for Pre-Litigation Breaches of Covenants Restricting Speech Exempt From the “Litigation Privilege”
Feenix Payment Sys. LLC v. Blum, C.A. No. 21-05-099 EMD CCLD (Del. Super. Jan. 25, 2021)
Under Delaware law, the litigation privilege prevents potential tort liability for statements that may be actionable (e.g., as defamation) where such statements were made in connection with a legal case. This case finds that the litigation privilege is not necessarily apt, however, to claims for breach of contract based on pre-litigation breaches of non-disparagement clauses or similar covenants. More ›
Court Of Chancery Affirms Arbitration Order And Denies Motion For Preliminary Injunction Based On The Preclusive Effect Of The Order
Agspring LLC v. NGP X US Holdings L.P., C.A. No. 2019-1021-JRS (Del. Ch. Jan. 19, 2022); Agspring LLC v. NGP X US Holdings L.P., C.A. No. 2019-0567-JRS (Del. Ch. Jan. 19, 2022)
Delaware follows the rule that an arbitrator’s award is “not lightly disturbed.” Accordingly, the applicable standard of review is “one of the narrowest standards of judicial review in all American jurisprudence.” To overturn an arbitrator’s order, a court must find that the arbitrator acted in “manifest disregard” of the law. More ›
Court of Chancery Holds That Exclusive Remedy Provisions Alone Are Not Enough To Bar Fraud Claims Based On Extra-Contractual Statements
Fortis Advisors LLC v. Johnson & Johnson, C.A. No. 2020-0881-LLW(Del. Ch. Dec. 13, 2021)
Delaware public policy respects freedom of contract, but it is also intolerant of fraud. These dueling policy aims are often pitted against one another in the context of complex commercial transactions, where the contracting parties agree to allocate risk – including limitations on the information relied on in entering the transaction. Delaware courts have struck a balance: contractual disclaimers of reliance are permitted, but they must be express and limited to the other party’s extra-contractual statements. Here, the Court of Chancery considered whether an exclusive remedies provision was alone sufficient to disclaim reliance on extra-contractual statements. More ›
Delaware Supreme Court Affirms that Seller’s Change of Business Operations in Response to the COVID-19 Pandemic Excused Buyer’s Obligation to Close
AB Stable VIII LLC v. Maps Hotels and Resorts One LLC, No. 71-2021 (Del. Dec. 8, 2021)
This Supreme Court decision affirms the Court of Chancery’s decision below (reported here) that a buyer’s obligation to purchase a $5.8 billion group of hotel properties was excused due to the seller’s failure to comply with a covenant that, between signing and closing, it would operate “only in the ordinary course of business, consistent with past practice in all material respects.” More ›
Chancery Rules That The Standard Of Proof For Contempt Motions Is The Preponderance Of The Evidence, Not Clear And Convincing Evidence
inTEAM Associates, LLC v. Heartland Payment Systems, LLC, C.A. No. 11523-VCF (Del. Ch. Oct. 29, 2021)
Court of Chancery Rule 70(b) empowers the Court to hold a party in contempt for, among other things, failing to obey an injunctive order. The standard of proof required to obtain a contempt order has not been uniformly applied. This recent decision applies the preponderance of the evidence standard, in contrast to certain decisions over the past decade applying the clear and convincing evidence standard. More ›
Delaware Court of Chancery Holds That Scope of Director and Officer Indemnification Under D&O Policy Is Within Exclusive Jurisdiction Of The Delaware Superior Court
Ernesto Rodriguez et al. v. Great American Insurance Company, C.A. No. 2020-0387-JRS (Del. Ch. Oct. 20, 2021)
The Court of Chancery’s subject matter jurisdiction is limited, and arises in three circumstances: (1) the complaint asserts an equitable claim; (2) the complaint seeks an equitable remedy and there is no adequate remedy at law; or (3) jurisdiction is vested in the Court of Chancery by statute. In this recent decision, the Court of Chancery held that its limited subject matter jurisdiction did not extend to determine the scope of a Delaware corporation’s directors and officers (D&O) insurance policy. More ›
Chancery Dismisses Derivative Claims That Private Equity Sponsors Comprised A Control Group
Patel v. Duncan, C.A. No. 2020-0418-MTZ (Del. Ch. Sept. 30, 2021)
For stockholders to comprise a control group, the alleged group members must be connected in some “legally significant way – such as by contract, common ownership, agreement or another arrangement – to work together toward a shared goal.” Sheldon v. Pinto Tech. Ventures, L.P., 220 A.3d 245, 251-52 (Del. 2019). There must be “an indication of an actual agreement, although it need not be formal or written.” Id. Here, the court dismissed a claim alleging that two private equity funds comprised a control group that agreed to cause the corporation to engage in two unfair, self-interested transactions as a quid pro quo arrangement between them. Specifically, the plaintiff alleged they agreed to cause the corporation to overpay in two successive transactions in which the counterparties who benefitted unfairly were affiliates of the respective private equity funds. More ›
Delaware Court of Chancery Enjoins Arbitration, Holds It Has Subject Matter Jurisdiction to Decide Substantive Arbitrability In Face Of Competing Arbitration Provisions
AffiniPay, LLC, et al. v. West, C.A. No. 2021-0549-LWW (Del. Ch. Sept. 17, 2021)
As a general matter, Delaware courts retain jurisdiction to determine substantive arbitrability – that is, whether claims are subject to arbitration under the relevant arbitration clause. Delaware courts will defer to arbitrators’ determinations of such issues, however, where the parties’ contract reflects their “clear and unmistakable” intent to do so, a standard that may be met by, among other things, contractual language that “all disputes” are submitted to arbitration and the incorporation of official arbitration rules that empower arbitrators to decide arbitrability. Here, because the parties’ dispute implicated multiple agreements with competing and conflicting arbitration clauses assigning arbitrability to different arbitrators, the Court of Chancery retained jurisdiction to determine arbitrability. The Court granted a preliminary injunction preventing arbitration from proceeding in the arguably incorrect forum. More ›