R. Eric Hacker

In a Books and Records Action, Court Critiques Defendant’s Motion to Dismiss, and Declines to Order Inspection of Documents Not Requested in the Plaintiff’s Demand

Paraflon Investments, Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. Apr. 3, 2020).

Sometimes it bears repeating that Section 220 actions are intended to be summary proceedings to evaluate a stockholder’s pre-suit demand to inspect a corporation’s books and records.  More ›

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Chancery Denies Preliminary Injunction Based Upon Overbroad Restrictive Covenants

FP UC Holdings, LLC v. Hamilton, C.A. No. 2019-1029-JRS (Del. Ch. Mar. 27, 2020).

A party seeking a preliminary injunction must demonstrate a likelihood of success at trial. In a breach of non-compete action, this burden may not be met when economically unjustified restrictive provisions are “too broad as they would essentially prevent Defendant from operating … anywhere in the United States.” More ›

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Chancery Denies Non-Member, Non-Manager’s Bid for Equitable Dissolution of LLC

SolarReserve CSP Holdings, LLC v.  Tonopah Solar Energy, LLC, C.A. 2019-0791-JRS (Del. Ch. Mar. 18, 2020).

While the Court of Chancery has recognized the concept of equitable standing to seek judicial dissolution, this case shows that equity is not a tool to rewrite the plain language of an operating agreement or to help a party regain the rights it bargained away. More ›

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Surveying the Law, Chancery Declines to Dismiss a Claim that a 35% Holder was the Controlling Stockholder of the Acquirer (as Well as the Target)

Voigt v Metcalf, C.A. No. 2018-0828-JTL (Del. Ch. Feb. 10, 2020).

This decision contains an instructive review of the factors the Court of Chancery will examine to determine whether a minority stockholder may in fact be a controlling stockholder in the circumstances of a specific transaction – an area of the law that has assumed increased importance after Corwin. More ›

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Chancery Denies Fees to Stockholder who Compelled Admittedly-Overdue Annual Meeting, But Primarily for his Own Interest in Forcing a Buyout

Martin v. Harbor Diversified, Inc., C.A. 2018-0762 SG (Del. Ch. Feb. 5, 2020).

A plaintiff who achieves a corporate benefit for the enterprise may be eligible for attorney’s fees, but he is not entitled them. Here, after trial on a paper record, the stockholder-plaintiff obtained an order directing the corporation to hold an annual meeting to elect directors (its first in eight years) and to produce certain books and records. The Court agreed that compelling an annual meeting met the minimum requirements to be eligible for a fee award, but the Court concluded that the circumstances made a fee award inequitable. More ›

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Post-Closing Earn-Out Claims Dismissed, But Fiduciary Duty Claims Against Former Director Survive

Neurvana Medical, LLC v Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Feb. 27, 2020).

Neurvana Medical, LLC (“Neurvana”) sold a medical device to Balt USA, LLC (“Balt USA”), largely for post-closing consideration if the device obtained regulatory approval. Balt USA was required to use commercially-reasonable efforts to obtain the approval, but otherwise, Balt USA had sole discretion over the process. More ›

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Chancery Appraisal Decision Illustrates the Importance of Reliable Expert Testimony and Witness Credibility to Fair Value Determinations

Manichaean Capital, LLC v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (Del. Ch. Jan. 30, 2020).

Even when its role is to determine the fair value of shares in an appraisal proceeding, credibility matters to the Court of Chancery. Following a three-party business combination, Petitioners (former minority stockholders) exercised appraisal rights under 8 Del. C. § 262. Petitioners and Respondent agreed to use a discounted cash flow analysis to determine the fair value because there was insufficient market-based evidence of fair market value. But the parties’ experts disagreed on the input values and results of the DCF analysis, leaving the Court to “grappl[e] with expert-generated valuation conclusions that [were] solar systems apart.” Mem. Op. 2.

After a lengthy comparison of the competing DCF analyses, the Court concluded that Petitioners’ calculation (with minor adjustments) represented fair value. By contrast, Respondent’s position suffered from significant credibility issues. One of the executives involved in the business combination transactions requested a backdated valuation, misrepresented the date of the valuation in discovery responses, and continued with its misrepresentation until the eve of trial. The Court also found Respondent’s expert was not credible because elements of his valuation approach were bespoke, were not used in the industry, and relied heavily on the ipse dixit of the expert. Complicating things further, Respondent disagreed with its own expert’s calculations and conclusions. These factors, combined with the superior DCF analysis by Petitioner’s expert, led the Court to accept Petitioner’s fair value calculation with only minor adjustments.

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Chancery Denies Attempt to Use Mediation Communications to Supplement Mediation Term Sheet

Starkman v. O’Rourke, C.A. 2018-0901-KSJM (Del. Ch. Jan. 14, 2019) (ORDER).

Parties who resolve a case through a mediation conducted under Court of Chancery Rule 174 should include all material provisions in any mediation term sheet. As the Order in Starkman demonstrates, Rule 174 provides no opportunity for a party to introduce mediation communications to assert that a signed mediation agreement does not accurately reflect the parties’ discussions. More ›

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Chancery Balances the Obligation to Defend an Arbitral Award from Collateral Attack with the Obligation to Defer to a Broad Agreement to Arbitrate

Gulf LNC Energy, LLC v. Eni USA Gas Marketing LLC, C.A. No. 2019-0460-AGB (Del. Ch. Dec. 30, 2019). 

Plaintiff (“Gulf”) invested over $1 billion to construct a facility designed to unload imported liquefied natural gas (“LNG”) in Pascagoula, Mississippi. Defendant (“Eni”) entered a “Terminal Use Agreement” (“TUA”) with Gulf to use the facility over a twenty-year period. When domestic production of LNG through shale boomed, importation became economically unfeasible and Eni did not use the facility other than one initial shipment. The TUA contained a provision requiring that any types of disputes under the agreement be arbitrated. In an initial arbitration, the panel determined that the purposes of the twenty-year TUA were “substantially frustrated,” terminated the agreement as of 2016, and awarded Gulf nearly $500 million in compensation for the benefits conferred upon Eni by Gulf’s partial performance. The arbitrators explicitly did not address Eni’s claims that Gulf had breached the TUA, finding the claim “academic” and deserving of no further consideration in light of the agreement’s termination. More ›

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Chancery Addresses Pleading Standards for Caremark Claims

In re LendingClub Corp., Consol. C.A. No. 12984-VCM (Del. Ch. Oct. 31, 2019).

Delaware law sets a high bar to sufficiently plead a Caremark claim for failure of board oversight, especially when the plaintiff must satisfy the heightened pleading requirements for establishing demand futility under Court of Chancery Rule 23.1.  To overcome those hurdles, a plaintiff must plead with particularity that the board of directors either (i) utterly failed to implement any reporting or information systems or controls to address the risk that ultimately manifested, or (ii) having implemented such safeguards, consciously failed to oversee their operation and thereby disabled themselves from being informed of the risk that ultimately manifested.  For either Caremark prong, the plaintiff must sufficiently plead bad faith, essentially that the directors knew they were not discharging their fiduciary duties. More ›

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Chancery Denies Section 220 Bid for Executive Compensation Records Involving Facebook

Southeastern Pa. Trans. Auth. v. Facebook, Inc., C.A. No. 2019-0228-JRS (Oct. 29, 2019)

Shareholders of a Delaware corporation have a qualified right to access corporate books and records for a “proper purpose.” One such proper purpose is to investigate potential mismanagement or fiduciary wrongdoing. Indeed, Delaware law encourages shareholders to use this “tool at hand” prior to bringing a derivative action. But this type of inspection has an important precondition: the shareholder must advance some evidence to suggest a “credible basis” from which the Court can infer actionable wrongdoing. As this decision involving Facebook illustrates, the credible basis standard is lenient but not meaningless, and may turn on, among other things, the potential for monetary damages arising out of the alleged wrongdoing. After a trial on a paper record, the Court of Chancery denied an attempt by two stockholders of defendant Facebook, Inc. to obtain additional documents related to the company’s executive compensation practices. More ›

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Court of Chancery Clarifies a Plaintiff’s Ability to Bind a Non-Signatory to a Forum Selection Provision

Neurvana Medical, LLC v. Balt USA, LLC, C.A. No. 2019-0034-KSJM (Del. Ch. Sep. 18, 2019), reargument denied (Oct. 10, 2019).

In Neurvana Medical, LLC v. Balt USA, LLC, the Court of Chancery declined to exercise personal jurisdiction over a French company, Balt International, S.A.S., the parent of Balt USA, LLC.  The Court rejected Neurvana’s argument that Balt International was so “closely related” to the asset purchase agreement at issue that the agreement’s forum selection clause bound Balt International, even though Balt International was a non-signatory.  The Court also declined to assert jurisdiction over Balt International based on the assertion that Balt USA was Balt International’s agent.  Thus, the Court granted Balt International’s motion to dismiss. More ›

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Chancery Enforces Preferred Stock Consent Rights, and Reasons that Designee of a Corporate Stockholder Is an “Affiliate” of that Stockholder for Purposes of an “Interested Party” Clause

PWP Xerion Holdings III LLC v. Red Leaf Resources Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019).

Preferred stockholders frequently obtain the right to veto specific types of transactions.  Here, plaintiff PWP Xerion Holdings III LLC (“Xerion”), a hedge fund that acquired Series A Preferred Stock in Red Leaf Resources Inc. (the “Company”), obtained consent rights for certain events, including (i) any transaction “with or for the benefit of any director or officer (or their respective affiliates)”; and (ii) any change of “the business or business plan” of the Company.  In this decision, the Court of Chancery grants partial summary judgment on Xerion’s claims that the Company violated these consent rights.    More ›

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Delaware Superior Court Finds Purchase Agreement Language Limits the Scope of Possible Claims Concerning Earn-Out Dispute

Collab9, LLC v. En Pointe Technologies Sales, LLC, C.A. No. N16C-12-032 (MMJ) (CCLD) (Del. Super. Sept. 17, 2019).

Under an asset purchase agreement (“APA”), the purchaser (“PCM”) acquired substantially all of the assets of the “En Pointe” business from the seller (“Collab9”).  The APA provided for an earn-out payment, calculated upon a percentage of En Pointe’s Adjusted Gross Profit over several years.  The APA provided that the purchaser “shall have sole discretion with regard to all matters relating to the operation of the Business.”  The agreement further disclaimed any express or implied obligation on the part of the purchaser to take any action, or omit to take any action, to maximize the earn-out amount, and stated that the purchaser “owes no duty, as a fiduciary or otherwise” to the seller.  The APA also contained a clear combined integration and anti-reliance provision. More ›

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Chancery Explains When Deal Price is a Persuasive Indicator of Fair Value in an Appraisal Proceeding

In re Appraisal of Stillwater Mining Co., Consol. C.A. No. 2017-0385-JTL (Del. Ch. Aug. 21, 2019).

Recent Delaware Supreme Court decisions on appraisal proceedings have stressed the pivotal importance of the deal price in establishing fair value.  In this case, the Court of Chancery faced an appraisal for a transaction in which the company’s General Counsel expressed ongoing concerns about the CEO’s potential conflict in spearheading the sale process.  That gave rise to the question:  In measuring fair value, what weight should be accorded to the deal price when there is some “hint of self-interest” that may have compromised the market check?  More ›

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