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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Morris James Blogs
Showing 56 posts by Samuel E. Bashman.
Court of Chancery Dismisses ABC Proceeding for Failure to Comply with Statute
In re Windmil Therapeutics Inc., C.A. No. 2023-1294-PAF (Del. Ch. Mar. 13, 2024)
This case dealt with the voluntary assignment for the benefit of creditors under 10 Del. C. § 7381, et seq. The ABC statute requires several actions, including the filing of an inventory, which has typically involved the assignee filing a motion for two appraisers. After the appraisal has been provided, the statute requires that the Court fix a bond. Due to the fact that these proceedings may be ex parte and lack transparency, Delaware courts have issued rulings requiring more details from assignees and establishing firm deadlines that are not present in the ABC statute. In this case, the assignee violated the statute by failing to file an inventory within 30 days of the execution of the assignment. Furthermore, the assignee sought to seek approval of a bond prior to the appointment of appraisers, and one of the appraisals was unsigned and marked as a draft. Therefore, because of these statutory violations, the Court dismissed the ABC proceeding.
Chancery Denies Motion to Dismiss Challenge to Microsoft-Activision Merger Where it Was Reasonably Conceivable that the Board Violated Section 251 of the DGCL
AP-Fonden v. Activision Blizzard Inc., C.A. No. 2022-1001-KSJM (Del. Ch. Feb. 29, 2024)
This case arose from a stockholder-plaintiff’s challenge to a merger whereby Microsoft acquired Activision Blizzard. Activision’s board met to approve the merger and approved a draft merger agreement. However, this draft agreement did not include (i) a disclosure letter, which was mentioned 45 times in the draft agreement; (ii) disclosure schedules, which were still being negotiated; (iii) the amount of consideration; or (iv) the surviving corporation’s certificate of incorporation. The agreement as-approved also did not address the issue of dividends that Activision would be permitted to pay while the deal was pending; when it approved the merger agreement, the board delegated the dividend issue to an ad hoc committee of the board. The full board did not review the merger agreement after this meeting, and the final version executed the next day included several changes from the draft agreement, including the dividend provision agreed to by Microsoft and the ad hoc committee. More ›
Court of Chancery Dismisses Derivative Claims Under Rule 23.1 When Plaintiff Failed to Show that Board Members Faced a Substantial Risk of Liability in Failing to Prevent Personal Use of Company Property
Conte v. Greenberg, C.A. No. 2022-0633-MTZ (Del. Ch. Feb. 2, 2024)
In examining whether a pre-suit demand upon the board of directors would be futile, the Court will examine on a director-by-director basis (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand, and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that is the subject of the litigation demand or faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand. In this case, the plaintiff alleged that the board faced a substantial risk of liability for failing to impose meaningful restrictions on certain executives’ alleged personal use of corporate airplanes, and also for issuing misleading disclosures. The Court disagreed, however, reasoning that even if directors failed to prevent the personal use of the airplane, that alone did not amount to bad faith, because the risk was contained. The Court reasoned the plaintiff’s claim related solely to the “misuse of two corporate assets by discrete individuals, as compared to a widespread operational deficiency.” Furthermore, the Court held that the directors were not at a substantial risk of liability for disclosure claims, because the proxy statement disclosed that certain executives had used the plane for personal use, and the failure to include the several details or characterizations upon which the plaintiff insisted were not material omissions in the context of the proxy statement. The Court accordingly granted the defendants’ motion to dismiss for failure to plead demand futility.
Chancery Denies Attorneys’ Fees for Appointment of New Directors Following Assertion of Derivative Claims
In re Oracle Corp. Deriv. Litig., Consol. C.A. No. 2017-0337-SG (Del. Ch. Feb. 7, 2024)
Under the mootness rule, a stockholder plaintiff can be awarded attorneys’ fees when the plaintiff’s litigation efforts result in the defendants taking action that results in a corporate benefit. In this case, following the stockholder-plaintiffs’ assertion of derivative claims, new independent directors were appointed by the corporation to serve on a special litigation committee to investigate the merits of the litigation. Although the underlying derivative claims were rejected after trial, the plaintiffs argued that the appointment of new directors nonetheless created a corporate benefit and, in fact, resulted in Oracle’s board having at least as many independent directors as supposedly non-independent directors. The Court disagreed, however, and held that the plaintiffs were not entitled to a mootness fee. The Court reasoned that the appointment of the new directors was not a significant benefit because the board was determined to have acted properly in the transaction that gave rise to the underlying lawsuit. Furthermore, the stockholder-plaintiffs did not seek the appointment of independent directors as part of the lawsuit. Therefore, the Court denied the plaintiffs’ request for attorneys’ fees.
Chancery Excuses Condition in Stockholder Agreement When Company Caused its Non-Occurrence
Chordia v. Lee, C.A. No. 2023-0382-NAC (Del. Ch. Jan. 4, 2024)
In this case, as part of a sale of a majority interest, a stockholder agreement granted the founders the ability to designate members to the board of directors so long as at least one founder remained at the company as an officer or employee. The agreement also granted the board the ability to hire and fire executive employees, but did not allow the board to terminate non-executive employees. In addition, the stockholder’s agreement required that the company use reasonable efforts to ensure the rights in the agreement remained effective for the founders’ benefit. More ›
Chancery Strikes Unclean Hands Defense Lacking Sufficient Nexus to the Claims
Pilot Corp. v. Abel, C.A. No. 2023-0813-MTZ (Del. Ch. Dec. 13, 2023)
Here, the plaintiff claimed that the adoption of pushdown accounting constituted a change to accounting rights that triggered a right to consent under the relevant operating agreement. The defendants asserted that the plaintiff had unclean hands because the plaintiff had manipulated earnings to alter valuation of a put right. The Court found the unclean hands defense inapplicable because the plaintiff’s claims were narrow and did not have an immediate direct relation the defense.
Plaintiffs Adequately Pled Unjust Enrichment for Materially Deficient Disclosures
Buttonwood Tree Value Partners, L.P. v. R.L. Polk & Co. Inc., C.A. No. 9250-VCG (Del. Ch. Dec. 29, 2023)
To state a claim for unjust enrichment, a plaintiff must adequately plead: (1) an enrichment; (2) an impoverishment; (3) a relation between the enrichment and impoverishment; and (4) the absence of a justification. In this Court of Chancery action, the plaintiffs claimed that the defendants were unjustly enriched because the plaintiffs were induced to tender their shares for inadequate compensation as a result of materially misleading disclosures. In response, the defendants argued that the relationship between the company’s self-tender and the benefits that the defendants received from subsequent special dividends and the sale of the company were too attenuated to plead that defendants were aware of these future developments. The Court held, however, that the plaintiffs had adequately pled their claims for unjust enrichment because defendants allegedly knew the true sale value of the company and defendants caused the company to make materially deficient disclosures to increase the defendants’ equity.
Chancery Finds Defendants Were Bound by Voting Agreement to Follow Board’s Recommendation
Texas Pacific Land Corp. v. Horizon Kinetics LLC, C.A. No. 2022-1066-JTL (Del. Ch. Dec. 1, 2023)
In this post-trial opinion, the plaintiffs argued that a voting agreement required that the defendants follow the board’s recommendation regarding a charter amendment to increase the corporation’s authorized shares. In opposition, the defendants argued that exceptions to the voting agreement allowed them to vote against the proposal, despite the board’s recommendation, if it related to a merger, acquisition, recapitalization, or other corporate transaction requiring a stockholder vote. The Court of Chancery found that portions of the voting agreement were ambiguous, and after considering certain course of performance extrinsic evidence, concluded that the defendants were required to follow the board’s recommendation because the defendants failed to show that the proposal fell under a contractual exception. As a remedy, the Court deemed the shares as voted in support of the proposal under the Court’s equitable power to treat as done that which in good conscious ought to be done. Notably, in reaching its conclusion, the Court enforced a clause in the agreement that excluded the consideration of the parties’ drafting history.
Chancery Denies Specific Performance in De-SPAC Transaction Based on Difficulty of Enforcement and Plaintiff’s Inequitable Conduct
26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., CA No. 2023-0128-JTL (Del. Ch. September 7, 2023)
Even where the parties have contractually agreed that specific performance is the preferred remedy for a breach, the decision whether to award that relief nevertheless remains within the Court of Chancery's discretion. In this decision, addressing the availability of specific performance, the Court assumed without deciding that the defendant target of a SPAC had not used its reasonable best efforts to close the transaction in breach of the agreement, that the SPAC was ready, willing, and able to close, and that money damages were an inadequate remedy at law. More ›
Chancery Upholds Written Consent Based on Signer’s Sophistication and Opportunity to Inspect
REM OA Holdings LLC v. Northern Gold Holdings LLC, C.A. No. 2022-0582-LWW (Del. Ch. Sep. 20, 2023)
Delaware is a contractarian state and the presumption is that parties are bound by their agreements. That presumption applies with even greater force when the parties are sophisticated and engage in arms-length negotiations. In this case, the defendant, a 50% member of an LLC, challenged a $10 million financing agreement entered into by the LLC’s other 50% member. That arrangement allowed the lender to purchase an interest in the company. In challenging the agreement, the defendant member argued that the plaintiff did not provide him with the term sheet for the transaction. In this decision, the Court of Chancery upheld the transaction, reasoning that, while the defendant member did not receive the term sheet, the consent for the loan that he signed repeatedly referenced the term sheet, the defendant was a sophisticated party with counsel, and he had the opportunity to inspect the consent and inquire about the term sheet as a matter of basic diligence. The Court also rejected numerous other defenses to enforceability.
Chancery Finds Defendant Officer Usurped Corporate Opportunity for His Own Competing Venture
Sorrento Therapeutics, Inc. v. Mack, C.A. No. 2021-0210-PAF (Del. Ch. September 1, 2023)
Under the corporate opportunity doctrine, an officer or director may not take a corporate opportunity for himself if "(1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation's line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation.” Broz v. Cellular Info. Sys., Inc., 673 A.2d 148, 154-55 (Del. 1996). In this post-trial opinion, the Court of Chancery held that a co-founder and former CEO who stayed on as President following his sale of the company to a strategic acquirer breached his fiduciary duties by usurping its corporate opportunities. While the defendant argued the company lacked the resources to pursue the opportunity, the Court reasoned that there was "no structural or situational barrier" to the company obtaining the capital needed. The Court did not credit the defendant's argument that the company was not likely to pursue the opportunities. The Court also explained that the corporate opportunity "test focuses on the company's ability to pursue the opportunity, not the board's likelihood of actually deciding to do so." The Court also found that the third prong was met because the opportunities were in the same line of business in which the company operated, but the defendant had usurped them for his own venture. It accordingly found the defendant liable and ordered supplemental briefing regarding the appropriate remedies.
Chancery Finds Defendants Liable for Fraud Based on the Failure to Disclose Internal Billing Practices
NetApp Inc. v. Cinelli, C.A. No. 2020-1000-LWW (Del. Ch. Aug. 2, 2023)
This decision arose out of the sale of the company Cloud Jumper to NetApp, Inc. The seller’s management had been recording internal software use as revenue in its unaudited financial statements but never disclosed this practice to the buyer in the sale’s process. In this post-trial opinion, in addition to breaches of contract, the Court of Chancery held that the defendants were liable for fraud because they failed to disclose internal billing practices that created the appearance of higher company revenue. The Court reasoned that this failure constituted common law fraud because the defendants had a duty to speak regarding the billing practice, there was circumstantial evidence that they had scienter to commit fraud due to their knowledge of the internal billing practice, and the plaintiffs relied on the financial data that reflected the billing practice when considering whether to pursue the deal. The decision also reflects a detailed analysis of damages and expert testimony related to the misrepresentations.
Chancery Finds that Acquiror Aided and Abetted Breaches of Fiduciary Duties by Exploiting Management’s Conflicts of Interest
In re Columbia Pipeline Group Merger Litig., Consol. C.A. No. 2018-0484-JTL (Del. Ch. June 30, 2023)
To establish a claim for aiding and abetting a breach of fiduciary duties, a plaintiff must show “i) the existence of a fiduciary relationship giving rise to a duty to the plaintiff, (ii) a breach of that duty by the fiduciary, (iii) knowing participation in the breach by the defendant, and (iv) damages proximately caused by the breach.” Id. at 94. The plaintiffs alleged that TransCanada, the acquirer in the merger transaction, aided and abetted a breach of fiduciary duties in the merger sale process and in disclosures to the stockholders in connection with the merger vote. More ›
Superior Court CCLD Declines to Award Costs for Special Master and Mediator, and Awards only Simple Interest on Judgment in Accord with Superior Court Default Rule
LCT Capital, LLC v. NGL Energy Partners LP, C.A. No. N15C-08-109 JJC CCLD (Del. Super. Ct. June 20, 2023)
Under Superior Court Rule 54, costs are allowed as a matter of course to the prevailing party. In this post-trial opinion, the Court denied costs associated with a special master fee and declined to include mediator fees but allowed costs relating to courtroom technology. The Court reasoned that the technology costs should be awarded because they were incidental and necessary to the trial. The Court found, however, that the fees related to the special master should not be awarded because those fees were similar to attorneys' fees. The Court also reasoned that the mediator's fees should not be awarded without a showing of abuse because mediator fees are typically split by the parties. More ›
Chancery Finds Derivative Plaintiffs Breached Duties in Withholding Arbitration Award of the Company
Optimiscorp v. Atkins, C.A. No. 2020-0183-MTZ (Del. Ch. June 1, 2023)
As this decision explains, when stockholder plaintiffs control the derivative claims of the company, they serve as agents of the company and owe the company fiduciary duties. This dispute involved the defendant-stockholders improperly withholding an arbitration award, which was obtained as a result of their successful litigation of derivative claims on behalf of the company. Ruling on summary judgment, the Court of Chancery held that the defendants breached their fiduciary duties to the company by withholding the award. The Court found that the defendants acted as agents of the company in the derivative claims and, therefore, owed fiduciary duties to the company. The Court reasoned that the defendants, as the company's agents, were required to return the award to the company because a monetized derivative asset belongs to the company. The Court ruled that the defendants breached their duty of care by divesting the company's board of its authority to manage the award and by failing to perform their obligations as company agents. Further, by withholding the award with the intent of distributing it to themselves, their friends, and their family, the defendants also breached their duty of loyalty. In ruling so, the Court rejected the defendant's argument that the business judgment rule should apply to their actions, finding the business judgment rule is intended to apply to directors, while derivative stockholder plaintiffs are held to a simple negligence standard with respect to their duty of care and a more stringent duty of loyalty than directors.