Posts in Chancery

Enforcing a “Draconian” Bargain, Chancery Grants Motion to Dismiss Claims Arising from Right to Repurchase Interest Upon Termination

Moscowitz v. Theory Entertainment LLC, C.A. No. 2019-0780-MTZ (Del. Ch. Oct. 28, 2020)
This case illustrates that the Court will enforce parties’ agreements even if they reflect a bad bargain for one party. Plaintiff Todd Moscowitz, a co-founder of Theory Entertainment LLC (“Theory” or the “Company”), resigned from Theory without giving prior notice, which triggered a “for cause” termination provision under agreements he had entered into with the Company. The termination provision allowed Theory to repurchase Moscowitz’s entire equity stake for a fraction of its value. To avoid that potential outcome, Plaintiff’s resignation notice contained language purporting to preserve his membership interest in Theory and to render his resignation void ab initio if a court were later to determine otherwise. More ›

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Chancery Enters Judgment for Seller On Post-Closing Milestone Payment Claim Because Buyer Failed to Establish Occurrence of Condition Subsequent

Shareholder Representative Services LLC v. Shire US Holdings, Inc., et al., C.A. No. 2017-0863 KSJM (Del. Ch. Oct. 12, 2020)
After the purchaser of a drug manufacturer failed to make a post-closing milestone payment required under the applicable merger agreement, the seller filed a two count complaint in the Court of Chancery for breach of contract and attorneys’ fees. In a post-trial opinion, Vice Chancellor Kathaleen St. Jude McCormick concluded that a condition subsequent that would have relieved the buyer of its milestone payment obligation had not, in fact, occurred. The Vice Chancellor entered judgment for the seller and awarded attorneys’ fees based upon a prevailing party provision of the merger agreement. More ›

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Chancery Reaffirms Narrowed Application of Gentile

In re Terraform Power, Inc. Stockholders Litigation, C.A. No. 2019-0757-SG (Del. Ch. Oct. 30, 2020)
In Terraform Power, the Court of Chancery declined the defendants’ invitation to disregard the rationale of Gentile v. Rossette—the seminal decision on dual-natured direct and derivative stockholder claims under Delaware law. On a motion to dismiss, the Court concluded that the plaintiffs adequately plead a direct claim for relief under Gentile against a controlling stockholder for executing a private placement that increased the controller’s voting power for an allegedly inadequate price and correspondingly decreased the minority ownership stake and voting power. In doing so, the Court reaffirmed the Gentile’s continued, albeit narrow, application, unless and until the Delaware Supreme Court holds otherwise.  More ›

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Chancery Invokes Internal Affairs Doctrine to Dismiss Dispute Over Former Delaware Corporation Brought Over Two Years After Its Migration to Nevada

Sylebra Capital Partners Master Fund, LTD v. Perelman, et. al., C.A. No. 2019-0843-JRS (Del. Ch. Oct. 9, 2020)

Defendant Scientific Games Corporation (the “Company”) is a gaming and lottery company that reincorporated in Nevada from Delaware in January 2018. The Company adopted new Nevada bylaws that, among other things, require stockholders to bring claims for breaches of fiduciary duties in Nevada. Because the Company operates in the gaming industry, the bylaws also require stockholders to meet “suitability” requirements and restrictions on sale set by gaming regulators in jurisdictions where the Company operates. Approximately four months before Plaintiffs filed suit, the Company filed suit in Nevada to force Plaintiffs to comply with an investigation into their suitability as stockholders. More ›

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Chancery Rejects Conspiracy Jurisdiction Over Foreign Defendant

Lacey v. Mota-Velasco, C.A. No. 2019-312-SG (Del. Ch. Oct. 6, 2020)

Under Istituto Bancario, a foreign defendant alleged to be part of a conspiracy may be subject to personal jurisdiction in Delaware, but only if the plaintiff alleges, among other requirements, and consistent with the Delaware long-arm statute and due process, an act in Delaware in furtherance of the conspiracy. Conspiracy jurisdiction is not an independent basis of jurisdiction but rather provides a framework by which the Delaware courts evaluate whether there are sufficient minimum contacts to justify the exercise of personal jurisdiction.  More ›

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Chancery Finds Warrant Issuance Triggered Stockholder Preemption Rights

L-5 Healthcare Partners, LLC v. Alphatec Holdings, Inc., C.A. No. 2019-0412-KSJM (Del. Ch. Oct. 12, 2020)

Pursuant to a share purchase agreement, a plaintiff stockholder had preemption rights that entitled the stockholder to participate on a pro-rata basis if the defendant company issued common stock equivalents to a third-party buyer. Defendant issued warrants convertible into common stock to a nonparty. In consideration of plaintiff’s preemption rights, defendant made a proposal for plaintiff to provide the company with a loan in exchange for acquiring warrants, based on a blended version of the prices and other terms of the issuance to the nonparty. The proposal was, however, subject to approval by defendant’s board and the nonparty, and contingent upon defendant drawing down on the loan provided by plaintiff. Plaintiff filed suit in the Delaware Court of Chancery, seeking to enforce its preemption rights, and moved for partial judgment on the pleadings. More ›

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Chancery Applies Contractual Shortening of Limitations Period for Breaches of Representations, Finds it Inapt to Fraud Claims and Enforces Clear Anti-Reliance Clause

Pilot Air Freight, LLC v. Manna Freight Systems, Inc., C.A. No. 2019-0992-JRS (Del. Ch. Sept. 18, 2020)

In a familiar fact pattern, an acquirer of a business brought suit against sellers claiming, inter alia, that the representations and warranties in the asset purchase agreement were untrue and, indeed, fraudulent when made. The sellers moved to dismiss on the basis of a provision they claimed shortened the limitations period for breaches of representations and warranties and an anti-reliance clause they claimed eliminated any potential claims for misrepresentations or omissions outside of the written agreement. More ›

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Chancery Addresses Contract and Fraud Claims Relating to M&A Post-Closing Price Adjustments

Roma Landmark Theaters, LLC v. Cohen Exhibition Co., LLC, C.A. No. 2019-0585-PAF (Del. Ch. Sept. 30, 2020)

In Roma Landmark Theaters, the parties’ purchase agreement contained a framework for post-closing price adjustments and set forth the pre-closing duties of the buyer (but not the sellers) relating to certain calculations and financial information. The agreement included a dispute mechanism, which provided for an independent accounting firm to make a binding determination as to the distribution of escrowed funds in connection with a dispute over post-closing price adjustments. The accounting firm decided the dispute largely in sellers’ favor. Sellers then filed suit in the Court of Chancery to confirm the accounting firm’s decision, and require buyer to release the escrowed funds. Buyer filed counterclaims, alleging that the sellers committed financial disclosure misrepresentations amounting to fraud and bad faith. More ›

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Chancery Confirms that, Without More, Threat of Proxy Contest from Activist Investor is Insufficient to Render Director Defendants Conflicted in Sale Transaction

Rudd v. Brown, C.A. No. 2019-0775 MTZ (Del. Ch. Sept. 11, 2020)

The Court of Chancery recently confirmed that the threat of a proxy contest from an activist investor alone was insufficient to render director defendants conflicted in a post-closing challenge to a sale of the company. Here, an activist investor that acquired a significant stake in the corporation expressed dissatisfaction with the board of directors for not exploring a potential sale of the company. Thereafter, the company announced that it would explore strategic alternatives. The company then entered into a cooperation agreement permitting the investor to appoint three members of the nine member board in exchange for not mounting a proxy fight. The strategic process resulted in a sale to a financial acquirer. The plaintiff then brought suit against the company’s board of directors and an officer alleging that that board’s acceptance of an inadequate offer was motivated by self-interest to avoid a proxy contest. More ›

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Chancery Discusses Standards for Reasonable Fees in Making Fee Award for “Bad Faith” Litigation

Carlos Eduardo Lorefice Lynch v. R. Angel Gonzalez Gonzalez, C.A. No. 2019-0356-MTZ (Del. Ch. Sep. 18, 2020)

Under the American Rule, parties to lawsuits in Delaware generally are responsible for paying their own attorneys’ fees and costs incurred in the litigation. Parties can petition Delaware courts, however, to shift the fees when such a party can prove that its opponent pursued its claims in “bad faith.”  More ›

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Chancery Awards No Damages to Either Party After the Break-Up of the Anthem/Cigna Merger

In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114- JTL (Del. Ch. August 31, 2020)

This action arose out of a failed merger transaction involving the second and third largest health insurers in the United States, Anthem, Inc. and Cigna Corporation (“the Merger”). The parties had entered into a merger agreement on July 23, 2015 (“Merger Agreement”). Either party could terminate if the transaction did not close by January 31, 2017, a date later extended to April 30, 2017. The parties each agreed to covenants to cooperate and to use their best efforts to accomplish the Merger (“Efforts Covenants”). Specifically, they agreed to take all reasonable steps to consummate the Merger (the “Reasonable Best Efforts Covenant”) and to take “any and all actions” necessary to avoid impediments to the Merger from government entities (the “Regulatory Efforts Covenant”). The parties authorized Anthem to take the lead in working with government entities to facilitate the Merger, but the parties were required to cooperate to obtain regulatory approval (the “Regulatory Cooperation Covenant”). The parties’ obligations to close the Merger were subject to the condition that no governmental entity or court had acted to enjoin the consummation of the Merger (the “No Injunction Condition”).  More ›

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Chancery Upholds Class Claims Alleging Breaches of Fiduciary Duty in Alleged Controlling Stockholder’s Tender Offer

In re Coty Inc. Stockholder Litigation, C.A. No. 2019-0336-AGB (Del. Ch. Aug. 17, 2020)  

JAB Holding Company S.à.r.l. and its affiliates (together “JAB”) completed a partial tender offer (the “Tender Offer”) for shares of Coty Inc. (“Coty”) on April 25, 2019, increasing its ownership stake from 40% to 60% of the outstanding Coty shares. At the time of the Tender Offer, Coty had a nine-member board of directors – four directors affiliated with JAB (the “JAB Directors”) and five individual directors (the “Individual Directors”). Pierre Laubies, the CEO of Coty, was one of the Individual Directors. Although Laubies was the only Individual Director with a management position at Coty, he, like all of the Individual Directors, had professional ties to JAB and its officers, with Laubies having formerly served as CEO of a JAB affiliate.  More ›

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Alleged Third-Party Beneficiary’s Contract and Alternate Unjust Enrichment Claims Survive Dismissal at the Pleadings Stage Based on Ambiguous Contract Language

CHS/Cmty. Health Sys., Inc. v. Steward Health Care Sys. LLC, C.A. No. 2019-0165-JRS (Del. Ch. Aug. 21, 2020)

A claim for unjust enrichment will not lie where there is a contract that governs the relationship between parties. Both types of claims may survive a motion to dismiss, however, if there exists a contractual ambiguity that prevents the Court of Chancery from interpreting the meaning of contract at the pleadings stage. More ›

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Chancery Addresses Statutes of Limitations Issues Arising Out Employment-Related Claims

Weik, Nitsche & Dougherty, LLC, v. Pratcher, C.A. No. 2018-0803-MTZ (Del. Ch. Aug. 26, 2020)

Following an employment dispute between former employers and employees of a Delaware limited liability company, the employers (“Plaintiffs”) filed an action in the Delaware Court of Chancery seeking rescission of a contract recently executed by the parties. The contract at issue governed the percentage of fees to which the employees (“Defendants”) were entitled for any business the employees originated for the LLC. According to Plaintiffs, Defendants breached the contract by engaging in “self-marketing campaigns” through which Defendants failed to recognize any affiliation with the LLC and which caused a disparity in the amount of fees each party believed Defendants were entitled to.  In a series of counterclaims, Defendants argued that Plaintiffs owed Defendants certain sums of money pursuant to the contractual relationship. Defendants asserted that Plaintiffs owed those sums based on the Defendants’ “expectancy in the contracts” which were lost after Plaintiffs purportedly breached the contract and forced Defendants to “resign and lose their expected profits from [the contract].” More ›

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Chancery Provides Guidance on Agency and Joint Venture Theories of Vicarious Liability

Otto Candies, LLC v. KPMG, LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Aug. 21, 2020)

The Court of Chancery dismissed a complaint filed by creditors and former business affiliates of a defunct Latin American offshore oil service company for failing to establish, under agency or joint venture theories, a basis for finding KPMG US vicariously liable for audits performed by KPMG Mexico.  More ›

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