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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
- October 30, 2020
- April 1, 2024
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Chancery Rules That Delisted and Long-Dark Corporation Failed To Show Harm Warranting a Confidentiality Order for Basic Financial Documents Responsive to a Books and Records Request
Rivest v. Hauppauge Digital, Inc., C.A. No. 2019-0848-PWG (Del. Ch. Sept. 1, 2022)
Plaintiff stockholder sought to inspect the books and records of a defendant company, requesting a narrow universe of annual and quarterly financial statements for closed periods in order to value his shares. For several years, including time periods after deregistering its stock from a public exchange, the defendant had not provided any financial information to stockholders or held an annual meeting. More ›
Chancery Finds Asset Purchase Agreement Required Buyer to Indemnify Seller for Liability Under State Tobacco Settlement
ITG Brands LLC v. Reynolds Am., Inc., C.A. No. 2017-0129-LWW (Del. Ch. Sept. 30, 2022)
Plaintiff acquired four cigarette brands from the defendant under an asset purchase agreement. Prior to entering into the APA, the seller had been making annual payments to the State of Florida based on the annual volume of tobacco product sales under a preexisting settlement agreement. The purchaser did not join the settlement, and the seller stopped making payments to Florida. Florida sued both parties in a Florida court over the lack of payments and obtained a judgment that the seller must continue to make settlement payments based on the purchaser’s own sales of the acquired brands. The seller and purchaser brought claims against each other in the Court of Chancery to determine which party bore responsibility for the Florida judgment. More ›
Court of Chancery Finds That Complaint Fails To Adequately Plead Caremark Claim In Context Of SolarWinds Cybersecurity Breach
Construction Industry Laborers Pension Fund v. Bingle, C.A. No. 2021-0940-SG (Del. Ch. Sept. 6, 2022)
Under the Delaware Supreme Court’s Caremark decision and its progeny – including its most recent articulation in Marchand v. Barnhill – corporate directors who in bad faith fail to impose systems for monitoring important risks or fail to act in response to known “red flags” conceivably face monetary liability for breaching the fiduciary duty of loyalty. This decision discusses that, where Caremark claims have survived a motion to dismiss under Court of Chancery Rule 23.1, the alleged breaches generally have been in the context of violations of positive law or regulations. More ›
Chancery Suggests Alternative Approach To Contracts Providing That Prohibited Acts Are Void Ab Initio
XRI Investment Holdings LLC v. Holifield, et al., C.A. No. 2021-0619-JTL (Del. Ch. Sept. 13, 2022)
Under precedents such as CompoSecure, L.L.C. v. CardUX, LLC (Del. 2018), acts defined by an LLC agreement as “void” or “void ab initio” are incurable, whether through equity or otherwise. For the Court of Chancery in this post-trial decision, applying the CompoSecure holding prohibited the Court from giving effect to the plaintiff’s acquiescence in the transaction at-issue. While respecting and applying CompoSecure, the Court proposed an alternative approach under which equitable doctrines may militate against holding that a challenged act may never be cured. More ›
Equitable Fraud Claim Sufficient to Support Court of Chancery Jurisdiction
Trust Robin, Inc. v. Tissue Analytics, Inc., C.A. No. 2021-0806-SG (Del. Ch. Sep. 29, 2022)
After initially questioning its own subject matter jurisdiction in a dispute involving allegations of breach of contract and tort in connection with a services agreement, the Court of Chancery concluded that the plaintiff’s equitable fraud claim was not “simply a makeweight equitable hook” attached to its legal claims. The plaintiff sufficiently alleged a special relationship between the plaintiff and defendant, and it was possible that the plaintiff could recover for equitable, but not legal, fraud. The Court’s reasoning cited the alignment of the parties’ interests, the defendant’s control over the parties’ joint purpose by virtue of controlling certain intellectual property and other proprietary information belonging to the plaintiff, and the defendant’s alleged use of that control to engage in self-dealing. Therefore, the Court permitted the matter to proceed.
Chancery Finds Personal Jurisdiction Over Individual Who Formed Delaware Entities in Connection with a Challenged Merger Transaction
In Re P3 Health Grp. Hldgs., LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 14, 2022)
The Court of Chancery rejected an individual defendant’s challenge to Delaware’s assertion of personal jurisdiction over him. Although the defendant portrayed himself as merely a shareholder of Delaware entities (which is not in itself a basis for personal jurisdiction), the Court found that he had transacted business in the state for purposes of Delaware’s Long Arm Statute because he also formed two entities as part of a planned merger. It did not offend due process to require the individual to defend litigation related to the merger in Delaware because there was a nexus between his contacts and the claims and because he should have reasonably anticipated that Delaware would exercise jurisdiction over him in litigation arising from the merger.
Chancery Holds Defendant in Civil Contempt for Using Discovery Materials for Business Purpose in Violation of Confidentiality Order
Murphy Marine Services of Delaware, Inc. v. GT USA Wilmington, LLC, C.A. No. 2018-0664-LWW (Del. Ch. Sept. 19, 2022)
During the course of a two-part trial in which plaintiffs argued that the defendant breached the terms of a binding letter agreement, plaintiffs brought a motion for contempt against the defendant alleging that defendant used discovery materials produced by plaintiffs in connection with the litigation in negotiations with one of the largest customers of plaintiff Murphy Marine Services. In connection with the underlying action, plaintiffs produced documents to the defendant reflecting the revenue and financial information of Murphy Marine Services’ customers. Defendant admitted that estimates used in negotiating with one of Murphy Marine Services’ customers were determined using information obtained from those discovery materials. The confidentiality order entered by the Court in connection with the litigation contained common language providing that discovery materials would be used solely for purposes of the litigation. Thus, plaintiffs contended that using the discovery materials to gain a competitive edge in negotiating with one of Murphy Marine Services’ customers was a clear violation of the confidentiality order’s terms. The Court agreed with the plaintiffs. In addition to finding that defendant breached and repudiated the binding letter agreement, the Court therefore also found that defendant’s use of discovery materials for a business purpose violated the confidentiality order and ordered the defendant to pay the plaintiffs’ fees and expenses incurred in bringing the motion for contempt.
Board Lacks Standing to Bring Motion to Dismiss Because It Delegated That Authority to Special Litigation Committee
Rowan v. Infinity Q Capital Mgmt., LLC, C.A. No. 2022-0176-MTZ (Del. Ch. Sep. 12, 2022)
If a conflicted board delegates all authority over derivative claims to a special litigation committee (“SLC”), then the board may lack authority separately to assert procedural defenses, including a motion to dismiss under Court of Chancery Rule 23.1. But whether a board has given up this authority depends upon the sequence and terms of the SLC’s creation. More ›
Chancery Addresses Multiple Discovery Scuffles in Twitter and Musk Litigation
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Aug. 23, 2022)
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Aug. 25, 2022) Letter Decision Resolving Plantiffs' Second Discovery Motion
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Aug. 25, 2022) Letter Decision Resolving Defendants' Second Discovery Motion
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Aug. 25, 2022) Letter Decision Resolving Defendants' Third Discovery Motion
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Sept. 7, 2022) Letter Decision Denying Defendants' Motion for Reargument
Twitter Inc. v. Elon musk et al., C.A, No. 2022-0613-KSJM (Del Ch. Sept. 7, 2022) Letter Decision Resolving Defendants' Motion For Leave To Amend And Extend Case Schedule
Twitter Inc. v. Elon Musk et al., C.A. No. 2022-0613-KSJM (Del Ch. Sept 7. 2022) Letter Resolving Fourth Discovery Motion
Twitter Inc. v. Elon Musk et al., C.A. No. 2022-0613-KSJM (Del Ch. Sept 7. 2022) Letter Decision Resolving Defendants Fourth Discovery
During its pendency, the suit by Twitter to compel Musk to complete his $44 billion purchase of the company produced several discovery rulings illustrating the Court of Chancery’s rules and practice. More ›
Chancery Denies Preliminary Injunction For Overly Broad Restrictive Covenants
Kodiak Building Partners LLC v. Adams, C.A. No. 2022-0311-MTZ (Del. Ch. Oct. 6, 2022)
Delaware courts review noncompete and nonsolicitation agreements to ensure that they “(1) are reasonable in geographic scope and temporal duration, (2) advance a legitimate economic interest of the party seeking its enforcement, and (3) survive a balancing of the equities.” And Delaware law recognizes that an acquirer has a legitimate economic interest in protecting what it purchases, including the purchased company’s assets goodwill. Here, the plaintiff argued that it not only had a legitimate business interest in protecting the goodwill of the company it purchased, but also had a legitimate business interest in protecting its other businesses, including those that pre-dated the acquisition, and, as a result, could restrict a former employee from participating in industries relating to any of those businesses. The Court of Chancery disagreed, finding that the plaintiff’s legitimate economic interest did not extend to goodwill and competitive spaces acquired in other transactions with other companies in different industries. The Court also found that the scope of the noncompete and nonsolicitation covenants at issue were unreasonable, ruling that the provisions’ geographical scope was unreasonably broad, as they covered areas surrounding the plaintiff’s subsidiaries, rather than only areas related to the acquired company. The Court, therefore, declined to enter a preliminary injunction, finding the plaintiff did have a reasonable likelihood of success on the merits. In reaching this conclusion, the Court held that the employee’s promise not to challenge the reasonableness of his restrictive covenants within the relevant contract could not circumvent the Court’s mandate to review those covenants for reasonableness.
Chancery Determines Divorcee Was One Share Short of Equal Ownership Needed To Avoid Removal from Leadership of Business Empire
Haart v. Scaglia, C.A. No. 2022-0145-MTZ (Del. Ch. Aug. 4, 2022)
In public, a high-powered couple presented themselves as equal owners of an operating company, of which the wife was also the CEO and a director. After marrying, the husband transferred fifty percent of the common stock of an umbrella holding company to his wife. He also transferred to her one share shy of equal ownership of preferred stock—leaving her with 49.9995957 percent of the preferred shares. After she realized this imbalance, the wife continued to insist they were equal owners. As their marriage deteriorated, the husband used his one-share majority to remove her from leadership at the holding company and the operating company, of which the holding company was the sole member and managing member. She brought claims in the Court of Chancery, alleging equal ownership and a corporate deadlock, seeking judicial dissolution. More ›
Chancery Dismisses Claims Alleging Directors Approved Spring-Loaded Stock Options Before Press Releases on COVID-19 Vaccine Efforts
In re Vaxart, Inc. S’holder Litig., Consol. C.A. No. 2020-0767-PAF (Del. Ch. June 3, 2022)
A small biotechnology company issued a press release that connected the company to the federal government’s Operation Warp Speed program and its efforts to develop a COVID-19 vaccine. The body of the press release provided more clarity than the headline—namely, that the company had been selected to participate in a primate research study, not selected as a final recipient of funds for vaccine development. Stockholders filed suit, alleging that the company’s selection was material information that should have been disclosed in advance of the stockholders’ vote on an amendment to the company’s equity incentive plan that enabled officers to issue themselves spring-loaded stock options prior to the press release. The defendants moved to dismiss. More ›
Chancery Sustains Claims for Improper Termination of Agreements For Cause in Connection with a Joint Venture to Develop Data Centers for Amazon
W.D.C. Holdings, LLC v. IPI Partners, LLC, C.A. No. 2020-1026-JTL (Del. Ch. June 22, 2022)
Two entities entered into a joint venture to develop data centers for Amazon. One entity managed the joint venture day to day, and the other controlled the board and had removal rights under certain circumstances. When whistleblowers raised concerns of potential kickbacks and the FBI executed a search warrant on the managing entity’s CEO, the second entity issued letters seeking to remove the CEO and corporate affiliates for cause from their roles in the joint venture and to terminate certain other agreements. The managing entity filed suit to challenge its removal and its affiliates’ removal, and the termination of the other agreements. The defendants moved to dismiss. More ›
Chancery Applies Implied Consent to Service Provision of Delaware LLC Act to LLC’s General Counsel and Chief Legal Officer
In re P3 Health Group Holdings, LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Sept. 12, 2022)
The plaintiff, a large unit holder in a Delaware LLC, sued several defendants, including the general counsel and chief legal officer of the LLC, for allegedly breaching her fiduciary duties to the LLC and its members for her role in facilitating a challenged de-SPAC merger. The implied consent provision of Section 18-109 of Delaware’s LLC Act provides that “managers” of Delaware LLCs consent to the service of process in Delaware. The statute defines “managers” as both (1) those formally designated as managers, and (2) those who “participate [] materially” in management. Defendant moved to dismiss for lack of personal jurisdiction arguing that Section 18-109 did not apply to her in her role as an officer of the LLC because (1) she was not a designated manager, and (2) she was not acting in a managerial capacity. Plaintiff argued that because the defendant voluntarily assumed the role of a senior officer of the LLC and because, as alleged in the complaint, she acted in a significant managerial capacity with respect to the LLC, the implied consent provision did, in fact, apply. The Court of Chancery agreed with the plaintiff and its decision provides a thorough discussion of the acting manager prong of Section 18-109. The Court reasoned that, at the pleading stage, the customary responsibilities of a general counsel and chief legal officer provided a basis for asserting personal jurisdiction. The specific allegations, in this case, supported a reasonable inference that the defendant acted in a significant managerial capacity in connection with the challenged conduct.
Chancery Concludes That Transaction Meets MFW Standard
In re Match Grp. Inc. Deriv. Lit., Cons. C.A. 2020-0505-MTZ (Del. Ch. Sep. 1, 2022)
Under the so-called MFW framework, a transaction with a controller is subject to business judgment review, rather than the more exacting entire fairness review, if the transaction satisfies all six procedural protections elaborated in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014). In simple terms, the MFW framework mimics the two key protections that exist in a transaction with a third party by requiring an independent negotiating agent (i.e., a board committee) and approval by the majority of the non-controlling stockholders. But the standard can be difficult to meet because the failure to comply with a single condition is fatal. Nonetheless, here, the Court of Chancery concluded that the transaction satisfied all six elements of the MFW framework because the as-pled facts established that the special committee had necessary authority, that a majority of the special committee was sufficiently independent, that the special committee satisfied its duty of care in negotiating a fair price, and that the minority stockholders approved the transaction through an uncoerced and informed vote. Because the plaintiff did not plead any claim that would overcome the application of the business judgment rule, the Court dismissed the case.
