Delaware Business Litigation Report

Chancery Relies on Inconsistencies Between Board Materials and Proxy Statement to Order Books and Records Production

Hightower v. Sharpspring, Inc., C.A. No. 2021-0720-KSJM (Del. Ch. Aug. 31, 2022)
Once a plaintiff establishes a proper purpose under Section 220 of the DGCL, the Court of Chancery must determine the scope of the books and records inspection, which is those documents that are essential and sufficient for the stockholder’s stated purpose. Often, where the inspection relates to possible mismanagement or wrongdoing at the corporation regarding a specific transaction, the production of formal board materials will be sufficient for the stockholder’s needs. Here, however, the Court found that a plaintiff exploring a transaction involving a conflict demonstrated a need for documents beyond formal board materials, relying on inconsistencies between the board minutes and the proxy statement for the merger, which could be reconciled only with additional information. The Court awarded the plaintiff access to both informal board materials as well as officer-level materials not shared with the board in several defined categories. 

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Implied Covenant of Good Faith Covers Contractual Conditions “Too Obvious” to State Expressly in Indemnification Dispute

Baldwin v. New Wood Resources, LLC, App. No. 303, 2021 (Del. Aug. 16, 2022)
This appeal involved an underlying claim that Baldwin had improperly refused to repay litigation expenses advanced to him under New Wood Resource’s limited liability company agreement. The agreement provided Baldwin with indemnification so long as he acted in good faith, and it also specified a process for determining whether Baldwin had done so. One narrow issue on appeal was whether the implied covenant of good faith and fair dealing required the good faith determination itself to be conducted in good faith. Reversing the Superior Court, an en banc panel of the Supreme Court ruled that the implied covenant did apply. The Court relied upon its earlier decision in Dieckman v. Regency GP LP to restate the principle that one function of the implied covenant is to cover those contractual conditions that are "too obvious" to include expressly. That "too obvious" category included the condition that the good faith determination be made in good faith. Because New World Resources conceded this point at argument and did not make a persuasive alternative argument, the Court remanded the case.

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Chancery Addresses eDiscovery Self-Collection in Pro Se Defense of Restrictive Covenant Dispute

Summit Fire & Security LLC v. Kolias, C.A. No. 2022-0460-MTZ (Del. Ch. Aug. 19, 2022)
“Self-collection” in eDiscovery refers to a party selecting its own data for review or production without input from counsel. Delaware courts generally disapprove of self-collection. But the courts will approach the issue differently in pro se matters where it may be necessary and appropriate for a party to self-collect, without turning any data repositories over to a vendor. In this restrictive covenant dispute, the plaintiff entity moved to compel the production of a complete forensic image of an individual pro se defendant’s phone, claiming that the prior production of relevant text messages was inadequate based on the defendant’s self-collection of data. The Court declined to order that relief, noting that self-collection often is necessary for pro se parties and that there was no indication that the defendant had failed to meet any of his preservation obligations. In light of those facts, and the case’s circumstances, requiring full access to a complete forensic image was unreasonable and disproportionate to the needs of the case.

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Supreme Court Reverses Chancery Approval of Litigation Settlement for Overly Broad Release and Recommends Change to Chancery Rule 23.1

Griffith v. Stein, No. 264, 2021, C.A. No. 2017-0354 (Del. Aug. 16, 2022)
The Court of Chancery denied a non-monetary settlement for derivative claims that included allegations of excessive non-employee director compensation, siding with an objector, and awarding the objector fees. Subsequently, the parties agreed to a new settlement that included a financial benefit to the corporation. The objector then renewed his objection, arguing that the settlement improperly released future claims and that the plaintiff was not an adequate representative of the corporation’s interests. The plaintiff argued that future claims could be waived because the settlement included a compensation cap, that the released claims were covered by allegations of the complaint, and that the parties were only trying to import the Delaware standard of corporate waste into their release. The Court of Chancery approved the new settlement and did not award the objector additional attorneys’ fees. The objector appealed. More ›

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Chancery Holds That Controlling Stockholder Approving Exclusive Forum Selection Clause In Charter Amendment Impliedly Consented To Personal Jurisdiction

In Re Carvana Co. S’holders Litig., C.A. No. 2020-0415-KSJM (Del. Ch. Aug. 31, 2022)
In Delaware, parties may waive the requirement of personal jurisdiction either expressly or impliedly. The Court of Chancery applied this waiver principle in In re Pilgrim’s Corporations Derivative Litigation (2019), finding that a controlling stockholder impliedly consented to personal jurisdiction when his Board appointees approved a bylaw selecting the Court of Chancery as the exclusive jurisdiction for certain stockholder disputes. This decision extends and applies Pilgrim’s ruling to a controlling stockholder who personally voted to approve a charter amendment that granted exclusive jurisdiction in the Court of Chancery. More ›

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Chancery Limits Review on Motion to Dismiss to Only Section 220 Documents Cited in Complaint and Dismisses Complaint Under MFW Doctrine

City Pension Fund for Firefighters and Police Officers in the City of Miami, v. The Trade Desk, Inc., et al., C.A. No. 2021-0560-PAF (Del. Ch. July 29, 2022)
This decision addresses certain points of interest concerning (i) the use of books and records produced pursuant to Section 220 of the DGCL in subsequent litigation, and (ii) structuring controlling stockholder transactions to facilitate business judgment review. More ›

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Delaware Supreme Court Clarifies That There Is No Blanket Rule Requiring Dismissal Of An Overbroad Section 220 Demand And That A Proper Purpose May Be Established Through Hearsay

Nvidia Corp. v, City of Westland Police and Fire Ret. Sys., et al., No. 259, 2021 (Del. July 19, 2022)
In this decision, the Delaware Supreme Court clarified two points concerning books and records actions under Section 220 of the Delaware General Corporation Law: (i) there is no blanket rule requiring the Court of Chancery to dismiss overbroad demands; and (ii) a stockholder may establish a proper purpose under Section 220 through hearsay evidence, but this exception should not be abused. More ›

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Chancery Declines to Order Acquirer to Make Contingent Payments after Discontinuing Development of a Medical Product

Pavel Menn v. ConMed Corp., C.A. No. 2017-0137-KSJM (Del. Ch. June 30, 2022)
Plaintiff was a representative of stockholders who had entered into a stock purchase agreement (“SPA”), in which the defendant acquired a company engaged in developing a medical product. The SPA allocated the risk of continued development via a contingent payment structure, including milestone payments and earn-out payments. The defendant agreed to use “commercially best efforts” to maximize the payments, and to accelerate the payments to the stockholders if the defendant permanently discontinued development or sale of the product, except for certain reasons, including risk of injury to patients. After making several milestone payments, the defendant discontinued development due to concerns of the risk of injury to patients. The plaintiff demanded acceleration payments and brought claims when defendant declined to make these payments. More ›

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Stockholder Lacks Standing to Enforce the Merger Agreement but May Be Able to Recover Lost Premium Through an Action for Damages

Crispo v. Musk, C.A. No. 2022-0666-KSJM (Del. Ch. Oct. 11, 2022)
Stockholders generally have standing as third-party beneficiaries of corporate contracts under only limited circumstances. As this decision notes, whether contractual language gives standing to stockholders can be “a thorny legal issue.” More ›

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Chancery Dismisses Claims in Favor of Arbitration in Dispute over Sale of Pittsburgh Penguins

Wildfire Productions, L.P. v. Team Lemieux LLC, C.A. No. 2021-1072-PAF (Del. Ch. June 29, 2022)
The Federal Arbitration Act and the public policy of Delaware favor the resolution of disputes through arbitration. When parties contractually agree to arbitrate their disputes, Delaware courts will enforce the terms of arbitration provisions. More ›

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Chancery Finds That Stockholder’s Broad Section 220 Demand Lacked The Precision And Plus Factors Required To Entitle Shareholder To Additional Materials

Oklahoma Firefighters Pension & Ret. Sys. v. Amazon.com, Inc., C.A. No. 2021-0484-LLW (Del. Ch. June 1, 2022)
In reviewing the propriety of a stockholder’s Section 220 demand to inspect corporate records, Delaware courts must determine (1) whether the stockholder has stated a proper purpose; and (2) whether the requested documents are essential to the accomplishment of the proper purpose. Where the stated purpose of a Section 220 demand is to investigate alleged corporate wrongdoing which is the subject of other pending investigations or litigation, Delaware courts require one or more “plus factors” in addition to the mere pendency of an investigation or litigation to establish a credible basis to suspect wrongdoing. In this decision of the Court of Chancery, the Court held that the stockholder failed to establish the requisite plus factors and, in all events, the company had already produced sufficient records for the accomplishment of the stockholder’s purpose. More ›

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Chancery Denies Bid to Dismiss Derivative Claims Amid Alleged “Gamesmanship” Regarding Composition of LLC’s Board of Managers

Schoenmann v. Irvin, C.A. 2021-0326-SG (Del. Ch. Jun. 2, 2022)
After the plaintiff filed his direct and derivative claims in April 2021, the defendants – the company and its controller – circulated in June 2021 a written consent purporting to change the composition of the company’s board of managers as of January 2021. The defendants then moved to dismiss the derivative claims on the grounds that the plaintiff did not plead demand futility with respect to the purported new board. Based on the plaintiff’s allegations, the Court agreed with the plaintiff that it was reasonably inferable that the consent was backdated. But the Court ultimately decided the matter on a different ground: even if the board composition validly changed in January 2021, equity would not reward the defendants’ gamesmanship in delaying notice of the change. Because it was reasonable to infer that the change was made in anticipation of the plaintiff’s derivative claims and to thwart them, and the plaintiff properly pleaded demand futility with respect to the board of which he had notice, the Court allowed those claims to proceed.

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Chancery Holds That Requests for Admission Are Subject to Discovery Deadlines

NetApp, Inc. v. Cinelli, Inc., C.A. No. 2020-1000-LWW (Del. Ch. June 3, 2022)
This decision clarifies discovery deadlines under the Court of Chancery rules. Plaintiff served dozens of requests for admission months after the close of discovery, arguing that such requests are not subject to discovery deadlines, but merely “a mechanism to eliminate factual disputes.” Federal courts have rendered conflicting decisions on the issue. Here, the Court of Chancery holds that requests for admission under Rule 36 are subject to discovery scheduling cut-offs because they are part of the discovery process as specified under Rule 26 and 36.

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Superior Court Upholds Highly Confidential Designations in Discovery

Surf’s Up Legacy Partners, LLC v. Virgin Fest, LLC, C.A. No. 19C-11-92 (Del. Super. June 6, 2022)
Delaware courts generally do not permit the redaction of non-responsive material that is otherwise not privileged. Two-tiered confidentiality stipulations, allowing for highly confidential attorneys’ eyes-only designations, are available to prevent sensitive information from being widely disseminated amongst an opposing party if such disclosure is substantially likely to cause injury to the producing party and a standard confidential designation would be insufficient to prevent that injury. More ›

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Chancery Dismisses Claims Seeking to Unwind Secondary Transactions that Allegedly Jeopardized Recovery for Primary Fraudulent Transfers

Burkhart v. Genworth Fin., Inc., C.A. No. 2018-0691-JRS (Del. Ch. May 10, 2022)
The plaintiffs were a putative class of policyholders and insurance agents with an interest in long-term care insurance policies written by the defendant's insurance company. Plaintiffs alleged that the company’s parent and related entities fraudulently removed assets and support from the company and impaired the company’s ability to make payments to the policyholders and agents. The plaintiffs sought to unwind the purported fraudulent transactions under Delaware’s Uniform Fraudulent Transfer Act. After failing to obtain the dismissal of the DUFTA claims, the defendants allegedly diverted assets away from the initial transferees. Plaintiffs subsequently amended their complaint to include additional DUFTA claims seeking to unwind these secondary diversions. Defendants moved to dismiss the new claims on the grounds that plaintiffs were not creditors of the transferees, and thus lacked standing, and that plaintiffs had sought improperly to unwind transactions, rather than plead a right to payment. More ›

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