Delaware Business Litigation Report

Delaware Supreme Court Explains Appraisal Rights and Finds Disclosure Violation Relating to Pre-Closing Dividend Contingent on a Merger

In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267 (Del. July 19, 2022)
Here, the defendants organized a merger so that a large majority of the total value of the merger would be granted as a pre-closing dividend to stockholders and that the remaining amount would be granted in return for the stockholder’s shares. In the resulting litigation, stockholders argued that the defendants’ structuring of the merger unlawfully denied or diluted the stockholders’ right to seek appraisal and that the defendants’ disclosures regarding the structuring were deficient. The defendants prevailed on a motion to dismiss before the Court of Chancery. On appeal, the Delaware Supreme Court found that the dividend conditioned on the merger’s consummation was part of the merger consideration for appraisal purposes under Delaware law, that receipt of the dividend did not disqualify stockholders from seeking appraisal, and that plaintiff’s claim regarding the structure, therefore, was properly dismissed. But the Supreme Court reversed the trial court’s dismissal of the related disclosure claim. The plaintiffs alleged that the director defendants, aided and abetted by the acquirer, had deprived stockholders of their appraisal rights by improperly describing what would be subject to appraisal. The Supreme Court agreed and held that the disclosures were confusing and materially misleading. The proxy stated that stockholders were entitled only to the amount that remained after the pre-closing dividend. But this was incorrect as a matter of Delaware law, as the stockholders were also entitled to appraisal for the pre-closing dividend. Two justices dissented from the majority’s holding regarding the disclosure claim.

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Delaware Supreme Court Enforces Class Vote Requirement, Reasons There Is No Insolvency Exception to Section 271 Of The Delaware General Corporation Law

Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021 (Del. June 15, 2022)
Section 271 of the Delaware General Corporation Law provides, among other things, that a majority vote of stockholders is required to sell all or substantially all of a corporation’s assets. As an issue of first impression, the Delaware Supreme Court reasoned that there is no insolvency exception to Section 271’s requirement of a stockholder majority vote. More ›

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On Motion To Dismiss, Court of Chancery Holds That Alleged Disclosure Violations Were Insufficient To Rebut Corwin Protections Of A Fully Informed Stockholder Vote

Teamster Members Ret. Plan v. Randall S. Dearth et al., C.A. No. 2020-0807-MTZ (Del. Ch. May 31, 2022)
Under the Supreme Court’s decision in Corwin and its progeny, a transaction approved by a fully informed, uncoerced stockholder vote, not involving a controlling stockholder, receives business judgment rule protection. However, one sufficiently alleged disclosure deficiency is enough to put into question whether a stockholder vote is fully informed and, thus, to defeat a motion to dismiss. More ›

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Chancery Dismisses Caremark Claim Against Energy Company Alleging Failure of Board Oversight Related to Fatal Pipeline Explosion

City of Detroit Police and Fire Retirement System v. Hamrock, C.A. No. 2021-0370-KSJM (Del. Ch. June 30, 2022)
Stockholder plaintiff filed a derivative suit on behalf of an energy company alleging that certain of the company’s former and current directors were liable for oversight failures leading to the fatal explosion of an over-pressurized gas pipeline. When the defendants moved to dismiss for failure to make a demand on the board, the plaintiff argued that demand was excused because a majority of the demand board faced a substantial likelihood of liability for oversight failures based on the following three theories of Caremark liability: (1) the board’s utter failure to implement a pipeline safety monitoring or reporting system; (2) the board’s failure to acknowledge “red flags” that put it on notice of the company’s numerous violations of pipeline safety laws; and (3) the board’s knowing encouragement of legal violations in the pursuit of corporate profit. The Court rejected all three of the plaintiff’s theories of Caremark liability and dismissed the action for failure to make a demand. The Court reasoned as follows: (1) according to the plaintiff’s own allegations, the company had set up a pipeline safety monitoring and reporting system which included a committee specifically tasked with pipeline safety that was active, therefore the plaintiff had not adequately pled “utter failure” to set up such a system; (2) any causal connection between the “red flags” identified by the plaintiff and the explosion were too tenuous to put the board on notice of the corporate trauma that occurred; and (3) plaintiff had not adequately pled that the board was “in the business” of encouraging violation of the law for profit because, according to plaintiff’s own allegations, the company actually discouraged legal violations through the formation of several committees tasked with regulatory compliance.

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Chancery Upholds Brophy Claim and Finds Post-Merger Direct Standing Based On Process Challenge

Goldstein v. Denner, C.A. No. 2020-1061-JTL (Del. Ch. June 2, 2022)
This motion to dismiss decision upholds a Brophy claim against an activist investor and director who was alleged to have concealed an eventual acquiror’s expression of interest while he leveraged that inside information to buy more stock and profit after the short-swing period’s expiration. The Court of Chancery found it was reasonable in the circumstances to infer materiality of the expression of interest, which represented a nearly 65% premium over the company’s trading price, and that the fiduciary was motivated to act upon it. The Court also found that a merger did not eliminate the plaintiff’s standing under the contemporaneous ownership requirement. The Court rejected the defendant's argument under Primedia regarding the asserted immateriality of the value of the plaintiff’s claims in the context of the merger. As the Court explained, under Parnes, a stockholder could may assert “a direct claim challenging a merger if the facts giving rise to what otherwise would constitute a derivative claim led either to the price or the process being unfair.” Here, the plaintiff’s allegations challenged the fairness of the sale process – a process that the activist allegedly delayed to serve his own interests at the expense of the Company running a better process or remaining independent. 

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Delaware Supreme Court Affirms Dismissal Under Zapata

Diep v. Trimaran Pollo Partners, No. 313, 2021 (Del. June 28, 2022)
After the Court of Chancery denied an initial motion to dismiss, the company formed a special litigation committee (“SLC”) to investigate the claims and determine whether the company should allow the plaintiff to proceed, take over the litigation, or move to dismiss. The SLC investigated and then moved to dismiss the claims, which the Court of Chancery granted under Zapata. Among other rulings, the Supreme Court affirmed and upheld the Court of Chancery’s rejection of the plaintiff’s contention that the SLC did not meet its burden to establish the independence of the SLC members. The Supreme Court agreed with the trial court that the record did not establish that as directors the SLC members had specific knowledge of the facts and circumstances that led the Company, as nominal defendant, to join the initial motion to dismiss those claims that the SLC later was charged with investigating. Justice Valihura dissented because she believed that material issues of fact existed regarding the SLC members’ independence.

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Chancery Holds That A General Partner Of A Limited Partnership Cannot Breach Fiduciary Duties It Does Not Owe

JER Hudson Group XXI LLC, et al. v. DLE Investors, LP, C.A. No. 2021-0478-MTZ (Del. Ch. May 2, 2022)
Under Delaware law, the purpose of a limited partnership and a general partner’s authority and fiduciary duties may be defined by the terms of a limited partnership agreement (“LPA”). In this post-trial decision, the Court of Chancery held, among other things, that a limited partner failed to prove fiduciary claims against a general partner because the partnership’s express purpose and the general partner’s fiduciary duties did not require it to take actions the limited partner alleged would be value-maximizing.  More ›

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Chancery Addresses Entitlement to Indemnification

Evans v. Avande, Inc., C.A. No. 2018-0454-LWW (Del. Ch. June 9, 2022)
This decision highlights the need for a nexus between legal expenses and one’s corporate capacity in the context of indemnification, as well as Delaware law’s claim-by-claim approach to indemnification. Here, the Court of Chancery denied indemnification to a former director and officer for tortious interference and defamation claims that he defeated because they concerned conduct occurring post-termination of employment. The Court also denied indemnification relating to a breach of fiduciary duty claim that the fiduciary lost but avoided most of the requested damages, finding partial indemnification would “contravene[] the claim-by-claim approach to indemnification consistently followed by Delaware courts.”

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Superior Court Complex Commercial Litigation Division Addresses Standing Requirements For Foreign LLCs “Doing Business” In Delaware And Reaffirms That Some Preliminary Agreements Give Rise To Obligations To Negotiate A Final Agreement In Good Faith

Greentech Consultancy Co., WLL v. Hilco IP Services, LLC, C.A. No. N20C-07-052 AML CCLD (Del. Super. Ct. May 11, 2022)
This decision addresses two points of note relating to standing for foreign limited liability companies and to the binding nature of preliminary agreements. More ›

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Superior Court Rejects Defendant’s COVID-related Force Majeure Arguments

Simon Property Group v. Regal Entertainment Group, C. A. No. N21C-01-204-MMJ (Del. Super. Ct. Jul. 6, 2022) (CCLD)
Simon Property, the landlord, sued Regal Entertainment, the tenant, for breach of a commercial lease, including Regal Entertainment’s failure to pay rent during the COVID-19 pandemic in 2020 and 2021. Regal Entertainment asserted several affirmative pandemic-related defenses. Upon Simon Property’s motion, the Court rejected Regal Entertainment’s defenses as a matter of law because the parties’ lease contained a force majeure provision broad enough to cover the pandemic events and because those provisions allocated the risk of loss to Regal Entertainment.

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Chancery Applies Schnell and Blasius Review and Upholds Deadlock-Breaking Stock Issuance

Coster v. UPI Companies, Inc., C.A. No. 2018-0440-KSJM (Del. Ch. May 2, 2022)
This case involved a control dispute of the defendant corporation, UPI Companies. After disputes arose between two fifty percent co-owners, one caused the company to issue long promised equity to an executive, which broke the deadlock. When the other co-owner challenged the transaction, the Court of Chancery found the stock sale satisfied the entire fairness standard and declined to invalidate it. On appeal, the Delaware Supreme Court found the trial court should have examined the sale under Schnell or Blasius. In this decision on remand, the Court of Chancery engaged in a thorough discussion of the Schnell and Blasius standards and the state of Delaware law on those tests. Applying its reading of those standards, the Court found the stock sale was not approved for inequitable purposes and had some good faith basis, and therefore was not invalid under Schnell. The Court also found that the stock sale was not primarily motivated by thwarting the co-owner’s vote, but, instead, was motivated by the best interests of the company and a desire to moot litigation that threatened it in the circumstances. The Court further found that, in any event, the company had a compelling justification for its action and an appropriately tailored response, and thus satisfied Blasius. 

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Superior Court Classifies Cryptocurrency as a Security and Calculates Contract Damages Based on Cryptocurrency Valuation

Diamond Fortress Techs., Inc. v. Everid, Inc., C.A. No. N21C-05-048 PRW CCLD (Del. Super. Ct. Apr. 14, 2022)
Plaintiff Diamond Fortress contracted with the defendant company to provide its software to develop a trading platform for the defendant’s cryptocurrency. In exchange, the defendant agreed to pay plaintiffs in cryptocurrency at the time that defendant made its initial coin offering and at subsequent token distribution events. After the offering and events, the defendant failed, however, to make any payments to the plaintiffs. Plaintiffs filed claims against the defendant for breach of contract, and a default judgment was entered after the defendant failed to appear or respond. After finding that defendant had repudiated and breached the contract, the Court then determined how to calculate damages resulting from breach of a contract to be paid in cryptocurrency, which involved the novel issue under Delaware law of how to classify and value cryptocurrency. More ›

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Chancery Orders Additional Information to Consider Dissolution Petition

In re Matter of Global Safety Labs, Inc., C.A. No. 2022-0309-JTL (Del. Ch. May 12, 2022)
This case concerned the dissolution procedures of the DGCL, specifically Section 280, which with Section 281 establishes an optional, court-supervised wind-up process that provides a safe harbor from post-dissolution liability. In this decision, the Court of Chancery faults the paucity of information the Court regularly sees in such actions, which often proceed ex parte. The Court explained that it requires more information to grant relief, including “about the entity, its history, the path that led to the relief being sought, and the parties who could be affected by the relief.” The Court cited first-day declarations in a bankruptcy proceeding as a helpful model.

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Delaware Supreme Court Interprets Deadline for Bringing Indemnification Claims

North American Leasing, Inc. v. NASDI Holdings, LLC, No. 192, 2020 (Del. Apr. 11, 2022)
Defendants acquired construction entities from plaintiffs and agreed to indemnify plaintiffs for any losses arising from performance and payment bonds on existing projects. Losses occurred in connection with one of the projects in 2017, and plaintiffs gave the defendants notice of indemnification claims for nearly $21 million. Defendants rejected the claims as untimely under the acquisition agreement, which they argued had a strict notice deadline of 2016. More ›

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Chancery Dismisses Contract, Dissolution, and Direct Claims, But Upholds Derivative Claim for Alleged Transfer of Funds Between Medicinal Marijuana Entities

BET FRX LLC v. Myers, C.A. No. 2019-0894-KSJM (Del. Ch. Apr. 27, 2022)
A minority member of a limited liability company had invested $8 million in the LLC. The LLC owned a majority interest in an entity that held a Pennsylvania medical marijuana grower and processor license. In addition to obtaining its membership interest, the plaintiff’s investment also secured appointment rights for one of the three manager positions, rights to participate in board decisions, and a veto right over sixteen types of actions. Ultimately, the plaintiff brought a series of claims in the Court of Chancery, alleging that the other members and their principals had funneled the plaintiff’s investment into a company that they owned—an Ohio-based medical marijuana company—via intercompany loans that were not being repaid and coverage of other corporate expenses. Defendants sought to dismiss all claims. More ›

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