Delaware Business Litigation Report

Chancery Rules That The Standard Of Proof For Contempt Motions Is The Preponderance Of The Evidence, Not Clear And Convincing Evidence

inTEAM Associates, LLC v. Heartland Payment Systems, LLC, C.A. No. 11523-VCF (Del. Ch. Oct. 29, 2021)
Court of Chancery Rule 70(b) empowers the Court to hold a party in contempt for, among other things, failing to obey an injunctive order. The standard of proof required to obtain a contempt order has not been uniformly applied. This recent decision applies the preponderance of the evidence standard, in contrast to certain decisions over the past decade applying the clear and convincing evidence standard. More ›

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Chancery Holds Plaintiffs Adequately Pled Wrongful Refusal Where Board Did Not Correct Unauthorized Charter Amendments

Drachman v. Cukier, C.A. No. 2019-0728-LWW (Del. Ch. Oct. 29, 2021)
To survive a motion to dismiss in the demand refusal context, the plaintiff must allege facts that create a reasonable doubt that the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis or that the board acted in good faith, consistent with its duty of loyalty. Where the board’s response and other circumstances give rise to a reasonable inference that directors did not care about a clear, continuing violation of law, the standard for wrongful refusal may be met.  More ›

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Chancery Applies Plain Language of a Merger Covenant To Dismiss Acquirer’s Untimely Indemnification Claim and Deny Sellers’ Request for Detailed Annual Reports

Supernus Pharms., Inc. v. Reich Consulting Grp., Inc., C.A. No. 2020-0217-MTZ (Del. Ch. Oct. 29, 2021)
Supernus Pharmaceuticals, Inc. acquired biotech startup Biscayne Neurotherapeutics, Inc. pursuant to a 2018 merger agreement. In 2019, Supernus submitted indemnification claim notices to Reich Consulting Group, Inc., the security holder representative for Biscayne. Subsequently, Supernus filed an indemnification action against Reich in the Court of Chancery. Following trial, plaintiff Supernus’s only remaining indemnification claim was based on a provision in the merger agreement that required Biscayne to operate in the ordinary course of business during a specific period of time (“Ordinary Course Covenant”). More ›

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Presented with Documents Outside the Pleadings, Chancery Converts Motion To Dismiss to Motion for Summary Judgment and Allows Discovery

Totta v. CCSB Fin. Corp., C.A. No. 2021-0173-KSJM (Del. Ch. Oct. 20, 2021)
While the Court may take judicial notice of the contents of materials like newspaper articles, public filings and websites for certain purposes, it generally may not do so to establish the truth of their contents. Where, as here, a party relies on documents outside the pleadings, the Court may convert a motion to dismiss into a motion for summary judgment, and therefore deny the motion. More ›

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Chancery Dismisses Implied Covenant Claim For Former Stockholders’ Alleged Improper Demands That Company Take Actions To Achieve Earn-out Milestones

Pacira Biosciences, Inc. v. Fortis Advisors LLC, C.A. No. 2020-0694-PAF (Del. Ch. Oct. 25, 2021)
There generally cannot be a claim under the implied covenant of good faith and fair dealing for conduct that is addressed by the plain language of an agreement. Even when a contract is silent, the Court will not use the covenant to rewrite the contract to imply contractual provisions that a party failed to obtain at the bargaining table. More ›

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In Recent Facebook Decisions, Chancery Permits Demand-Futility Plaintiffs to Proceed Before Demand-Refused Plaintiff

Feuer v. Zuckerberg, C.A. No. 2019-0324-JRS & In re Facebook, Inc. Deriv. Litig., Consol. C.A. 2018-0307 (Del. Ch. Oct. 5, 2021), rearg. denied (Del. Ch. Nov. 8, 2021). 
Recent decisions in the Facebook derivative litigation addressed issues of case management where competing groups of derivative plaintiffs disagree about whether making a pre-litigation demand upon the board was futile, and where disputes are raised about whether the suits should be consolidated, and which theories should proceed first. More ›

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Delaware Court of Chancery Holds That Scope of Director and Officer Indemnification Under D&O Policy Is Within Exclusive Jurisdiction Of The Delaware Superior Court

Ernesto Rodriguez et al. v. Great American Insurance Company, C.A. No. 2020-0387-JRS (Del. Ch. Oct. 20, 2021)
The Court of Chancery’s subject matter jurisdiction is limited, and arises in three circumstances: (1) the complaint asserts an equitable claim; (2) the complaint seeks an equitable remedy and there is no adequate remedy at law; or (3) jurisdiction is vested in the Court of Chancery by statute. In this recent decision, the Court of Chancery held that its limited subject matter jurisdiction did not extend to determine the scope of a Delaware corporation’s directors and officers (D&O) insurance policy. More ›

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Chancery Resolves Contingent Claim Security Dispute Between Altaba and Verizon in Altaba’s Judicial Dissolution Proceedings

In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021)
Petitioner Altaba (formerly Yahoo!) implemented a statutory dissolution process whereby the Delaware Court of Chancery was charged with overseeing the winding up of Altaba’s affairs, including resolving any disputes about the amount and form of security to set aside for contingent, conditional, or unmatured contractual claims. In connection with this process, claimant Verizon objected to the amount and form of security that Altaba agreed to set aside to satisfy Verizon’s conditional claim relating to indemnification rights associated with consumer class action lawsuits against Altaba. More ›

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Delaware Court of Chancery Dismisses Caremark Claim Arising From Marriott Cybersecurity Breach

Previously published on Business Law Today

Fire Ret. Sys. of St. Louis v. Sorenson, et al., 2021 WL 4593777 (Del. Ch. Oct. 5, 2021).
The Delaware Court of Chancery dismissed pursuant to Rule 23.1 derivative claims arising from the hack of roughly 500 million users’ personal data following Marriott’s 2016 acquisition of Starwood Hotels and Resorts – one of the largest hacks ever, an event that spawned lawsuits and governmental investigations. Among other things, the stockholder-plaintiff failed to allege with particularity facts showing that a majority of the board of directors consciously disregarded “red flags” showing alleged non-compliance data privacy norms. While “[w]ith hindsight knowledge of the extent of the data breach,” the board’s remediation plan was implemented “probably too slow.” Id. at *16. But, the court reasoned, “the difference between a flawed effort and a deliberate failure to act is one of extent and intent. A Caremark violation requires the plaintiff to demonstrate the latter.” Id. at *19. Accordingly, the court dismissed the plaintiff’s complaint.

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Delaware Court of Chancery Upholds Incumbent Directors’ Decision not to Excuse Stockholders’ Non-Compliance with Advance Notice Bylaw

Previously posted on Business Law Today

Rosenbaum v. CytoDyn Inc., 2021 WL 4775410 (Del. Ch. Oct. 13, 2021)
The Delaware Court of Chancery recently upheld incumbents’ decision not to include insurgent director nominees on the ballot due to their failure to comply with an advance notice bylaw. For months, the director nominees and certain affiliated stockholders were aware of the requirements of the bylaw, which had been adopted on a clear day. On the eve of the deadline, they submitted a deficient notice that failed to disclose (i) the supporters of the nominees or their proposals, and (ii) the fact one nominee recently tried to have the corporation purchase his separate business, and that he may do so again. The court reasoned that, had the stockholders proceeded sooner, and submitted a deficient notice with “ample time” before the deadline, then directors exercising their fiduciary duties may have had to work with the dissidents to address the deficiencies. Id. at *17. As it stood, however, the incumbents’ decision to enforce the bylaw did not evince “manipulative conduct” in violation of the incumbents’ fiduciary duties. See id. at *14-17. 

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Chancery Denies Motion to Compel Director’s Privileged Communications Stored on Third-Party’s Email Server

In Re Dell Technologies Inc Class V Stockholders Litigation, Consol. C.A. No. 2018-0816-JTL (Del. Ch. Sept. 17, 2021) (TRANSCRIPT)
A director utilizing an email account associated with a different company for board service communications might unintentionally compromise otherwise privileged communications. Here, a member of Dell’s board of directors served on a special committee and utilized an email account associated with his former employer to communicate with the committee’s lawyers. Plaintiff moved to compel the production of otherwise privileged communications on his account, raising the question of whether the director had a reasonable expectation of privacy in his communications. More ›

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Delaware Supreme Court Overrules Gentile, Resolving Tension in Legal Test To Determine Whether a Claim Is Direct or Derivative

Brookfield Asset Mgmt., Inc. v. Rosson, No. 406, 2020 (Del. Sept. 20, 2021)
Seeking to bring clarity to the issue of whether a claim is direct or derivative—a potentially outcome-determinative issue—the Delaware Supreme Court overturned its own precedent in Gentile v. Rossette, 906 A.2d 91 (Del. 2006). More ›

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Chancery Addresses Indemnification Rights Following CEO’s Partial Success On Underlying Claims, Including Success Based on Technicalities

Evans v. Avande, Inc. , C. A. No. 2018-0454-LWW (Del. Ch. Sept. 23, 2021)
The departure of a company’s CEO was contentious. After his termination, the company filed an action in the Court of Chancery, alleging that the CEO had breached his duty of loyalty, sought a declaratory judgment that his removal was valid and effective, and further asserted claims for tortious interference, defamation, and conversion against the CEO. After trial, the Court concluded that the CEO had breached his duty of loyalty but that the company had failed to brief, and therefore had waived, its claims for declaratory judgment, tortious interference, defamation, and conversion. On the basis of mandatory indemnification rights in the company’s charter and bylaws, the CEO filed a complaint in the Court of Chancery seeking indemnification for his fees incurred defending against the company’s suit. More ›

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Chancery Finds Adversity Between Directors and Formation of Special Committee Shields Against Production of Company-Privileged Information

In re: Howard Midstream Energy Partners, LLC, C.A. No. 2021-0487-LWW (Del. Ch. Sept. 22, 2021)
Issues of corporate privilege among directors entail a fact-specific analysis when a dispute arises among them. Here, the Court of Chancery considered a motion to compel brought by former directors and officers who claimed they were “ambushed” in a corporate “coup.” Because the directors should have considered themselves adverse to the corporation, and because a special committee was formed to deal with the petitioners’ potential separation from the company, the Court denied the petitioners’ motion to compel communications between the other directors and the company withheld as privileged.  More ›

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Chancery Applies Recent Zuckerberg Decision and Holds That Demand Was Not Excused

Genworth Fin., Inc. Consol. Deriv. Litig., C.A. No. 11901-VCS (Del. Ch. Sept. 29, 2021)
In a demand futility analysis, Delaware courts have traditionally applied the Rales and Aronson decisions. However, the Delaware Supreme Court recently adopted the Zuckerberg test. Under this new three-part test, Delaware courts ask: (1) whether the director received a material personal benefit from the alleged misconduct of the litigation demand; (2) whether the director would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand; and (3) whether the director lacks independence from someone who received a material benefit from the alleged misconduct that is the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are subject to the litigation demand. More ›

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