Delaware Business Litigation Report

Chancery Grants Leave to Move for Fees for Overly Aggressive Books and Records Defenses

Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020)

This case illustrates that the Court of Chancery will not accept overly aggressive defenses to books and records actions and may grant fees to discourage such tactics. Section 220 of the Delaware General Corporation Law permits a stockholder plaintiff who has a “credible basis” to suspect wrongdoing by officers and directors to demand inspection of books and records relating to that misconduct. In this case, plaintiff-stockholders of Gilead Sciences, Inc. (“Gilead”) sought to inspect Gilead’s books and records to investigate misconduct. Gilead was subject to numerous lawsuits and government investigations arising out of alleged anticompetitive conduct, mass torts, breach of patents, and false claims relating to the development and marketing of its HIV drugs. The plaintiffs sought books and records about Gilead’s (1) anticompetitive agreements, (2) policies and procedures, (3) senior management materials, (4) communications with the government, and (5) director questionnaires. Gilead refused to produce any documents, even though the plaintiffs had a credible basis to suspect wrongdoing and the records they sought related directly to the misconduct. The Court of Chancery found that “Gilead exemplified the trend of overly aggressive litigation strategies by blocking legitimate discovery, misrepresenting the record, and taking positions for no apparent purpose other than obstructing the exercise of Plaintiffs’ statutory rights.” The Court, therefore, granted plaintiffs leave to move for fee shifting.  More ›

Share

Delaware Supreme Court Finds that Court of Chancery Had Jurisdiction To Enjoin a Collateral Attack on a Prior Arbitration Award Under the Federal Arbitration Act

Gulf LNG Energy, LLC v. ENI USA Gas Mktg., LLC, No. 22, 2020 (Del. Nov. 17, 2020)

This decision confirms that the Court of Chancery has jurisdiction to enjoin a collateral attack on a prior arbitration award. The Delaware Supreme Court also reasons that the determination of whether a second arbitration collaterally attacks a prior arbitration does not depend on the res judicata or collateral estoppel effect of claims raised or decided in the prior arbitration, but rather whether the claimant asserts irregularities in the prior arbitration or seeks to rectify the harm it suffered, which are issues subject to exclusive review under the post-award procedure in the Federal Arbitration Act (“FAA”). More ›

Share

Chancery Dismisses Defendants From Action Against Their Own Wishes, Describing the Matter as an “Erewhon-like” Inversion of the Parties’ Typical Positions

Stimwave Technologies Inc. v. Laura Tyler Perryman, C.A. No. 2019-1003-SG (Del. Ch. Nov. 17, 2020)

Under Court of Chancery Rule 41(a), a Delaware plaintiff may voluntarily dismiss its own complaint without prejudice, provided that (i) the defendant has not yet filed an answer; (ii) the defendant has not yet filed a motion for summary judgment; and (iii) the defendant has not filed a motion to dismiss which has been answered by the plaintiff. In accordance with the abovementioned standards, where a defendant (1) files a motion to dismiss, and (2) the plaintiff thereafter submits an answering brief in opposition to that motion, the plaintiff may no longer voluntarily dismiss the action while that motion is pending. More ›

Share

CCLD Holds Indemnification Provision Does Not Cover First-Party Claims

Ashland LLC v. Samuel J. Heyman 1981 Continuing Trust for Lazarus S. Heyman, C.A. No. N15C-10-176 EMD CCLD (Del. Super. Ct. Nov. 10, 2020)

This case illustrates that Delaware courts will follow the “American Rule” that parties must pay their own legal fees unless they otherwise agree. In this case, the parties’ Stock Purchase Agreement (“SPA”) required defendants to indemnify against “Losses” – which was defined to include reasonable attorneys’ fees and expenses. The Court previously had found that the defendants breached a section of the SPA. Plaintiff then sought to recover as “Losses” its attorneys’ fees and expenses in proving the breach. The Court reasoned that indemnification provisions are presumed not to provide for fee-shifting in claims between the parties (first-party claims) absent a clear and unequivocal articulation of that intent. While there is no specific language that must be used, the SPA here contained a separate, relatively straightforward and narrower prevailing party fee-shifting provision, which did not apply to the claims at issue. Because the indemnification provision did not clearly support fee-shifting for first-party claims, and because the plaintiff was not entitled to attorneys’ fees based on the straightforward fee-shifting provision to which the parties had agreed, the Court granted defendants’ motion for summary judgment that plaintiff was not entitled to recover its attorneys’ fees and expenses under the indemnification provision.

Share

Chancery Dismisses Section 220 Complaint on Jurisdictional Grounds, Finding That Plaintiffs Filed Seven Hours Prematurely

MaD Investors GRMD, LLC, et al. v. GR Cos., Inc., C.A. No. 2020-0589-MTZ (Del. Ch. Oct. 28, 2020)
At 5:03 p.m., on the fifth day after serving a Section 220 demand (the “Demand”) on GR Companies, Inc. (the “Company”), MaD Investors GRMD, LLC and MaD Investors GRPA, LLC (together, “Plaintiffs”), filed a complaint to compel inspection of books and records pursuant to 8 Del. C. § 220 (the “Complaint”). The Company filed a motion to dismiss, asserting that Plaintiffs had filed the Complaint prematurely. Plaintiffs filed a cross-motion for leave to amend the Complaint (the “Leave Motion”).  More ›

Share

Chancery Sustains CEO’s Contract Claims in WeWork Litigation

In re WeWork Litig., Consol. C.A. No. 2020-0258-AGB (Del. Ch. Oct. 30, 2020).
A company facing a liquidity crisis (the shared working space company, WeWork), its outgoing CEO (Adam Nuemann), and two related SoftBank investment entities that collectively owned more than forty percent of the company’s equity entered into a Master Transaction Agreement (“MTA”). The MTA was designed to provide funding to the company, facilitate the CEO’s exit, and provide liquidity to minority stockholders. The MTA required a specific sequence of transactions from the entities: (1) equity financing; (2) stock purchase via a tender offer; and (3) debt financing after the closing of the tender offer. The tender offer’s closing was subject to certain conditions, which the parties to the MTA were required to use their reasonable best efforts to meet. More ›

Share

Chancery Addresses Fiduciary Duty Claims Related To Financial Statements Created For Merger

In re Baker Hughes Inc. Merger Litigation, C.A. No. 2019-0638 AGB (Del. Ch. Oct. 27, 2020).
This decision arose out of a merger involving Baker Hughes and the oil and gas segment of General Electric (GE). Stockholders of Baker Hughes brought post-closing breach of fiduciary duty claims against certain officers of Baker Hughes and aiding and abetting claims against GE, with the allegations focused on certain financial statements provided by GE in connection with the merger. GE did not maintain separate statements for its oil and gas business line in the ordinary course. The parties accounted for this by having GE prepare unaudited financial statements for that business line and conditioning closing obligations on GE providing audited financial statements that did not differ materially in an adverse manner.  More ›

Share

Chancery Holds California Statutory Bar to Choice-of-Forum Clauses in Employment Contracts Prevents Exercise of Personal Jurisdiction – Despite Parties’ Choice of Delaware Law and Agreement to Litigate in Delaware

Focus Fin. Partners, LLC v. Holsopple, C.A. No. 2020-0188-JTL (Del. Ch. Oct. 26, 2020).
Delaware law promotes freedom of contract, and Delaware courts enforce contractual choice-of-forum and choice-of-law provisions, including those in employment-related contracts. Recently, however, several Delaware cases have considered whether such provisions can be enforced against non-residents in the face of contrary substantive law or fundamental public policy in their home jurisdiction. In California, a statute (“Section 925”) makes choice-of-law and choice-of-forum provisions voidable by the employee if the provisions appears in an agreement signed as a condition of employment. Here, the Court addressed how to reconcile Section 925 with the parties’ agreement to resolve disputes in Delaware and to apply Delaware law. Specifically, when the defendant (a former employee who lives and works in San Francisco) was hired, he received incentive units pursuant to agreements that contained restrictive covenants and selected Delaware as the exclusive forum for disputes, and selected Delaware law as the applicable law. The plaintiff brought suit in Delaware to enforce the restrictive covenants, and the employee moved to dismiss for lack of personal jurisdiction. More ›

Share

Delaware Supreme Court Clarifies When Books and Records Requests to Investigate Wrongdoing or Mismanagement Have a “Proper Purpose”

Section 220 of the Delaware General Corporation Law permits a stockholder to inspect corporate books and records for a “proper purpose” reasonably related to her interests as a stockholder. In AmerisourceBergen Corp. v. Lebanon Cty. Employees’ Ret. Fund, __ A.3d __, 2020 WL 7266362 (Del. Dec. 10, 2020), the Delaware Supreme Court held that a stockholder who has a “credible basis” to investigate potential wrongdoing or mismanagement need not identify a specific intended use or “end” for the information requested. In addition, the Court clarified that a stockholder need not show, as a matter of law, that the potential wrongdoing is actionable. Rather, a “credible basis” to suspect possible wrongdoing or mismanagement is sufficient.  More ›

Share

Delaware Supreme Court Affirms CCLD Ruling Relying on Expert’s “Dual Hypothetical World” Damages Model for Measuring Business-Interruption Loss

XL Ins. Am., Inc., et al. v. Noranda Aluminum Holding Corp., No. 444, 2019 (Del. Oct. 2, 2020)
An aluminum manufacturer (the “Insured”) decided not to rebuild and resume operations at its facility following two operation-disabling accidents. The Insured made a claim pursuant to its “all risks” property-insurance policy (the “Policy”) to recoup certain amounts including business-interruption losses. The insurers (the “Insurers”) and the Insured each hired expert forensic accountants who, relying on different damages models, rendered widely divergent calculations of the Insured’s loss. Following a seven day trial in Superior Court wherein both parties’ experts presented their methodologies for calculating the business-interruption losses, the jury found in favor of the Insured. More ›

Share

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 ›

Share

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 ›

Share

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 ›

Share

Mindbody Deal Case Provides Conflict Takeaways For Boards

More › Share

Chancery Questions Utility of Aronson Test, Dismisses Derivative Suit of Facebook Stockholder for Failure To Allege Demand Futility

United Food and Comm. Workers Union v. Zuckerberg, C.A. No. 2018-0671-JTL (Del. Ch. Oct. 26, 2020)
In its recent decision in United Food and Comm. Workers Union v. Zuckerberg, the Court of Chancery discussed the legal tests to demonstrate demand futility in derivative actions under the seminal cases of Aronson and Rales. Reconciling longstanding and recent case law, the Court ruled that demand futility turns on whether at the time of filing of the complaint, the majority of a board of directors is disinterested, independent, and capable of impartially evaluating a litigation demand to bring suit on behalf of a company. More ›

Share