Delaware Business Litigation Report

Chancery Allows Fiduciary Duty Claims to Proceed against Minority Members Who Blocked Financings in Order to Bankrupt Company and Facilitate Unfair Asset Purchase

Skye Mineral Investors, LLC v. DXS Capital (U.S.) Ltd., C.A. No. 2018-0059-JRS (Del. Ch. Feb. 24, 2020) (Slights, V.C.).

Where parties to an LLC agreement do not unambiguously disclaim fiduciary duties, then Delaware law provides by default that managers owe traditional fiduciary duties to the entity and its members. The corporate law principles relating to fiduciary duties of controlling shareholders also apply, including that a minority member who exercises actual control may owe fiduciary duties. In this decision, the Court held that plaintiffs, the majority members of an LLC, adequately alleged that minority members exercised contractual blocking rights in a manner that gave them actual control over financing decisions and then used that control to implement in bad faith a scheme to enable the minority members to acquire the LLC’s assets on the cheap. With those allegations, the Court sustained a non-exculpated claim against the minority members for direct and derivative contract- and fiduciary-based claims. More ›

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Salzburg v. Sciabaccuchi: Delaware Supreme Court Upholds Certificate of Incorporation Provisions Making Federal Courts the Exclusive Fora for Federal Securities Act Claims

In Salzburg v. Sciabaccuchi, 2020 WL 1280785, __ A. 3d __ (Del. Mar. 18, 2020), the Delaware Supreme Court upheld the facial validity under Delaware corporate law of certificate of incorporation provisions making the federal courts the exclusive fora for claims arising under the federal Securities Act of 1933, which requires corporations selling securities to make “full and fair disclosure of relevant information” in a publicly filed registration statement. Although ’33 Act claims may be brought in state or federal court, many corporations and their advisors prefer federal court due to procedural advantages, including a better ability to coordinate parallel suits filed in multiple jurisdictions. The corporations named in the suit accordingly had adopted the federal forum provisions in advance of their IPOs. More ›

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Superior Court Dismisses Fraud Claim Improperly Boot-Strapped to Breach of Contract Claim

Cont’l Fin. Co., LLC, v. ICS Corp., C.A. No. N19C-07-184 AML (Del. Super. Feb. 20, 2020).

This case represents another example of the application of the “bootstrap doctrine” to define the limits of a contract party’s ability to assert a fraud claim against a counter-party. Ruling on a 12(b)(6) motion to dismiss, the Superior Court permitted plaintiff’s breach of contract claim to proceed but granted dismissal of plaintiff’s fraud claim. The Court reasoned the fraud claim was impermissibly boot-strapped to a breach of a contractual duty, and the plaintiff failed plead damages distinct from those allegedly resulting from the contractual breach.  More ›

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Chancery Addresses Civil Conspiracy Elements

O’Gara v. Coleman, C.A. No. 2018-0708-KSJM (Del. Ch. Feb. 14, 2020).

This action arose out of corporate infighting among certain directors and investors at a nutrient-infused water company. The plaintiff, the company’s founder, brought tort and contracts claims against certain former directors and current stockholders, accusing them of wrongfully attempting to seize control of the company. The parties settled several claims, but some defendants and claims remained. In this motion to dismiss decision, the Court of Chancery addresses, inter alia, the elements of a claim for civil conspiracy and, relatedly, the conspiracy theory of jurisdiction.  More ›

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Chancery Finds Pleadings Sufficient to Support Claim that a Corporate Self-Tender Offer was Coercive

Davidow v. LRN Corp., C.A. No. 2019-0150-MTZ (Del. Ch. Feb. 25, 2020).

Delaware law does not invoke the entire fairness test for a voluntary, noncoercive offer by a corporation to buy its own shares. But, as this decision illustrates, Delaware courts will apply the entire fairness test where the self-tender is coercive or the board is interested or lacks independence in approving the transaction. More ›

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Chancery Holds That Res Judicata Precludes Plaintiff’s Claim for Information Rights Under Merger Agreement

Fortis Advisors LLC v. Shire US Holdings, Inc., C.A. No. 2018-0933-JRS (Del. Ch. Feb. 13, 2020).

The doctrine of res judicata bars a plaintiff from splitting claims arising from a single transaction into multiple actions. As this decision illustrates, the requirement to plead all claims arising from a transaction in a lawsuit to avoid claim preclusion on res judicata grounds may include a claim for information rights arising from a merger agreement. A party with information rights should carefully evaluate those rights when bringing a claim for breach of contract, and should not assume that subsequent claims for information rights under the contract will avoid claim preclusion under the doctrine of res judicata. More ›

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Belated Use of Special Committee and Uninformed Stockholder Vote Undermine Bid for Business Judgment Review of Going-Private Merger

The Court of Chancery’s recent decision in Salladay v. Lev, 2020 WL 954032 (Del. Ch. Feb. 27, 2020) denied the director-defendants’ attempt to invoke procedural safeguards – a special committee and independent stockholder approval – to dismiss a stockholder suit challenging a going-private merger. While there was no controlling stockholder and the defendants contended that any board-level conflicts were appropriately addressed, Vice Chancellor Sam Glasscock III reasoned that a special committee of independent directors was not utilized ab initio in the buyout discussions, and that the disclosures to stockholders were materially incomplete.  More ›

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Delaware Corporate and Commercial Case Law 2019 Year in Review

This top ten list summarizes significant decisions of the Delaware Supreme Court and the Delaware Court of Chancery over the past calendar year. Our criteria for selection are that the decision either meaningfully changed Delaware law or provided clarity or guidance on issues relevant to corporate and commercial litigation in Delaware. We present the decisions in no particular order. The list does not include every significant decision, but provides litigants and litigators with an array of decisions on varied issues likely to affect business transactions or business litigation.  More ›

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Delaware Courts Issue Standing Orders Addressing Coronavirus Concerns

Over the last several days, the Delaware Supreme Court, the Court of Chancery and the Superior Court have entered orders concerning COVID-19 precautionary measures (the “Orders”). Each Order indicates it is being entered in light of U.S. government and regulatory determinations that the novel coronavirus presents a public health threat, as well as a recent Delaware Supreme Court statement that persons who may be experiencing symptoms and who have a court date scheduled should notify the appropriate parties. The Court of Chancery’s and Superior Court’s Orders indicate that each Court will conduct proceedings telephonically when practical and efficient. Where it is not efficient to proceed telephonically and a trial or hearing would involve the presence of a person who may have recently been exposed to an infected person, the parties are ordered to confer promptly and then file a joint letter or joint motion indicating the parties' agreements and any areas of disagreement. Among other things, the parties are to consider whether it may be appropriate to use videoconferencing, whether an alternate person (e.g., another attorney or witness) is available, and whether a continuance is appropriate. The Supreme Court’s Order similarly requires parties to confer when an argument may involve the presence of a recently exposed person and to advise the Court concerning any agreements or areas of disagreement.  More ›

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Chancery Denies Motions for Summary Judgment in Tesla Litigation, Questions Remain as to Whether Musk is a Controlling Stockholder

In re Tesla Motors, Inc. S’holder Litig., C.A. No. 12711-VCS (Del. Ch. Feb. 4, 2020).

The Delaware Court of Chancery denied plaintiffs’ and defendants’ (including Elon Musk’s) motions for summary judgment on the grounds that genuine issues of material fact still remain to be determined at trial. The plaintiffs brought the action based on the allegation that Musk improperly influenced the Tesla board of directors to approve Tesla’s acquisition of SolarCity, another entity owned partially by Musk that was purportedly on the verge of insolvency.  More ›

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Claims Alleging that Icahn Entities Schemed to Buy Out Minority Unitholders on the Cheap Survive Motion to Dismiss

In re CVR Refining, LP Unitholder Litig., Consol. C.A. No. 2019-0062-KSJM (Del. Ch. Jan. 31, 2020).

The Court of Chancery declined at the pleadings stage to dismiss claims for breach of a governing limited partnership agreement (the “Agreement”) and tortious interference alleging that entities controlled by Carl Icahn (the “Icahn Entities”) engaged in a multi-step scheme designed to artificially deflate the market price of CVR Refining L.P.’s (the “Partnership”) common units and facilitate an involuntary buyout that conferred a windfall on the Icahn Entities. More ›

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Chancery Appraisal Decision Illustrates the Importance of Reliable Expert Testimony and Witness Credibility to Fair Value Determinations

Manichaean Capital, LLC v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (Del. Ch. Jan. 30, 2020).

Even when its role is to determine the fair value of shares in an appraisal proceeding, credibility matters to the Court of Chancery. Following a three-party business combination, Petitioners (former minority stockholders) exercised appraisal rights under 8 Del. C. § 262. Petitioners and Respondent agreed to use a discounted cash flow analysis to determine the fair value because there was insufficient market-based evidence of fair market value. But the parties’ experts disagreed on the input values and results of the DCF analysis, leaving the Court to “grappl[e] with expert-generated valuation conclusions that [were] solar systems apart.” Mem. Op. 2.

After a lengthy comparison of the competing DCF analyses, the Court concluded that Petitioners’ calculation (with minor adjustments) represented fair value. By contrast, Respondent’s position suffered from significant credibility issues. One of the executives involved in the business combination transactions requested a backdated valuation, misrepresented the date of the valuation in discovery responses, and continued with its misrepresentation until the eve of trial. The Court also found Respondent’s expert was not credible because elements of his valuation approach were bespoke, were not used in the industry, and relied heavily on the ipse dixit of the expert. Complicating things further, Respondent disagreed with its own expert’s calculations and conclusions. These factors, combined with the superior DCF analysis by Petitioner’s expert, led the Court to accept Petitioner’s fair value calculation with only minor adjustments.

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Court of Chancery Finds the Delaware Uniform Fraudulent Transfer Act Grants Standing for Insureds with Contingent, Unmatured Claims to Sue Insurers, but Dismisses Certain Claims as Time-Barred

Burkhart v. Genworth Fin. Inc., C.A. No. 2018-0691-JRS (Del. Ch. Jan. 31, 2020). 

This case illustrates not only that plaintiffs who have only unmatured and contingent claims against a transferor have standing to seek relief under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”), but also that they must comply with that statute’s rules for timely filing to avoid dismissal. Here, the plaintiffs are a class of insureds who hold long-term care insurance policies and insurance agents who receive commission payments from selling the insurance policies. The defendant is Genworth Life Insurance Company (“GLIC”), which underwrote the insurance policies at issue. GLIC allegedly made fraudulent transfers between 2012 and 2014 while GLIC was near insolvency by: (1) declaring $410 million in dividends, and (2) terminating intra-company contracts that provided financial support. The plaintiffs filed an action in 2018 in which they argue that GLIC’s fraudulent transfers violate the DUFTA.  More ›

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Appraisal of Panera Bread: Court of Chancery Again Defers to Deal Price, Denies Request for a Refund of the Amount of Synergies

In re Appraisal of Panera Bread Co., C.A. No. 2017-0593-MTZ (Del. Ch. Jan. 31, 2020).

JAB Holdings B.V. (“JAB”), a private company that also owns Einstein Bros., Caribou Coffee and Krispy Kreme, acquired Panera Bread Company (“Panera”) via a cash-out merger for $315.00 per share on July 18, 2017. Multiple dissenting shareholders (the “Petitioners”) filed an appraisal action, asserting that the fair value of their shares was $361.00 per share. Post-trial, the Court of Chancery disagreed with the Petitioners, ruling that the deal price minus synergies was the best evidence of fair value. This was because Panera had followed a reliable sale process and any flaws in that process did not undermine its reliability. Specifically, the Court held that, among other factors, the parties’ arm’s length negotiations, Panera’s disinterested and independent board, price increases during negotiations, the fact that no other parties bid on Panera either before or after the announcement of the merger, and the outreach that Panera did with potential buyers provided persuasive evidence of a reliable sale process. More ›

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Co-Founder Squeezed Out in Conversion from LLC to Corporation Adequately Pled Claims for Fraud, Breach of Fiduciary Duties, Aiding and Abetting, and Civil Conspiracy

Ogus v. SportTechie, Inc., C.A. No. 2018-0869-AGB (Del. Ch. Jan. 31, 2020). 

Simon Ogus was a co-founder of a sports-technology news company. He owned 44.5 percent of the LLC’s units, held veto power over major decisions of the company, and had employment protection based on a requirement that the company could only terminate his employment for cause. After outside investors began making large investments in the company, several officers and directors persuaded Mr. Ogus to: (1) approve a conversion of the LLC to a corporation; (2) sign a written consent of stockholders to expand the size of the board of directors; and (3) execute a shareholders agreement that gave the company the option to purchase Mr. Ogus’ shares if his employment was terminated for any reason, at fair market value, as determined in good faith by the board. One month later, the company terminated Mr. Ogus without cause and proposed to purchase his shares. Mr. Ogus brought suit, claiming that the officers and directors conspired to remove him from the company and eliminate his 44.5% interest to enrich themselves, and transfer control of the company to Oak View Group, a private equity & venture fund. Defendants moved to dismiss his suit. More ›

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