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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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- February 19, 2021
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Court Of Chancery Permits Validation Of Defective Merger
The Cirillo Family Trust v. Moezinia, C.A. 10116-CB (Del. Ch. July 11, 2018)
This is an interesting decision for three reasons. First, it gives a good discussion of when defective corporate acts can be cured under Section 205 of the DGCL. Even a defective merger is possibly subject to Section 205. Second, it has a good outline of when advice of counsel is a good defense to allegations of director liability. Third, it permits a claim to go forward against corporate officers. This is a good reminder that the Delaware exculpation statute does not apply to officers.
ShareCourt of Chancery Imposes Over $20 Million in Damages on Investment Fund and Its Manager
This notable decision issued by the Court of Chancery holds an investment fund and its manager liable for over $20 million essentially for destroying a Delaware entity’s value. The litigation arises out of a once promising technology company’s downfall into liquidation. The facts involved an investor that leveraged a series of preferred investments into negative control and used that control to secure a self-dealing financing unfavorable to the company, while simultaneously turning away much needed financing opportunities threatening its control. The investor hoped to position the company for a prompt sale in which it would reap the benefits, but that did not pan out, and the company went under. More ›
ShareCourt of Chancery Requires Bad Faith Disclosure Violations for Demand Futility
Ellis v. Gonzalez, C.A. No. 2017-0342-SG (Del. Ch. July 10, 2018)
The pre-suit demand on the board requirement for derivative litigation usually is not excused solely by a sufficiently pled disclosure violation. Rather, as held in this decision and recently in Steinberg v. Bearden, 2018 WL 2434558 (Del. Ch. May 30, 2018), to excuse demand on an independent, disinterested, and duty-of-care-exculpated board on the basis that the directors face a substantial risk of liability for a disclosure violation, the complaint must sufficiently plead the disclosure violation was the product of bad faith. Absent sufficient non-conclusory facts on this point, the complaint will be dismissed.
ShareDelaware Supreme Court Reverses Corwin Dismissal and Stresses Importance of Disclosures
Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018, revised July 27, 2018)
Corwin holds that approval of a transaction by a fully-informed, uncoerced majority of the disinterested stockholders invokes the deferential business judgment standard of review for a post-closing damages action, making the transaction almost certainly immune from further judicial scrutiny. This is an important decision for its discussion of the “informed” approval prerequisite to a Corwin defense. This aspect of Corwin turns on thoroughly-developed standards under Delaware law regarding what is or is not material to the stockholders' decision-making. In that way, the decision is not novel. Yet, because a disclosure violation may prevent what would otherwise be an early dismissal of a breach of fiduciary duty action against directors for damages, the issue is of heightened importance post-Corwin. In the Court’s own words, this case “offers a cautionary reminder to directors and the attorneys who help them craft their disclosures: ‘partial and elliptical disclosures’ cannot facilitate the protection of the business judgment rule under the Corwin doctrine.” Here, the material undisclosed facts concerned a founder’s early dealings with the private equity buyer, pressure on the board, and the degree that this influence may have impacted the sale process structure. The stockholder plaintiffs’ arguments were aided substantially by documents obtained in connection with a pre-suit books and records demand. That is another area of increased importance post-Corwin, given the unavailability of a Corwin defense in that setting and the ability to obtain documents that might help one plead around a later Corwin defense.
ShareDoes Delaware Insist on “Controller” Accountability?
Once again, the Delaware courts are being accused of improperly favoring management in stockholder litigation. Those accusations have periodically surfaced over at least the last 45 years, since Professor Cary’s famous (or infamous”) “race to the bottom” article in the Yale Law Journal. The recent claims of bias might be dismissed as just the rantings of disgruntled plaintiffs’ attorneys. But, there are better rebuttals to those accusations than the all-too-common name calling that seems so popular lately.
Here is just one reason why the Delaware courts continue to fulfill their role of monitoring the management of Delaware corporations. In a series of recent decisions, the Court of Chancery has held that even a less-than-50% stockholder may be deemed to control a corporation. As a result, such a “controller” must prove any self-dealing transaction is entirely fair to the company. This exacting standard of review by the court involves just the kind of close scrutiny the critics of Delaware argue is appropriate to protect stockholders. More ›
ShareCourt of Chancery Awards Damages for Breach of a Director’s Duty of Loyalty
When friends go into business, their ties may fray if the business experiences difficulty and the parties have different views of how to proceed and who is responsible. If the principals are directors of a Delaware corporation, however, their duty of loyalty requires them to eschew self-interest and to do what is best for the corporation and its stakeholders. Moreover, when conflict arises, vague promises among friends do not supplant the requirements for binding agreements. More ›
Court Of Chancery Explains When Claim Is Direct And Survives A Merger
When a merger closes, stockholders of the acquired company generally lose standing to pursue claims, other than direct claims attacking the validity or fairness of the merger itself. Derivative claims, as chose in actions, pass to the purchaser. This is an important decision because it reconciles prior case law regarding when a claim is direct and not derivative and thus survives a merger. More ›
ShareCourt Of Chancery Enforces Agreement To Waive Corporate Opportunity Claims
Alarm.Com Holdings Inc. v. ABS Capital Partners Inc., C.A. 2017-0583-JTL (June 15, 2018)
Under 8 Del C. Section 122(17) a corporation may waive any claim that a corporate opportunity was wrongfully taken by a fiduciary. Private equity firms frequently invest in companies in the same line of business. When that investor also puts a director on the board of its investment, a potential conflict of interest may arises when that director obtains confidential information that may be useful to the other company the investor has invested in the same line of business. This decision holds that a trade secret claim under the Delaware Uniform Trade Secret Act is precluded by the type of waiver permitted by Section 122(17). Thus, investors may invest in competing companies if they get the protection provided by this section of the Delaware General Corporation Law.
ShareCourt Of Chancery Explains Who Is A Controller
In Re Hansen Medical Inc. Stockholders Litigation, C.A. 12316-VCMR (June 18, 2018)
This is another decision in a series of recent decisions where the Court of Chancery had to decide if a less-than-50% stockholder controlled the corporation. This is an important issue because a controller has fiduciary duties to the other stockholders and the intrinsic fairness test apples to the review of any transaction involving that controller. Here the longstanding close relationship of two stockholders who together owned more than 50% of the entity was enough for the complaint alleging they controlled the entity to survive a motion to dismiss. While all the facts alleged in the complaint on that issue are important to the analysis, perhaps the key fact was that the two stockholders in the past had acted together to get a benefit from the corporation that only they received compared to the other stockholders. That showed their strong influence over the corporation.
ShareWhen Is a Seller's Word His Bond?
Every transaction to some extent is based on trust. At least a buyer trusts that a seller is not actively trying to defraud him. But, when is that trust reasonable? That question is important because a buyer claiming fraud must, among other facts, show that it was reasonable for him to rely upon the representations he claims misled him. The recent decision in Edinburgh Holdings v. Education Affiliates, Del. Ch. C. A. 2017-0500-JRS (June 6, 2018), illustrates the importance of pleading facts that support a claim of reasonable reliance on a seller’s representations. More ›
Lewis Lazarus and Albert Manwaring Speak at DSBA Corporate Law Update
Morris James partners Lewis H. Lazarus and Albert H. Manwaring IV participated in a panel discussion titled, Corwin, Appraisal and Alternative Entity Developments: Updates That Transactional Lawyers and Litigators Need To Know, A View From the Bench and Bar" at the annual corporate law CLE sponsored by the Corporation Law Council of the DSBA on June 6th. More ›
Court of Chancery Finds Breach of Fiduciary Duty By Director Selfishly Opposing Cure of Defective Corporate Acts
When a corporation accidentally issues defective stock or takes some other defective corporate act, Delaware law offers avenues to cure under the right set of circumstances. See 8 Del. C. §§ 204, 205. As this decision shows, a director who self-interestedly stands in the way of that cure by attempting to impose selfish conditions breaches his fiduciary duty of loyalty and may be liable for damages. Even if the director later comes around, extra costs incurred from his obstinacy may be charged to him.
ShareCourt of Chancery Awards Fees Under the Corporate Benefit Doctrine in Director Qualifications Bylaw Dispute
Full Value Partners L.P. v. Swiss Helvetia Fund Inc., C.A. No. 2017-0303-AGB (Del. Ch. June 7, 2018)
A representative plaintiff who confers a non-monetary benefit on the represented class will be entitled to an award of attorneys’ fees and expenses under the right set of circumstances. Delaware does not follow the frequently-adopted lodestar method. Rather, it employs a more flexible approach known as the Sugarland factors, which may or may not result in a market hourly-rate. In this decision, the plaintiff conferred such a benefit and earned a handsome reward under the circumstances. Where the company allegedly was selectively enforcing its director qualifications bylaw, the plaintiff was able to seat a director that the board originally opposed and effectively prevented the company from using the bylaw improperly going forward in one respect. For this preservation of shareholder voting rights, the Court entered a fee award of $300,000, equating to a roughly $1,500 hourly-rate.
ShareMeghan A. Adams - Certified Mediator by the DSBA and the Superior Court of Delaware
Morris James is pleased to announce Meghan A. Adams has completed the Delaware State Bar Association’s Advanced Mediation Training and is now a Certified Mediator by the DSBA and the Superior Court of Delaware.
Meghan A. Adams is a member of the firm's Business Litigation group and focuses her practice on Corporate and Commercial Litigation. She represents clients in a wide variety of matters in the Delaware Court of Chancery, Delaware Superior Court, Supreme Court of Delaware and the District of Delaware, including in the areas of corporate governance, complex commercial litigation, stockholder litigation, fiduciary duties, limited liability company and limited partnership disputes, officer and director indemnity and breach of contract. More ›
ShareCourt of Chancery Enforces Broad Director-Like Books and Records Rights in the LLC Context
Obeid v. Gemini Real Estate Advisors LLC, C.A. No. 2017-0510-JTL (Del. Ch. June 5, 2018)
To facilitate the proper exercise of one’s fiduciary duties, the right of directors to inspect a corporation’s books and records is broad, often referred to as unfettered. The right of managers to inspect an LLC’s books and records generally is equivalent, subject to modification in the LLC agreement. A significant showing is required to avoid a fiduciary’s inspection on the basis that is not for a proper purpose, i.e., any purpose reasonably related to the inspector’s fiduciary status. The company must put forward concrete evidence that the fiduciary will violate duties and use the information to harm it. Without such a showing, the Court generally does not assume the role of questioning the fiduciary’s business judgment about the records he needs to do his job. This decision is an example of the LLC failing to prove the manager lacked a proper purpose for his inspection, with the backdrop of much friction and other litigation among the LLC’s several managers.
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