Delaware Business Litigation Report

Court of Chancery Explains Contract, Fraud, and Fiduciary Duty Standards in Contingent Deal Price Dispute

Edinburgh Holdings Inc. v. Education Affiliates Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018)

It is common for parties to an acquisition to structure some portion of the purchase price as contingent on the acquired company’s post-close performance. With some frequency, a party dissatisfied with the resulting payment sues for breach of contract and may point the finger at those in charge during the relevant period for measurement. Out of this particular example comes reminders on well-settled standards for breach of the implied covenant of good faith and fair dealing, fraudulent inducement, and breach of fiduciary duty.  For instance, the implied covenant may be deployed as a defense to a breach of contract claim based on one party preventing the other’s performance, but it may not be used as an affirmative claim to override a contract’s express terms.  Further, Delaware law does not permit bootstrapping fraudulent inducement claims onto contract claims by alleging that a party never intended to perform its obligations.  Additionally, predictions about future performance generally cannot be the basis for fraud.  Finally, Delaware courts will dismiss a breach of fiduciary duty claim that is entirely duplicative of a breach of contract claim.

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Delaware Superior Court Explains Statute Of Frauds

World Class Wholesale LLC v. Star Industries Inc., C.A. N17C-05-093 MMJ (May 22,2018)

This decision explains that when a contract may be validly terminated in less than a year the statute of frauds does not apply.

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Delaware Superior Court Explains When Statute Of Limitations Accrues

Black Diamond Hope House Inc. v. U&I Investments LLC, C.A. K15C-12-034 JJC (May 22, 2018)

If a contract spells out when the time to sue under it starts to run, the time of discovery rule does not apply. Instead, the contract provision for accrual of a claim governs.

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Delaware Superior Court Requires Contract Claim Be Plead For Prejudgment Interest To Start To Accrue

Viking Pump Inc. v. Century Indemnity Company, C.A. N10C-06-141 PRW CCLD (May 23, 2018)

This decision has an important warning. A complaint for a declaratory judgment does not alone entitle a plaintiff to a monetary judgment when its interpretation of a contract is upheld and the contract has been breached. Thus when the defendant then pays what is due and thereby negates the plaintiff’s ability to file a breach of contract case, the court will not award prejudgment interest even if the payment is years overdue. In short, add a breach of contract claim to any declaratory judgment complaint.

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Chancery Court Declines Stockholder Invitations to Expand Transactions Subject to Appraisal Rights

Appraisal rights have been the subject of increased focus in the current, post-Corwinenvironment, in which a fully-informed noncoerced stockholder vote suffices to dispose of most M&A challenges. In two recent decisions, the Delaware Court of Chancery considered attempts by stockholder-plaintiffs to expand the scope of transactions subject to appraisal rights.  In both cases, the court reinforced that appraisal rights are not available in transactions that do not satisfy 8 Del. C. Section 262’s express criteria. In doing so, the court rejected stockholder-plaintiffs’ arguments that appraisal rights should be available in the circumstances.

Akile v. Rite Aid, C.A. No. 2018-0305-AGB (Del. Ch. May 9, 2018) (Transcript).

In early May, the Court of Chancery declined to expedite an M&A challenge premised upon Rite Aid Corp.’s (Rite Aid) alleged failure to disclose that its proposed acquisition by Albertsons Companies, Inc. (Albertsons) triggered appraisal rights.

The acquisition at issue is to be effected by a merger between Rite Aid and a wholly owned subsidiary of Albertsons. Under the merger agreement, each share of Rite Aid stock will be exchanged for a partial share of Albertsons common stock, plus (either an additional fractional share of Albertsons stock or cash, at the election of each stockholder. More ›

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Court Of Chancery Explains Contract Reformation Law In Earn-Out Context

Glidepath Limited v. Beumer Corporation, C.A. No. 1220-VCL (Del. Ch. June 4, 2018)

This decision addresses two contracting parties’ divergent expectations relating to whether a delayed closing affected the agreement’s earn-out period.  The parties failed to alter the contract to adjust the earn-out period after a delayed closing had the effect of starting the period prior to closing.  The negatively-affected party argued in favor of reforming the earn-out period to take into account the delayed closing.  As the Court explains, however, reformation under Delaware law requires clear and convincing proof of a mutual mistake in drafting a document or unilateral mistake that is known to the other party who remains silent.  Both circumstances were absent here.

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Court Of Chancery Holds That Dr. Pepper And Keurig Reverse Triangular Merger Does Not Trigger Appraisal Rights

City Of North Miami Beach General Employees’ Retirement Plan v. Dr. Pepper Snapple Group Inc., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018)

In a reverse triangular merger, a parent company uses a subsidiary to acquire a target, with that subsidiary then being absorbed by the target.  That is how the Dr. Pepper and Keurig companies structured their deal.  Dr. Pepper would be the resulting parent company, with Dr. Pepper’s stockholders gaining cash but retaining their stock, and with Keurig’s stockholders gaining a controlling interest in Dr. Pepper.  Certain Dr. Pepper stockholders sued claiming that they had appraisal rights to a judicially-determined fair value in connection with the transaction under Section 262 of the DGCL, which were being violated.  More ›

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Court Of Chancery Dismisses Derivative Complaint Alleging Disclosure Violations

Steinberg v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018)

This is an interesting decision for its discussion of when pre-suit demand on the board is not excused for a derivative complaint alleging the directors made improper disclosures to stockholders.  Applying the well-known Rales test for demand futility, the Court’s focus here was on the absence of particularized allegations from which it was reasonable to infer that a majority of the directors deliberately caused the corporation to issue certain allegedly misleading statements.  When that is the case in a suit relying on a bad faith claim, the board doesn’t face a substantial threat of personal liability capable of excusing demand.

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Court Of Chancery Denies Post-Affirmance Request To Increase Fee Award

The Marilyn Abrams Living Trust v. Pope Investments LLC, C.A. No. 12829-VCL (Del. Ch. May 29, 2018)

When a party wins an attorneys’ fee award under the bad faith exception to the American Rule, and the final award is affirmed on appeal, may it also seek fees for successfully defending the appeal back in the trial court?  May the same party seek to increase the original award back in the trial court when it inadvertently omitted some trial-court fees the first time around? More ›

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Supreme Court Adopts Rules To Determine If Contract Was Formed

Eagle Force Holdings LLC v. Campbell,  No. 399, 2017 (Del. May 24, 2018)

When have the parties actually formed a contract? In this decision the Supreme Court adopts the Osborn decision as the analytical framework to determine if they manifested agreement, if the essential terms were adopted and so on.

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Court Of Chancery Stresses Proper Procedure When Relying On A Contractual Safe Harbor In The MLP Context

In Re Energy Transfer Equity, L.P. Unitholder Litigation, C.A. No. 12197-VCG (Del. Ch. May 17, 2018)

Conflicted transactions are commonplace in the master limited partnership (MLP) context.  The entity’s operating agreement usually authorizes conflicted transactions that are “fair and reasonable” to the entity, or some similar phrase.  The same agreements often provide one or more safe harbors capable of creating a presumption of fairness and reasonableness, such as using a conflicts committee process. This decision teaches, among other things, that if managers want to take advantage of such a safe harbor, proper process matters.  If, for example, a conflicts committee is not properly formed, its approval will not insulate the transaction from judicial review nor avoid potential liability for the conflicted managers.  Technicalities matter and it is best to start all over again if a flaw is identified rather than trying to rewrite history.

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Self-Dealing Conduct Supporting Fiduciary-Duty Claims Was Covered by Contractual Duties Imposed in the LLC Agreement

The Delaware Limited Liability Company Act’s policy is to give the maximum effect to the principle of freedom of contract in LLC operating agreements. The act permits parties to eliminate common-law fiduciary duties, and replace them with contractual duties that are often more limited in scope than default common-law fiduciary duties. While parties may not eliminate the implied covenant of good faith and fair dealing in an operating agreement, the implied covenant only operates to imply terms essential to fill gaps necessary to meet the reasonable expectations of the parties as reflected in the express terms of the operating agreement. More ›

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Delaware Super Lawyers® 2018 Recognizes 10 Morris James Attorneys

Delaware Super Lawyers® magazine has recognized five Morris James partners as top legal counsel in Delaware and five "Rising Stars®" attorneys. "Rising Stars®” is a recognition for lawyers who are 40 or under, or who have been practicing for 10 years or less. 

Super Lawyers® selects outstanding lawyers from more than 70 practice areas throughout the United States who have attained a high degree of peer recognition and professional achievement. The selection process includes independent research, peer nominations, and peer evaluations. Only the top five percent of attorneys in each state are honored as Super Lawyers in this annual list, and the Rising Star selection is limited to only 2.5 percent of eligible attorneys, according to Super Lawyers’ website.

Morris James attorneys recognized on the 2018 Delaware Super Lawyers® list are:

Business Litigation:
P. Clarkson Collins
Jason C. Jowers
Lewis H. Lazarus
Edward M. McNally 

Employment and Labor:
David H. Williams 

Business Litigation Rising Stars:
Meghan A. Adams
Albert J. Carroll
Bryan Townsend
Patricia A. Winston 

Medical Malpractice Rising Stars:
Joshua Meyeroff

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Court of Chancery Defends Aruba Networks Appraisal Decision

Verition Partners Master Fund Ltd. v. Aruba Networks Inc., C.A. No. 11448-VCL (Del. Ch. May 21, 2018)

This opinion arises out of the appraisal proceeding relating to Hewlett-Packard’s purchase of Aruba Networks. The case led to two notable opinions, so far.  More ›

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Court of Chancery Declines To Restrain Controller In Proposed Viacom-CBS Deal

CBS Corp., et al. v. National Amusements, Inc., et al., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018) (Letter Op.)

Arising out of the highly-publicized dispute over the proposed transaction involving CBS and Viacom, each controlled by the Redstones, this decision is both front-page newsworthy and legally significant.  CBS and Viacom used to be one entity but split.  The Redstones retained voting control in each through a dual-class voting structure.  Later, the Redstones began pushing to merge the entities once again and both entities formed special committees to consider the proposal.  More ›

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