Delaware Business Litigation Report

Court Of Chancery Explains Basis For Inspection Of Alleged Wrongdoing

Silverberg v. ATC Healthcare Inc., C.A. 2017-0242-JRS (December 5, 2017)

While the standard to win the right to inspect corporate records to investigate alleged wrongdoing is a lenient one, it is still not enough to just allege something was done improperly. As this decision shows, you still need to prove some factual basis for the inspection. Just showing the contract with an insider was amended does not get you the right to inspect.

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Superior Court Explains When Fraud Claims May be Brought

Novipax Holdings LLC v. Sealed Air Corporation, No. N17C-03-1682 (November 28, 2017)

This is an interesting decision because it explains: (1) when a fraud claim may be brought despite anti-reliance provisions in a contract and (2) when a fraud claim does not overlap and is thereby precluded by a contract claim based on similar facts. In each case, the inquiry is very fact specific.

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Superior Court Rules When Fees Recoverable

Clean Harbors Inc. v. Union Pacific Corporation, No. N15C-07-081 MMJ CCLD (Nov. 15, 2017)

When an obligation to indemnify includes the fees incurred in the underlying litigation is a surprisingly frequent question. This decision works its way through a series of contractual provisions to answer that question. The lesson is that the contract needs to specifically say fees are to be included.

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Superior Court Explains How To Prove Fees

The Boeing Company v. Spirit Aerosystems Inc., No. N14C-12-055 EMD CCLD (Dec. 5, 2017)

This decision explains the process and proof required to establish the amount of a fees award.

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Court Of Chancery Explains Conspiracy Jurisdiction

Perry v. Neupert, C.A. 2017-0290-VCL (December 6, 2017)

The conspiracy theory of jurisdiction developed in the Istituto Bancario decision is often misunderstood, for good reasons. This decision explains the theory in a careful and detailed way that is useful for those trying to obtain jurisdiction over non-residents of Delaware.

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Court Of Chancery Applies Limitations Outside Of Arbitration

HBMA Holdings LLC v. LSF9 Stardust Holdings LLC, C.A. 12806-VCMR (December 8, 2017)

This decision illustrates the dangers of not following the limited contractual time to file a dispute and instead relying on an arbitration provision to resolve that dispute. Exactly what the arbitrator is going to resolve was not clear to the plaintiff who filed a complaint to cover any claims not subject to arbitration. However, that complaint was not filed within the time permitted by the parties’ agreement. Hence, the complaint was dismissed.

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Court Of Chancery Denies Receivership Petition For Failure To Prove Insolvency

In re: Geneius Biotechnology Inc., C.A. 2017-0297-TMR (December 8, 2017)

This decision explains what is needed to prove a corporation is insolvent so that a receiver should be appointed for it. It is not enough to just use the balance sheet, but instead additional proof of the actual values of assets needs to be provided when those assets may be worth more than their book value.

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Court Of Chancery Enforces Oral Agreement To Add Directors

Sarissa Capital Domestic Fund LP v. Innoviva Inc., C.A. 2017-0309-JRS (December 8, 2017)

This is a great explanation of when a director is authorized to enter into an oral agreement that is enforceable, here to add two directors to a corporate board. To make the agreement depend on entering into a written contract, there must be a “positive agreement” that the oral agreement is not otherwise enforceable.

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Court Of Chancery Expands MFW To Recapitalization

IRA Trust FBO Bobbie Ahmed v. Crane, C.A.. 12742-CB (December 11, 2017)

This is an important decision because it extends the holding of MFW to a stock reclassification. Under the 6-part test of MFW, the business judgment standard of review applied and the complaint was dismissed. The opinion is particularly useful for its historical review of how the decisional law has evolved to cover many different types of transactions with a controller and when, but for the protections for stockholders provided by MFW, the intrinsic fairness test would have applied to the Court’s analysis.

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Court Of Chancery Determines When A Proxy Is Irrevocable And When It Has Jurisdiction To Decide Equitable Ownership In A Section 225 Case

Zohar II 2005-1 Limited v. FSAR Holdings Inc., C.A. No. 12946-VCS (Nov. 30, 2017)

This is an important decision for two reasons. First, it determines when a proxy is irrevocable under Delaware law. To be irrevocable under Section 212 of the DGCL, the proxy must be coupled with an interest. While the “interest” requirement is quite broad, the “coupled” requirement is more strict. The “interest” involved must be held by the person or entity receiving the proxy in order to be “coupled.” Thus, when the proxy is in favor of “X”, but the “interest” supporting the grant of the proxy is for “Y”, the proxy is not irrevocable. This prevents a proxy holder from voting in a way that may be inconsistent with the proxy’s purpose. More ›

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Court Of Chancery Applies Corwin And Test For Control

Peter Van Der Fluit v. Yates, C.A. No. 12553-VCMR (Nov. 30, 2017)

Briefly, under Corwin, the informed vote of a majority of the disinterested stockholders subjects a transaction to the business judgment rule when the deal does not involve a conflicted controlling stockholder. Additionally, a “controller” may be a group of stockholders when that group acts together in a way that is not just a concurrence of the members’ self-interest. This decision examines both issues. Further, as this decision explains, pleading around Corwin by adequately alleging a disclosure violation is not enough to sustain a complaint—the stockholder still needs to state a non-exculpated claim in order to pursue a damages action.

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Court Of Chancery Finds Pre-Merger Suit Unripe

In re Straight Path Communications Inc. Shareholders Litigation, C.A. No. 2017-0486-SG (Nov. 20, 2017)

This is an interesting decision with potential implications for future shareholder litigation. Briefly, the complaint alleged that, in connection with a proposed merger, the controlling shareholder secured a side deal at the expense of the corporation and its other shareholders. However, the merger had yet to close and the plaintiff sought only money damages while favoring the merger’s consummation. Further, the plaintiff was trying to advance a direct claim for money damages based on the side deal, as well as derivative allegations based on harm to the company. Under these circumstances, the Court held the action was premature and stayed it until the merger either did or did not take place, when the path forward would be more certain.

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Court of Chancery Dismisses Derivative Action for Failure to Plead Demand Futility

A cardinal principle of Delaware law is that directors manage the business and affairs of a Delaware corporation. This includes decisions regarding whether to pursue claims against officers and directors whose breach of duty may have injured the company. A stockholder who believes that the board is not pursuing claims of wrongdoing that harmed the company must first demand that the board investigate or pursue those claims so that the board has an opportunity to exhaust intra-corporate remedies. 

It is only if the stockholder believes that demand would be futile that the stockholder can skip that step and file a derivative claim on behalf of the corporation. In that circumstance the stockholder must plead adequately why demand would have been futile or have the action dismissed for failure to do so.  Lenois v. Lukman, C. A. No. 11963-VCMR (Del. Ch. Nov. 7) is the most recent guidance from the court on the topic of demand futility and the case illustrates, among other things, that the mere fact that one officer or director may have acted in bad faith does not suffice to excuse demand if the plaintiff is unable to plead particularized facts demonstrating that a majority of the board could not act impartially upon a stockholder demand. Where a company has an exculpatory provision in its charter under Section 102(b)(7) that means a plaintiff must plead facts showing that a majority of the board faces a risk of liability for claims not otherwise exculpated, i.e., claims for violation of the duty of loyalty or for not acting in good faith. More ›

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Court Of Chancery Rejects Attorney-Driven Books And Records Demand

Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-VCL (Nov. 13, 2017)

This decision has potential far-reaching consequences for shareholder-plaintiff litigation. As is well known, some entrepreneurial plaintiff-side corporate law firms advertise that they are “investigating” matters following a corporation’s report of some misfortune. That is done to attract a stockholder as a potential client. They then use that client’s status as a stockholder of the corporation to bring suit or, often, to demand an inspection under Section 220 of the DGCL of the books and records they need to support a well-pled complaint. This decision holds that when the demand is really generated by the law firm, and not the client, inspection will be denied for failure of an actual “proper purpose.” The case turned on its facts showing that the client had no real interest in what the law firm wanted to investigate. While some will argue that problem may be cured by a better “informed” client, that perhaps is too cynical. We shall see if this decision makes it harder for such plaintiff-side firms to bring such cases in the future.

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Be Careful What You Ask For in a Section 225 Case

Delaware recognizes the need to promptly resolve disputes over the composition of the board of directors of a Delaware corporation.

November 17, 2017Delaware Business Court Insider

Delaware recognizes the need to promptly resolve disputes over the composition of the board of directors of a Delaware corporation. Section 225 of the Delaware General Corporation Law provides that the Delaware Court of Chancery may “hear and determine” who is on the board. Those proceedings are “summary” in nature meaning that the entire case can go to trial in 90 days or less from the date the complaint is filed or even less when the circumstances warrant extra expedition. This fast adjudication, however, warrants special caution as a recent Court of Chancery decision points out. More ›

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