Delaware Business Litigation Report

Chancery Permits Discovery Under the Hague Evidence Convention

In Re Cote D’Azur Estate, C.A. No. 2017-0290-JTL (Del. Ch. Dec. 12, 2022)
The Hague Evidence Convention provides an alternative method from the Federal Rules of Civil Procedure to compelling production from opposing parties across international lines. In this decision, the Court of Chancery considered a request for production under the Convention from a plaintiff-heir, seeking discovery on her late father’s former legal counsel regarding issues surrounding the family estate, established as a Delaware LLC, to control the family villa in France. Questions arose regarding the propriety of the legal advice provided to the father by counsel, and plaintiff-heir sought to compel production of discovery, while defendant-counsel refused to cooperate. More ›

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Chancery Addresses Real-Party-In-Interest and Collateral Estoppel Doctrines in Section 225 Dispute

Hawk Investment Holdings Ltd. v. Stream TV Networks Inc., C.A. No. 2022-0930-JTL (Del. Ch. Nov. 29, 2022)
This Section 225 decision involved Stream TV Networks, Inc. and its secured creditor, Hawk Investment Holdings Ltd. Under certain pledge agreements securing Hawk’s loans, Stream granted Hawk the right to vote all of its common shares in subsidiary Technovative Media, Inc. following an event of default. Hawk exercised those voting rights to remove and replace Technovative’s sole director, resulting in this litigation. In this decision addressing pre-trial motions, the Court validated Hawk’s standing to pursue its Section 225 claim as a stockholder notwithstanding that had assigned certain rights to an affiliate. In doing so, the Court explained statutory standing and the real-party in-interest doctrine in the Section 225 context. The Court also applied the doctrine of collateral estoppel to resolve several issues in Hawk’s favor based on prior litigation involving Stream. 

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Chancery Sides With Board in Dispute Over Stockholder’s Compliance With Advanced Notice Bylaws to Nominate Directors

Jorgl v. AIM ImmunoTech, Inc., 2022-0669-LWW (Del. Ch. Oct. 28, 2022)
The Court of Chancery rejected a stockholder’s bid for a preliminary mandatory injunction directing the board of AIM ImmunoTech, Inc. to include his nominees on the ballot of potential directors. The dispute centered on whether the board had wrongfully rejected the stockholder’s nominees based upon the board’s suspicion that the stockholder had not complied with the company’s advanced notice bylaws requiring the stockholder to disclose “all arrangements or understandings” with any of his nominees. Because evidence suggested that the stockholder and his nominees may have been part of an undisclosed plan to commence a proxy contest, the stockholder could not establish at the preliminary injunction stage that the board erred as a matter of law in rejecting his nominations. The Court also concluded that the stockholder failed to establish, as a matter of law, that the board acted with an entrenchment motive in rejecting the nominations. Accordingly, the Court found that the stockholder could not meet the heavy burden necessary to obtain preliminary mandatory injunctive relief.

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Chancery Dismisses Claims Against Controller and its Affiliates Based on Group Pleading and Vague, General Allegations of Claims for Breach of Fiduciary Duty

Bocock v. Innovate Corp., C.A. No. 2021-0224-PAF (Del. Ch. Oct. 28, 2022)
A holding company acquired a controlling stake in an owner/operator of low-power television stations via a stock purchase agreement. The controller then designated certain of its own affiliates’ officers and directors as officers and directors of the acquired company. More than three years later, stockholders and option holders filed a complaint alleging that the controller, its affiliates, and the officers and directors had conspired to loot the company by usurping corporate opportunities, transferring assets for insufficient consideration, and entering into agreements that drained value from the company. The claims included breach of fiduciary duty, corporate waste, aiding and abetting, conspiracy, and tortious interference. More ›

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Chancery Trims Contract Claims in Post-Merger Dispute

In Re P3 Health Group Holdings, LLC, Consol. C.A. 2021-0518-JTL (Del. Ch. Oct. 31, 2022)
Plaintiff Hudson Vegas Investment SPV, LLC asserted various claims after its minority interest in Defendant P3 Health Group Holdings, LLC was wiped out in a business combination between P3 and a SPAC. The Court of Chancery has issued several decisions in the case; this one dealt with Hudson’s various claims for breach of P3’s LLC agreement. More ›

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Imposing “A Remedy Of First Impression,” Chancery Divests Party Of Stock Ownership As A Post-Judgment Contempt Sanction Under Rule 70.

In re Stream TV Networks, Inc. Omnibus Agreement Litig., C.A. No. 2020-0776-JTL (Del. Ch. Oct. 3, 2022)
Court of Chancery Rule 70 speaks to the Court’s discretion in fashioning sanctions for failure to comply with a Court order. This expressly includes the authority to divest a party of personal property over which the Court has jurisdiction. In what the Court of Chancery termed a “remedy of first impression,” the Court in this case divested a party of stock in a Delaware corporation as a sanction for failure to comply with a partial final judgment requiring it to transfer legal title of assets, including that stock, to the opposing party. More ›

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Chancery Sustains M&A Fraud Claims Based On Near-Term EBITDA Projections

In re P3 Health Grp. Hldgs., LLC, C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022)
This recent decision addresses three points of interest relevant to fraud claims.
First, while fraud claims generally involve statements of fact, future projections can support a fraud claim. The statement of future projection must be sufficiently specific, and the plaintiff must plead that the projection was fraudulently conceived. In this case, the Court of Chancery found plaintiff had sufficiently pleaded a fraud claim based on a specific EBITDA projection figure for the current year in which the statement was made. According to the plaintiff, the company missed the projected EBITDA number by roughly $52 million, with a projected EBITDA of $12.7 million and actual year-end results of negative $40 million. Because it was a near-term projection, and one reasonably conceivable inference from the large difference was that the defendant knowingly made a false representation, the Court found the plaintiff sufficiently pleaded a fraud claim based on the EBITDA projection. More ›

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Chancery Reasons Rule 15(aaa) Does not Contemplate Moving to Amend After the Responsive Brief is Filed and Before the Court Rules on a Motion to Dismiss

Wells Lory Hillblom, f/k/a Nguyen Be Lory vs Wilmington Tr. Co., 2021-1034-MTZ (Del. Ch. Dec. 6, 2022).
Rule 15(aaa), a rule unique to the Court of Chancery, requires plaintiffs faced with a motion to dismiss for failure to state a claim to either (i) stand on their complaint and answer the motion; or (ii) amend their complaint before the response to the motion is due. Plaintiffs could also seek to amend the complaint under Rule 15(aaa) after the Court decides that dismissal is warranted but only upon a showing of good cause why dismissal with prejudice is not just under all the circumstances. More ›

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Superior Court Orders Earn-Out Payment under Ambiguous Merger Agreement after Defendant Withheld Documents in Discovery

Fortis Advisors, LLC v. Dematic Corp., C.A. No. N18C-12-104 AML CCLD (Del. Super. Dec. 29, 2022)
Defendant acquired the plaintiff's hardware and software solutions business. The merger agreement required the defendant to make contingent payments if the company achieved performance targets. The targets were based on EBITDA calculations and sales of "Company Products," which the merger agreement referred to in a disclosure schedule that contained descriptions of products’ functionalities. Under the agreement, the defendant committed to incentivizing its sales force to sell Company Products and integrating the products into its own products and services. At the end of the earn-out period, the defendant reported low sales and EBITDA. From limited documentation, the plaintiff was able to determine that defendant based its calculations only on the acquired products, not an integrated portfolio. Plaintiff filed suit for breach of contract, alleging that the defendant either failed to incentivize its sales force and integrate the products, or had failed to properly account for "Company Products" when calculating contingent payments. More ›

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Delaware Supreme Court Overturns $700 Million Award in Master Limited Partnership Litigation

Boardwalk Pipeline Partners L.P. v. Bandera Master Fund LP, C.A. No. 2018-0372 (Del. Dec. 19, 2022)
Delaware Master Limited Partnerships (MLPs) can structure their organization to permit maximum flexibility, including eliminating fiduciary duties and limiting investor rights to the four corners of the MLP agreement. At issue in this case was whether the partnership's general partner properly exercised a call right to take the partnership private. Under the partnership agreement, the general partner could exercise this right if it received an opinion from counsel acceptable to the general partner that certain changes in regulation would have a specific effect on the business. More ›

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Chancery Finds Buzzfeed and Others Not Bound by Arbitration Provisions in Employment Agreements

Buzzfeed v. Anderson, C.A. No. 2022-0357-MTZ (Del. Ch. Oct. 28, 2022)
In 2021, Buzzfeed engaged in a SPAC transaction wherein its stock was converted into stock in Buzzfeed’s post-SPAC corporate form. An IPO followed. In connection with the IPO, former employees of the pre-transaction Buzzfeed (“Old Buzzfeed”) who had received shares in the post-transaction Buzzfeed (“New Buzzfeed”), filed mass arbitrations against New Buzzfeed, certain officers and directors, and the IPO transfer agent. These former employees and New Buzzfeed shareholders alleged that, because a different class of stock was offered in the IPO than the class of stock that they held, they were unable to participate in the IPO, suffering $9 million in damages. In response, New Buzzfeed, certain officers and directors, and the IPO transfer agent sued in the Court of Chancery seeking: (1) to enjoin the arbitrations, (2) a declaration that they were not bound by arbitration provisions in employment agreements entered into with Old Buzzfeed, and (3) a declaration that the former employees were obligated to comply with a forum selection clause in New Buzzfeed’s charter and bring their claims in the Court of Chancery. The plaintiffs moved for summary judgment on their claims; the former employees moved to dismiss the complaint for lack of subject matter and personal jurisdiction. More ›

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Superior Court Finds that Non-Recourse Provision Does Not Bar Fraud Claims Against Non-Seller Defendants

Amerimark Interactive LLC v. Amerimark Holdings, C.A. No. N21C-12-175 MMJ CCLD (Del. Super. Nov. 3, 2022)
This decision discusses and applies numerous rules governing fraud claims under Delaware law. For instance, an anti-reliance provision eliminates extra-contractual fraud claims while preserving intra-contractual fraud claims, and a non-recourse provision limits the entities and people against whom a claim can be brought. And, in Online HealthNow, Inv. v. CIP OCL Investments, LLC, 2021 WL 3557857 (Del. Ch. 2021), the Court of Chancery determined that a non-recourse provision did not bar claims against a non-signatory party. Here, the Superior Court applied Online HealthNow and held that fraud claims against non-seller defendants who allegedly were knowingly complicit in contractual fraud were not barred by the non-recourse and anti-reliance provisions of the agreement at issue.

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Chancery Denies Member Status to Individual Not Admitted By Members in Accordance With LLC Agreement

Riverside Risk Advisors LLC v. Chao, C.A. No. 2019-0789-KSJM (Del. Ch. Oct. 26, 2022)
The LLC Act generally provides that someone is admitted as an LLC member as provided in the LLC agreement. Here, the plaintiff sued seeking declaratory relief that the defendant, a former employee, was not a member of the LLC and that a 2015 agreement was the LLC’s governing document, rather than an earlier agreement. The Court of Chancery ruled in the plaintiff’s favor, finding that the defendant was not a member because, under the LLC agreement, written consent of all members was required for admission, and the defendant needed to agree to be bound by the agreement in writing. But neither of these steps occurred. The Court also held that the 2015 agreement was the current operative agreement for the LLC despite not being approved by the defendant, because, as required by the previous LLC agreement, it was approved by all members, which the defendant was not.

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Chancery Applies Implied Consent to Service Provision of Delaware LLC Act to Individual Without Any Formal Role at the LLC

In Re P3 Health Grp. Hldgs., LLC, Consol. C.A. No. 2021-0518-JTL (Del. Ch. Oct. 26, 2022)
The implied consent provision of Section 18-109 of Delaware’s LLC Act provides that “managers” of Delaware LLCs consent to the service of process in Delaware. The statute defines “managers” as both (1) those formally designated as managers, and (2) those who “participate [] materially” in management. Disputes over whether an individual not falling in the first category falls in the second often focus on individuals with some formal role at the LLC.  As this decision illustrates, however, an individual without any formal role at the LLC, but who otherwise participates materially in the LLC’s management, may also be found to be a manager, and thus have consented to service and jurisdiction in Delaware. Facts relevant to the Court of Chancery’s finding of an adequately alleged acting management, in this case, included the defendant’s direction of the company’s managers, control of the company’s advisors, involvement in legal decisions, and access to information.

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Chancery Grants Specific Performance For Release of Escrowed Funds, Rejects Sellers’ Representative’s Arguments to Withhold Funds As Inconsistent With Purchase Agreement’s Plain Language and the Implied Covenant of Good Faith and Fair Dealing

Am. Healthcare Admin. Services Inc. v. Aizen, C.A. No. 2019-0793-JTL (Del. Ch. Nov. 18, 2022)
Parties to acquisition agreements often have discretion concerning when to instruct an escrow agent to distribute funds post-closing, but any such discretion is limited by the plain language of the agreement and implied covenant of good faith and fair dealing. This decision addresses the availability of an unclean hands defense to contract claims seeking equitable relief.  More ›

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