A recent ruling of the Delaware Court of Chancery provides a useful refresher on the standards that must be met for various exceptions or waivers of the attorney/client privilege to apply. In Drachman v. BioDelivery Sciences International, Inc., C.A. No. 2019-0728-LWW (Del. Ch. Aug. 25, 2021), the Court addressed the following theories which, if applicable, could prevent one from enjoying the protection of the attorney/client privilege, and might lead to the disclosure of otherwise privileged communications:

  • The Garner doctrine;
  • Crime-Fraud exception;
  • At-Issue exception (placing the privileged document in question “at issue” or using it as both a sword and a shield)

Selected Key Facts

The case involves a stockholder claim that the approvals required by DGCL Section 242 were not obtained for amendments to the corporate charter, and that the related actions of the board of directors were a breach of their fiduciary duties.

Selected Highlights

The Court began with the basics. Chancery Rule 26(b) essentially allows discovery of relevant data that is proportional to the needs of the case. But Delaware Rule of Evidence 502(b), which codifies the attorney/client privilege, insulates from discovery “confidential communications made for the purpose of facilitating the rendition of professional legal services to the client.”

Garner Doctrine

Sometimes referred to as the “fiduciary exception”, the Court notes that this is not actually an exception to the privilege rule. See n. 34. When applicable it provides that “when a stockholder sues a fiduciary for behavior inimical to the stockholder’s interests, she may invade the corporation’s privilege upon a showing of “good cause”.

There are 9 enumerated factors that must be considered, but the first two are “gatekeepers” and the parties in this case focused on the first three factors. Although the party who moved to compel “cleared the first two gates”, the movant did not demonstrate that the data was unavailable from other sources (discovery was in the early stages) or that the data was needed to prove her claim. See Slip op. at 10-17.

The At-Issue Exception

The Court noted that whether this is an exception or a waiver deserves attention but is not determinative in practice. See n. 62. After a thorough analysis and application of the facts, the Court explained why the moving party did not meet the threshold for this exception to apply.

Crime-Fraud Exception

Any reader who needs to know the necessary requirements to determine if this exception applies, should read pages 23 to 26 of this letter ruling to understand why the moving party did not persuade the Court that this exception applied.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Court of Chancery recently refused Charter Communications Inc. investors’ bid to amend their breach-of-duty complaint so as to add previously-dismissed defendant Liberty Broadband Corp. based on newly-discovered evidence because plaintiffs failed to clear a “high bar” to reverse such a with-prejudice dismissal. Sciabacucchi, et al. v. Malone et al., No. 11418-VCG opinion issue (Del. Ch. Aug. 18, 2021). The Court also clarified that the “default rule” is that dismissals under Rule 12(b)(6) are “with prejudice”.

Vice Chancellor Sam Glasscock’s August 18 opinion allowed the motion to amend but only as to a new aiding and abetting charge not previously dismissed. As to the other charges he said because plaintiffs had failed to preserve the dismissal as “without prejudice” under Court of Chancery Rule 15(aaa), they could not replead that decision unless they could show “clear error, injustice, or a change in circumstances.”

The ruling contained a clear warning to Chancery Court plaintiffs against “the pernicious practice of using multiple motions to dismiss as honing stones against which to sharpen a claim, resulting potentially in a viable cause of action, but at the expense of the party opponent and the Court.”

The vice chancellor said after Broadband’s dismissal, plaintiffs claimed Broadband should be added to the complaint because they unearthed evidence that “a record will develop that may implicate defendants against whom the plaintiff has failed to state a claim in the initial complaint,” but plaintiffs never sought dismissal without prejudice and they have failed to clear the resulting “high bar.”

Background

Plaintiff shareholders’ 2015 complaint challenged as self-dealing certain transactions between Charter and Broadband undertaken to facilitate two acquisitions which are, themselves, not challenged. But necessary to any self-dealing charge, Vice Chancellor said, is the allegation that defendant director John Malone and now non-party Broadband together controlled Charter, at the very least, in connection with the Broadband transactions.

In two previous opinions, he found that although Malone and Broadband might technically combine to exert control contractual restrictions on them meant that they functionally could not exercise actual control and dismissed Broadband and part of the complaint.

Plaintiffs’ motion argued that discovery has revealed new information that supports a re-assertion of the allegation that Broadband and Malone were controllers and should allow them to revive two counts of the complaint which allege breaches of duty against Malone and Broadband.

The August 18 opinion

In the August 18 opinion, the court said since the dismissal was with prejudice under Rule 15(aaa) the plaintiff may replead only “if it can demonstrate that a compelling reason to disregard the law of the case exists.”

The Vice Chancellor pointed to Toro Co. v. White Consol. Indus., Inc., 383 F.3d, 1336 (Fed. Cir. 2004), where “The Federal Circuit has noted that “[a] departure from law of the case generally requires the discovery of new and material evidence not presented in the prior action or an intervening change of controlling legal authority, or [a showing that] the prior decision is clearly incorrect and its preservation would work a manifest injustice.”

He said even though his previous dismissals were not explicitly “with prejudice” under Rule 15(aaa), “ the default rule is that dismissals under Rule 12(b)(6) are with prejudice. That ruling controls, as law of the case.”

Plaintiffs are left with a high bar which they cannot clear with the three claims of new evidence they present, the vice chancellor said, because:

1. Although Malone testified that he had ‘soft control’ over Charter it was in context of and in contrast to a discussion about so-called “hard control” where he and his family would control of the stock,
2. The de facto veto Broadband held over two key acquisitions in the challenged deal was not a contractual right of Broadband, or any other defined right to veto the transactions, but was procedural.
3. Broadband’s designees on the Charter board allegedly voted in favor of the Broadband Transactions but at the time, Broadband had the right to designate four of ten board members—less than a majority.

The aiding and abetting exception

As to the aiding and abetting claims plaintiffs proposed to add against Broadband the court said the law of the case rule does not apply since they were not in the original complaint and there was no bad faith, undue delay, dilatory motive, or repeated failures to cure by prior amendment,” the court said.

The court found no futility since the aiding and abetting charges “rest on substantially the same allegations that previously supported the control allegations” and said the defendants were not prejudiced by undue delay. The vice chancellor noted that even though it has not been a defendant for three years and has been only marginally involved in discovery as a non-party, adding Broadband to the aiding and abetting charges is a “closer question than the other defendants since:

It is represented by the same lawyers who have represented Malone,
It is controlled by Malone and is a significant stockholder of Charter,
It was previously on notice that it was involved in this case, even as a non-party, and
It ought to have been on notice that it could be open to other claims stemming from the same facts

Vice Chancellor Glasscock granted that part of the motion while denying the bid to add Broadband as a defendant in the original claims based on new evidence.

A recent Delaware Court of Chancery decision must be read by anyone interested in the latest iteration of Delaware law concerning when a non-signatory may be bound by a forum selection clause in an agreement. In Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), the court provides the most thorough analysis of the titular topic that this reader is aware of, with scholarly insights and copious citations that explain the theoretical underpinnings that support a decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

The court granted an anti-suit injunction to prevent litigation from proceeding in Texas that was contrary to the forum selection clause to which the court found both a parent corporation and its wholly-owned subsidiary to be bound, based on the extensive reasoning provided in this opinion.

Issue Presented:

The issue presented in this decision was whether a non-signatory can be bound to a forum selection clause based on equitable estoppel or promissory estoppel. The court needed to determine whether the Flotek Sub was bound by the agreement signed by the Flotek Parent company before deciding if a particular issue was covered by the forum selection clause. The court conducted a claim-by-claim analysis to determine if the claims filed in another forum were covered by the forum selection clause at issue.

Key Facts:

The Flotek Parent in this case was a party to a Purchase Agreement with a Delaware forum selection clause. But the Flotek Subsidiary involved in this case was not a party to that agreement. Rather, the Flotek Sub was only a party to a separate Supply Agreement–that was referred to in the Purchase Agreement as an exhibit. The Purchase Agreement’s Delaware forum selection provision covered disputes related to other agreements such as the Supply Agreement. The supply agreement did not contain a forum selection provision.

Key Takeaways:

• It’s always useful to be reminded of the well-worn prerequisites for a preliminary injunction which the court provides at page 12.

• A reminder of basic Delaware contract interpretation principles is provided at pages 14-15.

• The court observes a truism of Delaware contract law that when more than one agreement is part of a unitary transaction, and when one contract is referred to in another, they are all interpreted as one contract. See Slip op. at 17-18. However, the court explained that this principle alone would not apply to require the claims of the Flotek Sub to be prosecuted in Delaware. See Slip op. at 32.

• The court restated a three-part test for determining when a non-signatory would be bound by a forum selection clause. See Slip op. at 33-48. The court modified the three-part test announced in the Chancery decision in Capital Group, 2004 WL 2521295, at *5. The first two parts of the test are as follows:

(i) the agreement contains a valid forum selection provision;

(ii) the non-signatory has a sufficiently close relationship to the agreement, either as an intended third-party beneficiary under the agreement or under principles of estoppel (such as equitable estoppel or promissory estoppel).

• The third element of the test described in the Capital Group case was the subject of extensive analysis and modification in this opinion.

• The court discussed the principles of estoppel that would bind a non-signatory to a forum selection clause: (i) a non-signatory accepted a direct benefit from the agreement; or (ii) a non-signatory had a close relationship to the agreement; a signatory to the agreement controlled the non-signatory; and the circumstances established that the signatory agreed to the forum selection provision on behalf of its controlled affiliate. Slip op. at 34. See also footnote 5. The court described the direct-benefit test as resting on principles of equitable estoppel, and the foreseeability test as introducing a measure of promissory estoppel. The court discussed at great length both the direct-benefit test and the foreseeability test. See Slip op. at 35-39.

• The third element in the Capital Group test, which the court modified, included the “same-agreement rule” that limited when a non-signatory would be bound, but that the Court of Chancery in this case decided not to follow.

• Among the extensive reasons given for not following that “same-agreement rule” in the third element of the Capital Group test are the following:

“That outcome [if the same-agreement rule applied] runs contrary to the underlying principles of estoppel that lead to the forum selection provision binding the non-signatory. When a non-signatory accepts a direct benefit under an agreement, principles of equitable estoppel demand that the non-signatory accept the burdens associated with that agreement, including a forum selection provision.”

Slip op. at 44.

• As applied to the facts of this case, the principles of estoppel called for enforcing the Delaware forum provision against the Flotek Sub. The Flotek Parent promised to litigate all claims arising out of or relating to the Supply Agreement in Delaware through the Delaware forum provision in the Purchase Agreement which encompassed related agreements among those claims that were within the forum selection provision. If the same-agreement rule were applied, it would permit the Flotek Parent to escape that promise.

• This decision interpreted the third element of the Capital Group test as asking whether the claims at issue fall within the plain language of a forum selection provision.

• This decision conducted a claim-by-claim analysis of the causes of action in a suit filed in Texas to determine whether they fell within the Delaware forum provision for purposes of an anti-suit injunction against the Flotek Parent. The court’s extensive reasoning explained why the Delaware forum selection provision also binds the Flotek Sub to the same degree as the Flotek Parent.

• The court’s holding also is based on the reasoning that it would allow parties to “enter into overarching forum selection provisions in a primary agreement without requiring that every controlled affiliate become a party to that agreement.”  The court further reasoned that the approach announced in this decision also promotes freedom of contract by enabling a controller to enter into an overarching forum selection provision and avoids the need for separate provisions in each agreement or the potentially cumbersome solution of having every controlled affiliate become a party to a primary agreement.

A recent Delaware Court of Chancery decision is noteworthy for its clarification of the nuanced contours of Delaware law regarding contractual restrictions on the perennial feature of Delaware commercial litigation, known as post-closing fraud claims. In Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), the court pronounced key statements of Delaware law on the titular topic in ruling on a Motion to Dismiss. The best way to begin short highlights of this 60-page decision is with a money quote:

“Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”

Slip. op. at 4. See generally seminal Chancery decision in Abry and its progeny, some of which have been highlighted on these pages.

Selected Key Facts:

Of course, a detailed grasp of the extensive factual recitations in this opinion are important for a full understanding of its holding, but a few selected key facts include the following: The Stock Purchase Agreement (SPA) involved in this post-closing dispute included representations that all tax returns of the seller were timely filed and accurate, and that there were no undisclosed liabilities. By contrast, the complaint alleges in extensive detail that large tax liabilities were not disclosed and that they were actively hidden during the due diligence period.

The buyer represented that it had accurate access to the records of the seller, and the SPA included anti-reliance provisions stating that the buyer was not relying on any representations other than those in the SPA.

The SPA also had detailed procedures to address post-closing purchase price adjustments, such as working capital. Disputes within the scope of that provision were to be submitted to an independent accounting firm.

But the parties contested what issues, or if all the issues, were required under the SPA to be submitted to the independent accounting firm, and whether the SPA allowed for any issues to be litigated in court.

Key Statements of Law:

• The court explained that Delaware public policy prohibits a party from contractually exempting itself for liability for fraud, or avoiding liability for intentionally or recklessly causing harm. Slip op. at 35-40. The opinion also relies on the reasoning in the Prairie Capital case, for example, with the following quote: “flesh and blood humans also can be held accountable for statements that they cause an artificial person, like a corporation, to make”. 132 A.2d at 59.

• The opinion includes a discussion of case law relating to the impact of “survival clauses” in connection with Delaware public policy against contractual barriers to fraud claims. Slip op. at 41-46.

• The weight of authority and public policy as explained in this decision, and applied to the facts of this case, prevented the use of the savings clause in the SPA to bar contractual fraud claims. Specifically, the court reasoned that:

“Sellers cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.”

Slip op. at 52-53.

• The court also emphasized that the non-recourse provisions in the SPA could not be relied on to bar the fraud claim. Slip op. at 53-54.
• The parties agreed that the fraud claims were outside of the scope of the post-closing issues that the SPA required to be submitted to an accounting firm but disagreed on what other claims were required to be submitted to the accounting firm.

• In closing, the court determined that the scope of the fraud, if any, that occurred, was a ripe controversy for purposes of a declaratory judgment claim that must be decided by the court before the neutral accounting firm provided for in the SPA could begin its work. See footnote 217 and accompanying text (compiling cases on this topic regarding the scope of an accountant’s role to decide post-closing disputes).

A recent Chancery decision recounts the epic tale of a group of business partners who were longtime friends and who later accused each other, after forming a business together, of fraud and breach of fiduciary duty. In Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), the court describes in exhaustive detail the factual background involving detailed examples of funds invested in a company that were diverted for personal use instead of being applied for business purposes.

The opinion in this case should be read in its 108-pages of glory but for purposes of this short blog post, the most consequential aspects of the court’s legal reasoning that have the most widespread applicability include its discussion of the fiduciary duties of LLC Managers, where the LLC agreement does not waive those duties.

The court explains the well-known truism that under Delaware law, absent unambiguous waiver, fiduciary duties are imposed on LLC managers by default. See Slip op. at 73-75. The court observed that the LLC agreement in this case did limit personal liability–except that liability was not eliminated for “acts or omissions in bad faith or involving intentional misconduct or knowing violation of law or personal financial benefit to which the manager is not entitled.” After extensive reasoning, the court found that the breaches of fiduciary duty constituted intentional misconduct.

The court relied on the recent Chancery decision in Largo Legacy Group, LLC v. Charles, 2021 WL 2692426, at *13 (Del. Ch. June 30, 2021), which was highlighted on these pages, for the following block quote that elaborates on the fiduciary duties of a manager of a Delaware LLC:

“In the limited liability context, as in the corporate context, the duty of loyalty mandates that the best interests of the company and its stakeholders take precedence over any interest possessed by the manager and not shared by the stakeholders generally. A manager is not permitted to use their position of trust and confidence to further their private interest. Nor can fiduciaries intentionally act with a purpose other than that of advancing the best interests of the corporation. Specifically, and very pertinently for this case, such fiduciary duties include the duty not to cause the corporation to effect a transaction that would benefit the fiduciary at the expense of the minority stockholders.”

Slip op. at 74 (citing Largo Legacy Group LLC).

Also notable is footnote 315 for its explanation about why the breach of contract claims in this case did not overlap the fiduciary duty claims, and why both were permitted to be pursued through trial in this matter. See, e.g., Largo Legacy Group decision: In addition to the statement of fiduciary duty quoted above, the Largo Legacy case also clarified when tandem claims of both breach of contract an breach of fiduciary duty can proceed at the same time.

Although not covered in this brief blog post, the court also addressed several other important issues for corporate and commercial litigators in Delaware:

● The elements of a claim for fraud or fraud in the inducement.
● Breach of a contract regarding LLC agreement terms.
● Elements of an acquiescence defense.
● Elements of an unclean hands defense.
● Why damages need not be proven with mathematical certainty after a breach is established. Slip op. at 103-104.
● Fee shifting principles.

In connection with a recent dispute among LLC members, the Court of Chancery discussed an apparent issue of first impression in Delaware: The rights of the fiduciary of a debtor who seeks to help a creditor-entity that the fiduciary has an interest in. In Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021), the court discussed claims among LLC members in connection with an LLC Agreement that did not unambiguously waive fiduciary duties.

The court observed that no Delaware case appears to have dealt with the precise issue presented here: Namely, what is the impact of a tortious interferer acting in bad faith as a fiduciary to a debtor in service of a creditor counterparty in which the fiduciary holds an interest?

The court referred to Section 773 of the Restatement (Second) of Torts which requires that the protection of an interest be undertaken “by appropriate means” when a party is entitled to defend a legally protected interest. See Redbox Automated Retail LLC v. Universal City Studios LLLP, 2009 WL 2588748, at *6. See also Restatement (Second) of Torts Section 770, which provides that an actor “charged with the responsibility of a third person” who “intentionally causes that person not to perform a contract . . . does not interfere improperly with the other’s relation if the actor (a) does employ wrongful means, and (b) acts to protect the welfare of the third person.

Comment A to Section 773 also provides that the provisions in Section 773 requiring that the protection of an interest be undertaken by appropriate means is “of narrow scope and protects the actor only when (1) he has a legal and protected interest, and (2) in good faith asserts or threatens to protect it, and (3) the threat is to protect by appropriate means. See footnotes 167 and 168 and related text.

In this case the court found that at “a bare minimum” it was reasonably conceivable that the bad faith acts of a fiduciary resulting directly in the alleged interference with an existing contract are improper means to pursue the ends of the LLC, and that the allegations were sufficient for pleading purposes to demonstrate that the interference was unlawful and therefore executed by inappropriate means. See footnote 169.

This decision also features an extensive explanation of the “not always easy to understand” concepts embodied in the “savings statute.” See Slip op. at 23-32.

Finally, an always useful explanation of the analysis of pre-suit demand futility in the context of an LLC is provided at pages 55 to 57.

 

The Delaware Court of Chancery recently published an updated version of Practice Guidelines. Weighing in at 38 single-spaced pages, it must be read by both Chancery litigators and those out-of-state counsel who litigate Chancery cases. The original Practice Guidelines highlighted on these pages, promulgated in 2012, were a mere 18-pages in length.

Courtesy of my assistant, we now have a redlined copy that shows the differences between the current version and the 2012 original version

A somewhat longer overview is provided in an article I co-authored with Chauna Abner that appeared in the August 18, 2021 edition of the Delaware Business Court Insider. In this short post, however, I’ll merely provide a few bullet points on the more noteworthy new provisions:

  • “Protocols for Remote Hearings and Trials” is a new section that describes best practices for this important medium of trial advocacy. Although most of the Covid-related restrictions on in-person trials have been lifted, the consensus is that remote hearings and trials, especially on a paper record, will continue to be a feature of Chancery practice. See Guidelines at 5-8.
  • Document collection and production are described at pages 28-31. Among the 11 sample forms provided as part of these updated Chancery Guidelines, is Exhibit 10, which is a detailed and comprehensive list of suggested protocols for the crucial aspect of discovery related to ESI identification, preservation, and production.
  • “Discovery Facilitator” is a role that is becoming increasingly common in complex Chancery cases, especially those that are expedited. Although not quite synonymous with a Special Master, it may be recommended by the court, or suggested by counsel, to address and streamline nettlesome discovery issues.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Superior Court recently dismissed Jarden LLC’s bid for D&O insurance coverage for an appraisal suit that was not “for” redress of a “wrongful act” – and even if it was, the act couldn’t have occurred before the sale to Jewel Rubbermaid Inc. closed, ending the coverage period, in Jarden LLC v. Ace American Insurance Co., et al., No. N20C-03-112 AML CCLD opinion issued (Del. Super. July 30, 2021).

In her July 30 opinion, Judge Abigail LeGrow, guided by a recent milestone Delaware Supreme Court opinion, said the underlying shareholder challenge to the price Jarden investors received in 2016 was by nature, a “statutory proceeding”, even if the deal negotiation was “flawed” and the appraisal petitioners won a $177.4 million judgment.

Judge LeGrow wrote that in keeping with the high court’s ruling in a coverage action for an appraisal suit in In Re Solera Insur. Coverage Appeals, 240 A.3d 1121, 1135-36 (Del. 2020), “the only issue before the appraising court is the value of the dissenting stockholder’s shares on the date of the merger,” and no claims of wrongdoing are considered.

Judge LeGrow’s opinion may be of interest to corporate and insurance specialists–-at least for the reason that it was a win of sorts for corporate insurers in what they have complained has been a long, dry season for them in Delaware D&O insurance coverage litigation.

“Although evidence of a flawed negotiation process generally is admissible in an appraisal proceeding, that evidence is relevant to what weight, if any, the Court accords the negotiated merger price,” she noted. “Accordingly, if the Appraisal Action was for any act, the only act from which it arose or for which it could seek redress” is the execution of the merger itself.

The judge said the insurer defense that is “fatal to Jarden’s coverage claim” is Jarden’s previous agreement that “for” a wrongful act meant a claim that sought redress for that act and the appraisal action could only sue over the execution of the merger itself–but that was too late for coverage.

Background
Jarden LLC, a Delaware limited liability company based in Florida, was a holding company whose portfolio included 120 consumer-product brands like Coleman sporting goods, Crock-Pot appliances, Sunbeam, and Yankee Candle. On December 13, 2015, it agreed to a merger in which it became a subsidiary of Newell Rubbermaid Inc. for cash and Newell stock valued at $59.21 per share as of the closing date.

Jarden’s shareholders voted to approve the deal but some petitioned the Chancery Court for appraisal and alleged the sales process leading up to the merger was flawed and unfair.

The Court of Chancery ascribed little weight to the negotiated deal price for purposes of determining Jarden’s value under Section 262 of the Delaware General Corporation Law because:

(i) Jardan’s lead negotiator “got way out in front” of its board and financial advisors in the negotiations,
(ii) there was no pre-signing or post-signing market check, and
(iii) there were challenges associated with valuing the synergies arising from the deal.

For those reasons, the court appraised the petitioners’ shares at $48.31– $11 below the negotiated price—and awarded them $177,406,216.48, consisting of the fair value of their shares plus pre and post judgment interest.

The coverage action
After paying that judgment, Jarden sought to recoup defense costs and interest from its insurers and when it was unsuccessful, filed breach of contract charges against a tower of insurers that provided coverage for securities claims related to the merger if they involved acts that occurred before the closing.

In opposition to the insurers’ motion to dismiss, Jarden argued that the allegations made in the appraisal complaint concerned defects in the merger itself and were lodged before the closing date, so they are covered by the policies. But the judge said the appraisal action was not for an act that occurred before the closing date.

“This conclusion is compelled by the simple fact that If the merger had not closed, none of the dissenting stockholders who submitted Appraisal Demands would have had standing to pursue appraisal,” Judge LeGrow wrote.

Those challenges to the deal process related only to the weight the trial court would give to the deal price, she said in granting dismissal with prejudice because the pleadings could not be cured by amendment.

Impact?

Although a rare win for insurers, the Jarden ruling’s impact is difficult to predict, partly because it largely defers to the agreed-to meaning of “for” and the Solera opinion’s definition of “wrongful act” rather than address those key terms anew.

In his summary and comments on the Jarden opinion in his Aug. 3 post on his D&O Diary blog, https://www.dandodiary.com, host Kevin LaCroix suggests that Judge LeGrow ”may have approached the dispute here with more than a little wariness… She was the judge who entered the Superior Court opinion in the Solera case – the one that the Delaware Supreme Court overturned in its October 2020 decision.”

The Delaware State Bar Association’s Professional Ethics Committee, for which I serve as the current Vice Chair, recently published Formal Opinion 2021-1 (July 9, 2021), that addresses the legal ethics issues related to lawyers who work remotely in states where they are not licensed–such as from their homes–as many were required to do when their offices were closed during the Covid pandemic. This Formal Opinion relied on a similar Formal Opinion recently published by the American Bar Association.

The Delaware Business Court Insider‘s current edition includes an article I co-authored with Chauna Abner that highlights a recent Delaware Court of Chancery decision that explains the types of claims that are barred by a standard integration clause–as compared to the more robust anti-reliance clause that is required to preclude most typical claims arising from allegations about misrepresentations made regarding a contract. See Shareholder Representative Services v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021). The article is available at this link.

Courtesy of The Delaware Business Court Insider, a copy of the article also appears below.

“Chancery Identifies Claims Barred by Standard Integration Clause”

By: Francis G.X. Pileggi* and
Chauna A. Abner**

The Court of Chancery’s recent decision in S’Holder Representative Servs. LLC v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021), involves the seller of a business claiming that the buyer intentionally evaded post-merger earnout payments. This opinion is useful for its explanation of the types of claims that will, and will not, be barred by a standard integration clause.

Background

The basic facts involved the sale of a company called Plated, bought by Albertsons, the supermarket chain. The closing price was $175 million with an earnout of up to $125 million if certain milestones were reached. Although the merger agreement gave Albertsons sole and complete discretion over the operation of Plated post-closing, the agreement specifically prohibited Albertsons from taking any action with the intent of decreasing or avoiding the earnout. Nonetheless, it was alleged that Albertsons changed Plated’s business model post-closing with an intent to avoid the earnout.

The Court’s decision was rendered in the context of a motion to dismiss, but detailed facts were recited indicating that the top management of Albertsons never intended to promote Plated. If properly supported, Plated would have fulfilled its projected revenues and, thus, would have triggered the earnout.

Analysis

The Court began its analysis noting the “typical” facts the case presented surrounding the payout of post-closing earnout consideration. Specifically, the Court explained that: “[A]s is typical, . . . Albertsons bargained for the right to operate Plated post-closing in its discretion limited only by its express commitment not to operate Plated in a manner intended to avoid the obligation to pay the earnout.” Id. at *1.

The Court recited the well-settled standard for deciding a motion to dismiss followed by the elements to establish a breach of contract claim and a fraudulent inducement claim. Id. at *16. In deciding whether Albertsons breached the merger agreement by intentionally decreasing or avoiding the earnout, the court turned to the meaning of “intent” and explained that: “‘Intent’ is a ‘well-understood concept,’ defined as ‘a design, resolve or determination with which persons act.’” Id. at *17. The Court further explained that “[a] defendant’s intent can be inferred from well-pled allegations in a complaint, with the understanding that allegations of intent need only be averred generally.” Id.

Specifically, in the context of this case, the Court explained that: “To plead a buyer’s intent to avoid an earnout, the goal of avoiding the earnout need not be ‘the buyer’s sole intent’; rather, a plaintiff may well-plead that the buyer’s actions were ‘motivated at least in part by that intention.’” Id. at *17.

Key Takeaways

The most noteworthy aspects of this opinion are found in the Court’s distinction between the claims that will be barred by a standard integration clause–as compared with the claims that will only be barred if a standard integration clause is supplemented and buttressed by more explicit anti-reliance language demonstrating with clarity that the plaintiff has agreed that it was not relying on facts outside the contract.

The Court instructed that:

• Fraud claims will not be barred by a simple integration clause that does not contain a more robust and explicit anti-reliance provision that expresses with clarity that there will be no reliance on facts outside the contract. In this case, the integration clause alone would not bar allegations of extra-contractual statements of fact. But that is not what the plaintiff alleged.

• Because the plaintiff alleged fraudulent inducement and claimed that Albertsons lied about its “future intent” with respect to the operation of the post-business closing, the Court explained clear anti-reliance language was needed to stand as a contractual bar to an extra-contractual fraud claim based on factual representations.

• By contrast, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises. The Court cited among other cases in support of its reasoning, Black Horse Capital, LP v. Capital Xstelos Holdings, Inc., 2014 Del. Ch. LEXIS 188, at * 22 (Del. Ch. Sept. 30, 2014), to explain that an extra-contractual fraud claim based on a “future promise” cannot stand when the parties committed in a clear integration clause that they will not rely on promises and representations outside the agreement.

• The Court, however, concluded that plaintiff bargained for Albertsons not to intentionally scuttle the earnout and, therefore: “It may attempt to prove a breach of that contractual obligation [regarding intent] but cannot claim fraud based on future promises not memorialized in the merger agreement.”

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*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Chauna A. Abner is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.