A recent post on the well-read blog of Prof. Stephen Bainbridge, our favorite corporate law scholar whose many publications are cited in Delaware court decisions, linked to an article that lawyers and other followers of Delaware corporate law should be interested in, by an eminent Delaware corporate litigator, on the topic of how much weight should be given to bench rulings, sometimes referred to as transcript rulings, from the Delaware Court of Chancery. As a matter of Delaware practice, such rulings are often cited in briefs and even appear in published opinions of Delaware courts.

A recent Delaware Court of Chancery opinion interpreted related agreements that included forum selection clauses that were conflicting.  In Mack v. Rev Worldwide, Inc., C.A. No. 2019-0123-MTZ (Del. Ch. Dec. 30, 2020), the court addressed forum selection provisions in two related agreements which the court treated as one because they were incorporated by reference.

The court was asked to decide whether Delaware was the proper forum when one of the forum selection clauses required courts in Texas to address certain issues–and the other forum selection provision provided for a California court to hear disputes.

Key Takeaways:
● The court recited the well-established Delaware law about the enforceability of forum selection clauses generally.  Slip op. at 15 to 17.
● The court also addressed Rule 12(b)(3) motions challenging venue and whether arguments required to be made in an initial Rule 12 motion are waived if all the grounds for such motions are not explained, as well as the impact of a second motion under Rule 12 in connection with an amended complaint.  The court explained why those arguments would generally not be waived, even if all the grounds for such a motion were not recited in the original motion.
● The court also observed that in some instances non-signatories to a forum selection clause may also be bound by it.
● The court reasoned that unlike the typical situation where conflicting forum selection clauses choose Delaware and another forum, in this instance competing forum selection clauses both required litigation in states outside of Delaware. Therefore, the court determined that because neither of the parties chose Delaware, a court in one of the other two forums selected would need to decide which of them would address the merits of the case.

Applying a contractual fee-shifting provision when it is not clear which party prevailed, is a topic that does not benefit from an extensive body of case law, relatively speaking. The recent Court of Chancery decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-VCG (Del. Ch. Dec. 31, 2020), provides an additional source of authority for resolving this issue of outsized importance to lawyers and clients alike.  See Slip op. at pages 15 and 16.

The court also addressed when an “ordinary” contractual indemnification provision might allow for first-party claims for fee shifting, and refers to the recent Chancery decision in International Rail Partners, highlighted on these pages, to explain that only when a contract explicitly provides for first-party claims in an ordinary or “bilateral commercial” contractual indemnification provision will it be deemed to cover fee shifting–as compared to governing documents of a company or “constitutive business entity documents”, such as an LLC agreement, that provide for advancement and indemnification provisions.  See Slip op. at 11 to 13.

In this matter, which was also the subject of many other Chancery decisions, some of which have been highlighted on these pages, the court observed that over eight years of hotly contested litigation the parties incurred collectively about $60 million in legal fees.

Over $122 million in damages was sought, but the plaintiffs were only awarded about $212,000.

The court provides sound reasoning to explain why there was no clear victor in this litigation and for those and related reasons, the court declined to award fees to either party.

Editor’s note: There is no typo in the name of the defendant above. The correct designation for the defendant entity is: LLLP.

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 ruled that the President/CEO of Skyline Energy Renewables LLC’s parent could not wield that holding company’s power to oust a rival Skyline director because it was not his specifically delegated governance power under the operating agreements of three related limited liability energy companies’ in Roccia et al. v. Mugica, et al., No. 2020-0641-MTZ order granting motion, (Del. Ch. Dec. 29, 2020).

Vice Chancellor Morgan Zurn’s Dec. 29 summary judgment ruling sided with plaintiff Lorenzo Roccia, Skyline’s Chairman of the board and the head of Transatlantic Ultiner LLC, one of two equal managing members of Skyline’s owner, Transatlantic Group Partners LLC.  He successfully argued that his removal was void because CEO Martin Mugica, his counterpart as head of TGP’s other controlling member, Ultiner LLC, lacked authority to act on behalf of the holding company, Transatlantic Power Holdings LLC.

Background
According to the opinion, after Mugica in May 2020 notified the Skyline board that he was using his authority to remove Roccia, Roccia in July filed suit seeking an injunction barring Mugica’s removal action.

In deciding dueling summary judgment motions Vice Chancellor Zurn said it is clear that the holding company had the power to remove a director of one of the nested companies but there was no language in the agreements that enabled a top officer like Mugica to use that power on the company’s behalf.

Even though LLC’s have the freedom to generally set rights and responsibilities by contract rather than statute like traditional corporations, when LLC’s do not specifically delegate powers to officers they act through a board of directors, the court said.

“Holdings could delegate to Mugica any or all of the powers and duties to manage and control its business and affairs,” the opinion said. “As it happened, Holdings granted plenary power to its board, and only limited authority to Mugica, as president and CEO, analogized to the authority held by a corporate officer in the same position,”

Four arguments rejected
The vice chancellor rejected each of the four categories of board-granted powers that Mugica claimed gave him removal authority power:

(1) “The general powers of management usually are typically vested in the office of president of a corporation.” Removing a director of an affiliated company is neither “usual and ordinary” nor part of Holdings’ core business and “Doing so is inherently an extraordinary event, outside of Holdings’ ordinary business,” Vice Chancellor Zurn ruled.
(2) Control of Holdings’ “business and operations.”  In Miramar Police Officers Retirement Plan v. Murdoch, this Court interpreted the meaning of the term “business and operations.” Miramar Police Officers’ Ret. Plan v. Murdoch, 2015 WL 1593745, at *12–13 (Del. Ch. Apr. 7, 2015).  The Murdoch Court, relying on “commonly used dictionaries,” found that “the word ‘business’ means the commercial enterprise of a company, and the word ‘operations’ means the commercial activities of a company,” she said, distinguishing these commercial activities from “corporate governance matters.”
(3) Control over Holdings’ “officers and employees.”  Because Holdings’ designees on the Skyline Board are not officers or employees of Holdings, that branch of Mugica’s power does not reach them, she ruled.
(4) “Other duties as assigned by the Holdings Board.” There is no evidence that the Holdings Board otherwise delegated to Mugica authority by which he could exercise the company’s removal power, the vice chancellor said, because the ten enumerated restrictions the board placed on Mugica’s power were not a comprehensive list of limits.  “This language does not broaden Mugica’s authority,” the vice chancellor ruled in ordering summary judgment for the plaintiff.

A recent Delaware Court of Chancery decision granted a motion to dismiss a fiduciary duty claim that it found to be duplicative of a breach of contract claim.  In re: WeWork Litigation, Cons. C.A. No. 2020-0258-AGB (Del. Ch. Dec. 14, 2020).  Note that two decisions in this case on two separate motions were issued the same day.  Careful readers will note that the preceding hyperlink to the Slip Opinion should not be confused with the second decision published in the same case on the same day, nor should it be confused with multiple prior decisions in this same case such as one of about six weeks ago.  See In re: WeWork Litigation, 2020 WL 6375438 (Del. Ch. Oct. 30, 2020).

 

There are not as many decisions as one might expect on the topic of: when tandem claims for breach of contract and breach of fiduciary duty may proceed in the same case.  For that reason, this decision is noteworthy, although it in some ways piggybacks on the decision addressing the same issue of about six weeks ago in the same case which included a more comprehensive analysis of the issue.  See In re: WeWork, 2020 WL 6375438, at * 11-14.  In fact, the instant decision not only refers back to the Oct. 30, 2020 opinion but also incorporates it by reference.

 

In sum, this decision explains why the fiduciary duty claims cannot proceed, in part, because: (1) the complaint “does not identify any additional facts relevant to his fiduciary duty claim, but not his contract claim”; and (2) “no independent basis exists to maintain the claim for breach of fiduciary duty.”  Slip op. at 42 (citing WeWork, 2020 WL 6375438, at *14).

 

This decision also has a useful discussion of standing.  A plaintiff bears the burden of establishing standing as part of subject matter jurisdiction which includes “injury in fact.”  This requirement is often satisfied when a party to a contract is seeking to enforce it.  In this case, the court found standing to exist even “without financial loss” because the plaintiff could still conceivably be injured. See Slip op. at 14-23

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 Court of Chancery recently ruled that Stimwave Technologies Inc. need not advance legal costs for its suit against its ex-CEO because she apparently doctored her indemnification agreement to falsely pre-date a charter amendment requiring officers to get a major investor group’s approval of their advancement rights in Perryman et al. v. Stimwave Technologies Inc., No. 2020-0079-SG, memorandum opinion issued (Del. Ch. Dec. 9, 2020).

Vice Chancellor Sam Glasscock’s December 9 opinion declined to order advancement for ex-CEO Laura Perryman based on his credibility issues with her testimony and documents, but he endorsed the advancement rights of her husband, director Garry Perryman, whom he found likely lacked skill to manipulate the truth or the metadata that identified his indemnification agreement.

The decision turned on the novel issue of whether the ex-CEO and director had complied with an STI charter change that purportedly gave investors in the company’s Series D Preferred stock, voting as a separate stock class, power to nullify a director or officer’s transactions, including indemnification pacts and advancement for their actions.

“Neither the bylaws nor the charter precludes the company from granting to an investor a veto right over extension of advancement benefits to its directors and officers,” the vice chancellor ruled.  Therefore, “whether Laura’s IA is valid accordingly turns on when that document was executed, which in turn determines whether such document required approval from the Series D stockholders to be valid.”

Background

Laura Perryman was a founder and CE0 of the Tucson-based marketer of wireless micro size injectable medical devices from when it was chartered in Delaware in 2010 until November 2019 when she was asked to step down amid a Department of Justice investigation.

According to the opinion, Laura sent the STI board an email the next day with an attachment that she identified as her indemnification agreement dated January 1, 2018 and based on that document, the board agreed to pay for her attorney bills for the investigation.

But the next month, STI filed its own complaint against its ex-CEO claiming she breached her fiduciary duties by directing employees to alter bills to falsely make it appear they had been paid and later added a charge that she misused company funds to pay her son’s apartment rent and bonuses to favored employees.

STI also included in the complaint what the vice chancellor found to be a “weak allegation” of breach of duty against Gary for “acting in concert” with his wife.

At a December 20 board meeting, a majority of the board concluded that the January 1, 2018 IA Laura submitted was not valid because it was actually created on November 11, 2019 —“after the DoJ’s civil investigative demand,” the opinion said.

The advancement action

Laura and Gary filed a February complaint and a petition for judgment on the pleadings to compel STI to provide indemnification and advancement.  In opposition, STI argued that both of them filed their indemnification agreements after the 2018 charter change that required Series D stockholder approval but doctored the documents to make it appear that they were signed before the amendment, so they were void ab initio under that amendment.

Gary’s advancement right

As to Gary’s right to advancement, Vice Chancellor Glasscock noted that Gary was not an executive and thus did not need to get Series D approval.  He found that even though the indemnification agreement that Gary submitted carried a date that did not jibe with his testimony, Gary had no motive for deception and was not very “engaged” in the discovery process or his role as a director.

The court found it most likely that Gary’s original IA was created before the amendment and is therefore valid.

Laura’s advancement right

STI’s document experts claimed they discovered Laura had merged her indemnification agreement with an earlier signature page and purported that its identification metadata applied to the agreement, but they said in truth, there was no metadata for her false agreement.

Vice Chancellor Glasscock found that Laura:

Has indemnification rights under the Charter, “but those may prove pyrrhic absent [advancement] funds to vindicate her legal rights”

Whether she was or was not a CEO when she signed her agreement, could not have a valid agreement if she lacked proof that it was signed before Stimwave’s July 17, 2018 charter amendment requiring Series D investor approval of benefit extension – which she did not seek.

Cannot argue that other parts of the charter always require indemnification and advancement.

“Came across as someone who had created a story to fit the facts, adjusted it as it became apparent that it would be advantageous to do so, and who was attempting to buttress that story by concocting details.”

Has failed to successfully challenge the contractual right of the company to give the Series D shareholders veto power over the extension of advancement

A time-will-tell-take-away?

Could the opinion be seen as diverging from a long trend of Chancery Court decisions that have cast a skeptical eye on any firm’s attempt to add disqualifying conditions to the indemnification/advancement rights its charter had granted?  Might the opinion encourage corporate law specialists to research more ways to attract investor groups by offering them expanded power to control executive transactions?  And might the Chancery Court of the future be asked to rule on a new species of advancement disputes as a result?

 

 

A recent decision from the Delaware Supreme Court provides hope to stockholders who seek to obtain corporate documents pursuant to Section 220 of the Delaware General Corporation Law to the extent that Delaware’s High Court removed two common defenses that companies use to oppose the production of corporate records to stockholders.  In AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Supr. Dec. 10, 2020), the two most important aspects of the ruling are that:

(i) A stockholder making a Section 220 demand need not demonstrate that the wrongdoing being investigated is “actionable;” and

(ii) When the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to “specify the ends to which it might use” the corporate records requested (i.e., exactly what it will do with the documents it receives).

Regular readers of these pages know that over the last 15 years I have highlighted many of the frustrating aspects of decisions construing Section 220 to the extent that one needs stamina and economic fortitude to pursue what oftentimes is an unsatisfying result.  See, e.g., my recent overview on this topic.

 

This decision should be in the toolbox of every corporate litigator not only because it announces a new path for Section 220 cases, and reminds us of the basic prerequisites of the statute, but also in light of it partially overruling and distinguishing some prior cases. This opinion also confirms that several Chancery decisions that were not in harmony with this decision should no longer be followed.

 

Key Takeaways:

•           One of the most important takeaways from this decision is that the court clarified that when the purpose of a Section 220 demand is to investigate potential mismanagement, the stockholder is “not required to specify the ends to which it might use” the corporate documents requested.  See page 22.

•           The second most important takeaway from this case is the court’s holding that a stockholder pursuing a Section 220 demand need not demonstrate that the alleged wrongdoing is “actionable.”  See page 25.

•           The three prerequisites (not including the many nuances) for successfully pursuing a Section 220 demand to inspect a corporation’s books and records requires a stockholder to establish that:  (1) such stockholder is actually a stockholder; (2) such stockholder has complied with Section 220 respecting the form and manner of making demand for inspection of such documents; and (3) the inspection such stockholder seeks is for a proper purpose.  See pages 12-13.

•           The court recited the many examples of proper purposes that have been recognized to be reasonably related to the interest of the requesting stockholder.  See footnote 30 for a lengthy list, which includes “to communicate with other stockholders in order to effectuate changes in management policies.”

•           The court reiterated the well-known requirement that when the proper purpose of a stockholder making a Section 220 demand is to investigate potential mismanagement, a stockholder needs to demonstrate “a credible basis” from which the court may infer that “there is possible mismanagement that would warrant more investigation.”  See page 15.

•           Although a credible basis of wrongdoing needs to be presented by a preponderance of the evidence to pursue the proper purpose of investigating potential wrongdoing, a company will not be permitted to mount a merits-based defense of such potential wrongdoing.  See page 37.

•           Moreover, while trying to harmonize prior decisions on these nuances, the court observed that some of the decisions struck a discordant note.  See footnote 109.

•           The court also affirmed the following two aspects of the Court of Chancery’s ruling:  (1) regarding the scope of documents, the court found that it was appropriate to include a requirement that the company produce officer-level materials and (2) the high court found it was not an abuse of discretion to order a Rule 30(b)(6) deposition–because the company refused to describe the types and custodians of corporate records that it had in response to discovery requests.  See pages 39 and 43.

A recent Delaware Court of Chancery decision provides a primer on the proper way to expand the size of a board of directors and the proper way to fill board vacancies, as well as explaining the difference between a de facto and a de jure director.  See Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020).

This opinion should be readily accessible for every corporate litigator who is called upon to address whether:

(1) the size of a board of directors was properly expanded;

(2) director vacancies were properly filled; or

(3) whether the actions of a de facto board member were binding even if because of technical mistakes that director was not properly appointed such that she would qualify as a de jure director.

 

Many additional consequential statements of Delaware law with widespread utility are included in this gem of a 52-page decision.

 

Highlights:

•           The court describes the well-known prerequisites for obtaining a preliminary objection.  See page 16.

•           The court provides a tutorial, with copious citations to statutory and caselaw authority, to explain:  (i) how to expand the size of the board of directors; (ii) who has the authority to expand the size of the board; (iii) how to fill vacancies on the board; and (iv) who is authorized to fill vacant board seats.  See pages 17 to 20.

•           This opinion features a maxim of equity that would be useful to have available when the situation calls for it: equity regards as done what ought to have been doneSee page 20.

•           The court explained that only the charter or the bylaws can impose director qualifications, and in any event those qualifications must be reasonable.  See page 21.

•           The court explained that a director could not agree to conditions of service as a board member that would be contrary to the exercise of the fiduciary duties of a director.  See page 22.

•           An always useful reminder of the three tiers of review of director decision-making are provided.  Those three tiers are: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness.  See pages 50 to 51.

•           In addition to explaining when those three tiers apply, the opinion also regales us with a classic recitation of the business judgment rule as the default standard:

“ . . . the default standard of review is the business judgment rule, which presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.”

See page 50.

•           This decision teaches that unless one of the rule’s elements is rebutted, the court merely looks  to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objective.

•           The court explains the difference between a de facto director and a de jure director, and which actions of a de facto director are binding.  See pages 23 to 25.

•           Another extremely important aspect of this decision (which takes up the majority of the 50-plus pages) is a deep dive into the historical foundations of Section 271 of the Delaware General Corporation Law which applies generally to the sale of most or all of the assets of a corporation, and which would typically require stockholder approval. See page 27 through 48.

•           The court supports with detailed reasoning and extensive footnote support, its conclusion that Section 271 does not apply to an insolvent corporation that transfers assets to a secured creditor.  Compare DGCL Section 272 (allows directors to mortgage corporate assets).

A recent Delaware Court of Chancery decision should be consulted by those who need to be aware of the latest iteration of Delaware law on the topic of indispensable parties to a lawsuit as prescribed in Rule 19. In Germaninvestments AG v. Allomet Corp., C.A. No. 2018-0666-JRS (Del. Ch. Nov. 20, 2020), the Court provides a thorough explanation of the various contours and factors in Rule 19 and why the lack of indispensable parties in this case required its dismissal.

The factual details of this case where provided in a prior Chancery decision profiled on these pages, as well as in a Supreme Court decision that reversed the first Chancery ruling in this case. That high court ruling was also covered on these pages.

Key Takeaways:

  • A thorough examination and analysis of the multi-faceted aspects of Rule 19, and the various factors that need to be applied to determine when a person or entity may be indispensable, is covered on pages 15 to 34 of this opinion.
  • The court observes that a Rule 19 argument may be presented for the first time at trial, based on Rule 12(h)(2), and therefore is not waived per Rule 12(g). See Slip op. at 18.
  • The net impact of the application of this rule can be quite draconian in terms of the wasted time and money and resources expended on litigating the merits of a case–only to reach trial and find that the merits of the case will not be addressed.
  • A much more efficient approach (even if it may necessitate a rule change), would be to require an issue not directly merits-based that has such a drastic impact on a case to be addressed and decided at an earlier stage of a case.

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 found Delaware’s Limited Liability Company Act requires American Rail Partners LLC to reimburse the legal bills a managing member and its directors and CEO incur in defense of ARP’s unjust enrichment and mismanagement charges — even if such “first party claims” are not specifically covered, in International Rail Partners LLC et al. v. American Rail Partners LLC, No. 2020-0177-PAF, memorandum opinion issued, (Del. Ch. Nov. 24, 2020).

Vice Chancellor Paul Fioravanti, Jr.’s Nov. 24, 2020 memorandum opinion on a novel advancement issue rejected ARP’s contention that two-member limited liability company agreements, like two-party commercial contracts, provide fee-shifting in some situations but not advancement and indemnification for the company’s suit against a member.

Ruling on dueling summary judgment motions, he sided with the plaintiffs seeking advancement, finding that unlike commercial contracts, the Delaware Limited Liability Company Act Section 18-108 was designed to encourage LLC officers, directors and members to serve without worry about suits over their actions on behalf of the company.

The underlying action

ARP filed an underlying action in February in the Delaware Superior Court, spurred by non-party member Newco SBS Holdings, LLC’s complaint that the management of the other member, International Rail Partners LLC, and ARP CEO and Chairman-of-the-Board Gary Marino unjustly profited at ARP’s expense. American Rail Partners, LLC et al. v. International Rail Partners LLC et al., C.A. No. N20C-02-283 EMD complaint filed (Del. Super. Feb. 28, 2020).

When IRP, Marino and their corporate allies sought advancement, ARP claimed the type of claims in the Superior Court suit could never be indemnified despite the broad scope of Section 10.02(c)(i) of the LLC Agreement, contending that an indemnification or advancement provision may only cover first-party claims if it expressly says so.

The court said that argument is grounded in a line of decisions which established a presumption that a standard indemnification provision in a bilateral commercial contract would not automatically be presumed to provide for fee-shifting in the indemnity section of a contract. TranSched Sys. Ltd. v. Versyss Transit Solutions, LLC, 2012 WL 1415466 (Del. Super. Mar. 29, 2012).

Not like a commercial contract

That decision spawned others that barred fee shifting in a commercial contract unless specifically spelled out, and the only Chancery Court ruling on the issue, Senior Housing Capital, LLC v. SHP Senior Housing Fund, LLC, 2013 WL 1955012 (Del. Ch. May 13, 2013), followed TranSched in holding that the indemnity provision in a management agreement was not a valid fee-shifting provision between the parties because it did not contain language indicating an intent to cover first-party claims.

But Vice Chancellor Fioravanti said the parties here were unable to locate any case applying the first-party/third party distinction to an indemnification or advancement provision in a certificate of incorporation, corporate bylaws, limited partnership agreement, or limited liability company agreement.

Defendant ARP argued that there was no significant difference between those agreements and a commercial contract, but the court said, “Unlike typical commercial contracts, indemnification and advancement provisions in LLC agreements are derived from clear statutory authority and apply much more broadly.”

The LLC Act statute, 6 Del. C. § 18-108, prescribes that an LLC contract “may indemnify any person to the fullest extent possible by contract. The only restrictions are those expressly set forth in the contract,” the opinion says. Therefore, “the clarity of the provision regarding power to indemnify, located in Section 18-108, underscores an effort to avoid any uncertainty or negative implication that might exist if the statute were silent on this important point.”

Not like TranSched

Even though “alternative entity agreements are a type of contract” the broad language of the LLC Agreement’s indemnification provision, and the strong public policy in favor of indemnification and advancement,” caused the vice chancellor to conclude that the first-party/third-party claim distinction applied in the TranSched line of cases is inapplicable here.

Even if there is a fee-shifting provision in the parties’ LLC agreement, it expressly applies only to members so it does not eviscerate the indemnification and advancement rights found elsewhere in the pact, the court ruled.

Defendant argued that ARP’s management agreement is the only possible source of indemnification because the claims in the Superior Court Action arise from IRP providing services to the company, but the vice chancellor held that, “because the company has asserted non-contract claims in the Superior Court Action, the court cannot determine at this stage whether the company’s claims asserted against the defendants in that action (i.e., Plaintiffs here) are exclusively governed by the management agreement.”

In granting summary judgment for plaintiffs and denying judgment to defendants, the court ruled that because the plaintiffs are entitled to advancement, they are also entitled to reasonable attorney fees and expenses to pursue advancement, commonly referred to as “fees-on-fees.”