In the current issue of the ABA publication Business Law Today, I co-authored an article on the intersection of corporate governance principles and the nearly ubiquitous field of artificial intelligence–along with my colleague Shani Else.
The Delaware Supreme Court recently issued an opinion that clarifies the duty of a company to produce emails among its management in a Section 220 case. In KT4 Partners LLC v. Palantir Technologies, Inc., Del. Supr., No. 281, 2018 (Jan. 29, 2019), Delaware’s High Court addressed a demand under Delaware General Corporation Law (DGCL) Section 220 by a stockholder for corporate books and records, including emails among management, to allow the stockholder to investigate possible wrongdoing, such as the reasons behind amendments to an Investors’ Rights Agreement that severely reduced the original rights granted under that agreement.
Notably, the court in its opinion quoted from a law review article that yours truly co-authored on the topic, which explained why demands under DGCL Section 220 should often include electronically-stored information (ESI) such as emails. See footnote 76.
This opinion is noteworthy because it clarifies Delaware law and authoritatively describes those circumstances when a demand for books and records under DGCL Section 220 will require the company to produce ESI, such as emails among management, to the extent necessary for the proper purpose established in a Section 220 case.
The stockholder demand in this case stated as its purpose the investigation of mismanagement, including depriving investors of their right of first refusal under an investors’ agreement that was amended without the consent of all investors, as well as interfering with the sale of stock by a large stockholder. The Court of Chancery, in a decision highlighted on these pages, determined that although some books and records had to be produced, emails need not be. The Supreme Court disagreed with that ruling and affirmed in part, reversed in part, and remanded.
Importantly, the facts of this case include an acknowledgment by the company that it often did not follow corporate formalities such as preparing board resolutions and keeping minutes of board meetings, but rather often communicated by email and took action by email–including on matters that were the subject of the investigative purpose of the Section 220 demand.
Highlights of Key Aspects of the Court’s Ruling:
For busy readers, I provide bullet points of key aspects of this crucial decision, but those who need to be familiar with the nuances of this aspect of Delaware corporate litigation should read the entire 49-page opinion linked above.
- The court discussed what appeared to be an issue of first impression about the standard of review regarding a dispute over the interpretation of the stated purpose in a Section 220 demand. The court explained that the standard of review for the scope of relief is abuse of discretion, but de novo review applies to questions of law such as whether the stated purpose under Section 220 is proper. Although contract interpretation is also subject to de novo review as a question of law, fact-intensive and judgment-based determinations are reviewed for abuse of discretion, and factual determinations that underlie the trial court’s interpretation of an ambiguous written document deserve the deference given to factual findings.
- The Delaware Supreme Court found that the demand in this case did include an explicit reference to a request for electronic documents.
- The core issue identified by the High Court was whether the Court of Chancery abused its discretion in ruling that emails and other ESI were not necessary to satisfy the purpose of investigating the wrongdoing alleged in this Section 220 case.
- The court reviewed the basic principles and policy undergirding the qualified common law and statutory right to inspect corporate books and records. See Slip op. at 22 to 24.
- The court observed that the scope of documents to which a stockholder is entitled under Section 220 is limited to those that are necessary to accomplish the proper purpose as stated in the demand. See Slip op. at 24 to 25.
- In explaining why ESI should be included in appropriate Section 220 cases, the Delaware Supreme Court quoted from a law review article on this topic co-authored by your truly. See footnote 76 (quoting Francis G.X. Pileggi, et al., Inspecting Corporate “Books and Records” in a Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163, 165 (2012)).
- The court reviewed Delaware cases that previously addressed whether ESI such as emails should be included in a Section 220 request. See footnotes 71 to 74. See also Amalgamated Bank v. Yahoo!, Inc., a Chancery opinion highlighted on these pages that also cited the same law review article on this topic co-authored by yours truly that was quoted by the Supreme Court in the instant case. See, e.g., footnote 72 (citing a Court of Chancery Order allowing for imaging of a Blackberry in a Section 220 case.)
- The court also explained, based on the facts and circumstances of this case, why emails and ESI had to be produced and were needed to accomplish the stated purpose. See Slip op. at 31. For example, the court explained that the company involved did not comply with required corporate formalities such as minutes of board meetings and that it often conducted corporate business informally, including over email, regarding the issues subject to the Section 220 demand. See footnote 77 and accompanying text. The ESI at issue included, for example, an allegedly incriminating message sent via LinkedIn.
- The court also emphasized that there may be some Section 220 cases where ESI may not be required to be produced by the company, such as those situations where the corporation has traditional, non-electronic documents that are sufficient to satisfy the needs of the Section 220 petitioner.
- In this case, the company admitted that there were no hardcopy documents that addressed all of the requests, and that there were emails and other ESI that were responsive to the requests.
- The court also provided practice tips for future litigants: there should be a cooperative effort to focus on the substantive data that should be produced–or in other words, focus on the information that is needed and that is available whether it be in hardcopy or in ESI format.
The court also addressed an unrelated issue. It rejected the argument that the company made that as a condition of production it could require the stockholder to file any suits based on the data received in the Delaware Court of Chancery. Although there have been cases that have imposed similar jurisdictional conditions, the court explained why such a condition should be the exception and not the norm.
SUPPLEMENT: Law360 published an article about this case in which they quoted my comments about the importance of the High Court’s opinion. (Subscription required)
A recent Court of Chancery decision is notable for its analysis of an issuance of shares approved by a sole director–but without stockholder approval. In the matter of Applied Energetics, Inc. v. Farley, C.A. No. 2018-0489-TMR (Del. Ch. Jan. 24, 2019), the court considered a somewhat unusual set of facts that included a shell corporation, at the time of the issuance of stock being contested, that only had one director–although the bylaws required a minimum of three directors. A stockholder challenged the issuance of a large number of shares to the sole director at a price that was allegedly less than fair market value.
The most notable aspects of this opinion include the following bullet points:
- When discretionary director compensation–including issuance of stock by directors to themselves–is done without stockholder approval, the directors have the burden of establishing the entire fairness of the transaction to the corporation and stockholders. See footnotes 99 to 103 and accompanying text.
- In the context of this case, the stockholders sought a preliminary injunction to prevent the director from selling or transferring the shares that he authorized to be issued to himself. In the context of a motion for preliminary injunction, despite the normal burden under the entire fairness standard, the moving party must carry the burden to show a reasonable probability of ultimate success on the merits in order to obtain injunctive relief prior to trial.
- The entire fairness standard includes a requirement for both fair price and fair dealing. In the circumstances of this case, the court determined that those two criteria were so overlapping that it focused on the fair price that the sole director determined on his own.
- The court found that there was an insufficient basis for the director to determine the low price that he set for himself for the large number of shares that he purported to authorize to be issued to himself.
- See DGCL § 141 requiring board approval by written consent to be unanimous. Only one director was serving at the time, but the bylaws provided for a minimum of three directors.
- The court reviewed the prerequisites of injunctive relief: (1) a likelihood of success on the merits; (2) irreparable harm, and (3) a balance of the equities, to support its reasoning for granting a preliminary injunction.
- The court also considered a claim for fraudulent transfer based on some of the shares being transferred to an LLC controlled by the family of the director–after it became likely the issuance of shares would be challenged. See Slip op. at 28 to 32 and accompanying text.
- The court also discussed how it determined the amount of the bond that would be required in order for injunctive relief to be granted. See Slip op. at 38 to 40 and accompanying text.
A recent Delaware Supreme Court decision is must-reading for those who need to know the latest iteration of Delaware law on the implied covenant of good faith and fair dealing. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), Delaware’s High Court provided the latest articulation of Delaware law on the multi-faceted doctrine of the implied covenant of good faith and fairing dealing. In connection with affirming in part and reversing in part a 176-page trial court opinion, which was highlighted on these pages, the Supreme Court agreed with the analysis of the trial court’s correct reading of the plain meaning of the LLC agreement at issue, but disagreed with the application by the trial court of the implied covenant.
Highlights of the most recent authoritative explanation of the implied covenant under Delaware law are noted in the following bullet points:
- When a board is given contractual discretion to make a choice, that is not a “gap” to be filled. Although “the vesting of a board with discretion does not relieve the board of its obligation to use that discretion consistently with the implied covenant of good faith and fair dealing,” the argument was not made in this case that the board exercised this contractual discretion in bad faith. See footnotes 92 and 93 and accompanying text.
- The court explained the two common situations where the implied covenant often applies. The first, at issue in this case, is when it is argued that a situation has arisen that was unforeseen by the parties and where the agreement’s express terms do not cover what should happen. See footnote 93.
- The next situation is when a party to the contract is given discretion to act as to a certain subject and it is argued that the discretion has been used in a way that is impliedly proscribed by the contract’s express terms. Id.
- “When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.” Id.
- Delaware’s High Court explained that the “implied duty of good faith and fair dealing is not an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, later adversely affected one party to a contract.” See footnote 109 and accompanying text.
- Rather, “the covenant is a limited and extraordinary legal remedy.” See footnote 110.
- The Supreme Court added that the implied covenant “does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand. Even where the contract is silent, an interpreting court cannot use an implied covenant to re-write the agreement between the parties, and should be most chary about implying a contractual protection when the contract could easily have been drafted to expressly provide for it.” See footnotes 110 to 113 and accompanying text.
A recent Delaware Court of Chancery decision addressed the important issue of the right of directors to be given access to corporate records. In Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), Delaware’s court of equity considered a claim under Section 220(d) of the Delaware General Corporation Law (DGCL) by the founder and largest stockholder of the Papa John’s pizza chain who was forced out as the CEO but retained his position as a director. He sought to obtain books and records in his capacity as a director to support an investigation that the other directors breached their fiduciary duties by improperly ousting him for unjustified reasons.
Key Bullet Points that Make this Case Noteworthy include the following:
- The court required the Defendant-Directors to produce their text messages and their private emails, that they sent and received, that related to the specific issues in contention. Prior Chancery decisions have required the production of such personal communications that related to corporate business but such a ruling is still notable. For example, a few years ago, in Amalgamated Bank v. Yahoo!, Inc., highlighted on these pages, the Court of Chancery ordered a similar scope of production–and also cited to a law review article that yours truly published in which my co-authors and I explained why electronically stored information (ESI), including text messages and private emails, should often be included within the scope of a DGCL Section 220 demand. See law review article co-authored by yours truly which argued that the court should often include ESI as part of the obligation to produce records under Section 220. See 37 Del. J. Corp. L. 163, 165 (2012), highlighted on these pages here.
- It is well-established that directors have nearly unfettered rights to access to books and records of a corporation in which they serve. Unlike a stockholder, when a director makes a demand for books and records under Section 220(d), the corporation has the burden to establish that the director’s demand for books and records is based an improper purpose.
- Unlike the impact of a stockholder filing a plenary action before a Section 220 case is complete, when a director files a plenary action before a final ruling in a Section 220 case, that will not necessarily bar the continuation of Section 220 claims and it will not otherwise moot the Section 220 claims. See generally CHC Investments, Inc. v. FirstSun Bancorp, C.A. No. 2018-0610-KSJM (Del. Ch. Jan. 24, 2019)(Section 220 stockholder demand case dismissed due to parallel plenary action.)
- The court observed that a director should not be required to sign a confidentiality agreement as a condition to obtaining records because a director already has a fiduciary duty to keep them confidential—as compared to stockholders who routinely are required to sign a confidentiality agreement as a condition to obtaining records pursuant to a Section 220 demand. See generally Murfey v. WHC Ventures, LLC, C.A. No. 2018-0652-MTZ (Del. Ch., Jan.23, 2019)(proposed confidentiality order rejected by Court as non-compliant with Chancery Rule 5.1 because it did not allow for filing confidential documents with the court–confidentially.)
A recent decision of the United States Supreme Court addressed the frequently encountered issue of arbitrability—that is, whether a court or an arbitrator should decide whether or not a particular issue is subject to arbitration based on the arbitration clause in an agreement.
This decision is noteworthy because the issue often arises about how to handle an argument that a claim is subject to arbitration when that claim is frivolous (at least in one party’s view.) In Henry Schein, Inc. v. Archer & White Sales, Inc., U.S. Supr. Ct., No. 17-1272 (Jan. 8, 2019), a unanimous decision written by Justice Brett Kavanaugh, the court rejected a judicially-imposed exception to arbitrability under the Federal Arbitration Act. The court determined that if an agreement containing an arbitration clause provides that arbitrators have the power to resolve arbitrability questions, then an arbitrator—not the court—should decide whether the arbitration provision applies to the issue involved, regardless of whether the arbitration demand is “groundless.”
The court rejected an argument followed by some lower courts that if an arbitration claim was “wholly groundless,” a court should decide arbitrability. The nation’s high court reasoned that because the statute did not impose a “wholly groundless” exception, the gateway question of arbitrability is a matter of contract law and, for example, when an agreement refers to the rules of the American Arbitration Association, those rules provide for the arbitrator to have the power to resolve arbitrability questions.
This decision should be compared to the long line of Delaware cases on arbitrability beginning with the Delaware Supreme Court decision in Willie Gary, highlighted on these pages here, that almost 13 years ago reached a similar result regarding questions of arbitrability. (Yours truly successfully argued that Willie Gary case.)
A recent Delaware Court of Chancery decision determined that “words” prevailed over “numbers” when they appear next to each other as contract terms in a manner that is inconsistent and contradictory. In Fetch Interactive Television, LLC v. Touchstream Technologies, Inc., C.A. No. 2017-0637-SG (Del. Ch. Jan. 2, 2019), the court described in extensive detail the claims and counterclaims between parties who had entered into licensing agreements and a sublicense for a patent, amid deteriorating personal and business relationships.
The most noteworthy aspect of this decision is the analysis by the court about how to interpret a deadline provision in the agreement that included a written word, spelling out a number, followed by a different number in parentheses, as follows: “fifteen (30).” Although there are other important aspects of the opinion, for purposes of this short blog post I focus on a provision discussed and analyzed at pages 52 through 55 of the slip opinion which provided that notice of an opportunity to cure a default must be provided, and that the default could be cured, according to the agreement: within “fifteen (30)” days . . ..
After observing the obvious that the terms of the agreement were in conflict to the extent that the written and numerical terms were contradictory, the court found after trial that the record was “devoid of evidence to resolve this ambiguity.”
The court referred to the Delaware version of the Uniform Commercial Code at 6 Del. C. Section 3-114 which provides that “words prevail over numbers.” See footnote 236. The court applied that general rule to the facts of this case to give precedence to the written number. The court reasoned that it’s less likely that a drafting error will occur in a written expression rather than in a numeric one. See pages 52 to 55.
The court also reasoned that the actual amount of time that was given to the opposing party to cure was consistent with the written number as opposed to the numeric representation of the number of days allowed.
An author of a treatise on contract drafting, Ken Adams, provided commentary on the case, and observed that even though the correct “general rule” was applied, this may be a case where principles of interpretation “don’t always work” as they are not infallible and not on the “level of scripture.”
N.B. This post was linked in the Bloomberg Money column by Matt Levine on Jan. 23, 2019.
A recent Delaware decision is noteworthy because of its clarification of when the statute of limitations begins to run in connection with the alleged breach of a contractual indemnification clause.
The Superior Court ruled that an indemnification claim for environmental remediation liability accrued when the seller refused to indemnify the buyer–and not when the buyer discovered the contamination on which the indemnification claim was based. See Cooper Industries v. CBS Corp., C.A. No. N18C-03-175-WCC-CCLD (Del. Super., Jan. 10, 2019). The agreement at issue provided that the duty to indemnify was triggered when the buyer sustained losses. See footnote 58 and accompanying text, citing cases for the position that the breach does not occur until the claim was rejected. In light of that finding, suit was filed within the three-year SOL for contract claims. A more careful review of the detailed facts described in the court’s opinion is warranted for those who need to be familiar with the nuances of the latest iteration of Delaware law on this topic.
For the 14th year, we provide a list of key Delaware corporate and commercial decisions from the prior year. This year, our list is co-authored by Chauna Abner in addition to yours truly, and appeared in the following article published in the Delaware Business Court Insider on January 2, 2019:
For the 14th year, we have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list is not by any means a complete list of important decisions of the two courts that were rendered this year. Instead, this list includes notable decisions that should be of widespread relevance to those who work in the corporate and commercial litigation field or follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink. This list focuses on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.
Delaware Supreme Court Decisions
- Aranda v. Phillip Morris USA, 183 A.3d 1245 (Del. 2018).
This Supreme Court decision should be required reading for anyone who has a forum non conveniens issue in Delaware. The opinion provides an overview of the Delaware law on forum non conveniens and clarifies that even if it is a minority view among the 50 states, Delaware only requires that the trial court “consider” whether an alternative forum is available as part of its analysis, and whether an alternative forum is available is not a deciding factor. In its analysis, the court explores three general categories of forum non conveniens cases. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- Eagle Force Holdings v. Campbell, 187 A.3d 1209 (Del. 2018).
For the first time, the Delaware Supreme Court clarifies the test to determine whether a contract’s terms are sufficiently definite to create an enforceable contract. Before setting forth the test, this opinion discusses the intent necessary for parties to be bound. This opinion also explains the three basic requirements for a valid contract and addresses the ancillary issue of whether the Court of Chancery could impose sanctions for violation of a court order prior to establishing that it had personal jurisdiction over the person who violated the order. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- Morrison v. Berry, 191 A.3d 268 (Del. 2018).
In this opinion, Delaware’s highest court limits the application of the Corwin doctrine and prohibits the cleansing effect of stockholder approval, in part due to inadequate disclosures. The opinion also explains the various nuances of the board’s duty of disclosure to stockholders, describes the duty of candor owed by directors to each other, and provides a definition of materiality as well as an explanation of when an omitted fact is material. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- Flood v. Synutra International, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018).
In this opinion with a vigorous dissent, the Supreme Court clarifies the MFW standard that was announced in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The court explains whether the prerequisites that must be satisfied for the MFW standard to apply must be imposed as a condition of the deal at the absolute beginning of negotiations. The opinion also discusses whether due care violations were pleaded in the complaint. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
Delaware Court of Chancery Decisions
- KT4 Partners v. Palantir Technologies, 2018 Del. Ch. LEXIS 59 (Del. Ch. Feb. 22, 2018).
The Court of Chancery determined that a stockholder satisfied the prerequisites of Section 220 in this case to obtain certain corporate records. This 50-page decision can serve as a primer for the requirements of Section 220, to which judicial opinions have added prerequisites that are not found in the text of the statute. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 75 (Del. Ch. Mar. 5, 2018).
In this opinion, the Court of Chancery adds to the relatively modest body of case law interpreting Section 273 of the DGCL. The court applies Section 273 to dissolve a joint venture with two 50/50 stockholders that was deadlocked. This is analogous to a “no fault business divorce” but the remedy is discretionary and the court will not always grant dissolution. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Shortly after the court issued its decision, the respondent moved for relief from the court’s entry of judgment and the court denied the motion. See Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 148 (Del. Ch. May 4, 2018).
- PR Acquisitions v. Midland Funding, 2018 Del. Ch. LEXIS 137 (Del. Ch. Apr. 30, 2018).
This Chancery decision is notable for enforcing the provisions in an agreement that provided a procedure and a comparatively short deadline for making claims for funds held in escrow. This decision was in the context of notice being mistakenly sent to the escrow agent when the agreement required that notice be sent to the seller. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- CBS v. National Amusements, 2018 Del. Ch. LEXIS 157 (Del. Ch. May 17, 2018).
In this high profile case, the Court of Chancery denies the request of CBS, a minority shareholder, for a TRO that sought to prevent the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- Basho Technologies Holdco B v. Georgetown Basho Investors, 2018 Del. Ch. LEXIS 222 (Del. Ch. July 6, 2018).
This 126-page Court of Chancery opinion is a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The opinion includes many key principles of Delaware corporate law and a description of different types of available remedies. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- In Re Oxbow Carbon Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018).
In this opinion, the Court of Chancery provides the most comprehensive description of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy in several decades. This decision should be treated as an indispensable reference for those involved in corporate or commercial litigation who might need to quote authoritative sources for the voluminous scope of the Court of Chancery’s flexible and customized equitable remedial powers. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- Applied Energetics v. Farley, 2018 Del. Ch. LEXIS 277 (Del. Ch. Aug. 14, 2018).
This Court of Chancery opinion is a must read for litigators who need to know the finer points of how the amount for a requisite bond is determined for purposes of obtaining an injunction. The court found problems with both parties’ estimates and essentially engaged in an abbreviated analysis of the appropriate measure of potential damages based on the claims in the case. A synopsis of the decision and a link to the full opinion is available at this hyperlink.
- Godden v. Franco, 2018 Del. Ch. LEXIS 283 (Del. Ch. Aug. 21, 2018).
In this opinion, the Court of Chancery explains several important principles that Delaware courts use to analyze issues in the LLC context, and interpretive rules involving LLC agreements. In doing so, the court provides a helpful analysis of the equitable powers of the court to fashion remedies in the context of an LLC—notwithstanding the often exaggerated explanation of LLCs as creatures of contract. In this vein, the court cites several exceptions to the concept of LLCs being purely a product of contract. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- Akorn v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325 (Oct. 1, 2018), aff’d, 2018 Del. LEXIS 548 (Del. Dec. 7, 2018).
This epic 246-page Court of Chancery opinion serves as a mini-treatise on several topics of importance to corporate and commercial litigators, including: interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Notably, the Supreme Court affirmed the decision in a three-page order in December.
- Lexington Services v. U.S. Patent No. 8019807 Delegate, 2018 Del. Ch. LEXIS 509 (Del. Ch. Oct. 26, 2018).
In this opinion, the Court of Chancery recognizes that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. In doing so, the court discusses two principles of well-established Delaware law: the general enforceability of forum-selection clauses in Delaware; and the ability of officers and directors of an entity subject to a forum-selection clause to invoke its benefits when they were closely involved in the creation of the entity and were being sued as a result of acts that directly implicated the negotiation of the agreement that led to the entity’s creation. A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- Decco U.S. Post-Harvest v. MirTech, 2018 Del. Ch. LEXIS 545 (Del. Ch. Nov. 28, 2018).
This Court of Chancery opinion adds to the modest body of Delaware case law that addresses whether an LLC should be dissolved based on the statutory standard that it is “not reasonably practicable” to carry on the LLC. The court explains that in determining the purpose for which an LLC was formed, it may not only look at the purpose-clause in the LLC’s operating agreement, but also to “other evidence … as long as the court is not asked to engage in speculation.” A synopsis of the decision and a link to the full opinion are available at this hyperlink.
- Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).
This recent seminal decision of the Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. The court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal-Forum Provisions”). A synopsis of this decision and a link to the full opinion are available at this hyperlink.
Francis G.X. Pileggi is a litigation partner and vice-chair of the commercial litigation practice group at Eckert Seamans Cherin & Mellott. Contact him at email@example.com. He comments on key corporate and commercial decisions and legal ethics rulings at www.delawarelitigation.com.
Chauna A. Abner is an associate in the firm’s commercial litigation practice group.
The above post originally was published as an article, and is reprinted with permission from the Jan. 2, 2019 edition of the Delaware Business Court Insider(c). 2019 ALM Media Properties, LLC. All rights reserved.
When the phrase “commercially reasonable efforts” appears as a standard of performance in contracts, it seems predetermined to generate litigation, and the recent Court of Chancery decision in Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), supports that observation. Although the agreement in this case had a contractual definition for “commercially reasonable efforts”, prior Delaware decisions highlighted on these pages that discuss this phrase should be of relevance to anyone who needs to know what the Delaware cases say about this somewhat amorphous standard, and similarly-phrased “efforts clauses”.
Why this decision is noteworthy: The most notable aspect of this decision is its collection of Delaware cases interpreting various iterations of “efforts clauses”. See footnotes 83 to 85.
[By the way, as I write this on New Year’s Eve, I extend best wishes to all my readers for a Happy New Year!]
Brief overview: This case involved an earn-out dispute and a claim by the seller that it did not receive milestone payments pursuant to an earn-out provision because the buyer did not use commercially reasonable efforts to reach the milestones. The buyer was the pharmaceutical company Cephalon, but Teva Pharmaceuticals later bought Cephalon. The product at issue was an antibody that would allow an organism’s immune system to overcome disease-causing pathogens. As with new drugs, the process to bring antibodies to market is long, difficult and risky.
The earn-out in the merger agreement in this case was payable upon the meeting of certain milestones in the process of obtaining approval by government agencies for the antibody to treat two different conditions. The buyer agreed to use “commercially reasonable efforts” to develop the antibody and achieve those milestones. The seller claims that the buyer did not comply with that efforts clause.
- The Court provides an excellent collection of Delaware decisions that have wrestled with various permutations of “efforts clauses”. See footnotes 83 to 85 and accompanying text. The Court categorizes the collected decisions into the following groups, some of which are overlapping: (i) motions to dismiss (at the pleadings stage); (ii) post-trial decisions; (iii) post-merger decisions (often involving a related earn-out clause); and (iv) pre-merger decisions where the efforts clause applied to the satisfaction of a condition to closing.
- The agreement involved in this case provided a contractual definition for “commercially reasonable efforts” as follows: “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cepahlon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
- The Court observed that the parties agreed that the foregoing is an “objective standard”, but the Court described the contractual definition as “inartfully” drafted and ambiguous. Also, in the context of denying a Motion to Dismiss this claim, the Court found that neither side offered a reasonable interpretation of this contract provision (as compared to another basis to deny an MTD: when both sides offer reasonable, but differing, interpretations.)
- Based on Delaware’s version of Rule 12(b)(6)–which is not as stringent as the current Federal standard–the Court found that there was a “reasonably conceivable set of circumstances susceptible of proof” in which (allowing for factual issues at this early stage of the case), it could be shown that companies with similar resources and expertise as Cephalon are currently developing treatments for a similar antibody as the one at issue in this case.