I’m a Contributing Author for: “The Art of M&A: A Merger, Acquisition and Buyout Guide” (5th ed. 2019)

Your truly is a contributing author for a recently published treatise entitled: “The Art of M&A: A Merger, Acquisition and Buyout Guide” (5th ed. 2019), edited by Alexandra Reed Lajoux. I was asked to attend a book signing at the flagship Barnes & Noble store on 5th Avenue in New York City on August 22, 2019, at noon, in connection with the announcement of the publication of the book. Details available at this link.


Confidentiality Agreement Not Always Required for Section 220 Demands

The Delaware Supreme Court recently announced a decision of great importance for stockholder demands under Section 220 of the Delaware General Corporation Law. In Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Supr. Aug. 7, 2019), the Delaware Supreme Court ruled that:

(i) although inspection of records demanded by stockholders pursuant to Section 220 is typically conditioned on a confidentiality order, or stipulation or agreement, such inspections are “not subject to a presumption of confidentiality”;

(ii) when the court, in the exercise of its discretion, enters a confidentiality order, an indefinite period of confidentiality protection should be the exception and not the rule; and

(iii) a party demanding books and records need not show exigent circumstances for a court to grant something less than indefinite confidentiality, under Section 220.

Regular readers familiar with the voluminous highlights on these pages of Section 220 cases over the last 14 years, are aware that despite the relative simplicity of the statute, pursuing rights under Section 220 requires stamina and patience and financial wherewithal.

Procedural Background:

This case involved an initial demand in December 2014 for books and records pursuant to Section 220. The primary dispute related to the scope and duration of a confidentiality agreement that the company required.  A second demand under Section 220 was sent in February of 2017, and again the parties could not reach an agreement over the terms of a confidentiality agreement.  In October 2017, a complaint was filed in the Court of Chancery demanding access to books and records based on a demand amended in May 2017.  The primary dispute between the parties continued to be the scope of the confidentiality obligations imposed by the company on its production.  Although the stockholder also requested non-confidential records, the company demurred.

A Master in Chancery submitted a report in July 2018 recommending indefinite confidentiality until such time as the stockholder filed a suit based on the inspection, after which confidentiality would be controlled by the applicable court rules. This appeal followed the finality of the Master’s Report.

Highlights of Court’s Ruling:

  • Although the court disagreed with the reasoning of the Court of Chancery, it affirmed the decision because even though the Supreme Court would have employed different reasoning, there was no abuse of discretion or reversible error with the result.
  • The Supreme Court clarified that there is no presumption of confidentiality in productions of data pursuant to Section 220.
  • Although a corporation need not show specific harm that would result from disclosure before receiving confidentiality treatment in a Section 220 case, Delaware’s High Court explained that: “One cannot conclude reflexively that the need for confidentiality is readily apparent.”
  • The Court ruled that: (i) An indefinite period of confidentiality protection should be the exception and not the rule; (ii) A party demanding Section 220 books and records need show exigent circumstances for a court to grant something less than an indefinite confidentiality.
  • Although the Supreme Court disagreed with Chancery’s grant of indefinite confidentiality restrictions until a suit was filed, the stockholder did not make an adequate showing of reversible error.

In sum, this decision can be added to the extensive list of examples of Section 220 cases that have been lengthy and expensive for the stockholder to pursue to a final adjudication in the court of last resort in Delaware. Although the Delaware case law is well-established that stockholders should employ Section 220 before filing a plenary complaint, that effort–in the end–is not always satisfying.

Earn-Out Dispute: Ambiguous Terms Bar Motion to Dismiss

The recent Delaware Court of Chancery decision in Windy City Investments Holdings, LLC v. Teachers’ Insurance and Annuity Association of America, C.A. No. 2018-0519-MTZ (Del. Ch. July 26, 2019), discussed an often recurring issue in commercial litigation: a seller of a business who claims that the Earn-Out provisions in the agreement of sale were not complied with by the buyer.

Key Takeaways:

The most noteworthy aspects of this decision are the thorough recitation of important contract interpretation principles, and a similarly thorough application of those principles. The key statements of law are found on pages 14 and 17.  The court’s reasoning is found most prominently at pages 15 and 22.

·     For example, the court explained that in the context of a motion to dismiss, the moving party in a contract dispute must demonstrate that its interpretation is the only reasonable reading of the disputed provision.

·     However, when the court “may reasonably ascribe multiple and different interpretations to a contract, it will find that the contract is ambiguous.  To be ambiguous, a disputed contract term must be reasonably susceptible to more than one meaning.”  See footnotes 36 and 37 and accompanying text.

·     In this case, the court found that each party’s contract construction left “something to be desired,” and would require the court to “import extra-contractual concepts to reconcile” the language in the agreement.

·     The court observed that an unreasonable interpretation of an agreement “produces an absurd result or one that no reasonable person would have accepted when entering the contract.”  See footnote 46 and related text.

·     The court reasoned that no party offered the only reasonable construction, and because the contract was susceptible to two or more reasonable interpretations and two of more meanings, the contract was ambiguous and required extrinsic evidence to determine the contractual intent of the parties–thus being inappropriate for decision at the motion to dismiss stage.  See footnote 58 and accompanying text.

Court of Chancery Addresses Personal Jurisdiction Over De Facto LLC Manager

The Delaware Court of Chancery addressed in a recent opinion the nuances of imposing personal jurisdiction (in a second ruling on the issue in as many days), in connection with someone who served as a de facto manager of an LLC.  In Metro Storage International LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. July 19, 2019), the court provided what can be fairly described as a definitive and comprehensive analysis, in the nature of a treatise, on the topic of the implied consent to personal jurisdiction over a person who serves as a formal, or de facto, manager of an LLC, based on § 18-109(a) of the Delaware LLC Act.  This decision is a “must read” for anyone who needs to understand the nuances of Delaware law on this topic.

In addition, the court provides a thorough discussion of the requirements, in general, for imposing personal jurisdiction over a non-resident. This should be compared with the decision issued a day earlier, by the same member of the Court of Chancery, which also discussed the requirements of imposing personal jurisdiction, in the matter styled: Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), highlighted on these pages here.

Key Takeaways:

This matter involved fraud claims against an LLC manager. The court recited many important aspects of Delaware corporate and commercial litigation, including the following important points:

  • This opinion engages in a “deep dive” that includes a review of all the prior Delaware case law that addresses the issue of implied consent to personal jurisdiction over a person who serves as a formal or de facto manager of an LLC, based on § 18-109(a) of the Delaware LLC Act. This thorough analysis is must reading for anyone who needs to understand this topic and wants to review the most complete analysis of the applicable case law in one place. See pages 8-39.
  • The court explains generally that based on the Delaware LLC Act, by default, an LLC is a member-managed entity unless the LLC Agreement provides otherwise. See page 39, citing § 18-402 of the Delaware LLC Act.

Personal Jurisdiction:

  • The basic concepts of personal jurisdiction are explained in the context of the Delaware Long-Arm Statute, 10 Del. C. § 3104(c)(1).
  • The court explains that “agency status” expands jurisdiction, and does not limit it under the plain language of the Delaware Long-Arm Statute.
  • Moreover, the court explored the concept of the common-law agency theory of jurisdiction, which provides a basis for asserting jurisdiction over a non-resident principal by attributing the jurisdictional acts of the agent to the principal. When this theory applies, it does not shield the agent from jurisdiction–nor does it substitute the principal for the agent; it instead enables the plaintiff to add the principal to the case in addition to the agent.” See pages 50-51. See generally Donald J. Wolfe, Jr. & Michael A. Pittinger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 3.04[c][3] (2d ed. & Supp. 2018).
  • The court explained that an actor’s status as an agent provides an avenue to hold the principal liable in addition to the agent under principles of attribution. See Verrastro v. Bayhospitalists, LLC,—A.3d—, 2019 WL 1510458, at * 2 (Del. Apr. 8, 2019) (discussing respondeat superior).

Due Process:

  • The court explained that in connection with analyzing whether there are sufficient minimum contacts with Delaware to require a non-resident to defend itself in the courts of this State, the court considers the following relevant factors: (i) the forum state’s interest in adjudicating the dispute; (ii) the interest of the plaintiff in obtaining convenient and effective relief; and (iii) the interstate judicial system’s interest in obtaining the most efficient resolution of controversies. See page 53 (citing Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982)) (citations omitted).
  • The court in this matter also observed that because the non-resident traveled frequently around the country, and in other countries, that by comparison litigating in Delaware would be a “relatively inconsequential burden that Delaware’s interest far outweighs.” See page 55.
  • The court also considered, in addition to the above factors, that: the citizens of Delaware have an interest in using its courts to recover for the injuries they claim to have suffered. See page 55.

Chancery Addresses Personal Jurisdiction Over Co-Conspirator

A recent Delaware Court of Chancery decision provides an excellent analysis of the requirements for imposing personal jurisdiction based on the Delaware Long Arm Statute, and also addresses the fiduciary duty of disclosure in a thorough manner worthy of careful reading.  In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the court provided a noteworthy explanation of the important nuances that need to be understood when personal jurisdiction is contested.  This is the second opinion in two days by the same member of the Court of Chancery that addressed personal jurisdiction in the context of a motion to dismiss under Del. Ct. Ch. Rule 12(b)(2).

The factual context of this case is based on claims against those who assisted in the fraudulent inducement of the plaintiff to invest in a troubled company that was presented as being much more prosperous than it was.

Key Takeaways:

Although the factual details are important to a complete understanding of the court’s analysis, and there are important statements of Delaware corporate law in this opinion, I will mostly focus on the aspects of the opinion that address the personal jurisdiction analysis, in the format of bullet points, while first mentioning a few other key pronouncements of practical value to those of us who toil in the vineyards of corporate and commercial litigation:

  • The court describes the nuances of the fiduciary duty of disclosure to buyers of stock, especially as it compares to the fiduciary duty of disclosure when, for example, directors are communicating with stockholders and seeking stockholder action. See pages 17 through 20.
  • The court explains that in order to be effective an anti-reliance clause must be explicit, and should not be conflated with a different clause, known as a “pro-sandbagging” clause. See page 22.
  • The court explains the important difference between fraud and puffery at pages 23 through 27.
  • The court explains the elements of a claim for aiding and abetting fraud at page 33.

Personal Jurisdiction Analysis:

The analysis in this case of personal jurisdiction should be compared with an equally helpful personal jurisdiction analysis in an opinion issued by the same author one day later in the matter styled Metro Storage International LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. July 19, 2019), highlighted on these pages here.

  • In the context of a motion to dismiss based on an alleged lack of personal jurisdiction, a motion is filed under Rule 12(b)(2), and the court applies a two-part test: First, the court must determine whether the Delaware Long-Arm Statute at 10 Del. C. § 3104(c) is applicable. If so, the court must decide whether subjecting a non-resident defendant to jurisdiction would violate due process. That is, the non-resident defendant must have sufficient minimum contacts with a forum state such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice (citing Matthew v. Flakt Woods Gp. SA, 56 A.3d 1023, 1027 (Del. Ch. 2012). See generally Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 3.02 (2d ed. & Supp. 2018).
  • The Delaware Long-Arm Statute provides that a court may exercise personal jurisdiction over a non-resident, or a personal representative, who in person or through an agent: transacts any business or performs any character of work or service in the state. 10 Del. C. § 3104(c)(1).
  • Jurisdiction under the statute can be based on a single transaction where the claim is based on that transaction. See pages 38 to 39.
  • Importantly, the court underscored that the Delaware Long-Arm Statute allows that: “forum-directed activity can occur “through an agent.” 10 Del. C. § 3104(c).

Due Process and Conspiracy Theory of Personal Jurisdiction

  • For purposes of due process, the question is whether the defendant had sufficient minimum contacts with Delaware such that compelling it to defend in the state would be consistent with the traditional notions of fair play and substantial justice. See page 9.
  • The court also discussed the five elements of the conspiracy theory of personal jurisdiction. See pages 39-40.
  • The conspiracy theory of jurisdiction was first announced by the Delaware Supreme Court in the case of Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982).
  • The court explained that the elements for the conspiracy theory of jurisdiction satisfy both prongs of the jurisdictional test. The first three elements encompass the statutory prong regarding the requirements of the Delaware Long-Arm Statute. The third element corresponds to the statutory requirement that the defendant had transacted business or performed work in the state. The fourth and fifth elements speak to due process and whether the minimum contacts are such that the defendant should have reasonably anticipated being sued in the forum.
  • The court noted in closing that the question of whether a defendant was validly served should be raised in a motion to dismiss under Rule 12(b)(5), and not under Rule 12(b)(2).

Extrinsic Evidence Required When Contractual Intent Unclear

A recent Delaware Court of Chancery case should win a “candor award” for acknowledging that despite the arguments of both sides regarding the alleged intent of parties in the agreement at issue, the court found that notwithstanding multiple re-readings of both the agreement involved, and the arguments of the parties in their briefs, the court could not quite understand the intent of the parties to the contract. Therefore, the court determined that extrinsic evidence was required to determine the intent of the parties (and to understand the meaning of the agreement). Thus, the motions to dismiss were denied. See Western Standard LLC v. Sourcehov Holdings, Inc., C.A. No. 2018-0280-JRS (Del. Ch. July 24, 2019).

Chancery Interprets DGCL § 174

For those interested in an interpretation of § 174 of the Delaware General Corporation Law, and under what circumstances directors may be personally liable in connection with issuing dividends, as well as the statute of limitations for claims that § 174 was violated, it remains necessary to read the recent Court of Chancery decision in JPMorgan Chase Bank, N.A. v. Ballard, C.A. No. 2018-0274-AGB (Del. Ch. July 11, 2019). This decision also addresses the issue of when the one-year begins to run for § 1309(1) of the Delaware Uniform Fraudulent Transfer Act.

Advancement Granted for Post-Termination Use of Confidential Information

The recent Delaware Chancery Court opinion in Ephrat v. medCPU, Inc., C.A. No. 2018-0052-MTZ (Del. Ch. June 26, 2019), remains noteworthy for two reasons, notwithstanding the large number of advancement decisions interpreting DGCL Section 145 appearing on these pages over the last 14 years:

(1)        It provides an anthology of prior Delaware decisions granting advancement to former directors or officers to defend claims regarding the use of confidential information acquired in their prior corporate capacity; and,

(2)        The opinion adds nuance to the existing abundant case law interpreting the threshold phrase “by reason of the fact”, which is one of the statutory prerequisites that must be satisfied for advancement claims to prevail.

Key Takeaways:

  • Despite the conduct at issue taking place post-termination, the “by reason of the fact” requirement of § 145 was satisfied because the underlying case involved the use of “Confidential Information” acquired while the former D&O was acting in his corporate capacity. (Although some conduct did not qualify and, thus, only partial advancement was granted).
  • This opinion compiles and discusses all the reported Delaware decisions that address the above circumstances in the § 145 context, and distinguishes one case, Lieberman, that does not grant advancement. See footnotes 42, 52, 56 and 69. See also page 19 which explains why Lieberman should be distinguished and why it is contrary to the great weight of authority on this issue.
  • The court also contrasts disputes relating to covenants-not-to-compete, and explains why those employer v. employee disputes typically involve personal disputes not in one’s corporate capacity–citing cases so holding. See footnote 74.

Chancery Advancement Ruling Recites Basic Principles and Nuances

Adding to the multitude of Delaware decisions featured on these pages involving the right of corporate directors and officers to advancement of their fees incurred to defend claims against them, pursuant to DGCL Section 145, or by agreement, we offer highlights of Sider v. Hertz Global Holdings, C.A. No. 2019-0237-KSJM, Order (Del. Ch. June 17, 2019), a recent Delaware Court of Chancery ruling. Our highlights appear in the form of an article published in the current edition of The Delaware Business Court Insider, co-authored by yours truly and my colleague Chauna Abner. This decision comes in the form of an Order, but regular readers know that Orders and transcript rulings from the bench may be cited in Delaware briefs as authority.

In Sider, the Court denied a motion for interlocutory appeal of a decision granting advancement, reasoning that one of the requirements for such an appeal was not met: “that there is no just reason for denying the appeal.” Other basic but important advancement principles, and nuances, are recited by the court, with copious citations in robust footnotes.

Advance Notice Bylaws Interpreted

A recent Delaware Court of Chancery decision interpreted an advance notice bylaw in a manner that disapproves of the attempt by the company to require onerous and extensive questions to be completed and returned within a five-day period before the proposed nominations to the board would be considered. The decision in Saba Capital Master v. Blacksock Credit Allocation Income Trust, C.A. No. 2019-0416-MTZ (Del. Ch. June 27, 2019), also includes useful nuggets of legal principles on related topics.

Key Takeaways:

The court distinguished between a request for a preliminary injunction and a request for mandatory injunctive relief. The court noted that mandatory injunctive relief is governed by the standard applicable to a request for summary judgment. See cases cited at footnote 26.  The injunctive relief sought in this case did not maintain the status quo, but rather seeks affirmative action to be taken by the opposing party.

The court observed that advance notice bylaws are frequently upheld as valid in Delaware but that they will be struck down if they “unduly restrict the stockholder franchise or are applied inequitably.” See footnotes 45 and 46.

The court discussed the well-established case law that triggers heightened judicial scrutiny if there is an unjustified interference with the stockholder franchise, and if fiduciary duties are violated by failing to ensure fair and reasonable nominating and voting procedures for the election of directors. See footnotes 49 – 51, including citations to Blasius Industries, Inc. v. Atlas Corp. and Schnell, Inc. v. Chris-Craft Industries, Inc.

See also discussion of the standard of review when a board impedes or interferes with the effectiveness of a shareholder vote, especially in the context of an election for directors. See cases cited at footnote 52.

In connection with the request for injunctive relief, the court explained that courts have consistently found irreparable harm where corporate management denies shareholders the right to vote their shares or if the management unnecessarily frustrates the stockholders’ attempt to obtain representation on the board of directors. See footnote 54.

The right of shareholders to vote includes the right to nominate a contesting slate of directors, and irreparable harm can be assumed where the lack of injunctive relief might defeat the efforts of stockholders and the will of the majority of stockholders in a vote to elect board members. See footnotes 55 and 56.