A recent Delaware Court of Chancery decision should be read by every lawyer who issues formal legal opinion letters—and those who litigate issues involving them. In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Sept. 9, 2024), the court amplified its earlier post-trial opinion, highlighted on these pages, after remand from the Delaware Supreme Court, whose decision was also highlighted on these pages.

This 116-page opinion deserves careful study for its thoughtful and scholarly analysis of the issues surrounding a formal legal opinion letter that was issued in connection with the exercise of a call right pursuant to a complex set of prerequisites in a limited partnership agreement.

The limited purpose of this short blog post is to highlight selected notable excerpts of the opinion to encourage interested readers to review the whole decision.

Highlights

  • The court discusses the terms of art and the important distinction between a “reasoned” and “non-reasoned” formal opinion letter, as well as a “non-explained” or “clean” opinion letter. Slip op. at 40.
  • The court emphasizes the key differences between the common practice of non-Delaware lawyers opining on “straightforward” issues of Delaware law—but observing also that non-Delaware attorneys do not regularly opine on “complex” issues of unsettled or complex issues of Delaware law. See Slip op. at 42 and footnote 80.
  • The opinion features copies of handwritten notes and marginalia—imbedded into the court’s decision—of the lawyers who prepared the formal opinion letter at issue. This emphasizes the importance to the court’s analysis of all the backup documents as well as the emails and notes created in connection with drafting the formal opinion letter. Slip op. at 23 and 26.
  • The court emphasized that in its prior opinion it did not conduct a de novo review of the formal opinion letter at issue, but it did review objective facts to determine bad faith, and it cited to scholarly articles for examples of how one’s conduct can reveal one’s state of mind in connection with surrounding circumstances. See Slip op. at 59-67 and footnotes 159-160.
  • The court explained that in its prior opinion it only referred to one of the law firms involved as issuing a formal opinion letter in bad faith, and it cited to scholarship and academic studies about observations confirming the truism that: even big-law lawyers are humans and can succumb to pressures to please clients.  See Slip op. at 50-53 and footnotes 109-117.
  • The court underscored that its decision “should not have any negative impact on the practice of rendering opinions.” See Slip op. at 78. In part, this conclusion is buttressed by the reality that lawyers rendering formal opinion letters should expect to support the basis for their opinions if litigation ensues. See generally footnote 212 (referring in a different context to why a board consent must be unanimous).
  • The court provided an always useful restatement of the elements of claims for: (i) tortious interference with contract, see Slip op. at 89-93; (ii) breach of the implied covenant of good faith and fair dealing, see Slip op. at 99-104; as well as (iii) restating the elements of an unjust enrichment claim, see Slip op. at 115.

Takeaway:

This blog post discusses a recent court decision that provides detailed analysis on the issuing of formal legal opinion letters. The court decision emphasizes the differences between various types of opinion letters and highlights the importance of supporting documents in drafting these letters. The decision also restates the elements of certain related claims.

A recent Delaware Court of Chancery decision clarified Delaware law in connection with determining that an alleged violation of a non-disparagement clause could be the basis to trigger the repurchase of LLC interests post-closing, in connection with the sale of a company—notwithstanding the general rule that the absolute litigation privilege generally bars claims of defamation based on pleadings filed with the court. Seva Holdings Inc. v. Octo Platform Equity Holdings, LLC, C.A. No. 2022-0437-PRW (Del. Ch. August 29, 2024).

Brief Factual Overview

The court examined the issues in the factual context of an LLC agreement that gave the seller of a company, as part of the deal, LLC interests in the holding company of the buyer. The seller’s founder also signed a related employment agreement that included confidentiality, non-compete, non-solicit, non-interference and non-disparagement clauses. (Superior Court Judge Paul Wallace was siting by designation of the Chief Justice pursuant to an order assigning selected Superior Court judges to hear Chancery decisions that arise under 8 Del. C. § 111.) 

The founder of the selling company, Sonny Kakar, remained involved in the business after the sale but the relationship with the buyer did not go smoothly. Not long after the closing he was purportedly terminated for cause. Both Kakar and the purchaser believed that they were disparaged in connection with Kakar’s departure post-closing. Several lawsuits and counterclaims were filed by the parties, most of which were consolidated into the Chancery matter.

Shortly after the lawsuits were filed, the purchaser purported to exercise an option to repurchase the LLC interests of Kakar based on a triggering provision which included claims of a violation of non-disparagement obligations. The employment agreement, which includes the non-disparagement clause that was a triggering event in the LLC agreement, defined “disparaging statements” but includes an exception for truthful information. The notice of repurchase cites to “publicly filed complaints” against the purchaser of a defamatory nature as the basis for the trigger.

There were other issues in the case about whether the procedural prerequisites in the LLC agreement for the repurchase were satisfied, such as whether a promissory note sufficed instead of cash, but the court determined there were too many factual issues to make a ruling on summary judgment on those other issues.

Noteworthy Highlights

I am providing selected highlights of the opinion that provide useful insights into how Delaware law treats alleged violations of a non-disparagement clause as a trigger to the right to repurchase LLC membership interests—and whether statements made in connection with court filings in a lawsuit can serve as a defense to the non-disparagement claims based on the absolute litigation privilege.

  • The court rejected the argument that the repurchase was void based on the unsuccessful position that statements made in a complaint filed with the court could not be the basis of a violation of the non-disparagement clause due to the absolute litigation privilege.
  • In order to understand the court’s ruling, we must understand what the absolute litigation privilege (“ALP”) is. The court explained that the ALP “protects from actions for defamation statements of judges, parties, witnesses and attorneys offered in the course of judicial proceedings so long as the party claiming the privilege shows that the statements issued as part of a judicial proceeding and were relevant to a matter at issue in the case.” Slip op. at 12.
  • The court provides citations to cases that explain the public policy behind the ALP. The court referred to two other decisions that it distinguished and a third decision dealing with this issue that formed the foundation for its reasoning. The court distinguished the following two cases: Ritchie CT Opps, LLC v. Huizenga Managers Funds, LLC, a 2019 Chancery decision, as well as Sheehan v. AssuredPartners, a 2020 Chancery decision. 
  • The court also discussed the 2022 Superior Court decision in Feenix Payment Systems LLC v. Blum, and found the facts and reasoning in that case to be applicable. The Feenix decision also distinguished the Ritchie and Sheehan decisions.
  • The competing public policy interests in the three cited cases, and the instant matter, are: (1) the freedom of a person to pursue one’s claims in court; and (2) upholding the freedom of contract. The court described the Feenix case as falling on the “latter end of the spectrum” and Sheehan and Ritchie cases falling on the other.
  • The court rejected what it referred to as the attempt by the seller to expand the scope of the ALP to nullify the repurchase of a member’s interest in a Delaware LLC in part because the court explained that: “[the seller] identifies no Delaware caselaw permitting this.”  Slip op. at 16.
  • The court reasoned that the balancing of the two policy interests at play, based on the circumstances of this case, require freedom of contract to prevail—regardless of the collateral effect that the repurchase of Kakar’s LLC interests will have on Kakar’s decision to litigate claims against the buyer, and defending claims that the non-disparagement clause was violated.  Slip op. at 16.
  • The court emphasized that Delaware law upholds the primacy of contract, especially in the context of agreements governing the internal affairs of an LLC. Id.
  • The court also found support for its reasoning in the Delaware Supreme Court decision of Cantor Fitzgerald, L.P. v. Ainslie, 312 A.3d 674 (Del. 2024). Although that case involved a limited partnership, the reasoning in cases involving the LP Act and the LLC Act are nearly interchangeable. The court focused on the reasoning of the high court in that case which resolved the divergent policy interests of respecting parties’ private agreements and the public interests against restraints of trade—in favor of the former.
  • The Ainslie case involved a forfeiture-for-competition in the non-compete context. The Delaware Supreme Court found that that provision did not prohibit the limited partners from engaging in competitive behavior, and held that the policy interests of disfavoring restraints on trade “significantly weakened.” Id. at 691. Therefore, the high court enforced the contract provisions in that case.
  • The court in this case found that Delaware precedent, including the Ainslie case, supported a similar limitation on the scope of the absolute litigation privilege.
  • The court underscored the important fact that the ALP was not being used as a defense to the non-disparagement claims under the employment agreement—but rather was being used as a means of opposing the right to repurchase under the LLC agreement. Slip op. at 18.
  • The court highlighted the determining factor of the contractual provisions involved controlling the governance of the internal affairs of the LLC, which the court was “strongly inclined” to respect unless, unlike the facts of this case: “dishonoring the contract was required to vindicate a public policy interest even stronger than freedom of contract.” Slip op. at 18 (footnote omitted).
  • The court’s summary of its key holding on this issue deserves to be quoted verbatim:
  • “In sum, Delaware law provides for maximum freedom in allowing parties to order their governance arrangements.  It doesn’t offend the public policy of this state for a Delaware limited liability company’s operating agreement to condition a member’s ownership in the business on whether a member makes disparaging remarks about the business.” Slip op. at 19.

The court also addressed issues relating to whether procedural prerequisites under the LLC agreement for the repurchase were complied with, but the court determined that there were too many factual issues to decide those matters before trial, such as whether a promissory note was sufficient in lieu of cash.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article

The full Delaware Supreme Court recently ruled that $26.67% fee and expense award to plaintiffs’ attorneys in the $1 billion settlement of a challenge to Dell Technologies Inc.’s redemption of its Class V stock for what shareholders claimed was an unfair price did not exceed the Chancery Court’s discretion in the ma tter styled In re Dell Techs. Inc. Class V S’holders Litig., C.A. No. 2018-0816 (Del.Supr. Aug. 14, 2024).

Chief Justice Collins Seitz Jr., writing for the unanimous en Banc court, affirmed the Chancery’s decision that although the $266.7 million award was near the top of the applicable range for settlements of that type, under the high court’s milestone Sugarland ruling, each of the fee objections and reductions filed by selling Class V shareholders were rightly rejected. In re Dell Techs. Inc. Class V S’holders Litig., 300 A.3d 679 (Del. Ch. 2023), as revised (Aug. 21, 2023).  

The decision is a fresh application of the high court’s Sugarland yardstick ruling on Chancery fee disputes that is sure to be closely examined by corporate law specialists nationwide, because the justices, among other things:

 *Took a comprehensive look at how the famous five Sugarland factors should be applied in large settlement fee request disputes. Sugarland Indus., Inc. v. Thomas, 420 A.2d 142, 149–50 (Del. 1980).

*Turned down a call to apply a declining fee percentage award to large settlements as judges in federal securities often do and said Chancery awards should be based on the “stage” of the litigation at settlement.

*Rejected the federal lodestar approach — that takes the time counsel expended and multiplies it by an approved hourly rate –because it would require Chancery to engage in “elaborate analyses” when the existing practice was sufficient, and

*Noted that, when applying the Sugarland factors, “Delaware courts have assigned the greatest weight to the benefit achieved in litigation.”

Background

Michael Dell and private equity firm Silver Lake Group LLC, who took Dell, Inc. private through a leveraged buyout in 2013, owned a controlling stake in the successor tech hardware company, and immediately set their sights on EMC Corporation, a publicly traded data-storage firm which held an 81.9% equity stake in VMWare, also a publicly traded data company. 

The court said Mr. Dell would have preferred to acquire those companies in an all-cash buy, but Dell was already over-leveraged, so he  settled for using a newly-issued V class of Dell stock in a part-stock deal.  The price Dell arrived at and the method it used prompted some of the class to sue the Dell directors for breach of duty in the Court of Chancery Court for two and a half years before a $1billion settlement was reached.

Their complaint alleged that the director defendants breached their fiduciary duties by approving the redemption, coercing the Class V stockholders to vote in favor of the redemption, and for making materially false and/or misleading proxy statements.

That complaint resulted in a $1billion settlement after two and a half years of discovery and litigation.

Clients vs. attorneys

But when the law firms that represented the plaintiff investors filed a motion for fees of 26.67% of the settlement that the Dell defendants had agreed to, some of the investors objected that the amount was so disproportionately large that their recovery was unfairly compromised. 

In its decision to dismiss the objectors’ action, Chancery observed that the Supreme Court’s seminal decision in Sugarland governs fee awards in representative actions so, when the court considers a fee application, the court should at the outset, review:

(1) the results achieved;

(2) the time and effort of counsel;

(3) the relative complexities of the litigation;
(4) any contingency factor; and

(5) the standing and ability of counsel

Chancery ruling ratified

The Court of Chancery found that the proposed fee met all five factors and the objectors appealed, arguing that among other things, the court misapplied the first two Sugarland factors — the results achieved and the time and effort of counsel. For the former, they claimed the recovery was a small fraction of what could have been obtained after trial. And for the latter, that the fee is seven times counsel’s customary rate, resulting in an award at the high end of fee awards in the Court of Chancery.

The high court said one of the exceptions to Delaware’s “each pays his own attorney fees” rule is the common fund exception which is “founded on the equitable principle that those who have profited from litigation should share its costs.”

As to the reasonableness of the fee amount, the justices agreed that, in addition to considering the other Sugarland factors, Chancery must weigh “the degree of the ’cause and effect’ between what counsel accomplished through the litigation and the ultimate result.”  Instead of adopting a “formulaic” approach such as the lodestar, to fee requests, we commit the fee award to the discretion of the Court of Chancery.

In summary, the Chief Justice wrote that, “On appeal, this Court will not usually disturb the Court of Chancery’s ruling if the court adequately explains its reasons and properly exercises its discretion when it applies the Sugarland factors”,

What about windfalls?

However, he cautioned that there may be an increasing number of corporate cases on the horizon that could generate so-called “megafund” outcomes with possible fee awards so large that “typical yardsticks, like stage-of the-case percentages, must yield to the greater policy concern of preventing windfalls to counsel.”

Some Delaware corporate law practitioners believe at least one case in the Chancery—involving Elon Musk’s attempt to earn a $56 billion pay package from his Tesla automaker’s investors—could present such a windfall award if objecting shareholders are the final winners.

Andrew A. Ralli, an associate in the Wilmington office of Lewis Brisbois, prepared this blog post.

A recent Delaware Court of Chancery decision determined whether persons seeking advancement satisfied the undefined term “officer” under the Bylaws and the Delaware General Corporation Law (the “DGCL”).  In Gilbert v. Unisys Corp., No. 2023-0513-PAF (Del. Ch. Aug. 13, 2024), the Court was tasked with determining whether Plaintiffs, a former Senior Vice President and Vice President of a Delaware corporation, were “officers” entitled to advancement for fees incurred to defend themselves in a Pennsylvania action.

The Plaintiffs proffered three theories under which they believed they are entitled to advancement under the Bylaws: (i) they were officers of the corporation; (ii) the “Presidents” were officers, and became Presidents, after an acquisition; and (iii) Plaintiffs served an enterprise at the request of the Corporation. The court addresses each theory in turn and found that Plaintiffs were entitled to advancement under each theory.

Highlights:

The Court recognized that advancement is “purely permissive” and, under Section 145(f) of the DGCL, permits a corporation to grant advancement rights in its corporate documents or by separate contract.  As Vice Chancellor Fioravanti explained, Section 145 serves the dual policies of: “(a) allowing corporate officials to resist unjustified lawsuits, secure in the knowledge that, if vindicated, the corporation will bear the expense of litigation; and (b) encouraging capable women and men to serve as corporate directors and officers, secure in the knowledge that the corporation will absorb the costs of defending their honesty and integrity.” 

Many Delaware corporations “provide for mandatory advancement as an enticement to attract qualified individuals to serve as directors and officers.” This is because the corporation maintains the right to be repaid all sums advanced, if the individual is ultimately shown not to be entitled to indemnification. Thus, the advancement decision is, effectively, a contingent loan. 

In this case, neither the Certificate nor the Bylaws explicitly define “officer.” However, the Bylaws do identify two categories of officers, which were “at a minimum”  ambiguous.  First, there are officers who are expressly identified by title. These are “a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, [and] a Controller.” Section 1 states that these “shall” be officers. The court labeled these as “mandatory officers.” The second category comprises of “other officers as may be elected … at the Board’s discretion.” The Court labeled these as “discretionary officers.” 

Due to the Bylaws’ ambiguity in “mandatory” and “discretionary” officers, Plaintiffs, unsurprisingly, contend that the ambiguity must be construed in their favor under the doctrine of contra proferentem.  Seeking guidance from Delaware precedent, the Court found that “[t]here is a tension between the transcript rulings in Pulier[1] and Centrella I,[2] which held that an election was a pre-requisite for officer status, and Aleynikov[3] and Kale,[4] which took a broader view and relied on contra proferentem.”  In resolving this tension, the Court stated:

Admittedly, some of the discussion in Aleynikov, despite its careful and detailed analysis, is dicta. But so are Pulier and Centrella I on the issue of whether a bylaw that denominates Vice Presidents as mandatory officers precludes persons with that title from receiving mandatory advancement unless the board of directors formally chooses them as officers or expressly designates another officer to do so, as both resolved whether discretionary officers were entitled to advancement.

…

One can easily imagine a prospective officer reading the Bylaws, seeing that vice presidents “shall” be officers, and concluding that they would be an officer entitled to advancement. . . . [C]onsistent with the persuasive reasoning in Aleynikov, the court finds that reasonable individuals who are hired as [] Vice Presidents by persons with authority to bestow the title can reasonably conclude under the Bylaws that they are officers of the Company.

In other words, the Court agreed with Plaintiffs that the president Plaintiffs are officers under the Bylaws’ advancement provision and, thereby, entitled to advancement of fees and expenses for the Pennsylvania action, further explaining that: “Delaware policy ‘supports the approach of resolving ambiguity in favor of indemnification and advancement.’”

Notable Takeaway:

When a corporation decides to utilize Section 145(f) of the DGCL, it should do so with specificity. In failing to do so, corporations, being the “drafters” or otherwise, potentially face the unwanted consequence of advancing fees and expenses to more persons than intended. The Court’s decision in Gilbert serves as a “caution” for others:

A reasonable person standing in the shoes of a prospective indemnitee … ought to be able to look at the advancement provisions in the … [corporate documents] and clearly determine whether they are entitled to advancement … rely[ing] on a reasonable interpretation thereof. … Plaintiffs are correct. That [the Corporation] doled out Vice President titles to dozens of employees is of its own doing. [The Corporation] “easily could have clarified whether or not the title of ‘Vice President’ was an officer title for purposes of advancement and indemnification.” [They] did not. Therefore, the ambiguity must be resolved in Plaintiffs’ favor.

With Delaware’s bedrock freedom of contract principle, parties have a right to enter into good and bad contracts. The law enforces both.

Footnotes

[1] Pulier v. Computer Scis. Corp., C.A. No. 12005-CB (Del. Ch. May 12, 2016) (TRANSCRIPT).

[2] Centrella v. Avantor, Inc. (Centrella I), C.A. No. 2022-0876-NAC (Del. Ch. Dec. 14, 2022) (TRANSCRIPT).

[3] Aleynikov v. Goldman Sachs Gp., Inc., C.A. No. 10636-VCL (Del. Ch. July 13, 2016) (ORDER).

[4] Kale v. Wellcare Health Plans, Inc., C.A. No. 6393-VCS (Del. Ch. June 13, 2011) (TRANSCRIPT).

The Delaware Supreme Court recently affirmed a Chancery decision that was highlighted on these pages, which described the limited scope of a summary proceeding under DGCL Section 225 to determine who properly holds a corporate office.

In Barby v. Young, No. 391-2023 Order (Del. June 11, 2024), the high court described that among the limited related topics that can be addressed in connection with determining who properly holds a corporate office, are: the validity of stock issuances, stock transfers, and stock acquisitions to determine which vote should be counted in ascertaining proper board composition. See footnote 2.

The court emphasized that the limited scope of a 225 proceeding cannot include the rescission of a transaction procured through unlawful behavior, which is the type of relief that can only be obtained in a plenary action in a court that has in personam jurisdiction over necessary parties as opposed to an in rem Section 225 proceeding. 

A recent Delaware Court of Chancery decision addressed issues with the receivership of a defunct corporation and the report of a Special Magistrate appointed to investigate claims against the court-appointed Receiver. In B.E. Capital Management Fund LP v. Fund.com Inc., C.A. No. 12843-VCL (Del. Ch. July 18, 2024), the court reviewed the report de novo of a Special Magistrate who chronicled the misdeeds of a Receiver appointed by the court for a defunct corporation.

Highlights

  • The court noted that DGCL Section 226(a)(3) limits the appointment of receivers for a defunct corporation in a manner that is an analogous to Chapter 7 in bankruptcy–not a Chapter 11 bankruptcy. See footnote 1. The court also observed that DGCL Section 226(a)(3) does not authorize a receiver to revive the defunct corporation, but rather a receiver can be appointed when the corporation “has abandoned its business and had failed within a reasonable time to take steps to dissolve, liquidate or distribute its assets.”  See DGCL Section 226(a)(3). The court also doubted that it would make the same appointment of a receiver today in this case if it knew then what it knows now about the undisclosed details.
  • A notable aspect of this decision, due to the paucity of case law addressing the standard of review of a Special Magistrate’s report regarding the determination of damages, is the court’s use of the summary judgment standard for reviewing the damages determination by the Special Magistrate. See Slip op. at 39-40.
  • More specifically, the court applied the Third Restatement of Restitution and Unjust Enrichment to analyze the damages recommended by the Special Magistrate, for example, in connection with deposits and withdrawals over a period of time, and profits received from embezzled funds.  See Slip op. at 41-47 and footnotes 11 and 13.
  • The court also explained the limits to the right to invoke the Fifth Amendment in a civil proceeding. See Slip op. 35-36.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article     

The Delaware Court of Chancery recently ordered biotech firm InterMune Inc.’s former CEO to repay nearly $6 million in director and officer insurance funds he spent trying to overturn his felony wire fraud conviction for misleading investors about the effectiveness of a lung disease treatment in InterMune Inc. et al. v. Harkonen, No. 2021-0694-NAC (Del.Ch. Aug. 1, 2024)

Vice Chancellor Nathan Cook found that in nearly two decades of investigation, negotiation and litigation stemming from a false 2002 press release about the commercial prospects for his interferon gamma-1b treatment Harkonen never successfully appealed his convictions or proved that he should not be liable for all the defense funds advanced to him from various D&O insurers and InterMune’s coffers. 

He ruled that two D&O insurers that had advanced funds had been paid by InterMune in a settlement after Harkonen was convicted and that under Section 145 of the Delaware General Corporation Law the company had a right to sue its ex-officer to repayment since the litigation was found to be non-indemnifiable.  

In addition, the vice chancellor rejected Harkonen’s counterclaims seeking a declaration that the Company must reimburse him for various legal expenses he accrued in a related California Medical Board disciplinary proceeding, two insurance arbitrations, advancement negotiations with InterMune, and a presidential pardon. 

He found that then-President Donald Trump’s pardon of the wire fraud conviction came long after a final adjudication of the case and could not qualify as a “successful defense of the charges.”  And “In addition to being procedurally improper, each of Dr. Harkonnen’s claims is either untimely or fails to satisfy the requirements for indemnification under Section 145.” 

Background

Harkonen founded InterMune in 2000 and issued a press release two years later extolling his new product, Actimmune which he claimed was “a major breakthrough” with “results [that] will support the use of Actimmune and lead to peak sales in the range of $400–$500 million per year[.]” – even though the study’s results indicated a failure.  One year later, Harkonen and InterMune negotiated a mutual release of claims against each other, and he resigned, only to face a 2004 justice department investigation that led to a 2008 indictment and a 2009 conviction.

That conviction carried an up to 20-year prison sentence; meanwhile InterMune’s D&O insurers began to seek repayment after learning that the charges and advancement would not qualify for indemnification and Harkonen began a decade of appeals.

At the same time, InterMune and its insurers pressed objections to what they insisted was Harkonen’s continuing “profligate” spending on attorney fees in many appeals and other legal proceedings.

The indemnification ruling

The vice chancellor laid out the ground rules for this type of indemnification case, noting that:

*”The corporation, rather than the employee, bears the burden of proof in an advancement claw-back action.”

*“In the case of a mandatory indemnification provision, the burden rests on the party from whom indemnification is sought to prove that indemnification is not required.”

*The applicable evidentiary burden in this post-trial context is proof by a preponderance of the evidence. [P]roof by a preponderance of the evidence means proof that something is more likely than not.”

*”Bylaw[s] not only mandate indemnification; [they] also effectively place the burden on [the Company] to demonstrate that the indemnification mandated is not required.”

Fraud = bad faith conviction

“Dr. “Harkonen is precluded from establishing good faith under Section 145(a) because his [wire fraud] conviction is conclusive evidence that he acted in bad faith,” Vice   Chancellor Cook wrote. “Dr. Harkonen is therefore ineligible to be indemnified for the advanced amounts he spent defending his wire fraud charge and appealing his conviction.”

Therefore Dr. Harkonen must repay the Company for the $5,906,927.02 it paid to settle the insurance disputes and six defenses Harkonen presented fail to prevent that, the court ruled, noting why each argument fails:     .

  • The Company waived and released all claims under the Mutual Release. The Court said: “Nowhere in Dr. Harkonen’s affirmative defenses did he assert the Mutual Release as a defense to InterMune’s claims. “
  •  The Company is barred by hold harmless provisions in the Indemnity Agreement and the Mutual Release. The Court said, “This defense, like the Mutual Release defense, was raised for the first time in the pre-trial briefings, which was too late for InterMune to focus its discovery on the hold harmless provisions of the two agreements.”
  •  The settlement payment was voluntary. The Court said: “InterMune devoted not insignificant portions of its briefing to rebutting this defense. And Dr. Harkonen ultimately withdrew the defense of voluntary payment at trial. “
  •  The Company’s claims are time-barred, The Court said: “InterMune filed its Complaint on August 11, 2021, well within the 3-year window under either alternative.  Harkonen’s time-bar defense therefore fails.” 
  •  The Company is barred by the unclean hands doctrine. The Court said: “The Company’s efforts to win the insurance arbitrations, or at least minimize any award, are not unclean hands. If they were, companies would be confronted with conflicting and strange incentives.” 
  •  The settlements themselves are not advancement fees. The Court said, “By mentioning the defense for the first time in passing at the trial on a paper record, the defense is waived. The analysis ends there.” 

Additional indemnification requests

The vice chancellor said Dr. Harkonen now requests indemnification “under 8 Del. C. § 145(c) for expenses incurred in (1) litigating the MBC action, (2) seeking advancements from the Company, (3) litigating the D&O insurance arbitrations, and (4) seeking the Pardon.” 

No fees or fees-on-fees

The Court held that Dr. Harkonen is not entitled to indemnification for the costs incurred in the medical board proceeding either, because the claim is both untimely and he was unsuccessful in the respective proceeding. This advancement claim regarding any of the legal actions is brought too late for the three-year time limit, the court said.  Finally, Dr. Harkonen also requests an award of fees on fees for this action, but given that he did not prevail on any claim, Dr. Harkonen is not entitled to fees on fees, Vice Chancellor Cook concluded

The Delaware Court of Chancery recently explained that a charging lien is the exclusive remedy of a judgment creditor against a member’s interest in an LLC, in XRI Investment Holdings LLC v. Holifield, C.A. No. 2021-0619-JTL (Del. Ch. July 24, 2024). See Slip op. at 7-8 and footnote 6 (citing Section 18-703(d) and other sources).

A Delaware Supreme Court opinion and a Chancery decision in this matter were previously highlighted on these pages.

Short Factual Overview

The abbreviated factual background of this case involved the parties structuring several special purpose vehicles in an effort to circumvent an existing lien on LLC membership units by designing the right of a subordinate creditor to receive proceeds from the sale of the membership units already encumbered—as opposed to a security interest in the membership units themselves. See Slip op. 9-14.

Highlights

A recent Delaware Court of Chancery decision is required reading for anyone who wants to know the requirements for validly transferring a member’s interest in an LLC, for example, upon death or bankruptcy of a member. 

In Gurney-Goldman v. Goldman, C.A. No. 2023-1124-JTL (Del. Ch. July 12, 2024), the court explained some aspects of the Delaware LLC Act in connection with the transfer of membership interests that, in the court’s words: “To put it mildly, [. . .] is not a well developed area of Delaware law.” Slip op. at 31. See Section 18-705.

As a bonus of sorts, the decision also features an exemplary overview of the dissolution process for both LLCs and corporations. See footnote 69.

Factual Background

The essential factual background involves four siblings who inherited a real estate empire in New York City involving “literally hundreds of entities.” Although the siblings hired one of the largest New York law firms to create the legal structure for their business, the court observed that entity formalities were not always observed and that some of the LLCs did not have any written operating agreements.

Moreover, there were no documents establishing the transfer of interest in key entities from the widow of the patriarch to the siblings. The management structure was not formalized. The 2 siblings who were the primary decision-makers did not have clear documentation to establish the basis of their authority.

After one of the two siblings who had historically been the decision-makers for the operation of the business passed away, his son sought to take over the role of his father in managing the business but the remaining sibling who historically managed the business did not agree that the son had a right to take over his father’s managerial role.

The LLC at the heart of this case, SG Windsor, did not have a written LLC agreement.

Issues Addressed

The litigation sought: (1) a declaration that SG Windsor is a member-managed entity; (2) that the estate of the sibling who historically was a co-manager of the LLC became a member of SG Windsor or, to the extent the estate is only an assignee, that the son is able to exercise governance rights in his capacity as an executor to the estate.

Key Takeaways

There are many principles in this epic decision of both well-settled and not well-traveled aspects of the Delaware LLC Act that should be of interest to anyone who either forms or litigates Delaware LLCs.

  • Under the LLC Act, the default rule is that an LLC is member-managed.  See 6 Del. C. § 18-402.

LLC Agreement Terms/Formation

  • Although SG Windsor did not have a written LLC agreement, the statute allows for an LLC agreement to be “oral or implied.”  See § 18-101(9).
  • The court explained that an implied agreement is one inferred from the conduct of the parties “though not expressed in words.”  See cases cited at footnote 16.
  • The court explained that to prove an implied agreement, the court must be able to infer “as a fact, from conduct of the parties showing, in light of the surrounding circumstances, their tacit understanding. The failure to object may be treated as acceptance.”  See Slip op. at 13-14 and footnotes 19-20.

Appointment of Manager

  • The court referred to “manager” as a term of art under the LLC Act, which defines it as a person who is either named as a manager in the LLC agreement or designated pursuant to a similar instrument.  This term of art should be distinguished from the colloquial use of the word manager where, as here, a person manages the company without the formal title or documentation giving him that title. See § 18-101(12).  See Slip op. at 16.

Transfer of Membership Interests in LLC

  • The default rule under the LLC Act when a member transfers its member interest is that the recipient of the interest does not automatically become a member.  See § 18-702. Rather, the recipient only holds the right of an assignee. Slip op. at 20-21.
  • The assignee does not receive any of the governance rights associated with the interest, nor does an assignee have the right to seek books and records or seek statutory dissolution.  Slip op. at 21 and footnotes 40-42.
  • The court explained the reasons for the default rules include the “pick-your partner principle” which underlies § 18-702(b)(3), and which essentially tries to avoid a situation where a new co-manager is imposed on a member as opposed to a new “passive co-investor.”  Slip at. 21-26.

How to Become a Member

  • To implement that principle, the LLC Act addresses: “(i) what a member is, and (ii) how an assignee becomes a member.  Slip op. at 23.
  • § 18-301 describes how an assignee becomes a member. After the formation of an LLC, the requirements for becoming a member are described in § 18-704(a). Those two ways include: (1) pursuant to provisions in the LLC Agreement; or (2) upon the affirmative vote or written consent of all the members of the LLC.

Death of Member

  • The court instructed that the death of a member who was a natural person terminates that person’s membership. See footnote 52 and accompanying text.
  • A member’s interest in an LLC, like other personal property, transfers by operation of law to the estate of the deceased member.

§ 18-705 – Rights of Personal Representative

  • § 18-705 authorizes the personal representative of a deceased or disabled member to exercise all the member’s rights only as provided in § 18-705, and those rights are limited as an assignee as compared to plenary rights.
  • The court was not persuaded by the Schedule K-1 forms that the parties used because those forms offer two options: (i) general partner or LLC member-manager, or (ii) limited partner or other LLC member. The second box was checked for the three living siblings and the estate, which is inconsistent with the positions taken by the parties in the lawsuit.

Can an Executor Exercise Member-Manager Powers under § 18-705

  • The court explained that this is not a well-developed area of Delaware law, but the court did a deep dive with extensive citations to treatises, case law and other learned commentary.
  • In the course of a short law review article  on § 18-705, the court elucidated several key points.
  • A consequential point for single-member LLCs is the court’s instruction that pursuant to § 18-801(a)(4), the general rule is that when the member of a single-member LLC who is a natural person dies, the default rule is that the LLC is dissolved.
  • Regarding dissolution, in connection with the deep dive into § 18-705, the court provided an illuminating footnote that spans over 4 pages and that provides a paradigmatic encapsulation of the stages of dissolution for both a corporation and an LLC. The court explained that the shuttering of an entity involves: “ … two distinct events that bracket an intermediate period of activity. The first event is dissolution, marking the point at which the entity enters the intermediate period called winding up.  The second event is termination, which takes place after the entity completes winding up.”  See footnote 69.

Stages of Dissolution for LLC and Corporation

  • The court went into further detail by comparing the stages for dissolution of a corporation and an LLC. Referring to DGCL § 278, the court described the Certificate of Dissolution as marking the start of the 3-year winding-up period that includes things such as marshalling assets and distributing any remaining assets after payment of liabilities. At the end of the winding-up period, the corporation’s existence terminates.
  • As for an LLC, dissolution marks the start of the winding-up period.  See § 18-801(a). The winding-up period is similar to that of a corporation. See § 18-803, § 18-804. At the end of the winding-up process an authorized person files a Certificate of Cancellation. See § 18-203.

§ 18-705 Needs Fixing

  • The court suggested that the language in § 18-705 referring to termination makes little sense based on the foregoing overview of termination ending the existence of an LLC, and that the legislature should consider a clarification and refinement of the language in the statute. See footnote 69.

History of § 18-705

  • The court provides an extensive historical overview of the origin of § 18-705 and the limits of the power of a personal representative of a deceased member.  See Slip op. 31-69.

A recent Delaware Court of Chancery decision provides a concise summary of the fiduciary duty of disclosure in the context of a proxy statement. In Stansell v. Rosensweig, C.A. No. 2023-0180-PAF (Del. Ch., June 12, 2024), the court rejected the claim that the proxy statement should have included a reference to reports that students are using the company’s online services to help them cheat on homework.

Highlights

  • The court restated established Delaware law that directors are not required to accept factual allegations prior to a formal adjudication.  This is sometimes referred to as directors having no duty to engage in self-flagellation. See Slip op. at 13.
  • The court reiterated that Delaware has adopted the federal standard for materiality in this context. Slip op. at 12.
  • The court provided a cogent analysis of the logical fallacies in the factual allegations for the claims that the proxy statement omitted material information. See Slip op. at 14 – 20.
  • The court noted the procedural issues involved with the decision by the plaintiff not to seek relief until after the annual meeting which the proxy statement related to.

A recent Court of Chancery decision allowed claims to proceed for the refusal to enable the seller of a business to exercise options in the new company.  In Osios LLC v. Tiptree, Inc., C.A. No. 2023-0589-NAC (Del. Ch. June 12, 2024), the court described a factual background in which the buyers of a business, to use a colloquial phrase, stiff-armed the buyer and did not provide, at least according to the allegations, a good-faith basis to refuse to allow the exercise of the options described in the LLC agreement.

Highlights

  • Form of Notice: The most noteworthy aspect of this decision is the court’s reasoning to support its rejection of the argument that the form of notice expressing an intent to exercise the options did not comply with the form of notice required under the agreement. The court determined that it need not decide whether “substantial compliance” with the notice provisions was satisfied due to the likelihood that the requirement was waived.  See footnote 54 and accompanying text (also collecting cases on substantial compliance with notice.)
  • This should be compared with the factually distinguishable notice issues in another recent Chancery decision, decided two days earlier, involving notice for an indemnification clause in an agreement that did not include a required form of notice.  See recent Chancery decision in Trifecta case, highlighted on these pages, that addressed adequate notice when no requirement for the form of notice was provided in the agreement.
  • Another noteworthy part of this decision involved a reference to the implied covenant of good faith and fair dealing as falling into two categories: (1) gap filling; and (2) protecting against arbitrary and bad faith exercise of discretion.  See Slip op. at 13 and footnote 61.
  • Lastly, always useful is a recitation of basic contract interpretation principles. See Slip op. at 8 – 9.

In a common fact pattern involving allegations that the buyer of a company intentionally derailed the attainment of milestones that would trigger additional payments, the Court of Chancery allowed several claims to survive a motion to dismiss. Trifecta Multi-Media Holdings, Inc. v. WCG Clinical Services LLC, C.A. No. 2023-0699-JTL (Del. Ch. June 10, 2024). The claims included fraud, breach of the implied covenant of good faith and fair dealing, breach of contract, and indemnification. 

As part of the factual background, the court provided detailed examples of the unabashedly disrespectful approach of the buyer when challenged regarding the multiple actions it took to allegedly prevent the milestone payments from being made.

Although the claims are not novel, it remains helpful to highlight some of the fundamentals of basic legal principles often involved in corporate and commercial litigation about post-closing disputes.

Highlights

  • The court recited the elements of fraud that must be pled to prevail on that claim, but also explained that in Delaware there is no difference between fraud and fraudulent inducement.  See page 20 and footnote 34.
  • Unlike fraud, the court also explained why some statements are mere puffery.  See Slip op. at 21 and 22.
  • The court described the scienter element of a fraud claim as requiring allegations with enough factual detail to support an inference that the speaker had no intent to perform when a promise was made.  Slip op. at 22 – 23.
  • Regarding the requirement of reliance, the court explained that this element is typically not suitable for a motion to dismiss unless a fully integrated contract has as an anti-reliance clause.  See Slip op. at 24 – 25 and footnote 47.

Required Reading

  • The court instructs on the interfacing between an integration clause and the requirements of an anti-reliance clause if someone seeks to prevent the use of statements outside the four corners of an agreement. See Slip op. at 24 – 28.

Indemnification

  • The court rejected the argument of ripeness as a basis to dismiss this claim because of the potential recovery for attorneys’ fees. Slip op. at 37-39.
  • Notice Requirement
    • Also noteworthy is the court’s observation that the agreement at issue did not require any specific form of notice and therefore the court found that filing the complaint sufficed for the notice requirement in the indemnification provisions.  See Slip op. at 37 -39 and footnote 93. 
  • Even though the elements for a breach of contract claims are well-known, this decision addressed two key points: (i) damages need not be alleged in a quantifiable amount because the court can award nominal damages; and (ii) liberal notice pleading rules do not require explicit allegations.  See Slip op. at 35 – 37. AS A SIDE NOTE, in my experience it may be dangerous to rely too much on liberal notice pleading rules when in Delaware, depending on the context and the claims, some members of the court can be quite willing to dismiss cases absent copious factual details.
  • The court provided an elucidation that although a claim for the breach of the implied covenant of good faith and fair dealing can be a gap filler—it does not fill all gaps, for example, where, as here, a term was expressly rejected during the drafting of the agreement.  See Slip op. at 28 – 32.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.  

The Delaware Court of Chancery, citing the milestone Corwin decision, recently dismissed a suit by Anaplan Inc. shareholders who claimed post-merger pact equity grants for some officers and directors cheated them out of $400 million of the original $10.7 billion price pursuant to a merger agreement requiring Thoma Bravo (not a typo) to pay for the business planning software company in In re Anaplan Inc. Stockholders Litigation, C.A. No. 2022-1073-NAC (June 21, 2024).

Vice Chancellor Nathan Cook ruled that whether defendants breached fiduciary duties, giving rise to a derivative suit, or whether they violated direct contract duties by mismanaging the deal–justifying a direct action–the suit fails the Corwin test because there was no proof that the Anaplan deal was inadequately disclosed or that the shareholders were coerced. See Corwin v. KKR Fin. Holdings LLC (Del. 2015).

Under Corwin, the Delaware Supreme Court held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully-informed, uncoerced majority of the disinterested stockholders. 

The opinion’s comprehensive examination of Corwin’s requirements to prove structural or situational coercion and what disclosures fully inform investors, is worthwhile reading for corporate law specialists. 

The court ruled that although the final price the Anaplan investors got took a big cut when their officer and director grants gave the original offer a $400 million “haircut,” the investors were not forced to accept a deal that gave them “nothing” because even the reduced offer provided a substantial premium over market value for their shares.

Background

The dispute began shortly after Anaplan accepted private equity firm Thoma Bravo’s March 2022 acquisition offer, when a handful of Anaplan officers and directors gave themselves $400 million in equity grants—an amount that, Bravo charged, violated the merger agreement.  Anaplan and Bravo later negotiated an amended merger agreement that provided $63.78 rather than the original $68.00 a share.  That pact still provided Anaplan investors with a premium but Pentwater Capital Management LP and other Anaplan shareholders filed suit to recover the $400 million, charging that three ex-officers and three former directors breached the merger pact’s $105 million limit on grants to employees and reduced the worth of plaintiffs’ shares.

Defendants’ motion to dismiss the claims argued that the charges are derivative, not direct, as plaintiff contended, because the alleged conduct only affected Anaplan’s stock price, but plaintiffs responded that it was only their stock value that was directly affected.

Plaintiffs also argued that the officer defendants violated their continuing Revlon duty to get the best price for the company, but defendants countered that a majority of the directors were not implicated as Revlon requires. 

No need to resolve

The court noted that, “To put it mildly, the parties have raised very interesting questions. They are not, however, questions I need to answer to resolve the Motion.”  But under Corwin, the Vice Chancellor said, “Plaintiff’s claims must be dismissed because they do not survive the informed and uncoerced vote of Anaplan’s stockholders approving the Merger.”

 He said Corwin enables parties to “avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. And I do not read our Court’s Corwin decisions, or the policy rationale underlying Corwin, as intended to apply Corwin narrowly.”

A fully informed vote?

Under Delaware law, when directors solicit stockholder action, they must “disclose fully and fairly all material information within the board’s control,’ the vice chancellor said, but he noted that “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” However, that doesn’t mean the standard requires “proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote,” he added.

In this case, the shareholders got a proxy that acknowledged a dispute between Anaplan and Thoma Bravo over the grants, but the disclosure stated that the company believed no wrongs were committed, so investors could make up their own minds whether to take the offer or take the risk of losing it, the court said in ruling that disclosure was adequate.

Was there coercion?

Plaintiffs asserted that the approval vote was coerced because “stockholders had a metaphorical gun to their head” when asked to approve a merger that was ”either situationally or structurally coercive.”  

However, the court defined an uncoerced vote as one that simply gives stockholders a “free choice between maintaining their current status and taking advantage of the new status offered by” the proposed transaction,” adding that, “The status quo may be undesirable or unpleasant, but that fact does not render the transaction coercive.”

Situational coercion—”arises when the status quo is so unattractive that it prevents a stockholder vote from operating as a clear endorsement of a transaction. ”It is “[t]he situational backdrop of an unacceptable status quo [that] calls into question the meaning of a stockholder vote such that it should not be given cleansing effect.”

The vice chancellor ruled that there was no situational coercion because, ‘”Although at a discount to the Original Merger Agreement, the Revised Merger Agreement still reflected a substantial premium both to Anaplan’s unaffected share price and to its expected share price if stockholders voted not to approve the Merger.”

Structural coercion— is simply “a vote structured so that considerations extraneous to the transaction likely influenced the stockholder-voters, so that [the Court] cannot determine that the vote represents a stockholder decision that the challenged transaction is in the corporate interest.”

Vice Chancellor Cook ruled that ”Plaintiff does not allege self-dealing or other extraneous factors that might warrant calling upon the principle of structural coercion.”

Was there waste?

Corwin includes no cleansing provision for waste, the court said, but it noted that, in addition to numerous other benefits and concessions, the final merger offer provides 10.4 billion in cash.

No new D&O route

Perhaps with a different set of facts, plaintiffs’ claims might have survived a motion to dismiss, but “acquiree fiduciaries are already disincentivized from acting in ways that jeopardize a merger’s closing,” the Vice Chancellor concluded. “Although this case presents what some might view as hard facts, it is not at all clear to me that the correct response is to open a new route for director and officer liability. “

A recent Delaware Court of Chancery ruling is a gem, notwithstanding—or maybe because of—its brevity, that addresses the minimum allegations required to seek dissolution of a business entity, and deserves a place in the pantheon of Delaware decisions.  It presents itself to the world in the form of a short and humble Order that simply recites core principles while denying a motion to dismiss a petition for the dissolution of an LLC. It is a big win for acknowledging the nuanced dynamics of business relationships in a closely-held entity. 

In Walter v. McManus, C.A. No. 2024-0412-NAC, Order (Del. Ch. June 7, 2024), the Court restated several key principles of law regarding the dissolution of LLCs or corporations that I highlight below in bullet points.

[Initially, I note that among the most exemplary discussions of the minimum requirements for surviving a motion to dismiss a petition for dissolution of a business entity are those in the Chancery decision of T&S Hardwoods, highlighted on these pages.]

Highlights of other dissolution decisions on these pages over the last 20 years are available at this link.

Highlights of Walter v. McManus:

  • The first paragraph of the Order describes several “convincing” factors that support a judicial dissolution such as an operating agreement that gives no means of navigating around a deadlock, or the existence of a board level voting deadlock—but the Order wisely at least implies that there is no express per se requirement for a deadlock.
  • The Court astutely observed that: it is not necessary to suggest that the business must be “metaphorically ablaze to state a reasonably conceivable claim to dissolve.”
  • Importantly, the Court instructed that the counterpart corporate statute, DGCL Section 273, is often used by analogy to apply to dissolution cases under the LLC Act. The court sagely reasons that the corporate dissolution statute: “does not mandate that the parties struggle until they have destroyed their relationship entirely and jeopardized their business.”
  • Although it is not required to be so pled, the Court found it relevant that there was “grave risk to the business, even if it is entirely profitable, via a residual inertial status quo.”
  • Delaware law does not require a member to plead she made a performative proposal she knew would be dead-on-arrival as a predicate to seeking judicial resolution.” (citing Seokoh, 2021 WL 1197593, at * 11.) (also distinguishing Arrow, 2009 WL 1101682, as not based on deadlock.)
  • Both the T&S Hardwoods Chancery opinion described on these pages, and this decision demonstrate a sensitivity to the exigencies of the nuanced business dynamics in closely-held entities, and that recognition supports a standard that is more closely aligned to no-fault divorces, as opposed to some opinions at the trial-court level that have attempted to impose additional requirements that are not in the statute, but instead are akin to requiring a purity test in order to establish a deadlock.
  • Lastly, but perhaps of at least equal importance to other principles stated in this Order, is that it remains an insufficient basis to oppose dissolution if a party has an option to sell his interest to a third party, because it would be inequitable to force a party to exercise an option to sell, when that option to sell is entirely voluntary, as an alternative to dissolution.

It would exalt artifice over pragmatism to require talismanic or magic words to be used in pleadings, or to require pleadings that, figuratively speaking, must describe “someone’s hair on fire” in order for one’s investment to be freed from the bondage of a dysfunctional group of a few business owners

The U.S. Court of Appeals for the Eleventh Circuit recently published a concurring opinion in which the judge explained how he used different AI-powered large language models like OpenAI’s ChatGPT to interpret words and phrases at issue in the case decided. Snell v. United Specialty Insurance Company, No. 22-12581 (11th Cir. May 28, 2024)(Newsom, J., concurring).

AI in the law is now mainstream when an appellate court includes references to how it was used as part of an analysis in connection with a published opinion.

A recent Delaware Court of Chancery opinion explains several principles of Delaware law useful for corporate and commercial litigators alike. In ETC Northeast Field Services, LLC v. Muse, C.A. No. 2023-0249-MTZ (Del. Ch. May 31, 2024), the Vice Chancellor determined that laches prevented breach of fiduciary duty claims because to allow the claims would be an impermissible collateral attack on a final arbitration award, which also eliminated the tolling arguments.

The following highlights should be of interest and widely applicable to corporate and commercial litigators, as well as fans of Delaware corporate and commercial law.

Highlights

●    The statute of limitations for breach of fiduciary duty claims is typically three years, and that timeline begins to accrue when the alleged wrongful act occurs, even if the plaintiff is ignorant of the cause of action. See Slip op. at 11-12 and footnote 44.

●    There are three ways to toll the applicable statute of limitations in order to enable a plaintiff to recover over a longer period of time: (i) an inherently unknowable injury; (ii) fraudulent concealment; and (iii) equitable tolling.  See Slip op. at 13-14.

●    The court explained that notice universally limits the tolling doctrines, and a plaintiff cannot invoke tolling doctrines when a plaintiff was objectively aware of—or should have been aware of the facts giving rise to the wrong.  See Slip op. at 14.

●     A basic principle of contract law applicable here is that when a party has assented to clear contractual terms, the parties are on notice of those terms. See footnote 57 and accompanying text (citing Restatement (Second) of Contracts § 157, cmt. (b) (1981)).

Compared to what might be described as an epistemological analysis of some aspects of Delaware corporate law, this short post is a more practical tool for the toolbox of litigators who can benefit, on a substantive level, from enforcing strict compliance with procedural discovery rules. In the case styled: In re Delaware Public Schools Litigation, C.A. No. 2018-0029-JTL (Del. Ch. May 30, 2024), the Delaware Court of Chancery provides a deep dive into the requirements for fee-shifting if a party denies a request for admission–and the requesting party proves at trial that the fact that was denied should have been admitted.  See Rule 37(c) and Rule 36. [As an aside, a few days ago the Court of Chancery published a recent tranche of revisions to its rules that practitioners should carefully review.]

This extensively footnoted 52-page decision deserves a comprehensive review but for purposes of this short blog post I will provide highlights via bullet points.

Highlights

●          Although rarely enforced in practice, and often observed in the breach, the court elucidates the proper way to object to discovery, with citations to extensive support to explain why commonly used boilerplate objections to discovery requests may result in waiver. Valid discovery objections must satisfy three requirements: (1) the objections must specifically apply to the facts of the case; (2) if information is being provided subject to an objection, the objection must clarify how the objection is applied; and (3) the responding party must explain what information is being provided notwithstanding the objection. See Slip op. at 18 and accompanying footnotes.

●          This scholarly opinion explains why Rule 36 allows requests for admissions of “ultimate facts”—but not requests for admissions of “legal conclusions.” The decision cites to and discusses applicable case law that helps to determine the boundaries of those two ends of the spectrum.  See Slip op. at 25-39.

●          In connection with awarding fees, the court reviews the standard to determine what reasonable hourly rate the court will allow, as well as the reasoning to buttress the unwillingness of the court to review bills “line by line.” See Slip op. at 43-50.

Prior blog posts over the last 19-plus years on these pages have addressed the difficulty of succeeding on a motion to disqualify counsel. The recent Delaware Court of Chancery decision in Brex Inc. v. Su, C.A. No. 2022-0758-MTZ (Del. Ch. May 22, 2024), is no exception.

This ruling explains why disqualification of counsel was denied based on an alleged violation of Rule of Professional Conduct 3.7(a), which provides the general prohibition of an attorney acting as a necessary witness and an advocate in the same trial. See prior blogs posts on these pages with highlights of court decisions addressing this rule.

Rule of Professional Conduct 1.9 may bar current representation of a client that is adverse to a prior representation of a former client. But in this case, delay in seeking disqualification on this basis, was the reason why the court determined that the argument was waived. See prior blog posts on these pages with highlights of court decisions addressing this rule.

I often defer to the professoriate for scholarly reviews of lengthy Chancery decisions.  Professor Ann Lipton provides a review of the Caremark analysis in a recent 100-plus page Chancery decision that discussed a conflicted controller transaction with a problematic special committee.  The case is Firefighters’ Pension System v. Foundation Building Materials, C.A. No. 2022-0466-JTL (Del. Ch., May 31, 2024). See professorial commentary here and here.

Of course, there is much more that can be, and will be, said about this important decision.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.              

The full Delaware Supreme Court recently reversed the dismissal of a shareholder challenge to a private equity consortium’s acquisition of Inovalon HoldingsInc. after finding the cloud-based healthcare industry support provider’s directors did not fully reveal to investors the conflicted roles of the deal’s financial advisors, as the high court’s seminal MFW ruling requires, in City of Sarasota Firefighters Pension Fund et al. v. Inovalon Holdings Inc., Del. Supr., No. 305, 2023 (May 1, 2024).

The justices unanimously reversed the Court of Chancery’s decision that the transaction met the standard Khan v. M & F Worldwide Corp. 88 A.3d 635 (Del. 2014) demands of controller-dominated deals to qualify for review under the defendant-friendly business judgment standard. The high court said MFW required Inovalon’s special committee of directors that negotiated the merger terms to reveal the full extent of their financial advisors’ involvement with counterparties in this transaction.  Without that information, the Inovalon minority shareholders could not cast the informed merger vote that would justify business judgment review and dismissal of the suit, Justice Karen Valihura wrote.

The decision marked the second time in as many months that the high court overturned a Chancery Court merger ruling on grounds that, the justices found, too little was required of the challenged deal’s proponents under MFW.  In the case styled In re Match Group Inc. Derivative Litigation, Del. Supr., No. 368, 2022 (April 4, 2024), Chancery had allowed an asset reshuffle that allegedly dealt less value and more debt to pension fund investors compared to IAC insiders. The high court said, in a controller-dominated deal, all the directors of the negotiating committee—not just a majority—had to be independent to avoid review under the exacting entire fairness standard.

Background

Three pension funds challenged the Nordic-led acquisition of Inovalon claiming it was a controller transaction that failed to qualify for protection under MFW because the deal did not have the benefit of a fully independent review committee from the outset and did not get a completely informed approval vote from a majority of the minority shareholders.

The suit claimed that Inovalon CEO Kieth Dunleavy and director Andre Hoffmann controlled a majority of Inovalon’s stock through multiple vote shares but did not establish a functioning, fully-independent negotiating committee from the outset of bidding. And it charged that the minority knew only part of the conflicts involving Inovalon’s investment banker financial advisors.

The trial court ruling

In a bench ruling, the Chancery Court dismissed, finding that the deal and disclosures about it to investors met MFW’s requirements. Concerning the ab initio requirement for the special committee, it found that the alleged conflicts did not arise until Nordic “formally requested that Dunleavy participate in an equity rollover as part of its written offer on July 21, 2021,” which marked the official beginning of the negotiations.   The trial court found that the conflicted roles of the advisors was adequately revealed.

The appeal ruling

On appeal, the high court focused on the plaintiffs’ contention that “judicial cleansing under the MFW framework is unavailable because the Proxy omitted material information that rendered the minority stockholders’ vote to approve the Transaction uninformed.”  The full court agreed.

The justices noted that MFW requires of controller buyouts that the business judgment standard of review will be applied “if and only if:”

(i)     the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders;

(ii)    the Special Committee is independent;

(iii)   the Special Committee is empowered to freely select its own advisors and to say no definitively;

(iv)    the Special Committee meets its duty of care in negotiating a fair price;

(v)     the vote of the minority is informed; and

(vi)    there is no coercion of the minority.

Full disclosure required

The high court said, “the trial court’s due care analysis concerning the retention and management of the advisors did not sufficiently address all of the disclosure issues and “Delaware courts have required full disclosure of investment banker compensation and potential conflicts.”

Conclusion

It was not enough to simply disclose to investors that the advisors might have received fees from counterparties to the transaction, the high court  said, because, “when a board chooses to disclose a course of events or to discuss a specific subject, it has long been understood that it cannot do so in a materially misleading way, by disclosing only part of the story, and leaving the reader with a distorted impression.” Rather, “[d]isclosures must provide a balanced, truthful account of all matters they disclose.”

The recent Delaware Court of Chancery decision styled In re Columbia Pipeline Group, Inc. Merger Litigation, Cons. C.A. No. 2018-0484-JTL (Del. Ch. May 15, 2024), provides a mini-treatise on the titular topic, and a scholarly deep dive that includes a tour of nearly 40 years of Delaware corporate law on the tension between the contractual obligations of directors—as compared to the fiduciary duties of board members, and the general primacy of contract law.  The court also addresses how those competing principles interface with the theory of efficient breach. See Slip op. at 37-64 and footnote 124.

This 86-page opinion could qualify as a law review article in its own right. A law review article could also be written with commentary on the cornucopia of case law, scholarship and statutory authority cited in the footnotes, as well as insightful analysis of the most important Delaware decisions on the titular topic over the last four decades.

It may be audacious, and it risks treating a serious topic too casually, but for purposes of busy readers who might be interested primarily in the highlights, I provide a few bullet points.

Takeaways and Gems of Delaware Law

  • The court observes that “Delaware law does not regard a contractual breach as less culpable than a fiduciary breach.”  See Slip at 39. The court begins the opinion with a quote from the Shakespeare play Measure for Measure:  “The tempter, or the tempted, who sins most?”  The court in the first sentence of the opinion describes that quote as a summary of the primary dispute addressed in the opinion, which is the final chapter of a case which includes the liability decision styled In re Columbia Pipeline Gp., Inc. Merger Litig., 299 A.3d 393 (Del. Ch. 2023). 
  • The court’s thorough discussion of the issue of whether a breach of contract or a breach of fiduciary duty is a greater sin, and whether one warrants graver consequences, reminds me of the iconic description of the many circles of hell in Dante’s Inferno, which assigns descending levels (or concentric circles) of eternal torment in the afterlife depending on the types of transgressions for which people were condemned to hell. [Applying the reasoning in this opinion to the circles of hell in Dante’s Inferno, if someone suffered damnation for breach of fiduciary duty or breach of contract, they would find themselves in the same circle of hell forever.]
  • The court describes why, under Delaware law, fiduciary duties do not trump contracts—but rather, the opposite is true. The court discussed the rationale of the key Delaware cases on this topic over nearly 40 years:  Van Gorkom; QVC; Omnicare; post-Omincare cases such as, e.g., C&J Energy Servs., Inc. v. Miami Gen. Empls.’, 107 A.3d 1049, 1072 (Del. 2014). Slip op. at 39 to 64.
  • The court emphasized that Delaware law does not regard the fiduciary duties imposed by equity as more important than voluntarily assumed contractual commitments.  Slip Op. at 61.  Rather, the court instructed that:

The cases overwhelmingly demonstrate that a court cannot invoke the fiduciary duties of directors to override a counterparty’s contract rights.  That is true even when a heightened standard of review applies. To argue that case law empowers a court to set aside a contract when reviewing director actions under an enhanced form of judicial scrutiny, embraces the much-ridiculed position that the Omnicare majority was perceived to take.  As consistently interpreted by courts and commentators, QVC does not support that assertion, and post-Omnicare case law soundly rejects it.

See footnote 122 and accompanying text.

  • The court noted that in some situations both claims for breach of fiduciary duty and breach of contract can proceed in the same case. In the present case, however, contractual pre-emption “has the upper hand.”  See footnote 122 at page 63.
  • In connection with explaining that the fiduciary duties of directors did not enable the corporation to escape a contract, the court recognized the concept of “efficient breach,” and that a corporation can engage in efficient breach just like any other contracting party.  See footnote 124.
  • For students and fans of philosophy, it is always enlightening to see a quote about metaphysical insights in a judicial opinion from a famous philosopher.  See footnote 140 quoting from Jean-Paul Sartre, Existentialism Is a Humanism 44 (Carol Macomber Trans., Yale Univ. Press 2007) (“[W]hat is impossible is not to choose.  I can always choose, but I must also realize that, if I decide not to choose, that still constitutes a choice.”)  This quote was in connection with the reference to several Delaware decisions in which the court referred to a conscious decision to refrain from acting as being nonetheless a valid exercise of business judgment.  See Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984) (subsequent history omitted).
  • The court also engaged in an extensive discussion of the Delaware Uniform Contribution Among Tortfeasors Act (DUCATA), and how to allocate damages when a plaintiff releases some, but not all tortfeasors, and later recovers damages in a higher amount.  See Slip op. at 31-32. The court also discussed the interfacing of the unclean hands doctrine with DUCATA.  See Slip op. at 33.

A recent Delaware Court of Chancery decision addressed many Delaware legal precepts of importance in connection with claims by members in a web of related alternative entities, that have broad application for those involved in commercial and business litigation.

In the case styled Kuramo Capital Management, LLC v. Seruma, C.A. No.  2021-0323-KSJM (Del. Ch. April 30, 2024), the court issued a 94-page decision, with the first 51-pages or so providing a detailed factual background that describes the multiple layers of interrelated entities and the shifting relationships among the parties as well as the multiple changes of ownership which impacted the duties and liabilities that gave rise to a panoply of claims. The court provides two charts to diagram the evolving relationships among the many entities involved and how their interrelated ownership changed over time.  Those charts filled the better part of two pages.  See Slip op. at 13 and 17.

With that backdrop, it may seem bold and unrealistic to provide a short overview of such a lengthy decision with so many complicated factual details and intricate legal issues and analyses.

Nonetheless, for the benefit of those readers who are primarily interested in the essential takeaways from the decision, and the irreducible kernels of wisdom that might be generally applicable, as well as insights that might lead one to decide that it would be helpful to read the whole opinion, I provide the following bullet points:

Highlights

  • The fiduciary duties of LLC managers, and the prerequisites for limiting or eliminating those duties is a perennial issue that the court addresses at page 53. See also footnotes 282 and 283.
  • The court also describes the contractual standard requiring actions to be “fair and reasonable,” to be akin to, “if not equivalent to, entire fairness review.”  See cases cited at footnote 283.
  • The always important recitation of the well-known three standards of review when analyzing claims for breach of fiduciary duty, is addressed at page 55.
  • The well-worn entire fairness standard is discussed and applied at pages 57 through 62.
  • The court also noted that the plaintiff repackaged its claim for breach of fiduciary duty as a claim for fraud, but the fraud claims appeared largely duplicative.
  • However familiar and pedestrian the elements for a breach of contract claim are, it’s always useful to be reminded of them.  See Slip op. at 63.
  • A helpful discussion explains why, based on the facts of this case, the court granted a D.J. that there was no right to indemnification due to the findings of a lack of good faith and breach of fiduciary duty, resulting in a claw back of funds previously advanced.
  • A comparison of the elements for a tortious interference with contractual relations claim, with a claim for tortious interference with prospective business relations, was discussed at page 68 through 71.  This analysis included the seven factors to determine if interference with the contract is justified, and the tension between some unavoidable interference as an allowable consequence of fair competition in the marketplace.  Also discussed was the distinction between interference and free speech as described in Section 768 of the Restatement, Second, of Torts.
  • The court noted the truism that a party to a contract cannot be liable for interfering with its own contract.

The Court of Chancery recently explained in the case styled In Re Harris FRC Corporation Merger and Appraisal Litigation, No. 2019-0736-JTL (Del. Ch. Feb. 19, 2024), the difference between the attorney/client privilege and a lawyer’s duty of confidentiality under Rule of Professional Conduct 1.6.

The titular topic was the subject of my latest ethics column for The Bencher, the publication of the American Inns of Court. I have been writing the ethics column for 25 years.

The titular topic is addressed in the recent Chancery decision of McRitchie v. Zuckerberg, and corporate law scholar Professor Bainbridge provides scholarly insights about the topic and the decision on his blog, which includes the following money quote from the opinion:

Under the standard Delaware formulation, directors owe fiduciary duties to the corporation and its stockholders. Implicitly, the “stockholders” are the stockholders of the specific corporation that the directors serve, i.e., “its” stockholders. The standard Delaware formulation thus contemplates a single-firm model (or firm-specific model) in which directors of a corporation owe duties to the stockholders as investors in that corporation. That point is so basic that no Delaware decisions have felt the need to say it. Fish don’t talk about water.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The full Delaware Supreme Court recently revived part of an investor challenge to IAC/InterActive Corp’s spinoff of its internet dating subsidiary after finding that the deal that controller IAC imposed on minority shareholders did not meet the exacting standards of the high court’s seminal MFW ruling, in In re Match Group Inc. Derivative Litigation, Del. Supr., No. 368, 2022 (April 4, 2024).

The en banc high court partially reversed a Court of Chancery decision that the derivative suit must be dismissed because IAC met the requirements of independence set by the milestone opinion in Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014).  The asset reshuffle allegedly dealt less value and more debt to pension fund investors compared to IAC insiders.  MFW famously said a controller-engineered deal could get business judgment protection if the negotiating committee was independent and disinterested–and the properly-disclosed transaction was endorsed by a majority of the minority shareholders.

The ruling’s importance

But the pivotal issue in this high court appeal concerned the proper standard to determine whether this unique corporate transaction was the product of fully independent, disinterested fiduciaries.  At one extreme, in the case of a freeze-out merger–where the corporate machinery is allegedly used to deprive investors of their shares and/or voting rights–all deal negotiators must be completely independent and disinterested. The high court said the key question in the appeal was: since the Match spinoff did not involve a freeze-out, could the IAC defendants qualify for the protection of the deferential business judgement standard even though one of three deal negotiators was not independent? 

The Court of Chancery said “yes”, agreeing with defendants that a majority of independent directors was enough to trigger the business judgment standard.  The high court said, ‘no“  and reversed. “If the controlling stockholder wants to secure the benefits of business judgment review, it must follow all MFW’s requirements,” the justices said.  In the MFW setting, to replicate arm’s length bargaining, all separation committee members must be independent of the controlling stockholder.

 Background

 The challenged 2020 transaction involved the creation of two new corporations out of the former IAC and Match.com businesses and a reshuffling of the assets and liabilities of those two entities that was engineered by a “separation committee” composed of three IAC directors.  The old Match was later dissolved into the new ICA.

Three pension funds that owned that eliminated stock sued alleging that the separation was a conflicted transaction in which Old IAC, as Old Match’s controlling stockholder, stood on both sides of the transaction. The plaintiffs claimed that Old IAC obtained significant “non-ratable” benefits in the Separation to the detriment of Match and its minority stockholders, and argued that the Separation Committee was conflicted and the proxy disclosures misled the Old Match minority stockholders.

The trial court ruling

Although the Court of Chancery found that the plaintiffs successfully pleaded facts creating a reasonable inference that one director was not independent of Old IAC, it ruled that a plaintiff must nonetheless show that “either (i) 50% or more of the special committee was not disinterested and independent,” or “(ii) the minority of the special committee ‘somehow infect[ed]’ or ‘dominate[ed]’ the special committee’s decision-making process.“  Finding that plaintiffs failed to do that, the vice chancellor dismissed.

The appellate ruling

Defendants argued that the vice chancellor correctly applied a less exacting standard than the one used in MFW and other freeze-out merger cases.  But the Supreme Court  said, in those key cases, “the common thread running through our decisions: a heightened concern for self- dealing when a controlling stockholder stands on both sides of a transaction.’”

In addition, the high court noted that, longstanding business affiliations, particularly those based on mutual respect, are of the sort that can undermine a director’s independence. Directors who owe their success to another will conceivably feel as though they owe a “debt of gratitude” to the individual. The plaintiffs have adequately pleaded that Director Thomas McInerney may have such a relationship with IAC.

The justices said, a controlling stockholder’s influence is not “disabled” when the special committee is staffed with members loyal to the controlling stockholder. “We stated in MFW that the special committee must be independent, not that only a majority of the committee must be independent,” the high court said’,  “A special committee created to secure the protections of MFW should function “in a manner which indicates that the controlling stockholder did not dictate the terms of the transaction and that the committee exercised real bargaining power at an arm’s length.

The unanimous Supreme Court reversed the dismissal, finding the plaintiffs’ claims of an unfair deal by non-independent directors are supported by the facts that:

1) the minority stockholders received a slightly higher percentage of ownership of New Match;

(2) Old Match was capitalized in a vastly different way, with limited cash, much higher debt, and restrictive governance provisions; and

(3) the boards were different

Supplement: One of Delaware’s favorite corporate law scholars, Professor Stephen Bainbridge, provides additional insights about this case on his eponymous blog here and here.

One of the nation’s leading corporate law professors, Stephen Bainbridge, addresses on his eponymous blog, whether a board meeting may be conducted by text messaging alone, and concludes that DGCL section 141(i) requires that board members participating in a meeting must be able to hear each other. The good professor cites to his own law review articles on the topic to support his reasoning.


Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

Vice Chancellor Travis Laster recently denied the TripAdvisor Inc. directors’ request for a quick appeal of his decision one month earlier to let shareholders press their charge that the board’s charter change move to Nevada robs them of litigation rights in a self-interested transaction that fails the exacting entire fairness standard. Palkon et. al. v. Maffei  et. al., No. 2023-0449-JTL  opinion issued (Del. Ch. Mar. 21, 2024).

The Chancery Court’s interlocutory appeal decision found no motive for the reincorporation move other than insulation of directors and officers and no attempt at bargaining or investor compensation for Nevada’s increased litigation shielding.  He said trial could reveal whether post-move changes in stock price support the plaintiffs’ claim that their shares would lose value while insiders benefited.

The appeal opinion is recommended reading for corporate law specialists in that it applies the Supreme Court Rule 42 interlocutory appeal certification requirements to the novel issue of fiduciary duties in a reincorporation into any entity with different shareholder rights.  Vice Chancellor Laster explained in detail why he rebuffed each of the grounds the defendants submitted as justifications for immediate review.

Background

Gregory B. Maffei, the CEO, Chairman and controlling shareholder of TripAdvisor which operates the world’s largest travel guidance platform, consulted his directors and lawyers  to produce a plan to reincorporate in Nevada to better protect the officers and directors under that state’s corporate law.  Shareholders sued, charging breach of fiduciary duty and defendants moved to dismiss.


The Feb.20 dismissal denial

Vice Chancellor Laster found that the unaffiliated stockholders’ voting pattern “supports an inference of unfairness”. Just as an informed vote by unaffiliated stockholders in favor of a conflicted transaction is evidence of fairness, an informed vote by unaffiliated stockholders against a conflicted transaction suggests unfairness, he said, noting that, “Here, the unaffiliated stockholders resoundingly rejected the conversions.” Palkon et. al. v. Maffei  et. al., No. 2023-0449-JTL  opinion issued (Del. Ch. Feb. 20, 2024).

The appeal

Vice Chancellor Laster examined the defendant’s grounds and found none sufficient.

Does the opinion involve an issue of first impression?

Defendants assert that “no other Delaware court has addressed whether and under what circumstances a company’s move to a state affording some greater litigation protection for potential future cases based on hypothetical future facts constitutes a non-ratable benefit material enough to trigger entire fairness review.”

But the vice chancellor said, “The application of entire fairness to an interested merger is not a novel issue. Nor is the application of entire fairness to a merger that confers litigation protections on the fiduciary defendants who approved it.”  He added that, “The Opinion also did not address a new issue by focusing on the materiality of a reduction in the litigation risk. Using a materiality standard to evaluate interestedness is not novel.”

Would a high court review resolve a conflict among the courts?

Defendants argued that “[t]he decisions of the trial courts are conflicting upon the question of law.” But the vice chancellor said, “Whether the  cases conflict depends how one interprets prior cases. On balance, this factor does not support interlocutory review.

Would review end the case and serve justice?

As their final basis for interlocutory appeal, the defendants invoke two factors

together: factor (G), which asks whether “[r]eview of the interlocutory order may

terminate the litigation,” and factor (H), which asks whether “[r]eview of the

interlocutory order may serve considerations of justice.” That combination does not

support interlocutory review.

The possibility that a reversal could save litigation costs “is not unique to [this] application and would otherwise warrant certification after nearly every trial court decision even in cases lacking ‘exceptional’ circumstance,”  the Vice Chancellor ruled, “Moreover, for reasons discussed previously, this matter is likely to require relatively less extensive litigation efforts than other entire fairness cases.”

“Not invited” to weigh Musk influence?

However, as to the appellants’ assertion that the Opinion decided a substantial issue thereby subtly alluding to the disproportionate media attention given to the Opinion because  “thousands of other Delaware corporations . . . need certainty as to the rules that apply to a decision to reincorporate in another jurisdiction,” the vice chancellor said that alluded to the attention the Feb. 20 opinion received after Elon Musk’s high-profile comments about “forsaking Delaware” following his loss in an unrelated decision in the Chancery Court.

“Rule 42 does not invite a trial court to consider the level of media attention that a decision has received. That does not mean that the Delaware Supreme Court could not consider it.” he said.

Not about Nevada
Finally, the vice chancellor noted that “ nothing about the ruling turns on anything about Nevada as a state. ” If the Company was converting into a Delaware LLC and paralleled Nevada law, then the outcome would be the same, he said. “The allegations about the substance of the post-conversion legal framework generate the result, not whether it was created by Nevada legislators or Delaware lawyers.”

“This is not a case where the interests of justice require early stage intervention

by the Delaware Supreme Court,” the vice chancellor concluded. It is a case where the differences between Delaware law and Nevada law have been explored. However, he noted that this certification review ruling is only a recommendation to the Delaware Supreme Court—which makes up its own mind about whether to grant an appeal.

This year’s Lecturer is Professor Lisa Fairfax from the University of Pennsylvania Law School. Details of the event on April 19 at the Hotel duPont in Wilmington, Delaware, are available at this link.

Hard to believe that when I started this idea while on the law review, it would still be going strong almost four decades later. Named after my father, the Delaware Journal of Corporate Law at the Delaware Law School of Widener University continues to host and organize the event that brings leading corporate law scholars from around the country to share their insights. Prior Annual Lectures have been highlighted on these pages.

Key Delaware decisions on advancement under DGCL Section 145 for directors and officers were highlighted in a just-published book chapter in an ABA publication that I co-authored with 5 of my colleagues in the Delaware office of Lewis Brisbois. This is the 8th year that I have highlighted key advancement cases for a book chapter for the ABA.

Links to other advancement decisions highlighted over the last 19 years on this blog, as well as prior ABA book chapters on this topic are available on these pages.

A recent gem of a short letter ruling from the Delaware Court of Chancery in Goldman v. LBG Real Estate Company LLC, C.A. No. 2023-0426-KSJM (Del. Ch., Feb. 26, 2024), provides important insights, with citations to authority, on three noteworthy topics of widespread relevance to corporate litigators:

  • California courts find “Delaware law on advancement particularly persuasive because of the depth of its experience with corporate governance issues.”  Slip op. at 2 and footnote 6 which cites to several cases (other citations omitted).
  • Like Delaware, California allows fees on fees proportionate to the degree of success of a claimant.  See Slip op. at 2 and footnote 7 (citing cases).
  • This letter ruling was in the context of a motion for reargument under Rule 59(f), and the fact that the court made quick work of the motion in a 3-page decision is an indication of how much of an uphill battle such motions usually are.

A recent Delaware Court of Chancery transcript ruling provides guidance on best practices for how to craft answers to a complaint, in the matter styled: 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., C.A. No. 2023-0128-JTL, Transcript (Del. Ch. Feb. 9, 2023). (N.B. In Delaware, transcript rulings can be cited in briefs.)

The court disapproved of the common tactic of denying most allegations in the complaint with a lack of careful attention to detail.  [The Delaware rules require that the allegations of the complaint be restated before the actual response.]  The applicable rule also requires an answer that fairly meets the allegations of the complaint.  The court expressed displeasure about “rampant denials.”

The court did not approve of those who may “have some epistemic doubt about the truth of an allegation that crosses multiple states of the universe . . . notwithstanding their confidence level about what the real state of the world is.”  Transcript at 46.

My additional comment is that an answer is not the correct forum for nuanced or pedantic ruminations about ontology or one’s own Weltanschauung.

The court discouraged denials of things that should be “really difficult to dispute” and instead expected parties to prepare answers that “fairly meet the allegations of the complaint . . . [in a way that] will help frame the issues in dispute.” The court further explained that denials should not be used “. . . even if they didn’t say it precisely like you would have if you had made the allegation.”  Id.

Supplement: Delaware’s favorite corporate law scholar (in my view), Prof. Bainbridge, kindly linked to this post on his eponymous blog.

In a recent magnum opus, the Delaware Court of Chancery in the matter of West Palm Beach Firefighters Pension Fund v. Moelis & Co., C.A. No. 2023-0339-JTL (Del. Ch. Feb. 23. 2024), addressed the tension between DGCL Section 141(a), which provides that directors manage the business and affairs of the corporation unless otherwise provided in the certificate of incorporation–and a stockholders’ agreement.

The court provided extensive scholarly analysis and citations to extensive authorities to buttress its reasoning that the stockholders’ agreement involved in this particular case improperly restricted directors’ powers, contrary to Section 141(a), because those restrictions were not contained in the certificate of incorporation.

Fortunately, Professor Stephen Bainbridge provided his typically erudite insights and learned commentary about this opinion on his eponymous blog. At least for now, I won’t add to the good professor’s insights.

My anecdotal observation is that Professor Bainbridge is one of Delaware’s favorite corporate law scholars to the extent that his prolific scholarship is often cited in Delaware court opinions, including in this opinion at footnotes 15, 296, 297, 298, and 299. 

A prior decision in this same case two weeks earlier was highlighted on these pages.

In his commentary on this most recent decision linked above, Professor Bainbridge was kind enough to give me a “shout out” as he referred to my above-linked highlights of the earlier decision in this case on my blog, writing that:

“My good friend and leading Delaware corporate law litigator Francis Pileggi has a new blog post that digs into an earlier decision in the case. As always, he does a brilliant job.”

  I am grateful to the good professor for his kind words.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The Delaware Court of Chancery recently refused to dismiss shareholder charges that TripAdvisor Inc.’s CEO/controller and directors robbed them of litigation rights by moving the firm’s charter to Nevada in a self-interested transaction that triggered the exacting entire fairness standard because the changes benefited only the defendants, in Palkon et. al. v. Maffei, et. al., No. 2023-0449-JTL  opinion issued (Del. Ch. Feb. 20, 2024).

Vice Chancellor Travis Laster’s February 20 opinion denied the company’s motion to dismiss the breach-of-duty suit after he found no evidence of a motive for the change other than insulating TripAdvisor officers and directors — and no attempt at bargaining or investor compensation for the increased shielding.

The Opinion’s Importance

The opinion is likely to be closely studied by corporate governance specialists—especially those with clients who would be impacted by a charter change that affects shareholder litigation rights.  Delaware, where two thirds of major Americans are incorporated, prides itself on its efforts to balance the power of public shareholders and corporate management and controllers. 

However, Vice Chancellor Laster’s opinion noted that if the engineers of a transaction control a majority of stock, the minority could go forward with a derivative suit if they can show–as they did here on a motion to dismiss–that the move was self-interested, triggering application of the plaintiff-friendly entire fairness standard.  And although in this case, the defendant CEO owned a full “hard majority” of TripAdvisor through his multi- vote shares, Delaware courts have found defendants with as little as 20 percent interest to be a “controller” if they had an influence over a majority of directors.

The opinion is valuable because it lists the defendants’ failures to craft a transfer plan that would have been fair to the minority and details the steps the defendants could have taken to devise a reincorporation that would not have triggered review under the entire fairness standard.

Background

 Gregory B. Maffei,  the CEO, Chairman and controlling shareholder of TripAdvisor which operates the world’s largest travel guidance platform, consulted his directors and lawyers  to produce a plan to reincorporate in Nevada to better protect the officers and directors under that state’s corporate law.  Shareholders sued, charging breach of duty and defendants moved to dismiss.

What standard applies?

The Vice Chancellor said the outcome of the motion depends first on which of Delaware’s three tiers of review for evaluating director decision-making applies.

Business judgment

This is Delaware’s default standard of review. When applying that standard, a court presumes that the defendant fiduciaries “acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.”  Unless a plaintiff rebuts one of the elements of the rule, “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.”

Advanced scrutiny

Under this standard, he said, the directors must establish that they (i) sought to pursue a legitimate end and (ii) selected an appropriate means of achieving it.

Entire fairness

Under that standard, the fiduciary defendants must establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.” “Not even an honest belief that the transaction was entirely fair will be sufficient to establish entire fairness. Rather, the transaction itself must be objectively fair, independent of the board’s beliefs.”

Was there a benefit?

Since Plaintiffs allege—and for purposes of this motion, defendants concede—that Maffei controls TripAdvisor and since no one suggests that the conversion was cleansed in any way, determining the correct standard of review therefore depends on whether the conversion conferred a non-ratable benefit on the fiduciary defendants, the court said.

The next step for the court was to determine whether the reincorporation conferred a “non-ratable benefit” on the controlling fiduciary by reducing the risk of shareholder litigation liability.  The Vice Chancellor said the answer is “yes” because, “Obtaining coverage for future potential liabilities is a benefit, and insureds pay premiums to get it.”

Fair dealing?

The vice chancellor concluded that the way the reincorporation came about was not fair to the public shareholders.  He noted that, “The procedural dimension ‘embraces questions of when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.”

He found that the unaffiliated stockholders’ voting pattern:

“supports an inference of unfairness. Just as an informed vote by unaffiliated stockholders in favor of a conflicted transaction is evidence of fairness, an informed vote by unaffiliated stockholders against a conflicted transaction suggests unfairness.  Here, the unaffiliated stockholders resoundingly rejected the conversions.”

Injunction or Damages?

The court denied the motion to dismiss but declined to approve plaintiffs’ motion to enjoin the reincorporation because money damages could be sufficient, if proven, since they could be based on any decline in stock value after the move.

In the context of explaining why certain challenges to a stockholders’ agreement were not barred by laches and were otherwise timely, the Delaware Court of Chancery recently recited several enduring fundamental principles of Delaware corporate law and corporate governance in the gem of a decision styled: West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, C.A. No. 2023-0309-JTL (Del. Ch. Feb. 12, 2024).

Key Takeaways:

In support of its reasoning for rejecting arguments that challenges to a stockholders’ agreement were barred by laches and ripeness defenses, the Court of Chancery, in a restatement of sorts, recited several basic tenets of Delaware law that have widespread applicability to those who practice or follow Delaware corporate and commercial litigation.

Selected Fundamental Principles and Mandatory Provisions of the Delaware General Corporation Law (DGCL):

The DGCL contains a number of mandatory provisions. The court provided examples of certain mandatory provisions of the DGCL that could be enforced, even after the normal three-years statute of limitations, assuming the corporation managed to avoid suit for that length of time. For example:

  • Section 141(a) should be recognized by readers as providing that:  “The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation.”  The court observed that over a dozen decisions have invalidated governance arrangements that violated Section 141(a).  See cases cited in footnotes 98 to 105.
  • Section 220. The court described the thought experiment in which a Delaware corporation attempted to include a provision in its chapter or bylaws that purported to bar stockholders from inspecting books and records in the manner provided by Section 220.  The court cited at footnote 32, a decision from almost a century ago that held even a charter provision cannot eliminate Section 220 rights.
  • Notwithstanding Sections 211 and 231, allowing a corporation to evade a challenge to these mandatory provisions by including a hypothetical provision in its charter or bylaws purporting to only require stockholders’ meetings every five years, or to do away with a requirement to appoint inspectors of election—would not be upheld.
  • Section 102(b)(7) authorizes exculpation subject to specified statutory limitations. A corporation should not be able to evade a challenge if no one sued after three years to challenge a charter provision that purported to insulate directors and officers from monetary damages for any breach of fiduciary duty. See Slip op. at 13.
  • The court referred to DGCL Section 327, the contemporaneous ownership requirement, as another example of a mandatory provision that cannot be waived.  Slip op. at 22.  But see footnotes 63 to 67 and related text, where the court discussed the policy reasons why that requirement should be reconsidered.
  • As a final example, the court considered a hypothetical similar to the facts of this case: If a Delaware corporation entered into a stockholders’ agreement stating that the elected board of directors shall have a purely advisory role, the court rejected the logic that a facial challenge would be impossible if no suit were filed to contest the provision within the first three years.

Ineffective Defenses to Challenged Void Acts:

  • Disclosures about legally non-compliant conduct cannot insulate conduct from challenge based on the same reasoning that applies to governing structures and agreements that violate mandatory features of the DGCL.  See footnote 62 and accompanying text.
  • This decision explains why an equitable defense like laches cannot validate a void act.
  • Estoppel is not a defense to challenge a void act.  See Slip op. at 21 and n. 61.
  • Likewise, acquiescence cannot validate a void act.

See generally footnote 11 (cases addressing contracts void as offending public policy).

When Laches or a Statute of Limitations Apply:

The court explained the two conceptual frameworks for analyzing timeliness through an application of the statute of limitations, and the doctrine of laches, and why a court of equity may apply either doctrine.

The court noted that Delaware corporate law relies on the vigilance, of sorts, of private litigants to enforce legal norms and provide fiduciary accountability. See footnotes 27 to 29.

There are Three Methods to Determine When a Claim Accrues:

  • The discrete act method applies when a claim arises at a distinct point;
  • The continuing wrong method; and,
  • The accrual method.

Noteworthy Corporate Law Principle:

A fiduciary does not owe fiduciary duties when exercising contractual rights, even if a counterparty is the fiduciary’s beneficiary.  Slip op. at 39. See also footnote 115 and accompanying text.  See also the 100-plus page Sears opinion of last month authored by Vice Chancellor Laster which discussed the duties of a controlling stockholder in the context of either maintaining the status quo, or challenging the status quo, as well as the applicable standard of review. In Re Sears Hometown & Outlet Stores, Inc. S’holder Litig., 2024 W: 262322 (Del. Ch., Jan. 24, 2024). The Vice Chancellor also provided insights on the topic generally from a seminar in Miami that he participated in and that His Honor highlighted on LinkedIn.

Venerable Twice-Tested Doctrine For Review of Corporate Acts:

In what the decision called “Berle I and Berle II” parts of the two-part test, referring to an iconic article by Professor Adolf Berle cited in footnote 72, Delaware corporate action is twice-tested: 

“First, by the technical rules having to do with the existence and proper exercise of the powers; second, by equitable rules somewhat analogous to those which apply in favor of a cestue que trust for the trustee’s exercise of wide powers granted to him in the instrument making him a fiduciary.”

Slip op. at 26 (citing article). See also footnotes 72, 73 and 75.

For my latest ethics column, now in its 25th year, for the national publication of the American Inns of Court called The Bencher, in the January/February 2024 edition, I highlight a decision of the Delaware Court of Chancery that addressed litigation misconduct in a summary proceeding under Section 220 of the Delaware General Corporation Law. That provision allows stockholders who satisfy certain prerequisites to seek corporate books and records on an expedited trial schedule.

In Myers v. Academy Securities, Inc., C.A. No. 2023-0241-BWD, Order (Del. Ch., Oct. 2, 2023), Magistrate in Chancery Bonnie David explained the circumstances that satisfied the “glaringly egregious” standard which allows the Court to shift fees as an exception to the American Rule, as compared to awarding fees based on contractual or statutory provisions.

The article also cites to other recent Chancery decisions on this topic that support an anecdotal observation: litigation tactics that meet the “glaring egregious” standard are becoming more common of late.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The Delaware Supreme Court, in a recent guidepost opinion, ruled that officer exculpation amendments to Fox Corp. and Snap Inc.’s charters did not require a separate class vote from those companies’ non-voting common stock classes because they changed no powers, preferences, or special rights of those stock classes in In re Fox Corp./Snap Inc. Section 242 Litig., Nos. 120 &121, 2023 (Del. Supr., Jan. 17, 2024).

The justices’ unanimous en banc ruling upheld the Court of Chancery’s summary judgment decision that the amendments did not deprive the non-voting stock classes of a unique, class-based power to sue their officers for damages for alleged breach of the duty of care. 

It was the high court’s first major clarification in decades regarding the parameters of Section 242(b)(2) to the “powers” in Section 102 of the Delaware General Corporation Law.

The justices upheld Chancery’s view on how two long-standing opinions govern the way the DGCL should operate in this area:

Hartford Accident & Indemnity Co. v. W.S. Dickey Clay Mfg. Co. 24 A.2d 315 (Del. 1942) hereinafter Dickey Clay]; 1993 WL 547187, and

Orban v. Field (Del. Ch. Dec. 30, 1993) [hereinafter Orban].

The high court affirmed Chancery’s reading that had found those decisions stated: “The powers, preferences, or special rights of class shares expressed in the charter include default provisions in the DGCL, which are part of every charter under Section 394. The ability to sue directors or officers for duty of care violations is an attribute of the Companies’ stock, but not a power, preference, or special right of the Class A common stock under Section 242(b)(2 )”

Background

Both news-content generator Fox Corp. and social media content specialist Snap Inc. were multi-stock class companies that in 2022 adopted officer exculpation charter amendments allowed by recent Delaware legislation.   Both were sued by their respective non-voting common stockholder class and those actions were consolidated by the Court of Chancery, which granted the defendants’ joint summary judgment motion.

The Class A Stockholders claimed that the “plain language” of Section 242(b)(2) unambiguously required a class vote before adopting the exculpatory charter provisions. As they argued, stockholders have three fundamental “powers” – to vote, sell, and sue–and that power, according to Black’s Law Dictionary, includes “[t]he ability to act or not act[.]”4

The Companies countered that Sections 242(b)(2), 151(a), and 102(a)(4) – with their overlapping use of the terms “powers,” “preferences,” and “special rights” – must be read together—and when read together, “powers” cannot carry the powerful dictionary definition that the plaintiffs contend it must have. Chancery agreed, finding that the power to sue for breach of duty “is an attribute of the Companies’ stock, but not a power, preference, or special right of the Class A common stock under Section 242(b)(2).”

 The appeal.  

On appeal, the high court agreed that the “the stockholders’ rigid interpretation of “powers” upsets the balance between Sections 242(b)(1) and (2). Section 242(b)(2) is intended as a “safeguard” to protect the powers, preferences and special rights authorized by Section 151 and expressed in the charter. It is not a broad grant of the right to vote on any amendment affecting any attribute of stock ownership.”

Orban and Dickie Clay have final say

The justices noted that:

*In Orban, the Court of Chancery held that Section 242(b)(2) “makes clear that it affords a right to a class vote when the proposed amendment adversely affects the peculiar legal characteristics of that class of stock.”

* For seventy-five years, Dickey Clay has held that “rights incidental to stock ownership are not a peculiar characteristic of the shares of a class of stock” and “Section 242(b)(2) should be read considering other provisions of the DGCL.”

*In the nearly 40 years since 1986 and the adoption of Section 102(b)(7) for directors, no one has taken the position until this case that an exculpation amendment requires a class vote.

Andrew Ralli of the Delaware office of Lewis Brisbois prepared this post.

The Court of Chancery recently granted a motion to strike portions of a complaint derived from privileged or confidential board-level communications in Icahn Partners LP, et al. v. Francis deSouza, et al., C.A. No. 2023-1045-PAF (Del. Ch. Jan. 16, 2024).

Background

Illumina is a biotech company that develops tools and systems for genetic analysis. In April 2023, three Illumina stockholder—collectively owing approximately 1.4% of the Company’s outstanding common stock and under the control of Carl Icahn—proposed a three-candidate slate to challenge the Company’s nominees at the 2023 annual meeting of stockholders. Andrew Teno, one of Plaintiffs’ nominees and an employee of another Icahn-controlled entity, Icahn Capital LP (“Icahn Capital”), was elected to the Company’s Board. Teno subsequently provided privileged and confidential information to Icahn and his affiliates, including information that predated his tenure on the Board.

In October 2023, several months after Teno joined the Board, the same three Illumina stockholders filed a derivative lawsuit claiming Illumina’s Board caused the Company to break the law by voting in favor of the troubled $8 billion reacquisition of Grail, Inc. (“Grail”), which resulted in a $476 million fine by the European Union and barred Illumina from acquiring Grail.

Shortly thereafter, the Company filed a motion to strike paragraphs of the complaint that contain information that Teno obtained and supplied to the Plaintiffs after joining the Company’s Board.

Highlights of the Case

The motion before the court did not involve a dispute over Teno’s entitlement to Illumina information that was protected by the attorney-client privilege. Rather, “[t]he issue is whether Teno is permitted to share that privileged information with the Plaintiffs and whether Plaintiffs may disclose that confidential information in a civil complaint against the Company’s directors.”   

Vice Chancellor Fioravanti acknowledged the Court “has not developed a bright-line rule” regarding directors’ sharing of privileged information with the stockholders who nominated them. After providing a “brief recap of the key precedents . . . to set the stage[,]” the Court recognized that it “has held in a long line of cases dating back to 1992 that a director may share a corporation’s privileged communications with the director’s designating stockholder under certain limited circumstances.”  A director’s sharing information with the designating stockholder, however, “does not give the stockholder freedom to further disseminate the company’s confidential information.”  Under Delaware law, a director may share privileged or confidential company information with a stockholder when the director is either:

(A) designated to the board by the stockholder (known as “designated-director” matters) pursuant to:

(i) a contract; or

(ii) the stockholder’s voting power, i.e., a controlling stockholder. 

(B) serves in a controlling or fiduciary capacity with the stockholder (known as “one-brain” or “dual-fiduciary” matters). 

Vice Chancellor Fioravanti found that “[t]he facts of this case do not fit the paradigm of the cases discussed above.” First, the Plaintiffs did “not have a contractual right to appoint a director and, owning less than two percent of Illumina’s outstanding stock, they did not control the vote during Teno’s election.”  In fact, “as an undisputed factual matter, Plaintiffs did not designate Teno to the Company’s [Board] pursuant to the type of contractual right present in any of the designated-director cases.”  For instance, recently in Hyde Park Venture P’rs Fund III, L.P. v. FairXchange, LLC, 292 A.3d 178 (Del. Ch. 2023), two venture capital funds that owned preferred stock in FairXchange, Inc. had a contractual right to designate a director to the FairX board of directors.

In contrast, Teno, in connection with his joining the Board, agreed to abide by the Company’s Code of Conduct, which provides, inter alia, that, “‘[e]xcept as required for the proper performance of your duties, you may not use or give to others trade secrets or confidential information of the Company.’”

Second, “Plaintiffs’ contention that their relationship with Teno grants them access to Illumina’s privileged information lacks support under either recognized path of acceptable information sharing.”  As the Court noted, for instance, “[i]n the ‘one brain’ cases, the director controlled or served in a fiduciary capacity with the stockholder seeking the information and, therefore, was unable to split their brain between their position as a director and their position controlling or as a fiduciary to the entity seeking information.” Here, Teno’s employment relationship with Plaintiffs is readily distinguishable from the ‘one brain’ cases. Teno did not serve in a fiduciary role for any of the Plaintiffs, nor did Plaintiffs argue that Teno exercises influence over any of them. In fact, Teno is not an employee of any of the Plaintiffs.  Rather, he is an employee of Icahn Capital, which, like the Plaintiffs, is also controlled by Icahn.

Additionally, the Court rejected Plaintiffs’ implicit argument suggesting that Hyde Park expanded the circumstances under which a director could share confidential and privileged information with stockholders:

“Hyde Park did not change the law; it reframed and clarified a ‘framework [that] has been settled law in Delaware for nearly four decades.’ . . . [T]he mere fact that Teno was nominated by the Plaintiffs and is an employee of another Icahn-affiliated entity does not persuade the court that Teno had the right to disclose Illumina’s confidential and privileged information to the Plaintiffs.”

. . .

The Court also rejected Plaintiffs’ argument “that there is no harm” because the complaint was filed confidentially and not available to the public:

“The purpose of the motion to strike is to prevent Plaintiffs from utilizing privileged information to which they are not entitled. The fact that the public is not able to access that information does not remedy Teno’s unauthorized dissemination of Illumina’s privileged and confidential information or Plaintiffs’ unauthorized use of it.”

Conclusion

The Court recognized the  Challenged Information did “not neatly fit into the four categories that permit the court to strike information from a pleading under Rule 12(f).”  Nevertheless, the Court used its broad equitable powers “to protect confidential information and to formulate an appropriate remedy in the event confidential or privileged information is improperly interjected into litigation.” The Court granted the motion and required all references to challenged information be stricken from the complaint.

On January 23, 2024, however, the Plaintiffs filed a motion for reargument, claiming that the Opinion “overlooked or misapprehended facts . . . that met both standards” under which a director may share privileged or confidential company information with a stockholder. The results of that motion–not available as of this writing–should be included in a complete analysis of this case.

This post was prepared by Aimee Czachorowski of the Delaware office of Lewis Brisbois.

The Court of Chancery’s recent Memorandum Opinion in DiDonato v. Campus Eye Management, LLC, C.A. No. 2023-0671-LWW (Del. Ch. Jan. 31, 2024), covers a great deal of ground in addressing a wide variety of defenses raised in connection with a claim under 6 Del. C.  Section 18-110 to confirm whether the plaintiff remained as a manager of the LLC, but of particular interest is the Court’s discussion of whether the defendant should be held in contempt for violating the Court’s status quo order.

The Court explained that Court of Chancery Rule 70(b) provides “broad latitude to remedy violations of its orders” and clearly set forth the requirements for a movant seeking such an order. By a preponderance of the evidence, a movant must show the contemnors violated an order of the Court of which they had notice and by which they were bound and the violation must be a failure to obey the Court in a meaningful way. If that burden is met, the burden then shifts “to the contemnors to show why they were unable to comply with the order.”

After briefing and argument, the Court found the defendant in contempt of its status quo order and, as a remedy, rather than unwinding the transaction at issue, awarded fees incurred by the plaintiff in bringing the motion.    

By: Francis G.X. Pileggi, Sean M. Brennecke, Aimee M. Czachorowski, Rolando A. Diaz, Andrew A. Ralli, Andrew J. Czerkawski, Katherine R. Welch, and Fanta M. Toure

Reprinted courtesy of The Delaware Business Court Insider, ALM Media Properties, LLC, which published this on January 3, 2024.

This is the 19th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors.  This year’s list does not attempt to include all important decisions of those courts that were rendered in 2023, and eschews some of the cases already extensively discussed by the mainstream press or legal trade publications. This list highlights some of the notable decisions that should be of widespread interest to those involved in corporate and commercial litigation or those who follow the latest developments in this area of Delaware law.

Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc.?

          In Coster v. UIP Companies, Inc., 300 A.3d 656 (Del. 2023), the Delaware Supreme Court approved the Court of Chancery’s combination of Unocal’s nexus test with Blasius’s compelling justification requirement, affirming the holding that:  “To satisfy the compelling justification standard, ‘the directors must show that their actions were reasonable in relation to their legitimate objective, and did not preclude the stockholders from exercising their right to vote or coerce them into voting a particular way.”  The Court of Chancery, noting the case’s “exceptionally unique circumstances,” articulated that “in this context, the shift from ‘reasonable’ to ‘compelling’ requires that the directors establish a close fit between means and ends.”  The Delaware Supreme Court agreed, concluding that courts can apply Unocal “with the sensitivity Blasius review brings to protect the fundamental interests at stake—the free exercise of the stockholder vote as an essential element of corporate democracy.”

Did Delaware Supreme Court Merge the Blasius and Unocal Standards in Recent Decision of Coster v. UIP Cos., Inc. | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements

          In Holifield v. XRI Investment Holdings LLC, 2023 Del. LEXIS 295 (Del. Sept. 7, 2023), the Delaware Supreme Court upheld an LLC agreement’s incurable voidness provision.  The provision at issue rendered void—not just voidable—any transfers of interest that were in violation of the LLC agreement. The Court emphasized that Delaware law affords parties to alternative entity agreements maximum private ordering and contractual freedom.  Though it rejected the notion that parties must use “talismanic magic words,” the Court concluded that the plain, unambiguous language of the LLC agreement indicated that sophisticated LLC members bargained for an enforceable clause voiding non-compliant interest transfers, incapable of being cured—even by a court of equity.

Supreme Court Clarifies Limits of Judicial Equitable Review of LLC Agreements | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC

          In In re Dissolution of T&S Hardwoods KD, LLC, 2023 Del. Ch. LEXIS 16 (Del. Ch. Jan. 20, 2023), the Delaware Court of Chancery clarified what kind of allegations seeking the dissolution of an LLC suffice to pass muster under the plaintiff-friendly Rule 12(b)(6) standard.  The allegations reflected a “continuing breakdown” in the relationship of the managers.  Moreover, despite the LLC agreement’s broad, general purpose clause (“engage in any lawful activities”), the Court determined the parties could not carry on their specifically contemplated business.  Also, because the LLC agreement’s buy-sell provision failed to offer the parties an equitable exit mechanism, the action proceeded past the motion to dismiss stage.

Recent Chancery Decision Clarifies Basis for Judicial Dissolution of LLC | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Caremark Claims Allowed to Proceed Against Corporate Officer

          The Court of Chancery denied a motion to dismiss a McDonald’s shareholders’ derivative complaint against a company officer, which alleged that the officer breached his fiduciary duty of oversight.  The officer contended that Caremark fiduciary obligations do not extend to Delaware corporate officers and thus did not apply to him.  But the Court disagreed.  Mincing no words, the Court in In re McDonald’s Corp. Stockholder Derivative Litigation, 2023 Del. Ch. LEXIS 23 (Del. Ch. Jan. 25, 2023) wrote: “This decision clarifies that corporate officers owe a duty of oversight.”

Caremark Claims Against McDonald’s

Who Can Represent a Cancelled LLC in Response to a Petition Seeking a Receiver?

          In In Re Reinz Wisconsin Gasket, LLC, 2023 Del. Ch. LEXIS 194 (Del. Ch. May 8, 2023), after a company’s counsel filed a notice of dissolution and cancellation, the Court of Chancery prohibited a cancelled LLC from “participat[ing] in the process of appointing its own receiver or retain[ing] counsel to do so.”  The petitioner sought to appoint a receiver and nullify the cancellation.  Opposing the petitioner’s requested relief, Delaware counsel entered appearances on behalf of the company.  Though it granted the request, the Court nevertheless invited the parties “to address the puzzle of a dissolved and cancelled entity appearing to litigate the propriety of its cancellation before they submitted proposed receivers.”

          The Court reflected on the lifespan of an LLC, observing that an LLC’s separate, statutory existence continues until the “cancellation” of its certificate of formation.  Once an authorized person files a certificate of cancellation for the company, “its existence as a jural entity ceases.”  Upon the filing of the certificate of cancellation, “a defunct entity may speak only through a receiver to manage litigation or any other outstanding business: the receiver is appointed because there are no other fiduciaries to make decisions for the entity.”  Finding that a non-existent entity could not retain counsel, and considering it a “metaphysical wonder,” the Court determined: “Counsel’s purported representation of a defunct limited liability company is not only puzzling, but impossible.”

Who Can Represent a Cancelled LLC in Response to a Petition Seeking Receiver? | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees

          In the runup to a merger, a shareholder plaintiff challenged the “don’t, ask don’t waive” provisions in the company’s confidentiality agreements with the bidders by contending that the proxy statement contained materially deficient descriptions.  In Anderson v. Magellan Health, Inc., 298 A.3d 734 (Del. Ch. July 6, 2023), following the suit’s commencement, the company (i) waived some of its confidentiality rights and (ii) supplemented its proxy statement, further detailing the “don’t ask, don’t waive” provisions.  The supplemental disclosures mooted the shareholder litigation.  In the wake of the merger, shareholder plaintiff’s counsel petitioned the Court of Chancery for a $1.1 million fee award.  The company challenged the petition’s “eye-popping” size.

          Thoroughly reviewing the jurisprudential shift in M&A strike suits, the Court opined that going forward, “unless a higher authority proclaims otherwise . . . I will award mootness fees based on supplemental disclosures only when the information is material.”  Nevertheless, the Court found it “unjust” to immediately apply that standard: Delaware courts had yet to apply it and neither the company nor the petitioner briefed it.  Using only the “helpful” standard, the Court found the supplemental proxy disclosures “marginally helpful” and, “[p]utting it all together,” awarded plaintiff’s counsel a $75,000 fee.

Delaware Court of Chancery Provides Guidance on Standard for Awarding Mootness Fees | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Fee-Shifting in Section 220 Case Provides Cautionary Tale

          In Seidman v. Blue Foundry Bancorp, 2023 Del. Ch. LEXIS 178 (Del. Ch. July 10, 2023), concerned over a potentially excessive director and management equity incentive plan, a shareholder demanded to inspect the company’s consulting reports and formal board materials in connection with the equity plan pursuant to DGCL § 220. The shareholder asserted purposes of “investigating mismanagement and communicating with Plaintiff’s fellow stockholders regarding any proxy contest or other corrective measures.”  Claiming the shareholder lacked a proper inspection purpose, the company rejected the demand and refused to produce a single document. The Court had a much different view of the matter.

          Emphasizing the exception to the American Rule under which the Court may discretionarily shift fees “where equity requires,” the Court noted: “To capture the sorts of vexatious activities that the bad-faith exception is intended to address, this court employs the ‘glaringly egregiousness’ standard.”  Decrying “overly aggressive litigation strategies” in the books and records context and highlighting the company’s less-than-scrupulous tactics, the Court concluded: “After [the company] declined to produce a single document to Plaintiff, forcing him to commence litigation, [the company] took a series of litigation positions that, when viewed collectively, were glaringly egregious.”  Accordingly, “[j]ustice” required fee shifting to mitigate such “serious ‘vexatious behavior.’”

Recent Chancery Decisions Provide Cautionary Tales in Section 220 Matters | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out

          In Cygnus Opportunity Fund, LLC v. Washington Prime Group, 302 A.3d 430 (Del. Ch. Aug. 9, 2023), after an LLC controller and board of managers squeezed-out the minority unitholders, a group of hedge fund plaintiffs challenged certain disclosures in connection with the merger and a preceding tender offer.  The Court of Chancery dove deep into Delaware’s disclosure jurisprudence in the context of what the Court referred to as the “stockholder-action duty.”  Because Delaware law “piggybacks on the federal [securities] disclosure regime,” the Court entertained the notion that “[i]f a controlling stockholder or third party makes a tender offer for the corporation’s shares, then depending on the circumstances, the directors might well have a duty to respond.  To the extent officers owe the same duties as directors, the duty could apply to them as well.”  Though the Court could not “hash these issues out at the pleading stage,”  the plaintiffs stated a “conceivable” claim because the officers disclosed nothing in connection with “a severely underpriced” tender offer.

          Moreover, examining the etymology of the word “fiduciary” and its trust law roots, the Court emphasized that “[t]he duty of disclosure is a context-specific duty, and no Delaware decision holds that fiduciaries do not owe any duty in the context of a transaction in which the fiduciaries unilaterally eliminate their investors from an enterprise.”  Because a squeeze-out is such a transaction, “the duty of loyalty could manifest as an obligation to inform the beneficiary of the material facts surrounding the transaction, regardless of whether or not the beneficiary’s approval is required.”

Chancery Addresses Fiduciary Duty of Disclosure in Context of a Squeeze-Out | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive

          The Court of Chancery, in IBEW Local Union 481 Defined Contribution Plan & Trust v. Winborne, 2023 Del. Ch. LEXIS 342 (Del. Ch. Aug. 24, 2023), allowed a shareholder derivative suit to survive a motion to dismiss because the plaintiff adequately pled demand futility based on the board’s alleged bad faith overpayment to settle an outstanding company liability.  Reviewing Rule 23.1’s doctrinal pillars, the Court examined the pleading standard required to withstand dismissal for want of “reasonable doubt” as to the board’s ability to properly respond to a pre-suit demand.  Focusing on the second prong of Delaware’s demand futility test, the Court considered whether at least three of the directors faced a substantial likelihood of bad faith liability for approving the settlement.

          Noting that “[c]lairvoyance plays no role,” the Court extensively reviewed the precedent detailing how Delaware measures pleadings-stage fiduciary bad faith. In sum: “Properly understood, the good faith inquiry is a holistic one.”  A court of equity can allow a case to proceed past the pleading stage when the allegations as a whole support an inference of bad faith.  The “constellation of factors”—including an almost $700 million disparity between what the company valued the settlement at and what the company actually paid for it—supported a pleading stage bad faith inference sufficient to pass demand futility review.

Chancery Court finds collection of bad faith factors enough to keep GoDaddy suit alive | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Chancery Rejects Request for Specific Performance to Close Deal

          With a factual background that reads like a Hollywood thriller, in 26 Capital Acquisition Corp. v. Tiger Resort Asia Ltd., 2023 Del. Ch. LEXIS 364 (Del. Ch. Sept. 7, 2023), the Court of Chancery declined to compel an acquisition target to close a busted deal.  The acquirer sought specific performance under a de-SPAC merger agreement.  The Court meticulously weighed the factors supporting specific performance after criticizing the sponsor and its hedge fund majority shareholder’s duplicitous behavior.  Refusing to specifically enforce the merger agreement’s reasonable best efforts clause, the Court concluded that the transaction’s troubling factual backdrop disfavored such a remedy.

The Court of Chancery Declines to Save Belly Up de-SPAC

Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO

          In Colon v. Bumble, Inc., 2023 Del. Ch. LEXIS 367 (Del. Ch. Sep. 12, 2023), the Court of Chancery upheld the validity of a challenged capital arrangement that layered standard Up-C and dual class voting structures into a “bespoke” capital design.  The share classes’ voting power differed depending on the holder’s identity.  If a separately referenced and defined (outside the charter) “Principal Stockholder” held a class A share, then it carried ten votes per share; otherwise, it carried only one.  And if a Principal Stockholder held a class B share, then it carried ten votes per each class A share into which it could convert; otherwise, it carried only one.  Though the Court noted that its opinion did not consider whether such an identity-based governance regime would pass Delaware’s “twice tested” review of corporate action, it concluded the challenged charter provisions and capital structure complied with the Delaware General Corporation Law.

Chancery rules that Delaware allows grant of 10 votes per-share to “Up-C” CEO | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Section 225 Action Determines That Board Members Were Properly Removed

          In Barbey v. Cerego, Inc., 2023 Del. Ch. LEXIS 379 (Del. Ch. Sept. 29, 2023), after a wholly owned foreign subsidiary launched a tender offer to the shareholders of its Delaware parent, resulting in an inversion, the Court of Chancery upheld as valid the removal of the entire parent board.  A shareholder and ousted director challenged the removal under DGCL § 225, contending that the director’s failure to receive the required notice of the meeting at which the board approved the tender offer rendered the approval thereof and subsequent management change void.  The Court agreed, but nevertheless determined that the plaintiffs failed to draw a sufficient connection between the void meeting and the effect of the tender offer.  Noting that the internal affairs doctrine governed whether the foreign subsidiary enjoyed the authority to independently launch the tender offer without the parent’s approval, the Court concluded that the plaintiffs failed to timely meet their burden, and upheld the board’s removal.

Chancery Determines in Section 225 Action: Board Members Properly Removed | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Entire Fairness Test Applied, But No Damages

          The Court of Chancery in In re Straight Path Communications Inc. Consolidated Stockholder Litigation, 2023 Del. Ch. LEXIS 387 (Del. Ch. Oct. 3, 2023),held that a controlling shareholder drove a not-entirely-fair transaction and breached fiduciary duties he owed to the minority.  Yet, the Court found that the transaction, while unfair under Delaware’s “unified fairness review, considering both price and process,” caused the minority no actual damages.  Nevertheless, finding the controller steered the transaction “in a manifestly unfair manner,” the transaction thus “was not entirely fair.”  Pointing out that a claim for breach of fiduciary duties does not require proving actual damages, the Court awarded the minority class nominal damages.

Unfair Process Incurs Nominal Damages Under Entire Fairness Review

Chancellor “X”s out Twitter investor’s claim he spurred Musk’s social media mind change

          In Crispo v. Musk, 2023 Del. Ch. LEXIS 466 (Del. Ch. Oct. 31, 2023), the Court of Chancery declined to award a mootness fee because the plaintiff shareholder filed an unmeritorious claim.  The decision turned on whether a merger agreement’s lost premium carve-out to its general no third-party beneficiaries clause conferred standing on the shareholder seeking damages for the then-failed merger agreement.  Examining the development of lost premium provisions in the M&A space, the Court detailed the unique relationship between Delaware’s board-centric governance paradigm, merger agreements, and shareholder interests.  Invoking Delaware’s hesitance to confer third-party merger agreement standing on shareholders, the Court found the contractual scheme afforded the shareholder plaintiff no third-party beneficiary status, thus rendering his mooted claim unmeritorious.

Chancellor “X”s out Twitter investor’s claim he spurred Musk’s social media mind change | Delaware Corporate & Commercial Litigation Blog (delawarelitigation.com)

Lead Plaintiff Forced to Elect Remedy

          In litigation following a plenary Revlon action (in which the Delaware Court of Chancery awarded damages to a shareholder class after finding the CEO, with a private equity firm’s aiding and abetting, breached his fiduciary duty), in In re Mindbody, Inc., 2023 Del. Ch. LEXIS 575 (Del. Ch. Nov. 15, 2023), the Court concluded that Delaware law permitted the lead hedge fund class plaintiffs, who simultaneously petitioned for appraisal, to elect to receive the merger consideration and class damages remedy.  Because the appraisal-seeking hedge funds shouldered no obligation to “make a binding election as to remedy” before the plenary action’s trial, and the shareholder class included the funds, Delaware precedent allowed them to choose either.  But the Court prohibited a double recovery. If the funds elected to pursue their appraisal petition, they could not receive the class remedy.  Conversely, if the funds elected to receive the class remedy, then the Court would not appraise their shares.

The Court of Chancery Permits Concurrent Plenary Fiduciary and Appraisal Claims

Restrictive Covenants Found Unenforceable

          In Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023), the Court of Chancery denied a solar power system dealer’s application for a preliminary injunction to enforce restrictive covenants against a former minority member.  The Court found that two of the members surreptitiously procured an amendment to the LLC agreement in breach of their fiduciary duties.  The amendment rendered the resulting minority little more than mere employees and imposed onerous restrictive covenants.  Because the purported majority members breached their fiduciary duties in connection with the amendment, the Court prevented them from enforcing the covenants.  The Court further opined, assuming arguendo their threshold validity, the restrictive covenants failed to “pass muster” under Delaware law.  Reviewing the primary and additional factors governing the enforceability of restrictive covenants, the Court evaluated “all of the dimensions” of the disputed provisions “holistically and in context.”  The Court considered how they operated within the contract as a whole and declined to “tick through individual features of a restriction in insolation, because features work together synergistically.”  With reasonableness as the touchstone, the Court found the “astonishingly broad” restrictions unreasonable and refused to enforce them.

Unreasonable Restrictive Covenants Fail Delaware’s Holistic Review

Rarely Invoked Provision of DGCL Examined

          As one part of a vast, multi-jurisdictional saga between oil giants, in a decision concerning a DGCL provision that is rarely the subject of a judicial decision, the Court of Chancery in Venezuela v. PDC Holding, Inc., 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023),ordered a wholly-owned Delaware subsidiary to issue a replacement stock certificate to its Venezuelan parent.  The Court detailed the three requirements under section 168 of the DGCL that a shareholder must satisfy to receive a judicially-ordered replacement of a “lost, stolen, or destroyed” stock certificate.  Though the parties did not dispute the typically litigated elements, the subsidiary initially requested the parent post a bond in the neighborhood of $40 billion.  Although the Court lacked power to waive the bond requirement altogether (if the issuer requested one), the Court nevertheless enjoyed discretion to set the amount “based on the circumstances presented in each case.”  After examining the purpose for the bond-as-security requirement and the circumstances surrounding the potential ramifications of reissuing a certificate evincing ownership of the particular shares, the Court found a “nominal, unsecured” bond in the amount of $10,000 appropriate.Chancery Interprets DGCL Section 168 for Replacement Stock Certificate

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

A Delaware Supreme Court milestone ruling has revived a shareholder suit over pharmaceutical giant AmerisourceBergen Corp.’s role in the nation’s opioid crisis, finding the Court of Chancery should not have dismissed the derivative action by relying on a related federal court decision in  Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 22, 2023, Dec. 18, 2023 (Del.).

Justice Gary Traynor, writing the December 18 unanimous en banc opinion that reversed the Chancery’s Dec. 22, 2022 ruling, said the Court of Chancery correctly concluded that the plaintiff pension funds supported charges that the Amerisource directors disloyally exposed the company to $6 billion in liability by favoring profits over people.  Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022). But Justice Traynor said the vice chancellor should not have accepted as law a West Virginia District Court’s ruling about facts that were still in dispute concerning director actions. City of Huntington v. AmerisourceBergen Drug Corp., 609 F. Supp. 3d 408, 425 (S.D. W. Va. 2022).

The high court said on that basis, the vice chancellor decided that despite his finding that the board ignored numerous red flag warnings and violated an opioid distribution monitoring pact with the government, the derivative charges must fail the pre-suit demand test because the federal court ruled that the directors faced no individual liability. 

The opinion will likely be studied by corporate law practitioners first because it:

  • Sets parameters regarding when and how to take, weigh and apply judicial notice of the facts and law contained in rulings outside the First State.
  • Updates guidelines to apply to developments in multi-faceted mega-litigation that occur after the filing of the operative complaint in a Delaware derivative suit and how they can be factored into a demand futility decision in that action, and
  • Takes a fresh look at what constitutes potential liability that could prevent directors from objectively evaluating shareholder litigation over whether they have mismanaged and financially damaged their company — known as Caremark claims after the seminal decision in In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959 (Del. Ch. 1996).

Background

AmerisourceBergen, one of three major wholesale distributors of opioid pain medication in the United States over the past two decades, found itself at the center of America’s opioid epidemic and in 2021, agreed to pay over $6 billion as part of a nationwide settlement to resolve multidistrict litigation brought against the three, additionally incurring hundreds of millions of dollars to settle other lawsuits and over $1 billion in defense costs.

Two dismissal motions

According to the court’s record, two pension funds sued in Chancery Court, contending that Amerisource’s directors and officers breached their fiduciary duties by making affirmative decisions and conscious non-decisions that led to the harm that the company has suffered. Plaintiffs sought to shift the responsibility for that harm from AmerisourceBergen to the human fiduciaries who allegedly caused it to occur.  The plaintiffs survived the directors’ motion to dismiss on grounds that the charges were filed too late.  Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 15, 2022).

 But that novel ruling only kept the derivative suit alive for an additional week.  In a December 22 opinion, the vice chancellor agreed with the directors’ argument that under the pre-suit demand futility test, dismissal was justified because a majority of the board was not too conflicted to objectively decide whether the suit had enough merit to go forward.  Lebanon County Employees’ Retirement Fund, et al. v. Collis, et al., C.A. No. 2021-1118-JTL (Del. Ch. Dec. 22, 2022).

The Vice Chancellor found that a federal court in West Virginia, in a related bellwether test case to decide nationwide liability for damages to opioid users, had already ruled that the directors could not be held legally liable for making decisions that directly caused the damage.  He said that federal judge had considered all the evidence and testimony in the opioid damages trial and found insufficient reason to hold the directors individually liable for causing the damages.

A rare reversal

The plaintiffs’ appeal to the Supreme court argued that Vice Chancellor Laster wrongly let the federal opinion sway his decision even though it came after the operative complaint in his case had been filed and the federal court facts he relied on were still in dispute.

In a rare reversal of the Chancery Court, the justices issued the December 18 opinion four days shy of the one-year anniversary of the dismissal ruling. It essentially agreed with plaintiffs on those weight, applicability and timing issues concerning the federal court’s finding of no director liability.

Would have survived

“The Court of Chancery accepted the West Virginia Court’s findings that “‘[n]o culpable acts by defendants caused an oversupply of opioids,” finding that Amerisource  had an adequate anti- diversion program in place and that there was no evidence that it  distributed opioids to pill mills,” Justice Traynor wrote, finding that, “Without the findings, the plaintiffs’ claims would have survived; with them, they perished.” And he found the trial court’s “adjudicative judicial notice of the factual findings” in error.

Proper judicial notice

Moreover, he noted, judicial notice can be properly taken of only undisputed facts and the federal court wrongly concluded that no wrongdoing had occurred for which the defendants might be held liable, which “was, and is, reasonably disputed.”

As to the issue of the timing of the federal court’s liability ruling and the date of the complaint, the High Court stated:  ‘the Court of Chancery’s reliance on the factual findings in the West Virginia Decision changed the date at which demand futility was considered.”  The Justice concluded on behalf of the High Court that, “under the Court of Chancery’s analysis, the plaintiffs established their derivative standing as of the time the complaint was filed.  The court erred by vitiating the plaintiffs’ standing in deference to the factual findings in the West Virginia decision.”

Andrew J. Czerkawski of the Lewis Brisbois Delaware office prepared this post.

          Seeking to compel its Delaware subsidiary to issue a replacement stock certificate evincing ownership of all 1,000 of the subsidiary’s issued and outstanding shares, a foreign parent corporation filed suit in the Delaware Court of Chancery under the rarely litigated DGCL § 168, in Venezuela v. PDC Holding, Inc., 2023 Del. Ch. LEXIS 582 (Del. Ch. Nov. 28, 2023).

BRIEF FACTUAL OVERVIEW

          This action took place as one part of a vast web of internationally connected litigation sagas and geopolitical intrigue.  A non-party Canadian corporation sought to execute on its $1.2 billion international arbitration judgment against a foreign nation.  That nation’s government wholly owned the parent entity which in turn wholly owned all of the instant defendant Delaware corporation’s shares (the subsidiary itself in turn wholly owns one of the largest operating petroleum refining companies in the United States).

          In federal court, the non-party Canadian corporation successfully moved to attach and foreclose on the parent’s shares of its Delaware subsidiary, arguing the parent acts only as an alter ego of the foreign nation.  The federal court eventually ordered the sale of the foreign parent’s shares of its Delaware subsidiary to satisfy the foreign nation’s debt to the non-party Canadian corporation and required the parent to submit its original stock certificate evincing its ownership of the Delaware subsidiary shares.  If the parent could not produce the stock certificate, the order gave the option for the parent to seek the Court of Chancery’s expedited aid in procuring a replacement.  The parent did just that: it filed the instant DGCL § 168 action against its wholly owned Delaware subsidiary to compel the issuance of a replacement stock certificate (the parties aligning interests in connection with the foreign nation did not escape the Court; multiple creditors of the foreign nation filed amici curiae briefs supporting the certificate’s reissuance, pointing to the foreign parent and its Delaware subsidiary’s “repeated acts of recalcitrance” to “slow down the sales process”).

KEY ANALYSIS

          Beginning with the language itself, the Court laid out the Delaware precedent detailing Section 168’s primary requirements, the burden of which rests on the plaintiff to show: (i) the plaintiff demanded corporate management issue a replacement certificate; (ii) management refused the demand; (iii) the plaintiff lawfully owns the complained-of capital stock; and (iv) the original stock certificate “has in fact been lost, stolen, or destroyed.”  If the plaintiff satisfies her burden on these elements, then the rebuttal burden shifts to the corporation to demonstrate “good cause” in opposition to the reissue.  And if the corporation fails to carry its rebuttal burden, then the Court “shall make an order requiring the corporation to issue and deliver to the plaintiff” a new stock certificate.

           The parties left the primary elements virtually undisputed.  But, receiving the lion’s share of the Court’s attention, Section 168 also mandates the plaintiff receiving the new certificate give the corporation an indemnity bond.  Providing the “upper limit of the corporation’s liability for actions arising out of” the reissuance, the plaintiff must first “‘give the corporation a bond in such form and with such security as to the court appears sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new . . . certificate.’”

          The defending subsidiary initially requested the plaintiff parent post an indemnity bond “between $32 and $40 billion,” eventually settling on $1 to $2 billion.  Though the amici creditors contended the Court could dispense with the statutory indemnity bond requirement altogether, Delaware precedent held the opposite: if the issuer insists on one, the Court cannot waive the bond and security requirement altogether.

          Yet, the Court enjoys discretion to set the bond’s amount—an amount sufficient “to protect the issuer if the original stock certificate is presented.”  The Court described the reason for the bond requirement: “A bond ‘is necessary because the absence of a certificate constitutes notice to the corporation that a third party might have superior title to the underlying stock and that the corporation could be liable for conversion to one holding the original certificate in good faith under a superior title.’”  But if the issuing party appears to face little to no “cognizable harm,” the Court may set a “nominal bond.”

          Setting the discretionary bond amount required the Court to examine all the circumstances surrounding the low-but-not-zero risk posed to the subsidiary for the reissuance.  The Court pointed to a litany of reasons supporting a nominal, unsecured bond: neither party disputed the parent’s record ownership; unlike a “typical retail stockholder of a publicly traded company seeking a replacement certificate,” the particular certificate represents absolute control over one of the planet’s largest oil companies worth potentially hundreds of billions of dollars—only “Rip Van Winkle” would not know of the shares’ involvement in the tumultuous litigation sagas; no other party had claimed any interest in the shares or certificate; Delaware corporations cannot issue bearer shares, and no party had requested the subsidiary to change its books reflecting a transfer; and no adequate evidence indicated the parent secretly pledged the shares.

          Declining to “suspend disbelief” on an unrealistic threat to the subsidiary for reissuing the certificate, the Court refused to find good cause opposing the reissue and ordered the foreign parent plaintiff to post an unsecured $10,000 bond.

PRACTICAL TAKEAWAY

          Though typically arising these days in connection with a startup or closely-held company, this decision lays out a clean, succinct blueprint for Delaware investors to procure replacement stock certificates.

Rolando Diaz of the Lewis Brisbois Delaware office prepared this post.

          The Court of Chancery refused to enforce a restrictive covenant in Sunder Energy, LLC v. Jackson, 2023 Del. Ch. LEXIS 580 (Del. Ch. Nov. 22, 2023). Chancery subsequently approved, with thorough reasoning, an interlocutory appeal to the Supreme Court–which makes its own determination whether to accept the interlocutory appeal.

BRIEF FACTUAL BACKGROUND

          Sunder Energy, LLC (“Sunder”), a Delaware LLC headquartered in the State of Utah, a purveyor of residential solar power systems, had an exclusive dealer agreement with Freedom Forever LLC (“Freedom”), one of the nation’s largest installers. In the summer of 2023, Freedom encouraged Tyler Jackson, the head of sales for Sunder, who lived and worked in the State of Texas, to join Solar Pros LLC (“Solar Pros”), another solar power system dealer that referred installations to Freedom.  This led to a mass exodus of Sunder’s workforce. Nine of the twelve regional managers that reported to Jackson, as well as over three hundred sales personnel, joined Solar Pros.  On September 25, 2023, Solar Pros announced that Jackson had joined as its new President.

          Sunder asserted that Jackson—as a holder of Incentive Units—was bound by certain restrictive covenants (the “Covenants”) provided for in Sunder’s 2019 and 2021 LLC operating agreements (the “OA”) that applied to any Incentive Unit holder (the “Holder”).  The co-founders formed Sunder by filing a certificate of formation with the Delaware Secretary of State but did not execute a written operating agreement. 

In the fall of 2019, the two co-founders that together owned 60% of the membership interest of Sunder engaged a law firm to draft an LLC agreement that dramatically changed the ownership structure of the LLC; it imposed the Covenants, emasculated the minority members rights as owners, and reduced them to purely economic beneficiaries with very little rights. Communications from the majority co-founders to the minority rights holders did not explain that the two co-founders received common units with full rights while the minority holders received incentive units with little to no ownership rights. 

In a concerted effort to obfuscate reality, the majority co-founders referred to the Holders as “partners,” implying that there was some semblance of equal footing aside from the difference in percentage of interests. For the subsequent adoption of the 2021 operating agreement, the majority co-founders did not even bother to circulate a copy of the new operating agreement.  Instead they only circulated the signature page and indicated to the Holders that there were no substantive changes to the operating agreement and that the only change was the addition of a member.  This was not true.  The geographical scope of the restrictive covenant was also expanded.

          In addition to broad restriction on the use of Sunder’s confidential information, the Covenants in the OA prohibited a Holder from: (i) engaging in any competitive activity (the “Non-Compete”); (ii) soliciting Sunder’s employees and independent contractors (the “Worker Non-Solicit”); (iii) soliciting, selling to, accepting any business from, or engaging in any business relationship with any of Sunder’s customers; and (iv) inducing, influencing, advising, or encouraging any Sunder stakeholder to terminate its relationship with Sunder. Furthermore, each Covenant bound not only the Holder, but also Holder’s affiliates, defined in the OA as a Holder’s spouse, parents, siblings, and descendants, both natural and adopted. The Covenants applied while a person held incentive units and for two years thereafter.  However, a Holder had no right to transfer or divest themselves of the Incentive Units. In contrast, Sunder had the option, but not the obligation, to repurchase the Incentive Units for zero dollars upon either Sunder’s termination of Holder’s employment or if the Holder left the company without good reason.

          On September 29, 2023, Sunder terminated the dealer-installation agreement with Freedom and filed an arbitration to enforce their rights against Freedom. Sunder also filed an action in the Court of Chancery against Jackson and its competitors. Sunder sought a preliminary injunction enjoining Jackson and any party acting in concert with Jackson from taking any action in breach of the Covenants. The Court denied the preliminary injunction because Sunder could not establish a reasonable likelihood of success on the merits.  The Court found (i) the restrictive covenants unenforceable under general principles of law and (ii) the competition and solicitation restrictive covenants unreasonable in their scope and effect.

KEY ANALYSIS

          First, the Court was faced with determining the Covenants’ governing law. The terms of the Covenants appeared in the OA, which governs the internal affairs of a Delaware LLC.  The OA expressly provided that Delaware law governed its terms.  Thus, a contractarian basis for the application of Delaware law existed. Under normal circumstances, the combination of the internal affairs doctrine and contract principles would require the application of Delaware law. However, for the Covenants, the drafters were not attempting to govern the internal affairs of a Delaware LLC.  Instead, the drafters were attempting to govern an employment relationship.  The Court opined:

Delaware follows the Restatement (Second) of Conflict of Laws, and Delaware courts consequently will not enforce choice of law provisions when doing so would circumvent the public policy of another state that has a greater interest in the subject matter. Consequently, when a different state’s law would govern in the absence of a choice of law provision, and if that state has established legal rules reflecting a different policy toward restrictive covenants, than Delaware’s then this court will defer to that state’s laws notwithstanding the presence of a Delaware choice of law provision.

Thus, either Utah, where Sunder is headquartered, or Texas, where Jackson worked and resided would apply in the absence of a choice of a law provision.  Under the Court’s analysis, both Texas and Utah approach the enforceability of restrictive covenants only slightly differently than Delaware. Under its conflict of laws analysis, due to the low degree of divergence between laws of the relevant forums, the Court applied Delaware law, finding that the conflict between Delaware and Utah law was a false conflict.

          Second, due to the circumstances for ratification of Sunder’s 2019 and 2021 LLC operating agreements, the Court determined that Sunder’s purported majority co-founders breached their fiduciary duty by failing to fully disclose all material information and making misleading partial disclosures to the minority.  The 2019 agreement materially and adversely impacted the rights of Sunder’s minority members; legal counsel only represented Sunder and the majority co-founders, but the co-founders made it seem as if counsel represented everyone. For the 2021 agreement, the co-founders told the minority members that the 2021 agreement contained no material changes and did not even bother to circulate a copy of the 2021 agreement to the minority members. Thus, the Court determined that due to the co-founders’ breach of fiduciary duties, the amended operating agreements themselves were invalid, and consequently, so were the restrictive covenants therein.

          Assuming, however, for the “sake of argument” that the amended LLC agreements were valid, the Court addressed the enforceability of two of the Covenants, namely, the Non-Compete and Worker Non-Solicit provisions. The Court found the Non-Compete provision extremely overbroad. The prohibited business activity covered a wide swath of the “door to door sales industry, without regard to whether Sunder markets or sells similar products.” The restriction on a Holder’s affiliates (as defined in the OA) was inane; it was not written in a manner that simply thwarts a straw man conferring the benefits to a Holder.  But, as written, a Holder’s “daughter cannot go door to door selling girl scout cookies.” Absurdly, the Covenants thus purported to bind a Holder’s wife and children. The geographic scope of the Non-Compete left only Alaska, Montana, North Dakota, and South Dakota available for a Holder as territory not restricted by the Covenants. Perhaps the most appalling factor of the Non-Compete was that since a Holder had no right to divest himself of the Incentive Units under the OA, the temporal component could continue in perpetuity. Similarly, the Court found the Worker Non-Solicit overbroad and unreasonable. It also applied to the same set of affiliates and for the same potentially “forever” time period. It extended not only to any current Sunder employee or independent contractor, but also applied to “any person employed in the past by Sunder for any period of time.” Individually, each overbroad provision was unreasonable.  And read together, the Court deemed the Covenants oppressive and refused to enforce them.

PRACTICAL TAKEAWAYS

          Delaware courts will not apply Delaware law under a theory of contract law if another state has a greater public policy interest in an issue when, absent a choice of law provision, another forum’s laws would apply. Circumstances may also dictate abandonment of the internal affairs doctrine when drafters embed employment provisions that have nothing to do with the governance of the entity into a governing agreement. Additionally, Delaware courts apply both general principles of law and a holistic analysis of restrictive covenants to determine reasonableness. This analysis can result in Delaware courts refusing to enforce restrictive covenants.

In a recent letter ruling, the Delaware Court of Chancery provided a short tutorial on the Chancery rules of procedure that describe the specific requirements for responding to discovery and the detail that the parties are obligated to provide, especially for objections. See Bocock, et al. v. Innovate Corp., et al., C.A. No. 2021-0224-PAF (Del. Ch. Dec. 6, 2023). 

For example, objections must be specific and must identify what is being withheld based on the objections. See Ct. Ch. R. 33(b)(4) (regarding interrogatories). See also Ct. Ch. R. 34 (regarding responses to requests for documents).

Highlights

  • Relying on prior Chancery decisions, the court instructed that “generic and formulaic objections are insufficient.” Slip op. at 8. 
  • The court also reminded us: that failure to assert a proper, timely objection in compliance with the rules risks waiver of objections. See Ct. Ch. R. 33(b)(4).
  • Specifically, the court referred to prior decisions that explain: “Boilerplate objections have been considered prima facie evidence of a Rule 26 violation, which causes the objecting party to waive any legitimate objections that they may or may not have had.”  Slip op. at 8-9.
  • The court instructed that “an objection must state whether the responding party is withholding or intends to withhold any responsive materials on the basis of that objection.”  Quoting Ct. Ch. R. 34(b).
  • The decision provides more examples of the failure to provide specificity or to explain the basis on which documents were being withheld. 
  • The court also emphasized why the failure to comply in this case justified waiver of all of the objections except for attorney/client privilege and work product doctrine.

Takeaway:

The Delaware Court of Chancery has emphasized the importance of specific, timely objections. Generic or formulaic objections are considered insufficient, potentially leading to waiver of objections. Failure to comply can result in waiving all objections.

Delaware Court of Chancery Rule 5.1 provides the standard and an intricate series of procedures for the parties to seek “confidential treatment” to prevent pleadings filed with the court from being publicly available. The prior version of the rule referred to this procedures as “filing under seal.”  Notably, analogous procedures in federal court employ a much different standard.

A recent pair of Orders from the Delaware Court of Chancery featured the unusual shifting of fees in connection with Rule 5.1, as an exception to the American Rule where each party pays its own fees. See Robert Garfield v. Getaround, Inc., C.A. No. 2023-0445-MTZ, Order (Del. Ch. Oct. 26, 2023). This is the first of two Orders that need to be read together to put them in context. The second Order is noted below.

The Orders understandably do not feature the typically copious background facts provided in opinions, but it includes sufficient information to make the point for purposes of this short blog post.

The noteworthiness of the Orders is that they will remind counsel that under Rule 5.1, when a party disagrees about what portions of a pleading should be designated as confidential, the party harboring the disagreement does not have the right to publicize the information sought to be kept confidential—until the court rules on the issue or unless the procedures provided in Rule 5.1 are followed.

With that background, the relatively short Order deserves to be quoted verbatim: 

“It was not for Plaintiff to unilaterally decide that information Defendant has designated and redacted as confidential in its opposition could be publicized in Plaintiff’s reply.  Defendant bore the burden of designation under Court of Chancery Rule 5.1(b)(3).  Nor was it for Plaintiff to resists Defendant’s call to withdraw Plaintiff’s Reply to publicize information Defendant had designated.  Rather, Plaintiff’s recourse was to file a Motion of Challenge to the Opposition and the Reply under Court of Chancery Rule 5.1(f).

The parties shall work with the Register in Chancery to place Plaintiff’s Reply under seal.  The parties shall follow Rule 5.1’s procedures to address any remaining disagreements as to whether information in that reply was fairly designated as confidential.”

The first Order was in response to a Motion by the Defendant to place under seal the Reply of the Plaintiff in opposition to the Defendant’s Motion to File Under Seal because that Reply was wrongly filed in a publicly available manner.

In a second Order shifting fees under the bad-faith exception to the American Rule, the Court reasoned that the Plaintiff’s:

“insistence on publicizing information Defendant designated as confidential serves no plain purpose other than agitation.  I conclude the publication in the opposition to the motion to seal was in bad faith. Fees are shifted for the Motion to Seal the Opposition.”

Garfield v. Getaround, Inc., C.A. No. 2023-0445-MTZ, Order (Del. Ch. Oct. 27, 2023)

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The Delaware Court of Chancery, in a key ruling on the third-party beneficiary rights of merger target shareholders, has dismissed an ex-Twitter Inc. investor’s “lost premium” suit that sought a $3 million “mootness fee” after Elon Musk reversed his decision to abandon the social media giant’s purchase in Crispo v. Musk, et al., No. 2022-0666-KSJM (Del. Ch. Oct. 31, 2023).

Chancellor Kathaleen St. Jude McCormick’s October 31 opinion found plaintiff shareholder Luigi Crispo’s suit was not meritorious when filed since he never had a valid claim that he should profit by Musk’s buy decision. She said either he lacked third-party status or those rights had not yet vested during Musk’s on-again-off-again acquisition.  But she took the occasion to comprehensively clarify the parameters of third-party shareholder beneficiary rights—which might benefit M&A practitioners.

The Chancellor noted that although the facts of this case made the decision seem deceptively simple, the complexity of the underlying rights issue has the potential to form a legal “Gordian KnoI” which requires some explanation as to how it might be cut.

Background

The litigation arose out of Elon Musk’s July 2022 decision to acquire Twitter—and his change of mind less than three months later to scrub it, resulting in a suit by Twitter for specific performance, but Musk changed his mind again in October and consummated the deal on the original terms that month.  Meanwhile Crispo, who held 5,000 shares of Twitter, sued Musk and his X Holdings Inc. I and II  acquisition companies in July for breach of the merger pact and breach of duty as the controller of Twitter,

After Chancellor McCormick dismissed most of those claims and the sale closed, Crispo’s suit was considered dead, but it “sprang back to life zombie-like” she said, when Crispo claimed partial credit for Musk’s. change-of-heart and sought a $3 million award on grounds that Musk mooted plaintiff’s breach of merger charge by keeping his deal promise after all.

Meritorious mootness suit?

Chancellor McCormick said the Delaware Supreme Court has held that mootness fees are only awarded when:

i)The suit was meritorious when filed

ii) the action that produced the benefit to the corporation “was taken by the defendant before a judicial resolution was achieved;” and

iii) “the resulting corporate benefit was causally related to the lawsuit.”

“In order for a suit to be considered meritorious when filed, the complaint must have been able to have survived a motion to dismiss, whether or not such a motion was filed,” so he must prove the remaining lost premium claim was meritorious for the suit to survive, the Chancellor pointed out; but she added that plaintiff  was not a party to the Merger Agreement, so the merits of his claim hinge on the argument that he had standing to sue for breach of the agreement as a third-party beneficiary

To allege standing as a third-party beneficiary, a plaintiff must plead that:

i) “the contracting parties . . . intended that the third party beneficiary benefit from the contract,”

ii) the benefit [was] intended as a gift or in satisfaction of a pre-existing obligation to that person, and

iii) “the intent to benefit the third party [was] a material part of the parties’ purpose in entering into the contract.”

Was the investor vested?

But the Chancellor ruled that, “[T]hird party beneficiaries, however, cannot object to the alteration or termination  of the contract before their rights against the promisor have vested.’’  and Crispo’s rights had not vested.

Moreover, she said, Delaware courts are reticent to confer third party beneficiary status to stockholders under corporate contracts for a mix of doctrinal, practical and policy reasons not the least of which is that “under Delaware law, the board of directors manages the business and affairs of the corporation, which extends to litigation assets.”  That includes Delaware’s exacting presuit demand test for shareholders who seek to sue on behalf of the corporation.

Lost Premium Provision no help

The court said Section 9.7 of the Merger Agreement is a no-third-party-beneficiaries provision which comprises a blanket prohibition disclaiming third-party beneficiaries followed by three. carve-outs but none of those provide any help for the plaintive here.  In addition, the chancellor noted, the blanket prohibition states that the Merger Agreement “shall not confer upon any Person other than the parties hereto any rights or remedies hereunder[.]”

Conclusion

Finally, she said, the parties stipulated to specific performance as to “prevent” breaches of the Merger Agreement, suggesting that a breach claim seeking lost-premium damages would not accrue unless specific performance was unavailable.  The limitation necessarily implied by the Merger Agreement is that the drafters did not intend to vest stockholders with a right to enforce lost-premium damages while the company pursues a claim for specific performance, she concluded.

Former U.S. Attorney General William Barr wrote an article in today’s Wall Street Journal arguing: Delaware is at risk of losing its prominence in corporate law because of what the former U.S. Attorney General describes as the increasing infiltration into Delaware corporate law of ESG priorities, for example via Caremark claims.

Barr describes ESG as a means to inject left-leaning policy preferences into the law. It’s not a law review article, although he refers in passing to several developments that those familiar with Delaware corporate law will recognize. Whether he is correct or not in his admonition is currently a topic of debate among various sectors in the legal profession.

UPDATE: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, has written an erudite response to AG Barr’s article, with copious citations and quotes from the good professor’s own extensive scholarship on the topic, as well as the publications of other leading authorities. Among the quotes in his article linked above, is one from a former Chancellor and Delaware Supreme Court Chief Justice, described as “pro-ESG”, which follows: “It is not only hollow but also injurious to social welfare to declare that directors can and should do the right thing by promoting interests other than stockholder interests.”

SECOND UPDATE: The Chancellor of the Delaware Court of Chancery, as reported in an article by Reuters, responded during a seminar to the referenced article by AG Barr, and Vice Chancellor Travis Laster also provided a rebuttal on LinkedIn, and invited AG Barr to a debate, as described in follow-up commentary by Professor Bainbridge–which includes, as usual, copious citations to his own extensive scholarship and the publications of other corporate law scholars.

The Delaware Court of Chancery recently addressed a litany of claims that the buyer of a business breached its contractual and fiduciary duties by diverting new deals that deprived the sellers from reaching milestones in the purchaser’s new entity that would have triggered increased value. 

In MALT Family Trust v. 777 Partners LLC, C.A. No. 2022-0652-MTZ (Del. Ch. Nov. 13, 2023), the court addressed a long list of claims that provide corporate litigators with a refresher course on basic claims and defenses often encountered in Delaware’s court of equity in connection with the sale of a business.

This short blog post will provide highlights by way of bullet points.

Highlights

  • The court recited the familiar elements of a claim for fraudulent inducement, as well as the specificity requirement of Rule 9(b) for fraud claims. See Slip op. at 10.
  • The court reviewed the well-settled Delaware law on the objective theory of contract interpretation.  See Slip op. at 15.
  • The court explained that the LLC agreement did not include any of the alleged express representations or warranties on which the Plaintiff’s allegations were based. Nor was the purpose clause a “representation or warranty.” See also the court’s application of the contract interpretation principle known by the Latin phrase: expressio unius est exclusio alteris. See Slip op. at 17.
  • The court observed that an LLC agreement is not required to have a “purpose clause,” but that if a purpose clause limits the scope of authorized activity of the LLC, only the company can breach that clause. In this matter, the allegations were against the individual members.  Slip op. at 17-20.
  • Court of Chancery Rule 8 allows duplicative claims in the alternative to be pled, but a nuanced approach applies when the breach of the implied covenant of good faith and fair dealing is contradicted by the expressed terms in an agreement.  Slip op. at 22-25.
  • The well-settled principle that fiduciary duties of an LLC manager and controllers of the LLC must be waived with specific clarity supported the court’s reasoning that the corporate opportunity doctrine was not waived.  Slip op. at 27-31.
  • This opinion regales the reader with a quote and citation to a reference book that should be on the shelves of every corporate and commercial litigator.  At footnote 101 of the opinion, the court cited to Justice Antonin Scalia’s book that he co-authored with Bryan Garner entitled:  Reading Law: The Interpretation of Legal Texts 126-27 (2012). In that same footnote the court also cited to Kenneth A. Adams, “A Manual of Style for Contract Drafting,” Section 13.631 (Fifth Ed. 2023). The citations were for the purpose of interpreting a clause that included the word “Notwithstanding.”  The specific quote from the Scalia book was: 

“A dependent phrase the begins with notwithstanding indicates that the main clause that it introduces or follows derogates from the provision to which it refers.” 

The court interpreted that clause in a section involving fiduciary duties to conclude that the parties did not intend to waive fiduciary duties relating to the usurpation of “other business interests and activities.”

A recent Delaware Court of Chancery decision determined the proper members of an LLC and their respective interests pursuant to Section 18-110 of the Delaware LLC Act.  In REM OA Holdings, LLC v. Northern Gold Holdings, LLC, C.A. No. 2022-0582-LWW (Del. Ch. Sept. 20, 2023), the court determined in a post-trial opinion that at least one of the two initial 50/50 members lied while testifying during trial, but the court nonetheless reached a conclusion based on all the admissible evidence.

Although the entire decision should be read carefully for the factual context, this short blog post will only provide a few key takeaways.

Highlights

  • Despite one of the initial 50/50 members not being provided with all of the documents that described the loan terms that diluted his interest–before he signed a document agreeing to those terms–the court found that  he would still be bound by a written consent to loan terms that would admit a new member.
  • Without reference to the conduct of the counterparty who failed to provide all the terms, the member was nonetheless bound  by the documents he signed.
  • The court relied on several cases for the well-established principle that ignorance of the terms in an agreement signed and consented to is no defense to their enforceability. Slip op. at 49.
  • This basic principle that one generally is bound by the document she signs, also extends to the terms of documents incorporated by reference—even if they were not supplied prior to signing.  See footnote 274.
  • The court determined that several arguments were unavailing to prevent enforceability, including: (1) unilateral mistake; (2) fraudulent inducement; and (3) breach of fiduciary duty.
  • Regarding the breach of fiduciary duty argument, the court observed that fiduciary duties under the LLC agreement only applied to controllers or managers of the LLC, but the claimant in this case was neither.  See Slip op. at page 52-54.

Of course, there is much more to commend the reading of this entire opinion, but these bullet points were the most useful takeaways with the most widespread applicability. 

In a targeted proceeding pursuant to Section 225 of the DGCL with the limited purpose of determining whether members of the board of directors were properly removed, the Delaware Court of Chancery determined that the plaintiff did not establish its burden of proof to challenge the removal of board members. In Barbey v. Cerego, Inc., C.A. No. 2022-0107-PAF (Del. Ch., Sept. 29, 2023), the Court found that the removal of the entire board, and their replacement by a new sole director, was effective.

The Delaware Supreme Court affirmed this decision on June11, 2024.

This gem of an opinion provides several key principles of Delaware corporate law, and corporate litigation, that can be applied in other Section 225 actions, and other litigation generally.

Very Brief Overview of Background

The factual background of this case is somewhat tortuous, but for purposes of these short highlights I will only provide a few key points for context. The case involves a corporate inversion effected through a tender offer whereby the subsidiary would swap its shares in exchange for the outstanding shares of the parent, with the goal of giving the subsidiary a supermajority of the parent’s outstanding shares.  Once that was accomplished, the subsidiary took action to remove the existing board of directors of the parent.  The subsidiary was a company formed in Japan. The parent was a Delaware corporation.

The plaintiffs challenged the removal based on the argument that the inversion was invalid.  Specifically, the plaintiffs argued that the parent purported to authorize the subsidiary to commence a tender offer at a special meeting of the board for which adequate notice was not given according to bylaws of the parent.

The key factual and legal findings of the Court for purposes of this Section 225 action were: (i) although a regular meeting did not require notice under the bylaws, a special meeting did require notice which—based on the facts presented—was not properly given, thereby making the actions taken at the special meeting void.

Nonetheless, the Court found that, even though the plaintiffs did not anticipate or address the issue of whether the inversion and tender offer even required approval by the parent’s board, board action was not required to authorize the subsidiary’s tender offer that resulted in the subsidiary becoming the majority stockholder of the parent. Therefore, the actions taken by the new majority stockholder to remove the board and appoint a new sole director were effective.

Highlights of Key Legal Aspects of the Court’s Opinion

●       Section 225 of the DGCL permits any stockholder or director to apply to the Court of Chancery to determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation.  These are “in rem proceedings” which only exert jurisdiction over the corporation, and may only provide relief concerning the corporate office.  Slip op. at 15.

●       Other types of ultimate relief beyond what is necessary to determine the proper holder of a corporate office may only be obtained through a plenary action through which the court would exercise jurisdiction over affected parties. Id.

●       Notably, the party challenging the removal of a director bears the burden of proving by a preponderance of the evidence that a director’s removal was invalid.  Id.

●       In order to resolve the issues presented, the court had to determine whether a board meeting at issue was a regular meeting of the board or a special meeting of the board. Only a special meeting required notice.  There is a useful and cogent analysis of the bylaws to determine whether the meeting held was properly described as a regular meeting or a special meeting, as well as the notice requirements under the bylaws.

●       The Court instructed that:  “The production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse.”  Slip op. at 20. As applied to the facts of this case, the Court determined that the dispositive original emails in their native format, with metadata, should have or could have been produced instead of a simple screen shot, which did not contain any metadata.  The Court then applied an adverse inference that: if the stronger evidence were produced, it would have been harmful to the person with the burden of proof.

●       The Court also reiterated the principle: “it is, of course, fundamental that a special meeting held without due notice to all the directors is not lawful, and all acts done at such meeting are void.”  The Court emphasized that it was only making this determination solely for the purpose of determining the proper composition of the board, and noted that unlike a plenary proceeding, the issues that a court can address in a Section 225 proceeding are limited. Slip op. at 21-22.

●       The Court explained that the burden of the proof was on the plaintiffs to determine that even if the board action was ineffective, the transaction which gave the subsidiary a majority ownership of  the parent and the ability to replace the board was still not effective.

●       The Court reasoned that the subsidiary was a separate legal entity from the parent and observed the truism that: Delaware law respects corporate separateness even when there is common ownership and even if there is total ownership and total control of one corporation by another, absent a showing of fraud or the existence of an alter-ego.  Slip op. at 23.

●       Interestingly, on a procedural but key note, neither of the companies involved entered an appearance in the case, and only one of the board members involved intervened.

Conclusion

In sum, the Court explained that the plaintiff merely focused its case on whether or not there was proper notice for a special board meeting and whether the actions taken at the meeting were void, but even though the Court found that meeting to be void, the Vice Chancellor also held that the corporate inversion making the subsidiary the majority stockholder properly authorized it to remove the all board members.

Lastly, the Court found that the plaintiff failed to timely raise the issue of foreign law under Court of Chancery Rule 44.1, therefore that argument was waived.

Frank Reynolds, who has been covering Delaware corporate decisions for various national publications for over 35 years, prepared this article.

The Delaware Court of Chancery, in a guidepost ruling on the power to bestow super-voting stock, has dismissed a shareholder’s “identity-based voting” suit over Bumble Inc.’s decision to designate ten-votes-per-share only for the stock of the relationship-nurturing software company’s CEO/founder and his financial backer in Colon v. Bumble Inc. et al., C.A. No. 2022-0824-JTL (Del. Ch. Sept. 12, 2023).

Vice Chancellor Travis Laster’s September 12 summary judgment opinion dismissed breach-of duty charges against Bumble and its CEO, finding that granting the allegedly discriminatory 10X-power voting stock did not conflict with either key provisions or rulings governing that action.  He ruled that the defendants had the right to designate a super voting stock class under the certificate of incorporation — or they could give the directors the right to make that designation at some future time.

The vice chancellor said the challenged action was not invalid because it did not violate Sections 212(a) and 151(a) of the Delaware General Corporation Law and had properly structured a dual-voting class “Up-C” company/partnership entity to enable two insiders to validly gain the control benefit of 10 votes per-share and a tax benefit.

An Up-C structure enables insiders to gain the benefits associated with a public listing without giving up the benefits associated with pass-through tax treatment. To eat that cake and still have it requires two entities: an umbrella partnership and a C corporation. It also requires that the C corporation issue two classes of stock.

Background

Defendant CEO Whitney Herd founded Bumble in 2014 as a web software company that enabled internet clients to cultivate business, friendship and romantic relationships and took it public in 2021 with the financial backing of Blackstone Inc.  Kyrstyn Colon filed suit in 2022 on behalf of all common shareholders claiming that an action that bestowed ten votes per-share on Herd and Blackstone, as the only “principal shareholders” was invalid “identity-based voting.”

Both parties sought summary judgment and Vice Chancellor Laster granted the defendants’ motion—which resulted in a decision that the vote grant was valid and the challenge must be dismissed.

A comprehensive review

The court used the occasion to comprehensively review the scope of the applicable sections of the DGCL and the parameters of the UP-C dual voting class entity structure.

The court reasoned that if the corporation will issue stock that has special attributes, then Section 102(a)(4) provides two alternatives for memorializing the special attributes in the certificate of incorporation.  One alternative is to specify the special attributes directly. The other is to empower the board of directors to bestow super-voting stock at a future time.

8 Del. C. § 151(a) generally authorizes a corporation to issue multiple classes of stock and makes clear that they may either carry default rights by implication, have some or all the default rights specified expressly in the charter, or have whatever special rights are allowed.

Section 212(a) provides that if the certificate of incorporation is otherwise silent, then each share of stock carries one vote by default. Section 212(c) also provides that if the certificate of incorporation calls for greater or lesser voting power, then references in the DGCL refer to that level of voting power.

A trio of key decisions

The Delaware Supreme Court and the Court of Chancery have approved charter provisions that allocate voting power using a formula or procedure, and the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held, he said.

The vice chancellor said, “the Delaware Supreme Court and this court have approved charter provisions that allocate voting power using a formula or procedure.  In Providence & Worcester Co. v. Baker, 378 A.2d 121 (Del. 1977), the Delaware Supreme Court upheld a scaled voting structure in which the number of votes appurtenant to a share varied depending upon the total number of shares that the owner held.”

In Williams v. Geier, 1987 WL 11285 (Del. Ch. May 20, 1987), this court dismissed a challenge to a tenured voting mechanism, holding that it complied with the DGCL, the Vice Chancellor said.

And he noted that in Sagusa v. Magellan Petroleum Corp., 1993 WL 512487 (Del. Ch. Dec. 1, 1993), aff’d, 650 A.2d 1306 (Del. 1994) (TABLE), this court dismissed a challenge to a per capita voting provision that gave each stockholder a single vote, regardless of how many shares the stockholder held, and the Delaware Supreme Court upheld the dismissal.  Framed using the language of this decision, the certificate of incorporation used a mechanic conceptually similar to Providence.

“A strange move”

Contrary to the preceding analysis, the court said, plaintiff argued that the challenged provisions violate Section 212(a) of the DGCL, but the plaintiff did not rely on the text of the provision, but rather on language from the Providence decision.  The plaintiff asserts that under Providence, a corporation cannot create a mechanism in which shares of the same class differ in their share-based voting power depending on who holds them.

Relying primarily on Section 212(a) was a “strange move”, because that section does not authorize or restrict anything, the vice chancellor said. “Section 212(a) creates a default right of one vote per share, and it provides that if a charter departs from the default right, then any voting calculations required by the DGCL—such as the amount of voting power that would constitute a majority of the voting power outstanding—must use the voting power as determined by the charter.

Conclusion

The plaintiff views identity-based voting as an entrenched hierarchy and wants all stockholders to have equality of opportunity, the court said, noting that, “In many areas of the law, those noble sentiments could carry weight. They cannot overcome the plain language of the DGCL.” Nothing in Section 151(a) prohibits a provision that creates a closed set of holders who can exercise certain rights, the court ruled.

The Delaware Supreme Court issued a momentous decision recently that should be read by all those who want to know the latest iteration of Delaware law on the limits of judicial equitable review of LLC Agreements. 

Key Issue Addressed

In Holifield v. XRI Investment Holdings LLC, Del. Supr., No. 407, 2022 (Sept. 7, 2023), the Delaware Supreme Court determined that freedom of contract in the context of LLC agreements extends to “contractually specified incurable voidness.”  This 77-page decision from Delaware’s high court reviewed a 154-page decision of the Court of Chancery that was highlighted on these pages.

This is the type of decision that could justify a law review article, but for purposes of this short blog post, I will only highlight key parts of the decision that should justify a careful reading of the decision in its entirety.

Basic Factual Context

The background of the case involves complex, extensive facts, but for purposes of these brief highlights, the most important context involved whether or not the parties to an LLC Agreement could determine, in connection with an attempted transfer of interests, that failure to comply with certain conditions would make a transaction “incurably void” such that it would not be subject to judicial equitable review and remedies—even if it might result in an inequitable holding by the court.

Highlights

  • The trial court found that it was bound to uphold the “contractual incurable voidness” based on the Delaware Supreme Court’s CompoSecure II opinion.  Slip op. at 32. 
  • See footnote 82 noting that it was not an issue on appeal that, generally, the equitable defense of acquiescence is available as a defense to claims at law.
  • The Supreme Court explained why it would not reconsider its decision in CompoSecure II which the appellant and the trial court urged.  Slip op. at 43 – 44.
  • The Supreme Court provided guidance on why the primacy of freedom of contract embodied in the LLC Act supported the CompoSecure II decision—which endorsed private ordering to a degree “not available in the corporate context.”  Slip op. at 44.
  • The Delaware Supreme Court instructed that “. . . particularly in the alternative entity context, equity will not save a bad contract.”  Slip op. at 46.  See cases cited at footnotes 118 to 120.
  • The high court also provided a primer on basic Delaware law regarding contract interpretation principles.  Id. at 47.
  • The Supreme Court emphasized that the freedom of contract allowed in LLC agreements extends to “contractually specified incurable voidness.”  Id.
  • Although the Supreme Court acknowledged that there are limits to private ordering, and that Delaware courts retain an inherent measure of authority and equitable power regarding LLC agreements: equity cannot always override the plain language of an LLC agreement with respect to incurable voidness.  Id. at 47-48.
  • By comparison, corporate bylaws cannot alter the directors’ fiduciary obligations “and the attendant equitable standards a court will apply enforcing those obligations.”  Slip op. at 49.  See also footnotes 136 to 142 and accompanying text.
  • The Delaware Supreme Court emphasized that its CompoSecure II opinion “did not hold, or even suggest, that in every case where the parties used the word ‘void’, a non-compliant act will be incurably void.”  Id. at 65.  If the use of the word in some circumstances is ambiguous, a different analysis is possible.
  • The court declined to require “talismanic magic words to contract for incurable voidness in an LLC agreement.”  Id. at 66.
  • The case was remanded to address damages and recoupment.  Id. at 77.

This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years

The Delaware Court of Chancery has allowed GoDaddy Inc. shareholders to continue their suit that claims their directors exhibited bad faith by disloyally rubber-stamping the under-valued buyout of a tax asset business that allegedly cost the web hosting company $850 million, in IBEW Local Union 481 Defined Contribution Plan and Trust v. Winborne, et al., C.A. No. 2022-0497-JTL (opinion issued) (Del. Ch. Aug. 24, 2023).

Vice Chancellor Travis Laster’s August 31 opinion refused to dismiss a pension fund’s derivative breach of duty and waste of assets charges, finding that, viewed as a whole, the suit contained enough particularized allegations supporting multiple reasons to believe the directors’ actions were not entitled to the protection of the business judgment rule or exculpation—due to indications of bad faith conduct.

The process by which the court made that determination should be of interest to corporate law practitioners.  The vice chancellor said one way to determine bad faith in this context is, if it appears that the transaction was “authorized for some purpose other than a genuine attempt to advance corporate welfare or is known to constitute a violation of positive law,” then a court can find bad faith.   Even if the defendants argue that the extreme transaction had a legitimate purpose, “if the decision is sufficiently extreme, then the court can still infer bad faith, but the decision must be so extreme that it could not be rationally explained on another basis” he said, citing. In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 34 (Del. Ch. 2014).

In fact, he explained, that type of pleading matches the standard for a claim for waste, defined as a decision “so egregious or irrational that it could not have been based on a valid assessment of the corporation’s best interests.” White v. Panic, 783 A.2d 543, 554 n.36 (Del. 2001).  The vice chancellor said that at the pleading stage, the test for bad faith is “whether the complaint alleges a constellation of particularized facts which, when viewed holistically, support a reasonably conceivable inference that an improper purpose sufficiently infected a director’s decision to such a degree that the director could be found to have acted in bad faith.”

Vice Chancellor Laster said that inference of bad faith was enough, for the purposes of the dismissal motion, to find that pre-suit demand is satisfied under Rule 23.1 because a majority of the defendants’ actions are not the type of breach of duty that can be exculpated.

Background

The source of the litigation began in 2015, when GoDaddy completed an Up-C IPO, a structure which the court said, “layers a parent- level corporation on top of a limited liability company that is treated as a partnership for tax purposes” and has a member interest in the LLC divided into a number of units – some of which are owned by GoDaddy and some by public and private equity investors. 

The opinion said the litigation arose from a complex transaction involving the buyout of the tax assets generated.  The complaint charged GoDaddy CFO Raymond Winborne significantly misstated the value of the tax asset, causing a multimillion liability payment that hurt GoDaddy’s value.     Windborne knew the value he stated was incorrect and so did the directors who voted for the tax asset scheme, the complaint by a union pension fund claims;

A holistic approach

In this case, the court said it “adopted a ‘holistic’ approach, compiling a “constellation” of various factors from the complaint’s allegations that together provide reason to doubt that the voting directors acted in good faith. The court listed those factors:

The first indicative factor is the stark contrast between the valuation of $175.3 million for the TRA Liability in GoDaddy’s audited financial statements and the $850 million payment in the TRA Buyout. The contrast between those figures is so glaring as to support a claim of waste and hence an inference of bad faith on that basis alone.

The second indicator of bad faith is the conflict between Winborne’s representations to the Audit Committee and Ernst & Young and his representations to the Special Committee and the Voting Directors.  For Winborne to have said one thing to the Audit Committee and Ernst & Young then said the opposite to the Special Committee and the Voting Directors supports an inference of bad faith.

In addition, there were no questions or objections from the directors regarding that wide discrepancy, the courts noted.  Indeed, such an exchange “is so one-sided that no businessperson of ordinary, sound judgment could conclude that the corporation has received adequate consideration.” the court said.

A third indicative factor is that that Winborne’s projections and analysis excluded any consideration of GoDaddy’s M&A-based business model and its effect on GoDaddy’s ability to use the Tax Asset. One of the main reasons why GoDaddy had not made any payments under the Tax Agreements and kept putting off when they would begin was because the Company engaged in M&A. The pleading-stage record supports an inference that the members of the Special Committee knew that Winborne’s projections rested on unrealistic assumptions.

It’s all how you look at it

In summary, the vice chancellor ruled that, at most, a claim for breach of the duty of care does not give rise to liability for pre-suit demand purposes but, “When viewed holistically, the complaint’s allegations support an inference of bad faith.”  Two members of management steered a process towards an outcome designed to favor the Founding Investors, aided by a Special Committee populated with the three outside directors most likely to sign off on the deal.

“Since the standard under Rule 12(b)(6) is less stringent than the standard under Rule 23.1, a complaint that survives a Rule 23.1 motion to dismiss generally will also survive Rule 23.1” he said.

Over the nearly two decades that I have maintained this blog, I have written about a fair number of court decisions involving statutory dissolution. The recent Delaware Court of Chancery decision styled:  In re Neworld Energy Holdings LLC, C.A. No. 2023-0282-MTZ (Del. Ch. August 24, 2023), granted a motion to dismiss based on an arbitration clause in an LLC Agreement that the court found to require arbitration of statutory dissolution claims. 

Seminal Delaware Opinion on Arbitrablity

Relying on the seminal Delaware Supreme Court decision in James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 79 (Del. 2006) (highlighted on these pages here and which this author argued before the Delaware Supreme Court), the court addressed those situations where an issue of substantive arbitrability should be determined by the court or an arbitrator.  In this decision, the court explained that the arbitration provision, which incorporated the American Arbitration Association Rules, evidenced a “clear and unmistakable intent to submit arbitrability issues to an arbitrator.”  The court determined that the agreement involved in this case provided an exception for seeking equitable relief–but that did not apply to a request for statutory dissolution. 

Additional Case Law Support

The court also found support for its reasoning in two other Delaware cases that applied the Willie Gary decision:  Blackmon v. O3 Insight, Inc., 2021 WL 868559 (Del. Ch. Mar. 9, 2021, and McLaughlin v. McCann, 942 A.2d 616, 622-35 (Del. Ch. 2008).  The court also referred to the recent United States Supreme Court decision in Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S.Ct. 524, 529 (2019)(highlighted on these pages here and here), regarding the position that a court possesses no power to decide an arbitrability issue when there is clear and unmistakable evidence that the parties intended to delegate issues of substantive arbitrability to an arbitrator. 

The court also noted in closing, in support of its decision. another Chancery opinion that concluded:

“There is nothing inherent in the claim for judicial dissolution that could not be fully and fairly litigated in the context of an arbitration.” (citing Johnson v. Foulk Road Med. Ctr. P’ship, 2001 WL 1563693, at *1-2 (Del. Ch. Nov. 21, 2001)).

A recent Chancery decision addressed many important issues related to a squeeze-out merger involving an LLC in which the minority member claimed that it did not receive a fair price for its minority interest.  See Cygnus Opportunity Fund, LLC v. Washington Prime Group, LLC, C.A. No. 2022-0718-JTL (Del. Ch. Aug. 9, 2023).  There are many issues in the 48-page decision that could be the subject of an extensive review, but for purposes of this relatively short blog post I will limit my discussion to the fiduciary duties of officers, which the court described as:  having “long been an undertheorized area of Delaware law.”  Slip op at 13. 

Issue Addressed

Whether the defendant-officers breached their fiduciary duties because the company provided no or few disclosures in connection with a squeeze-out merger.  The court refused to grant a motion to dismiss on that issue.  Although there was a waiver of fiduciary duties for some, there was only an exculpation clause that applied to officers.  The LLC was structured in a manner similar to corporations with a board of directors and officers.

The Fiduciary Duty of Disclosure

This decision engages in a rather deep-dive into the public policy and historical underpinnings of the fiduciary duty of officers to make disclosures.  Slip op. at 12 through 25.

The court explained that the duty of disclosure is not a separate duty but rather a contextual manifestation of the duties of care and loyalty.  Slip op. at 13.  The court instructed that the duty of disclosure arises situationally, its scope and requirements depend on context.  The court cited to cases that refer to the recurring scenarios in which the governing principles of disclosure have been developed.

Duty to Inform

The court reasoned that the duty of disclosure is a context-specific duty, and

“no Delaware decision holds that fiduciaries do not owe any duty in the context of a transaction in which the fiduciaries unilaterally eliminate their investors from an enterprise.  I personally am not prepared to rule as a matter of law that a fiduciary can take the property of its beneficiary without some level of disclosure, even in the absence of any request for action.  To the contrary, basic fiduciary principles suggest that a fiduciary cannot do that”.

Slip op. at 18-19.

The court traces the anglicized Latin word fiduciary to its meaning as trustee-like, and also traces the origin of fiduciary duties to obligations similar to those of a trustee—and the fiduciary relationship as analogous to one between an express-trustee and a beneficiary.

The court cited to treatises and case law for the principle that a fiduciary should keep beneficiaries informed as a central aspect of a trustee’s duties at common law and:  “Even in the absence of a request for information, a trustee must communicate essential facts to beneficiaries.”  Slip op. at 19.  The court emphasized that:  “The duty to inform is not limited to trustees.  It runs through the whole law of fiduciary and confidential relations.”  Slip op. at 21.

Duty to Disclose in Context of Squeeze-Out Merger 

In the context of a squeeze-out merger, the court reasoned that:

“If the duty to inform could apply anywhere, it would apply to a transaction in which a fiduciary unilaterally effectuates a taking of a beneficiary’s interest.  In that setting, the duty of loyalty could manifest as an obligation to inform the beneficiary of the material facts surrounding the transaction, regardless of whether or not the beneficiary’s approval is required.”  Slip op. at 21.

The court further explained that even if the LLC Agreement would allow the defendants to argue that they could convert a minority interest into a right to receive the amount offered—without any explanation:  “that result would be contrary to equity.”  Slip op. at 21.

Exculpation Provision

The court discusses the exculpation provision, as contrasted with the waiver of fiduciary duties, and describes the willful conduct that is not covered by the exculpation provision. The court described those situations at the pleadings stage where the allegations of willful conduct which require insight into the state of mind, such as the intent of a person, “may be averred generally”.  Slip op at 46.  The court also observed that the degree to which a party must plead facts of this nature takes into account whether the facts lie more in the knowledge of the opposing party than of the pleading party.  Id. 

The court found that the complaint alleged facts supporting a reasonable inference that the defendants intentionally pursued a scheme to eliminate the minority at a grossly unfair price.  The court held that the difference between the transaction price and the actual value supported an inference of subjective bad faith that inferably violated the provisions of the LLC Agreement and the fiduciary duties of the officers.  The exculpation provision at this early phase of the case could not be relied upon to support a motion to dismiss.

My latest column on legal ethics for the flagship publication of the American Inns of Court, The Bencher, addresses the titular topic. During the more than 25 years that I have penned the legal ethics column, this topic may be among the most challenging. That is, do the rules of legal ethics provide any guidance on how, if at all, to respond when one is falsely accused–especially of despicable acts or statements.

Courtesy of The Bencher, my latest article is reprinted below.

Do Legal Ethics Rules Provide Guidance for Responding to False Accusations?

The Bencher | September/October 2023

By Francis G.X. Pileggi, Esquire

During the 25 years or so that I have written this ethics column, the titular topic may be the most challenging among those I have addressed. If one is falsely accused of some despicable act, with no details and no opportunity to confront the unnamed accuser, do the rules of professional responsibility suggest how a lawyer should reply? Let’s be more specific.

What if an anonymous and amorphous accusation of racist behavior, without details of specific words used or other details, is recklessly repeated without an opportunity for the accused person to confront the accuser or rebut unspecified facts? How should the ethical lawyer respond? Most lawyers, and most reasonable people, would expect that such a serious false accusation, or repeating such a false accusation, should surely be actionable in some manner.

Those who weaponize the accusation of racism for improper motives continue to make it harder for those who seek to eradicate racism where it truly exists.

Those who believe in the approach of an “eye for an eye” may seek retribution. Adherents of Stoicism might counsel a “grin and bear it” approach. Christians may counsel a “turn the other cheek” response. Others may rely on karma.

Delaware Cases

Relatedly, a Delaware Supreme Court decision found that a defamation claim based on a member of the legal profession falsely accusing a lawyer of being a racist was barred by the First Amendment guarantees of free speech and observed that “it is clear to us that Americans disagree about a long and growing list of things that to some are racist and to others are not.” Cousins v. Goodier, Del. Supr., No. 272, 2021, Slip op. at 28 (Aug. 16, 2022).

Delaware’s High Court referred to the evolving definition of racism and cited to the recently updated definition of the word in a leading dictionary that now includes systemic racism, id. at n. 103, while also noting that the term “racist” has been used so variously as to have been “drain[ed]…of its former, decidedly opprobrious meaning” and to now “fit comfortably within the immunity for name-calling.” Id. at n.104 (quoting Stevens v. Tillman, 855 F.2d 394, 402 (7th Cir. 1988)).

When an accusation is made by an unidentified person, options may be limited. In 2005, the Delaware Supreme Court reasoned in Doe v. Cahill that only in certain circumstances can one force the disclosure of the identity of an anonymous online accuser.

An activist affiliated with Harvard Law School has described Christianity as a religion guilty of systemic racism, just as many have described our criminal justice system. So what do those charges mean for Christians or those who play key roles in the criminal justice system?

ABA Opinion

The American Bar Association (ABA) Model Rules of Professional Conduct do not provide clear direction on the titular issue. In 2021, the ABA issued a formal opinion on the related topic of whether, and how, to respond to online criticism. See Standing Committee on Ethics and Professional Responsibility, Formal Opinion 496 “Responding to Online Criticism,” American Bar Association (Jan. 13, 2021).

This opinion speaks directly to lawyers faced with online attacks. The opinion focuses on the Model Rules of Professional Conduct that advise lawyers how to respond to their client, former clients, opposing counsel, and opposing counsel’s clients. The ABA recommends that in these scenarios, the lawyer either not respond to the negative posts, respond by asking the person who is posting to allow for a private discussion offline, or respond by stating that professional obligations do not permit the attorney to respond. The committee noted that any response to the negative review or comment may be counterproductive.

In sum, there is no panacea for dealing with false accusations, especially anonymous ones. One goal is not to react in a manner that would run afoul of the aphorism that two wrongs don’t make a right. Although revenge might best be served cold, a Chinese saying provides that a person who seeks revenge should dig two graves: one for the person against whom revenge is sought and one for the person seeking revenge. Life is not fair.

Francis G.X. Pileggi, Esquire, is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP. He comments on legal ethics as well as corporate and commercial decisions at www.delawarelitigation.com.

Any litigator who has been practicing long enough will confront a challenge with a pre-trial deadline. The Delaware Bar, at least traditionally, has had a custom of freely granting reasonable requests for extensions. But in summary proceedings, where a trial is often scheduled within 90 days of a complaint being filed, special nuances need to be addressed.

Bottom line: A deadline for disclosing trial witnesses will not be extended absent good cause shown. The test is not whether the other side will be prejudiced.

In the recent decision styled PVH Polymath Venture Holdings Ltd. v. TAG Fintech, Inc., C.A. No. 2023-0502-BWD (Del. Ch. Aug. 3, 2023), Magistrate in Chancery Bonnie W. David granted a Motion in Limine to bar the introduction of an expert report at trial that was submitted after the applicable deadline.

Prior Delaware decisions highlighted on these pages exemplify how seriously Delaware courts treat deadlines, especially those enshrined in a scheduling order. See, e.g., these examples. Careful readers may recall a blog post earlier this month about two decisions enforcing deadlines (coincidentally in August of all months).

In this pithy decision, the following key points are noteworthy about a deadline issue in the most common type of summary proceeding: a DGCL Section 220 case:

Highlights

  • A deadline for disclosing trial witnesses will not be extended absent good cause shown. The test is not whether the other side will be prejudiced.
  • Scheduling Orders in summary proceeding are often shorter and less detailed than their more extensive counterparts in a plenary action–but no specifically-delineated deadline for expert witnesses simply means that the deadline for all fact discovery will also include the completion of all expert discovery.
  • The Scheduling Order in this particular case included a deadline–prior to the cutoff for fact discovery–by which witness lists needed to be exchanged, as well as those witnesses to be presented by affidavit, which is not uncommon in a Section 220 trial presented “on a paper record”.
  • Rule 44.1 regarding disclosure of foreign law experts did not supersede the deadlines in the Scheduling Order.
  • The Court explained that deadlines are essential in summary proceedings and that in order to litigate efficiently: “the parties need to cooperate with one another to tee up issues for resolution. There isn’t time for ‘overly aggressive litigation strategies’ and games of ‘gotcha'”. Slip op. at 5.
  • The Court cited an example of a prior Delaware decision the precluded the use of an expert report that was not timely disclosed. See footnote 6.

Postscript: Pursuant to Chancery Rule 144(h), the parties in this matter agreed to submit this case for a final decision by the Magistrate in Chancery.

A recent Delaware Court of Chancery ruling emphasizes the importance of meeting deadlines that are part of a scheduling order, and the consequences for not following those deadlines.  In two separate Orders in the matter of Shareholder Representative Services, LLC v. Alexion Pharmaceuticals, Inc., C.A. No. 2020-1069-MTZ, Order (Del. Ch. Mar. 23, 2023), the court granted a motion to exclude an expert report when the deadline for disclosing the subject matter of expert testimony was not met.  Specifically, six days after the deadline, the identity of the expert and his CV were produced, but not the subject matter of his proposed testimony. That was not disclosed until his expert report was provided 26 days after the deadline for disclosure–on the date that expert reports were due. Neither leave to amend the scheduling order nor consent from the other parties was sought. (FYI: Orders can be cited in briefs in Delaware.)

The court relied on Rule 6(b) which allows the court “for good cause shown” in its discretion to enlarge the period of time by which the parties are required to meet a deadline:  “if requested before it [the deadline] expires, or ‘upon motion made after the expiration of the specified period … where the failure to act was the result of excusable neglect.’’’

In the explanation on the last page of the Order, the court explained that the party involved neither sought an extension before the deadline nor moved for an extension after the deadline, nor did it try to show excusable neglect.  The court noted prior decisions of the Delaware Court of Chancery have stricken an expert report that was submitted late.  See Encite LLC v. Sony, 2011 WL 156181 (Del. Ch. Apr. 15, 2011).

In a second, separate Order in the same case, the court granted a motion in limine to exclude untimely produced documents that a party tried to use as exhibits for trial because they were not produced by the deadline.  In Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., C.A. No. 2020-1069-MTZ, Order (Del. Ch. June 28, 2023), the court explained that the documents requested in discovery were not produced until after the discovery deadline, and were required to be produced even though the opposing party “did not press for them.”  The court cited prior decisions where the court “excluded from trial documents that an expert relied on but were not timely produced.”  See Verition P’rs Master Fund v. Aruba Networks, C.A. No. 11448-VCL (Del. Ch. Nov. 30, 2016).  In sum, the court struck the documents that were sought to be introduced as exhibits because they were responsive to requests for production and there was a failure to timely produce them. Thus, the expert was prohibited from testifying or opining on the contents of those documents.

This article was prepared by Frank Reynolds, who has been following Delaware corporate law and writing about it in various publications for more than 35 years

The Delaware Court of Chancery has ruled that the contempt sanction of a $1,000-a-day fine is an appropriate means of forcing Hone Capital LLC to comply with the Court’s previous order to advance funds for an ex-officer’s defense of Hone’s charges that she fraudulently managed an investment  fund in Gandhi-Kapoor v. Hone Capital LLC  and CSC Upshot Ventures I LLP, No. 2022-0881-JTL Opinion issued  (Del. Ch., July 19, 2023).

Among the many cases on advancement highlighted on these pages over nearly two decades, this decision is especially noteworthy for, among other things, emphasizing the public policy reasons behind advancement and the serious consequences that might follow for not fulfilling advancement obligations–as determined by the Court to be owed.

Vice Chancellor Travis Laster’s July 19 opinion granted former Hone CFO Purvi Gandhi-Kapoor’s motion to hold Hone and its CSC Upshot Ventures I LLP fund in contempt for flouting his earlier summary judgment decision that they had no excuse for their seven month-long failure to honor an advancement agreement   He decided that the circumstances justified a fine, not as a punishment, but as just enough coercion to obtain compliance with the court order when irreparable harm was on the horizon.  And the ruling warned that a receiver could be used to force compliance.

In a decision affecting corporate and insurance law specialists, the court found that although “contempt is not generally available to enforce a money judgment,” the holder of this advancement judgment need not resort to slower collection mechanisms because, “The right to advancement is a time-sensitive remedy…A lack of timely advancements prejudices the covered person’s ability to defend the underlying litigation, potentially resulting in irremediable consequences, such as an adverse judgment or a conviction.”

Background

Gandhi-Kapoor was a member of limited liability company Hone, served as its Chief Financial Officer, and had the title of Partner. At Hone, she reported to Bixuan Wu and together with Wu, managed the Upshot Fund.

For disputed reasons, the CSC Group, the parent of Hone, terminated Wu. Gandhi-Kapoor resigned, and in 2020, caused Hone to file a lawsuit against Gandhi-Kapoor in California Superior Court accusing her of breach of fiduciary duty and fraud. That action was consolidated with Gandhi-Kapoor’s California declaratory judgment suit seeking a ruling that she was entitled to a percentage of the Upshot fund’s profits as promised compensation.

The Court awarded summary judgment in April in Gandhi-Kapoor’s advancement suit against both Hone and Upshot, at which time they owed nearly $1 million in submitted fees but neither has contested any of the billed amounts nor paid anything, the vice chancellor ruled.  He said seven months had passed since Gandhi-Kapoor had made what has been found to be a valid demand for advancement.  The companies unsuccessfully argued that there was no proof of irreparable harm.

Contempt petition ruling

In response to Gandhi-Kapoor’s petition for a contempt ruling, the Vice Chancellor decided that, “Advancement provides corporate officials with immediate interim relief from the personal out-of-pocket financial burden of paying the significant on-going expenses inevitably involved with investigations and legal proceedings,” citing Homestore, Inc. v. Tafeen (Tafeen III), 888 A.2d 204, 211 (Del. 2005). The proceeding is summary, he said, because “immediate interim relief” must be provided in timely fashion to be effective since the advancement award “is also an interim monetary award, akin to an interim award of alimony or an interim fee award,” and “the covered person faces a threat of irreparable harm.”

The Vice Chancellor said Delaware entities are not required to provide advancement, but if they chose to, they may be compelled through contempt rather than collection procedings to make paymemts if:

*The companies are actually found to be in contempt, and “To establish civil contempt, [the movant] must demonstrate that the [opponent] violated an order of the court of which they had notice and by which they were bound.” Handels AG v. Johnston, 1997 WL 589030, at *3 (Del. Ch. Sept. 17, 1997). The standard of proof required in a civil contempt proceeding is a preponderance of the evidence, and there is no longer any doubt that the companies are in contempt, he ruled.

*The remedy is appropriate. “If the primary purpose of the remedy is to coerce compliance with the court’s order, then the remedy is civil in character.” But he noted, “a court is obligated to use the least possible power adequate to the end proposed.” TR Invs., LLC v. Genger, 2009 WL 4696062, at *18 n.74 (Del. Ch. Dec. 9, 2009).

The appropriate remedy

The Vice Chancellor said he could have chosen to use the court’s “broad power” to force advancement order compliance by employing a receiver to utilize the respondent companies’ assets to provide Gandhi-Kapoor the awarded funds—especially where there was a history of refusal without valid reason.  Delaware laws that govern corporations and limited liability companies alike urge the courts to endow the receiver with just enough power to effect compliance.

Vice Chancellor Laster took that limited power principle a step further.  He noted that Gandhi-Kapoor had submitted a new brief in support of immediate relief in the form of a daily fine, but he decided that at least initially, he could impose the fine without employing a receiver to do it.  He calculated that Hone gained $658 per day by retaining the money it owed to Gandhi-Kapoor for her defense so the $1K per-day fine would be an incentive to pay up.

However, considering new information from Gandhi-Kapoor indicating that Hone might be selling or restructuring to put assets out of the Court’s reach, he held the door open for the future appointment of a receiver with appropriate power to cope with that situation.

Over the last 18 years that I have maintained this blog, I have published highlights on these pages, and elsewhere, of about 190 or so Delaware decisions involving stockholder demands under DGCL Section 220 for books and records, as well as the analogue in the LLC context. Nowadays, I only highlight those I find to be especially noteworthy.  A case that meets that standard is Seidman v. Blue Foundry Bancorp, C.A. No. 2022-1155-MTZ (Del. Ch. July 7, 2023), in which the Court “regretfully” shifted fees for “glaringly egregious litigation conduct in defending against a books and records request.”

This is a “doubleheader” blog post. I will also highlight a second decision (by the same VC) also issued this month that addressed sanctions for failure to comply with post-trial obligations to produce a company’s books and records in the LLC context, as well as errant litigation conduct.

This short blog post assumes the reader is familiar with the basic principles applicable to these types of summary proceedings. 

Highlights

The complaint in the Seidman case was filed on December 14, 2022, and the trial was scheduled for Feb. 22, 2023.  (Notably, complaints in summary proceedings such as these need not be long, compared to complaints I have filed in plenary cases which were 100-pages long–not including voluminous exhibits.)

The demand in this case included requests for formal board materials and compensation consulting reports for the purpose of investigating mismanagement and communicating with fellow stockholders.  Defendants initially refused to produce a single document.  Moreover, the company refused to confirm or deny what, if any, formal board materials existed.

Errant Litigation Conduct

The court observed that the defendant offered no real reason for demanding a deposition in-person in Delaware, in light of the plaintiff being in Florida at the time, especially when the defendant initially did not press an improper purpose defense.

Despite his confirmation that he was not a member of the purported group, the company continued to claim that the plaintiff was a member of the “Jewish mafia.”  The plaintiff was offended by the ethnic slur. 

The company notified the plaintiff too late for the plaintiff to take discovery on the affirmative defense that plaintiff’s stated purpose was not his actual purpose, despite the plaintiff being entitled to take discovery on that issue—on which the company bears the burden.  See Woods Tr. of Avery L. Woods Tr. v. Sahara Enters., Inc., 2038 A.3d 879, 891 (Del. Ch. 2020).

Two days before trial, the parties submitted a Proposed Final Order and Judgment pursuant to which the company produced 60-pages of documents including the compensation consulting reports that were the focus of the initial demand.

Attorneys’ Fees

This decision, from page 14 to 24, discusses the request for attorneys’ fees of over $220,000 for the time period ending two-days before trial.  Included in the court’s analysis was the fact that the company was inappropriately defending the case on the merits of a future plenary action, despite Delaware law being clear that a books and records proceeding is not the time for a merits assessment of potential claims.

Rather, under settled Delaware law, a stockholder “who demonstrates a credible basis from which the court can infer wrongdoing or mismanagement need not demonstrate that the wrongdoing or mismanagement is actionable.”  See Slip op. at 19 (quoting AmerisourceBergen Corp. v. Lebanon Cnty. Emps’. Retirement Fund, 243 A.3d 417, 437 (Del. 2020)).  The court also observed that it was improper to refuse to state what exact formal board materials existed.  Id. at n.78. 

Key Points

The court highlighted the categories of the company’s litigation conduct that the court found glaringly egregious: (i) The plaintiff was forced to file suit to “secure a clearly defined and established right” to inspect the company’s books and records; (ii) “Unnecessarily prolonged or delayed litigation” by refusing to produce any documents; (iii) “Increased the litigation’s cost” by, among other things, insisting in bad faith on an in-person deposition leading to motion practice; (iv) “Completely changed its legal argument” in a way which would prevent plaintiff from taking discovery to which he was entitled; and (v) Multiple misrepresentations to the court.  Id. at 21-22.

Takeaways

Although somewhat egregious facts often are not easily applicable to more routine cases, this case serves as a cautionary tale for companies that are less cooperative than the courts require in responding to stockholder demands for books and records.

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Part two of this “doubleheader” blog post discusses another cautionary tale: the recent Chancery decision in Bruckel v. TAUC Holdings, LLC, C.A. No. 2021-0579-MTZ (Del. Ch. July 17, 2023). This opinion deals with contempt sanctions for failure to comply with a post-trial order for production of books and records.  This case is another example of how difficult it is sometimes for a plaintiff to achieve, even after trial, the production of books and records. 

Key Facts

This case involves the demand by a manager pursuant to Section 18-305 of the LLC Act, as well as a contractual right pursuant to the operating agreement.

The court issued multiple prior decisions in this case, cited in the opinion, that provide additional background details.

The defenses asserted by the company included an alleged lack of a proper purpose, and that the stated purpose was not the primary purpose, and that demand was deficient under 6 Del. C. Section 18-305(e).  The court noted that the contractual rights under the operating agreement did not require a proper purpose.

Reasons for Fee-Shifting

The court summarized its reasons for fee-shifting to include the following: the company resisted through and after trial, by:  (1) withholding books and records to which the manager had unfettered rights; (2) failing to identify whether formal board materials exist; (3) altering the way the board functions in an attempt to duck the company’s production obligations; (4) manufacturing weeks-long delays in conveying books and records; (5) over-designating documents and communications as privileged.

Highlights

This decision includes guidance that goes beyond books and records cases and includes reminders of well-settled Delaware law regarding obligations for the preparation of privilege logs and redaction logs.

Also notable is that the court required production of documents through the present, as an ongoing obligation, not limited to documents dated as of the trial.

In connection with forcing compliance, the court appointed a receiver from among three Delaware lawyers proposed by the parties.

The scope of the opinion was intended to address the contempt of the company and any further sanctions; whether the defendant waived privilege; and whether the defendant met its burden to show cause as to why fees should not be shifted.

The court reviewed the standards for imposing sanctions due to the violation of a court order.  See Slip op. at 16.

Date-Range

The court noted that it was “remarkable” that the defendant took the position that it did not owe documents dated after the trial, and that this position ignored the plaintiff’s statutory inspection rights as a manager and the contractual inspection rights based on the operating agreement. 

Exception to Board Member’s Full Access

In this 44-page decision, the court also reviewed the standard to determine whether the exception when a board member is “adverse” applied such that it would entitle a company to withhold from a director or a manager unfettered access to the books and records that a manager or a director would normally be entitled to obtain–especially to the extent that they are provided to other board members.  Slip op. at 25.  It did not.

Privilege Log

The court reviewed the obligations of a party preparing a privilege log, which include a prohibition on withholding entire documents that are only partially privileged.  Id. at 26.  The court also explained that attachments to otherwise privileged documents need to be separately analyzed and described to justify their privilege.

The court found that not disclosing board materials was “at the heart of this case” and defendants did not explain why a member of the board was adverse to the extent that the minutes of a board meeting should not be produced in their entirety.

The court applied the standard for shifting fees in these types of cases as recited in the Gilead case, which was highlighted previously on this blog. See also AmerisourceBergen case highlighted on these pages as another cautionary tale.

As an example of an improperly asserted defenses, the court repeatedly explained that the plaintiff had contractual rights under the operating agreement that did not require that it establish a proper purpose, especially in light of a manager having essentially unfettered statutory rights and, in this case, “unbounded contractual rights” to books and records.  See Slip op. at 36-37 and footnote 164.

Reasonableness of Fees The court observed that the plaintiff was requesting approximately $219,000 in fees and expenses–incurred merely for bringing the contempt motion.  The court requested that the plaintiffs’ counsel supplement the request for fees by including billing statements.  The court also determined that it would consider the request for fees pertaining to the contempt motion as part of its consideration of the request for fees shifted for the entire action,

Takeaways

The parties and their counsel should expect close scrutiny by the Court of Chancery, in all aspects of the litigation, both pre-trial and post-trial, to ensure that the procedural and substantive obligations of the parties and their counsel are being complied with in good faith, especially in what is categorized as a summary proceeding.

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U.S. Court of Appeals Judge Amul Thapar recently published a book entitled, “The People’s Justice:  Clarence Thomas and the Constitutional Stories that Define Him.”  This is not a book review.  Rather, I just wanted readers to be aware of this exemplary new publication.  The book should be read by those who seek to understand one of the greatest jurists to ever sit on the U.S. Supreme Court and whose opinions have an outsized impact on the law that impacts every American.

A former U.S. Attorney General described the book as a must-read for “anyone concerned about the country’s future.”

Often the subject of unfair and relentless criticism, this book explains through the examination of landmark cases and the people behind the cases how Justice Thomas’ originalist jurisprudence delivers equal justice under the law.  Justice Thomas is quoted as saying that “finding the right answer is often the least difficult problem.”  What is needed is “the courage to assert that answer and stand firm in the face of the constant winds of protest and criticism.”

The Delaware Court of Chancery recently published an opinion that provides guidance on the latest iteration of the standard that will be applied when the court considers an application for mootness fees in the context of stockholder litigation. In Anderson v. Magellan Health Inc., C.A.No. 2021-0202-KSJM (Del. Ch. July 6, 2023), Chancellor McCormick granted a fee award of $75,000 in response to a fee request of $1.1 million in connection with a stockholder class action challenging a merger agreement between Centene Corporation and Magellan Health, Inc. After suit was filed, Magellan took certain actions that included supplemental disclosures which mooted the action and a stipulation of dismissal was filed.

Basic Background Facts

The suit claimed that confidentiality agreements that contained “don’t-ask, don’t-waive” provisions impeded the process that led to the Centene deal and, because the provisions were not fully described in the proxy, rendered stockholder provisions materially deficient. Shortly after suit was filed, Magellan issued supplemental disclosures on the don’t-ask-don’t-waive provisions and waived its rights under three of the four confidentiality agreements. On the theory that the supplemental disclosures and waivers were corporate benefits, plaintiff’s counsel petitioned the court for an award of fees and expenses.

Key Aspects of Ruling

This decision was provided as a public service to non-Delaware courts applying Delaware law who may not have “access to the this court’s bench rulings” that reflect a doctrinal shift that resulted in an “overall decline in settlements and fee awards” for strike suits challenging M&A transactions in Delaware. Slip op. at 15.

The Chancellor described this opinion as a clarification “for their sake”. Id. Specifically, the Court explained that: “Often, pre-Trulia precedent pricing corporate benefits reflect inflated valuations and warrant careful review.” Id.

The Court’s analysis emphasized that precedent prior to the seminal decision in the matter of In Re Trulia S’holder Litig.,129 A.3d 884 (Del. Ch. 2016), was “less useful”. In particular, the Court added that: “Post-Trulia decisions awarding attorneys’ fees in suits challenging don’t-ask-don’t-waive provisions reflect the decline in fees awarded for non-monetary benefits in merger litigation.’ Id.

Supplemental Disclosures

After explaining why the waivers did not deserve a fee award, the Court focused on the value of the supplemental disclosures. Although such disclosures have been recognized as a benefit, the Court observed that: “… the standard for pricing that benefit for the purpose of awarding mootness fees warrants reexamination in view of developments in deal litigation since Trulia.” Slip op. at 16.

In response to excessive deal litigation, Delaware courts responded in several ways, including a change in substantive law. In MFW and Corwin, the Supreme Court allowed deal lawyers to invoke the business judgment rule to avoid a merits-based review under the entire fairness or enhanced scrutiny standards. See Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014) and Corwin v. KKR Fin. Hldngs LLC, 125 A.3d 304 (Del. 2015). In addition, C & J Energy Servs. Inc. v. City of Miami Gen. Empls. and Sanitation Empls. Ret. Trust, 107 A.3d 1039 (Del. 2014), “denounced the use of preliminary injunctions as a means of challenging third-party acquisitions and rerouted stockholders to ‘after-the-fact monetary damages.'” Slip op. at 17.

Importantly, moreover, “Delaware courts … began to clamp down on disclosure-only settlements.” Id. See footnote 49 and 51 collecting cases that document this change.

Delaware Public Policy

For the avoidance of doubt, the Court underscored that Delaware public policy does not encourage plaintiffs’ counsel to: “pursue weak disclosure claims with the expectation that defendants would rationally issue supplemental disclosures and pay a modest mootness fee as a cheaper alternative to defending the litigation.” Slip op. at 22.

Delaware courts have not had much opportunity to clarify Delaware policy and law on mootness fees based on supplemental disclosures because in the wake of Trulia, the “… deal-litigation diaspora spread mainly to federal courts, where plaintiffs’ attorneys repackaged their claims for breach of the fiduciary duty of disclosure as federal securities claims.” Id.

After careful reasoning and citation to scholarship on the topic and the case law developments, the Chancellor clarified that: ” At a minimum, mootness fees should be granted for the issuance of supplemental disclosures only where the additional information was legally required.” Slip op. at 23.

Going forward, the Court gave notice that it: “… will award mootness fees based on supplemental disclosures only when the information is material”. Slip op. at 24.

The Court engaged in a thorough analysis of the precise details and impact of the supplemental disclosures in this case, and what amounts have been awarded in relevant Delaware decisions. See, e.g., footnotes 81 to 84.

Money Quote and Takeaway

After an extensive review of the facts of this case and reasoning based on the applicable cases as well as public policy considerations, including the submissions by several professors who filed amici curiae briefs, my vote for the best concluding quote of the case, that also serves as a takeaway for future guidance, follows:

Where lawsuits are not worth much, plaintiffs’ counsel should not be paid much. In this case, the award represents less than the Movants’ lodestar, which should send a signal that these sorts of cases are not worth the attorneys’ time. Moreover, had Movants been required to meet the materiality standard, it seems unlikely that there would have been any award at all.

Slip op. at 35 (emphasis added).

This blog’s favorite preeminent corporate law scholar provides learned commentary on the titular topic on his eponymous blog ProfessorBainbridge.com with citations to his prior scholarship and insights by other leading corporate law professors. They do a deep dive into the implications of Coster v. UIP Cos., Inc., Del. Supr., No. 163, 2022 (June 28, 2023).

See, e.g., Prof. Ann Lipton’s commentary on the case as well as her reference on Twitter to Vice Chancellor Laster’s very recent reference to the Coster decision and its impact on the standard of review in the context of a corporate election or a stockholder vote involving corporate control.

Typically, I don’t duplicate coverage of noteworthy Delaware corporate law decisions that have already been the subject of widespread commentary such as this one that has been analyzed extensively by leading experts.

I want to thank my partner, Sean Brennecke, for his valuable contribution to this post.

The titular holding was rendered in the context of whether substantial compliance was established as a defense to a breach of contract claim in a recent decision of the Delaware Court of Chancery in the matter styled LPPAS Representative, LLC v. ATH Holding Company, LLC, et al., C.A. No. 2022-0241-KSJM (Del. Ch., May 2, 2023).

This useful decision deserves a spot in the toolbox of all commercial litigators. It addresses several noteworthy issues beyond substantial compliance, including whether the right to participate by the indemnitee as part of a right to indemnification was honored–but for purposes of this short post I will limit my highlights to only a few aspects of the decision.

The court’s discussion begins with its holding that the defendant breached the terms of the contract it entered into with plaintiff by, among other things, not including the plaintiff in discussions with a government agency, not allowing plaintiff to review and comment on filings and submissions the defendant made to a court or government agency, and otherwise failed to allow plaintiff to participate in the defense of claims for which the defendants were providing indemnification. 

In so holding, the court rejected the defendants’ arguments, including that they substantially complied with the contract’s requirements. The court discusses the substantial compliance issue primarily from pages 34 to 39 of the slip opinion.  Initially, the court observed that the parties disagreed on whether Delaware law required a party to strictly comply with the terms of a contract or whether substantial compliance was sufficient. In footnote 163 the court reviewed the cases cited by the parties on this issue although the court did not view the parties as having “meaningfully” briefed the question and noted that the limited authority cited by the parties did not fully support their respective positions.

In order to “streamline this decision,” the court assumed that the applicable standard is substantial compliance as that is the lower standard. 

Applying that assumption, the court considered whether the defendants’ failure was “material.”  The court instructed that Delaware followed the Restatement (Second) of Contracts for determining materiality in the substantial compliance context and identified five circumstances which are particularly significant, including “the extent to which the injured party will be deprived of the benefit which he reasonably expected, and the extent to which the injured party can be adequately compensated for the part of the benefit of which he will be deprived….”  See Slip Op. at 35-36.  The court added that the materiality standard is “necessarily imprecise and flexible” and must be “applied in the light of the facts of each case in such a way as to further the purpose for securing for each party his expectations of an exchange of performance.”

The court reasoned that the plaintiff was deprived of the benefit which it reasonably expected, which in this case was the ability to participate in the defense in connection with its right to indemnification and that because that benefit was intangible, “it is hard to imagine how to adequately compensate” for the breach.  Under the circumstances of this case, the court found those factors to weigh in favor of a finding of materiality.

The defendant raised, and the court rejected, five arguments in support of their claim that their breach was immaterial.  One such argument was that their obligations to include plaintiff in critical discussions was not triggered because the plaintiff did not approach the defendant and request that they enter into joint defense agreement.  In rejecting this argument, the court held that the language of the indemnification provision did not impose an affirmative duty to contact the other party to put a joint defense agreement in place. 

The court further observed that the lack of such language in the agreement suggested that “neither party alone bears the burden of first contact.”  Slip Op. at 39.

Therefore, the court concluded that the failure to propose a joint defense agreement proactively did not necessarily absolve the defendants of their own obligation to work with the plaintiff to get one in place or honor their other contractual obligations. 

A recent decision of the Delaware Superior Court cited an article that I co-authored with Chauna Abner that provides a step-by-step guide to transferring cases from the Delaware Court of Chancery to Delaware’s trial court of general jurisdiction, the Superior Court. See RiseDelaware Inc. v. DeMatteis, C.A. No. N22C-09-526-CLS (Del. Super. May 22, 2023). 

The article is cited at footnote 8 of the opinion and was previously posted on this blog.  Footnote 8 notes that the procedure for transferring a case from the Court of Chancery to the Superior Court is similar to transferring a case from the Superior Court to the Court of Chancery. 

This recent decision provides a hard-to-find, practical explanation of the procedure, which is somewhat esoteric to the extent that it is not a well-traveled path and explanations about the nuanced procedures described for transfer between trial courts are not easy to find. That point makes this opinion required reading for any Delaware practitioner that needs to know the procedural requirements for this type of case transfer. 

The opinion’s judicial guidance is especially important in light of a recent trend in Delaware Court of Chancery decisions that employ more scrutiny, often sua sponte, in the service of jealously guarding (understandably) the famously limited subject matter jurisdiction of the Court of Chancery–which, many will be surprised to know, does not always always include requests for a permanent injunction.  See, e.g. In re Covid-Related Restrictions on Religious Services, Consol. C.A. No. 2021-1036-JTL (Del. Ch. Nov. 22, 2022), highlighted on these pages.

I recently posted my latest ethics column for The Bencher which provided a short overview of the standards for judicial recusal or disqualification applicable to federal judges. The standards for state judges are similar but based on slightly different rules.

Fortunately, there are not many decisions by the Delaware Court of Chancery on the standards applicable to judicial recusal or disqualification.

A recent Chancery decision applied the same standards to a Special Master as would apply to a judge in the matter styled: In re AMC Entertainment Holdings, Inc. Stockholder Litigation, Consol. Civil Action No. 2023-0215-MTZ (Del. Ch. May 10, 2023). The Court applied Rule 2.11 and Rule 2.11(A) of the Code of Judicial Conduct for Delaware Judges. Rule 2.11 provides in relevant part that:

(A) A judge should disqualify himself or herself in a proceeding in which the judge’s impartiality might reasonably be questioned, including but not limited to instances where:
(1) The judge has a personal bias or prejudice concerning a party[;]
(2) The judge, . . . or a person within the third degree of relationship,
calculated according to the civil law system,
. . .
(c) is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding[.]6

Regarding Rule 2.11(A), the Court explained that:

Our Supreme Court has set forth the standard where one seeks disqualification of a judicial officer under Rule 2.11(A)(1):

‘[T]he judge must engage in a two-part analysis to determine if recusal is warranted. First, the judge must determine whether she is subjectively satisfied that she can hear the case free of bias or prejudice concerning the party seeking recusal. Second, “even if the judge believes that he or she is free of bias or prejudice, the judge must objectively examine whether the circumstances require recusal because ‘there is an appearance of bias sufficient to cause doubt as to the judge’s impartiality.’

For those interested in this topic, I encourage a close review of this excellent application of the standards to the facts in this case

Postscript: This topic was also recently addressed in a recent article about a motion to disqualify the judge hearing the pending case involving the Disney Company and the Florida Governor.

My latest ethics column for The Bencher, the publication of the American Inns of Court, on the titular topic, is reprinted below courtesy of the publisher. I have been writing an ethics column for The Bencher for the last 25 years.

Before I provide an overview of the basic standards that apply to inform the decision about whether a judicial officer should recuse himself or herself, or otherwise be disqualified from presiding over a particular lawsuit, I want to share some practical wisdom I have learned from several judges with whom I am close to personally—but before whom I would never appear in a courtroom to argue a case.

When a reasonable person familiar with the relevant facts earnestly believes that an issue of a judge’s impartiality might reasonably be raised in a pending lawsuit, that person should explore an appropriate informal means of presenting that issue to the presiding jurist. That approach provides an informal opportunity to the judicial officer to make his or her own assessment of the issue in an appropriate manner that might make a formal motion unnecessary.

This topic is covered in books dedicated solely to judicial disqualification, as well as in heavily footnoted law review articles, but this short ethics column is only intended to cover the highlights. Over the past 25 years of publishing these ethics columns I have, in a few instances, touched on topics that are related to the standards that regulate the judicial branch. See, e.g., Francis G.X. Pileggi, “Fifth Circuit Orders Recusal of Trial Judge,” The Bencher (July/August 2011); Francis G.X. Pileggi, “Professionalism and Judges,” The Bencher (July/August 2015) (describing earlier behavior of attorney as indication of judicial demeanor as a later member of court); Francis G.X. Pileggi, “Resources for Judicial Ethics Research,” The Bencher (January/February 2022).

Applicable standards include Canon 2 of the Code of Conduct for United States Judges, which provides that a judge should avoid impropriety and the appearance of impropriety in all activities. Canon 2(A) states that “[a]n appearance of impropriety occurs when reasonable minds, with knowledge of all the relevant circumstances disclosed by a reasonable inquiry, would conclude that the judge’s honesty, integrity, impartiality, temperament, or fitness to serve as a judge is impaired.” (emphasis added).

The rubric to avoid even the appearance of impropriety applies to both professional and personal conduct. The federal statute that governs judicial conduct requires that: “Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.” 18 U.S.C. § 455(a).

“[T]he test for recusal under § 455(a) is whether a reasonable person, with knowledge of all the facts, would conclude that the judge’s impartiality might reasonably be questioned.” In re Kensington Int’l, Ltd., 368 F.3d 289, 296 (3rd Cir. 2004)(emphasis added). See generally 12 Moore’s Federal Practice-Civil § 63.35 (2022). (Although mere friendship, for example with counsel, ordinarily is insufficient to warrant recusal, unusual circumstances may require recusal.)

Section 144 of Title 18, unlike Section 455, refers specifically to the appearance of a lack of impartiality as it relates to parties—as compared to counsel. See generally Geyh, Alfini, & Sample, 1 Judicial Conduct and Ethics § 4.07[3], Matthew Bender & Co., 2020). The Comment to Rule 2.3 of the Delaware Judges’ Code of Judicial Conduct notes that manifestations of bias or prejudice can include epithets, slurs, references to personal characteristics, or threatening, intimidating, or hostile acts.

The public policy animating the disqualification rules is the need to inspire public confidence in the public perception that the due process requirement of a fair trial before a fair tribunal appears to be provided to all parties and their counsel in litigation. The emphasis is on how the circumstances appear to a reasonable person with knowledge of the relevant facts—not whether actual lack of impartiality can be proven. See, e.g., Richard E. Flamm, Judicial Disqualification: Recusal and Disqualification of Judges § 5.1, at 104 (3rd edition, Banks & Jordan, 2017).

Notwithstanding the applicable standards, appropriate efforts to informally seek the recusal of a judge, and if necessary, formal motions to disqualify, should only be pursued in those rare circumstances when one’s duty to the client, as well as broader duties, make it absolutely necessary.  Even then, they should be brought reluctantly, only after thorough research, careful analysis, extensive soul-searching, confidential vetting with colleagues, and with conscientious consideration of all the aspects and ramifications of such an unpleasant process.

Francis G.X. Pileggi, Esquire, is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP. He comments on legal ethics as well as corporate and commercial decisions on his blog. He is the author of American Legal Ethics: A Retrospective from 1997–2018 (Outskirts Press 2018).