In General Video Corp. v. Kertesz, et al., 2008 Del Ch. LEXIS 181 (Dec. 17, 2008), read opinion here, the Delaware Chancery Court  addresses in a 76-page decision, issues of practical importance to anyone interested in the sundry dilemmas that always arise in connection with the "break-up" of a closely-held business. As commonly happens, one of the "partners" of the failed business in this imbroglio claimed some interest in a new enterprise founded "on the ashes’ by the other partner in the original venture. Other issues addressed related to what right, if any, each of the former partners had to restrict the other partner from competing in a new venture.

This decision should be required reading for anyone who plans to form a closely-held business in order to avoid typical traps for the unwary. A common omission that plagues such ventures is lack of appropriate documentation to memorialize understandings and failure to observe corporate formalities.

Two prior decisions (on mostly procedural issues) in this case were highlighted here.

Among the claims addressed by the court in this opinion, include:

  1. breach of the fiduciary duty of loyalty to the entity;
  2. usurpation of corporate opportunity;
  3. misappropriation of trade secrets (12 Del. C. sec. 2001(4));
  4. conversion of corporate property;
  5. deceptive trade practices (6 Del. C. sec. 2532);
  6. tortious interference with business relations;
  7. breach of the fiduciary duty of the company’s lawyer who allegedly assisted the former partner in establishing the new business.

Importantly, the court interpreted DGCL Sections 141(b) and 142(b) dealing with resignations by officers and directors, such that resignations do NOT need to be written, and when one party announced that he "wanted out", that was the effective date of his resignation (though it was later confirmed in writing).

The court also determined that neither the former partner nor the attorney acquired any confidential information that was used inappropriately.

An exclusive license agreement  for patented electronic equipment was also interpreted and the court noted that they are normally not assignable, but nevertheless it was found to have been terminated in this case.

An issue arose about whether an amount advanced to one partner should have been considered a loan. The determining factor in such a designation is the intention of the parties at the time. (See footnote  65). In the end, in this post-trial opinion, the court  dismissed all the plaintiff’s claims.

UPDATE: The Wall Street Journal’s  Law Page highlighted this post here.