The Court of Chancery in Jeter v. RevolutionWear, Inc., C.A. No. 11706-VCG (Del. Ch. July 19, 2016), provides a helpful explanation and application of several basic principles of Delaware corporate and commercial law that are useful to include in the toolbox of corporate and commercial litigators.
The court’s opinion begins with the admonition that: “This case provides a cautionary tale of the mixing of roles in a corporate-governance setting.” The facts of the case involve a well-known professional baseball player who was given an equity interest in, and made a director of, a company that sold sportswear, in exchange for an understanding that he would promote the products. The facts are heavily disputed about whether there was an express condition precedent or an express obligation of the baseball player to formally and unequivocally endorse the products made by the company.
The opinion addresses overlapping principles of corporate law and commercial law to the extent that there was a contract dispute as well as allegations that the baseball player breached his fiduciary duties as a director.
Legal Principles Addressed:
This opinion features one of the rare instances where a motion to dismiss a claim for the breach of the implied covenant of good faith and fair dealing is denied. The court also upheld a claim of fraudulent inducement. The court found that the doctrine of equitable tolling applied to extend the statute of limitations based on the reasonable conceivability that the fraud claims were concealed by a failure of the baseball player to expose the terms of a contract that might have conflicted with his representations in the agreement at issue in this case. For example, a prior deal with Nike barred him from endorsing other products.
Pleading Requirement to Plead Fiduciary Duty Breach:
Because of the exculpatory provision in the charter, the allegation of a breach of fiduciary duty that plaintiff had to establish at the pleading stage requires a reasonable conceivability of a non-exculpated duty: the fiduciary duty of loyalty. See footnote 104. A useful definition of the duty of loyalty was explained by the Court, which explained:
… that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally. Corporate fiduciaries ‘are not permitted to use their position of trust and confidence to further their private interests in ways inimical to the corporation. Encompassed within the duty of loyalty is the requirement that a director act in good faith. Although the duty to act in good faith may be invoked with regard to a variety of behavior, RWI contends that it has pled a breach of the duty to act in good faith by showing that Jeter ‘intentionally act[ed] with a purpose other than that of advancing the best interests of the corporation’.
See footnote 104 through 109.
The court observed that contractual obligations may give rise to breach of contract claims but they do not alter the fiduciary obligations of the director. It appears that the contractual obligations of the baseball player enlarged the company’s expectations of Jeter beyond his fiduciary obligations. Thus, the court explained, that all but the claim that Jeter made false statements to investors must be dismissed for failure to state a claim. The court found that Jeter made statements to investors to encourage investment which were knowingly false, and in bad faith, and therefore sufficiently pleads a claim of breach of fiduciary duty – – to the extent that a court must assume the truth of the pleadings at this early stage.
In sum, this 39-page decision carefully analyzes many factual details on which each of the claims are based, and explains which of the claims survived a motion to dismiss based on the facts.
Supplement: The author of this opinion is very precise in the use of his words, and footnote 90 is indicative of that careful use. Regarding the use of the word “fulsome” that one of the parties used in their brief, the court observed in footnote 90: “I hereby renounce, in defeat, a pedantic pet peeve: I confess that in today’s United States, ‘fulsome’ is a sesquipedalian synonym for ‘full,’ Mr. Webster’s dictionary be damned. I give up, I give in, I yield to the majority; I will no longer be stuck in fulsome prison.” (No doubt referring to the Folsom Prison in a famous Johnny Cash song called “The Folsom Prison Blues.“)