A recent Delaware Court of Chancery opinion analyzed claims that are not uncommon: one of two founders of a start-up, that failed to launch, claimed that the other co-founder breached fiduciary duties by launching another start-up venture with a third-party who then pursued the business plan of the original start-up, but without the original co-founder. In McKenna v. Singer, C.A. No. 11371-VCMR (Del. Ch. July 31, 2017), the court disagreed that the original co-founder of the original start-up entity had any right to an interest in the separate start-up venture later launched with a different third-party.
The first 40 pages of this 69-page opinion offers detailed facts which are necessary to understand the court’s reasoning. The comprehensive background details explain why one co-joint venture partner decided not to do business with the other. As an aside, one of the co-joint venture partners who was not a part of the eventual launching of the start-up formed with another third-party, exhibited a chronic failure to promptly reply to emails, as well as consistently dilatory behavior and failure to follow-up on tasks that were assigned to him as part of the due diligence for the start-up that was eventually launched with another third party. That type of languid behavior did not endear him to the other entrepreneurs.
This opinion features iconic articulations of the basic elements of a fiduciary duty claim and eminently quotable descriptions of the fiduciary duties owed by directors or others serving in a fiduciary role to constituencies in a business venture. See Slip op. at 47.
Also useful for the toolbox of any corporate or commercial litigator is the application by the court of a fiduciary duty analysis to a former co-joint venture partner who decided to consummate the joint venture start-up deal with a third-party.
Of practical and widespread application is the court’s analysis of the unclean hands doctrine that barred relief based on the improper conduct by the party requesting relief. Slip op. at 41-42. That is, but for the material misrepresentations of the plaintiff, the original joint venture partner never would have agreed to form a start-up entity.
Similarly helpful for commercial litigators is the court’s discussion of the duty of disclosure, if any, in an arm’s length negotiation, Id. at 43, as well as the standard for usurpation or misappropriation of a corporate opportunity. Id. at 48.
In sum, the court reasoned that the fiduciary relationship on which the request for relief rested was conceived in an unholy manner, due to the several material misrepresentations by the plaintiff that was requesting damages for the breach of an alleged fiduciary duty – – one that was never properly consummated due to the unclean circumstances created by the misdeeds of the plaintiff.