A recent Delaware Court of Chancery decision provided remedies in connection with the formation of a business entity by two entrepreneurs based on the court’s finding that the equity, and employment agreement, given to one of the businessmen was based on fraudulent representations. Trascent Management Consulting, Inc. v. Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), contains a practical statement of principles and analysis for those engaged in corporate and commercial litigation.
Overview of Court’s Holding:
The court found that the defendant not only fraudulently induced the formation of the limited liability company and his employment agreement, but also made numerous false statements during the litigation. As a remedy, the court rescinded the employment agreement and declared the limited liability company agreement unenforceable by the defendant. The court also awarded some attorneys’ fees and costs as a penalty for bad faith litigation conduct.
The 75-page long opinion provides copious factual details that are necessary to understand the factual basis of the court’s reasoning and decision, but for purposes of a short blog post, I will highlight the key statements of law that have the most widespread applicability to corporate and commercial litigation practitioners.
Noteworthy Legal Principles in Court’s Decision:
- The court listed the elements of “fraudulent inducement”, which are identical to the elements of common law fraud. See pages 36-37.
- The court described a 2-part test that is used to determine if an entity can assert fraud claims for fraud committed prior to, but related to, its formation. See page 38.
- The court explained the nuances within the definition of misrepresentation, including liability for “half-truths” as well as the duty to correct misleading impressions. See pages 45-46.
- The court also discussed the aspects of the following elements of fraud: (i) when a statement is intended to induce action (pages 49-50); and (ii) when a statement is justifiably relied on. (page 51).
- Rescission as a remedy was found to be appropriate for an agreement that was fraudulently induced. See page 57.
- The court explained that a fraudulently induced agreement may be either voidable or unenforceable at the option of the innocent party. See page 59.
- The court also discussed the rare application of the bad faith litigation conduct exception to the American Rule, in connection with the court’s decision to make a partial award of attorneys’ fees in this case. See pages 64 to 67.