This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.
The Court of Chancery recently refused Charter Communications Inc. investors’ bid to amend their breach-of-duty complaint so as to add previously-dismissed defendant Liberty Broadband Corp. based on newly-discovered evidence because plaintiffs failed to clear a “high bar” to reverse such a with-prejudice dismissal. Sciabacucchi, et al. v. Malone et al., No. 11418-VCG opinion issue (Del. Ch. Aug. 18, 2021). The Court also clarified that the “default rule” is that dismissals under Rule 12(b)(6) are “with prejudice”.
Vice Chancellor Sam Glasscock’s August 18 opinion allowed the motion to amend but only as to a new aiding and abetting charge not previously dismissed. As to the other charges he said because plaintiffs had failed to preserve the dismissal as “without prejudice” under Court of Chancery Rule 15(aaa), they could not replead that decision unless they could show “clear error, injustice, or a change in circumstances.”
The ruling contained a clear warning to Chancery Court plaintiffs against “the pernicious practice of using multiple motions to dismiss as honing stones against which to sharpen a claim, resulting potentially in a viable cause of action, but at the expense of the party opponent and the Court.”
The vice chancellor said after Broadband’s dismissal, plaintiffs claimed Broadband should be added to the complaint because they unearthed evidence that “a record will develop that may implicate defendants against whom the plaintiff has failed to state a claim in the initial complaint,” but plaintiffs never sought dismissal without prejudice and they have failed to clear the resulting “high bar.”
Plaintiff shareholders’ 2015 complaint challenged as self-dealing certain transactions between Charter and Broadband undertaken to facilitate two acquisitions which are, themselves, not challenged. But necessary to any self-dealing charge, Vice Chancellor said, is the allegation that defendant director John Malone and now non-party Broadband together controlled Charter, at the very least, in connection with the Broadband transactions.
In two previous opinions, he found that although Malone and Broadband might technically combine to exert control contractual restrictions on them meant that they functionally could not exercise actual control and dismissed Broadband and part of the complaint.
Plaintiffs’ motion argued that discovery has revealed new information that supports a re-assertion of the allegation that Broadband and Malone were controllers and should allow them to revive two counts of the complaint which allege breaches of duty against Malone and Broadband.
The August 18 opinion
In the August 18 opinion, the court said since the dismissal was with prejudice under Rule 15(aaa) the plaintiff may replead only “if it can demonstrate that a compelling reason to disregard the law of the case exists.”
The Vice Chancellor pointed to Toro Co. v. White Consol. Indus., Inc., 383 F.3d, 1336 (Fed. Cir. 2004), where “The Federal Circuit has noted that “[a] departure from law of the case generally requires the discovery of new and material evidence not presented in the prior action or an intervening change of controlling legal authority, or [a showing that] the prior decision is clearly incorrect and its preservation would work a manifest injustice.”
He said even though his previous dismissals were not explicitly “with prejudice” under Rule 15(aaa), “ the default rule is that dismissals under Rule 12(b)(6) are with prejudice. That ruling controls, as law of the case.”
Plaintiffs are left with a high bar which they cannot clear with the three claims of new evidence they present, the vice chancellor said, because:
1. Although Malone testified that he had ‘soft control’ over Charter it was in context of and in contrast to a discussion about so-called “hard control” where he and his family would control of the stock,
2. The de facto veto Broadband held over two key acquisitions in the challenged deal was not a contractual right of Broadband, or any other defined right to veto the transactions, but was procedural.
3. Broadband’s designees on the Charter board allegedly voted in favor of the Broadband Transactions but at the time, Broadband had the right to designate four of ten board members—less than a majority.
The aiding and abetting exception
As to the aiding and abetting claims plaintiffs proposed to add against Broadband the court said the law of the case rule does not apply since they were not in the original complaint and there was no bad faith, undue delay, dilatory motive, or repeated failures to cure by prior amendment,” the court said.
The court found no futility since the aiding and abetting charges “rest on substantially the same allegations that previously supported the control allegations” and said the defendants were not prejudiced by undue delay. The vice chancellor noted that even though it has not been a defendant for three years and has been only marginally involved in discovery as a non-party, adding Broadband to the aiding and abetting charges is a “closer question than the other defendants since:
It is represented by the same lawyers who have represented Malone,
It is controlled by Malone and is a significant stockholder of Charter,
It was previously on notice that it was involved in this case, even as a non-party, and
It ought to have been on notice that it could be open to other claims stemming from the same facts
Vice Chancellor Glasscock granted that part of the motion while denying the bid to add Broadband as a defendant in the original claims based on new evidence.