A recent Delaware Court of Chancery decision discussed many issues of great interest to commercial and corporate litigators in connection with a finding that Boston Scientific Corporation could not justifiably terminate an acquisition agreement with the target company, including an analysis of the familiar contractual standard of “commercially reasonable efforts,” which has been held to be synonymous with the similar phrase “reasonably best efforts.” In Channel Medsystems, Inc. v. Boston Scientific Corporation, C.A. No. 2018-0673-AGB (Del. Ch. Dec. 18, 2019), a 119-page decision, Delaware’s equity court determined that Boston Scientific did not fulfill its contractual duty to use “commercially reasonable efforts” to consummate the merger.

The court noted that Delaware case law “contains little support for distinctions” between the clause “commercially reasonable efforts” and the clause “reasonably best efforts.” See footnote 410 (citing the Delaware Supreme Court decision in Akorn, 2018 WL 4719347, at * 91.)   Many prior Delaware decisions interpreting and applying that contractual standard have been highlighted on these pages. Followers of this area of the law will find the scholarly insights on this topic by Professor Bainbridge especially notable.

In the instant Chancery decision, the court relied on the Akorn case that interpreted a similar covenant to “impose obligations to take all reasonable steps to solve problems and consummate the transaction.”  (citing Williams Cos. v. Energy Transfer Equity, L.P., 159 A.3d 264, 272 (Del. 2017)).  The Williams case was highlighted on these pages.  The court further relied on the Delaware Supreme Court decision in Akorn to provide the following guidance:

“When evaluating whether a merger partner has used reasonable best efforts, this court has looked to whether the party subject to the clause: (i) Had reasonable grounds to take the action it did; and (ii) Sought to address problems with its counter party.” See footnote 410.

The instant Chancery decision provided several examples why the record supported the holding that Boston Scientific, according to the court’s findings, made no reasonable efforts to engage with Channel, or “to take other appropriate actions to attempt to keep the deal on track . . ..” See Slip op. at 102.

The court used the reasoning of another decision when it explained that:

“Utter failure to make any meaningful attempt to confer with Channel when Boston Scientific first became concerned . . ., both constitutes a failure to use reasonable best efforts to consummate the merger and shows a lack of good faith.” See footnote 418 (citing to Hexion, 965 A.2d at 755-56.)

Finally, the court observed that even though motive to avoid a deal does not demonstrate the lack of a contractual right to do so, the evidence in this case, according to the court’s findings:

“Adds credence to and corroborates other robust factors demonstrating that Boston Scientific did not fulfill its obligation to engage with Channel in a commercially reasonable manner to vet any concerns they may have had about the findings in the Greenleaf Report and to keep the transaction on track thereafter. To the contrary, Boston Scientific simply pulled the ripcord.”

When the phrase “commercially reasonable efforts” appears as a standard of performance in contracts, it seems predetermined to generate litigation, and the recent Court of Chancery decision in Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), supports that observation. Although the agreement in this case had a contractual definition for “commercially reasonable efforts”, prior Delaware decisions highlighted on these pages that discuss this phrase should be of relevance to anyone who needs to know what the Delaware cases say about this somewhat amorphous standard, and similarly-phrased “efforts clauses”.

Why this decision is noteworthy: The most notable aspect of this decision is its collection of Delaware cases interpreting various iterations of “efforts clauses”. See footnotes 83 to 85.

[By the way, as I write this on New Year’s Eve, I extend best wishes to all my readers for a Happy New Year!]

Brief overview: This case involved an earn-out dispute and a claim by the seller that it did not receive milestone payments pursuant to an earn-out provision because the buyer did not use commercially reasonable efforts to reach the milestones. The buyer was the pharmaceutical company Cephalon, but Teva Pharmaceuticals later bought Cephalon. The product at issue was an antibody that would allow an organism’s immune system to overcome disease-causing pathogens. As with new drugs, the process to bring antibodies to market is long, difficult and risky.

The earn-out in the merger agreement in this case was payable upon the meeting of certain milestones in the process of obtaining  approval by government agencies for the antibody to treat two different conditions. The buyer agreed to use “commercially reasonable efforts” to develop the antibody and achieve those milestones. The seller claims that the buyer did not comply with that efforts clause.

Key takeaways:

  • The Court provides an excellent collection of Delaware decisions that have wrestled with various permutations of “efforts clauses”. See footnotes 83 to 85 and accompanying text. The Court categorizes the collected decisions into the following groups, some of which are overlapping: (i) motions to dismiss (at the pleadings stage); (ii) post-trial decisions; (iii) post-merger decisions (often involving a related earn-out clause); and (iv) pre-merger decisions where the efforts clause applied to the satisfaction of a condition to closing.
  • The agreement involved in this case provided a contractual definition for “commercially reasonable efforts” as follows: “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cepahlon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
  • The Court observed that the parties agreed that the foregoing is an “objective standard”, but the Court described the contractual definition as “inartfully” drafted and ambiguous. Also, in the context of denying a Motion to Dismiss this claim, the Court found that neither side offered a reasonable interpretation of this contract provision (as compared to another basis to deny an MTD: when both sides offer reasonable, but differing, interpretations.)
  • Based on Delaware’s version of Rule 12(b)(6)–which is not as stringent as the current Federal standard–the Court found that there was a “reasonably conceivable set of circumstances susceptible of proof” in which (allowing for factual issues at this early stage of the case), it could be shown that companies with similar resources and expertise as Cephalon are currently developing treatments for a similar antibody as the one at issue in this case.

Postscript: See also highlights on these pages of a Delaware Supreme Court decision on the interpretation of the important phrase addressed in this Chancery ruling, as well as related commentary.

A recent Delaware Court of Chancery opinion addressed issues that are of importance to commercial and corporate litigators. In CompoSecure, L.L.C. v. CardUX, LLC f/k/a Affluent Card, LLC, C.A. No. 12524-VCL (Del. Ch. revised Feb. 12, 2018), the court provided a thorough analysis of a contract dispute in a post-trial ruling that primarily relied on New Jersey law, and even though that reliance on non-Delaware law for most issues in this case guarantees cursory treatment on this blog–there are several nuggets of Delaware law which the court cited, for some of its analysis of a marketing agreement for credit cards, that have widespread application in Delaware litigation. For example, the court addressed:

As a postscript for readers who might enjoy trivia, this opinion features as plaintiff’s counsel Delaware’s former Chief Justice, Myron Steele, as well as Arthur Dent, a classmate of mine who was the editor-in-chief of the law review the same year that I was the law review’s internal managing editor. That last bit of data, plus a few dollars, may get you a small coffee at a local coffee shop.

UPDATE: In November 2018, the Delaware Supreme Court had a different perspective on this matter, and affirmed in part and remanded in part.

The Delaware Supreme Court recently analyzed, for the first time, a common contractual standard in business agreements.  The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident.  The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point. The Delaware high court decision in this matter featured a vigorous dissent from the Chief Justice in opposition to the majority’s affirmance of the Court of Chancery’s decision. The majority opinion was based on different reasoning than the trial court applied.

The background facts were included in the Court of Chancery’s opinion in this matter that was highlighted on these pages previously. The foregoing hyperlink also features links to scholarly commentary on this topic by the esteemed Professor Stephen Bainbridge. (The dissent of the Chief Justice will not be covered in this modest blog post, although those interested in this topic may want to read it, because it may provide ideas for opposing arguments on the topic, and in the future when a new majority exists on the Delaware Supreme Court, perhaps the reasoning in the dissent will garner a majority of votes.)

For now, the majority’s restatement of the latest Delaware law in connection with interpreting the meaning of the phrase “commercially reasonable efforts” includes the following important principles.  

Important Legal Principles Explaining the Legal Meaning of “Commercially Reasonable Efforts”:

Although the Delaware Supreme Court affirmed the post-trial opinion of the Court of Chancery, based on different reasoning, Delaware’s high court explained three errors in the Chancery decision, and in doing so the Supreme Court elucidated the correct principles of law applicable to an understanding of the phrase “commercially reasonable efforts.”

First, the Supreme Court explained that the Court of Chancery took an “unduly narrow view” of the decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008).  The Delaware Supreme Court emphasized in this opinion that it agreed with Chancery’s Hexion decision, which was highlighted on these pages. The Supreme Court quoted extensively from the Hexion opinion, and described that the buyer in the Hexion case required financing to complete a transaction.  The Court of Chancery in Hexion held that the agreement required action to the extent that such action was “both commercially reasonable and advisable to enhance the likelihood of consummation of the financing . . ..”  (Hexion, 965 A.2d at 749.) The Supreme Court in Williams quoted with approval the reasoning in the Hexion case even though the Hexion case involved a standard of “reasonable best efforts”–and not commercially reasonable efforts. See footnote 16 and accompanying text in the Williams decision for related analysis.

The Supreme Court in Williams also observed that in the Hexion case, after the buyer developed a more substantial concern about the solvency of a combined entity after the deal closed, the buyer “was then clearly obligated to approach the seller’s management to discuss the appropriate course to take to mitigate the solvency concerns.” Instead, the buyer in Hexion chose not to approach the seller’s management, and the court in Hexion reasoned that such a “choice alone would be sufficient to find that the buyer had knowingly and intentionally breached its covenants under the merger agreement.”  Hexion, 965 A.2d at 750.

The second error that the Supreme Court determined that the Court of Chancery made in the Williams case was the trial court’s focus on the absence of any evidence to show that Energy Transfer Equity, L.P. (ETE) caused the law firm to withhold the opinion that was a condition precedent to closing.  This is so, explained the Supreme Court, because there was evidence recognized by the Court of Chancery from which it “could have concluded that ETE did breach its covenants,” including evidence that ETE did not direct the law firm to engage more fully with counsel for the opposing party in the transaction in an attempt to negotiate any issues.

The third error the Supreme Court found with the Chancery opinion involved shifting of the burden of proof.  The Supreme Court in Williams ruled that “once a breach of a covenant is established, the burden is on the breaching party to show that the breach did not materially contribute to the failure of a transaction.”  See footnote 54. (Of course, one might note that an adjudication that a party was in breach is not usually made until after trial).  Moreover, the Supreme Court emphasized that a plaintiff “has no obligation to show what steps the breaching party could have taken to consummate the transaction.”

Nonetheless, the Supreme Court affirmed the decision of the Court of Chancery (just barely), because the end result in its post-trial opinion would have been the same even if the Court of Chancery applied the proper burden of proof – – in light of a footnote in the Chancery opinion noting that Williams did not present sufficient facts at trial to prevail even if the burden of proof were correctly applied.

Bottom Line: If you have a case that involves an issue of the meaning or application of the phrase “commercially reasonable efforts,” your first step is to read this opinion.  The next step is to determine how the facts of your case compare to the facts in this decision.

SUPPLEMENT: Scholarly commentary on this decision and the topic of “commercially reasonable efforts” in general, is provided by friend of the blog, Professor Stephen Bainbridge, whose scholarship is often cited in Delaware court opinions.

In an expedited deal litigation matter, in The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12168-VCG (Del. Ch. June 24, 2016), the Court of Chancery denied a request to enjoin Energy Transfer Equity, L.P. (“ETE”) from evading a deal based on its inability to obtain a tax opinion that was a condition precedent to closing on a deal with The Williams Companies, Inc. Although the facts of this case are somewhat sui generis, the legal principles addressed should have broader application, not only for deal litigation but contract litigation in general.

The court’s discussion of the concept of “commercially reasonably efforts” and “reasonable best efforts” is useful to remember. The court distinguished the two prior Chancery opinions in Hexion, highlighted on these pages previously, and WaveDivision Holdings, highlighted on these pages, in part because, on a factual level, in both of those cases the Court of Chancery found, unlike in the instant case, that a party took affirmative steps, in violation of the relevant cooperation clause, to thwart a condition to closing such as using commercially reasonable efforts, or reasonable best efforts, to obtain financing or to obtain the consent of a third party to the deal.

Short Overview of the Basic Facts

After the merger agreement between the parties was entered into, the energy market, and the value of the assets in the transaction, experienced a precipitous decline. Since a part of the consideration for Williams was $6 billion in cash, which ETE would have to borrow against its devalued assets to obtain, the proposed transaction quickly because financially unattractive to ETE as the buyer. Thus, ETE was looking for an exit from the merger agreement, although initially it had been an ardent suitor of The Williams Companies.

One of the key facts of the case was that a condition precedent to consummation of the merger was the issuance of an opinion by the tax attorneys for ETE at the law firm of Latham & Watkins. The firm was specified in the agreement, and in its sole discretion, was to issue an opinion as a prerequisite to closing, to the effect that the transaction “should” be treated as a tax free exchange under Section 721(a) of the Internal Revenue Code. Although Latham initially, at the time the agreement was signed, expected to be able to issue that opinion, after the agreement was signed something changed. Based on the effect of changing market conditions and reduced value of the stock on the tax impact, Latham disclosed that it was no longer able to issue such an opinion. One of the claims that Williams maintained against ETE was that it failed to use “commercially reasonable efforts” to secure the Latham opinion and, therefore, materially breached its contractual obligations.

The court approached the inability of ETE to obtain the Latham opinion with skepticism, amid claims that it was a ruse to allow it to back out of the deal in light of the downturn in the energy market which made the deal financially problematic. Another important fact is that the court found that the person at ETE in charge of tax issues did not accurately read or understand the terms of the deal at the time the agreement was signed, and both he and the Latham firm only realized there was a problem in issuing a the tax opinion after the agreement had been signed. Curiously there were six different tax opinions presented at trial by independent experts and tax experts connected with the deal. Some of those opinions were contradictory.

Money Quote

Notwithstanding the court’s initial skepticism and the motive that ETE had to avoid the closing, a few money quotes from the court have application far beyond this case. For example, the court reasoned that:

“Just as motive alone cannot establish criminal guilt, however, motive to avoid a deal does not demonstrate lack of a contractual right to do so. If a man formerly desperate for cash and without prospects is suddenly flush, that may arouse our suspicions. Nonetheless, even a desperate man can be an honest winner of the lottery.”

Court’s Holding

The court explained in its 58-page post-trial opinion, issued the same week that the trial ended, that Delaware is a contractarian state, and recognizes and respects provisions in contracts that favor specific performance in case of breach. But conditions precedent to a transaction must be enforced as well. The request of Williams to force the court to consummate the deal with ETE would force ETE to accept the risk of substantial tax liability which the parties did not contract for.

Key Issues

Among the key issues the court had to consider was whether the Latham firm determined “in good faith” that it was unable to issue the tax opinion. Williams argued that Latham reached a conclusion that it could not issue the opinion in bad faith and for reasons other than its best legal judgment, in order to please its client. That relates to the argument that ETE persuaded Latham not to issue the necessary opinion, which, if true, would be a breach by ETE of the requirement that it use commercially reasonable efforts to obtain the opinion.

The court articulated the issue as whether Latham determined in “subjective good-faith” that it could issue the necessary opinion which was a condition precedent to closing. The court observed that Latham was a law firm of “national and international repute” and that is was at the very least a blow to the reputation of the firm and its tax partners that they had preliminarily advised that the deal would qualify for certain tax treatment, but had to backtrack in a way that “caused the ‘deal to come a cropper.’”

Among the six different tax experts who testified at trial about the ability to issue the necessary tax opinion that was a condition precedent, one tax law professor testified that “no reasonable tax attorney could agree with Latham’s conclusion,” but another professor testified that the conclusion of Latham that it could not issue the opinion was appropriate. Other law firms argued that although the conclusion of Latham was correct, the reasoning for that conclusion was different.

In its analysis of subjective good-faith, the court observed that it was a “substantial embarrassment to Latham” that it was not able to issue the opinion despite its initial view that it could do so, and that the reputational effects outweighed any benefit of an unethical deference to the interests of its client because “while this deal is, certainly, a lunker, Latham has even bigger fish to fry.” The court also noted a blog post from one of the Wall Street Journal’s blogs that Latham & Watkins had been a clear loser on the deal regardless of who won the litigation. See footnote 122.

Legal Principles Discussed

The court observed that the phrase “commercially reasonable efforts” was not defined in the agreement, and that even though the phrase has been addressed in other cases – – “the term is not addressed with particular coherence in our case law”. The phrase has also been articulated as “reasonable best efforts” which has been described as “good-faith in the context of the contract at issue.” Citing Hexion Specialty Chemicals Inc. v. Huntsman Corp., 965 A.2d 715 (Del. 2008), the court found that the phrase “commercially reasonably efforts” in the agreement in this case required the purchaser, ETE, to submit itself to a “objective standard to ‘do those things objectively reasonable to produce the desired’ tax opinion in the context of the agreement reached by the parties.”

The court found that the argument by Williams regarding burden of proof was wrong, and that the buyer, ETE, did not have the burden to “prove a negative.” That is, it did not need to show that its lack of more forceful action, or that a specific action taken, was the reason that Latham did not render a tax opinion. The court similarly distinguished the holding in WaveDivision Holdings, LLC v. Millennium Digital Media Sys., LLC, 2010 WL 3706624 (Del. Ch. Sept. 17, 2010). See footnote 130.

Regarding the court’s reasoning about why ETE did comply with its obligation to use commercially reasonable efforts, the court explained why the arguments of Williams were rejected. Williams argued that ETE:

“. . . generally did not act like an enthusiastic partner in pursuit of consummation of the Proposed Transaction. True. The missing piece of Williams’ syllogism is any demonstration that the Partnership’s activity or lack thereof, caused, or had a materially effect upon, Latham’s current inability to issue the [tax opinion].”

Thus, one may read the above quote as suggesting that “not being enthusiastic about closing a deal” is insufficient to breach a duty to use commercially reasonable efforts. The missing part of Williams’s syllogism described by the court is a key fact that distinguished both the Hexion case and the WaveDivision case because the non-performance allegation and the lack of best efforts allegation – – even if true – – did not contribute materially to the failure of the goal to which the “efforts clause” was directed. See footnotes 122 and 123 and accompanying text.

Postscript: Courtesy of The Chancery Daily, we understand that this decision has been appealed to the Delaware Supreme Court. The Court of Chancery facilitated this option by noting in an Order that accompanied the opinion that pursuant to Rule 54(b), this ruling was appealable although it did not conclude all issues at the trial court level.

Supplement: The venerable Professor Bainbridge provides professorial commentary on the use of the phrase “commercially reasonable efforts” and variants, and observes how common it is to use this phrase, and its variations, without definition and without precision. We are also grateful that the good professor links to yours truly and this post in his discussion.

Second Supplement: In a more recent transcript ruling, in a separate case, another vice chancellor addressed the standard of “commercially reasonable efforts” in the context of a motion to dismiss, as opposed to the post-trial findings in the Williams case. In the matter styled:WP CMI Representative LLC v. Roche Diagnostics Operations Inc.,  C.A. No. 11877-VCL (transcript)(Del. Ch. July 14, 2016), the money quote is found at page 56 of the above-linked transcript ruling when the court explains that a reasonable inference that the parties’ interests are aligned can be defeated when the party with the duty to act in a commercially reasonable manner, does “… something that wasn’t originally contemplated and which has the effect of causing the milestone not to be hit….” In that context, it might be “reasonably conceivable” [under Rule 12(b)(6)] that the change in behavior that was  not originally contemplated or not consistent with past practice, may be a change that was not commercially reasonable.

By:  Francis G.X. Pileggi* and Sean M. Brennecke**

Courtesy of the Delaware Business Court Insider, which published this article in two parts (it’s 34-pages long), this is our annual review of key Delaware corporate and commercial decisions.

This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications, such as many rulings involving Elon Musk, Tesla and Twitter.  Links are also provided below to the actual court decisions.

This is the 18th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors.  This list does not attempt to include all important decisions of those two courts that were rendered in 2022.  Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law.  Prior annual reviews are available at this link.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Reverses Chancery and Finds that LP Manager Reasonably Relied in Good Faith on Opinion Letter

          The Delaware Supreme Court recently reversed a decision of the Delaware Court of Chancery, highlighted on these pages, that addressed whether the general partner of a limited partnership relied in good faith on the formal legal opinion of a law firm to support a going-private transaction.

          In Boardwalk Pipeline Partners, LP v. Bandera Master Funds LP, Del. Supr., No. 1, 2022 (Dec. 19, 2022), the majority of Delaware’s High Court determined, without reconsidering the finding by the Court of Chancery that one of the formal legal opinion letters involved was not done in good faith, that:  (1) the proper decision maker accepted the opinion of counsel of one of the law firms involved to exercise a call right, contrary to the Chancery opinion; and (2) that party relied in good faith on the formal opinion letter of the Skadden law firm. The court found it unnecessary to address the Chancery’s holding that the formal opinion letter of another firm was not issued in good faith. (The Chancery opinion weighed in at 194-pages long, and the Supreme Court’s opinion, including the concurrence, in total was just under 100-pages long.)

Basic Background Facts

          This case involved an intricate and extensive network of entities including Delaware Master Limited Partnerships (“MLPs”).  Under Delaware law, an MLP can be structured to eliminate fiduciary duties.  The Boardwalk Limited Partnership Agreement (“Partnership Agreement”) disclaimed the fiduciary duties of the general partner and included a conclusive presumption of good faith when relying on advice of counsel.  It also exculpated the general partner from damages under certain conditions.

          Under the Partnership Agreement, the general partner could exercise a call right for the public units if it received an opinion of counsel acceptable to the general partner that certain regulations would have a particular impact.  The Boardwalk MLP general partner received an opinion of counsel from the Baker Botts law firm that the condition to exercising the call right had been satisfied.

In addition, the Skadden law firm advised that (i) it would be reasonable for the sole member, an entity in the boardwalk MLP structure, to determine the acceptability of the opinion of counsel for the general partner; and (ii) it would be reasonable for the sole member, on behalf of the general partner, to accept the Baker Botts opinion.  The sole member followed the advice of Skadden and caused the Boardwalk MLP general partner to exercise the call right and acquire all the public units pursuant to a formula in the Partnership Agreement.

Procedural History

          The Boardwalk MLP public unitholders filed suit and claimed that the general partner improperly exercised the call right. The Court of Chancery, in a post-trial opinion, held that the opinion by the Baker Botts firm had not been issued in good faith, and also held that the wrong entity in the MLP structure determined the acceptability of the opinion, and that the general partner was not exculpated from damages.

Issues Addressed

          The Supreme Court did not address all of the issues included in the Court of Chancery’s opinion, but determined that: (1) the sole member of the MLP was the correct entity to determine the acceptability of the opinion of counsel; (2) the sole member, as the ultimate decision maker who caused the general partner to exercise the call right, reasonably relied on a formal opinion letter of the Skadden law firm; and (3) the sole member and general partner, based on the applicable agreement, are conclusively presumed to have acted in good faith in exercising the call right.  The other arguments on appeal were not reconsidered in the majority opinion.

Highlights of Key Legal Analysis

          The Supreme Court only focused on the proper decision maker and the exculpation arguments.

          The Supreme Court disagreed with the interpretation of the Partnership Agreement by the Court of Chancery and initially focused on the need to read both the Partnership Agreement and the related LLC Agreement together because both agreements described how the general partner managed Boardwalk.  See footnote 232 (citation to Delaware Supreme Court decision about reading separate agreements together when there is evidence “that might imply an intent to treat them as a unitary transaction.”)

          The Supreme Court engages in a thorough contract interpretation analysis in their review of several key provisions in the Partnership Agreement.  See generally footnote 252 (citing cases that incorporate defined terms into contractual provisions to make them a part of the contract.)

Determination of Proper Entity as Decision Maker

          Unlike the Court of Chancery, the Supreme Court found both the Partnership Agreement and the LLC Agreement, when read together, to be unambiguous, reasoning that words are not surplusage if there is a reasonable construction which will give them meaning, and noting the truism that simply because the parties disagree on the meaning of a term does not render that term ambiguous.  See Slip op. at 50-60 and footnotes 263 and 264.  The Supreme Court held that the Sole Member Board and not the board of the general partner was the appropriate entity to make the acceptability determination and had the ultimate authority to cause the call right to be exercised.

Reasonable Reliance on the Skadden Opinion

          Delaware’s High Court disagreed with the Court of Chancery regarding agency theory and explained that the decision in Dieckman v. Regency GP LP, 2021 WL 537325, at *36 (Del. Ch. Feb. 15, 2021), did not support extending the agency theory to an exculpation inquiry of an agreement beyond those persons who govern a partnership or limited liability company.  Slip op. at 62.  Specifically, the court observed that:  “an entity, such as [the entity involved in the Gerber case,] Enterprise Products GP, can only make decisions or take actions through the individuals who govern or manage it.”  Slip op. at 62 (quoting from Gerber v. EPE Holdings, LLP, 2013 WL 209658, at *13 (Del. Ch. Jan. 18, 2013)).  See also footnote 282 (noting that notice given to a retained lawyer-agent may be viewed as notice to the client principal, but the cases do not support imputing scienter from a lawyer to a client).

          Unlike the Court of Chancery, the Supreme Court found nothing disqualifying about the Skadden firm giving “an opinion about an opinion,” but rather found it unobjectionable for Skadden to conclude that it would be reasonable for the Sole Member Board to accept the Baker Botts Opinion.  See Slip op. at 66-67.  The court held that implicit in the acceptability opinion is Skadden’s conclusion that the Baker Botts opinion was not contrived and that it was rendered in good faith.  Slip op. at 67.

          The court also discussed the provisions in the agreement that provided for a conclusive good faith presumption which the court distinguished from a rebuttable presumption.  The court opined that a conclusive presumption of good faith is “validly triggered through reliance on expert advice . . . and no longer subject to challenge.”  Slip op. at 68-69 (footnotes omitted).

Conclusion

          The court concluded that: “having reasonably relied on Skadden’s advice, the General Partner through the Sole Member, is conclusively presumed to have acted in good faith and is exculpated from damages.”

Concurring Opinion

          Justice Valihura wrote a concurrence that would have reversed the decision of the Chancery Court that the formal legal opinion of the Baker Botts firm was not rendered in good faith.  The concurrence also noted that because the majority left the findings regarding the Baker Botts opinion in place, the Baker Botts opinion did not satisfy Section 15.1(b)(ii) of the Partnership Agreement which was a necessary precondition to the exercise of the call right.

Supreme Court Offers New Guidance on DGCL Section 220

          The Delaware Supreme Court recently provided guidance to corporate litigators regarding the nuances of DGCL Section 220, which most readers recognize as the statute that allows stockholders to demand certain corporate records if the prerequisites in the statute–and those imposed by countless court decisions–have been satisfied. In NVIDIA Corp. v. City of Westmoreland Policy and Fire Retirement System, Del. Supr., No. 259, 2021 (July 19, 2022), a divided en banc bench of Delaware’s High Court explained in a 54-page decision why the “credible basis” requirement may be satisfied in some circumstances by “reliable hearsay”.

          Regular readers of these pages will be forgiven if their reaction might be: what more can be said about the relatively simple right of stockholders to demand corporate records, in some circumstances, pursuant to DGCL Section 220–that hasn’t already been covered by the hundred or more Section 220 cases highlighted on these pages over the last 17 years, as well as the thousands of court decisions on the topic over the many decades preceding this publication? In short, when the Delaware Supreme Court speaks, those who labor in its vineyard need to listen. And one indication that this topic is not as simple as the statute might suggest, is that those with the final word on Delaware corporate law–the members of the Delaware Supreme Court–were not in complete unanimity in their decision in this case. A concurrence was not in 100% agreement with the majority opinion.

Key Takeaway

          Prior to this decision, it was not well-settled whether a stockholder could satisfy the “proper purpose” requirement under DGCL Section 220 with hearsay–instead of live testimony, for example. The Delaware Supreme Court ruled that: “The Court of Chancery did not err in holding that sufficiently reliably hearsay may be used to show proper purpose in a Section 220 litigation, but did err in allowing the stockholders in this case to rely on hearsay evidence because the stockholders’ actions deprived NVIDIA of the opportunity to test the stockholders’ stated purpose.” Slip op. at 4. (emphasis added).

Overview of Background

          After finding post-trial both a proper purpose and a credible basis for the requests, the trial court ordered the production of documents to investigate: possible wrongdoing and mismanagement; the ability of the board to consider a pre-suit demand; and to determine if the board members were fit to serve on the board. The trial court rejected the defenses that: the requests were overbroad and not tailored with rifled precision to what is necessary and essential for the stated purpose; no proper purpose was shown; no credible basis was demonstrated to infer wrongdoing; and the stockholder failed to follow the “form and manner” requirements–in part by changing the list of requested documents during the litigation.

          Several stockholders consolidated their demands prior to suit, and 530,000 pages were produced prior to the litigation. Suit was filed in February 2020 based in part on public statements made during an earnings call. Prior to trial, the stockholders were less than forthcoming about whether they would call any witnesses, or which witnesses they would call at trial to establish their proper purpose. The Supreme Court held that the lack of pre-trial transparency by the stockholders deprived the company of the option to depose witnesses to explore the proper purpose issue prior to trial.

The Basics

          Most readers are familiar with the basic Section 220 requirements, but the Court’s review provides a helpful reminder. Some of the prerequisites include:

  • Stockholders must demonstrate by a preponderance of the evidence a credible basis from which the court may “infer possible mismanagement that would warrant further investigation.” Slip op. at 18.
  • The requested documents must be “essential to the accomplishment of the stockholder’s articulated purpose of inspection.” Id.

Key Highlights and Takeaways

  • The Court of Chancery has discretion to trim overly broad requests to craft a production order circumscribed with rifled precision.
  • Although a stockholder may not broaden the scope of their requests throughout the litigation, a Section 220 plaintiff may narrow their requests if they do so in good faith and such narrowing does not prejudice the company.
  • The Court observed that Section 220 cases are “summary proceedings” and such trials do not always include live testimony. Thus, the court reasoned that: “hearsay is admissible in a Section 220 proceeding when the hearsay is sufficiently reliable.” Slip op. at 38.
  • The Court cautioned that Section 220 plaintiffs should not abuse the hearsay exception, and “must be up front about their plans regarding witnesses” in the pre-trial phase of a case. Slip op. at 41. In this case the Court held that the company was deprived of the “ability to test the stockholders’ purpose”, such as through a deposition or otherwise, because the stockholders did not give the company sufficient notice about what they would rely on at trial to establish a proper purpose. Slip op. at 42-43.
  • In dicta, the Court upheld the trial court’s inference made by “connecting the dots” that the credible basis requirement was satisfied based on a combination of: insider stock sales, public statements that may have been false, and concurrent securities litigation supported by ample research. Slip op. at 45.
  • The Court restated the law that the “credible basis threshold may be satisfied by a credible showing, through documents, logic, testimony, or otherwise, that there are legitimate issues of wrongdoing.” Slip op. at 46.

          The concurring opinion of one member of the High Court observed that Section 220 cases often involve the issue of whether the “stated purpose” is the “actual purpose”, which makes the truth of the stockholder’s statements on that point a key issue.  The concurrence also emphasized the importance of the distinction between a proper purpose and the threshold requirement of credible basis–and that a stockholder who is neither an employee nor an officer of a company will rarely have first-had knowledge of wrongdoing, but a typical stockholder “will always have knowledge of her purpose because it is, after all, her purpose.” Slip op. at 54. (emphasis in original).

In Sum

          Although this decision may make it easier in some ways for a stockholder to prove its case in a Section 220 lawsuit, companies still have several tools at their disposal to test the basis for a stockholder’s assertion of a proper purpose and other statutory and court-made prerequisites for a Section 220 demand.

The Standard for Individual Contempt for Corporate Actions

          The Delaware Supreme Court recently had occasion to address the standard to determine when a person who controls an entity—for example, through ownership of all or most of the stock of a corporation—can be personally responsible for contempt of court penalties when the corporation’s actions are in violation of a court order.

          In the matter styled TransPerfect Global Inc. v. Pincus, Del. Supr., No. 154, 2021 (June 1, 2022), Delaware’s highest court reviewed the latest appeal in a long-running bitter battle that entered the Delaware court system in 2014 with a petition under Delaware General Corporation Law Section 226 to appoint a custodian to resolve a deadlock between two co-owners who were formerly engaged to be married and who each held 50% ownership of a translation and litigation-support company. They continued to co-manage their company, in a contentious manner, despite calling off their nuptials.

Procedural Background

          For purposes of this short summary, instead of reviewing the four prior Supreme Court decisions concerning this case, and about a dozen rulings of the Delaware Court of Chancery over almost a decade, as well as several cases filed in a few other states, suffice it to say that the limited aspect of the appeal that this column focuses on is a suit filed by TransPerfect in Nevada that was in violation of an order by the Delaware Court of Chancery requiring all disputes related to this matter to be filed in the Court of Chancery.

          After the appointment of a custodian to break the deadlock, one of the 50% owners bought the other half of the company to become essentially the 100% owner (the “controller”). The controller was not a named plaintiff in the Nevada lawsuit. But the Court of Chancery found the controller in contempt for the company’s filing of that lawsuit, which the trial court held to be a violation of a prior order, as explained in a 135-page opinion by the Court of Chancery.

Key Standards of Contempt Clarified

          Delaware’s High Court began its careful analysis with a recitation of the fundamentals on which a finding of civil contempt is based, with copious footnotes to authorities that describe the prerequisites and the nuances involved in such a “weighty sanction.” Slip op. at 22–23 and footnotes 99–101 and 127.

     A trial court must explain how an individual personally violated a court order to satisfy the standard to hold a person in contempt of a court order. Specifically, there must be evidence in the record that a person who controls a company personally violated a court order, for example by directing a company he or she controls to violate that court order. In this particular appeal, there was no such evidence in the record.

          For clarification and guidance, the Delaware Supreme Court explained that “to find a corporate officer or shareholder in civil contempt of a court order, the trial court must specifically determine that the officer or shareholder bore personal responsibility for the contemptuous conduct.” Slip op. at 33. The court observed that this requirement is consistent with the prerequisite that “when an asserted violation of a court order is the basis for contempt, the party to be sanctioned must be bound by the order, have clear notice of it, and nevertheless violate it in a meaningful way.” Id. at 33–34.

          Although the sanctions for contempt were properly applied to the company, the criteria for imposing penalties for contempt on the controller were not satisfied, based on the appellate record. Therefore, the penalties imposed on the controller for contempt were vacated.

          This decision will be helpful for anyone who needs to determine if a person who controls a company may also be personally liable for actions taken by the company that may violate a court order.

Supreme Court Decides Deadline for Notice of Indemnification Claim

          A recent Delaware Supreme Court decision provides a lesson for drafters of agreements for the sale of a business by providing an example of the problems caused by a lack of clarity in describing a deadline to send notices of claims for indemnification post-closing. To paraphrase a former member of the U.S. Supreme Court, the Delaware Supreme Court is always right when it comes to deciding Delaware law not because the members of the Court are infallible, but rather because they always have the last word.  The reader can decide how that aphorism applies to the decision of a divided court in the matter of North American Leasing v. NASDI HoldingsDel. Supr., No. 192, 2020 (April 11, 2022).

          The court decided three issues in this case. First, whether the Delaware Court of Chancery erred in interpreting an agreement of sale according to the principles of Delaware contract law in connection with determining what the deadline was in the agreement for giving notices of indemnification claims. Second, the court decided whether an affirmative defense of set-off and recoupment was waived. Lastly, the court decided whether it was appropriate for the Court of Chancery not to consider evidence that the total amount of the claims should have been reduced. Three members of the Delaware Supreme Court affirmed the decision of the Court of Chancery, and two dissented from the majority opinion.

Key Background Facts

          This case involved the sale of a company that, among other things, was involved in the construction of bridges. One of the bridge projects underway at the time of the closing on the sale of the business had a bond in place that the seller posted in the approximate amount of $20 million. After the closing, because the buyer decided to discontinue work on the bridge project, the letter of credit was drawn down in the full amount of the bond. The seller sued the buyer setting forth three causes of action: breach of contract regarding an indemnity obligation; equitable subrogation; and a claim for declaratory judgment that the defendants breached their indemnity obligation.

          The Court of Chancery granted summary judgment in favor of the seller and also denied a motion for reargument. In connection with the motion for the entry of the final judgment, the Court of Chancery determined that the affirmative defense of set-off/recoupment was waived because it was not raised in response to the motion for summary judgment, or in the motion for reargument.

Legal Analysis

          The majority decision acknowledged that questions of contract interpretation on appeal are reviewed de novo. Delaware’s high court observed that Delaware law adheres to an objective theory of contracts, which means that the construction of a contract should be “that which would be understood by an objective, reasonable third party.” That theory gives priority to the intentions of the parties reflected in the four corners of the agreement, “construing the agreement as a whole and giving effect to all its provisions.”

          The majority opinion carefully considered the various provisions of the agreement at issue and examined the reasoning of the Court of Chancery which rejected the buyer’s arguments that Section 9.3(a) provided for a deadline which ended before the indemnification claim of the seller arose, which would have rendered the indemnification notice untimely.

          The decision turned in large measure on the reading of one phrase. The majority explained its reasoning for the interpretation of the phrase “but in any event” as introducing an exception to the sentence that followed—not a limitation of the phrase that followed.

          The majority also agreed with the Court of Chancery’s conclusion that the set-off/recoupment defense was waived.  The buyer argued that set-off/recoupment was a defense that pertained to damages, and damages did not need to be briefed in the motion for summary judgment.  Not so, according to those with the last word on the topic, because damages were central to the relief requested in the motion.

Regarding the last issue of damages, the Supreme Court concluded that the Court of Chancery did not err when it did not consider the evidence regarding the reduction of damages because the set-off/recoupment defense was waived.

Dissent

          Notably, both the majority and the dissent agreed on the basic contract principles of Delaware law that applied to this case, although they disagreed on the result after applying those principles to the facts.

          A substantial focus of the dissent was its different interpretation of the phrase “ in any event,” and whether: it applied to all indemnification claims; or it only applied to the “representations and warranties” claims. The majority held that the phrase created an exception, but the dissent explained why in its view the phrase introduced a limiting or qualifying clause. The dissent referred to a dictionary definition for the adjective “any” as meaning “without limitation.” The phrase “in any event” means “no matter when [an event] happens.”

          The dissenters explained that the drafters of the agreement could have used the verb “the” instead of the word “any”—if the drafters wanted to establish an exception to the deadline for sending a notice of claim.

          Moreover, the dissent noted that even if the deadline for the notice of a claim were missed, the seller could still rely on equitable subrogation as a basis for a claim. The dissent added that the availability of that remedy supports the view that an earlier notice deadline would make an indefinite period for indemnification claims unnecessary.

          The dissent included the following memorable quote: “The majority sacrifices the plain meaning of Section 9.3 on the altar of the context of the provision and the contract as a whole.” The dissent concluded by explaining that its view demonstrated more than one reasonable interpretation of the agreement, which is one definition of an ambiguous contract. Therefore, the trial court should not have granted summary judgment and, in the view of the dissenting opinion, should have considered extrinsic evidence.

Supreme Court Splits on Contract Interpretation Issue

          A majority of the Delaware Supreme Court recently ruled that a settlement agreement contained an enforceable obligation to negotiate in good faith with the goal of reaching a separate definitive contract within the parameters outlined in the settlement agreement–although the court recognized that such a contractual obligation did not assume that a definitive agreement would necessarily be reached.

          In Cox Communications, Inc. v. T-Mobile, Inc., Del. Supr., No. 340, 2021 (March 3, 2022), Delaware’s High Court explained both basic principles and sophisticated nuances of Delaware contract law that should be required reading for anyone who needs the know the latest iteration of Delaware law on this topic, especially in the context of preliminary or transitional agreements that contemplate a more comprehensive second-stage agreement.

Why This Decision Is Noteworthy:

          A common situation where familiarity with this decision will be required is when a lawsuit is settled after a long day of mediation and basic terms are signed while all the parties are present, or otherwise available, to confirm the terms of a settlement–but a more complete, formal agreement is contemplated. One lesson that this decision teaches is to make certain that the abbreviated memorialization of essential terms is expressly stated to be enforceable, in the event a more formal, comprehensive agreement is never finalized. This, of course, applies beyond settlement agreements–for example, in the context of any deal where essential terms are agreed upon before a more comprehensive, formal agreement is completed (assuming the parties may want to enforce those essential terms, which may not always be the case.)

Key issue:

          The expedited appeal in this case turned on the interpretation of a single provision in a settlement agreement and whether it should be construed as either: (i) an unenforceable “agreement to agree”, or (ii) an enforceable “Type II preliminary agreement” requiring the parties to negotiate in good faith.

Basic Background Facts

          Cox and Sprint signed a settlement agreement in 2017 that resolved litigation between the parties. T-Mobile later purchased Sprint. Section 9(e) of that settlement agreement contained a sentence that was the crux of the dispute over contract interpretation that the Court decided. The disputed provision provided that:

          “Before Cox or one of its Affiliates (the “Cox Wireless Affiliate”), begins providing Wireless Mobile Service (as defined below), the Cox Wireless Affiliate will enter into a definitive MVNO agreement with a Sprint Affiliate (the “Sprint MVNO Affiliate”) identifying the Sprint MVNO Affiliate as a “Preferred Provider” of the Wireless Mobile Service for the Cox Wireless Affiliate, on terms to be mutually agreed upon           between the parties for an initial period of 36 months (the “Initial Term”).”

          T-Mobile, as the successor to Sprint’s rights in the settlement agreement, argued that the above language required Cox to enter into an agreement with it for a term of 36 months before it could provide wireless services with any other carrier. On the other hand, Cox read the above provision to merely require it to negotiate in good faith to “try” to reach an agreement. The Court of Chancery agreed with T-Mobile’s view of the provision. The Supreme Court did not.

Basic Principles and Nuances of Delaware Contract Law Underscored

  • Delaware adheres to an objective theory of contracts. See footnotes 47-48.
  • Extrinsic evidence is only considered if the text is ambiguous. n.49.
  • A contract provision is “not rendered ambiguous simply because the parties in litigation differ as to the proper interpretation.” n.51.
  • When a provision “leaves material terms open to future negotiations” as the High Court found Section 9(e) did, it is “a paradigmatic Type II agreement” of the kind we recognized in SIGA v. PharmAthene. n.52. (That Supreme Court decision and related decisions were highlighted on these pages.)
  • Unlike the old, superseded view that an incomplete agreement was not enforceable, Delaware recognizes that “parties may make an agreement to make a contract…if the agreement specifies all the material and essential terms including those to be incorporated in the future contracts.” n.53.
  • Delaware recognizes two types of enforceable preliminary agreements: Type I and Type II.
  • Type I agreements reflect a “consensus on all the points that require negotiation” but indicate the mutual desire to memorialize the pact in a more formal document. n.55. Type I agreements are fully binding.
  • Type II agreements exist when the parties “agree on certain major terms, but leave other terms open for future negotiation.” n.56 Type II agreements “do not commit the parties to their ultimate contractual objective but rather to the obligation to negotiate the open issues in good faith.” n.57.

Selected Excerpts of Court’s Reasoning

  • The Supreme Court read Section 9(e) to leave open a number of essential terms, such as price, which barred it from being categorized as a Type I agreement. n.60. That is, it specifically contemplates a future “definitive” agreement and provides that open terms will be “mutually agreed upon between the parties”–though it is not completely open-ended. 
  • Practice note:  If the parties want a settlement agreement to be a Type I binding agreement–as compared to an agreement to negotiate in good faith–a fair observation based on the Court’s decision in this case is to avoid the reference to a future “definitive” agreement, and make sure to include essential terms such as price.
  • Type II agreements do not guarantee the parties will reach agreement on a final contract because “good faith differences in the negotiation of the open issues may preclude final agreement.” n.63
  • The provision at issue in this case did not include a promise to do anything other than negotiate in good faith–which is where the Supreme Court parted ways with the Court of Chancery’s post-trial ruling. See also n.71 (explanation of why the majority  parted ways with the dissenting justices in this case, and did not think it was necessary to address extrinsic evidence.)
  • The Court’s reasoning including diagramming of the sentence in the disputed provision to parse the syntax and structure of the language at issue, by identifying the single subject, single verb, and singled object–as well as which clause modified the predicate and which clause modified the object.
  • The quality or quantify of consideration in a contract should not be second-guessed. n.86. Moreover: “obligations to negotiate in good faith” are recognized in Delaware as “not worthless”. n.81.

Postscript: A candid observation that reasonable people can differ on these contract issues is buttressed by the fact that the brightest legal minds in Delaware who decide what the law is in Delaware were not unanimous in their view of the law as applied to the facts of this case. That is, three members of the Delaware Supreme Court saw it one way, two members of that High Court saw it another way, and a member of the Court of Chancery arguably viewed the law as applied to the facts of this case in a third way.

Supreme Court Decides Important Contract Dispute in Sale of Business

          The recent Delaware Supreme Court decision in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021), has already been the subject of many articles in the few days since it was released because it is the first definitive pronouncement by Delaware’s High Court on the breach of what is known as an “ordinary course covenant” in connection with how a business is managed between the date an agreement of sale is signed and the date of closing. The Supreme Court affirmed the Court of Chancery’s decision, 2020 WL 7024929 (Del. Ch., Nov. 30, 2020), that the Seller breached its covenant that it would not deviate from how the business was typically run–without the Buyer’s consent–notwithstanding the intervening worldwide pandemic.

          Although I typically eschew highlights of decisions such as this one that have already been the focus of widespread analysis in legal publications, this decision has such widespread applicability to basic contract disputes, in addition to the sale of businesses, that I decided to provide a few pithy observations. I encourage readers to also read the copious commentary published by many others on this case that provides more detailed background facts and thorough insights.

Basic Facts

          The basic facts involved the sale of 15 hotel properties for $5.8 billion. In response to the pandemic and without the Buyer’s consent, the Seller made drastic changes to its hotel operations. The transaction also featured fraudulent deeds for some of the hotel properties. The lengthy Court of Chancery opinion provided extensive details about what the court regarded as active concealment or failure to disclose that fraud by the Seller’s law firm. The Supreme Court’s opinion references the failure to disclose the fraud, and repeats the Court of Chancery’s findings on that aspect of the case–that could be the topic for a separate article–but the High Court’s decision focuses on the impact of the violation of the ordinary course covenant as a sufficient basis to uphold Chancery’s decision. Among the changes made by the Seller without the Buyer’s approval (which could not have been unreasonably withheld) were the closure of two hotels, thirteen hotels “closed but open”, and the layoff or furlough of over 5,200 full-time-equivalent employees.

Highlights of Court’s Analysis 

  • The Court explained that an ordinary course covenant “in general prevents sellers from taking any actions that materially change the nature or quality of the business that is being purchased, whether or not those changes were related to misconduct.” See Slip op. at 25 and n. 42.
  • The agreement did not refer to what was ordinary in the industry in which the Seller operated. Rather, the ordinary course language referred only to the Seller’s operation in the ordinary course–and consistent with past practice in all material respects measured by its own operational history. Slip op. at 27 and n. 55-56.
  • The covenant did not have a reasonable efforts qualifier–although other parts of the agreement did. If the agreement referred to industry standards, it would be more akin to a commercially reasonable efforts provision, which it was not. Slip op. at 28 and n. 58
  • The High Court rejected the Seller’s reliance on FleetBoston Financial Corp. v. Advanta Corp., 2003 WL 240885 (Del. Ch. Jan. 22, 2003), as inapposite, but instead the Court relied on a Chancery decision interpreting an ordinary course covenant in Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2014 WL 5654305 (Del. Ch. Oct. 31, 2014).
  • The Supreme Court affirmed Chancery’s reasoning that the drastic actions taken in response to the pandemic were both inconsistent with past practices and far from ordinary. Although the Seller could have timely sought the Buyer’s approval before making drastic changes in response to the pandemic, it did not. Having failed to do so, the Seller breached the ordinary course covenant and excused the Buyer from closing. Slip op. at 33.
  • The MAE provision in the agreement was written differently and had to be interpreted differently, and independently, from the ordinary course covenant, because, for example, it did not restrict a breach of the ordinary course covenant to events that would qualify as an MAE. The parties knew how to provide for such a limitation, as they did elsewhere, but they did not do so in the ordinary course covenant. Slip op. at 34.

SELECTED CHANCERY COURT DECISIONS

Chancery Examines Equitable Defenses and Restrictions on Transfer of LLC Interests

          The Delaware Court of Chancery’s recent opinion in XRI Investment Holdings LLC v. Holifield, No. 2021-0619-JTL (Del. Ch. Sept. 19, 2022), should be included in the pantheon of consequential Delaware Chancery opinions and will remain noteworthy for many reasons that deserve to be the subject of a law review article, but for purposes of this short review, I only intend to highlight a few of the many gems in this 154-page magnum opus with the most widespread applicability to those engaged in Delaware corporate and commercial litigation.

Brief Background

          The background facts are described in the first 50 pages or so of the opinion, but for purposes of this high-level short overview, this case involved a disputed transfer of interests in an LLC that were alleged to be in violation of the transfer restrictions in the LLC Agreement.  The membership interests were used as security for a loan, and upon default the membership interests were foreclosed upon in an inequitable manner.

Key Points

          This opinion engages in a deep and comprehensive analysis regarding the historical foundation of equitable defenses and their applicability to claims that are not the type of traditional claims pursued in a court of equity, as well as other key aspects of Delaware Law, including a discussion of:

  • The Step-Transaction Doctrine and when a series of transactions will be treated as a unitary whole.
  • Void and voidable transactions–and when an act will be treated as void ab initio, in which event it generally cannot be cured or defended against.
  • Equitable Defenses: Some, such as laches, can only be asserted as defenses to equitable claims–but other equitable defenses, such as acquiescence, are available to defend against both equitable and legal claims. This holding by the Court is contrary to a “smattering of recent decisions” in Chancery that did not fully address “nuances that permeate this area of the law”.
  • This decision attempts to bring more harmony and cohesiveness to that “smattering of recent decisions”.
  • The Court examines in extensive depth the somewhat ancient historical origins of the courts of equity, and the claims and defenses permitted in those courts.
  • The always useful fundamentals of contract interpretation are reviewed as well. See pages 45-47
  • The Court addresses the distinction between: (i) a “right tied to an ownership interest in an entity” and (ii) “the right to whatever cash that interest might generate once it reaches a particular person’s pocket”. See footnote 25. Also cited in the footnote is the recent Supreme Court opinion in Protech Minerals Inc. v. Dugout Team LLC, 288, 2021 (Del. Sept 2, 2022), and the important need to distinguish between the above two concepts.
  • Although the Court of Chancery faithfully (but maybe reluctantly) follows the Supreme Court’s precedent in CompoSecure LLC v. Card UX, LLC, No. 177, 2018 (Del. Nov 7, 2018), regarding void transactions, in dictum the opinion encourages the Supreme Court to reconsider its decision in CompoSecure. A polite list of reasons is offered for why Delaware’s high court should reconsider that precedent, in part because it prevented the trial court in this case from avoiding an inequitable result–and because there is a need to harmonize several areas of Delaware law at issue in this case. See page 111.
  • For example, current Supreme Court precedent allows parties to an agreement to declare certain acts as void–not voidable–and this current ability to “contract out” of equitable review and prevent a court of equity from applying its traditional equitable powers and remedies, deserves (reasoned this opinion respectfully), to be revisited.
  • Among the multi-faceted aspects of the opinion’s rationale for encouraging the  Delaware Supreme Court to reconsider its CompoSecure opinion, this opinion cites to basic contract principles under the common law that considered some contracts as void ab initio if they were violative of public policy. See footnotes 58 to 62 and related text. See also footnotes 65 to 68 regarding the aspects of corporate charters and bylaws that are subject to the limitations of the DGCL because corporations are creatures of the state.
  • This Court of Chancery decision importantly notes that the Delaware LLC Act recognizes that principles of equity apply in the LLC context. See footnote 96. (Cue: the “maxims of equity”.)
  • Even though the Court of Chancery held that its holding was “contrary to the equities of the case”, it held that the result was controlled by precedent–that should be revisited.

Chancery Addresses Fiduciary Duties of Corporate Officer

          The Delaware Court of Chancery recently published a post-trial decision involving the officer of a company who breached his fiduciary duties by, among other things, competing against the company for which he served as president. Metro Stores International LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. May 4, 2022), is a 128-page opinion that warrants a plenary review, but for purposes of this short review I am only highlighting a few gems of Delaware corporate and commercial law that every Delaware litigator should know.

Brief Overview

          The first 34 pages or so of the opinion describe in extensive detail the factual background. A basic outline of the facts includes an existing U.S. company that was a large player in the self-storage facility business.  They brought on a person who was assigned the job of growing the business in Brazil.  The court’s decision goes into great detail about how this person, in his capacity as president of the LLC that was responsible for the business in Brazil, in violation of his contractual and fiduciary duties, competed against the company and took confidential information from the company when he left.

Selected Key Principles of Delaware Law

  • The Court reviewed the elements that must be established in order to successfully pursue a breach of fiduciary duty claim, with a special emphasis on such a claim against the officer of a company, as compared to a director. Slip op. at 36-39.
  • The opinion describes the three potential levels of review that the court uses to determine if a fiduciary duty was breached. In this case, the court determined that the “entire fairness standard” applied.
  • The court explained that the state of the law in Delaware regarding the analysis of the duty of care of an officer applies the “Director Model”. Slip op. at 40–47.
  • The court highlighted the important difference between the provisions in an LLC Agreement that:

                     (i)  waive or limit the scope of fiduciary duties – – as compared                       with;

                     (ii)  an exculpation cause which merely limits liability for certain                             actions.  Slip op. at 47–48.

  • Notably, a clause limiting liability for certain actions does not limit fiduciary duties–and would merely bar money damages but not other potential remedies.
  • In an extensive footnote, the court explains that an officer is an agent of the company, and like all agents is a fiduciary–but not all fiduciaries are agents. See footnote 18.
  • The court expounded on the duty of loyalty and its various nuances. Slip op. at 40.
  • The court also described in great detail the duty of disclosure that an agent has. Slip op. at 55–57.
  • The court explained the very useful distinction between behavior that could be either a breach of contract and/or a breach of fiduciary duty – – and when both claims may proceed in the same case to the extent that they are not overlapping.
  • The court found that the unauthorized access to the former employer’s computer system, without authority, was not only a breach of confidentiality obligations but also a breach of a federal statute called the Stored Communications Act.  Slip op. at 120–122.
  • In particular, the court found that the federal statute involved, the Stored Communications Act, was violated because the former officer accessed an electronic communication while it was being stored, by either intentionally accessing the computer system without authorization or exceeding his authorization.  See 18 U. S. C. §2701.

Chancery Addresses Claims of Excessive Executive Compensation

          In the Delaware Court of Chancery opinion styled: Knight v. Miller, C.A. No. 2021-0581-SG (Del. Ch. April 27, 2022), the court described this case as “. . . another bloom on the hardy perennial of director compensation litigation.”  Slip op. at 2.

          The court granted some parts of a motion to dismiss, but allowed other claims to proceed based on the application of the entire fairness standard and the difficulty in securing a dismissal of claims at the initial pleadings stage when that fact-intensive standard applies, for example, when, as here, stock option awards are challenged.

Another Memorable Quote

          The opinion begins with the following eminently quotable truisms of Delaware corporate law that aptly describe how the court reviewed the allegations in this case:

          “The oft-noted fact that corporate actions are ‘twice-tested’–first in light of compliance with the DGCL, second for compliance with fiduciary duties–is neatly illustrated by directors’ actions to set their  own compensation.  Those actions are clearly authorized by statute, and just as clearly an act of self-dealing, subject to entire fairness review.”

          Slip op. at 2.

Highlights

          This case involved a challenge to the award of stock options to members of the board of directors, some of whom are considered to be controllers and insiders.

          The court noted that Section 141(h) of the Delaware General Corporation Law authorized the board to “fix the compensation of directors.”  The board in this case was implementing a stock incentive plan that vested the compensation committee with authority to award stock options in its discretion.

          The court began its consideration of the claims by describing the causes of action as requiring a “somewhat convoluted analysis” as the challenge to the stock awards implicates different standards of review for different grants.  Slip op. at 16.  Thus, the court reviewed the claims in three categories:

          (i) whether the Compensation Committee acted in bad faith as an        independent breach of fiduciary duty for granting the awards;

          (ii) alleged breach of the duty of loyalty for granting the awards generally; and

          (iii) alleged breach of the duty of loyalty for accepting the awarded stock      options.

          The court rejected the bad faith claims, and instructed that: “Bad faith is one of the hardest corporate claims to maintain.” Slip op. at 18. This version of a breach of the duty of loyalty claim typically is made when a plaintiff cannot establish lack of independence or lack of disinterestedness.

          Notably, the court observed that because the stock options were granted to individuals in “varying factual postures”:  “. . . different standards of review will apply to the Compensation Committee Defendants’ choices in making the grants.  As in nearly all pleadings stage challenges to the viability of a breach of fiduciary duty claim in the corporate context, deciding the standard of review will be outcome determinative.”  Slip op. at 20-21.

When Entire Fairness Standard of Review Applies–Absent an Exception

          Because the decision by directors to determine their own compensation is necessarily self-interested, even when done pursuant to a pre-existing equity incentive plan, such decisions are subject to the entire fairness standard of review, “unless a fully informed, uncoerced, and disinterested majority of stockholders has approved the compensation decisions and therefore ratified them.” Slip op. at 21 (citing In re Investors Bank Corp., Inc. S’holder Litig., 177 A.3d 1208).

Standard for Awards to Controllers

          The court explained that even if a controller of a company, such as a majority stockholder, is not actually a member of the compensation committee, the entire fairness standard still applies to compensation granted to a controller: “Because the underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny.  The underlying risk is that the independent committee members who pass upon a transaction in question- -here the granting of equity awards- -might perceive that disapproval may result in retaliation by the controlling stockholder.”  Slip op. at 20-21.  This principle applies equally to outside directors as decisionmakers, given the controlling stockholder’s ability to elect directors.  Slip op. at 26-27.

Nascent Standard of Review–When Accepting Compensation is Allegedly “Clearly Improper”

          The court acknowledged that the standard of review for breach of fiduciary duty claims in connection with accepting compensation is “nascent in its development.”  Slip op. at 32.  With over 200 years of decisions in the Delaware Court of Chancery about fiduciary duty, it’s surprising that any aspect of caselaw about fiduciary duties is “nascent,” but so it is.

          The court discussed this aspect of the case by beginning with the definition of the duty of loyalty.  Slip op. at 29-30. The plaintiff conceded that there is a relative lack of caselaw defining what might constitute “clearly improper” to the extent that it might be a breach of fiduciary duty to accept compensation that is clearly improper.  The court found that even though the caselaw is not well developed on this issue, courts have found actions for breach of fiduciary duty for accepting compensation to survive a motion to dismiss when two factors are present:  (1) the compensation award was ultra vires, and the recipients knew it, or (2) where compensation was repriced advantageously in light of confidential and sensitive business information which the recipients knew, and which they accordingly used to the company’s detriment.

Standard for Accepting “Clearly Improper” Compensation

          The court  acknowledged that : “The ‘clearly improper’ standard, if standard it is, is nascent in its development”. Then the court asked the question: “What is the standard that must be applied to the facts when considering whether such a breach of duty has been plead?”  The court concluded that:

What is required is defendant’s knowingly wrongful acceptance of compensation, and the standard must be bad faith.  That is, there must be sufficient pleading of scienter to support a bad faith claim, which serves as a claim based on breach of the duty of loyalty.  But, as discussed above, there is an insufficient record to sustain even a claim that the Compensation Committee Defendants making the awards acted in bad faith, much less that the recipients’ acceptance violated that standard. 

          All that is alleged is that option awards were made at what proved to be      the bottom of the market.

Slip op. at 32

          Therefore, the court granted the motion to dismiss with respect to the cause of action alleging breach of fiduciary duty by all defendants for accepting the March 2020 awards.  The court distinguished Howlan v. Kumar, 2019 WL 2479738 (Del. Ch. June 13, 2019) and Pfeiffer v. Leedle, 2013 WL 5988416 (Del. Ch. Nov. 8, 2013).  Unlike the Howlan case, the instant case does not plead nonpublic facts known to the company and the defendants that give rise to an inference of “clearly improper” compensation.  Unlike Pfeiffer, there is no allegation that the awards violate the stock incentive plan, let alone that the defendants were aware of the same.

          The court also noted that the claim against the Compensation Committee Defendants for accepting the self-dealing awards merged with the breach of duty claim against the Compensation Committee Defendants for making the awards.

Waste Claims Dismissed

          The court dismissed the corporate waste claims because in order to constitute waste, the grants must have been “without business purpose” but that cause of action was insufficiently plead.

Stock Incentive Plan Not Self-Executing

          Regarding the grant of stock options to outside director defendants, the court explained that there are other cases such as Kerbs v. California Eastern Airwaves, 90 A.2d 653 (Del. 1952), which involved a self-executing stockholder-approved plan where the equity incentive plan listed grants of unissued stock in specific amounts to named executives based on the mathematical formula which left no room for discretionary decisions by the directors.  No such formula constrained the directors in this case.

Key Point–Difficult to Win Motion to Dismiss When Entire Fairness Standard Applies

          The court instructed that when entire fairness is the applicable standard of review, dismissal of a complaint under a Rule 12(b)(6) motion is usually precluded because:  “A determination of whether the defendant has met its burden will normally be impossible by examining only the documents the court is free to consider on a motion to dismiss.”

          Although the court listed at footnote 102 the many other cases that have followed this approach–it also acknowledged at footnote 103 a few cases that have granted motions to dismiss, but “generally where a plan has failed to allege any evidence of unfair process or price.”

          The court found that the facts in this case were sufficient to raise a reasonably conceivable inference of an unfair transaction–but the finding does not preclude the Compensation Committee Defendants from establishing that the awards were entirely fair.

          The court observed that it would allow the claims against the outside directors to proceed even though it found that: the facts alleged in this case were “not overwhelming.”  Slip op. at 21-25.

Standard Applicable to Officer Defendants

          The third standard applied was to officer defendants and the court determined that the standard of review applicable to officer defendants was the business judgment rule unless the plaintiff pleads:  (1) Facts from which it may be reasonably inferred that the board or compensation committee lacked independence (for example, if they were dominated or controlled by the individual receiving the compensation); or (2) Facts from which it may be reasonably inferred that the board or compensation committee, while independent, nevertheless lacked good faith in making the award.

          The court found that the Compensation Committee Defendants did not act in bad faith in making the awards, and plaintiff did not plead facts relating to the lack of independence by the Compensation Committee for purposes of making the compensation awards.  Although the business judgment rule can be dislodged by the successful pleading of corporate waste, the court explained why that was not successfully plead here.  Therefore the motion to dismiss this claim with respect to the officer defendants was granted.

The author of this overview was co-counsel for all the defendants–and the intent of this short discussion was to provide objective highlights without any advocacy of any party’s position.

Irrevocable Proxy Too Ambiguous to Enforce

          In the Chancery decision of Hawkins v. Daniel, C.A. No. 2021-0453-JTL (Del. Ch. April 4, 2022), the court found that an irrevocable proxy was ambiguous and it did not state that it would “run with the shares” based on the “special principles of contract interpretation” applicable to proxy agreements.  This 85-page opinion needs to be read by anyone who wants to know the latest Delaware law on enforceability of proxies.

Court Allows Claims to Proceed Against Buyer Whose Payment to Seller for the Purchase of Company Stock Was Hacked–and Never Received

          In the case styled:  Sorenson Impact Foundation v. Continental Stock Transfer & Trust Co., C.A. No. 2021-0413-SG (Del. Ch. April 1, 2022), the Delaware Court of Chancery denied a motion to dismiss filed by former stockholders of an acquired company who did not receive the proceeds from the sale of their shares in their company because the wire transfer from the buyer to them for the purchase of their shares was hacked.  An intermediary transfer agent was used to disburse the funds and transfer the stock.

          This, of course, is a nightmarish situation that anyone who expects to receive wired funds wants to avoid. For a graphic display of the various parties involved and at what point the hacking occurred, a chart appears as an exhibit attached to the last page of the opinion linked above.

Chancery Declares Delaware a “Pro-Sandbagging” State

          In a recent Delaware Court of Chancery decision that addressed claims of breach of contract and fraud in connection with the sale of a business, the Court announced that Delaware law allows for sandbagging, which can be described as allowing a buyer of a business to sue for breach of a representation made in an agreement for the sale of a business even if the buyer knew that the representation was false–before closing–and when the agreement was signed.

          In Arwood v. AW Site Services, LLC, C.A. No. 2019-0904-JRS (Del. Ch. Mar. 9, 2022), while acknowledging that the Delaware Supreme Court has not definitively ruled on this issue, the Court of Chancery expressed confidence in stating that Delaware is a “pro-sandbagging state” for purposes of allowing a buyer to bring claims for breach of contractual representations in an agreement against a seller of a business even if the buyer were aware of the claim prior to closing–and at the time that the buyer signed the agreement of sale.

          This decision is consequential and noteworthy for the foregoing highlights alone, but there are also other notable aspects of this 113-page opinion that make it worth reading in its entirety.  For purposes of this short blog post, I will only provide a few bullet points.

Additional Selected Highlights

  • The Court defined sandbagging as referring colloquially to “the practice of asserting a claim based on a representation despite having had reason to suspect it was inaccurate.” See footnote 267 and related text.  The Court also explained sandbagging as “generally understood to mean to misrepresent or conceal one’s true intent, position, or potential in order to take advantage of an opponent.”  See Slip op. at 71.  See also footnotes 270-274 and accompanying text describing the etymology of the word and public policy issues implicated by the Court’s position.
  • The Court also observed that the parties are free to draft contract provisions to avoid sandbagging claims. See footnote 290 and accompanying text.
  • This ruling also instructed that a fraud claim in Delaware is the same as a claim for fraudulent inducement. Slip op. at 50.
  • In this lengthy opinion the Court chronicles in much detail the history of the deal from the first meeting of the buyer and seller through various iterations of the letter of intent, as well as through the extraordinary and unfettered access given to the buyer during the due diligence period (that helped to defeat a fraud claim), and that may serve as a cautionary tale for drafters of agreements of sale.
  • This decision also features extensive analysis and commentary regarding the competing expert reports on damages, and why the Court relied more on one expert as compared to the other.

Chancery Decision Addresses Advancement Issues

            The Delaware Court of Chancery decision in Krauss v. 180 Life Sciences Corp., C.A. No. 2021-0714-LWW (Del. Ch. Mar. 7, 2022), addressed nuances of advancement law that will be useful to those who labor in the field of corporate litigation dealing with these issues that are crucial to officers and directors.

          The key points of law that makes this decision blogworthy are twofold: (i) it serves as a reminder that some compulsory counterclaims may be eligible for advancement; and (ii) it reinforces the longstanding interpretation in Delaware of the phrase that serves as a prerequisite to providing advancement, with an origin in § 145 of the Delaware General Corporation Law, and which was used in the provision of the Bylaws at issue in this case–namely, whether the person seeking advancement was sued “by reason of the fact” that she was an officer.

          Advancement has been a frequent topic of commentary on these pages over the last 17 years, and has been the subject of many articles and book chapters published by this writer.

Background:

          Unlike the corporate charter involved in this case, the advancement provision in the Bylaws of the company involved did not require board approval for advancement to be given for certain types of proceedings.

Highlights:

          Perennially, one of the more common defenses to a claim for advancement, and often the least successful argument–as in this case–is whether the prerequisite to the provision for advancement in the Bylaws was triggered to the extent that the litigation for which advancement was sought was prosecuted: “by reason of the fact that . . . [the plaintiff] is or was a director or officer of the company.”  See Slip op. at 8-9 and n.32.

          As the Court explained, the foregoing phrase is broadly interpreted by Delaware courts, and many published decisions have explained in many different ways why it is very easy to satisfy that condition of advancement, despite may failed attempts by companies to use it as a defense.  See Id. at 9-10.  See also footnotes 32-37.

          Also noteworthy in this case is the reminder that the court will not typically make a determination at the advancement stage about an allocation between legal fees that must be advanced–and intertwined claims in the same case that are not subject to advancement.  But rather, the parties should follow the procedure in the Danenberg v. Fitracks  decision to make advancement payments based on the good faith allocation of the parties, and a final allocation will be made at the end of the case.  See Slip op. at 12 and footnotes 44-45.

          Another noteworthy aspect of this case is the reminder that compulsory counterclaims are covered by the right to advancement when asserted to defeat or offset an underlying claim that is subject to advancement.  See Slip op. at 20 and footnote 74-81.

Chancery Ruling Underscores Basics of Stockholder Right to Demand Corporate Records under DGCL Section 220

          A Delaware Court of Chancery ruling in Wagner v. Tesla, Inc., C.A. No. 2021-1090-JTL, transcript ruling (Del. Ch. Jan. 19, 2022), has sharpened the “tools at hand” that the Delaware courts have long exhorted corporate litigators to use before filing a plenary lawsuit–namely, DGCL § 220, which is the basis for the right of stockholders to sue for corporate records.

          Readers of these pages since the 2005 launch of this blog will be forgiven if they have grown weary of the multitude of Delaware decisions on DGCL § 220 highlighted on these pages, chronicling the often long-suffering stockholders who attempt to use the frequently blunt tools at hand.

          But the recent Chancery ruling in Wagner v. Tesla, Inc. provides hope to those who would like § 220 to be a sharper tool for seeking corporate records than it sometimes seems to be.

          There are four especially noteworthy takeaways in this gem of a transcript ruling, in the context of a decision on a motion to expedite:

  • A reminder that § 220 complaints should be given a trial date within 90 days of the complaint being filed. The court eschews dispositive motions and other procedural obstacles to a quick trial date.  A trial date in this case was provided in about 90 days or so from the filing of the complaint, despite protestations by the company, addressed below. 
  • The court explained that it was a mistake for companies to defend § 220 cases on the merits of a potential underlying claim for several reasons, including that a stockholder does not need to demonstrate an “actionable claim”–but rather only needs to demonstrate a credible basis. See generally AmerisourceBergen Supreme Court decision highlighted on these pages. 
  • Because a stockholder only needs to show a credible basis and does not need to prove that it has an actionable claim, if a company does not want to “air dirty laundry” then they should not defend § 220 cases by addressing the merits of a potential underlying claim that might be brought in a later plenary action. Likewise, it was no defense in this case to seeking a trial in 90 days that the company had a federal securities trial scheduled across the country during a similar time period because a § 220 case should not be viewed as having any material impact on a plenary trial on actionable claims.[1] 
  • A defense that the court did not squarely address, but did not allow to be used as a bar to holding a prompt § 220 trial, was that the plaintiff in this case only held “fractional shares,” although the court did provide some dicta on that issue. See generally In re Camping World Holdings, IncStockholder Derivative Litigation, C.A. No. 2019-0179 (consol.), memo op. (Del. Ch. Jan. 31, 2022)(An unrelated § 220 case also considering a motion to expedite, but deferring ruling on the argument that the plaintiff lacks standing because he only owned a fractional share of stock.)

[1] The court noted that at the time of the hearing on the motion to expedite in this case, Tesla had the largest market cap in the world and had capable lawyers to handle litigation of both cases with trials in close proximity to each other.

Supplement: A few hours after this post was written, I received in the mail a law review article that discussed the consequential Section 220 decision in Woods v. Sahara Enterprises, Inc., highlighted on these pages, and the author of that article kindly quoted from my blog post on that Sahara case. See Clifford R. Wood, Jr., Note, Knowing your Rights: Stockholder Demands to Inspect Corporate Books and Records Following Woods v. Sahara Enterprises, Inc., 46 Del. J. Corp L. 45, 52. (2021)The same article also cited to a law review article I co-wrote on Section 220. Id. at 46.

______________________________________________________________________________

*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith, LLP. His email address is Francis.Pileggi@LewisBrisbois.com. He comments on key corporate and commercial decisions, and legal ethics topics, at www.delawarelitigation.com

**Sean M. Brennecke is a partner in the Delaware office of Lewis Brisbois Bisgaard & Smith, LLP. His email address is Sean.Brennecke@Le

The recent Delaware Supreme Court decision in AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021), has already been the subject of many articles in the few days since it was released because it is the first definitive pronouncement by Delaware’s High Court on the breach of what is known as an “ordinary course covenant” in connection with how a business is managed between the date an agreement of sale is signed and the date of closing. The Supreme Court affirmed the Court of Chancery’s decision, 2020 WL 7024929 (Del. Ch., Nov. 30, 2020), that the Seller breached its covenant that it would not deviate from how the business was typically run–without the Buyer’s consent–notwithstanding the intervening worldwide pandemic.

Although I typically eschew highlights of decisions such as this one that have already been the focus of widespread analysis in legal publications, this decision has such widespread applicability to basic contract disputes, in addition to the sale of businesses, that I decided to provide a few pithy observations. I encourage readers to also read the copious commentary published by many others on this case that provides more detailed background facts and thorough insights.

Basic Facts

The basic facts involved the sale of 15 hotel properties for $5.8 billion. In response to the pandemic and without the Buyer’s consent, the Seller made drastic changes to its hotel operations. The transaction also featured fraudulent deeds for some of the hotel properties. The lengthy Court of Chancery opinion provided extensive details about what the court regarded as active concealment or failure to disclose that fraud by the Seller’s law firm. The Supreme Court’s opinion references the failure to disclose the fraud, and repeats the Court of Chancery’s findings on that aspect of the case–that could be the topic for a separate article–but the High Court’s decision focuses on the impact of the violation of the ordinary course covenant as a sufficient basis to uphold Chancery’s decision. Among the changes made by the Seller without the Buyer’s approval (which could not have been unreasonably withheld) were the closure of two hotels, thirteen hotels “closed but open”, and the layoff or furlough of over 5,200 full-time-equivalent employees.

Highlights of Court’s Analysis 

  • The Court explained that an ordinary course covenant “in general prevents sellers from taking any actions that materially change the nature or quality of the business that is being purchased, whether or not those changes were related to misconduct.” See Slip op. at 25 and n. 42.
  • The agreement did not refer to what was ordinary in the industry in which the Seller operated. Rather, the ordinary course language referred only to the Seller’s operation in the ordinary course–and consistent with past practice in all material respects measured by its own operational history. Slip op. at 27 and n. 55-56.
  • Nor did the covenant have a reasonable efforts qualifier–although other parts of the agreement did. If the agreement referred to industry standards, it would be more akin to a commercially reasonable efforts provision, which it was not. Slip op. at 28 and n. 58
  • The High Court rejected the Seller’s reliance on FleetBoston Financial Corp. v. Advanta Corp., 2003 WL 240885 (Del. Ch. Jan. 22, 2003), as inapposite, but instead the Court relied on a Chancery decision interpreting an ordinary course covenant in Cooper Tire & Rubber Co. v. Apollo (Mauritius) Holdings Pvt. Ltd., 2014 WL 5654305 (Del. Ch. Oct. 31, 2014).
  • The Supreme Court affirmed Chancery’s reasoning that the drastic actions taken in response to the pandemic were both inconsistent with past practices and far from ordinary. Although the Seller could have timely sought the Buyer’s approval before making drastic changes in response to the pandemic, it did not. Having failed to do so, the Seller breached the ordinary course covenant and excused the Buyer from closing. Slip op. at 33.
  • The MAE provision in the agreement was written differently and had to be interpreted differently, and independently, from the ordinary course covenant, because, for example, it did not restrict a breach of the ordinary course covenant to events that would qualify as an MAE. The parties knew how to provide for such a limitation, as they did elsewhere, but they did not do so in the ordinary course covenant. Slip op. at 34.

Postscript: We are grateful to Prof. Bainbridge for sharing this post on LinkedIn. 

In the case of Snow Phipps Group LLC v. KCAKE Acquisition, Inc., C.A. No. 2020-0282-KSJM (Del. Ch. April 30, 2021, modified  June  2021), the court reviewed a topic of importance in deal litigation and one that has been the subject of many blog posts on these pages: an analysis of when reasonable best efforts or commercially reasonable efforts, which are deemed equivalent standards, have been satisfied.  This decision found that reasonable best efforts were satisfied in the context of obtaining financing–and found no MAE in the context of the pandemic. Also notable in this decision is the discussion of the “prevention doctrine.”

This 125-page decision, authored by newly-appointed Chancellor Kathaleen St. J. McCormick while she was still a Vice Chancellor, has already been the subject of much commentary by practitioners and others. See, e.g., the overview that appeared on Harvard Law School’s Corporate Governance Blog (on which yours truly has published multiple articles in the past.)  In part because I prefer not to duplicate extensive existing commentary, I simply want to highlight a few key issues addressed in the opinion that have widespread applicability to corporate and commercial litigators.

A prior Chancery decision in AB Stable VIII LLC v. Maps Hotels and Resorts One LLC (Del. Ch. Nov. 30, 2020), was another magnum opus of epic length that addressed similar issues, such as reasonable best efforts, and similarly did not find an MAE in the context of the pandemic.

Over the last 14 years that I have published this blog, I have compiled an annual review with a list of key Delaware corporate and commercial decisions that have widespread utility to practitioners, especially those court decisions that are not widely covered by other legal publications or the mainstream press. On a few occasions, I have prepared a mid-year review. This is one of those years.

A few weeks ago, I prepared highlights of key decisions published over the last 6 months or so (and in some instances a little beyond that period), for presentation to a large law firm based on the west coast. I’m “repurposing” my materials for that presentation by providing those case highlights below. For each blurb below, there is a link to a fuller overview as well as a link to the complete court opinion.

HIGHLIGHTS OF RECENT KEY DELAWARE CORPORATE AND COMMERCIAL DECISIONS–as of May 30, 2019

DELAWARE SUPREME COURT DECISIONS

Delaware Supreme Court Clarifies Appraisal Law

The Delaware Supreme Court, in a per curiam decision, recently determined that “deal price less synergies” was the appropriate determination of fair value in the appraisal action before it.  In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019), the Court reversed the Court of Chancery’s holding that “unaffected market price” was the fair value on the date of the merger. This case is the third in a recent trilogy of precedent-setting Delaware appraisal cases, preceded by DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017).  This case has been the subject of extensive commentary by scholars and practitioners in the short time since its publication.

Link: https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-appraisal-law/

Company Required to Produce Emails Among Management to Stockholders

The Delaware Supreme Court recently issued an opinion that clarifies the duty of a company to produce emails among its management in a Section 220 case. In KT4 Partners LLC v. Palantir Technologies, Inc., Del. Supr., No. 281, 2018 (Jan. 29, 2019), Delaware’s High Court addressed a demand under Delaware General Corporation Law (DGCL) Section 220 by a stockholder for corporate books and records, including emails among management, to allow the stockholder to investigate possible wrongdoing, such as the reasons behind amendments to an Investors’ Rights Agreement that severely reduced the original rights granted under that agreement.

Notably, the court in its opinion quoted from a law review article that yours truly co-authored on the topic, which explained why demands under DGCL Section 220 should often include electronically-stored information (ESI) such as emails. See footnote 76.

This opinion is noteworthy because it clarifies Delaware law and authoritatively describes those circumstances when a demand for books and records under DGCL Section 220 will require the company to produce ESI, such as emails among management, to the extent necessary for the proper purpose established in a Section 220 case.

Brief Overview:

The stockholder demand in this case stated as its purpose the investigation of mismanagement, including depriving investors of their right of first refusal under an investors’ agreement that was amended without the consent of all investors, as well as interfering with the sale of stock by a large stockholder. The Court of Chancery, in a decision highlighted on these pages, determined that although some books and records had to be produced, emails need not be. The Supreme Court disagreed with that ruling and affirmed in part, reversed in part, and remanded.

Importantly, the facts of this case include an acknowledgment by the company that it often did not follow corporate formalities such as preparing board resolutions and keeping minutes of board meetings, but rather often communicated by email and took action by email–including on matters that were the subject of the investigative purpose of the Section 220 demand.

Highlights of Key Aspects of the Court’s Ruling:

For busy readers, I provide bullet points of key aspects of this crucial decision, but those who need to be familiar with the nuances of this aspect of Delaware corporate litigation should read the entire 49-page opinion linked above.

Procedural Background:

  • The court discussed what appeared to be an issue of first impression about the standard of review regarding a dispute over the interpretation of the stated purpose in a Section 220 demand. The court explained that the standard of review for the scope of relief is abuse of discretion, but de novo review applies to questions of law such as whether the stated purpose under Section 220 is proper. Although contract interpretation is also subject to de novo review as a question of law, fact-intensive and judgment-based determinations are reviewed for abuse of discretion, and factual determinations that underlie the trial court’s interpretation of an ambiguous written document deserve the deference given to factual findings.
  • The Delaware Supreme Court found that the demand in this case did include an explicit reference to a request for electronic documents.
  • The core issue identified by the High Court was whether the Court of Chancery abused its discretion in ruling that emails and other ESI were not necessary to satisfy the purpose of investigating the wrongdoing alleged in this Section 220 case.

Basic Principles:

  • The court reviewed the basic principles and policy undergirding the qualified common law and statutory right to inspect corporate books and records. See Slip op. at 22 to 24.
  • The court observed that the scope of documents to which a stockholder is entitled under Section 220 is limited to those that are necessary to accomplish the proper purpose as stated in the demand. See Slip op. at 24 to 25.

Emails/ESI Production:

  • In explaining why ESI should be included in appropriate Section 220 cases, the Delaware Supreme Court quoted from a law review article on this topic co-authored by your truly. See footnote 76 (quoting Francis G.X. Pileggi, et al., Inspecting Corporate “Books and Records” in a Digital World: The Role of Electronically Stored Information, 37 Del. J. Corp. L. 163, 165 (2012)).
  • The court reviewed Delaware cases that previously addressed whether ESI such as emails should be included in a Section 220 request. See footnotes 71 to 74. See also Amalgamated Bank v. Yahoo!, Inc., a Chancery opinion highlighted on these pages that also cited the same law review article on this topic co-authored by yours truly that was quoted by the Supreme Court in the instant case. See, e.g., footnote 72 (citing a Court of Chancery Order allowing for imaging of a Blackberry in a Section 220 case.)
  • The court also explained, based on the facts and circumstances of this case, why emails and ESI had to be produced and were needed to accomplish the stated purpose. See Slip op. at 31. For example, the court explained that the company involved did not comply with required corporate formalities such as minutes of board meetings and that it often conducted corporate business informally, including over email, regarding the issues subject to the Section 220 demand. See footnote 77 and accompanying text. The ESI at issue included, for example,  an allegedly incriminating message sent via LinkedIn.
  • The court also emphasized that there may be some Section 220 cases where ESI may not be required to be produced by the company, such as those situations where the corporation has traditional, non-electronic documents that are sufficient to satisfy the needs of the Section 220 petitioner.
  • In this case, the company admitted that there were no hardcopy documents that addressed all of the requests, and that there were emails and other ESI that were responsive to the requests.
  • The court also provided practice tips for future litigants: there should be a cooperative effort to focus on the substantive data that should be produced–or in other words, focus on the information that is needed and that is available whether it be in hardcopy or in ESI format.

The court also addressed an unrelated issue. It rejected the argument that the company made that as a condition of production it could require the stockholder to file any suits based on the data received in the Delaware Court of Chancery. Although there have been cases that have imposed similar jurisdictional conditions, the court explained why such a condition should be the exception and not the norm.

SUPPLEMENT: Law360 published an article about this case in which they quoted my comments about the importance of the High Court’s opinion.

Link: https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/company-required-to-produce-emails-among-management-to-stockholders/

Supreme Court Explains the Implied Covenant of Good Faith and Fair Dealing

A recent Delaware Supreme Court decision is must-reading for those who need to know the latest iteration of Delaware law on the implied covenant of good faith and fair dealing. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), Delaware’s High Court provided the latest articulation of Delaware law on the multi-faceted doctrine of the implied covenant of good faith and fairing dealing. In connection with affirming in part and reversing in part a 176-page trial court opinion, which was highlighted on these pages, the Supreme Court agreed with the analysis of the trial court’s correct reading of the plain meaning of the LLC agreement at issue, but disagreed with the application by the trial court of the implied covenant.

 Highlights of the most recent authoritative explanation of the implied covenant under Delaware law are noted in the following bullet points:

  • When a board is given contractual discretion to make a choice, that is not a “gap” to be filled. Although “the vesting of a board with discretion does not relieve the board of its obligation to use that discretion consistently with the implied covenant of good faith and fair dealing,” the argument was not made in this case that the board exercised this contractual discretion in bad faith. See footnotes 92 and 93 and accompanying text.
  • The court explained the two common situations where the implied covenant often applies. The first, at issue in this case, is when it is argued that a situation has arisen that was unforeseen by the parties and where the agreement’s express terms do not cover what should happen. See footnote 93.
  • The next situation is when a party to the contract is given discretion to act as to a certain subject and it is argued that the discretion has been used in a way that is impliedly proscribed by the contract’s express terms. Id.
  • “When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.” Id.
  • Delaware’s High Court explained that the “implied duty of good faith and fair dealing is not an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, later adversely affected one party to a contract.” See footnote 109 and accompanying text.
  • Rather, “the covenant is a limited and extraordinary legal remedy.” See footnote 110.
  • The Supreme Court added that the implied covenant “does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand. Even where the contract is silent, an interpreting court cannot use an implied covenant to re-write the agreement between the parties, and should be most chary about implying a contractual protection when the contract could easily have been drafted to expressly provide for it.” See footnotes 110 to 113 and accompanying text.

Link: https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/supreme-court-explains-the-implied-covenant-of-good-faith-and-fair-dealing/

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review

The Delaware Supreme Court recently clarified the “ab initio” requirement announced in the Kahn v. M&F Worldwide Corp. case as part of the set of standards that would allow for the BJR standard to apply to a challenged merger. See Olenik v. Lodzinski, No. 392, 2018 (Del. Supr., rev. April 11, 2019).  The High Court determined that the requirement was not satisfied based on the facts of the instant case because the “economic bargaining took place prior to the date” when the protections announced in the Kahn v. M&F Worldwide Corp. case needed to be in place.

Much commentary has already been written about this case, so it will not be covered thoroughly on these pages, but I refer to prior decisions that have applied the ab initio requirement, for background purposes, as noted on these pages.

 Link: https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-ab-initio-requirement-for-bjr-review/ 

Supreme Court Affirms Akorn Decision

The Delaware Supreme Court, in Akorn, Inc. v. Fresenius Kabi AG, et al., Del. Supr., No. 535, 2018 (Dec. 7, 2018), affirmed in a 3-page order, two days after oral argument, the Court of Chancery’s 253-page decision which was highlighted on these pages, and which is thought to be the first Delaware decision to find that a “material adverse effect” clause was triggered in such a way as to allow an acquiring party to terminate a merger pre-closing. Much has been written in trade publications about the Akorn case. See, e.g., here and here .

Link: https://www.delawarelitigation.com/2018/10/articles/chancery-court-updates/chancery-allows-termination-of-merger-agreement-based-on-material-adverse-change/

COURT OF CHANCERY DECISIONS

Chancery Instructs on DGCL Merger Requirements

A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.

In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:

(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;

(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;

(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;

(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;

(5)  Whether the director defendants breached their fiduciary duty of disclosure; and

(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair.  With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.

Key Highlights of Decision:

  • As an initial procedural matter, in connection with this motion for judgment on the pleadings, the court observed that it was not well-established in Delaware case law or Rules of Civil Procedure whether a “supplemental notice” attached to a motion for judgment on the pleadings could be considered “part of the record or pleadings.”  Based on this opinion, however, it is now established that under Delaware law, under some circumstances, it is now possible for such a supplemental notice to be included as part of the pleadings in such a procedural posture.  See, e.g., footnotes 1 through 6 and accompanying text.

DGCL Section 262:

  • The company sought a “do-over” or a “mulligan” for its statutory errors, because it purported to send proper notices required by DGCL Section 262–only after suit was filed.  Three problems with that approach are that: (i) Such a “replicated remedy proposal” had never before been blessed by a Delaware court; (ii) Even the supplemental notice proposed was itself wrong (in part because it quoted the statute of another statute); and (iii) trying to make a “supplemental notice” sent after the lawsuit was filed does not always make it part of the pleadings, although as noted above–in some circumstances–based on the opinion in this case, it is now possible to do so.  See Slip op. at 13.

DGCL Section 228:

  • Based on an amendment to the statute passed in 2017, Section 228 no longer requires that the written consent of stockholders be dated next to each signature.  See Slip op. at 19.
  • The court addressed the “less than bright-line rule” about whether or to what extent disclosures are required in connection with written consents of stockholders pursuant to Section 228, but cases cited by the court in this opinion support the view that in this case the company is not entitled to judgment on the pleadings on this issue in light of the lack of material data, or their supplying of incorrect data, with the solicitations for consents that were sent to the minority stockholders in this case.

DGCL Section 228(e)–Prompt Notice Requirement:

  • The prompt notice requirement under Section 228(e) requires that notice of action by written consent of stockholders to those who did not consent must be prompt.  Nonetheless, the exact timetable for such “prompt notice” is not defined in the statute.  One case found that five months was not prompt.  In this matter, notice was given after the Section 262 appraisal deadline, which the court found as a sufficient basis to deny the motion for judgment on the pleadings filed by the company (rather audaciously) in this case.

DGCL Section 251(b):

  • This section of the DGCL requires that a merger agreement include specified details about the deal terms, including compensation to stockholders, but the company failed to comply with this requirement.

DGCL Section 144:

  • The court held that the safe harbor under Section 144(a)(2) was not satisfied in this matter because the stockholders were not given material facts about the interests of the directors in the merger.

The court also denied the company’s motion for judgment on the pleadings regarding claims for breach of fiduciary duty.

Link: https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-instructs-on-dgcl-merger-requirements/

Chancery Applies Corporate Advancement Case Law to LLC Context

A recent Delaware Court of Chancery decision interpreted the advancement provisions of an LLC Agreement by applying case law interpreting DGCL Section 145 in the corporate context.  In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), the court reviewed the applicability of “defined phrases” that are familiar prerequisites for advancement in the corporate context pursuant to DGCL Section 145, and analyzed that same language that was used in an LLC agreement provision granting advancement.

The highlights of this decision are based on the assumption that the reader is familiar with the principles of advancement for officers and directors pursuant to DGCL Section 145, and the leading Delaware court decisions on the topic–even if they are not aware that I have written several book chapters on advancement and published multiple articles on advancement and handled many advancement cases.   

 Brief Background:

This case involved a request for advancement by a member (not a manager) of an LLC seeking advancement for the cost of defending a suit in New Jersey brought by the managing member of the LLC relating to the call right of the member under the LLC Agreement.  (The plaintiff-member of the LLC involved in this case was itself an LLC.)

 Issues Addressed:

The two issues that the court addressed in this case are:  (1) Does corporate case law apply to the provisions for advancement in an LLC Agreement which contains language that mirrors the corporate statute, DCGL Section 145; and (2)  Whether the underlying action for which advancement is sought, arises “by reason of the fact” that the party seeking advancement acted in its “official” capacity?  The court answered both questions in the affirmative.

 Highlights of this Decision–Assuming Familiarity with Delaware Corporate Advancement Case Law:

  • The court referenced the well-known truism that advancement cases are particularly appropriate for resolution on a paper record, such as via dispositive motions.  See footnote 22 and accompanying text.
  • The court cited other Delaware cases that have applied corporate case law to analyze the contractual terms of advancement in an LLC Agreement.  See, e.g., Hyatt v. Al Jazeera American Holdings, II, LLC, 2016 WL 1301743 (Del. Ch. Mar. 31, 2016) (highlighted on these pages previously)See also other cases cited at footnotes 36, 37 and 38.
  • The court explained that LLCs and corporations differ most pertinently in regard to indemnification: “mandating it in the case of corporate directors and officers who successfully defend themselves, but leaving the indemnification of managers or officers of LLCs to private contract.”  See footnote 46 and accompanying text.
  • The court recited the guidelines that the Delaware courts used to determine if someone was acting “by reason of the fact”–for purposes of being entitled to either indemnification or advancement, and restated the familiar standard that the operative phrase will be satisfied “if there is a nexus or a causal connection between any of the underlying proceedings and one’s official corporate capacity . . . without regard to one’s motivation for engaging in that conduct.”  See footnotes 50 and 51 and accompanying text.
  • By contrast, the court cited examples of cases where the “by reason of the fact” requirement was not satisfied, which is best exemplified by disputes involving personal contractual obligations that do not involve the exercise of judgment, discretion, or decision-making authority on behalf of the corporation.  See footnote 53 and accompanying text.  Because the party seeking advancement in this case was a member and not an officer or a director, the context was unusual, but the LLC Agreement clearly defined the responsibilities of the member.
  • The court reasoned that the causal relationship between the official capacity of the member and the underlying lawsuit was met for several reasons: (i) The underlying case in New Jersey was about the failure of the member to carry out its responsibilities specified in the LLC Agreement: (ii) The underlying lawsuit in New Jersey is based on whether the member discharged its official duties such that the call rights could be exercised; and (iii) The underlying dispute fully implicates whether or not the member seeking advancement carried out its official duties.  Thus, the court held that the “by reason of the fact” requirement and the “official capacity requirement” were met.
  • The court distinguished five cases in which advancement or indemnification claims were denied because the underlying litigation involved a personal interest that lacked a sufficient connection to official duties.  Those five cases that were distinguished are cited in footnote 56–most of which have been highlighted on these pages:  Bernstein v. TractManager, Inc., 953 A.2d 1003 (Del. Ch. 2007); Cochran v. Stifel Fin. Corp., 2000 WL 1847676 (Del. Ch. Dec. 13, 2000) (rev’d in part on other grounds, 809 A.2d 555 (Del. 2002)); Lieberman v. Electrolytic Ozone, Inc., 2015 WL 5035460 (Del. Ch. Aug. 31, 2015); Dore v. Sweports, Ltd., 2017 WL 45469 (Del. Ch. Jan. 31, 2015); Charney v. Am. Apparel Inc., 2015 WL 5313769 (Del. Ch. Sept. 11, 2015).
  • Regarding whether the “undertaking” provided by the party seeking advancement satisfied the statutory undertaking requirement, the court ruled that the sufficiency of an undertaking is determined by looking at the substance–and not the form alone–of the document containing the undertaking.

 Postscript: It was recently reported by The Chancery Daily that the Vice Chancellor who wrote this opinion published it the day after giving birth to a baby boy. Wow. That’s a dedicated jurist. Congratulations to Her Honor and her family on their new addition.

Link: https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-applies-corporate-advancement-case-law-to-llc-context/

Chancery Finds Usurpation of Corporate Opportunity

Delaware case law is well-established regarding the aspect of the fiduciary duty of loyalty that prohibits a corporate director from usurping a corporate opportunity. A recent decision from the Delaware Court of Chancery applies that well-settled prohibition in a flexible manner to a set of facts that have apparently not been squarely addressed in prior precedent.  In Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), the court awarded damages for the breach of this subset of fiduciary duty, as well as for other breaches of fiduciary duty.

Basic Background Facts:

This case involved a co-founder who also served as a president and director of a New York-based provider of healthcare services. He was removed when the company discovered various transgressions. The former director purchased an office building in his individual capacity–secretly–even though the court found that the former director had been aware that the company was interested for several years in purchasing a similar building for its own use.  The former director then offered to lease the building back to the company at what the court found to be above-market rental rates.

Key Principles of Law:

This short blog post assumes that readers are familiar with the basic principles involved with the usurpation of corporate opportunities, and will merely highlight some of the key statements of law and the court’s reasoning in this 84-page opinion.

The well-known elements of a claim based on the corporate opportunity doctrine have been stated frequently in prior Delaware cases. Those familiar with corporate litigation will recognize the following four elements of a claim for usurpation of corporate opportunity:

“ (1)      The corporation is financially able to exploit the opportunity;

(2)      The opportunity is within the corporation’s line of business;

(3)      The corporation has an interest or expectancy in the opportunity;

(4)      By taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.”

Slip op. at 36-38.

The court explained that Delaware Supreme Court decisions have referred to some of these elements in the disjunctive even though they are often quoted as being conjunctive. Specifically, proof of either the third element or the fourth element would sustain a corporate opportunity claim.

Moreover, the court decides the viability of a corporate opportunity claim by weighing the four factors in a holistic fashion and no one factor is dispositive. Id.

Key Reasoning of the Court:

  • The court rejected the argument that the purchase of the office building was not in the line of business of the healthcare company involved, which historically leased office space, because the “line of business factor” was in either inapplicable or was satisfied because the company had a clear “interest and expectancy” in the opportunity. In addition to that factor having a flexible meaning, the court explained that latitude should be allowed for development and expansion of a business, and the Delaware courts have broadly interpreted the nature of the corporation’s business when determining whether a corporation had an interest in a opportunity.
  • Regardless, the court found that the line of business test was not relevant where, as here, the company had a clear interest and expectancy in acquiring the building, and the opportunity presented related to an operational decision about how to expand the business as opposed to an opportunity to acquire a new business.
  • The court further reasoned that even if the opportunity was not within the existing line of business, it was sufficient that the company had a “clear interest and expectancy” at the time the opportunity arose. Id. at 44-47.
  • Regarding the fourth factor, the court instructed that a corporate officer or director was prohibited from taking an opportunity for his own “if the corporate fiduciary will thereby be placed in a position inimicable to his duties to the corporation.”
  • The court elaborated by observing that the corporate opportunity doctrine is implicated where the fiduciary’s seizure of an opportunity results in a conflict between the fiduciary’s duties to the corporation and the self-interest of the director as actualized by the exploitation of the opportunity.” Id. at 47-49.
  • The court also rejected an argument that the employment agreement of the former director allowed him to pursue other business interests outside of the company, and to devote a material portion of his time to other business interests. The court found that contractual defense to be unavailing in part because that provision did not allow the defendant to compete with the company for opportunities in which the company had an interest or expectancy. In addition, the employment agreement also prohibited the former director and president from engaging in activities which were “competitive with” the business of the company.
  • The court applied the entire fairness test because the former director was on both sides of the transaction involving a lease of the building to the company, and also because the director received a personal benefit from the transaction that was not received by the shareholders generally. Id. at 53.
  • The court also explained that charging the company an above-market rate for rent was unfair self-dealing and a breach of the duty of loyalty–regardless of whether the former director acted in subjective good faith.

As a side note, the court also found a separate breach of fiduciary duty as a result of the former director engaging in a “letter-writing campaign” over a several month period in which the former director sent harassing and disturbing anonymous letters to board members, employees and the lender of the company which caused harm to the company by hurting morale and causing distraction–in addition to attempting to sabotage the company’s relationship with its primary lender. Slip op. at 76-83.

Link: https://www.delawarelitigation.com/2019/03/articles/chancery-court-updates/chancery-finds-usurpation-of-corporate-opportunity/

Chancery Clarifies Director’s Right to Corporate Records

A recent Delaware Court of Chancery decision addressed the important issue of the right of directors to be given access to corporate records. In Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), Delaware’s court of equity considered a claim under Section 220(d) of the Delaware General Corporation Law (DGCL) by the founder and largest stockholder of the Papa John’s pizza chain who was forced out as the CEO but retained his position as a director.  He sought to obtain books and records in his capacity as a director to support an investigation that the other directors breached their fiduciary duties by improperly ousting him for unjustified reasons.

Key Bullet Points that Make this Case Noteworthy include the following:

  • The court required the Defendant-Directors to produce their text messages and their private emails, that they sent and received, that related to the specific issues in contention. Prior Chancery decisions have required the production of such personal communications that related to corporate business but such a ruling is still notable. For example, a few years ago, in Amalgamated Bank v. Yahoo!, Inc., highlighted on these pages, the Court of Chancery ordered a similar scope of production–and also cited to a law review article that yours truly published in which my co-authors and I explained why electronically stored information (ESI), including text messages and private emails, should often be included within the scope of a DGCL Section 220 demand. See law review article co-authored by yours truly which argued that the court should often include ESI as part of the obligation to produce records under Section 220. See 37 Del. J. Corp. L. 163, 165 (2012), highlighted on these pages here.
  • It is well-established that directors have nearly unfettered rights to access to books and records of a corporation in which they serve. Unlike a stockholder, when a director makes a demand for books and records under Section 220(d), the corporation has the burden to establish that the director’s demand for books and records is based an improper purpose.
  • Unlike the impact of a stockholder filing a plenary action before a Section 220 case is complete, when a director files a plenary action before a final ruling in a Section 220 case, that will not necessarily bar the continuation of Section 220 claims and it will not otherwise moot the Section 220 claims. See generally CHC Investments, Inc. v. FirstSun Bancorp, C.A. No. 2018-0610-KSJM (Del. Ch. Jan. 24, 2019)(Section 220 stockholder demand case dismissed due to parallel plenary action.)
  • The court observed that a director should not be required to sign a confidentiality agreement as a condition to obtaining records because a director already has a fiduciary duty to keep them confidential—as compared to stockholders who routinely are required to sign a confidentiality agreement as a condition to obtaining records pursuant to a Section 220 demand. See generally Murfey v. WHC Ventures, LLC, C.A. No. 2018-0652-MTZ (Del. Ch., Jan.23, 2019)(proposed confidentiality order rejected by Court as non-compliant with Chancery Rule 5.1 because it did not allow for filing confidential documents with the court–confidentially.)

Link: https://www.delawarelitigation.com/2019/01/articles/chancery-court-updates/chancery-clarifies-directors-right-to-corporate-records/

Advancement for Counterclaims Granted Despite Withdraw of Covered Claim

A recent transcript ruling by the Delaware Court of Chancery in Gasgarth v. TVP Investments, LLC, C.A. No. 2018-0621-JTL, transcript ruling (Del. Ch. Dec. 7, 2018), explained that the right to advancement was not extinguished by an amendment of a counterclaim to specifically withdraw breaches of fiduciary duty counterclaims and remove factual allegations relating to the service of the plaintiffs (counterclaim defendants) as directors and officers.

The court reasoned that it is not bound by the four-corners of a pleading, but rather will view the context of the litigation as a whole to determine if advancement is warranted in light of all the facts and circumstances of the case and the role that the directors and officers played in connection with the claims against them.

Relying on Delaware precedent, the court in this transcript ruling also included as part of the “fees on fees” awarded, a success bonus, which was part of the engagement letter with counsel.

Link: https://www.delawarelitigation.com/2019/01/articles/chancery-court-updates/advancement-for-counterclaims-granted-despite-withdraw-of-covered-claim/

Chancery Addresses “Commercially Reasonable Efforts” Standard

When the phrase “commercially reasonable efforts” appears as a standard of performance in contracts, it seems predetermined to generate litigation, and the recent Court of Chancery decision in Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), supports that observation. Although the agreement in this case had a contractual definition for “commercially reasonable efforts”, prior Delaware decisions highlighted on these pages that discuss this phrase should be of relevance to anyone who needs to know what the Delaware cases say about this somewhat amorphous standard, and similarly-phrased “efforts clauses”.

Why this decision is noteworthy: The most notable aspect of this decision is its collection of Delaware cases interpreting various iterations of “efforts clauses”. See footnotes 83 to 85.

Brief overview: This case involved an earn-out dispute and a claim by the seller that it did not receive milestone payments pursuant to an earn-out provision because the buyer did not use commercially reasonable efforts to reach the milestones. The buyer was the pharmaceutical company Cephalon, but Teva Pharmaceuticals later bought Cephalon. The product at issue was an antibody that would allow an organism’s immune system to overcome disease-causing pathogens. As with new drugs, the process to bring antibodies to market is long, difficult and risky.

The earn-out in the merger agreement in this case was payable upon the meeting of certain milestones in the process of obtaining  approval by government agencies for the antibody to treat two different conditions. The buyer agreed to use “commercially reasonable efforts” to develop the antibody and achieve those milestones. The seller claims that the buyer did not comply with that efforts clause.

Key takeaways:

  • The Court provides an excellent collection of Delaware decisions that have wrestled with various permutations of “efforts clauses”. See footnotes 83 to 85 and accompanying text. The Court categorizes the collected decisions into the following groups, some of which are overlapping: (i) motions to dismiss (at the pleadings stage); (ii) post-trial decisions; (iii) post-merger decisions (often involving a related earn-out clause); and (iv) pre-merger decisions where the efforts clause applied to the satisfaction of a condition to closing.
  • The agreement involved in this case provided a contractual definition for “commercially reasonable efforts” as follows: “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cepahlon], with due regard to the nature of efforts and cost required for the undertaking at stake.”
  • The Court observed that the parties agreed that the foregoing is an “objective standard”, but the Court described the contractual definition as “inartfully” drafted and ambiguous. Also, in the context of denying a Motion to Dismiss this claim, the Court found that neither side offered a reasonable interpretation of this contract provision (as compared to another basis to deny an MTD: when both sides offer reasonable, but differing, interpretations.)
  • Based on Delaware’s version of Rule 12(b)(6)–which is not as stringent as the current Federal standard–the Court found that there was a “reasonably conceivable set of circumstances susceptible of proof” in which (allowing for factual issues at this early stage of the case), it could be shown that companies with similar resources and expertise as Cephalon are currently developing treatments for a similar antibody as the one at issue in this case.

Link: https://www.delawarelitigation.com/2018/12/articles/chancery-court-updates/chancery-addresses-commercially-reasonable-efforts-standard/

Chancery Rules on Limits of Forum-Selection Clauses in Corporate Documents

A recent seminal decision of the Delaware Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. In the case of Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018), the Court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal Forum Provisions”).

Why this Case is Noteworthy: The court reasoned in its holding that: “The constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.  In this case, the Federal Forum Provisions attempt to accomplish that feat.  They are therefore ineffective and invalid.

Overview of Key Points:

This opinion is destined to form part of the bedrock of foundational Delaware corporate decisions and could rightly be the subject of a lengthy law review article, but for purposes of this quick blog post, I will merely highlight a few of the more notable excerpts in bullet points.

  • A substantial basis for the court’s reasoning was a prior decision from the Court of Chancery which upheld the validity of corporate bylaws that required claims based on the internal affairs doctrine and related claims to be brought exclusively in the Court of Chancery. That decision by the current Chief Justice of Delaware, writing at the time as the Chancellor, was Boilermakers Local 154 Retirement Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. June 25, 2018).
  • Although the Boilermakers case involved bylaws, the Sciabacucchi decision explained why that same reasoning applied to a certificate of incorporation which is governed by similar provisions in the Delaware General Corporation Law (DGCL). The court in Sciabacucchi explained that the reasoning in Boilermakers focused on the ability to enforce forum-selection clauses that related to the internal corporate matters of a Delaware corporation as opposed to external matters, such as claims arising under the Securities Act of 1933.
  • The Court buttressed its reasoning by referring to the codification of the Boilermakers decision, shortly after its publication, by means of the adoption of a new Section 115 of the DGCL. In connection with that new DGCL section, the Delaware General Assembly also passed new amendments to Sections 102 and 109 of the DGCL which prohibit fee-shifting provisions in the certificate of incorporation or bylaws particularly in connection with claims related to the internal affairs of a corporation as defined by DGCL Section 115.
  •  The Court’s reasoning was also supported by reference to what the court referred to as “first principles.” Those first principles included several basic tenets of corporate law such as the following: (i) Although the document filed with the state that gives rise to an artificial entity such as a corporation, and confers powers on it, is a contract, it is not an ordinary private contract among private actors; (ii) The certificate of incorporation is a multi-party contract that includes the State of Delaware. Unlike an ordinary contract, it also includes terms by reference that are imposed by the DGCL; (iii) Unlike an ordinary contract, a charter can only be amended to the extent that it complies with the DGCL; (iv) The DGCL specifies what provisions a charter may or may not include; and (v) Although the courts enforce both types of contracts, when enforcing relationships created by the corporate contract, the courts use an overlay of fiduciary duty. See pages 38 to 42 and footnotes 111 to 125.
  • A thorough analysis of the contours and policy behind the internal affairs doctrine is an important feature of this opinion. See, e.g., pages 41-46.

In sum, the court reasoned that the “constitutive documents of a Delaware corporation cannot bind the plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” The opinion provides extensive citations to substantial scholarship, case law and statutes.

Prof. Ann Lipton provides extensive insights in her blog post about this case with links to her articles on the topic. The good professor’s scholarship on this issue was also cited by the court in the above opinion.

Many cases have been highlighted on this blog regarding forum-selection clauses in private agreements. See, e.g., here and here. In some of the posts on these pages about cases involving forum-selection clauses, a graphic of the Roman Forum adds color as well as an etymological connection.

SUPPLEMENT: Professor Stephen Bainbridge, a prolific corporate law scholar, kindly links to this post on his blog.

Link: https://www.delawarelitigation.com/2018/12/articles/chancery-court-updates/chancery-rules-on-limits-of-forum-selection-clauses-in-corporate-documents/

For the 14th year, we provide a list of key Delaware corporate and commercial decisions from the prior year. This year, our list is co-authored by Chauna Abner in addition to yours truly, and appeared in the following article published in the Delaware Business Court Insider on January 2, 2019:

For the 14th year, we have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list is not by any means a complete list of important decisions of the two courts that were rendered this year. Instead, this list includes notable decisions that should be of widespread relevance to those who work in the corporate and commercial litigation field or follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink. This list focuses on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications.

Delaware Supreme Court Decisions

  • Aranda v. Phillip Morris USA, 183 A.3d 1245 (Del. 2018).

This Supreme Court decision should be required reading for anyone who has a forum non conveniens issue in Delaware. The opinion provides an overview of the Delaware law on forum non conveniens and clarifies that even if it is a minority view among the 50 states, Delaware only requires that the trial court “consider” whether an alternative forum is available as part of its analysis, and whether an alternative forum is available is not a deciding factor. In its analysis, the court explores three general categories of forum non conveniens cases. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Eagle Force Holdings v. Campbell, 187 A.3d 1209 (Del. 2018).

For the first time, the Delaware Supreme Court clarifies the test to determine whether a contract’s terms are sufficiently definite to create an enforceable contract. Before setting forth the test, this opinion discusses the intent necessary for parties to be bound. This opinion also explains the three basic requirements for a valid contract and addresses the ancillary issue of whether the Court of Chancery could impose sanctions for violation of a court order prior to establishing that it had personal jurisdiction over the person who violated the order. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Morrison v. Berry, 191 A.3d 268 (Del. 2018).

In this opinion, Delaware’s highest court limits the application of the Corwin doctrine and prohibits the cleansing effect of stockholder approval, in part due to inadequate disclosures. The opinion also explains the various nuances of the board’s duty of disclosure to stockholders, describes the duty of candor owed by directors to each other, and provides a definition of materiality as well as an explanation of when an omitted fact is material. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Flood v. Synutra International, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018).

In this opinion with a vigorous dissent, the Supreme Court clarifies the MFW standard that was announced in Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014). The court explains whether the prerequisites that must be satisfied for the MFW standard to apply must be imposed as a condition of the deal at the absolute beginning of negotiations. The opinion also discusses whether due care violations were pleaded in the complaint. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

Delaware Court of Chancery Decisions

  • KT4 Partners v. Palantir Technologies, 2018 Del. Ch. LEXIS 59 (Del. Ch. Feb. 22, 2018).

The Court of Chancery determined that a stockholder satisfied the prerequisites of Section 220 in this case to obtain certain corporate records. This 50-page decision can serve as a primer for the requirements of Section 220, to which judicial opinions have added prerequisites that are not found in the text of the statute. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 75 (Del. Ch. Mar. 5, 2018).

In this opinion, the Court of Chancery adds to the relatively modest body of case law interpreting Section 273 of the DGCL. The court applies Section 273 to dissolve a joint venture with two 50/50 stockholders that was deadlocked. This is analogous to a “no fault business divorce” but the remedy is discretionary and the court will not always grant dissolution. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Shortly after the court issued its decision, the respondent moved for relief from the court’s entry of judgment and the court denied the motion. See Feldman v. YIDL Trust, 2018 Del. Ch. LEXIS 148 (Del. Ch. May 4, 2018).

  • PR Acquisitions v. Midland Funding, 2018 Del. Ch. LEXIS 137 (Del. Ch. Apr. 30, 2018).

This Chancery decision is notable for enforcing the provisions in an agreement that provided a procedure and a comparatively short deadline for making claims for funds held in escrow. This decision was in the context of notice being mistakenly sent to the escrow agent when the agreement required that notice be sent to the seller. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • CBS v. National Amusements, 2018 Del. Ch. LEXIS 157 (Del. Ch. May 17, 2018).

In this high profile case, the Court of Chancery denies the request of CBS, a minority shareholder, for a TRO that sought to prevent the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Basho Technologies Holdco B v. Georgetown Basho Investors, 2018 Del. Ch. LEXIS 222 (Del. Ch. July 6, 2018).

This 126-page Court of Chancery opinion is a mini-treatise on the capacious capacity of the court to fashion creative and customized remedies when a breach of fiduciary duty is found. The opinion includes many key principles of Delaware corporate law and a description of different types of available remedies. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • In Re Oxbow Carbon Unitholder Litigation, C.A. No. 12447-VCL (Del. Ch. Aug. 1, 2018).

In this opinion, the Court of Chancery provides the most comprehensive description of the broad and flexible authority of the Court of Chancery to fashion an appropriate customized equitable remedy in several decades. This decision should be treated as an indispensable reference for those involved in corporate or commercial litigation who might need to quote authoritative sources for the voluminous scope of the Court of Chancery’s flexible and customized equitable remedial powers. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Applied Energetics v. Farley, 2018 Del. Ch. LEXIS 277 (Del. Ch. Aug. 14, 2018).

This Court of Chancery opinion is a must read for litigators who need to know the finer points of how the amount for a requisite bond is determined for purposes of obtaining an injunction. The court found problems with both parties’ estimates and essentially engaged in an abbreviated analysis of the appropriate measure of potential damages based on the claims in the case. A synopsis of the decision and a link to the full opinion is available at this hyperlink.

  • Godden v. Franco, 2018 Del. Ch. LEXIS 283 (Del. Ch. Aug. 21, 2018).

In this opinion, the Court of Chancery explains several important principles that Delaware courts use to analyze issues in the LLC context, and interpretive rules involving LLC agreements. In doing so, the court provides a helpful analysis of the equitable powers of the court to fashion remedies in the context of an LLC—notwithstanding the often exaggerated explanation of LLCs as creatures of contract. In this vein, the court cites several exceptions to the concept of LLCs being purely a product of contract. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Akorn v. Fresenius Kabi AG, 2018 Del. Ch. LEXIS 325 (Oct. 1, 2018), aff’d, 2018 Del. LEXIS 548 (Del. Dec. 7, 2018).

This epic 246-page Court of Chancery opinion serves as a mini-treatise on several topics of importance to corporate and commercial litigators, including: interpretation of material adverse change clauses or material adverse effect clauses in merger agreements; and the meaning and application of the phrase “commercially reasonable efforts” or “reasonable best efforts” often found in merger agreements. A synopsis of the decision and a link to the full opinion are available at this hyperlink. Notably, the Supreme Court affirmed the decision in a three-page order in December.

  • Lexington Services v. U.S. Patent No. 8019807 Delegate, 2018 Del. Ch. LEXIS 509 (Del. Ch. Oct. 26, 2018).

In this opinion, the Court of Chancery recognizes that a non-signatory to an agreement may enforce the provisions of a forum-selection clause under certain conditions. In doing so, the court discusses two principles of well-established Delaware law: the general enforceability of forum-selection clauses in Delaware; and the ability of officers and directors of an entity subject to a forum-selection clause to invoke its benefits when they were closely involved in the creation of the entity and were being sued as a result of acts that directly implicated the negotiation of the agreement that led to the entity’s creation. A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Decco U.S. Post-Harvest v. MirTech, 2018 Del. Ch. LEXIS 545 (Del. Ch. Nov. 28, 2018).

This Court of Chancery opinion adds to the modest body of Delaware case law that addresses whether an LLC should be dissolved based on the statutory standard that it is “not reasonably practicable” to carry on the LLC. The court explains that in determining the purpose for which an LLC was formed, it may not only look at the purpose-clause in the LLC’s operating agreement, but also to “other evidence … as long as the court is not asked to engage in speculation.” A synopsis of the decision and a link to the full opinion are available at this hyperlink.

  • Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL (Del. Ch. Dec. 19, 2018).

This recent seminal decision of the Court of Chancery must be included in the lexicon of every lawyer who wants to understand the boundaries of Delaware law on forum-selection clauses in corporate documents. The court determined that a forum-selection clause in a certificate of incorporation was invalid and ineffective to the extent that it purported to “require any claim under the Securities Act of 1933 to be brought in federal court” (the “Federal-Forum Provisions”). A synopsis of this decision and a link to the full opinion are available at this hyperlink.

Francis G.X. Pileggi is a litigation partner and vice-chair of the commercial litigation practice group at Eckert Seamans Cherin & Mellott. Contact him at fpileggi@eckertseamans.com. He comments on key corporate and commercial decisions and legal ethics rulings at www.delawarelitigation.com.

Chauna A. Abner is an associate in the firm’s commercial litigation practice group.

Supplement: Prof. Stephen Bainbridge, a nationally-prominent corporate law scholar, kindly linked to this post and described it as: “a must read for anybody working in corporate law.”


The above post originally was published as an article, and is reprinted with permission from the Jan. 2, 2019 edition of the Delaware Business Court Insider(c). 2019 ALM Media Properties, LLC. All rights reserved.