Chancery Determines Valid LLC Managers; Rejects Bump-Out Theory of Board Replacements

A recent Delaware Court of Chancery decision is notable for featuring the resolution of a dispute regarding the valid managers of an LLC, and rejecting the “bump-out theory” of replacing LLC managers–that is, incumbent managers need to be removed before their replacements can validly “take their seats”. The ruling in Llamas v. Titus, C.A. No. 2018-0516-JTL (Del. Ch. June 18, 2019), is the product of the summary proceedings available pursuant to Section 18-110 (a) of the Delaware LLC Act, which is the counterpart to DGCL Section 225, which allows for an expedited procedure to determine the proper composition of a corporate board.

Basic Facts

Originally, one member of the LLC in this case had a 90% interest and the other member had a 10% interest. The person owning 90% died, leaving the surviving member as the sole member and manager. An advisor of the deceased member cajoled the surviving member to appoint two others as managers.

After regretting his decision, the surviving member tried to appoint two different managers whom he thought would be more reliable allies. There were purported amendments to the operating agreement and various written consents whose impact was disputed. The applicable LLC documents provided for only three managers.

Among the key facts are that the surviving member’s attorney failed to prepare the requisite paperwork to remove the other two managers before attempting to install their replacements via the written consent of the sole member. That critical fact played a determinative role in the court’s decision.

Noteworthy Legal Principles in Court’s Analysis

  • Delaware rejects the bump-out theory, which means that an individual cannot be appointed to a board with no vacancies. Slip op. at 43. Namely: “Without a vacancy, there is no room for an individual to be appointed.” Id.
  • The summary proceeding available via Section 18-110(a) is “limited to determining those issues that pertain to the validity of actions to elect or remove” an LLC manager. Slip op. at 32.
  • Case law addressing corporate board membership applies by analogy to manager-managed LLCs. Id. at 38.
  • When one attempts to reduce the size of a board below the number of sitting directors, for example via a bylaw amendment, and the attempt takes place between annual meetings, that act does not remove the sitting directors. Id. (citing Crown EMAK Partners, LLC v. Kurz (Del. 2010))[That Delaware Supreme Court decision was highlighted on these pages.]
  • The Court emphasized that it did not use the corporate law analogy to override the LLC agreement–which had a provision for removing managers but that provision was not followed in this case. Slip op. at 39-40. Compare: case cited at footnote 55 for the position that before a director is removed for cause he is entitled to notice and an opportunity to address the accusations.
  • The introductory clause of an LLC agreement, such as the “whereas clause” in other documents, typically does not have “substantive effect” and does not establish agreed upon facts. Slip op. at 35. The introductory clauses in this case wrongly stated that there was only one manager at the time of the attempt to replace two other managers.

Chancery Clarifies Section 220 Principles

A recent Delaware Court of Chancery opinion clarified a few key Section 220 prerequisites that are not otherwise explicit in the statute. The decision styled In re Facebook, Inc., Section 220 Litigation, Cons. C.A. No. 2018-0661-JRS (Del. Ch. rev. May 31, 2019), is notable for the following refinements of well-worn Section 220 requirements for a successful books and records demand.  For example:

  • The court explained the familiar requirement that in order to establish the proper purpose of  investigating mismanagement, or in this case to investigate a failure to satisfy Caremark duties, the stockholder seeking books and records must present a “credible basis” for the claims against fiduciaries.
  • That standard is the “lowest burden of proof known in our law and asks a fundamentally different question than would be asked at a trial on the merits: has the stockholder presented ‘some evidence’ to support an inference of wrongdoing that would justify allowing the stockholder to inspect . . .” books and records. See Slip op. at 4.
  • The court also noted that in a Section 220 proceeding, hearsay evidence may be considered if it is sufficiently reliable. See footnote 10 for supporting authority. The court relied in this case on an heavy dose of newspaper articles and other news media reports.
  • The court allowed for the electronic communications of board members to be produced with some limitations in scope. See Slip op. 51 to 55.

Postscript: Regular readers are familiar with a theme in my comments on the multitude of Section 220 decisions highlighted on these pages over the last 14 years: that Section 220 cases are not for the faint of heart. I have described Section 220 as a blunt instrument, often untimely and expensive–through no fault of the courts. This 56-page post-trial decision, based on a paper record, was submitted for decision to the court on March 7, 2019. The complaint was filed on September 6, 2018.

Chancery Explains the Standard of Review for Excess Director Compensation Claims

A recent Delaware Court of Chancery decision provides a helpful explanation of the standard of review for claims of excess director compensation, in Stein v. Blankfein, C.A. No. 2017-0354-SG (Del. Ch. May 31, 2019).  The decision also explains the prerequisites for stockholder ratification to be sufficient in order to shift the standard from entire fairness to the business judgment rule.  The Delaware Supreme Court addressed this issue: In re Investors Bancorp, Inc. Stockholder litigation, 177 A.3d 1208 (Del. 2017).  The claims in the Stein case survived a motion to dismiss in part because the court found that the business judgment rule did not apply.

Expedited Proceedings Granted to Enforce Forum Selection Clause

There are many decisions highlighted on these pages ordering the enforcement of forum selection clauses. A recent transcript ruling is notable for granting expedited proceedings, without ruling on the merits, for a plaintiff who sought to enforce a forum selection clause even though the plaintiff was not a signatory to the agreement with the forum selection clause.

The plaintiff in this case is a law firm seeking to enforce a forum selection clause in a release and settlement agreement that released the attorneys of the signatory. See Dentons US LLP, v. Platt, C.A. No. 2019-0177-MTZ, transcript (Del. Ch. March 20, 2019). Regular readers are aware that transcript rulings may be cited in Delaware briefs.

Requirements for Confidential Treatment of Chancery Court Filings

A recent Court of Chancery decision explains the prerequisites that must be satisfied to obtain court approval to prohibit the public from viewing documents filed with the court. In The Chemours Co. v. DowDuPont, Inc., C.A. No. 2019-0351-SG (Del. Ch. June 7, 2019), the court denied a motion for confidential treatment and explained why the requirements of Rule 5.1 were not met.

This is only one of many decisions in this case that have been the subject of widespread press reports, but this short letter ruling should be in the toolbox of litigators for its important explanations of how to avoid the easy traps for the unwary who try to follow this intricate rule.

Court of Chancery Rule 5.1 provides the procedures and prerequisites that must be followed in order to withhold from public view court filings that would otherwise be available to the public. In the past, the old nomenclature was to file documents “under seal”, but the current terminology is to obtain court approval for “confidential treatment”. The procedure for filing an initial complaint confidentially is different from seeking confidential treatment for the first time after a suit is filed.

As we wrote on these pages when the rule was updated a few years ago, Rule 5.1 attempts to strike a balance between the importance of public access to the courts and court filings–as compared to the legitimate need to maintain the confidence of legitimately sensitive data such as trade secrets for example.

Delaware Supreme Court Addresses Independence of Directors

A recent Delaware Supreme Court opinion addressed the independence and disinterestedness of corporate directors in the context of adequately pleading pre-suit demand futility as a prerequisite for pursuing a derivative claim. In Marchand v. Barnhill (Del. June 19, 2019), the court reversed the Court of Chancery’s dismissal of the case for failure to establish demand futility. This issue is one of the most nuanced and challenging in Delaware corporate litigation (evidenced by the disagreement on the outcome among the jurists deciding this case.)

Instead of my typical highlights of the case, I will share the scholarly insights of Prof. Ann Lipton as excerpted by Prof. Stephen Bainbridge on his blog, as follows:

Chief Justice Leo Strine rehabilitates his Oracle decision

Ann Lipton analyzes the recent Delaware Supreme Court decision in Marchand v. Barnhill, “which is notable for two reasons.  First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations.”

As to the former, she observes that:

Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution.  Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.

Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him.  Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.

This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004).  Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative.

 

Mid-Year Review of Key Delaware Corporate and Commercial Decisions

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/

Delaware A.G. Obtains Cancellation of LLC Certificate of Formation

The Delaware Attorney General announced today that she obtained a Consent Judgment to secure the cancellation of  the Certificates of Formation for several LLCs allegedly involved in criminal activities or otherwise “abusing its LLC powers and privileges” in connection with the website Backpage.com. The Consent Decree signed by the Court of Chancery was dated June 11, 2019.

Chancery Orders Mandatory Indemnification per DGCL Section 145(c)

A recent Delaware Court of Chancery decision ordered mandatory indemnification based on success in underlying litigation pursuant to DGCL § 145(c), in the matter styled:  Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019).

Issue Addressed Whether dismissal of the underlying litigation based on a technical argument was “success” for purposes of mandatory indemnification under DGCL Section 145(c)–even if all of the arguments in the underlying litigation were not successful?

Answer:  Yes.

Procedural Background:

The procedural history of this litigation involves multiple court decisions in several jurisdictions over the span of a decade.  See, e.g., cases cited at footnotes 4, and 13 through 17.

Even though Brown was convicted and sentenced for certain financial crimes in connection with his role as an officer and a director of Rite Aid, in separate civil litigation pursued against him by Rite Aid, Brown was successful in having that litigation dismissed based on technical procedural arguments.  See footnotes 18 through 20 and accompanying text.

Key Aspects of Court’s Legal Analysis:

The court began its analysis by explaining that indemnification sought in this matter was based on three separate sources.

First, Brown relied on DGCL Section 145(c) which requires indemnification when a present or former director or officer has been “successful on the merits or otherwise” . . ..  The court noted that Section 145(c) is independent and non-exclusive of any right based in the charter, which in turn is independent and non-exclusive of any bylaw right, which in turn is independent and non-exclusive of any contract right, absent specific agreement to the contrary.  See Section 145(f), which makes this clear in both the indemnification and the advancement context.

The second basis for indemnification in this case was a provision in the corporate bylaws.

The third basis for indemnification sought in this matter was a provision in the corporate charter.

Notably, the court observed that even though Section 145(c), in the current version of the statute, covers officers and directors, the court added : 

“But when a corporation has provided other authorized individuals with mandatory indemnification to the fullest extent of the law, then that right extends the mandatory indemnification contemplated by Section 145(c) to those individuals”  (citing Dore v. Sweports, Ltd., 2017 WL 415469, at * 18 (Del. Ch. Jan. 31, 2017)).

The foregoing extension of the mandatory indemnification of Section 145(c), which in its current form only benefits directors and officers–to employees, agents and others that are expressly granted indemnification in the bylaws “to the fullest extent allowed by law”–is not well-known even by those familiar generally with the nuances of advancement law in Delaware.

The court explained that Section 145(c) provides for mandatory indemnification for an officer and a director who meets the requirements of the statutory provision, which is when: “a covered person defending himself in a covered proceeding . . . succeeds on the merits or otherwise . . ..”  See Slip op. at 10.  See also footnotes 39-41.

Other Notable Bullet Points:

·     The court recited the public policy rationale behind mandatory indemnification as including the need to encourage capable individuals to serve as corporate directors, which is viewed less as an individual benefit and more as a desirable mechanism in return for greater corporate benefits.

·     A key point and an essential aspect of the court’s reasoning is its reliance on an abundance of case law that interprets the “success” requirement in Section 145(c) very broadly.  That is, in order to satisfy the requirement of success “on the merits or otherwise” under Section 145(c), one must merely obtain any result in a lawsuit “other than conviction,” which does not equate with moral exoneration, but rather can be satisfied merely from:  “escape from an adverse judgment or other detriment, for whatever reason . . ..”  See footnotes 54 to 55 and accompanying text.

·     Moreover, if such a broad definition of success is achieved, it is not relevant, and the court will not inquire into, whether all arguments were won, or if preliminary motions or other efforts in the underlying litigation failed before the final successful result was reached.  See footnote 56 and accompanying text.  See also footnotes 72 to 80 and accompanying text.

·     The court also granted fees on fees and required Brown to file an affidavit under Rule 88, itemizing the fees for which he seeks indemnification, along with a motion seeking an entry of an order requiring the corporation to indemnify him in the amount specified in the damages motion.

Forum Selection Clause Interpreted Based on Austrian Law

A forum selection clause, controlled by Austrian law, was recently interpreted by the Delaware Court of Chancery as a mandatory forum selection clause requiring the dispute to be litigated in Vienna.  In Germaninvestments A.G. v. Allomet Corporation, C.A. No. 2018-0666-JRS (Del. Ch. May 23, 2019), the court also determined that the choice of law provision designating Austrian law and the forum selection clause requiring litigation in Vienna were both enforceable.

Procedural Background:

The court observed that Rule 12(b)(3), which addresses improper venue, was “the proper procedural rubric” for addressing a motion to dismiss based on a forum selection clause.  The court also explained that a motion under Rule 12(b)(3) does not “shackle” the court to the plaintiff’s complaint, but rather the court is permitted to consider extrinsic evidence from the outset.  See footnote 63. 

The court also noted that Chancery Rule 44.1 provides the procedure for presenting foreign law to the court to allow the court to interpret a document governed by foreign law.  The rule provides that a party is required to give notice in the pleadings or other reasonable written notice that the law of a foreign country will control.  Prior decisions have recognized that expert affidavits may be considered along with expert testimony.

Key Statements of Law:

·     The court explained the well-settled rule that Delaware courts will give effect to the terms of private agreements providing for forum selection clauses.  See footnote 64 and accompanying text.

·     In order for a forum selection clause to be considered exclusive under Delaware law, the “contractual language must be crystalline in stating the parties’ intent to litigate only in the designated forum.”  See footnote 66.

·     The Delaware courts also generally honor contractually-designated choice of law provisions as long as the jurisdiction selected “bears some material relationship to the transaction.”  See footnote 70.

·     A key issue is whether the forum selection clause states that it is exclusive, or whether the language will be construed as merely permissive. See footnote 80 (citing Delaware cases holding that a mandatory forum selection clause must make clear that the litigation is required to proceed in the designated forum).

·     In this instance, the applicable Austrian law applied to require litigation only in Vienna.

·     The court also rejected the argument that DGCL Section 168 applied because the statute relates to replacements for lost stock certificates, and in this instance the issue was whether the original stock certificate should have been issued.

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