A recent Delaware Court of Chancery letter ruling determined the amount of a bond for an injunction entered in connection with a suit to enforce a non-competition agreement. The matter of Natera, Inc. v. Goddard, C. A. No. 2020-0371-KSJM (Del. Ch. June 15, 2020), deserves mention due to the relative lack of a robust body of decisional law on this topic. See, e.g., only two prior decisions highlighted on these pages that address this issue (which I don’t suggest are the only recent cases on this topic.)

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Chancery Court recently green-lighted key parts of an investment company’s suit against officers and owners who allegedly inflated their I.T. and data center services provider’s worth, finding the buyer plaintiff was more likely the victim of fraud and breach of contract rather than mere buyer’s remorse in LightEdge Holdings LLC, et al. v. Anschutz Corporation et al., No. 2019-0710-JRS, memorandum opinion (Del. Ch. June 11, 2020.)

Vice Chancellor Joseph R. Slights’ June 11 ruling denied the seller defendants’ motion to dismiss LightEdge Holdings LLC and parent Anschutz Corporation’s well-plead charges that they concealed bad financial news and doctored the business prospects of Delaware-chartered OnRamp Access, LLC during sale negotiations.

Fraud, contract claims survive

He found that fraud and breach of contract allegations are well-supported and unjust enrichment and some extra-contractual representations claims are not barred by the anti-reliance provision in the sale document. However, he said the buyer failed to state viable aiding and abetting claims, civil conspiracy, conversion and Colorado and Texas state law charges.

In early May 2018, LightEdge Holdings, LLC had been negotiating a $106 million sale with defendants Brown Robin Capital, LLC, a Delaware-chartered Limited Liability Company, OnRamp CEO Lucas Braun, President and Board Chairman Ryan Robinson and CFO Jack D’Angelo when OnRamp disclosed news that literally gave LightEdge and parent Anschutz pause. A major OnRamp client had cancelled its services subscription for a $600,000 revenue loss and OnRamp’s April sales were less than 1/3 of its target.

Falsified financials?

According to the opinion, the buyers were assured of the company’s continued bright prospects and talks resumed because, “under the direction of the OnRamp insiders, company management secretly falsified the product pipeline by adding more than $6 million in illusory projected annual revenue.”

In addition, one of OnRamp’s biggest customers had told its management during the sales negotiations that it planned to cut its business in half but that was concealed from the buyers, as was the un-collectability of numerous client accounts, the September 2019 complaint says.

Defendants moved to dismiss the entire 13-count complaint, but the vice chancellor found the breach of contract claims were not barred by the sales agreement, the fraud claims were not boot-strapped breach of contract claims and the unjust enrichment claims were not duplicative of the breach of contract claims.

Parent helps finance

He found that even though LightEdge was the official buyer, Anschutz, which contributed $62 million toward the purchase, had standing to sue as a defrauded buyer.

The court spent most of the June 11 ruling parsing other claims that defendants argued were duplicative of other charges or barred under Delaware law – including Colorado statutory theft and securities fraud and Texas statutory fraud and securities fra

The vice chancellor said Delaware General Corporation Law applies to both the plaintiffs’ contractual and extra-contractual claims. He said § 2708 “requires courts to presume that, where parties have chosen Delaware law in their contract, the transaction memorialized in the contract has a material relationship with our state.”

Abry is controlling

He says the extra-contractual claims are governed by Delaware law as established by then-Vice Chancellor Leo Strine’s seminal 2006 opinion in Abry P’rs V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032, 1046 (Del. Ch. 2006), which Vice Chancellor Slights quotes:

“To hold that their choice is only effective as to the determination of contract claims, but not as to tort claims seeking to rescind the contract on grounds of misrepresentation, would create uncertainty of precisely the kind that the parties’ choice of law provision sought to avoid.”

Vice Chancellor Slights agreed with that “persuasive” logic, writing that, “To try to parse out what exactly should be decided under Delaware law and what falls under another state’s law … would be a foolhardy endeavor almost certain to result in the kind of confusion contractual choice of law provisions are meant to avoid.”

Relying on anti-reliance?

Regarding defendants’ assertion that various sections of the sale agreement could be read as an anti-reliance statement, the vice chancellor said Delaware courts have consistently held that:

“sophisticated parties to negotiated commercial contracts may not reasonably rely on information that they contractually agreed did not form a part of the basis for their decision to contract.”

But he said anti-reliance language must be explicit and comprehensive, meaning the parties must:

“forthrightly affirm that they are not relying upon any representation or statement of fact not contained [in the contract].”

And although the sale contract contains a standard integration clause, “What is notably absent from these provisions is any disclaimer of reliance by Buyer,” the Court noted.


In connection with the Delaware Supreme Court’s recent Order providing for the multi-phased, limited reopening of Delaware Courthouses as of June 8, 2020, while at the same time extending Delaware’s “judicial emergency declaration” for another 30 days, the Delaware Court of Chancery has issued an Order to impose new Courtroom protocols for attorneys and visitors, also effective June 8, 2020, such as installing podiums on counsel tables instead of a common podium in the center of the Courtroom, and limiting the number of people who can enter the Courtroom. It will be the “new normal” for quite some time. The Delaware Judiciary has a webpage with the many Orders and related information regarding its response to the Coronavirus/Covid-19 pandemic.

“Be careful out there.”

A recent Delaware Supreme Court decision is noteworthy for the approach it takes in determining the meaning of a word in an agreement, for example, by parsing the syntax and sentence structure where the word appears in the agreement. In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., Del. Supr., No. 68, 2020 (May 22, 2020), the Delaware Supreme Court provides useful guidance about how to determine the meaning of a key word in an agreement. In this matter, despite a lengthy definition in the agreement of the word “transfer”, the parties still disputed its meaning.


The underlying dispute involved a complex constellation of interrelated entities which the court provided a graphic description of by way of a chart. The essential facts on which the dispute was based involved the interpretation of an LLC agreement which imposed restrictions on the transfer of LLC units and provided for the right of first refusal and other provisions triggered by a “transfer.” Several terms were defined in the agreement–with rather lengthy definitions–but the definitions did not provide sufficient clarity. The most consequential definition that was disputed was the meaning in the context of the agreement of the word “transfer.”

The problem presented to the Court of Chancery was whether the sale of an interest triggered either a right of first refusal and/or a right of first offer, and if both applied, which was to be given priority.

The Court of Chancery concluded that a sale by Hunt of its shares to Borealis would be a “transfer.” The Supreme Court had a different view.

The finding by the Court of Chancery that the purchase of Hunt’s shares constituted a transfer, triggered the requirement to offer the shares to Sempra. As a result of other consequences of that holding, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares, and entered judgment in favor of Sempra. This expedited appeal followed an expedited trial. It remains noteworthy that this opinion came only 30 days after the final submission of the appeal to the Supreme Court.

Analysis by the Supreme Court:

The Supreme Court held that the right of first refusal in Section 3.9 of the agreement at issue is only triggered by transfers by the Minority Member and its Permitted Transferees, and that Hunt is neither. Put another way, Delaware’s High Court held that the fact that the right of first refusal is only triggered by transfers by the Minority Member is dispositive in favor of Borealis, regardless of whether the Hunt Sale could be said to effect an indirect transfer.

One of the agreements involved was governed by New York law and one was governed by Delaware law–but the court noted that the law of both states as it relates to contract interpretation in this case is the same. See footnote 22.

Two other footnotes contain important observations of Delaware law that are especially worth remembering:

(1) The management of an LLC is vested in proportion to the then-current percentage or other interest of members in the profits of the LLC owned by all the members, and “the decision of members owning more than 50% of the said percentage or other interest in the profits [is] controlling.” Footnote 27. See Section 18-402 of the Delaware LLC Act.

(2) Also noteworthy is the observation by the Court that an argument that was only raised in a footnote would justify “passing over it” because footnotes, according to Delaware Supreme Court Rules, “shall not be used for argument ordinarily included in the body of a brief.” Footnote 28. See Del. Supr. Ct. R. 14 (d)(iv).

The most noteworthy parts of this pithy 21-page decision are found in the last few pages which include the core of the court’s reasoning.

In particular, the most memorable part of the Court’s reasoning is the parsing by the court of the syntax and sentence structure of the agreement in order to interpret the meaning of a particular word in the agreement. The court focuses on the “subject of the operative sentence” in Section 3.1, of which “the verb phrase ‘may only transfer’ serves as the predicate.” The court further explains that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in section 3.9.

The Court added that the subject, which is stated conjunctively, does not include Hunt. Therefore, the court reasoned that it was unnecessary and inappropriate to parse the definition of transfer, as defined in the agreement, to determine the scope of Section 3.1 and Section 3.9, because: “the subjects of the opening sentences in both of those sections do that for us.” See Slip Op. at 20 – 21.

In sum:

Although the detailed factual background needs to be reviewed more closely in order to fully understand the Court’s reasoning, for anyone who wants to understand Delaware law regarding proper contract interpretation, and interpretation of the meaning of a word, even when it is defined in an agreement, this opinion is must-reading.


This post was prepared by Chauna A. Abner, an associate in the Delaware office of Lewis Brisbois.

Invoking the principles articulated in USA Cafes, the Court of Chancery recently held that a controller cannot use its control over an entity to advantage himself at the expense of the controlled entity. 77 Charters, Inc. v. Gould, C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020).


The plaintiff in this case was an investor with a non-preferred ownership in a mall. Defendant, Jonathan D. Gould also invested in the mall and held a similar non-preferred interest. A non-party, Kimco, possessed preferred interests in the mall. Unbeknownst to 77 Charters, Gould acquired Kimco’s interest. Gould then amended the operating entity’s governing documents to advantage the mall’s preferred investors (i.e., himself) before selling part of Kimco’s interests to a third party for the same price he paid for the whole interest. Gould retained “a slice of the preferred stake for himself.” Id. at *2.

Claims Made

77 Charters filed suit against Gould alleging a multitude of claims, including a claim that Gould breached his fiduciary duties by acquiring Kimco’s interest, amending the operating agreement of the controlling entity and then selling the mall at a time and in such a manner where he derived a personal benefit while 77 Charters was left with nothing. Id. at *3.

Court’s Holding

In a 65-page opinion granting in part and denying in part the defendants’ motion to dismiss, the Court held that “[w]hile the scope of USA Cafes-type liability is limited, ‘it surely entails the duty not to use control over [an entity] to advantage the [controller] at the expense of’ the controlled-entity” and the plaintiff well pled such a circumstance. Id. at *40 (internal citations omitted).

In USA Cafes, L.P. Litigation, 6 A.2d 43 (Del. Ch. 1991), highlighted in many other decisions summarized on these pages, Chancellor Allen held that “remote ‘controllers’ of an alternative entity may owe limited fiduciary duties, the ‘full scope’ of which the court did not ‘delineate.’” 77 Charters, Inc., C.A. No. 2019-0127-JRS, at **3-4 (citing USA Cafes, 6 A.2d at 49).

In 77 Charters, Inc., the plaintiff plead that Gould, the LLC’s ultimate controller: “(i) acquired the Preferred Interest, (ii) executed the Amended CRA to increase the Preferred Interest’s economic value at 77 Charters’ expense and (iii) sold a slice of the augmented Preferred Interest to Eightfold while retaining a piece for himself.” Id. at ** 40-41.

The Court held that Gould, as the LLC’s ultimate controller, conceivably owed “USA Cafes-type” fiduciary duties and that Gould conceivably breached those duties by amending an agreement that governed the LLC’s operating company to enrich himself. Id.  The Court found the plaintiff’s allegations to be well-plead and thus denied the defendants’ motion to dismiss with respect to this count. Id.

In addition to a host of other claims, the Court also analyzed 77 Charters’ aiding and abetting and civil conspiracy claims against Eightfold, an entity that was unaffiliated with the other defendants. Id. at **57-62. In doing so, the Court recited the four basic elements of a claim for aiding and abetting breach of fiduciary duty: “(1) the existence of a fiduciary relationship, (2) a breach of fiduciary duty, (3) defendant’s knowing participation in that breach and (4) damages proximately caused by the breach.”Id. at *57.

After finding that 77 Charters failed to satisfy these elements, the Court dismissed this count of the complaint and turned to 77 Charters’ civil conspiracy claim. The Court held that the conspiracy claim, “as pled, [was] functionally the same as 77 Charters’ aiding and abetting claim.” Id. at *60. After recognizing the “functional identity” of the two claims,” id. at *60, n. 242, the Court iterated “[t]he elements for civil conspiracy under Delaware law . . . (1) a confederation or combination of two or more person[s]; (2) an unlawful act done in furtherance of the conspiracy; and (3) actual damage.” Id. at **60-61. The Court then also dismissed this count of the complaint.

Key Takeaway

Although the decision provides a lengthy analysis on several principles of Delaware corporate law, I highlight the following key takeaway: a controller cannot use its control over an entity to advantage himself at the expense of the controlled entity by, for example, amending an agreement to waive the duty of care. See id. at *40, n. 162. This implicates the fiduciary duty of loyalty and its variant, usurpation of corporate opportunity.

This post was prepared by Frank Reynolds, who has been following Delaware corporate law, and writing about it for various legal publications, for over 30 years.

The Delaware Court of Chancery recently imposed additional sanctions on the controller of a chain of troubled senior care facilities who had repeatedly flouted orders to give a court-appointed receiver and investors access to the finances of his labyrinth of companies, and who might place vital revenue out of reach in GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. May 18, 2020).

In a May 18 opinion, Vice Chancellor Sam Glasscock held that 6 Del. C. § 18-703 of the Delaware Limited Liability Company Act justifies a temporary restraining order and an interim charging order to force defendant controller Andrew White to pay a receiver the court brought in to stabilize his firm.

That section specifically addresses the rights and responsibilities of limited liability company members and the court’s power to use charging orders to satisfy judgment creditors without encroaching on a defendant member’s property rights.

The vice chancellor said that section allows him to effectively impose a lien against the entities through which White receives revenue from his 100% ownership of two limited liability companies that generate income through leases of the senior care facilities properties of East Lake Capital Management LLC.

It was the third ruling within a year in which the Court sought to provide interim relief for a group of investor plaintiffs led by GMF ELCM Fund L.P. who claimed White’s alleged continuing neglect and mismanagement of his senior care facilities hurt the value of their investments and the residents’ quality of life.

Their November 2018 suit claimed White’s multi-state nursing home chain and its residents were in serious trouble, facing litigation and state actions in Vermont, North Carolina and elsewhere and that delivery of food to residents and pay to employees had often been interrupted or delayed.

After a March 29, 2019 rule-to-show cause hearing, the vice chancellor found White did not cooperate with the receiver he had appointed over ELCM HCRE GP LLC, the lead entity through which White controlled the chain and said White repeatedly failed to show for hearings or gave confusing testimony.

The April 4 opinion

In an April 4 memorandum opinion, the Court stated that it had learned that White had repeatedly failed to comply with orders to turn over financial records and other documents to the receiver, ex-Chancellor William Chandler, and that both he and White’s defense counsel petitioned to withdraw from the case. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, letter opinion issued, (Del. Ch. Apr. 4, 2019).

According to the Court, White’s “intransigence” and “obstruction” made it impossible for them to do their jobs.

In that opinion, he found that White had engaged in bad faith litigation, which justified a departure from the normal “American Rule” where each side pays its own legal costs. He said at that point, White had failed to pay more than $350,000 in receiver costs and imposed civil contempt, which he said is remedial, rather than the criminal variety, which is punitive.

The August 7 opinion

That was not enough to effect the change the vice chancellor wanted, and in an August 7 opinion, he granted the plaintiffs’ motion to dissolve and liquidate HCRE because it was not fulfilling the purpose for which it was created. GMF ELCM FUND L.P., et al. v. ELCM HCRE GP LLC et al., No. 2018-0840-SG, memorandum opinion issued, (Del. Ch. Aug. 7, 2019).

The purpose of HCRE was to operate the nursing home chain and invest in new facilities but it has not been able to do either because of White’s “obstruction,” including intercepting and redirecting revenues needed to operate the facilities – most of which are already under state receivership, the Court said.

“The business, therefore, must be liquidated to preserve what value remains,” Vice Chancellor Glasscock said in the August opinion. “In other words, the operation of the business is stymied, and absent liquidation, its remaining value is at risk.”

The May 18 opinion

But that too was not enough, the Court said in its May 18 opinion, because the plaintiffs found through discovery that White was using two limited liability companies, EL FW Leasing LLC and EL FW Intermediary I LLC, to collect sublease payments from senior care facilities in Connecticut, but he did not use the funds to pay any portion of the judgments against him, the vice chancellor said.

The plaintiffs sought a charging order as a lien against the distribution of those funds to the sole member of those FW entities, Andrew White.

Under 6 Del. C. § 18-703, a charging order acts as a lien against White’s membership interest in the FW entities and gives judgment creditors “the right to receive any distribution or distributions to which the judgment debtor would otherwise have been entitled,” the Court said. But it does not grant “any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.”

The vice chancellor found the plaintiffs stated a colorable claim because:

(1) They have outstanding judgments in the Court, arising as sanctions for White’s misconduct, which he claimed to be unable to satisfy;

(2) Plaintiffs faced irreparable harm because, based on this litigation’s history, there was a likelihood that in the absence of injunctive relief, White will act to make the assets unavailable to the plaintiffs;

(3) A balancing of the equities favored the plaintiffs because a charging order on White’s membership interests would not cause a default of the master lease, harming the FW Entities as White claimed.

He ordered a TRO and charging order to remain in effect until a summary judgment decision could permanently resolve the matter.


The Court of Chancery recently refused to reconsider its decision that, pending resolution of a challenge to the validity of their indemnification agreements, Stimwave Technologies Inc. must advance defense costs to a CEO and a director in actions by the company and the U.S. Department of Justice.

Vice Chancellor Sam Glasscock’s May 13 letter-to-counsel opinion denied Stimwave’s motion to reargue his April 1 bench ruling after rejecting the medical device developer’s contention that his order to advance expenses effectively granted mandatory relief without a trial when key facts were in dispute.

The Vice Chancellor said he granted preliminary injunctive relief because of “the summary nature of, and the public policy undergirding, advancement actions” where the Court “has long recognized that a delay in recognizing advancement rights may ultimately render those rights illusory.”

The short decision is yet another example of the Court’s reluctance to let companies inject novel objections to established advancement provisions to hold up reimbursement of defense funds to eligible officers and directors in actions relating to their corporate positions.

According to its website, Stimwave is a Delaware-chartered medical technology company founded by former CEO Laura Perryman in Pompano Beach, Florida, that markets an electronic pain relief device.  In April 2018, its board adopted, and the stockholders ratified, an indemnification agreement that she would supposedly be able to immediately offer to the directors and officers.

But one year later, Stimwave had undergone management changes and filed suit against Laura and Gary Perryman in an underlying action in Chancery. When she and fellow director Gary Perryman sought legal fee reimbursement for that suit and an investigation by the U.S. Department of Justice, the request was denied.  Stimwave Technologies Incorporated v. Laura Tyler Perryman, et al., C.A. No. 2019-1003-SG, complaint filed (Del. Ch. Feb. 11, 2020).

They filed a complaint for advancement, with a motion to expedite and request for temporary restraining order February 11, 2020, claiming Stimwave violated their valid agreements.

The Vice Chancellor on February 20 granted their motion to expedite, but denied their TRO motion, and instructed the parties to proceed to a judgment on the pleadings.  Then on April 1, from the bench, he denied their motion for judgment on the pleadings but converted it into a motion for interim relief, which he granted.

When Stimwave sought reargument — arguing that the decision violated the fundamental precept that mandatory injunctive relief be ordered only after trial or on facts not legitimately in dispute, citing C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Tr., 107 A.3d 1049, 1071–73 (Del. 2014).  But the Court said it appeared that Stimwave’s board validly adopted the indemnification bylaw in April 2018 and the shareholders ratified it days later.

That, coupled with (a) the Perrymans’ apparent promise to repay the advanced funds if the court found them not to be entitled to advancement and (b) the bylaw’s wording that, the court found, likely referred to current officials that included the Perrymans, seemed on its face, to favor the petitioners here, the court said.

But Stimwave maintained that the wording actually only applied to an earlier designated director and not the Perryman petitioners apparently due to a problem with the timing of the board’s adoption, the stockholder ratification and when the CEO conferred the indemnification.

The vice chancellor said on its face, the indemnification more likely applied to the then-current officers and directors.  He found that under the circumstances, since the Perrymans had apparently made the required commitment to repay the advance funds if they were for any reason not entitled to them, the court’s practice was to require payment until the validity of the pacts was resolved.

“Litigating a defense attacking the validity of a contract for advancement before providing advancement might leave the petitioners unable to effectively vindicate their contractual advancement rights, assuming they exist, as well as to defend the underlying substantive action and investigation, threatening imminent irreparable harm,” the opinion said

However, he limited the advancement order to legal costs incurred from the date of the opinion forward, excluding legal fees the Perrymans had already incurred in responding to the DOJ’s investigation.

The vice chancellor reasoned in support of his holding that: “the unusual procedural posture of this matter, the nature of the respondent’s defense that the indemnification agreements are void, and the fact that the forgoing defense will be addressed promptly,” and because the petitioners could seek to recover those amounts once the validity of the indemnification agreements is resolved.



A recent Delaware Court of Chancery post-trial opinion addressing a demand for books-and-records by an LLC member did not attract my attention for the rather routine legal issues it decided, but it provides an opportunity to rely on it as a launchpad for broader commentary generally on this common type of Delaware corporate and commercial litigation. This post is intended for advanced readers of these pages who have followed at least some of the 200-plus highlights on this blog regarding Delaware decisions on DGCL Section 220 over the last 15 years, and a fewer number of case highlights regarding the analog to Section 220 in the Delaware LLC Act: Section 18-305.

In Riker v. Teucrum Trading, LLC, C.A. No. 2019-0314-AGB (Del.Ch. May 12, 2020), the Court determined after trial that only some of the requested data requested by the LLC member, and not yet provided, was required to be produced, although the case followed a familiar pre-trial pattern: The company initially refused to produce most of the documents requested prior to the suit being filed; then additional documents were produced after suit was filed, but not as many as requested. At trial, the Court needed to determine how many of the documents still requested were required to be produced.

Procedural History

The complaint was filed in April 2019. Court guidelines suggest a trial date within 90 days of the complaint for summary proceedings such as these, but through no fault of the court, that timetable may not always be possible. In this case, a pre-trial mediation took place that resulted in additional documents being produced, and that process added additional months to the timetable for trial. Post-trial briefing was also submitted.

Highlights of Decision

  • The Court held that all the “form and manner” requirements of the statute were met, in terms of stating a proper purpose, for example. See pages 8-18.
  • Valuation was recognized as a well-established statutory proper purpose, so the focus was on whether the documents requested were necessary in order to perform a valuation using the DCF method, which the plaintiff testified he was qualified to perform. The Court held that he was entitled to only one of the documents requested–most of them already having been produced. See generally, Lim v. PowerWise, highlighted on these pages, a 2010 Chancery decision that determined what documents were necessary to pursue the proper purpose of valuation in the context of that case.
  • The second purpose was recognized as proper–investigation of mismanagement–but a prerequisite for pursuing such a purpose is presenting a “credible basis” of wrongdoing which the plaintiff in this case did not establish in connection with the documents requested for this category of requests. See pages 21-28.

General Commentary on Section 220/Books-and-Records Cases

Hundreds of highlights on these pages, over the last 15 years, of Delaware decisions on demands for books and records–based on both the corporate statute and the LLC Act–and the many cases of this type that I have handled over the last 30 years or so, reveal a few common themes:

  • Although a reading of DGCL Section 220 and Section 18-305 of the LLC Act may appear to the casual observer as relatively simple and straightforward, the many hundreds of published decisions interpreting those statutes tell a different story.
  • Exhortations in ample Delaware corporate litigation decisions instruct Delaware lawyers to “employ the tools at hand”, including Section 220,  prior to filing a plenary action, especially a derivative suit which requires that one plead with particularity why pre-suit demand is futile. But what a blunt instrument Section 220 can be. Notably, Section 220 case law is often used by analogy when applying Section 18-305.
  • Highlights on these pages of decisions on this topic recite the many nuances and prerequisites that must be mastered for a successful books and records claim under either statute, often added by judicial gloss, which are not obvious from a reading of the statutes only.
  • Having represented both companies and stockholders/members in these cases over the years, there are many traps for the unwary. Companies have many arrows in their quiver to oppose a request under either statute. In addition to challenging a proper purpose (which can include a defense that the stated purpose is not the “true” purpose), a fertile field for disputes in this area relates to whether each of the documents requested is necessary to accomplish the stated purpose.
  • These cases are not for the faint of heart because:

(i) As this case indicates, the litigation can last for a year or more (and some cases highlighted on these pages have lasted several years through appeal);

(ii) In connection with the litigation lasting as long as some plenary cases, the fees incurred in these cases can be substantial for matters such as discovery (however limited and circumscribed by the narrow scope and summary nature of these cases) and motion practice, for example, related to discovery disputes (though dispositive motions are strongly discouraged.);

(iii) As the instant case highlighted above exemplifies, the results of trial in these types of case are often unsatisfying to the extent that even if one is successful–which is never a certainty–the court merely orders the production of documents. This contrasts with a typical trial in which success often means a monetary award or substantive relief. So too, an order for production of records does not equate with receipt of records. It’s not uncommon that a continuing struggle ensues to enforce the production ordered by the court.

(iv) Truly egregious behavior, as an exception to the American Rule, must be presented before the court will engage in fee shifting–otherwise each party pays its own fees. Thus, the economics must support pursuing one of these cases through trial, and possible appeal.

UPDATE: Professor Stephen Bainbridge, a nationally-prominent corporate law professor whose scholarship is often cited in Delaware court opinions, kindly linked to this post on his blog.

A recent letter ruling by the Delaware Court of Chancery is noteworthy, in part, because it deals with the issue of a real-party-in-interest, and there is a relative paucity of comprehensive case law on this somewhat esoteric procedural issue. The decision in Fortis Advisors v. Allegan W.C. Holding, Inc., C.A. No. 2019-0151-MTZ (Del. Ch. May 14, 2020), was made in the context of the discovery obligations of the plaintiff acting in its role as a shareholder representative.

The Court in this matter denied a motion to force stockholders to participate in discovery and be subject to trial subpoenas–rejecting the argument that they were the “real parties in interest”. A formal agreement appointed Fortis Advisors as the shareholders’ representative, as well as a “lawful agent and attorney-in-fact.” The motion also sought, in the alternative, to make Fortis Advisors responsible for procuring and producing documents from the stockholders it represented.

Key Takeaways:

  1. This ruling essentially resolved a discovery dispute, and the court reasoned that if it granted the Motion to Compel data directly from the shareholders, then the agreed-upon shareholder representative structure would be displaced, and it would also circumvent Rule 34, regarding who was in control over documents. Nor should the efficiency of the representative structure for resolving post-closing disputes be disturbed by treating the shareholders as the real parties in interest, the Court reasoned.
  2. Prior Chancery decisions have held that Stockholder Representatives are considered the real parties in interest, and those representatives may bring an action without joining the stockholders. See footnotes 23 and 24.
  3. Notably, Court of Chancery Rule 17(a) was not cited, though it refers to real parties in interest, and provides for flexibility to add those parties to a case if needed.