The Delaware Business Court Insider again published this year’s Annual Review, reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.
This is the 17th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This list does not attempt to include all important decisions of those two courts that were rendered in 2021. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.
This year’s list focuses, with some exceptions, on the unsung heroes among the many decisions that have not already been widely discussed by the mainstream press or legal trade publications. Links are also provided below to the actual court decisions and longer summaries.
DELAWARE SUPREME COURT DECISIONS
A recent Delaware Supreme Court ruling endorsed the reasoning of a Delaware Court of Chancery decision holding that federal bankruptcy law does not entirely preempt the Delaware LLC Act to the extent that the LLC Act provides for a member of an LLC to become an assignee only, with economic rights, upon the filing of bankruptcy by that member, in Zachman v. Realtime Cloud Services LLC, 228 A.3d 1065 (Del. April 20, 2021).
The Delaware Supreme Court decided a consequential case in 2021 addressing choice-of-law and fraud-exclusion issues in connection with requiring D&O insurers to pay settlements with investors who claimed that the CEO of Dole Foods Company Inc. cheated them in a going-private buyout. RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020 (Del. March 3, 2021). Among the reasons that this decision is noteworthy is because it established the applicability of Delaware law to the insurance policy of a company incorporated in Delaware, but which had many contacts elsewhere. Also, importantly, the court determined that insurance coverage would not be defeated simply because it covered payment for the settlement of fraud allegations. The high court added that Delaware does not have a public policy against the insurability of losses occasioned by fraud, reasoning that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance against any liability whether or not the corporation has the power to indemnify against such liability.
In Coster v. UIP Companies, Inc., et al., No. 29, 2020 (Del. June 28, 2021), the unanimous opinion of Delaware’s high court en banc required that on remand the Court of Chancery determine if a board acted for inequitable purposes or in good faith, but for the primary purpose of disenfranchisement without a “compelling justification,” in connection with a stock sale intended to shift the power balance between rival deadlocked stockholder fashions, even if the sale were fairly negotiated. If the trial court found after remand that the transaction was intended for inequitable purposes without a compelling justification, the trial court could consider available remedies including cancelling the stock sale and considering the appointment of a custodian. Chief Justice Seitz wrote for the Supreme Court that the sanctity of the shareholder franchise superseded entire fairness review based on the circumstances of this case.
Although this is a decision that has already received widespread commentary, the Supreme Court decision in Brookfield Asset Management, Inc. v. Rosson [TerraForm], No. 406, 2020 (Del. Sept. 20, 2021), is a seminal decision that every corporate litigator must be aware of because it redefines and clarifies the test in Delaware to distinguish between a direct stockholder claim and a derivative stockholder claim.
Another Supreme Court decision that has already been the subject of extensive analysis but is still required reading for all corporate litigators is United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021), because it clarifies and restates the law in Delaware for the analysis of pre-suit demand futility for purposes of pursuing a derivative stockholder claim.
The Supreme Court of Delaware affirmed an epic Delaware Court of Chancery decision that found a breach of an agreement of sale that permitted the buyer to avoid consummation of the purchase for failure to comply with the “ordinary course covenant” in connection with how the business was managed between the date the agreement of sale was signed and the date of closing. See AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021). The Supreme Court explained that the seller was required to obtain the prior written consent of the buyer before making the changes that it made, and distinguished the separate reasoning that applied to the material adverse change clause.
DELAWARE COURT OF CHANCERY DECISIONS
The Court of Chancery decided an issue of first impression in Delaware by rejecting the argument that the management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining privileged information of the corporation. See In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2021).
The Delaware Court of Chancery penned a seminal decision that explains the analysis necessary to determine when a deadlock in an LLC might be the basis for a dissolution. In Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the court addressed whether there was a failure to achieve the votes necessary for board action and whether the board deadlock was genuine or merely manufactured to force the appearance of a deadlock.
Although the general rule in Delaware is that forum selection clauses will be upheld, even if they require litigation to be conducted in states outside of Delaware, an exception to the rule was applied to keep a dissolution case in Delaware notwithstanding a contrary mandatory forum selection clause, in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021).
A useful Chancery decision that is bound to be of widespread applicability is the ruling in RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021), in which the court explained that the fiduciary duties of a majority or a controlling stockholder do not require self-sacrifice, nor do they mean that such a fiduciary forfeits her contractual rights.
Delaware law has evolved regarding the nuances of forum non conveniens, and those most recent iterations are explained in the Chancery decision styled Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021).
The Delaware Court of Chancery recently recognized “outside reverse veil-piercing,” as compared to “insider reverse veil-piercing.” The former iteration was explained based on the unusual circumstances present in Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021).
The Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), remains noteworthy for its guidance that provides litigators in general, and corporate litigators in particular, with a definition of “glaringly egregious,” and helps to clarify where the line is drawn for determining when fees will be shifted for inappropriate litigation conduct. This decision gives greater instruction for what behavior will be sufficient to trigger the exception to the general American Rule that each party pays its own legal fees.
The Court of Chancery addressed the titular topic in Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021).
The Chancery decision in Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), deserves attention for its treatment of well-established principles of fiduciary duty with widespread applicability in the LLC context, absent unambiguous waiver. Also noteworthy, is the explanation about why the circumstances of this case allowed breach of contract claims to proceed to the extent that they did not overlap the fiduciary claims–and why both were permitted to be pursued through trial.
In connection with perennial post-closing claims related to the sale of a business, the Chancery decision in Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), explains the consequential nuances about what specific language in an agreement of sale will allow, or will bar, certain types of fraud claims. The money quote from the decision provides the best insight into its holding: “Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”
While it may be surprising to some, quite a few Delaware decisions have bound non-signatories to forum selection clauses. The Chancery decision in Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), provides the most thorough analysis of the titular topic, with scholarly insights and copious citations that explain the theoretical and public policy underpinnings that support the decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.
Those interested in the not self-evident winding-up process in connection with the dissolution of a corporation under Delaware law need to read the Court of Chancery decision styled: In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021), which provides an extensive analysis of the statutory provisions for the dissolution of corporations and a description of the corresponding winding-up process.
A recent Chancery decision explained why the first-filed rule was not applied in an advancement case under Section 145 of the Delaware General Corporation Law. See Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021).
The Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021), provides comprehensive detail of the factual background of the issuance of a formal legal opinion letter in connection with a transaction, and provides a thorough analysis of problems with that letter in a 194-page decision which also offers guidance to lawyers around the country who are involved in issuing a formal opinion letter based on Delaware law. The court found that the formal opinion letter given in the transaction at issue was not rendered in good faith, and explained what lawyers need to do in order to make sure the formal opinion letters that they grant do not suffer the same fate.
Several years ago the Delaware Supreme Court expanded the prior interpretation of Delaware’s consent statute that imposes personal jurisdiction on directors and officers who agree to service in that capacity for Delaware corporations. The contours of that expansion continue to be clarified and defined for those situations where there has been no breach of fiduciary duty. See BAM International, LLC v. MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021).
SUPPLEMENT: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, and one of the most prominent corporate law expert’s in the country, was kind enough to link to this article and described it as “essential reading”.
*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.
**Ciro C. Poppiti, III practices in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.
***Cheneise V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.