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

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

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

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


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

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

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

Basic Background Facts

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

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

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

Procedural History

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

Issues Addressed

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

Highlights of Key Legal Analysis

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

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

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

Determination of Proper Entity as Decision Maker

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

Reasonable Reliance on the Skadden Opinion

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

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

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


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

Concurring Opinion

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

Supreme Court Offers New Guidance on DGCL Section 220

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

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

Key Takeaway

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

Overview of Background

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

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

The Basics

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

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

Key Highlights and Takeaways

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

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

In Sum

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

The Standard for Individual Contempt for Corporate Actions

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

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

Procedural Background

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

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

Key Standards of Contempt Clarified

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

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

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

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

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

Supreme Court Decides Deadline for Notice of Indemnification Claim

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

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

Key Background Facts

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

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

Legal Analysis

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

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

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

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

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


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

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

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

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

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

Supreme Court Splits on Contract Interpretation Issue

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

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

Why This Decision Is Noteworthy:

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

Key issue:

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

Basic Background Facts

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

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

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

Basic Principles and Nuances of Delaware Contract Law Underscored

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

Selected Excerpts of Court’s Reasoning

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

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

Supreme Court Decides Important Contract Dispute in Sale of Business

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

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

Basic Facts

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

Highlights of Court’s Analysis 

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


Chancery Examines Equitable Defenses and Restrictions on Transfer of LLC Interests

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

Brief Background

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

Key Points

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

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

Chancery Addresses Fiduciary Duties of Corporate Officer

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

Brief Overview

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

Selected Key Principles of Delaware Law

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

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

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

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

Chancery Addresses Claims of Excessive Executive Compensation

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

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

Another Memorable Quote

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

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

          Slip op. at 2.


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

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

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

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

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

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

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

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

When Entire Fairness Standard of Review Applies–Absent an Exception

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

Standard for Awards to Controllers

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

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

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

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

Standard for Accepting “Clearly Improper” Compensation

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

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

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

Slip op. at 32

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

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

Waste Claims Dismissed

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

Stock Incentive Plan Not Self-Executing

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

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

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

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

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

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

Standard Applicable to Officer Defendants

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

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

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

Irrevocable Proxy Too Ambiguous to Enforce

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

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

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

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

Chancery Declares Delaware a “Pro-Sandbagging” State

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

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

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

Additional Selected Highlights

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

Chancery Decision Addresses Advancement Issues

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

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

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


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


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

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

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

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

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

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

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

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

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

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

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

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


Professor Stephen Bainbridge, a nationally-prominent corporate law professor whose voluminous scholarship is often cited in Delaware corporate law decisions, was kind enough to share this annual review via Twitter with the following high praise while referring to a subscription-only publication called The Chancery Daily which reports on decisions from Delaware’s Court of Chancery and Supreme Court:


With all due deference to @chancery_daily, which is considerable, this is the single most indispensable event of the corporate law year. A must read.

Annual Review of Key Delaware Corporate Decisions


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

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

In my latest article for the current issue of The Delaware Business Court Insider, I provide highlights of a recent Chancery decision that involved virtually no damages for non-compliance with a confidentiality provision. Courtesy of that publication, the article is reprinted below.

A recent noteworthy Delaware Court of Chancery decision should be kept handy by corporate and commercial litigators for its practical and persuasive analysis of noncompliant handling of confidential documents: AlixPartners v. Mori, C.A. No. 2019-0392-KSJM (Del. Ch. April 14, 2022).

Key Aspects of Decision

This litigation is based on the defendant’s departure from AlixPartners to work for a client of AlixPartners in Italy.


The court awarded virtually no damages for noncompliance with the confidential designation given to certain documents. The introductory paragraph in the court’s 58-page post-trial opinion includes a money quote that captures the essence of this decision. In connection with the end of his employment with the plaintiffs:

“… the defendant copied thousands of the plaintiffs’ confidential documents onto his personal devices. He did so to use them in a follow-on employment lawsuit in an Italian court [—he lived in Milan—], although he also used certain of the documents for other innocuous, personal ends—to update his curriculum vitae and email goodbyes to his former clients.” Slip op. at 1 (emphasis added).


One could infer that the court was less than enthused that plaintiffs “pressed on with their claims,” on this issue—notwithstanding the return of the documents defendant had copied other than those he needed for his separate employment lawsuit with the plaintiffs.

Key Background Facts

The defendant, Giacomo Mori, was a managing director in the Milan, Italy, office of AlixPartners.

Italian law applied to some aspects of this dispute and experts on Italian law testified that Mori had a right to take and use documents from AlixPartners that he needed for his lawsuit with AlixPartners about his departure. See AlixPartners v. Mori, 2019 WL 6327325 (Del. Ch. Nov. 20, 2019) (prior decision in this case addressing jurisdictional issues). See generally Slip op. at 20 and n. 92 (observing that the court often grapples with employment disputes that the parties make into partnership agreement disputes, citing a recent case as another example.)

Breach of Confidentiality Obligations

This post-trial opinion features an application of the Italian Constitution, as well as a discussion of decisions of various courts throughout Italy, in addition to Italian statutory authority and various opinions of experts on Italian law.

Importantly, regarding whether there was a defense to a breach of a confidentiality provision for Mori to use some of the documents in connection with his separate employment litigation, the court relied on Section 178(1) of the Restatement (Second) of Contracts for the statement of law that a promise or other term of an agreement is unenforceable in some instances on grounds of public policy. Section 178(3) identifies four additional factors to consider “in weighing a public policy against enforcement of a term.”

The court assumed that Italian law provided a strong public policy to permit Mori to use confidential documents for use in his Italian litigation, based on either Section 178(1) of the Restatement (Second) of Contracts, or Section 187(b) of the Restatement (Second) of Conflict of Laws, regarding the law of the state chosen by the parties to govern their contractual rights and which state has an applicable fundamental policy relevant to an issue in dispute. The court also cited to Williston on Contracts, Section 19:8.


The court found no violation of a nonsolicitation clause, and employed reasoning that has widespread applicability. The court explained that a non-solicitation provision “should not be construed to prohibit a former employee from responding to unsolicited inquiries. Otherwise, a former employee would have to be on guard at every turn and possibly barred from responding to a host of acceptable communications.”

Trade Secrets Under Italian Law

The court determined that Italian law applied to the issue of trade secrets and that the Delaware Uniform Trade Secret Act does not have extraterritorial effect. The court emphasized the challenge it faced to independently test the parties’ Italian law contentions by being unable to conduct its own independent research in original Italian sources, and that it was entirely reliant on the information provided by the parties, one of whom appeared pro se. Therefore the court cautioned that the precedential value of its decision on Italian trade secret law should be understood to be limited to the facts of this case and the law presented by the parties. Nonetheless, the court regaled the reader with a discussion of multiple decisions of several courts throughout Italy that decided trade secret issues under Italian law.

Permanent Injunction and Damages Denied

The court provides the reasons why permanent injunctive relief was denied. Notably, an Italian court awarded the defendant in this case nearly $2 million against AlixPartners regarding employment claims.

The Court of Chancery awarded a mere $7 in nominal damages, which was the amount requested by the plaintiffs, and which for all practical purposes, as an economic matter, is the functional equivalent in the context of this case, of no damages awarded for the breach of confidentiality provisions.


In connection with a recent dispute among LLC members, the Court of Chancery discussed an apparent issue of first impression in Delaware: The rights of the fiduciary of a debtor who seeks to help a creditor-entity that the fiduciary has an interest in. In Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021), the court discussed claims among LLC members in connection with an LLC Agreement that did not unambiguously waive fiduciary duties.

The court observed that no Delaware case appears to have dealt with the precise issue presented here: Namely, what is the impact of a tortious interferer acting in bad faith as a fiduciary to a debtor in service of a creditor counterparty in which the fiduciary holds an interest?

The court referred to Section 773 of the Restatement (Second) of Torts which requires that the protection of an interest be undertaken “by appropriate means” when a party is entitled to defend a legally protected interest. See Redbox Automated Retail LLC v. Universal City Studios LLLP, 2009 WL 2588748, at *6. See also Restatement (Second) of Torts Section 770, which provides that an actor “charged with the responsibility of a third person” who “intentionally causes that person not to perform a contract . . . does not interfere improperly with the other’s relation if the actor (a) does employ wrongful means, and (b) acts to protect the welfare of the third person.

Comment A to Section 773 also provides that the provisions in Section 773 requiring that the protection of an interest be undertaken by appropriate means is “of narrow scope and protects the actor only when (1) he has a legal and protected interest, and (2) in good faith asserts or threatens to protect it, and (3) the threat is to protect by appropriate means. See footnotes 167 and 168 and related text.

In this case the court found that at “a bare minimum” it was reasonably conceivable that the bad faith acts of a fiduciary resulting directly in the alleged interference with an existing contract are improper means to pursue the ends of the LLC, and that the allegations were sufficient for pleading purposes to demonstrate that the interference was unlawful and therefore executed by inappropriate means. See footnote 169.

This decision also features an extensive explanation of the “not always easy to understand” concepts embodied in the “savings statute.” See Slip op. at 23-32.

Finally, an always useful explanation of the analysis of pre-suit demand futility in the context of an LLC is provided at pages 55 to 57.



In a high-profile expedited control contest covered on the front page of The Wall Street Journal and most of the major media outlets covering business, law or Hollywood, the Court of Chancery denied the request for a TRO by a minority stockholder that sought to thwart the efforts of the Redstone family from exercising its voting control regarding a potential deal with Viacom, in an opinion styled CBS Corp. v. National Amusements, Inc., C.A. No. 2018-0342-AGB (Del. Ch. May 17, 2018).

The issues in this opinion and the detailed facts could be the topic of a law review article. The intent of this short blog post is more modest and will rely on bullet points for busy readers, but a careful reading of the short decision of the court linked above is necessary for anyone who seeks to be current on the latest rulings impacting Delaware corporate litigation.

Key Facts

  • Shari Redstone and her family have voting control of CBS even though they own a small percentage of the stock. A Special Committee of the CBS board was concerned that Ms. Redstone would use her voting power to replace the CBS directors who were not in favor of a merger with Viacom.
  • The Special Committee planned a dividend of voting stock that would dilute the voting power of Ms. Redstone but purportedly would not impact the economic interests of her or any other stockholders.
  • On Monday, May 14, the Special Committee sought a TRO. On May 16 a hearing was held on the TRO. On May 17, the above linked opinion denied the TRO.
  • One hour before the May 16 hearing, Ms. Redstone, by written consent, amended the bylaws to require a vote of 90% of board members before any dividends could be issued (which would prevent the dividend of voting stock that the directors had planned–unless Ms. Redstone consented.)

Key Aspects of Court’s Legal Analysis 

  • The court recited the familiar requirements for a TRO. Slip Op. at 7. But, the defendants argued for the slightly higher standard applicable to a preliminary injunction which requires a likelihood of success on the merits.
  • The key legal issue arose in connection with the right of a controller to be a “first mover” to protect its control position and the right of independent directors to manage the company pursuant to DGCL Section 141(a).
  • Although there was one case arguably suggesting a contrary position, the court relied on two cases that more directly support the rights of a controller to be a “first mover” to protect its control position: Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401, 407 (Del. 1985), and Adlerstein v. Wertheimer, 2002 WL 205684, at *9 (Del. Ch. Jan. 25, 2002). Compare Hollinger Int’l Inc. v. Black, 844 A.2d 1022, 1029 (Del. Ch. 2004), aff’d 872 A.2d 559 (Del. 2005)(granting injunction to prevent a controller, Lord Black, from reneging on a prior agreement to grant authority to independent directors in connection with the sale of a company he controlled.)
  • The court also referred to relief available under DGCL Section 225 which the directors could use in the future to contest their removal as directors if they allege their removal was improper. In addition, relief would be available if a merger with Viacom is alleged to be the result of a breach of fiduciary duties by a controller. Thus, the irreparable harm component and the balancing of the equities requirement for injunctive relief were not met at this juncture–though one can be fairly certain that the parties will be back in court again in the near future as this drama unfolds.

SUPPLEMENT: I was quoted in an article about this case. As predicted, amended complaints and new complaints have been filed in this case since the date of the above opinion.



This is the 13th year that I have created an annual list of the key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. I chose the following rulings from among the more than 100 corporate and commercial decisions that have been highlighted on this blog over the past 12 months. There were many more decisions of those two courts in 2017 that are not covered on these pages, but I have selected notable decisions that should be of widespread relevance to those who toil in the corporate and commercial litigation field, as well as others who follow the latest Delaware developments in this area of the law.

Well-versed readers could easily select different decisions for this annual review, and I invite suggestions for additions that might be added to the list, although the challenge is to avoid making the list too long. I have omitted some decisions, such as the Supreme Court’s important Dell appraisal ruling, and others that have already been widely written about in legal publications and other mass media outlets, so additional coverage of them in this list did not seem necessary. (Prior annual reviews are available at the link in the right margin of this blog.) Best wishes for a happy and healthy 2018.

Delaware Supreme Court Decisions

City of Birmingham Retirement and Relief System v. Good, No. 16-2017 (Del. Supr., Dec. 15, 2017).
This split decision of the Delaware Supreme Court is required reading for anyone who seeks to understand the nuanced standards for demand futility in the context of a Caremark claim. In light of the majority of the directors in this case being independent, the court determined that there was an insufficient showing of bad faith. A synopsis of this decision and a link to the full opinion is available at this hyperlink. Cf. Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017) (highlighted on these pages, addressing a nearly identical legal issue).

In re Investors Bancorp, Inc., Stockholder Litigation, No. 169, 2017 (Del. Supr. Dec. 13, 2017; revised Dec. 19, 2017).
The Delaware Supreme Court, for the first time in many decades, explicitly clarifies Delaware law on stockholder ratification of directors’ actions and the prerequisites that must be satisfied. This restatement was in the context of a challenge to the directors’ award to themselves of generous compensation packages pursuant to an Equity Incentive Plan. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Bridgeville Rifle and Pistol Club, Ltd. v. Small, No. 15, 2017 (Del. Supr., Dec. 7, 2017).
Although this decision does not fall within the category of corporate and commercial litigation, the superseding noteworthiness of this ruling is based on a bedrock principle of transcending relevance to any lawyer or student of the law. This 143-page opinion (including the dissent) involves the natural right to self-defense that every person is born with and includes a scholarly analysis of the inseparable right to bear arms under the Delaware Constitution. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Brinckerhoff v. Enbridge Energy Company, No. 273, 2016 (Del. Supr., Mar. 20, 2017; revised Mar. 28, 2017).
This decision of Delaware’s high court is necessary reading for anyone who seeks to understand the latest iteration of Delaware law on contractual fiduciary standards and the requirements for waiving fiduciary duties in the alternative entity context. This opinion also discusses equitable remedies that may be available for breach of contract, and it should also be read in conjunction with the Supreme Court’s 2017 Dieckman opinion, highlighted on these pages. I also wrote an article for Directorship magazine about the Brinckerhoff case. A synopsis of the Brinckerhoff decision and a link to the full opinion is available at this hyperlink.

The Williams Companies, Inc. v. Energy Transfer Equity, L.P., No. 330, 2016 (Del. Supr., Mar. 23, 2017).
The Supreme court explains in this opinion the concept of “commercially reasonable efforts,” sometimes compared to “reasonable best efforts,” and the challenging application of those phrases to various fact patterns. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dieckman v. Regency GP LP, No. 208, 2016 (Del. Supr., Jan. 20, 2017).
The Delaware Supreme Court in this opinion discusses the implied covenant of good faith and fair dealing in the context of a limited partnership agreement that waives all fiduciary duties. This decision should be read in conjunction with the 2017 Supreme Court decision in Brinckerhoff . A synopsis of the Dieckman decision and a link to the full opinion is available at this hyperlink.

Delaware Court of Chancery Decisions

Oklahoma Firefighters Pension & Retirement System v. Corbat, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017).
This Chancery decision provides a scholarly and practical explanation of the onerous prerequisites that must be satisfied before a Caremark claim will meet the rigors of the demand futility analysis. This decision should be read in conjunction with the 2017 Supreme Court decision, highlighted on these pages, in City of Birmingham Retirement and Relief System v. Good. A synopsis of the Oklahoma decision and a link to the full opinion is available at this hyperlink.

HBMA Holdings, LLC v. LSF9 Stardust Holdings LLC, C.A. No. 12806-VCMR (Del. Ch. Dec. 8, 2017).
This Delaware Court of Chancery opinion discusses the general enforceability of a “survival clause” which provides a contractually shortened period of time by which claims referenced in the contract must be made. The court also discusses the general enforceability of statutes of limitation shortened by contract. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dollar Tree Inc. v. Dollar Express LLC, C.A. No. 2017-0411-AGB (Del. Ch. Nov. 21, 2017).
This Chancery opinion discusses the important standards that apply to a motion to disqualify counsel due to an alleged conflict of interest and an alleged breach of the applicable Rules of Professional Conduct. Importantly, the court applies the well-settled Delaware law that a simple violation of a rule of legal ethics is not, in and of itself, sufficient to disqualify counsel. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

McKenna v. Singer, C.A. No. 11371-VCMR (Del. Ch. July 31, 2017).
This Chancery opinion addresses a not uncommon situation where a co-founder of a start-up entity claims that another co-founder stole the idea for the new company, and launched a separate venture with a different party. This opinion addresses the claim for an interest in the separate start-up venture and related fiduciary duty claims. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Williams v. Ji, C.A. No. 12729-VCMR (Del. Ch. June 28, 2017).
This opinion addresses the statutory requirements for a valid stockholder voting agreement and what the limitations are on “selling a vote.” Standards by which director compensation packages will be reviewed is also analyzed. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. June 6, 2017).
This Chancery decision clarifies the distinction between defective corporate acts and unauthorized corporate acts, as well as the sections of the Delaware General Corporation Law that allow for both a self-help provision in some circumstances, as well as a method to seek judicial imprimatur for certain corporate transactions that did not follow the proper corporate formalities for approval. See DGCL Sections 204 and 205. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dietrichson v. Knott, C.A. No. 11965-VCMR (Del. Ch. April 19, 2017).
This Court of Chancery opinion explains an important principle that corporate and commercial litigators need to remember: A derivative claim in the LLC context must satisfy the same requirement of pre-suit demand futility as required in the corporate context. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Doctors Pathology Servs., PA v. Gerges, C.A. No. 11457-CB, transcript (Del. Ch. Feb, 15, 2017).
This opinion provides practice tips for the most effective way to present a motion to compel discovery to the court, and the consequences for not following best practices in connection with discovery responses. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Kleinberg v. Aharon, C.A. No. 12719-VCL (Del. Ch. Feb. 13, 2017).
This Chancery opinion discusses the criteria that must be satisfied before the court will appoint a custodian of a company that is deadlocked due to stockholder and director dysfunction as provided in DGCL § 226(a). A synopsis of this decision and a link to the full opinion is available at this hyperlink.

Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. Jan. 31, 2017).
This opinion addresses a situation where a director conceivably could be indemnified for fees incurred in pursuing an affirmative claim as compared to the more typical situation where indemnification is sought for reimbursement of fees incurred to defend a claim successfully. See DGCL § 145. A synopsis of this decision and a link to the full opinion is available at this hyperlink.

UPDATE: Friend of the blog, Prof. Stephen Bainbridge, a prolific corporate law scholar often cited in Delaware opinions, has linked to this post.

Last week the Delaware Supreme Court reversed its prior decision interpreting a master limited partnership agreement that provided what Delaware’s high court described as a contractual fiduciary standard.  The Court’s opinion is necessary reading for anyone who drafts or litigates alternative entity agreements that waive fiduciary duties but provide other contractual replacement standards.  In Brinckerhoff v. Enbridge Energy Company Inc., Del. Supr., No. 273, 2016 (Mar. 20, 2017; revised Mar. 28, 2017), Delaware’s high court was candid enough to describe the contract provisions in this case as “complex,” and the Court’s precedent on the controlling issues as “confusing.” (Four of the five members of the Court on the bench in 2013, the year of the decision reversed in this case, are no longer on the bench.  Next month, no member of the Court sitting in 2013 will still be on the bench.)

BackgroundThere were three prior Chancery decisions involving the master limited partnership agreement (LPA) in this matter, and two prior Delaware Supreme Court rulings.  Some of these decisions, which provide more factual background, were highlighted on these pages: here, here and here. In this fifth Delaware decision in this matter, to be known hereafter as Brinckerhoff V, the Court reversed the Chancery decision which had dismissed a claim by a unitholder in a publicly traded master limited partnership (MLP).  The Court’s opinion included a chart to distinguish the alphabet soup of related entities involved, including the general partner and other entities affiliated with the master limited partnership.  For purposes of this short blog post, the important facts are that the LPA waived all fiduciary duties and substituted a contractually defined standard of conduct.  A unitholder challenged an affiliated transaction that the unitholder claimed was in violation of the contractual substitute standard, in part because it was unfair to the unitholders and favored the general partner.

The MLP in this case was involved in the oil and gas industry and the transaction related to a project for a proposed $1.2 billion pipeline.  Despite declining oil prices and a nearly 20% decrease in projected EBITDA during the intervening period, the partnership paid $200 million more for the rights in the project that it had sold several years earlier. 

Although the Court of Chancery followed the Supreme Court’s pleading standard announced in the Supreme Court’s 2013 decision in this matter, known as Brinckerhoff III, this ruling changed course and reversed the standard announced by the Supreme Court in its 2013 decision in Brinckerhoff III

Delaware’s high court acknowledged the confusing precedent in this area, and cited in footnote 1 to no less than ten decisions of the Delaware Supreme Court within the past few years alone, not including the several decisions by the Court of Chancery addressing similar issues, on the topic addressed in this opinion.  See, e.g., Dieckman v. Regency GP LP, Del. Supr., No. 208, 2016 (Jan. 20, 2017), highlighted on these pages. 

Legal Analysis:

In connection with its analysis, the Court noted that in light of the statutory authorization allowing expansive variations on standards of conduct, the general principles interpreting such contractual standards need to be nuanced. In this writer’s view, it turns out that attorneys are often not exemplary in their drafting of clearly defined contractual standards of conduct when fiduciary duties are waived.

The high court explained that the Court of Chancery confused the general standard of care in the LPA with more specific requirements in other sections, and observed that the trial court also violated settled rules of contract interpretation requiring that courts prefer specific provisions over more general ones.

Although the general partner was exculpated for actions taken in good faith, good faith was not a defined term in the LPA.  Rather, a general standard of conduct allowed actions to be taken by the general partner if the general partner reasonably believed that its action was in the best interest of, or not inconsistent with, the best interest of the partnership.  The Supreme Court treated this standard as a contractual fiduciary standard similar to the entire fairness standard.

In explaining the reversal of its decision in the 2013 Brinckerhoff III decision, the Court in this opinion announced the following pleading standard:  In order to plead a claim that the general partner did not act in good faith, the facts must support an inference that the general partner did not reasonably believe that the [challenged] transaction was in the best interest of the partnership.  Importantly, the Court emphasized that:  “as our prior cases established, the use of the qualifier ‘reasonably’ imposed an objective standard of good faith.”  See footnote 63 (citing the cases referring to a subjective good faith standard where the LPA at issue did not require a “reasonable” belief).

The Court provided seven specific reasons why the claims challenging the transaction at issue in this matter were sufficient at the pleading stage.  The Court also explained why a claim that the fairness opinion used should not be entitled to a conclusive presumption of good faith, also satisfied pleading standards.  For example, the Court found that the “financial terms were fully baked” by the time the author of the fairness opinion appeared on the scene. 

Equitable Remedies:

An important principle reiterated in this opinion was that even if the LPA exculpated a general partner from monetary damages based on good faith behavior, that language did not insulate the general partner from equitable remedies for breaches of the contract.  A key ruling in this matter was that based on what the Court regarded as a “contractual fiduciary standard similar if not identical to entire fairness,” the general partner was subject to equitable remedies if the trial court, after remand, found contractual violations even if such actions were taken in good faith.

In re: Shawe & Elting LLC, C.A. No. 9661-CB (Del. Ch. Aug. 13, 2015).

There are many important principles of Delaware corporate law addressed in this 104-page post-trial opinion, but for the benefit of busy readers, I will highlight those aspects of this decision that have the widest practical applicability to those involved in corporate and commercial litigation. The key issue in this case is when can a custodian be appointed for a deadlocked company. A related decision in this case involving errant deposition conduct was also highlighted on these pages. Another prior decision in this case denying interim relief under DGCL Section 226, was also covered on these pages.


The factual background of this case involves a company called Transperfect Global, Inc., owned by two 50% stockholders who were also the only two directors of the company.

The primary issue addressed was whether the court should grant a petition to appoint a custodian under DGCL § 226 even though the corporation is highly profitable.  The court found that the state of management of the corporation devolved into one of complete dysfunction between the two directors/stockholders who were also co-CEOs.  The irretrievable deadlocks over significant matters caused the business to suffer and threatened the business with irreparable injury notwithstanding its profitability.

The court found that the requirements of both § 226(a)(1) and § 226(a)(2) were satisfied.  A separate request for dissolution of an LLC subsidiary  pursuant to 6 Del. C. § 18-802 was also granted to dissolve that entity.  DGCL § 273, which provides a summary basis to dissolve a joint venture which is owned 50/50, could not be used because technically speaking, the stockholders in this case were not 50/50 stockholders.  They were 50/50 on a de facto basis, but 1% was actually held by a third party who was controlled by one of the directors/co-CEOs.

Painfully detailed facts take up more than half of the opinion.  The factual background could be the basis for a compelling novel, but for purposes of this brief blog post, I will focus on the most useful legal principles involved.

Key Legal Principles

  • DGCL § 226(a)(1) allows the court to appoint a custodian for a solvent corporation when “at any meeting held for the election of directors the stockholders are so divided that they have failed to allow successors to directors whose terms have expired or would have expired upon qualification of their successors.” This provision does not require irreparable harm as a prerequisite.  The court found that the requirements of this statute were met, but even so, the appointment of a custodian is discretionary.
  • DGCL § 226(a)(2) is slightly different, and allows the court to appoint a custodian for a solvent corporation when the business is suffering or is threatened with irreparable injury because the directors are so divided respecting the management of the corporation that the required vote for an action by the board cannot be obtained, and the stockholders are unable to terminate the division.
  • The court explains in extensive detail why the deadlock on substantive matters was real. The court distinguished at footnote 291 a decision that denied relief under § 226(a) based on the conclusion that the alleged deadlock was caused by one of two directors who “sought to create a deadlock by refusing to consider any issue until the deadlock is resolved.” That opinion concluded that such facts were not the type of conduct that should support the appointment of a custodian, unlike the instant case.
  • The parties in this case engaged in what was described as “mutual hostaging” in which one party refused to agree to any action unless his or her demands were met. [It is not readily apparent how this differs from the facts of the case distinguished at footnote 291 above.] The court distinguished this case from the case at footnote 291 based on the reasoning that the disputes in this case were “genuine, good faith divisions” between the two parties, of a “fundamental and systemic nature on how the company should be managed.”
  • The court discussed other cases where deadlocks existed in a solvent and profitable corporation, and for which custodians were appointed, as well as those instances where a custodian was not appointed. See, e.g., footnotes 320 and 321.
  • In connection with appointing a custodian to evaluate the possible sale of this company, the court provided options including a “Texas shootout”, which is a type of auction in which either party would specify a price, and the other party would have the option to either buy the other’s interest at that specified price or sell his or her own interest at that price.
  • The court explained why it would not exercise its equitable authority to order a dissolution of the company which it had the power to do, for example, in extreme cases as a remedy for breach of fiduciary duty. See footnotes 330 through 335.
  • The articulation of the fiduciary duty of directors is always useful. In this opinion the court reiterated that:

    “Directors of a Delaware corporation owe fiduciary duties of care and loyalty to the corporation and to its stockholders.  The duty of care requires the exercise of an informed business judgment.  The duty of loyalty mandates that the best interest of the corporation and its shareholders takes precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the stockholders generally.  To that end, a director may not allow his self-interest to jeopardize his unyielding obligations to the corporation and its shareholders.  A director must, therefore, exercise good faith in advancing the corporation’s interest.”  (footnotes omitted.)

  • The court held that the breach of fiduciary duty claims were barred by both unclean hands and acquiescence.
  • A separate analysis of the dissolution claim for an LLC subsidiary under § 18-802 is helpful. Also useful is the court’s reference to § 18-402 of the Delaware LLC Act which provides for the majority owner of an LLC or members constituting more than 50% of the LLC to prevail in the absence of any contrary provision in the limited liability agreement.  Also of practical application is a discussion of the distribution of assets upon dissolution of an LLC.[1]

 [1] The court also referred to § 18-804(a) which provides that unless otherwise specified in connection with the dissolution of an LLC, the assets of the company shall be distributed to the company’s creditors and then to its members in connection with the dissolution.

  • Lastly, I want to note a quote of widespread applicability that needs to be credited to The Chancery Daily which referred to a case involving another dysfunctional business relationship in a Chancery decision that was not quoted in this opinion but that The Chancery Daily provided. The quote is as follows:

“The Chief Justice once observed, with respect to business co-managers or co-owners whose relationships have soured, that ‘if people are really good business people . . . you just wonder . . . whether they’re only able to use their brains in some limited compromised way that allows them to make money, then, when they function on a broader dynamic, all their economic rationality and intuition just goes out the window.”

Utilisave, LLC v. Khenin, C.A. No. 7796-CS, Transcript (Del. Ch. Jan. 11, 2013; filed Jan. 15, 2013).  See also a more recent decision in the Khenin case, unrelated to this quote: Utilisave, LLC, et al. v. Mikhail Khenin, C.A. No. 7796-ML, final report 2 (Del. Ch. Aug. 18, 2015).

Supplement: A well-written article about this case by Sam Waltz, founding publisher of the Delaware Business Times, quotes yours truly–in addition to former Delaware Supreme Court Justice Henry duPont Ridgely.

The Delaware Court of Chancery’s opinion in Fox v. CDx Holdings, Inc., C.A. No. 8031-VCL (Del. Ch. July 28, 2015), addresses a complex set of facts relating to the liability resulting from the intentionally inaccurate valuation of a spin-off in order to avoid tax consequences to the controlling stockholders, which wrongly minimized the value of stock options.chanceryseal

There are a number of eminently quotable insights and observations in this 82-page decision that could easily be the subject of a lengthy synopsis, but for busy readers who would prefer highlights until they can devote more time to reading the whole opinion, I offer a few selected bullet points that should be of interest to corporate and commercial litigators:

  • In addition to reciting important concepts of Delaware law, the Court provides insight into what might motivate a person who sold a business, that he founded, for $7 billion dollars over a decade before the facts giving rise to this case, to risk the ignominy described in the opinion in order to avoid paying taxes in connection with the spinoff of a subsidiary of his new company.
  • The Court found that: (i) the company breached the applicable agreement that required the board to determine the fair market value of a share of common stock–which impacted the value of options that the plaintiff owned; and (ii) the determination of FMV was not a good faith determination and “resulted from an arbitrary and capricious process.”
  • The Court reasoned that Grant Thornton, in essence, copied the valuation report of another major accounting firm, and provided a valuation report in an intentionally low amount that the controlling stockholder requested in order to avoid his tax burden. The Court explained in detail why it reached the conclusion, somewhat startling, that the valuation by one of the country’s leading accounting firms, was done “not in good faith” and was the result of an “arbitrary and capricious” process. Footnote 21 cites to other Delaware opinions that have critiqued misleading and incorrect reports of other iconic firms.
  • The board was required to make the determination of FMV but instead the majority stockholder did so. The Court emphasized that “director primacy” is the foundation of the DGCL even if there is a controlling stockholder, and that the board cannot shirk its duties in the face of a controlling stockholder. That is:
  • Although some controllers and boards may act this way [i.e., letting the controlling stockholder displace the board], Section 141(a) of the Delaware General Corporation Law (the “DGCL”) establishes ―the bedrock statutory principle of director primacy.” Klaassen v. Allegro Dev. Corp., 2013 WL 5967028, at *9 (Del. Ch. Nov. 7, 2013). “[D]irector primacy remains the centerpiece of Delaware law, even when a controlling stockholder is present.” In re CNX Gas Corp. S’holders Litig., 2010 WL 2291842, at *15 (Del. Ch. May 25, 2010).

  • The Court explained that an option is not a stock, and holders of an option are not stockholders. The rights of an option holder are based on the document that created the option.
  • The following quote is an example of insights the Court provides, with citations to scholarly journals, regarding what motivates people, other than greed, to breach their duties:
  • I reach these conclusions about Martino and Halbert reluctantly. Other aspects of their testimony were credible, and I am not suggesting that either is inherently bad or malicious. Like all of us, they are multidimensional. Martino appears to have had a respectable career, and he testified to other instances when he has done the right thing. Halbert has achieved great things and, at least through Caris, devoted much of his time and treasure to improving the lives of others. But humans respond to incentives, and powerful incentives can lead humans to cross lines they otherwise would respect. This is particularly true when the transgression can be rationalized, the benefits are immediate and concrete, and the potential costs are distant, conditional, and readily discounted by the chance of detection and the possibility of a successful defense or settlement. (citations omitted)

  • For example, the Court quotes from articles that define the psychological explanation of “hindsight bias”, to explain why the wrongdoers in this case may have tried to justify their actions in forcing an artificially low valuation:

    “Hindsight bias has been defined in the psychological literature as the tendency for people with outcome knowledge to believe falsely that they would have predicted the reported outcome of an event.” Hal R. Arkes & Cindy A. Schipani, Medical Malpractice v. the Business Judgment Rule: Differences in Hindsight Bias, 73 Or. L. Rev. 587, 591 (1994). “[S]tudies have demonstrated not only that people claim that they would have known it all along, but also that they maintain that they did, in fact, know it all along.” (citations omitted)

In an article for the current issue of the Delaware Business Court Insider, I discussed a recent opinion by the Delaware Court of Chancery that denied a motion to dismiss claims against the seller of a business. Those claims included allegations of fraud and breach of fiduciary duty. The article appears below.

The Delaware Court of Chancery recently allowed claims involving breach of fiduciary duty and fraud against the sellers of a business to survive a motion to dismiss. The business provided non-legal administrative services to law firms and their mortgage lender clients in connection with mortgage foreclosures in a number of Western and Midwestern states. The organizational structure of the businesses was relatively complex and involved overlapping entities. The causes of action were seven in number and the court described the multiple motions to dismiss by the defendants as including a “somewhat dizzying array of arguments and counter-arguments.”

The 61-page opinion in CMS Investment Holdings LLC v. Castle, C.A. No. 9468-VCP (Del. Ch. June 23, 2015), provides an extensive description of the facts. In essence, the claims for breach of the LLC agreement, breach of the implied covenant of good faith and fair dealing, unjust enrichment, breach of fiduciary duty, fraudulent transfer and related claims were based on an alleged scheme to deprive the purchaser of receiving the benefit of its bargain. In particular, the LLC that was created to receive the fees generated for administrative services was not being utilized in the manner intended by the parties. For example, instead of the fees being paid to the LLC, the defendants retained the fees for themselves, leading to the LLC’s default on its debt obligations. Moreover, instead of helping the LLC to restructure, the defendants allegedly ushered it into insolvency and then bought the most valuable assets of the company from the LLC’s receivership, the opinion said.

Several important legal principles and analyses with wide practical application are discussed in this opinion. For example, the court discusses the criteria to determine when a claim should be considered direct or derivative. The court explained that the following questions inform the determination: (1) who suffered the alleged harm (the corporation or the suing stockholders individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders individually). However, courts have long recognized that the same set of facts can give rise to both a direct claim and a derivative claim. In this case, the court found that the claims were at least dual claims that have both direct and derivative aspects, and thus were allowed to proceed on that basis.

The court described the types of fiduciary duty claims that could be derivative in nature and also noted several types of direct claims for infringement of a stockholder’s right that are direct in nature, such as an infringement of the right to vote and the right to enforce contractual restraints on the authority of a board pursuant to the charter, bylaws or provisions of the Delaware General Corporation Law. Compare NAF Holdings LLC v. Li & Fung (Trading) Ltd., 2015 Del. LEXIS 310 (June 24, 2015), a recent Delaware Supreme Court decision that held individual contractual rights are direct and not derivative even if a corporation might be a beneficiary of that contract.

The Chancery opinion in CMS includes a helpful articulation of the implied covenant of good faith and fair dealing, and an explanation of why and how, based on the facts of this case, that claim survived a motion to dismiss. The court emphasized the temporal focus as being critical in the analysis of such a claim. Thus, the court addressed what the parties would have agreed to themselves had they considered the issue in their original bargaining positions at the time of contracting.

The court provided a useful description of an unjust enrichment or quasi-contract claim juxtaposed with a breach of contract claim, and explained how those two claims can be pleaded in the alternative in the same complaint. Based on the facts of this case, the court reasoned that the unjust enrichment claim would proceed in the alternative.

Likewise, the court explained how a breach of a contractually-defined fiduciary duty claim can be pleaded compared to a conventional breach of contract claim. The court emphasized that a cause of action for aiding and abetting can only survive in connection with the former claim.

The court explained that the terms of the LLC agreement in this case did not eliminate all the fiduciary duties that could be eliminated under the LLC Act. The court observed that for those fiduciary duties that were not waived by the LLC agreement, there was a factual issue regarding whether the managerial responsibilities of certain of the individual defendants rose to the level that would impose upon them the default fiduciary duties provided for in the LLC Act.

In allowing a breach of fiduciary duty claim to proceed, and to survive a motion to dismiss, the court noted that there may be some situations where simply resigning from the board, without taking other action, may in some circumstances support a claim for breach of fiduciary duty.

In the concluding section, the court addressed a claim pursuant to the Delaware Uniform Fraudulent Transfers Act and allowed the claim for actual and constructive fraud to proceed pursuant to Sections 1304 and 1305 of the act. The court explained that the underpayment or diversion of fees that were properly payable to the LLC supported a claim that those actions were actually, or reasonably appeared to have been, made intentionally to hinder the interests of the plaintiff as a holder of equity and debt in that LLC, for less than reasonably equivalent value, while the LLC was in financial distress.

The court also emphasized that the DUFTA also allows principles of law and equity to supplement its statutory provisions, which formed an additional basis for the court’s refusal to dismiss those claims.

In sum, this opinion efficiently distills complicated facts and a plethora of claims and defenses involving important principles and statements of Delaware law that have widespread applications.