A recent Court of Chancery decision acknowledged the “muddled” status (before this decision) of Delaware case law on the anti-bootstrapping doctrine, which has been covered in several decisions highlighted on these pages. The opinion in Levy Family Investors, LLC v. Oars + Alps, LLC, C.A. No. 2021-0129-JRS, Memo. Op. (Del. Ch. Jan. 27, 2022), provides a multi-part test to help practitioners understand Delaware jurisprudence on this subject.  The court explained that:

The anti-bootstrapping law does not prevent parties from bringing a fraud claim if: (1) the plaintiff alleges the seller knowingly made false contractual representations; (2) damages for plaintiff’s fraud claim may be different from plaintiff’s breach of contract claim; (3) the conduct occurs prior to the execution of the contract and thus with the goal of inducing the plaintiff’s signature and willingness to close on the transaction; or (4) the breach of contract claim is not well-plead such that there is no breach claim on which to “bootstrap” the fraud claim.  Id. at 18-22.

The Court further instructed that:

“In my view, the anti-bootstrapping rule bars a fraud claim where the plaintiff merely ‘adds the term’ ‘fraudulently induced’ to a complaint or alleges that the defendant never intended to comply with the agreement at issue at the time the parties entered into it, but it does not prevent a fraud claim against defendants who knew [contractual representations] were false, and yet made them anyway.  A rule that would limit a plaintiff’s recovery for so-called ‘contractual fraud’ solely on the ground that the same conduct also constitutes a breach of contract would offend Delaware public policy and the now-settled Delaware law regarding contractual fraud that is animated, in part, by those policy concerns.”

The Court also clarified that “a plaintiff can also plead a fraud claim that is not the product of improper bootstrapping by alleging facts that support an inference that the defendant knowingly made false representations in a contract on which the plaintiff justifiably relied, and then breached that contract by violating the representations that were falsely made.  That scenario, if well-plead, supports at least two viable claims–fraud and breach of contract.”  Id.

A recent Court of Chancery letter ruling is noteworthy because it granted a motion for reargument.  Over the last 17 years that I have been highlighting cases on this blog, I can count on my fingers the number of motions for reargument that have been granted.  This is one of those rare birdsTygon Peak Capital Management, LLC v. Mobile Investments Investco, LLC, C.A. No. 2019-0847-MTZ (Del. Ch. Feb. 10, 2022).

A recent Delaware Chancery decision is noteworthy for its application of the Revlon exception to the recent statement of Delaware law in the Rosson case–a Supreme Court opinion[1] declaring that equity-dilution or overpayment claims are derivative, except when there is also a change of control in which event it would be a direct claim.  In KZ Capital General Trading LLC v. Petrossov, C.A. No. 2020-0750-PAF, Order (Del. Ch. Jan. 31, 2022), the Court explained that there are 3 ways to trigger a Revlon[2] level of heightened scrutiny in which case dilution claims could be direct.  Revlon duties can be triggered in the following ways:

“(1)  When a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company; and, (2) Where in response to a bidder’s offer, a target abandons it long-term strategy and seeks an alternative transaction involving the break-up of the company; or, (3) When approval of a transaction results in a sale or change of control.”

Order at 19 (citation omitted).

The Order also includes a helpful definition of “control” for Revlon purposes.  The Court noted that:  “To establish control, the complaint must sufficiently allege that: (1) the alleged controller owns more than 50% of the voting power of a corporation, or (2) owns less than 50% of the voting power of the corporation but exercises control over the business affairs of the corporation.”  Order at n.95 (citing In Re Vaxart, Inc. S’holder Litig., 2021 WL 5858696, at *15 (Del. Ch. Nov. 30, 2021)).

The court observed that Revlon will not apply:  “Where the plaintiffs cannot allege that a sale or change of control has taken place or necessarily will take place such that the public shareholders of a corporation have been or will be deprived of a control premium.”  Order at 19-20 (citations omitted).

 

[1] Brookfield Asset Management, Inc. v. Rosson, 261 A.3d 1251, 1267 (Del. 2021), highlighted on these pages.

[2] Revlon, Inc. v. MacAndrews & Forbes Hldgs, Inc., 506 A.2d 173, 182 (Del. 1986).

A recent 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, Inc. Stockholder Derivative Litigation, C.A. No. 2019-0179 (consol.), memo op. (Del. Ch. Jan. 31, 2022)(An unrelated § 220 case also considering a motion to expedite, but deferring ruling on the argument that the plaintiff lacks standing because he only owned a fractional share of stock.)

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

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

During the 17 years or so of this blog’s existence, we have featured many Delaware decisions on the topic of indemnification and advancement for directors and officers, interpreting a company’s obligations to make those payments pursuant to Delaware General Corporation Law (DGCL) Section 145, in addition to contract-based claims for advancement and indemnification. See also several book chapters I have published on advancement and indemnification as the Chair of the Indemnification and Advancement Subcommittee of the ABA Business Law Section’s Corporate Litigation Committee.  Enough background, and now for the main event:

The purpose of this short post is to make note of a consequential amendment, recently passed by the Delaware Legislature and signed by Gov. Carney, to DGCL Section 145, which as amended allows Delaware companies to use a captive insurance company to provide coverage for directors and officers–such as for purposes contemplated by Section 145–but with a few key exceptions. Relevant to this statutory amendment is a recent Delaware Supreme Court decision that concluded: Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance “against any liability,” whether or not the corporation has the power to indemnify against such liability.  

One of Delaware’s favorite nationally recognized corporate law scholars and one of the leading indigenous Delaware firms have provided exemplary commentary on this new development in corporate law. Those interested in this development should also read the reliably thoughtful insights by D&O insurance expert Kevin LaCroix on his widely-read blog, The D&O Diary.

 

This post was prepared by Delaware lawyer Evan Williford, an experienced corporate litigator, who practices with The Williford Firm LLC.

In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch., Feb. 3, 2022), a recent Chancery ruling, suggests that the Court may grant future valid petitions which revive defunct corporations with publicly traded stock to be sold and merged into existing companies via “reverse mergers”.  In that case, however, as a matter of first impression, it ruled that the authority of custodians appointed under 8 Del. C. § 226(a)(3) is limited to liquidating the company.

As the Court has recognized, a corporation’s ability to publicly trade stock “gives the company value” even if it is otherwise defunct.  Plaintiffs with stock in such corporations periodically petition the Court to allow such transactions, such as by appointing a custodian or ordering an annual meeting.  The Court has issued opinions denying several such petitions over the past two decades.

Last April in one such case, In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL, the Court appointed an amicus curiae, Mark Gentile of law firm Richards Layton & Finger, P.A., to consult with the SEC and provide his independent view.  Forum Mobile was one of ten before the Court seeking similar relief.  The Court expressed concern about “the use of Delaware entities to circumvent the federal securities laws.”

In October, the SEC submitted a letter to the Court. In response to the Court’s concern, the SEC stated that “a reverse merger is not per se illegal under the federal securities laws.”  Nevertheless, the SEC expressed concern that where federal laws did not require periodic public filings, lack of information could “pose a significant risk to investors” and “contribute to incidents of fraud and manipulation”.

The amicus recommended that the Court grant the petition.  According to the amicus, granting the petition would further “Delaware public policy goals” including “avoiding the waste of corporate assets” and “permitting accretive transactions”.  The amicus listed existing protections for stockholders and creditors, including under federal securities laws and Delaware fiduciary duties.

The amicus proposed that the Court further protect stockholders by requiring the custodian to:

  • Have power limited to enabling stockholder appointment of directors at an annual meeting;
  • Nominate an independent director;
  • Via affidavit promise not to violate securities laws and disclose prior accused violations; and
  • Disclose significant additional information any agreements between nominated directors and the custodian or company.

On February 3, the Court denied the petition – but for a different reason.

The Court noted that the SEC’s submission “easily could have supported” the Court’s prior reverse merger policy, but instead “took no position on the Petition”.  According to the Court, “the SEC Letter made clear that granting Synergy’s requested relief would not enable the Company to circumvent federal securities laws.”  The Court therefore reasoned that the Court’s prior policy “provides no basis for denying relief.”  The Court noted the stockholder protections the amicus had proposed.

Rather, the Court as a matter of first impression, ruled that the authority of a custodian appointed under 8 Del. C. § 226(a)(3) was limited to liquidating the business.  Section 226(a)(3) applies where a corporation “has abandoned its business”.  Under Section 226(b), the authority of the custodian is to continue the business and not “to liquidate its affairs” – except “in cases arising under paragraph (a)(3)”.  The Court therefore reasoned that the authority for Section 226(a)(3) custodians “is limited to liquidating the affairs of the abandoned corporation and distributing its assets,” which did not allow petitioner’s proposed course of action.  The Court noted commentary questioning this limitation and commented that the Delaware legislature was “free to eliminate” it.

The Court’s reasoning implies that a future petition to enable a reverse merger by permissible means, perhaps by requesting an annual meeting under 8 Del. C. § 211, may be granted.  If and when such a petition is considered, the Court may consider additional appropriate stockholder protections.  The Court noted that the outcome of the case provided it no opportunity to consider the recommendations of the amicus “or discuss additional conditions that the court might have imposed.”

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

The Delaware Chancery Court has dismissed GrafTech International, Ltd. investors’ suit over their directors’ alleged overpayment for the repurchase of a controlling shareholder’s stock in a ruling citing two recent state high court decisions that make it tougher for shareholders to challenge stock deals without proof of bad faith, in Simons v. GrafTech International Ltd., et al., No. 2020-0841-KSJM opinion issued (Del. Ch. Jan. 21, 2022).

Chancellor Kathaleen McCormick’s Jan. 21 opinion dismissed all breach-of-duty charges against the GrafTech directors and controlling shareholder Brookfield Asset Management, Inc. over a $250 million stock repurchase, applying standards from one state Supreme Court decision that narrowed the types of stock suits that qualify as direct rather than derivative — and another that requires plaintiffs to show bad faith or disloyalty to avoid dismissal of those derivative claims.

In the first case relied on, the Delaware Supreme Court ruled in Brookfield Asset Management, Inc. v. Rosson, 261 A.3d 1251 (Del. 2021), that the type of claim made against the GrafTech board’s alleged power to expand its number of directors at will was derivative, not direct — which meant the plaintiff could not survive a motion to dismiss without showing that the directors were too conflicted to objectively review the charges.

In the second, the high court affirmed Vice Chancellor Travis Laster’s milestone ruling in United Food & Com. Workers Union v. Zuckerberg, 250 A.3d 862, 889 (Del. Ch. 2020), finding that many Delaware-chartered companies had opted into the state’s exculpatory clause exempting their directors from money damages for ordinary negligence, and as a result, did not face liability that would present a conflict of interest in reviewing those charges.  Therefore, only well-supported bad faith and disloyalty claims would overcome an exculpatory clause and pass the derivative pre-suit demand test, the Delaware’s Supreme Court ruling agreed.

Under the new three-part Supreme Court test in the Zuckerberg case, as applied by the Court of Chancery chief judge in her Jan. 21 ruling, on a motion to dismiss, Delaware courts must now count heads and ask whether each director;

(i) Received a material personal benefit from the alleged misconduct that is the subject of the litigation demand;

(ii) Faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and

(iii) Lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability demand.

Only if the answer to any of those three questions is “yes” can the plaintiff survive a motion to dismiss for failure to first ask the directors to bring charges of investor share dilution or overpayment in a stock transaction such as this one, the Chancellor said.

Background

According to shareholder plaintiff Steve Simons’ complaint, in 2015, Brookfield acquired a controlling stock  interest in GrafTech, a publicly traded Delaware corporation that manufactures graphite electrode products essential to the production of electric arc furnace steel and other metals.  But by 2020, asset manager Brookfield wanted to unload a large block of stock, after acquiring inside information that dark fiscal clouds were on GrafTech’s horizon, and the GrafTech directors approved a buyback at an unfairly high price, the complaint said.  In addition, Simons charged that the board allegedly misused a bylaw that lets them expand the number of directors from seven to as many as eleven.

He claimed that by raising the number of directors from eight up to nine, seven months after approving the allegedly over-generous repurchase, the board tried to make itself litigation-proof.  Since the additional independent director came after the repurchase, she was able to tip the new nine-member board balance in favor of five directors who took no part in the repurchase.

Simons claimed the directors breached their duty by timing the new appointment to thwart what would have otherwise been a charge that could have withstood a motion to dismiss.

Adding a director is okay

The Chancellor found that GrafTech’s charter permitted the board to name additional directors without limitation up to eleven and did not bar the board from choosing an independent director.  In addition, GrafTech’s exculpatory clause means that the plaintiff would have to show that the board’s appointment was a breach of the directors’ duty of loyalty, the Chancellor ruled.

The Court found that none of the five outside directors had business relationships long enough to compromise their independence or disinterest, so all of them were capable of objectively reviewing a pre-suit demand and the motion to dismiss should be granted.

The Delaware Business Court Insider again published this year’s Annual Review, reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

This is the 17th year that Francis Pileggi has published an annual list of key corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery, often with co-authors. This list does not attempt to include all important decisions of those two courts that were rendered in 2021. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available here.

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

DELAWARE SUPREME COURT DECISIONS

Supreme Court Confirms Impact of Bankruptcy on LLC Membership

A recent Delaware Supreme Court ruling endorsed the reasoning of a Delaware Court of Chancery decision holding that federal bankruptcy law does not entirely preempt the Delaware LLC Act to the extent that the LLC Act provides for a member of an LLC to become an assignee only, with economic rights, upon the filing of bankruptcy by that member, in Zachman v. Realtime Cloud Services LLC, 228 A.3d 1065 (Del. April 20, 2021).

Delaware High Court Finds First State Charter Outweighs Other Factors in Dole Foods Choice-of-Law Ruling

The Delaware Supreme Court decided a consequential case in 2021 addressing choice-of-law and fraud-exclusion issues in connection with requiring D&O insurers to pay settlements with investors who claimed that the CEO of Dole Foods Company Inc. cheated them in a going-private buyout.  RUSI Indemnity Co. Inc. v. Murdock, et al., No. 154, 2020 (Del. March 3, 2021).  Among the reasons that this decision is noteworthy is because it established the applicability of Delaware law to the insurance policy of a company incorporated in Delaware, but which had many contacts elsewhere.  Also, importantly, the court determined that insurance coverage would not be defeated simply because it covered payment for the settlement of fraud allegations.  The high court added that Delaware does not have a public policy against the insurability of losses occasioned by fraud, reasoning that Delaware’s statutory indemnification provisions allow corporations to purchase D&O insurance against any liability whether or not the corporation has the power to indemnify against such liability.

Delaware Rules Shareholder Franchise Right Question Tops Entire Fairness Test

In Coster v. UIP Companies, Inc., et al., No. 29, 2020 (Del. June 28, 2021), the unanimous opinion of Delaware’s high court en banc required that on remand the Court of Chancery determine if a board acted for inequitable purposes or in good faith, but for the primary purpose of disenfranchisement without a “compelling justification,” in connection with a stock sale intended to shift the power balance between rival deadlocked stockholder fashions, even if the sale were fairly negotiated.  If the trial court found after remand that the transaction was intended for inequitable purposes without a compelling justification, the trial court could consider available remedies including cancelling the stock sale and considering the appointment of a custodian.  Chief Justice Seitz wrote for the Supreme Court that the sanctity of the shareholder franchise superseded entire fairness review based on the circumstances of this case.

Supreme Court Clarifies Test for Direct v. Derivative Stockholder Claims

Although this is a decision that has already received widespread commentary, the Supreme Court decision in Brookfield Asset Management, Inc. v. Rosson [TerraForm], No. 406, 2020 (Del. Sept. 20, 2021), is a seminal decision that every corporate litigator must be aware of because it redefines and clarifies the test in Delaware to distinguish between a direct stockholder claim and a derivative stockholder claim.

Supreme Court Clarifies Pre-Suit Demand Analysis

Another Supreme Court decision that has already been the subject of extensive analysis but is still required reading for all corporate litigators is United Food and Commercial Workers’ Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020 (Del. Sept. 23, 2021), because it clarifies and restates the law in Delaware for the analysis of pre-suit demand futility for purposes of pursuing a derivative stockholder claim.

Supreme Court Decides Important Contract Dispute in Sale of Business

The Supreme Court of Delaware affirmed an epic Delaware Court of Chancery decision that found a breach of an agreement of sale that permitted the buyer to avoid consummation of the purchase for failure to comply with the “ordinary course covenant” in connection with how the business was managed between the date the agreement of sale was signed and the date of closing.  See AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, Del. Supr., No. 71, 2021 (Dec. 8, 2021).  The Supreme Court explained that the seller was required to obtain the prior written consent of the buyer before making the changes that it made, and distinguished the separate reasoning that applied to the material adverse change clause.

DELAWARE COURT OF CHANCERY DECISIONS

Company’s Privileged Communications Must Be Provided to Board Members

The Court of Chancery decided an issue of first impression in Delaware by rejecting the argument that the management of a Delaware corporation has the authority to unilaterally preclude a director of the corporation from obtaining privileged information of the corporation.  See In re WeWork Litigation, No. 2020-0258-AGB (Del. Ch. Aug. 21, 2021).

Recent Chancery Decision Addresses Dissolution Based on LLC Deadlock

The Delaware Court of Chancery penned a seminal decision that explains the analysis necessary to determine when a deadlock in an LLC might be the basis for a dissolution.  In Mehra v. Teller, C.A. No. 2019-0812-KSJM (Del. Ch. Jan. 29, 2021), the court addressed whether there was a failure to achieve the votes necessary for board action and whether the board deadlock was genuine or merely manufactured to force the appearance of a deadlock.

Chancery Keeps Dissolution Case Despite Mandatory NY Forum Clause

Although the general rule in Delaware is that forum selection clauses will be upheld, even if they require litigation to be conducted in states outside of Delaware, an exception to the rule was applied to keep a dissolution case in Delaware notwithstanding a contrary mandatory forum selection clause, in Seokoh, Inc. v. Lard-PT, LLC, C.A. No. 2020-0613-JRS (Del. Ch. March 30, 2021).

Self-Sacrifice Not Required of Controlling Stockholder

A useful Chancery decision that is bound to be of widespread applicability is the ruling in RCS Creditor Trust v. Schorsch, C.A. No. 2017-0178-SG (Del. Ch. March 18, 2021), in which the court explained that the fiduciary duties of a majority or a controlling stockholder do not require self-sacrifice, nor do they mean that such a fiduciary forfeits her contractual rights.

Chancery Addresses Forum Non Conveniens

Delaware law has evolved regarding the nuances of forum non conveniens, and those most recent iterations are explained in the Chancery decision styled Sweeny v. RPD Holdings Group, LLC, C.A. No. 2020-0813-SG (Del. Ch. May 27, 2021).

Chancery Recognizes Reverse Veil-Piercing

The Delaware Court of Chancery recently recognized “outside reverse veil-piercing,” as compared to “insider reverse veil-piercing.”  The former iteration was explained based on the unusual circumstances present in Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601-JRS (Del. Ch. May 25, 2021).

Chancery Clarifies Standard to Shift Fees for Improper Litigation Conduct

The Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), remains noteworthy for its guidance that provides litigators in general, and corporate litigators in particular, with a definition of “glaringly egregious,” and helps to clarify where the line is drawn for determining when fees will be shifted for inappropriate litigation conduct.  This decision gives greater instruction for what behavior will be sufficient to trigger the exception to the general American Rule that each party pays its own legal fees.

Can Fiduciary of a Debtor Assist a Creditor-Entity that Fiduciary Has Interest In?

The Court of Chancery addressed the titular topic in Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited, C.A. No. 2018-0059-JRS (Del. Ch. July 28, 2021).

Chancery: LLC Managers Breached Fiduciary Duties

The Chancery decision in Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), deserves attention for its treatment of well-established principles of fiduciary duty with widespread applicability in the LLC context, absent unambiguous waiver.  Also noteworthy, is the explanation about why the circumstances of this case allowed breach of contract claims to proceed to the extent that they did not overlap the fiduciary claims–and why both were permitted to be pursued through trial.

Chancery Explains Policy Limits to Contractual Restrictions on Fraud Claims

In connection with perennial post-closing claims related to the sale of a business, the Chancery decision in Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), explains the consequential nuances about what specific language in an agreement of sale will allow, or will bar, certain types of fraud claims.  The money quote from the decision provides the best insight into its holding: “Under Delaware law, a party cannot invoke provisions of a contract it knew to be an instrument of fraud as a means to avoid a claim grounded in that very same contractual fraud.”

Chancery Clarifies When Forum Selection Clause Binds Non-Signatory

While it may be surprising to some, quite a few Delaware decisions have bound non-signatories to forum selection clauses.  The Chancery decision in Florida Chemical Company, LLC v. Flotek Industries, Inc., C.A. No. 2021-0288-JTL (Del. Ch. Aug. 17, 2021), provides the most thorough analysis of the titular topic, with scholarly insights and copious citations that explain the theoretical and public policy underpinnings that support the decision to bind a non-signatory to a forum selection clause, and the prerequisites for doing so.

Chancery Does Deep Dive into Corporate Dissolution Details and Winding-up Process

Those interested in the not self-evident winding-up process in connection with the dissolution of a corporation under Delaware law need to read the Court of Chancery decision styled:  In re Altaba, Inc., C.A. No. 2020-0413-JTL (Del. Ch. Oct. 8, 2021), which provides an extensive analysis of the statutory provisions for the dissolution of corporations and a description of the corresponding winding-up process.

Chancery Declines to Follow First-Filed Rule in Advancement Case

A recent Chancery decision explained why the first-filed rule was not applied in an advancement case under Section 145 of the Delaware General Corporation Law.  See Lay v. Ram Telecom International, Inc., C.A. No. 2021-0631-SG (Del. Ch. Oct. 4, 2021).

Chancery Provides Guidelines for Non-Delaware Lawyers Issuing Formal Delaware Legal Opinion Letters

The Court of Chancery in Bandera Master Fund LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Nov. 12, 2021), provides comprehensive detail of the factual background of the issuance of a formal legal opinion letter in connection with a transaction, and provides a thorough analysis of problems with that letter in a 194-page decision which also offers guidance to lawyers around the country who are involved in issuing a formal opinion letter based on Delaware law.  The court found that the formal opinion letter given in the transaction at issue was not rendered in good faith, and explained what lawyers need to do in order to make sure the formal opinion letters that they grant do not suffer the same fate.

Chancery Clarifies Officer Consent Statute

Several years ago the Delaware Supreme Court expanded the prior interpretation of Delaware’s consent statute that imposes personal jurisdiction on directors and officers who agree to service in that capacity for Delaware corporations.  The contours of that expansion continue to be clarified and defined for those situations where there has been no breach of fiduciary duty.  See BAM International, LLC v. MSBA Group, Inc., C.A. No. 2021-0181-SG (Del. Ch. Dec. 14, 2021).

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SUPPLEMENT: Professor Stephen Bainbridge, one of Delaware’s favorite corporate law scholars, and one of the most prominent corporate law expert’s in the country, was kind enough to link to this article and described it as “essential reading”.



*Francis G.X. Pileggi is the managing partner of the Delaware office of Lewis Brisbois Bisgaard & Smith LLP, and the primary author of the Delaware Corporate and Commercial Litigation Blog at www.delawarelitigation.com.

**Ciro C. Poppiti, III practices in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

***Cheneise V. Wright is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

Delaware Court of Chancery Rule 5.1 defines the requirements for court filings to receive confidential treatment, contrary to the presumption that all court filings should be made available to the public. (The former terminology “under seal” is no longer used in the current version of the rule.) A recent Chancery decision addressed the filing of depositions with the court–referred to as lodging the depositions–with confidential treatment, but they were stricken from the docket based on the court’s analysis that there was no compliance with the requirements of Rule 5.1 in general, and Rule 5(d)(6) in particular.

In Tornetta v. Musk, C.A. No. 2018-0408-JRS (Del. Ch. Jan. 14, 2022), one the of cases pending in Delaware involving the iconic Elon Musk, the court reasoned that contrary to the applicable rule, the lodging of the depositions: served no purpose in the defense or prosecution of claims before the court. By striking the deposition transcripts from the docket, the court also avoided the need to address redactions of over 6,000 pages of the transcript.

Two Key Takeaways

There are two main takeaways that make this pithy letter-ruling noteworthy for future reference:

  • The always useful reminders of the prerequisites under Rule 5.1 to receive confidential treatment for court filings, such as the definition in Rule 5.1(b)(3) of “good cause” that the person seeking to maintain “confidential treatment” has the burden of establishing. See Slip op. at 8.
  • The rarely explained requirements of Rule 5(d)(6), which states: “When discovery materials are to be filed with the Court [such as the lodging of depositions] other than during trial, the filing party shall file the material together with a notice (a) stating in no more than one page, the reason for filing and (b) setting forth an itemized list of the material.”

A recent decision by the Delaware Court of Chancery provides a handy reminder of the standards the court applies to determine when it will grant a motion to expedite.  In Silverberg v. Munshi, C.A. No. 2022-0018-PAF (Del. Ch. Jan. 10, 2022), the court explained that:

 Although our court is well known for being responsive to plaintiffs seeking expedited proceedings in order to obtain injunctive relief, a plaintiff must first plead a colorable claim and demonstrate a sufficient threat of irreparable harm warranting the costs of expedited proceedings.

Slip op. at 4.

The court determined in its discretion that the motion to expedite did not meet the prerequisites, and denied the motion as being “facially without merit”.

Notable about this decision is that it decided a motion that was filed on Jan. 5, 2022, with the complaint, and denied by this letter decision on Jan. 10–before a response to the motion appears to have been filed. Motions to Expedite are commonly granted in Chancery, but this ruling proves what most practitioners know: not all such motions are granted.