A recent Delaware Court of Chancery decision is noteworthy for its clarification of the nuanced contours of Delaware law regarding contractual restrictions on the perennial feature of Delaware commercial litigation, known as post-closing fraud claims. In Online Healthnow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), the court pronounced key statements of Delaware law on the titular topic in ruling on a Motion to Dismiss. The best way to begin short highlights of this 60-page decision is with a money quote:

“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.”

Slip. op. at 4. See generally seminal Chancery decision in Abry and its progeny, some of which have been highlighted on these pages.

Selected Key Facts:

Of course, a detailed grasp of the extensive factual recitations in this opinion are important for a full understanding of its holding, but a few selected key facts include the following: The Stock Purchase Agreement (SPA) involved in this post-closing dispute included representations that all tax returns of the seller were timely filed and accurate, and that there were no undisclosed liabilities. By contrast, the complaint alleges in extensive detail that large tax liabilities were not disclosed and that they were actively hidden during the due diligence period.

The buyer represented that it had accurate access to the records of the seller, and the SPA included anti-reliance provisions stating that the buyer was not relying on any representations other than those in the SPA.

The SPA also had detailed procedures to address post-closing purchase price adjustments, such as working capital. Disputes within the scope of that provision were to be submitted to an independent accounting firm.

But the parties contested what issues, or if all the issues, were required under the SPA to be submitted to the independent accounting firm, and whether the SPA allowed for any issues to be litigated in court.

Key Statements of Law:

• The court explained that Delaware public policy prohibits a party from contractually exempting itself for liability for fraud, or avoiding liability for intentionally or recklessly causing harm. Slip op. at 35-40. The opinion also relies on the reasoning in the Prairie Capital case, for example, with the following quote: “flesh and blood humans also can be held accountable for statements that they cause an artificial person, like a corporation, to make”. 132 A.2d at 59.

• The opinion includes a discussion of case law relating to the impact of “survival clauses” in connection with Delaware public policy against contractual barriers to fraud claims. Slip op. at 41-46.

• The weight of authority and public policy as explained in this decision, and applied to the facts of this case, prevented the use of the savings clause in the SPA to bar contractual fraud claims. Specifically, the court reasoned that:

“Sellers cannot invoke a clause in a contract allegedly procured by fraud to eviscerate a claim that the contract itself is an instrument of fraud.”

Slip op. at 52-53.

• The court also emphasized that the non-recourse provisions in the SPA could not be relied on to bar the fraud claim. Slip op. at 53-54.
• The parties agreed that the fraud claims were outside of the scope of the post-closing issues that the SPA required to be submitted to an accounting firm but disagreed on what other claims were required to be submitted to the accounting firm.

• In closing, the court determined that the scope of the fraud, if any, that occurred, was a ripe controversy for purposes of a declaratory judgment claim that must be decided by the court before the neutral accounting firm provided for in the SPA could begin its work. See footnote 217 and accompanying text (compiling cases on this topic regarding the scope of an accountant’s role to decide post-closing disputes).

A recent Chancery decision recounts the epic tale of a group of business partners who were longtime friends and who later accused each other, after forming a business together, of fraud and breach of fiduciary duty. In Stone & Paper Investors, LLC v. Blanch, C.A. No. 2018-0394-PAF (Del. Ch. July 30, 2021), the court describes in exhaustive detail the factual background involving detailed examples of funds invested in a company that were diverted for personal use instead of being applied for business purposes.

The opinion in this case should be read in its 108-pages of glory but for purposes of this short blog post, the most consequential aspects of the court’s legal reasoning that have the most widespread applicability include its discussion of the fiduciary duties of LLC Managers, where the LLC agreement does not waive those duties.

The court explains the well-known truism that under Delaware law, absent unambiguous waiver, fiduciary duties are imposed on LLC managers by default. See Slip op. at 73-75. The court observed that the LLC agreement in this case did limit personal liability–except that liability was not eliminated for “acts or omissions in bad faith or involving intentional misconduct or knowing violation of law or personal financial benefit to which the manager is not entitled.” After extensive reasoning, the court found that the breaches of fiduciary duty constituted intentional misconduct.

The court relied on the recent Chancery decision in Largo Legacy Group, LLC v. Charles, 2021 WL 2692426, at *13 (Del. Ch. June 30, 2021), which was highlighted on these pages, for the following block quote that elaborates on the fiduciary duties of a manager of a Delaware LLC:

“In the limited liability context, as in the corporate context, the duty of loyalty mandates that the best interests of the company and its stakeholders take precedence over any interest possessed by the manager and not shared by the stakeholders generally. A manager is not permitted to use their position of trust and confidence to further their private interest. Nor can fiduciaries intentionally act with a purpose other than that of advancing the best interests of the corporation. Specifically, and very pertinently for this case, such fiduciary duties include the duty not to cause the corporation to effect a transaction that would benefit the fiduciary at the expense of the minority stockholders.”

Slip op. at 74 (citing Largo Legacy Group LLC).

Also notable is footnote 315 for its explanation about why the breach of contract claims in this case did not overlap the fiduciary duty claims, and why both were permitted to be pursued through trial in this matter. See, e.g., Largo Legacy Group decision: In addition to the statement of fiduciary duty quoted above, the Largo Legacy case also clarified when tandem claims of both breach of contract an breach of fiduciary duty can proceed at the same time.

Although not covered in this brief blog post, the court also addressed several other important issues for corporate and commercial litigators in Delaware:

● The elements of a claim for fraud or fraud in the inducement.
● Breach of a contract regarding LLC agreement terms.
● Elements of an acquiescence defense.
● Elements of an unclean hands defense.
● Why damages need not be proven with mathematical certainty after a breach is established. Slip op. at 103-104.
● Fee shifting principles.

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.

 

The Delaware Court of Chancery recently published an updated version of Practice Guidelines. Weighing in at 38 single-spaced pages, it must be read by both Chancery litigators and those out-of-state counsel who litigate Chancery cases. The original Practice Guidelines highlighted on these pages, promulgated in 2012, were a mere 18-pages in length.

Courtesy of my assistant, we now have a redlined copy that shows the differences between the current version and the 2012 original version

A somewhat longer overview is provided in an article I co-authored with Chauna Abner that appeared in the August 18, 2021 edition of the Delaware Business Court Insider. In this short post, however, I’ll merely provide a few bullet points on the more noteworthy new provisions:

  • “Protocols for Remote Hearings and Trials” is a new section that describes best practices for this important medium of trial advocacy. Although most of the Covid-related restrictions on in-person trials have been lifted, the consensus is that remote hearings and trials, especially on a paper record, will continue to be a feature of Chancery practice. See Guidelines at 5-8.
  • Document collection and production are described at pages 28-31. Among the 11 sample forms provided as part of these updated Chancery Guidelines, is Exhibit 10, which is a detailed and comprehensive list of suggested protocols for the crucial aspect of discovery related to ESI identification, preservation, and production.
  • “Discovery Facilitator” is a role that is becoming increasingly common in complex Chancery cases, especially those that are expedited. Although not quite synonymous with a Special Master, it may be recommended by the court, or suggested by counsel, to address and streamline nettlesome discovery issues.

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 Superior Court recently dismissed Jarden LLC’s bid for D&O insurance coverage for an appraisal suit that was not “for” redress of a “wrongful act” – and even if it was, the act couldn’t have occurred before the sale to Jewel Rubbermaid Inc. closed, ending the coverage period, in Jarden LLC v. Ace American Insurance Co., et al., No. N20C-03-112 AML CCLD opinion issued (Del. Super. July 30, 2021).

In her July 30 opinion, Judge Abigail LeGrow, guided by a recent milestone Delaware Supreme Court opinion, said the underlying shareholder challenge to the price Jarden investors received in 2016 was by nature, a “statutory proceeding”, even if the deal negotiation was “flawed” and the appraisal petitioners won a $177.4 million judgment.

Judge LeGrow wrote that in keeping with the high court’s ruling in a coverage action for an appraisal suit in In Re Solera Insur. Coverage Appeals, 240 A.3d 1121, 1135-36 (Del. 2020), “the only issue before the appraising court is the value of the dissenting stockholder’s shares on the date of the merger,” and no claims of wrongdoing are considered.

Judge LeGrow’s opinion may be of interest to corporate and insurance specialists–-at least for the reason that it was a win of sorts for corporate insurers in what they have complained has been a long, dry season for them in Delaware D&O insurance coverage litigation.

“Although evidence of a flawed negotiation process generally is admissible in an appraisal proceeding, that evidence is relevant to what weight, if any, the Court accords the negotiated merger price,” she noted. “Accordingly, if the Appraisal Action was for any act, the only act from which it arose or for which it could seek redress” is the execution of the merger itself.

The judge said the insurer defense that is “fatal to Jarden’s coverage claim” is Jarden’s previous agreement that “for” a wrongful act meant a claim that sought redress for that act and the appraisal action could only sue over the execution of the merger itself–but that was too late for coverage.

Background
Jarden LLC, a Delaware limited liability company based in Florida, was a holding company whose portfolio included 120 consumer-product brands like Coleman sporting goods, Crock-Pot appliances, Sunbeam, and Yankee Candle. On December 13, 2015, it agreed to a merger in which it became a subsidiary of Newell Rubbermaid Inc. for cash and Newell stock valued at $59.21 per share as of the closing date.

Jarden’s shareholders voted to approve the deal but some petitioned the Chancery Court for appraisal and alleged the sales process leading up to the merger was flawed and unfair.

The Court of Chancery ascribed little weight to the negotiated deal price for purposes of determining Jarden’s value under Section 262 of the Delaware General Corporation Law because:

(i) Jardan’s lead negotiator “got way out in front” of its board and financial advisors in the negotiations,
(ii) there was no pre-signing or post-signing market check, and
(iii) there were challenges associated with valuing the synergies arising from the deal.

For those reasons, the court appraised the petitioners’ shares at $48.31– $11 below the negotiated price—and awarded them $177,406,216.48, consisting of the fair value of their shares plus pre and post judgment interest.

The coverage action
After paying that judgment, Jarden sought to recoup defense costs and interest from its insurers and when it was unsuccessful, filed breach of contract charges against a tower of insurers that provided coverage for securities claims related to the merger if they involved acts that occurred before the closing.

In opposition to the insurers’ motion to dismiss, Jarden argued that the allegations made in the appraisal complaint concerned defects in the merger itself and were lodged before the closing date, so they are covered by the policies. But the judge said the appraisal action was not for an act that occurred before the closing date.

“This conclusion is compelled by the simple fact that If the merger had not closed, none of the dissenting stockholders who submitted Appraisal Demands would have had standing to pursue appraisal,” Judge LeGrow wrote.

Those challenges to the deal process related only to the weight the trial court would give to the deal price, she said in granting dismissal with prejudice because the pleadings could not be cured by amendment.

Impact?

Although a rare win for insurers, the Jarden ruling’s impact is difficult to predict, partly because it largely defers to the agreed-to meaning of “for” and the Solera opinion’s definition of “wrongful act” rather than address those key terms anew.

In his summary and comments on the Jarden opinion in his Aug. 3 post on his D&O Diary blog, https://www.dandodiary.com, host Kevin LaCroix suggests that Judge LeGrow ”may have approached the dispute here with more than a little wariness… She was the judge who entered the Superior Court opinion in the Solera case – the one that the Delaware Supreme Court overturned in its October 2020 decision.”

The Delaware State Bar Association’s Professional Ethics Committee, for which I serve as the current Vice Chair, recently published Formal Opinion 2021-1 (July 9, 2021), that addresses the legal ethics issues related to lawyers who work remotely in states where they are not licensed–such as from their homes–as many were required to do when their offices were closed during the Covid pandemic. This Formal Opinion relied on a similar Formal Opinion recently published by the American Bar Association.

The Delaware Business Court Insider‘s current edition includes an article I co-authored with Chauna Abner that highlights a recent Delaware Court of Chancery decision that explains the types of claims that are barred by a standard integration clause–as compared to the more robust anti-reliance clause that is required to preclude most typical claims arising from allegations about misrepresentations made regarding a contract. See Shareholder Representative Services v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021). The article is available at this link.

Courtesy of The Delaware Business Court Insider, a copy of the article also appears below.

“Chancery Identifies Claims Barred by Standard Integration Clause”

By: Francis G.X. Pileggi* and
Chauna A. Abner**

The Court of Chancery’s recent decision in S’Holder Representative Servs. LLC v. Albertsons Cos., C.A. No. 2020-0710-JRS (Del. Ch. June 7, 2021), involves the seller of a business claiming that the buyer intentionally evaded post-merger earnout payments. This opinion is useful for its explanation of the types of claims that will, and will not, be barred by a standard integration clause.

Background

The basic facts involved the sale of a company called Plated, bought by Albertsons, the supermarket chain. The closing price was $175 million with an earnout of up to $125 million if certain milestones were reached. Although the merger agreement gave Albertsons sole and complete discretion over the operation of Plated post-closing, the agreement specifically prohibited Albertsons from taking any action with the intent of decreasing or avoiding the earnout. Nonetheless, it was alleged that Albertsons changed Plated’s business model post-closing with an intent to avoid the earnout.

The Court’s decision was rendered in the context of a motion to dismiss, but detailed facts were recited indicating that the top management of Albertsons never intended to promote Plated. If properly supported, Plated would have fulfilled its projected revenues and, thus, would have triggered the earnout.

Analysis

The Court began its analysis noting the “typical” facts the case presented surrounding the payout of post-closing earnout consideration. Specifically, the Court explained that: “[A]s is typical, . . . Albertsons bargained for the right to operate Plated post-closing in its discretion limited only by its express commitment not to operate Plated in a manner intended to avoid the obligation to pay the earnout.” Id. at *1.

The Court recited the well-settled standard for deciding a motion to dismiss followed by the elements to establish a breach of contract claim and a fraudulent inducement claim. Id. at *16. In deciding whether Albertsons breached the merger agreement by intentionally decreasing or avoiding the earnout, the court turned to the meaning of “intent” and explained that: “‘Intent’ is a ‘well-understood concept,’ defined as ‘a design, resolve or determination with which persons act.’” Id. at *17. The Court further explained that “[a] defendant’s intent can be inferred from well-pled allegations in a complaint, with the understanding that allegations of intent need only be averred generally.” Id.

Specifically, in the context of this case, the Court explained that: “To plead a buyer’s intent to avoid an earnout, the goal of avoiding the earnout need not be ‘the buyer’s sole intent’; rather, a plaintiff may well-plead that the buyer’s actions were ‘motivated at least in part by that intention.’” Id. at *17.

Key Takeaways

The most noteworthy aspects of this opinion are found in the Court’s distinction between the claims that will be barred by a standard integration clause–as compared with the claims that will only be barred if a standard integration clause is supplemented and buttressed by more explicit anti-reliance language demonstrating with clarity that the plaintiff has agreed that it was not relying on facts outside the contract.

The Court instructed that:

• Fraud claims will not be barred by a simple integration clause that does not contain a more robust and explicit anti-reliance provision that expresses with clarity that there will be no reliance on facts outside the contract. In this case, the integration clause alone would not bar allegations of extra-contractual statements of fact. But that is not what the plaintiff alleged.

• Because the plaintiff alleged fraudulent inducement and claimed that Albertsons lied about its “future intent” with respect to the operation of the post-business closing, the Court explained clear anti-reliance language was needed to stand as a contractual bar to an extra-contractual fraud claim based on factual representations.

• By contrast, an integration clause alone is sufficient to bar a fraud claim based on expressions of future intent or future promises. The Court cited among other cases in support of its reasoning, Black Horse Capital, LP v. Capital Xstelos Holdings, Inc., 2014 Del. Ch. LEXIS 188, at * 22 (Del. Ch. Sept. 30, 2014), to explain that an extra-contractual fraud claim based on a “future promise” cannot stand when the parties committed in a clear integration clause that they will not rely on promises and representations outside the agreement.

• The Court, however, concluded that plaintiff bargained for Albertsons not to intentionally scuttle the earnout and, therefore: “It may attempt to prove a breach of that contractual obligation [regarding intent] but cannot claim fraud based on future promises not memorialized in the merger agreement.”

______________________________________________________________________________
*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.

**Chauna A. Abner is a corporate and commercial litigation associate in the Delaware office of Lewis Brisbois Bisgaard & Smith LLP.

For the last 16 years, these pages have featured many highlights of court decisions addressing the right of a stockholder, or a member of an LLC, to demand a company’s “books and records“. Regular readers will recall much commentary about why the exercise of such rights are not for the fainthearted.

Why this decision is important: The Delaware Court of Chancery’s pithy ruling in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. July 22, 2021), provides guidance to litigators in general, and corporate litigators in particular, that “glaringly egregious” is where the line is drawn for determining when fees will be shifted. This illuminates the amorphous “bad faith” articulation of the standard that must be triggered before the losing party will be required to pay the attorneys’ fees of the victor as an exception to the general “American Rule” that each party pays its own legal fees. To be sure, other decisions have shifted fees, and this letter decision is filled with copious citations to many prior Chancery opinions that provide a solid foundation for the court’s reasoning. The court also cited to key cases that explain the substantive requirements of DGCL Section 220.  See, e.g., AmerisourceBergen Chancery decision, highlighted here, and upheld by the “Supremes”, as noted here.

In this recent ruling, the Court of Chancery clarified the standard the court will apply to shift fees and require the company who has engaged in improper litigation tactics to pay the attorneys’ fees of the stockholder seeking the books and records of a company. In this case, the court granted a request for attorneys’ fees that have been reported to be about $1.7 million through the trial. The post-trial decision in this matter that granted the requested access to books and records provides more background about this case and was featured on these pages

Commentary on court decisions too numerous to count appearing on these pages has included the statutory prerequisites for successfully demanding corporate books and records, and the ruling in this case assumes familiarity with those requirements. Thus, the most useful approach for this short blog post is to highlight via bullet points the notable quotes with the most widespread applicability for those who toil in the vineyards of corporate and commercial litigation in Delaware.

Money Quotes:

  • “Gilead argued that Plaintiffs had not met the credible basis requirement to investigate wrongdoing–a requirement that imposes ‘the lowest possible burden of proof’–even though Plaintiffs had ample support for their proposition.” See footnote 10, which recites examples of that support from the post-trial opinion.
  • Gilead incorrectly opposed the inspection requests by arguing (wrongly) that any claims being investigated would be dismissed–but the Court instructed that under Delaware law: “…the stockholder need not demonstrate that the alleged mismanagement or wrongdoing is actionable in order to be entitled to inspection.” See footnote 11 and accompanying text.
  • “… where this court shifts fees to curb and correct for overly vexatious litigation behavior, a showing of glaringly egregious litigation conduct is enough.” (emphasis added) Slip op. at 5.  (Glaringly egregious is a more useful formulation than “bad faith alone”, and specific examples were provided in this ruling.)
  • The court added that: “To the extent a finding of bad faith is necessary, then the court can infer bad faith based on the litigation conduct alone.” Slip op. at 5-6. In this case, the court found that inference to be appropriate based on the examples provided and references to the post-trial opinion–highlighted on these pages.

Supplement: I was quoted by The Delaware Business Court Insider, as well as by a publication of Financial Times called Agenda about the impact of this decision.

A recent Delaware Court of Chancery decision provided a thorough examination of the titular topic in connection with allegations of fraudulent enticement to invest. In Sehoy Energy LP v. Adriani, C.A. No. 12387-VCG (Del. Ch. June 16, 2021), the court discussed a few things that should be of interest to corporate and commercial litigators.

● The facts of this case provided the rare exception to the general rule that breach of contract claims cannot be bootstrapped into a fraud claim.
● The court provided an excellent recitation of the five elements of a fraudulent inducement claim. See Slip op. at 27-30. The court also provides key reasoning about the application of those principles.
● Another useful nugget with wide applicability is the court’s discussion about the following principle: when rescissory damages are granted, the claimant cannot also receive contradictory money damages. See Slip op. at 31 and footnote 183.

 

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 recently decided OptimisCorp may be able to prove three ex-directors disloyally withheld from the struggling physical therapy company a $6.7 million award they had won in a derivative action against its former outside counsel for legal malpractice during a bitter board feud in OptimisCorp v. Atkins et al., No. 2020-0183-MTZ opinion issued (Del. Ch. July 15, 2021).

Vice Chancellor Morgan Zurn’s July 15 opinion denied the ex-directors’ motion to dismiss breach-of-duty and unjust enrichment charges because of evidence that as derivative suit plaintiffs, they put their own interests first by seeking to divide the award among their shareholder allies even when it became a company asset that Optimis badly needed.

Notably, the court likened the three directors’ duty to that of a trustee, especially when the derivative charges they brought against ex-Optimis counsel regarding his advice about the legality of their ‘ambush” ouster of CEO Alan Morelli  resulted in an award to the company and all its investors. “The board may, and sometimes must, relinquish control over that asset to a stockholder representative in a derivative action,” the Vice Chancellor wrote. “Defendants’ position that they owed no duty to the company as derivative plaintiffs is inconsistent with Delaware law.”

She cautioned lawyers immersed in bitter contest-for-control litigation that “defendants’ disdain for Morelli and Sussman does not obviate their duties to them as stockholders, or to the other stockholders, or to Optimis” adding that per Delaware General Corporation Law, after the award, “the Optimis board should have regained its power under Section 141(a) to make decisions regarding the use of the benefits derived from corporate litigation.”

Background
The three defendant directors — William Atkins, Gregory Smith and John Waite — had been in conflict with CEO and Chairman Alan Morelli since October 2012 when they purported to remove him from both positions in a surprise board meeting. The ex-Optimis counsel was drawn into the battle when the three directors charged him with malpractice for some of the legal positions he took during the many lawsuits spawned by the contest for control.

After the parties agreed to arbitrate the claims against the ex-lawyer for the company, an arbitrator found him liable to Optimis for legal malpractice and breach of duty in Sept. 2019 but despite the severe financial problems the company was experiencing at that time, the defendants did not turn the award over, the vice chancellor said. She found that it cost Optimis a total of $4 million counting loss of market share, referral sources, patients, payors, goodwill, and revenue, combined with the levy the defendants filed on Optimis operating unit’s accounts receivable funds, interfering with its business operations and Optimis’ cash flow and forcing it to borrow at a $1.4 million cost.

The defendants, who now hold positions with an Optimis competitor, turned over the full award only after the vice chancellor, in a June 19, 2020 bench ruling, found the award to be derivative and ordered them to comply, the court said.

Turning to the breach of duty and unjust enrichment charges, Vice Chancellor Zurn rejected as being “wrong under Delaware law,” defendants’ arguments that:

1. Any fiduciary role and duties they assumed as derivative plaintiffs prosecuting the arbitration was with respect to their fellow stockholders only, not to the corporation itself,
2. “[E]ven if Defendants owed fiduciary duties to Plaintiff, Delaware law does not impose upon them any obligation other than to maintain the derivative action for the benefit of the stockholders,” and therefore Plaintiff has not pled breach as a matter of law,” and
3. Delaware law does not recognize a claim for money damages for a derivative plaintiff’s breach of fiduciary duty.

In answer, the court ruled that:

1. “Defendants’ position that they owed no duty to the Company as derivative plaintiffs is inconsistent with Delaware law. Defendants owed fiduciary duties to the Company and its stockholders with respect to the corporate asset entrusted to them.”
2. “As a fiduciary, the representative plaintiff owes to those whose cause he advocates a duty of the finest loyalty… Any stockholder seeking to bring a derivative suit on behalf of the corporation has to act in the best interest of the corporation.”
3. “Optimis is not required to plead and prove damages in order to state a claim for breach of fiduciary duty, but has nonetheless done so by alleging that withholding the Award caused Optimis to take out unfavorable loans costing the Company approximately $1,500,000.”

Unjust enrichment claim may also proceed

The court said, “[b]y withholding the derivative proceeds from Optimis, Defendants unjustly enriched themselves with ill-gotten benefits to the detriment of Optimis, while also causing other direct and indirect harm to Optimis on a significant scale. Under Delaware law, “[u]njust enrichment is the unjust retention of a benefit to the loss of another, or the retention of money or property of another against the fundamental principles of justice or equity and good conscience.”