In a departure from the manner in which most cases have been highlighted on these pages, this post includes a collection of short blurbs about recent Delaware corporate and commercial decisions, identifying the key issues addressed, with a link to the whole opinion. This experimental approach to highlighting recent decisions was prompted by a combination of many decisions published recently and an increased workload from paying clients.

Supreme Court Interprets Bylaws and Enforceability of Contractual Deadlines

A recent decision of the Delaware Supreme Court should be read by anyone who needs to know the latest iteration of Delaware law on the following issues:

  1. Interpreting bylaws;
  2. Prerequisites for the nominations of directors; and,
  3. Enforceability of contractual deadlines to provide replies or information.

See Blackrock Credit Allocation Income Trust v. Saba Capital Master Funds, Ltd., Del. Supr., No. 297, 2019 (Jan. 13, 2020). Of course, a careful reading of the entire 32-page decision is warranted, but for purposes of this short blog post I merely highlight the key issues addressed for those who find the topics to be of interest.

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Chancery Explains Doctrine of Recoupment

A recent Delaware Court of Chancery decision addressed the nuances of the doctrine of recoupment, as well as the timetable/deadline by which counterclaims with such defenses must be asserted. See Claros Diagnostics, Inc. v. Opko Health, Inc., C.A. No. 2019-0262-SG (Del. Ch. Feb. 19, 2020). The entire 36-page decision should be reviewed carefully for those who need to understand the nuances of this less-than-common legal topic.

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Court Analyzes Stock Sale Under Entire Fairness

A recent decision of the Delaware Court of Chancery analyzed a stock sale that took place after suit was filed. The sale was intended to make moot a suit under DGCL Section 226 seeking to appoint a custodian based on a deadlock. In connection with that analysis, the court discussed the different levels of review applicable to such actions, in addition to the business judgment rule, based on which a court will analyze the actions of directors or others who owe fiduciary duties. See Coster v. UIP Companies, Inc., Cons., No. 2018-0440-KSJM (Del. Ch. Jan. 28, 2020).

The court also includes an instructive discussion of the nuanced analysis to determine whether or not a director should be deemed independent and/or disinterested. For example, the court cites to case law indicating that financial considerations are not the only basis to determine whether or not a director is interested. This is so, because the Court observed that: human relations and motivations are complex and

“greed is not the only human emotion that can pull one from the path of propriety; so might hatred, lust, envy, revenge, or, as is here alleged, shame or pride.”

See footnotes 219 and 220, and accompanying text. That eminently quotable above passage deserves to be memorized.

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Chancery Considers Alleged Fraudulent Transfers in a Failing Company

The Court of Chancery recently analyzed whether or not certain transfers should be treated as fraudulent conveyances, but the court concluded that the complaint was time-barred to the extent that it challenged dividends that were declared and paid beyond the allowable time period to file a claim. See Burkhart v. Genworth Financial, Inc., No. 2018-0691-JRS (Del. Ch. Jan. 31, 2020).

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Chancery Addresses Squeeze-out of Founder

For those interested in a thoughtful and careful analysis of a matter involving the squeeze-out of a founder, and claims related thereto, see Ogus v. Sporttechie, Inc., No. 2018-0869-AGB (Del. Ch. Jan. 31, 2020).

 

This post is an aggregation of miscellaneous worthwhile Delaware corporate litigation developments that was easier to present as one post instead of multiple smaller posts:

1.     Case Law Regarding Importance of Formalities to Modify Pretrial Scheduling Orders:

A Delaware Supreme Court opinion of several years ago, highlighted on these pages, emphasized that informal extensions of a scheduling order, without court approval, might not be recognized by the court if the unapproved new deadlines are not met.  See Christian v. Counseling Resources Associates.  A recent Chancery transcript ruling indicates that there may not be uniform application of that Supreme Court decision in the trial courts.  See Greenstar IH Rep, LLC v. Tutor Perini Corp., C.A. No. 12885-VCS, transcript (Del. Ch. Mar. 11, 2019; filed Mar. 27, 2019); see also Vanilla Corp. v. VelQuest Inc., C.A. No. 7459-VCL, transcript (Del. Ch. Jan. 15, 2013). But see and compare: a relatively recent Chancery decision that went to great lengths to emphasize the importance of adhering to scheduling orders and court-imposed deadlines, which was highlighted on these pages.

2.     Rule 54 Interpretation:

Court of Chancery Rule 54 allows “costs” to be awarded to the “prevailing party,” but disputes about: (i) who is the prevailing party; and (ii) which exact costs are covered by the rule, are not well developed nuances explained by many reported Delaware court opinions. Not to worry: a recent Chancery transcript ruling added to the paucity of court decisions on this important, esoteric topic by finding that the costs of a supersedeas appeal bond were included as Rule 54 costs when, after a Supreme Court remand, the party who lost in the trial court and posted a bond pending appeal–and became the prevailing party on remand–was entitled to the costs of the supersedeas bond.  The court distinguished a prior case where a compromise by the parties on a substitute for a bond did not make it a “necessary expense” in that matter.  See In re Oxbow Carbon, LLC Unitholder Litigation, C.A. No. 12447-VCL consol. (Order )(Del. Ch. May 10, 2019).  One of the many prior Chancery decisions in this matter was highlighted on these pages–a lengthy post-trial Chancery opinion which was reversed in part on appeal and remanded.

3.     Amendments to Court of Chancery Rules of Procedure:

The Court of Chancery Rules are modeled after the Federal Rules of Civil Procedure which were recently amended.  Consistent with the recent amendments to the FRCP, the Court of Chancery recently amended Rules 1, 26, 34 and 37–effective on July 1.  The press release from the court is at the following link.   The order changing the rules is available at this link, and a redlined version of the new rules is available at this link

In short, highlights of the amendments include the following:

(i)  the proportionality standard is imposed, based on the type of the case, as an explicit parameter for the scope of discovery instead of the former “unduly burdensome” standard;

(ii)  specific references added to “ESI” for electronically stored information;

(iii)  the new rules follow the federal amendments and omit the well-worn standard of “reasonably calculated to lead to the discovery of admissible evidence,” and replace it, in the comment section only, with: “any possibility that the discovery will lead to relevant evidence.”

4.     Useful Commentary on “Non-Financial” Caremark Claims:

The Harvard Corporate Governance Blog has a useful blog post about Caremark claims for non-financial matters such as: condoning a culture of harassment, e.g., the Harvey Weinstein matter.  It’s a 2018 post, but still relevant today.

The Delaware Court of Chancery recently had occasion to describe the important norms that lawyers are expected to follow, and the minimum standards of attorney conduct imposed on both Delaware and non-Delaware counsel who enter their appearance in a matter before the Court. See Lendus, LLC v. Goede, C.A. 2018-0233-SG (Del. Ch. Dec. 10, 2018).

This case is noteworthy for a few reasons. In addition to the recitation of basic principles on which the practice of law is based, the decision provides citations to authority and quotable excerpts for use in a brief when issues of attorney conduct arise. The behavior involved in this case was egregious, and it serves as a reminder of the outer limits of conduct that will not be tolerated, for example during depositions and during other interactions among counsel and clients.

This case also serves as a reminder that in Delaware the trial courts do not view themselves–in the first instance–as enforcers of all the rules of professional conduct for lawyers–unless a violation interferes with the administration of justice in the litigation–though they may, as in this case, refer the matter to the Office of Disciplinary Counsel, which is an arm of the Delaware Supreme Court, or the analogous agency in other states when the conduct of an non-Delaware attorney is an issue.

The court begins the opinion by citing another case that exhorts attorneys to: “think twice, three times, four times, perhaps even more” before seeking sanctions against other attorneys for inappropriate conduct. Both parties in this case filed cross-motions for sanctions, but the court found only one of them to be warranted.

The court emphasizes in its introduction that it derives no pleasure in criticizing others because judges understand the “pressures and frustrations of practice.” The court also referred to members of the bench as not being above reproach, with the following phrase: “None of our own eyes being timber-free….” See page 2.

In sum, without dwelling on the embarrassing details, if an attorney’s conduct is truly egregious enough, this decision provides the authority and reasoning to address the problem, especially if that attorney is admitted pro hac vice.

Compare: Recent Chancery decision highlighted on these pages that explained why it was important for lawyers to follow the rules applicable to discovery, as well as abiding by related deadlines.

The Court of Chancery recently explained the public policy reasons for enforcing discovery rules and scheduling deadlines, as well as explaining the types of penalties available for failure to comply with discovery obligations or deadlines.

The key takeaways from the decision in Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D June 21, 2002, C.A. No. 12875-VCL (Del. Ch. Dec. 4, 2018), include the following:

  • The court explains the policy reasons for the need to enforce the rules of discovery and scheduling deadlines. See pages 19 to 20.
  • The court describes the types of penalties that are available for the court to impose for a party’s failure to comply with discovery rules or deadlines. See pages 21 to 25. See generally, Rule 37(b)(2).
  • The court explained that Delaware courts generally will strictly adhere to discovery deadlines. See footnote 48.

There are multiple Delaware decisions highlighted on these pages regarding the topic addressed in this decision. See, e.g., here and here.

One of the more common forms of commercial litigation continues to be disputes regarding earn-out formulas for post-closing payments due if certain milestones are met.  The Delaware Court of Chancery decision in Fortis Advisors LLC v. Stora Enso AB, C.A. No. 12291-VCS (Del. Ch. Aug. 10, 2018), involved a motion to dismiss earn-out claims. 

Background:

The amended complaint alleged that there were two post-closing payments due upon the achievement of designated milestones (the “Milestone Payments”).  The Milestone Payments were based on certain provisions in the merger agreement that called for various actions to be completed, and if they were completed, then substantial additional payments would be due to the seller.  Exhibits to the merger agreement provided the details and deadlines regarding the Milestone Payments.  The first Milestone Payment required a construction of a plant and the completion of the production of certain products.  The second Milestone Payment required the construction of a separate plant and the production of certain products at a specific price by a specific deadline.

The claim for breach of contract alleged that the buyer did not comply with the business plan that was a part of the Merger Agreement and that the actions required to be taken in order for the Milestone Payments to be due, were not performed.

Legal Analysis:

The usefulness of this decision is primarily based on the court’s analysis of the standard under Rule 12(b)(6) for a motion to dismiss, as opposed to its analysis of specific terms of the merger agreement that might be replicated in other merger agreements with earn-out provisions such that the court’s analysis of merger terms would be applicable in other cases.

Rather, the court explained that in a motion to dismiss, the movant can only prevail if its proffered interpretation of the merger agreement is the only reasonably interpretation.  In this case, however, the interpretations of the merger agreement by each of the parties were both reasonable, and therefore, as a procedural matter the court found that granting the motion to dismiss was inappropriate.

The court explained in detail why the interpretation of each of the parties was reasonable because of an ambiguity in the provisions of the agreements on which the motion to dismiss was based.  Because the court determined that additional discovery is needed and a fuller record would need to be examined at trial in order to determine the intent of the parties in connection with the terms in the merger agreement that were disputed, a determination prior to trial about whether or not there was a breach of the agreement regarding the Milestone Payments was premature.

A recent decision of the Delaware Court of Chancery provides a cautionary tale for corporate and commercial litigation practitioners about the importance of complying with contractual notice deadlines. In PR Acquisitions, LLC v. Midland Funding LLC, C.A. No 2017-0465-TMR (Del. Ch. April 30, 2018), the court barred a claim made for funds held in escrow because the applicable agreement required notice to be sent to the seller, but instead notice was mistakenly sent to the escrow agent. Although actual notice by phone was given to the seller prior to the deadline, the court explained why that did not satisfy the manner of notice required by the deadline provided for in the agreement.

Brief Factual Background

The basis for the dispute between the parties was the sale of consumer debt accounts. The purchase and escrow agreements for the transaction required that claims for funds held in escrow based, for example, on allegations of breach of representations and warranties, be sent to an address for the seller provided in the agreement. The seller’s liability for those claims was limited to the $6 million held in escrow. The court found that no written request or documentation of a claim was sent to the seller by the deadline. The court described how the buyer’s general counsel gave the notice letter to his assistant, but according to the opinion, the letter was only sent to the escrow agent and not the seller directly as required by the agreement. Despite this “clerical error”, the seller was notified by phone of the claim by the deadline.

Court’s Analysis

The court rejected the buyer’s argument that actual notice to the seller by phone should suffice as substantial compliance with the deadline. Nor was the court persuaded by the argument that the agreement did not require “strict compliance” with the notice provision.

Strict Compliance Required for Notice Provisions for Contract Claims

Notably, the court supported its holding in large part by distinguishing several cases that the buyer relied on for its failed argument that “actual notice” should suffice as “substantial compliance” with a contractual notice provision.  The cases that the court distinguishes are cited at footnotes 71, 75, 79, and 88, and accompanying text. None of those cases that the buyer relied on allowed for substantial compliance when the agreement specified a particular method of delivery to a specific party by a fixed deadline–as a condition for claims to an escrow fund. The buyer offered “no reason other than its own error for its failure to comply with the notice provision in the escrow agreement.” Thus, the court granted summary judgment to the seller and barred the claims.

Liability Limited to Escrow Funds

The court also dismissed claims of fraud that would have circumvented the buyer’s claim that the seller’s limitation of liability should not be confined to the funds held in escrow. The buyer’s argument on this point was based on the decision in Abry Partners V, L.P. v. F & W Acquisitions LLC, 891 A.2d 1032, 1050 (Del. Ch. 2006). The court explained that Abry did not help the buyer in this case. The Abry opinion, authored by the current Chief Justice of Delaware when he was a Vice Chancellor, announced that the “public policy of Delaware prohibits a seller from insulating itself from the possibility that the sale would be rescinded if the buyer can show either: 1) that the seller knew that the Company’s contractual representations and warranties were false; or 2) that the seller itself lied to the buyer about a contractual representation and warranty.” 891 A.2d at 1064.

In order to make the showing explained in Abry, the buyer must “prove that the seller acted with an illicit state of mind, in the sense the seller knew that the representation was false and communicated it to the buyer. The buyer may not escape the contractual limitations on liability by attempting to show that the seller acted in a reckless, grossly negligent, or negligent manner.” Id. This statement of the law needs to be contrasted with the limitations of liability in an agreement that, if carefully drafted, will be enforced in Delaware to limit liability of the parties for representations and warranties to only that which is explicitly stated in the agreements between the parties.

The Delaware Court of Chancery recently issued a decision that should be required reading for any lawyer that practices before it, whether they be Delaware counsel or non-Delaware counsel admitted pro hac vice, and whether they engage in corporate and commercial litigation or other types of cases before the court.  In the matter styled: In re Examworks Group, Inc. Stockholder Appraisal Litigation, Cons. C.A. No. 12688-VCL (Del. Ch. Feb. 21, 2018), the court explained in a heavily footnoted and scholarly analysis how serious the court regards scheduling orders, pretrial deadlines, discovery obligations, and the importance of properly-prepared and timely-submitted privilege logs.

For the last 13 or so years that this blog has highlighted key decisions from the Delaware Court of Chancery, the purpose has been to provide noteworthy excerpts from important decisions that are of practical application to lawyers who toil in the vineyards of the Delaware courts.

I have intentionally avoided using names of counsel involved in this case, and have focused on the “nuggets” of the court’s ruling that a busy litigator would need to know. I provide bullet points of the most noteworthy statements of law and the principles emphasized in this decision that should be memorized by any practitioner in the Court of Chancery who seeks to avoid the types of penalties that were imposed in this case for the failure to meet deadlines and the failure to fulfill various discovery obligations.

  • The court begins its analysis with the doctrinal underpinning and the public policy rationale for the importance of candor and fair dealing during the discovery process in order to reduce the element of surprise at trial and to insure that a trial decision is the result of a disinterested search for truth from all available evidence.
  • The court reminded parties that scheduling orders are “not merely guidelines but have the same full force and effect as any other court order.” See footnote 39.
  • The court bluntly underscored the rule that a “party that disregards the provisions in a scheduling order that govern discovery is engaging in discovery abuse.”
  • The court remonstrated that: “Discovery abuse has no place in Delaware courts, and the protection of litigants, the public and the bar demands nothing less than Delaware trial courts be diligent and promptly and effectively take corrective action to secure the just, speedy and inexpensive determination of every proceeding before them.” See footnote 41.
  • Importantly, the court interpreted Court of Chancery Rule 37(b)(2), based on Delaware Supreme Court decisions, as generally requiring the mandatory award of fees for discovery abuses unless the failure to comply with discovery obligations was “substantially justified.” See Slip Op. at 15-17.
  • One of the several problems that the court addressed was that the production of documents came many weeks after the discovery deadline, and well after the depositions were taken. The court noted that the offending party neither requested an extension of the deadline from the court nor sought an extension by agreement with the other parties in the case.
  • The court rejected with emphasis the argument that because the receiving party did not “nag” or press for the compliance with the discovery deadline, that there should be no penalty for non-compliance. The court refused to allow the offending party to “shift the obligation for compliance” to the other party.

Two Levels of Consequences for Missed Discovery Deadlines:

  • The court described the first level of consequence for misconduct involved as including the actual prejudice that resulted from the belated production of documents that the company could have used in discovery for depositions and with their experts.
  • The second level of prejudice involves the “degradation of the litigation process.” The court explained that in order for the litigation system to function, the parties must follow the rules.
  • The court’s reasoning on this point deserves a block quote:

“If participants suspect that others are not following the rules, then the process deteriorates. People who follow the rules feel like chumps when others seem to be cutting corners or breaking rules and getting ahead. People who otherwise might not think of pushing limits become more aggressive if they think everyone else is doing it. It is this broader, systemic interest that the Delaware Supreme Court seems to have had in mind when stressing the courts must address discovery abuse not only to protect litigants, but also to protect the public and the bar.” See footnote 57.

  • The foregoing rationale is one of the best articulations of the need for the courts to enforce discovery obligations so that those who don’t follow the rules gain some advantage, and those who do follow the rules feel, in the words of the court, “like chumps.”

Penalties Imposed

  • The penalty that the court imposed for the substantially tardy production of documents was that the offending party that missed the production deadline was required to produce their witnesses again for deposition and pay for the cost of the depositions, or as the court described it, “bear all expenses associated with their late production of documents and the remedy imposed by this decision.” The court listed in an extended description the types of additional efforts that would be included in the fees that the offending party would be responsible for.

Privilege Logs:

  • Although many prior Chancery decisions have described in detail the importance of privilege logs and the specific components required to be included in privilege logs, as well as the penalty of waiver if the contents of the privilege logs are not sufficient, this opinion provides an additional reminder for those who might not have gotten the message in prior decisions.

For example, the court emphasized that:

  • Producing a timely privilege log is part of a party’s obligation when asserting privilege. The privilege logs must be produced by the same deadline as the date for documents to be produced.
  • The burden of establishing privilege rests on the party asserting it. See footnote 61.
  • The court emphasized that: “An insufficiently supported claim of privilege can result in waiver.” See footnote 63 for cases supporting that well-established statement of Delaware law. Those cited cases also describe the detailed contents that a privilege log must include in order to avoid waiver.
  • The court explained that: “Just as you can’t hit what you can’t see, you can’t challenge what the other side has hasn’t described.” That is, the privilege log must provide sufficient information to enable the adversary to “assess the privilege claim an decide whether to mount a challenge.”
  • The court reiterated Delaware law that: “Producing a privilege log after the discovery cutoff prevents the opposing party from evaluating the log, making timely challenges, and using the resulting documents in discovery. Producing a post-cutoff log has the same effect as not producing a log, which is the same thing as not providing any support for a claim of privilege. Improperly asserting a claim of privilege is no claim of privilege at all.” See footnote 57 (cases collected).

Conclusion:

  • In sum, the court gave the party who did not receive the documents on time leave to conduct supplemental depositions to explore any materials produced after the depositions were taken, or as a result of the penalties imposed by this decision. The court imposed on the offending party the cost of the supplemental depositions of its own representatives, as well as the additional costs of additional efforts incurred as a result of the late production, as more specifically described in the opinion.
  • This opinion should be required reading for anyone who practices before the Delaware Court of Chancery, especially out of state counsel who are admitted pro hac vice, in order to “bring home” the importance that the court places on timely compliance with discovery deadlines and discovery obligations, as well as the severe and costly penalties that the court will impose, on a mandatory basis, if those discovery deadlines and obligations are not complied with properly.

POSTSCRIPT: Several years ago, a Delaware Supreme Court opinion was highlighted on these pages, addressing a related issue of what penalties are appropriate for missing pretrial deadlines. See Christian v. Counseling Resource Associates, Inc., Del. Supr., No.  460, 2011 (Jan. 2, 2013) (revised March 26, 2013).

The Court of Chancery recently reiterated its expectations of Delaware discovery conduct at a hearing in Medicalgorithmics S.A. v. AMI Monitoring, Inc., C.A. No. 10948-CB (Transcript).  Notable among the Court’s comments at the hearing were:

  • The Court stressed the importance of attorney review of documents before production, saying that, absent a “quick-peek” agreement, attorney involvement should be the default. The sampling and filtering techniques employed in lieu of attorney review were insufficient.  The Court indicated that, in this situation, where an expedited schedule was agreed to by the parties, rather than required by the Court, the parties should have approached the Court and requested that discovery deadlines be modified once they realized that it was not feasible to properly review documents to ensure they were relevant and non-privileged before production.
  • When relying on references to documents as a response to an interrogatory under Court of Chancery Rule 33(d), the answering party must either refer to specific Bates numbers or provide a narrative response. It is not sufficient to state that the documents in which the information is contained have been produced and force the other side to locate them.
  • A new, Delaware-compliant privilege log was ordered to be produced to replace a log that did not contain the appropriate categories of information, although it declined to deem the privilege waived as to those documents that were improperly listed.
  • The Court reiterated the default rule that plaintiffs who file suit in Delaware should be made available for deposition in Delaware, absent agreement to the contrary.

The Court acknowledged this to be one of the occasions on which an award of costs, including attorneys’ fees, associated with bringing the motion was warranted.

 

Hill International, Inc. v. Opportunity Partners L.P.,  Del. Supr., 305, 2015 (Del. July 2, 2015). This Delaware Supreme Court opinion should be read by anyone interested in the latest iteration of Delaware law on advance notice bylaws. A few bullets points about this decision should help readers decide if they want to read the whole ruling linked above.

  • The original notice of the annual meeting did not provide a precise date; rather, it described the meeting to be held “on or about” June 10.
  • Not until a date certain was made public, were various timetables and deadlines triggered–especially because the actual date certain of June 9 was different than the first date given as “on or about June 10”
  • The Supreme Court based its analysis on contract interpretation principles applied to the applicable provisions of the bylaws, which of course are treated as a contract within the framework of the Delaware General Corporation Law.
  • The procedural posture was an appeal from the Court of Chancery’s grant of a mandatory injunction preventing the company from conducting business at the annual meeting other than adjourning the meeting, which allowed the court to consider more fully the arguments that the company improperly refused to consider nominees for two director positions that the company argued were not timely submitted in accordance with the advance notice bylaws
  • No security was required by the Court of Chancery when the mandatory injunction was imposed and the last footnote of this opinion “dodges” that issue in some respect by finding that the issue was not adequately presented in order for it to be considered on appeal. Nonetheless, in dicta  Delaware’s high court, in a panel decision, observed that, in essence, the Court of Chancery was not in error on that point for reasons explained in the final footnote of the decision.
  • After the June 5 injunction was ordered, based on a complaint and motion for preliminary injunction filed on May 14, the Court of Chancery granted a partial final judgment under Rule 54(b) on June 16, at which time an expedited appeal was filed with the Supreme Court, which held oral argument on July 1. This decision of July 2 affirming the Chancery decision deserves to be exalted as an example of very fast decision making in a formal written opinion, after full briefing, on complicated issues of corporate litigation (by both the Court of Chancery and the Supreme Court.)

Two recent letter rulings serve as practical reminders that even though the grant of a motion for expedited proceedings in the Delaware Court of Chancery is common for corporate and commercial litigation, there remains a standard that must be satisfied before such expedition will be granted: irreparable harm must be shown as both imminent and non-speculative in order to impose on parties and the court abbreviated deadlines and a quick timetable for hearings and trial. Threatened financial insolvency must also be demonstrated with some detail and substantiation. See Smollar v. Potarazu, C. A. No 10287-VCN (Del. Ch. Nov. 19, 2014) and Platinum Partners Value Arbitrage Fund L.P. v. Echo Therapeutics, Inc., C.A. No. 10303-VCN (Del. Ch. Nov. 14, 2014).