Search forum

16th Annual Review of Key Delaware Corporate and Commercial Decisions

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

This is the 16th 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. This list does not attempt to include all important decisions of those two courts that were rendered in 2020. 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.

The Delaware Business Court Insider again published this year’s Annual Review though it appeared in two parts due to its length, in last week’s edition and in this week’s edition. Part I and Part II are reprinted below with the courtesy of The Delaware Business Court Insider. (c) 2020 ALM Media Properties, LLC. All rights reserved.

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. For example, the Sciabacucchi; Solera; and AB Stable (Anbang) cases have already been the subject of extensive commentary by others. Links are also provided below to the actual court decisions and longer summaries.

DELAWARE SUPREME COURT DECISIONS

Supreme Court Instructs on Nuances of Fiduciary Duties of Disclosure and Loyalty

A Delaware Supreme Court decision from 2020 that deserves to be read by anyone interested in the nuances of Delaware law on the fiduciary duties of disclosure and loyalty of a manager or a director in connection with communications with stockholders or others to whom a fiduciary duty is owed, is Dohmen v. Goodman, No. 403, 2019 (Del. June 23, 2020), in which Delaware’s High Court answered a question on this topic certified from the U.S. Court of Appeals for the Ninth Circuit.

Key Takeaways:

There is a “per se damages rule” in Delaware that covers only those breaches of the fiduciary duty of disclosure involving requests for stockholder action that impair the economic or voting rights of investors. Importantly, this per se damages rule only covers nominal damages. Again, for emphasis: the per se damages rule does not apply to damages other than nominal damages. Therefore, in order to recover compensatory damages, one who proves a breach of the fiduciary duty of disclosure must also prove reliance, causation and damages. See Slip op. at 24.

The Court in its en banc opinion provides a useful overview of fiduciary duties in general, and addresses the many nuances–that change depending on the situation presented–of the duty of disclosure in particular as it relates to requests for action by stockholders or others to whom a fiduciary duty is owed.　 See Slip op. at 9-10.

Brief Overview of the Case:

The procedural background of the case involved an issue of Delaware law that the U.S. Court of Appeals for the Ninth Circuit certified to the Delaware Supreme Court. In other words, the Ninth Circuit asked the Delaware Supreme Court to decide an issue of Delaware law that was originally presented to the Ninth Circuit.

This gem of a 24-page opinion, which is relatively short for many Delaware opinions, was decided based on stipulated facts, which in a very simplified way, decided a claim by a limited partner in a hedge fund, who as limited partner in a limited partnership was owed a duty by the fund manager, which was structured as an LLC. Among the claims by the limited partner was that the general partner of the limited partnership, the LLC manager, breached fiduciary duties by failing to disclose that the general partner was the only investor in the fund other than the suing limited partner, and related omissions or misrepresentations.

Delaware Fiduciary Duty Law:

In connection with its decision, the Delaware Supreme Court recited several useful truisms of Delaware law. For example, the agreements at issue did not disclaim the fiduciary duty of loyalty, and therefore, the general partner owed fiduciary duties to the limited partners, similar to those owed by directors of Delaware corporations. See footnotes 15 through 16.

The Court recited the very nuanced and multifaceted aspects of the fiduciary duties of care and loyalty that applied to communications with stockholders or limited partners. Those duties depend on the context of the communication, and whether the communication is to an individual stockholder or to a group of stockholders. See footnotes 18 through 32 and accompanying text.

The Court described several different types of factual situations which impact the application of the duty owed in connection with communications that involve a request for stockholder action, as compared to those that might involve merely periodic financial disclosures. The per se damages rule does not apply to the latter.

The Court discussed the most important Delaware decisions involving the duty of disclosure and how it is applied in various factual circumstances.

Bottom Line:

The Court explained that the per se damages rule only applies when a director seeks stockholder action and breaches their fiduciary duty of disclosure, in which case a stockholder may seek equitable relief or damages. That is, when directors seek stockholder action, and the directors fail to disclosure material facts bearing on that decision, a beneficiary need not demonstrate other elements of proof, such as reliance, causation or damages. This rule only applies to nominal damages and does not extend to compensatory damages. See Slip op. at 10 through 11.

Link to original post on these pages about this case.

 

Supreme Court Interprets Key Words in Agreement

A Delaware Supreme Court decision from May 2020 is noteworthy for the approach it takes in determining the meaning of a word in an agreement, for example, by parsing the syntax and sentence structure where the word at issue appears in the agreement. In Borealis Power Holdings Inc. v. Hunt Strategic Utility Investment, L.L.C., No. 68, 2020 (Del. May 22, 2020), the Delaware Supreme Court provides useful guidance about how to determine the meaning of a key word in an agreement. In this matter, despite a lengthy definition in the agreement of the word “transfer”, the parties still disputed its meaning.

Background:

The underlying dispute involved a complex constellation of interrelated entities which the Court provided a graphic description of by way of a chart. The essential facts on which the dispute was based involved the interpretation of an LLC agreement which imposed restrictions on the transfer of LLC units and provided for the right of first refusal and other provisions triggered by a “transfer.” Several terms were defined in the agreement–with rather lengthy definitions–but the definitions did not provide sufficient clarity. The most consequential definition that was disputed was the meaning in the context of the agreement of the word “transfer.”

The problem presented to the Court of Chancery was whether the sale of an interest triggered either a right of first refusal and/or a right of first offer, and if both applied, which was to be given priority.

The Court of Chancery concluded that a sale by Hunt of its shares to Borealis would be a “transfer.” The Supreme Court had a different view.

The finding by the Court of Chancery that the purchase of Hunt’s shares constituted a transfer, triggered the requirement to offer the shares to Sempra. As a result of other consequences of that holding, the Court of Chancery found that Sempra was the only party with the right to purchase the Hunt shares, and entered judgment in favor of Sempra. This expedited appeal followed an expedited trial. It remains noteworthy that this opinion came only 30 days after the final submission of the appeal to the Supreme Court.

Analysis by the Supreme Court:

The Supreme Court held that the right of first refusal in Section 3.9 of the agreement at issue is only triggered by transfers by the Minority Member and its Permitted Transferees, and that Hunt is neither. Put another way, Delaware’s High Court held that the fact that the right of first refusal is only triggered by transfers by the Minority Member is dispositive in favor of Borealis, regardless of whether the Hunt Sale could be said to effect an indirect transfer.

One of the agreements involved was governed by New York law and one was governed by Delaware law–but the Court noted that the law of both states as it relates to contract interpretation in this case is the same. See footnote 22.

Two other footnotes contain important observations of Delaware law that are especially worth remembering:

(1) The management of an LLC is vested in proportion to the then-current percentage or other interest of members in the profits of the LLC owned by all the members, and “the decision of members owning more than 50% of the said percentage or other interest in the profits [is] controlling.” Footnote 27; see Section 18-402 of the Delaware LLC Act.

(2) Also noteworthy is the observation by the Court that an argument that was only raised in a footnote would justify “passing over it” because footnotes, according to Delaware Supreme Court Rules, “shall not be used for argument ordinarily included in the body of a brief.” Footnote 28. See Del. Sup. Ct. R. 14 (d)(iv).

The most noteworthy parts of this pithy 21-page decision are found in the last few pages which include the core of the Court’s reasoning.

In particular, the most memorable part of the Court’s reasoning is the parsing by the Court of the syntax and sentence structure of the agreement in order to interpret the meaning of a particular word in the agreement. The Court focuses on the “subject of the operative sentence” in Section 3.1, of which “the verb phrase ‘may only transfer’ serves as the predicate.” The Court further explains that the subject of the operative sentence is neither accidental nor unimportant because it is the same subject for which the verb phrase “intends to transfer” serves as the predicate in section 3.9.

The Court added that the subject, which is stated conjunctively, does not include Hunt. Therefore, the Court reasoned that it was unnecessary and inappropriate to parse the definition of transfer, as defined in the agreement, to determine the scope of Section 3.1 and Section 3.9, because: “the subjects of the opening sentences in both of those sections do that for us.” See Slip Op. at 20 – 21.

In sum:

Although the detailed factual background needs to be reviewed more closely in order to fully understand the Court’s reasoning, for anyone who wants to understand Delaware law regarding proper contract interpretation, and interpretation of the meaning of a word, even when it is defined in an agreement, this opinion is must-reading.

Link to original post.

 

Delaware Supreme Clarifies Contract-Based Right to Corporate Records

A Delaware Supreme Court opinion issued in July 2020 should be required reading for anyone interested in the latest iteration of Delaware law on the contract-based right to demand “books and records” in the alternative entity context. Delaware’s High Court ruled in Murfey v. WHC Ventures, LLC, No. 294, 2019 (Del. July 13, 2020), that the Court of Chancery erred by interjecting into a limited partnership agreement a statutory requirement from Section 17-805 of the Delaware LLC Act that did not appear in the parties’ agreement.

The great importance of this ruling can best be appreciated by emphasizing that the Court did not opine in any manner on the statutory requirements for demanding books and records of a business entity–about which we recently provided an overview of key decisions on this topic, with the title of: Demands for Corporate Documents Not for the Fainthearted.

We will add to that characterization of Delaware decisions interpreting statutory provisions for demanding corporate documents, a general observation based on the instant decision: Contract-based demands for books and records of business entities are not for the fainthearted either. A few reasons that support our observation include the following:

  • This Supreme Court decision features the en banc Justices split 3-2, along with a less-than-common reversal of a Chancery decision. So, that procedural note underscores that 6 of the best legal minds in Delaware (5 jurists on the high court and 1 in Chancery rendering opinions in this case) cannot find unanimity on this issue.
  • The original demand in this case was made on January 10, 2018. The Chancery complaint was filed in September 2018. Through no fault of the court system, this final decision on appeal came down on July 13, 2020. About 2 years is still lightening-fast for the period from filing a complaint to a final decision by a state’s highest court, but that still implies substantial legal fees and the need for financial and other types of stamina for someone who is serious about seeking corporate records.
  • Although this decision provides authoritative guidance on this nuance of Delaware business litigation, a careful parsing of the opinion still reveals a fertile field for indeterminacy–which makes it a challenge for the lawyers toiling in this vineyard who are trying to predict the outcome of this type of contract interpretation dispute–even if one need not be concerned with applying the multitude of court decisions applying the statutory provisions for inspection rights in this context.
  • We will end our introductory observations on a positive note: despite the plethora of case law interpreting the various statutory provisions for demanding books and records, such as Section 220 and Section 18-305, this decision is a welcome addition to the relatively few published Delaware opinions that address the purely contract-based right to books and records of an alternative entity.

Basic Factual Background:

Based on the assumption that readers of this post are familiar with the basics of Delaware law in this area, we are only highlighting the irreducible minimum amount of facts to provide context for the key legal principles announced.

This case followed a typical pattern. The company provided some documents initially, and at the time of trial the only issue was the very limited documents the company refused to produce.

Somewhat unusual was that only one specific type of document was the subject of the trial court decision and the appeal: the K-1 of the other limited partners in the limited partnership. Although the company allowed counsel for the plaintiff and the plaintiff’s valuation expert to review those K-1s, they refused to let the plaintiffs themselves review the K-1s of other limited partners–even subject to the common confidentiality agreement.

The limited partnership agreements involved allowed for a rather broad scope of documents to be demanded, including tax returns which were specifically listed as being subject to production. The company took the curious position that a K-1 (of other limited partners) was not part of the tax returns of the company–or at least not within the scope of documents they need to produce.

Primary Issue Addressed on Appeal:

Whether the Court of Chancery erred by injecting into the terms of the agreement that provided for a right to books and records–additional statutory prerequisites. Short answer: yes.

High Court’s Reasoning–Key Takeaways:

The majority opinion made quick work of dispensing with the defense that valuation was not a valid basis for requesting the disputed documents or that tax returns were not needed to complete a valuation. See, e.g., footnotes 65 and 66 as well as related text. More notably, the Court found that the statutory notion of a “proper purpose” was not applicable to contract-based demands. See, e.g., footnote 53 and accompanying text (quoting with approval prior decisions so holding.)

Also noteworthy is the Court’s reference to dictionary definitions of words, including prepositions, at issue in this case. See footnotes 32 and 33.

The Court reviewed many prior Delaware decisions that addressed when, if ever, it would be appropriate to infer words or conditions that do not appear in the terms of an agreement, such as statutory prerequisites. Slip op. at 18-25.

A key part of the Court’s reasoning was that: because the partnership agreements involved

… do not expressly condition the limited partner’s inspection rights on satisfying a “necessary and essential” condition [a statutory concept], and given the obvious importance of tax return and partnership capital contribution information to the Partnerships’ investors, as evidenced by the agreements, we are not persuaded that such a condition should be implied. Slip op. at 25.

The majority opinion’s “rebuttal” of the dissenting opinion deserves to be read in its entirety. Slip op. at 32 to 37. Two especially notable excerpts:

  • “The words ‘necessary and essential’ do not appear in the written agreements”. Slip op. at 35.
  • “… we also do not agree that the parties to a limited partnership agreement have to expressly disclaim any conditions applied in the Section 220 context (or the Section 17-305 context….)” Footnote 85.

Link to original post.

 

Supreme Court Rejects Two Common Defenses to Section 220 Demands

A recent decision from the Delaware Supreme Court provides hope to stockholders who seek to obtain corporate documents pursuant to Section 220 of the Delaware General Corporation Law to the extent that Delaware’s High Court removed two common defenses that companies use to oppose the production of corporate records to stockholders. In AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Dec. 10, 2020), the two most important aspects of the ruling are that:

(i) A stockholder making a Section 220 demand need not demonstrate that the wrongdoing being investigated is “actionable;” and

(ii) When the purpose of a Section 220 demand is to investigate potential wrongdoing and mismanagement, the stockholder is not required to “specify the ends to which it might use” the corporate records requested (i.e., exactly what it will do with the documents it receives).

Over the last 15 years we have highlighted many of the frustrating aspects of decisions construing Section 220 to the extent that one needs stamina and economic fortitude to pursue what oftentimes is an unsatisfying result. See, e.g.,recent overview on this topic.

This decision should be in the toolbox of every corporate litigator not only because it announces a new path for Section 220 cases and reminds us of the basic prerequisites of the statute, but also in light of it partially overruling and distinguishing some prior cases. This opinion also confirms that several Chancery decisions that were not in harmony with this decision should no longer be followed.

Key Takeaways:

•　　　　　　　One of the most important takeaways from this decision is that the Court clarified that when the purpose of a Section 220 demand is to investigate potential mismanagement, the stockholder is “not required to specify the ends to which it might use” the corporate documents requested.　 See page 22.

•　　　　　　　The second most important takeaway from this case is the Court’s holding that a stockholder pursuing a Section 220 demand need not demonstrate that the alleged wrongdoing is “actionable.” See page 25.

•　　　　　　　The three prerequisites (not including the many nuances) for successfully pursuing a Section 220 demand to inspect a corporation’s books and records requires a stockholder to establish that: (1) such stockholder is actually a stockholder; (2) such stockholder has complied with Section 220 respecting the form and manner of making demand for inspection of such documents; and (3) the inspection such stockholder seeks is for a proper purpose. See pages 12-13.

•　　　　　　　The Court recited the many examples of proper purposes that have been recognized to be reasonably related to the interest of the requesting stockholder. See footnote 30 for a lengthy list, which includes “to communicate with other stockholders in order to effectuate changes in management policies.”

•　　　　　　　The Court reiterated the well-known requirement that when the proper purpose of a stockholder making a Section 220 demand is to investigate potential mismanagement, a stockholder needs to demonstrate “a credible basis” from which the court may infer that “there is possible mismanagement that would warrant more investigation.” See page 15.

•　　　　　　 Although a credible basis of wrongdoing needs to be presented by a preponderance of the evidence to pursue the proper purpose of investigating potential wrongdoing, a company will not be permitted to mount a merits-based defense of such potential wrongdoing. See page 37.

•　　　　　　　Moreover, while trying to harmonize prior decisions on these nuances, the Court observed that some of the decisions struck a discordant note. See footnote 109.

•　　　　　　　The Court also affirmed the following two aspects of the Court of Chancery’s ruling: (1) regarding the scope of documents, the Court found that it was appropriate to include a requirement that the company produce officer-level materials and (2) the high Court found it was not an abuse of discretion to order a Rule 30(b)(6) deposition–because the company refused to describe the types and custodians of corporate records that it had in response to discovery requests. See pages 39 and 43.

Link to original post

 

DELAWARE CHANCERY COURT DECISIONS

Chancery Provides Refreshing Section 220 Guidance

The Delaware Court of Chancery rendered a decision in November 2020 that belongs in the pantheon of noteworthy Court opinions addressing the nuances, first principles and practical challenges regarding Section 220 of the Delaware General Corporation Law. There are many decisions on this topic addressing the right of stockholders to demand inspection of corporate records, but few are as “blogworthy” as this decision in Pettry v. Gilead Sciences, Inc., C.A. No. 2020-0173-KSJM (Del. Ch. Nov. 24, 2020). Compare another pantheon-worthy Chancery decision earlier this year in AmerisourceBergen. See Lebanon Cnty. Emps. Ret. Fund v. AmerisourceBergen Corp., 2020 WL 132752 (Del. Ch. Jan. 13, 2020), which was affirmed by the Delaware Supreme Court.

Weighing in at 69-pages, this opinion’s length is indicative of the complexities of Section 220 that are belied by the apparent simplicity of the statute. Our favorite part of this decision is the acknowledgement that when pursuing the statutory rights that Section 220 appears to allow, one can easily be stymied by the gamesmanship of companies who can play a war of attrition, usually with impunity, in light of the asymmetrical economics involved. See Slip op. at 3-5 and footnote 6 (citing an article addressing the obstacles to pursuing Section 220 rights: James D. Cox, et al., The Paradox of Delaware’s “Tools at Hand Doctrine: An Empirical Investigation,” 75 Bus. Law. 2123, 2150 (2020)).

Similar observations about the practical hindrances, economic and otherwise, to utilizing Section 220 have often been the topic of blog posts over the last 15 years. See, e.g., recent blog post explaining that Section 220 cases are not for the fainthearted.

This Gilead case provides guidance on an important topic that warrants a very lengthy analysis. We provide highlights via bullet points, and then interested readers can click on the above link and read all 69-pages.

The bullet points that we find to have the most widespread applicability and importance are the following:

• The Court criticizes the trend in which companies often inappropriately litigate the underlying merits of a potential, future plenary suit as opposed to addressing whether the prerequisites have been met for a Section 220 demand, as well as the tendency of companies to otherwise prevent stockholders from using Section 220 as a “quick and easy pre-filing discovery tool.” Slip op. at 3-4.

• The Court provides many quotable explanations of the “credible basis” standard that must be satisfied in order to rely on the proper purpose of investigating suspected wrongdoing. The Court emphasizes that this “lowest possible burden of proof” does not require a stockholder to prove that any wrongdoing actually occurred; nor does it require a stockholder to show by a preponderance of the evidence that wrongdoing is even probable. Slip op. at 23, footnotes 103 and 104.

• Rather, the Court instructed that the recognized proper purpose for using Section 220 to investigate suspected wrongdoing is satisfied when there is a credible basis to suspect merely the “possibility” of wrongdoing. Id. at 24, n.106.

• The Court addresses the common tactic used by companies challenging a proper purpose when they assert that the “stated proper purpose is not the actual proper purpose for the demand.” This opinion teaches that in order to succeed in such a defense, the company must prove that the “plaintiff pursued its claim under false pretenses. Such a showing is fact intensive and difficult to establish.” See footnote 153 and accompanying text.

• The Court made quick work of dispensing with the issue of standing in Section 220 cases. The Court reasoned that the standing argument in this case was in reality a Potemkin Village (our words) for the company’s challenge to the viability of derivative claims that the plaintiffs might pursue in the future. Although the Court discussed standing under Section 220 in general, it also underscored that a Section 220 proceeding does not warrant a trial on the merits of underlying claims. Slip op. at 41–42.

• The Court instructed that generally Section 220 plaintiffs need not specify the “end-uses” of the data requested for their investigation. Slip op. at 49.

• The Court also provided helpful practical tips about the scope of production required once the preliminary prerequisites of Section 220 have been satisfied. The Court noted that in some instances the company will be required to provide more than simply formal board materials. See Slip op. at 51-54.

• The opinion acknowledged that in some instances after limited discovery in a Section 220 action, plaintiffs can refine their requests with greater precision and that in some cases the Court has asked the plaintiffs to streamline their requests. See Slip op. at 63.

• In response to the Court being vexed by the overly aggressive tactics of the company, the Court invited the plaintiff to “seek leave to move for fee shifting.” As one example of the Court’s observation that the company was taking positions for no apparent purpose other than obstructing the exercise of the statutory rights of the plaintiff, the Court noted that the company refused to produce even a single document before litigation commenced.

Link to original post

 

Must-Read Chancery Decision for Buyers of Businesses Whose Value Depends on Retaining Customer Relationships

The Delaware Court of Chancery in August 2020 addressed the issue of whether a seller was liable for not disclosing the notification it received prior to closing that one or more key customers were terminating their relationship with the seller’s business. Swipe Acquisition Corporation v. Krauss, C.A. No. 2019-0509-PAF (Del. Ch. Aug. 25, 2020). The Court’s decision and other decisions cited below must be read by anyone who seeks a deep understanding of Delaware law on this topic.

Key Issue Addressed:

When will a fraud claim survive in connection with a purchase agreement that restricts claims for misrepresentations and limits claims for indemnification? In this case, most of the motion to dismiss was denied, but one of the reasons this decision is noteworthy is because it exposes the lack of a bright-line-rule on this issue when compared to other decisions addressing the same or similar issues–depending on the specific terms of the anti-reliance clause involved and the specific claims of fraudulent misrepresentations or omissions.

As an indication of how common this issue is, a few days before this ruling the Court of Chancery issued another decision that addressed the issue: Pilot Air Freight, LLC v. Manna Freight Systems, Inc., No. 2019-0992-VCS (Del. Ch. Sept. 18, 2020).

Key Facts of Swipe case:

This case involves a dispute over the lack of disclosure by the seller prior to closing when the seller learned that a key customer was claiming to terminate its business relationship even though the sales price was impacted by the existence of key customers. The sellers knew that if the buyers learned of the termination by the key customer involved that the deal might not close. See Slip op. at 8. Nonetheless, the sellers did not inform the buyers of the termination of the key customer at issue. Moreover, the sellers did not amend any of the financial information provided to the buyers, which had then become stale. Id. at 9. Based on weaker-than-expected performance before the closing, the buyers and the sellers did agree to reduce the purchase price even though the loss of the key customer was not disclosed.

Key Principles of Law with Widespread Applicability:

  • The Court cited to multiple cases to explain when an anti-reliance clause will not bar a fraud claim. See Slip op. at 28-29.
  • The Court also elucidates when a fraud claim and a contract claim will not be considered duplicative; when both can proceed at the preliminary stage of a case; and when a contract claim and a fraud claim will not be considered boot-strapped. See id. at 31-33.
  • The Court explained why duplicative claims may often survive at the motion to dismiss stage. See footnote 61 and accompanying text.
  • The Court explained the primacy of contract law in Delaware, and when parallel contract claims and breach of fiduciary duty claims may not proceed in tandem. See footnote 58 and accompanying text.

In addition to the cases cited above on the topic at hand, this decision should be compared with the Delaware Superior Court’s Infomedia decision that was issued just a few short weeks before this Chancery ruling. Of course, the exact terms of the applicable agreements and the detailed circumstances are often determinative, but in the unrelated Delaware Superior Court decision about a month earlier, the Court concluded that the failure to inform the sellers shortly before the execution of an asset purchase agreement that key customers intended to terminate their service contracts, even though written notice had not yet been received, would not be a sufficient basis for fraudulent misrepresentation claims due to anti-reliance provisions in an asset purchase agreement, thereby resulting in a grant of the motion to dismiss, based on the terms of the agreement involved in that case. See Infomedia Group Inc. v. Orange Health Solutions, Inc. (Del. Super. July 31, 2020).

Link to original post.

 

Chancery Determines Standard Applicable to Contested Transaction

The recent Delaware Court of Chancery decision in Salladay v. Lev, No. 2019-0048-SG (Del. Ch. Feb. 27, 2020), addressed the standards the Court may apply to review the conduct of directors in a contested transaction, and determined that the entire fairness standard applied, based on the facts of this case, resulting in a denial of a motion to dismiss.

Key Points:

This decision provides the latest iteration of Delaware law regarding the analyses the Court employs to review a challenged transaction to determine whether fiduciary duties were fulfilled.

In this case, the Court determined that the business judgment rule did not apply. The Court provides a practical, educational elucidation of why the efforts to “cleanse” the transaction did not revive the business judgment rule, in light of the failure to satisfy the prerequisites discussed in Corwin v. KKR Holdings, LLC, 125 A.3d 304 (Del. 2015); Kahn v. M & F Worldwide (MFW), 88 A.3d 635 (Del. 2014); and In re Trados, Inc. Shareholders Litigation (Trados II) 73 A.3d 17 (Del. Ch. 2013).

The Court also discusses the recent Delaware Supreme Court cases which clarified “where or when the line is drawn” for the “cleansing” criteria to be considered as being imposed “ab initio,” such that a deal will earn the deferential BJR review standard, in Flood v. Synutra International, Inc., 195 A.3d 754 (Del. 2018), as well as Olenik v. Lodzinski, 208 A.3d 704 (Del. 2019).

Link to original post.

 

Chancery Explains Proper Methods to Expand Board Size and to Fill Board Vacancies

A recent Delaware Court of Chancery decision provides a primer on the proper way to expand the size of a board of directors and the proper way to fill board vacancies, as well as explaining the difference between a de facto and a de jure director. See Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020).

This opinion should be at the fingertips of every corporate litigator who is called upon to address whether:

(1) the size of a board of directors was properly expanded;

(2) director vacancies were properly filled; or

(3) whether the actions of a de facto board member were binding even if because of technical mistakes that director was not properly appointed such that she would qualify as a de jure director.

Many additional consequential statements of Delaware law with widespread utility are included in this consequential 52-page decision.

Highlights:

•　　　　　　 The Court describes the well-known prerequisites for obtaining a preliminary objection. See page 16.

•　　　　　　 The Court provides a tutorial, with copious citations to statutory and caselaw authority, to explain: (i) how to expand the size of the board of directors; (ii) who has the authority to expand the size of the board; (iii) how to fill vacancies on the board; and (iv) who is authorized to fill vacant board seats. See pages 17 to 20.

•　　　　　　 This opinion features a maxim of equity that would be useful to have available when the situation calls for it: equity regards as done what ought to have been done. See page 20.

•　　　　　　 The Court explained that only the charter or the bylaws can impose director qualifications, and in any event those qualifications must be reasonable. See page 21.

•　　　　　　 The Court explained that a director could not agree to conditions of service as a board member that would be contrary to the exercise of the fiduciary duties of a director. See page 22.

•　　　　　　 An always useful reminder of the three tiers of review of director decision-making are provided. Those three tiers are: (i) the business judgment rule; (ii) enhanced scrutiny; and (iii) entire fairness. See pages 50 to 51.

•　　　　　　 In addition to explaining when those three tiers apply, the opinion also regales us with a classic recitation of the business judgment rule as the default standard:

” . . . the default standard of review is the business judgment rule, which presumes that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company.” See page 50.

•　　　　　 This decision teaches that unless one of the rule’s elements is rebutted, the Court merely looks to see whether the business decision made was rational in the sense of being one logical approach to advancing the corporation’s objective.

•　　　　　　 The Court explains the difference between a de facto director and a de jure director, and which actions of a de facto director are binding.　 See pages 23 to 25.

•　　　　　　 Another extremely important aspect of this decision (which takes up the majority of the 50-plus pages) is a deep dive into the historical foundations of Section 271 of the Delaware General Corporation Law which applies generally to the sale of most or all of the assets of a corporation, and which would typically require stockholder approval. See page 27 through 48.

•　　　　　　 The Court supports with detailed reasoning and extensive footnote support its conclusion that Section 271 does not apply to an insolvent corporation that transfers assets to a secured creditor. Compare DGCL Section 272 (allows directors to mortgage corporate assets).

Link to original post

 

Delaware Court of Chancery Provides Rule 11 Insights

There are relatively few Chancery decisions on Rule 11 compared with more common corporate and commercial litigation issues that are the subject of Chancery opinions, and an October 2020 letter decision provides insights into why there are not more rulings on Rule 11. In POSCO Energy Co., Ltd. v. FuelCell Energy, Inc., Civil Action No. 2020-0713-MTZ (Del. Ch. Oct. 22, 2020), in which a motion for leave to amend under Rule 15 was granted without awarding fees, while distinguishing both the Lillis and Franklin Balance cases, the Court explained that Rule 11 should not be casually raised, but that in any event a requirement for invoking it is to provide separate written notice and an opportunity to cure, as opposed to including it as part of a motion addressing other issues as well.

The Court explained that:

FuelCell has invoked Court of Chancery Rule 11 casually and repeatedly in this matter.21 The Court may only determine if Rule 11(b) was violated “after notice and a reasonable opportunity to respond,” and a litigant may only initiate those proceedings by “[a] motion for sanctions . . . made separately from other motions or requests.”22  Under that plain language, if FuelCell seeks sanctions for conduct it believes violates Rule 11, it must do so in an independent motion, not in argument opposing unconditional leave to amend. And, in my view, it is distracting, detrimental to the famed collegiality of the Delaware bar, and counterproductive to the “just, speedy and inexpensive determination” of judicial proceedings to summon Rule 11 in rhetoric.23

Link to original post

 

Chancery Declines to Order Reserve for Fraud Claims Against Dissolving Corporation Under DGCL Section 280

There remains a relative paucity of opinions addressing the nuances of the dissolution statute under DGCL Section 280, compared to the Delaware decisions addressing other sections of the DGCL, so we refer to a September 2020 Court of Chancery decision that denies a Motion for Reargument under Rule 59(f) of a ruling that rejected a request to set aside a reserve for a fraud claim–even though the letter ruling was barely three-pages long–in the matter styled In re Swisher Hygiene, Inc., 2018-0080-SG (Del. Ch. Sept. 4, 2020). The prior decision was highlighted here.

The Court explained that the allegations did not state a “creditor claim”, though the ruling expressly did not prejudice the right to “bring litigation to determine” the fraud claim, which related to disputed ownership of stock in the company being dissolved.

Link to original post

 

Chancery Enforces Forum Selection Clause in Charter for Inspection Demand

One of our selected Court of Chancery decisions is almost as noteworthy for what it did not decide as for what was decided. In JUUL Labs, Inc. v. Grove, C.A. No. 2020-0005-JTL (Del. Ch. Aug. 13, 2020), Delaware’s Court of equity enforced an exclusive forum selection clause in a company charter, based at least in part on the internal affairs doctrine, to prevent a stockholder in a Delaware corporation from filing suit in California in reliance on a California statute to demand the inspection of corporate records, notwithstanding a California statute that appears to allow a stockholder to sue in California for corporate records if the Delaware company has its principal place of business in California.

What the Court did not decide is whether a stockholder may contractually waive her rights under DGCL section 220. Count this writer as a skeptic on that point. The Court reviewed several overlapping agreements, such as a stock option exercise agreement, that the stockholder signed and that purported, at least in the company’s view, to waive inspection rights under DGCL section 220. Some of the agreements were governed by Delaware law and some by California law.

This decision could be the topic of a law review article due to the many core principles of corporate law and doctrinal underpinnings the Court carefully analyzes. But, we only provide a few bullet points with an exhortation that the whole opinion be reviewed closely.

  • The Court provides an in-depth discussion of the foundational concepts that undergird the internal affairs doctrine as it applies to the request for corporate records, as well as related constitutional issues that arise.
  • But footnote 7 acknowledges contrary authority that suggests that a local jurisdiction may apply its law to a demand by a local resident for corporate records of a foreign corporation.
  • The Court compares DGCL section 220 with its counterpart in the California statutory regime.
  • The exclusive forum selection clause in the charter was addressed, and the Court explained that but for this provision, the California court would be able to apply DGCL section 220.
  • Importantly, the Court emphasized that is was not deciding whether a waiver of DGCL section 220 rights would be enforceable. Although at footnote 14 the Court provides citations to many Delaware cases that sowed doubt about the viability of that position–but then the Court also cited cases at footnote 15 that more generally recognized the ability to waive even constitutional rights.
  • Footnote 16 cites to many scholarly articles, and muses about the public policy aspects of the unilateral adoption of provisions in constitutive documents, such as forum selection clauses in Bylaws. Early in the opinion, at footnote 7, by comparison the Court waxes philosophical about the concept of the corporation as a nexus of contracts–as compared to it being viewed as a creature of the state. The latter view has implications about the exercise of one state’s power in relation to other states, especially when private ordering may be seen as private parties exercising state power by proxy.

Link to original post

 

Chancery Clarifies Nuances of Section 220 Stockholder Demand for Inspection Rights

A July 2020 Delaware Court of Chancery opinion provides insights into nuances of DGCL Section 220 as it relates to the rights of stockholders to inspect corporate books and records, and deserves to be in included in the pantheon of Delaware decisions on this topic. It must be read by anyone seeking a complete understanding of Delaware law on Section 220. In Woods v. Sahara Enterprises, Inc., C.A. No. 2020-0153-JTL (Del. Ch. July 22, 2020), the Court provided warmly welcomed clarity about important nuances of DGCL Section 220 with eminently quotable passages for practitioners who need to brief these issues. See generally overview of takeaways from 15 years of highlighting Section 220 cases, and compare a recent Delaware Supreme Court decision about contract-based rights to inspect corporate books and records.

This short overview will only provide several of those worthy passages in the format of bullet points.

Among the more noteworthy aspects of this notable decision are the following.

  • A consequential aspect of this jewel of a decision is the instruction by the Court that there is no basis in Delaware law to require a stockholder demanding corporate records under Section 220 to explain why the stockholder wants to value her interest in the company–in order to satisfy the recognized proper purpose of valuation. See Slip op. at 11; and 14-15.
  • The Court provided an extremely helpful list of many recognized “proper purposes” needed to be shown to satisfy Section 220. See Slip op. at 8-9.
  • The Court also recited several examples of what showing is recognized as sufficient to satisfy the “credible basis requirement” to investigate mismanagement pursuant to Section 220. See Slip op. 18-19.
  • An always useful recitation of the basic elements of the fiduciary duty of directors of a Delaware corporation and the subsidiary components of the duty of loyalty and care, are also featured. See Slip op. at 20.
  • The Court categorized the specific requests for documents in this case as follows: (i) formal board materials; (ii) informal board materials; and (iii) officer-level materials. Then the Court expounds on the different focus applicable to each category.
  • Notably, after quoting the actual document requests, the Court found that some of them were overly broad–but the Court edited and narrowed some of the requests before concluding that the company was required to produce the Court-narrowed scope of documents.

Bonus supplement: Prof. Bainbridge, a nationally prominent corporate law scholar, provides learned commentary on this case and Section 220 jurisprudence generally. Readers should recognize the good professor as the prolific author who scholarship has been cited in Delaware Court opinions.

Link to original post. 

———————————————————————————————————————————————

__________________________________________________________________________

*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.

A recent Delaware Court of Chancery decision should be consulted by those who need to be aware of the latest iteration of Delaware law on the topic of indispensable parties to a lawsuit as prescribed in Rule 19. In Germaninvestments AG v. Allomet Corp., C.A. No. 2018-0666-JRS (Del. Ch. Nov. 20, 2020), the Court provides a thorough explanation of the various contours and factors in Rule 19 and why the lack of indispensable parties in this case required its dismissal.

The factual details of this case where provided in a prior Chancery decision profiled on these pages, as well as in a Supreme Court decision that reversed the first Chancery ruling in this case. That high court ruling was also covered on these pages.

Key Takeaways:

  • A thorough examination and analysis of the multi-faceted aspects of Rule 19, and the various factors that need to be applied to determine when a person or entity may be indispensable, is covered on pages 15 to 34 of this opinion.
  • The court observes that a Rule 19 argument may be presented for the first time at trial, based on Rule 12(h)(2), and therefore is not waived per Rule 12(g). See Slip op. at 18.
  • The net impact of the application of this rule can be quite draconian in terms of the wasted time and money and resources expended on litigating the merits of a case–only to reach trial and find that the merits of the case will not be addressed.
  • A much more efficient approach (even if it may necessitate a rule change), would be to require an issue not directly merits-based that has such a drastic impact on a case to be addressed and decided at an earlier stage of a case.

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 Court of Chancery recently barred a Scientific Games Corp. investor from suing ex-Chairman Ron Perelman and his “hand-picked” directors in Delaware because the plaintiff couldn’t prove it was tricked into approving a mandatory forum selection bylaw requiring all corporate governance charges to be tried in Nevada where officers and directors would allegedly be shielded, in Sylebra Capital Partners Master Fund Ltd. et al. v. Perelman, et al., No. 2019-0843-JRS opinion issued (Del. Ch. Oct. 9, 2020).

In his Oct. 9 opinion, Vice Chancellor Joseph Slights dismissed shareholder Sylebra Capital Partners’ breach of duty and declaratory judgment counts on venue grounds.  He  said although Perelman’s alleged scheme to force Sylebra to sell out at an unfairly low price began when SGC was a Delaware-chartered company and invokes Delaware General Corporation Law, Sylebra knew what might happen when the Nevada-based gaming company reincorporated in Nevada in early 2018 and revised its bylaws.

Moreover, the plaintiff had a year to make its charges as counterclaims in a first-filed suit by SGC against Sylebra in the Nevada state court designated in the mandatory forum bylaw — an action that related to the internal affairs claims Sylebra made instead in Delaware, the vice chancellor said.

Not like Delaware forum selection clauses

The suit stands out against the backdrop of the Delaware litigation that has stemmed from the First State’s recent enactment of Delaware General Corporation Law § 115, which allows Delaware corporations to specify through their charter or bylaws, that all litigation involving the company’s internal affairs must be brought exclusively in the Delaware courts.

Section 115 allowed companies to cope with the problem of multi-forum litigation over mergers or other disputed deals by forcing all plaintiffs to sue in one forum — Delaware.  But in this case, the SGC board specified the Nevada state court as the mandatory forum.

The wrong forum

The vice chancellor said Chancery is the wrong forum here because:

(1) plaintiffs seek to invalidate provisions of Delaware constitutive documents that no longer exist,

(2) plaintiffs were stockholders at the time Scientific Games left Delaware for Nevada, yet at no time before now have they challenged that move or sought to pursue their supposed Delaware claims;

(3) plaintiffs’ claims require the Court to decide whether provisions in the constitutive documents of a Nevada corporation are enforceable;

(4) the company’s mandatory Nevada forum selection bylaw is broad and unambiguously covers plaintiffs’ supposed Delaware claims; and

(5) there is a first-filed action pending in Nevada before a court that is fully capable of adjudicating all claims between these parties.

The alleged Perelman scheme

Sylebra charges that Ronald Perelman, who owned 39 percent of SGC through his holding company, McAndrews & Forbes, wanted to force Sylebra out and used the tight gaming industry regulations that governed SGC and its subsidiary, Bally Gaming, Inc., to subject Sylebra to a series of trumped-up investigations into its “suitability” as a gaming investor.

Meanwhile, Perelman misused his influence over the SGC directors  to force through by-law changes that allowed the company to freeze and then forcibly redeem investments by any shareholder found “unsuitable” due to the taint of suspicion that such investigations might incur, the suit says.

At the same time, Perelman tricked the shareholders into supporting a 2018 charter change to Nevada on the pretext that SGC would then be less vulnerable to suits by activist investors hoping to force short-term profit changes on the board, Sylebra claims.  But in fact, the move was made to insulate the directors and officers from liability for helping Perelman elbow Sylebra out and gain power the suit says.

Wrong venue

Addressing defendants’ motion to dismiss under both Chancery Rule 12(b)(3) for improper venue and Chancery Rule 12(b)(6) for failure to state viable claims , Vice Chancellor Slights first denied Sylebra’s belated motion to amend the claims, finding that plaintiff in effect, put the cart before the horse by concentrating on opposing dismissal under 12(b)(6) before seeking leave to amend.

He then found that:

Any request to have the Chancery Court declare SGC’s Delaware charter or bylaw provisions invalid “faces an immediate and insoluble problem”—they ceased to exist after reincorporation.

Any request to have Chancery invalidate the Nevada charter or bylaw provisions would have this Court do “what this Court strongly prefers courts in other jurisdictions not do with respect to Delaware corporations—decide matters that impact the internal affairs of a corporation chartered in another state.”

It is indisputable that the Nevada Charter and Nevada Bylaw provisions implicated by Sylebra’s claims fall within the purview of the internal affairs doctrine.

No escape from forum clause

The vice chancellor ruled that contrary to Sylebra’s assertions:

It did consent to the forum selection bylaw because it knew SGC required securities in the company to “be held subject to the suitability standards” so it might be barred from selling its stock and  besides “the link Sylebra attempts to draw between the ability of a stockholder to sell its shares and that stockholder’s consent to the corporation’s bylaws finds no support in our law.”

The forum selection bylaw Is not unreasonable or unjust because plaintiff’s allegation that Nevada state courts are accustomed to “only holding fiduciaries accountable for ‘intentional misconduct, fraud or a knowing violation of the law” is an unsupported characterization of the Nevada courts.

The forum bylaw was  not procured by fraud because Sylebra failed to allege: “the time, place, and contents of the false representation, the identity of the person(s) making the representation, and what he intended to obtain thereby.”  Plaintiff never opposed the adoption of the bylaw when it was clearly presented for adoption and never provided specifics to support its claim that Nevada law would insulate the directors from fiduciary duty charges.

 

 

 

 

 

 

 

 

URL
https://www.delawarelitigation.com/tag/502/
https://www.delawarelitigation.com/tag/6-del-c-%c2%a7-18-111/
https://www.delawarelitigation.com/tag/6-del-c-%c2%a7-18-305/
https://www.delawarelitigation.com/tag/6-del-c-section-17-1101/
https://www.delawarelitigation.com/tag/6-del-c-section-18-1101/
https://www.delawarelitigation.com/tag/ab-initio/
https://www.delawarelitigation.com/tag/aba-journals-blawg-100/
https://www.delawarelitigation.com/tag/abigail-myers-legrow/
https://www.delawarelitigation.com/tag/accounting/
https://www.delawarelitigation.com/tag/adequate-security/
https://www.delawarelitigation.com/tag/admission-pro-hac-vice/
https://www.delawarelitigation.com/tag/advance-notice-bylaws/
https://www.delawarelitigation.com/tag/advancement-of-feesaffirmative-claimsfrancis-g-x-pileggi/
https://www.delawarelitigation.com/tag/advancement/
https://www.delawarelitigation.com/tag/advancement/page/2/
https://www.delawarelitigation.com/tag/advancementindemnificationattorneys-fees-from-trusttrust-litigation/
https://www.delawarelitigation.com/tag/advancementindemnificationfees-on-feescorporate-litigation/
https://www.delawarelitigation.com/tag/advancementindemnificationsection-145/
https://www.delawarelitigation.com/tag/adverse-inference/
https://www.delawarelitigation.com/tag/adverse-witness/
https://www.delawarelitigation.com/tag/affidavits-attached-pleadings/
https://www.delawarelitigation.com/tag/affiliate-defined/
https://www.delawarelitigation.com/tag/affirmative-defenses/
https://www.delawarelitigation.com/tag/agency/
https://www.delawarelitigation.com/tag/agent/
https://www.delawarelitigation.com/tag/agents-duty-to-principal/
https://www.delawarelitigation.com/tag/agreement-to-agree/
https://www.delawarelitigation.com/tag/aicpascienterpleading-the-fifth-amendmentfiduciary-v-contract-claimsequitable-fraudcommon-law-fraudrule-56summary-judgment/
https://www.delawarelitigation.com/tag/aiding-and-abetting/
https://www.delawarelitigation.com/tag/ali-corp-gov-principles/
https://www.delawarelitigation.com/tag/allocation-of-settlement-proceeds/
https://www.delawarelitigation.com/tag/alter-ego/
https://www.delawarelitigation.com/tag/alternative-pleading/
https://www.delawarelitigation.com/tag/amend-stipulation/
https://www.delawarelitigation.com/tag/amended-complaint/
https://www.delawarelitigation.com/tag/amended-v-supplemental-pleading/
https://www.delawarelitigation.com/tag/amendment-to-complaint/
https://www.delawarelitigation.com/tag/amendment/
https://www.delawarelitigation.com/tag/american-rule/
https://www.delawarelitigation.com/tag/amici-curiae/
https://www.delawarelitigation.com/tag/amicus-curiae-brief/
https://www.delawarelitigation.com/tag/amicus-curiae/
https://www.delawarelitigation.com/tag/annual-meetings/
https://www.delawarelitigation.com/tag/annual-pileggi-lecture/
https://www.delawarelitigation.com/tag/annual-review-of-key-delaware-corporate-and-commercial-decisions/
https://www.delawarelitigation.com/tag/annual-shareholders-meeting/
https://www.delawarelitigation.com/tag/annual-tulane-corporate-law-institute/
https://www.delawarelitigation.com/tag/anti-reliance-clause/
https://www.delawarelitigation.com/tag/apparent-authority/
https://www.delawarelitigation.com/tag/appeal-of-summary-possession/
https://www.delawarelitigation.com/tag/appeals/
https://www.delawarelitigation.com/tag/appellate-review-standards/
https://www.delawarelitigation.com/tag/appellate-standard-of-review/
https://www.delawarelitigation.com/tag/appointment-of-receiver/

For the last 15 years, I have published a list of key corporate and commercial decisions by the Delaware Supreme Court and Court of Chancery on these pages. On a few occasions, I have published a Mid-Year Review of those cases. This year, veteran reporter and court watcher Jeff Montgomery of Law360 published such a review this month, and quoted your truly about the import of a few of those decisions. The link is here and the article is copied below.

Top Delaware Cases Of 2020: A Midyear Report
By Jeff Montgomery

Law360 is providing free access to its coronavirus coverage to make sure all members of the legal community have accurate information in this time of uncertainty and change.

Law360 (July 2, 2020, 4:11 PM EDT) — Despite the pandemic, the first half of 2020 saw epic judicial gear-shifting but no real slowdown in Delaware’s key business courts, with new Chancery Court complaints actually picking up and important corporate and commercial law decisions regularly emerging from remotely conducted proceedings.

Movement was a little slower in the state Supreme Court and U.S. District Court, where new complaints slowed or held steady and arguments were generally handled differently, but both venues released rulings that were felt far beyond the 2,000 square miles of the First State.

COVID-19 Plan: Keep Socially Distant and Carry On

Delaware Chief Justice Collins J. Seitz declared a COVID-19 judicial emergency on March 13, closing courthouses to the public days later and limiting court activities to essential matters. Workarounds soon followed that limited physical public interaction at all levels of the state’s court system by turning to teleconference, videoconference and internet conference technologies that were already in use or being explored.

By May 29, a four-phase court reopening plan developed by a systemwide court committee emerged, with  limited public access to courthouses resuming on June 15 during Phase 2. Although the use of courtrooms was permitted to resume, initial Phase 2 rules included tight restrictions on the number of individuals allowed inside, with remote proceedings still the norm and jury trials remaining on hold until the start of the next phase, which has yet to be announced.

“The Court of Chancery and the Supreme Court seem to have adjusted pretty well to the constraints,” said Lawrence A. Hamermesh, professor emeritus at Widener University Delaware Law School. “Of course, being able to process cases without a jury is a big advantage under the circumstances.”

As the eventful first half of 2020 came to a close, many looked back on:

Matthew B. Salzburg et al. v. Matthew Sciabacucchi

In March, Justice Karen L. Valihura and a unanimous state Supreme Court broadened the scope of Delaware chartered company affairs that can be handled in federal court, reversing Vice Chancellor J. Travis Laster’s ruling that state corporation law prohibits companies from adopting federal forum selection provisions for Securities Act litigation.

Instead, the justices found a category of “intra-corporate” matters, including those involving Section 11 of the Securities Act of 1933, that also can be kept out of state courts if companies choose.

It was a case noteworthy in part for the characterization of opposing positions as “nonsense on stilts” by former Chancellor William B. Chandler III, now of Wilson Sonsini Goodrich & Rosati PC, during winning arguments before the justices. Chandler’s firm represented Blue Apron, Roku and StitchFix, the companies challenging the forum ruling.

Francis G.X. Pileggi of Lewis Brisbois LLP, author of Delaware Corporate & Commercial Litigation Blog, said it was the first Supreme Court finding that a Delaware company’s bylaws can require some claims to be filed in federal court.

“The ramifications of that have not yet been fully felt, because there are certain variations on that decision that are not quite predictable in terms of how the court will rule,” Pileggi said. “Whether that same reasoning would apply to arbitration provisions is an open question in some circles.”

Hamermesh tagged the Blue Apron decision as a major ruling, noting that its reach could extend beyond venue choices to arbitration and limits on class actions, shifting of fees or rights under federal law. Interpretation of the decision in federal districts across the country remains unsettled, however.

“I’ve now seen a couple federal cases elsewhere that have tossed shareholder complaints asserting federal securities claims (even ones that can’t be brought in state court) based on Blue Apron and a forum selection bylaw,” Hamermesh said in an email. “The interesting question to me is how aggressive companies will be in adopting this sort of bylaw, and in regard to what range of federal claims.”

The case is Matthew B. Salzburg et al. v. Matthew Sciabacucchi, case number 346,2019, in the Supreme Court of the State of Delaware.

Dell Technologies Inc. Class V Stockholders Litigation

A court finding of “several recognized forms of coercion” tripped up Dell Technologies’ hopes of escaping a stockholder suit in June, with Vice Chancellor Laster refusing to dismiss a class complaint that stockholders came up at least $6 billion short when the tech company lined up a $24 billion stock swap deal. Any of the coercive acts, the court noted, were enough to deny business judgment deference in the suit. The remaining defendants are Dell, controlling shareholder Silver Lake Group LLC and four Dell directors.

In his 94-page opinion, the vice chancellor laid out a sort of Field Guide to Corporate Breaches, detailing a range of coercive conduct and ways in which it could circumvent or undermine requirements for independent special committee approvals and and majority of the minority shareholder votes.

Afterward, the vice chancellor’s opinion zeroed in on the company’s conduct, pointing to a brute-force species of coercion in the tech company’s plan to eliminate a costly class of stock that was supposed to track the value of cloud computing company VMWare, but in practice consistently came up short.

According to the stockholders, Dell and the directors threatened to pursue a forced conversion of their VMWare stock to Dell “Class C” common stock by a straight board vote, without negotiation or purportedly independent evaluation and with Dell founder Michael Dell having the independent power to trigger the move. The forced conversion, however, would have shrugged off customary corporate attempts to “cleanse” a troubled deal by relying on an independent committee of company directors to assess conflicts under precedents set in the Delaware Supreme Court’s 2014 Kahn v. M & F Worldwide Corp. decision, often referred to as MFW, and cases that followed.

While Dell did go with a special board committee, the vice chancellor found in his June decision that both directors on the panel were themselves “hopelessly conflicted” to begin with. They recommended approval of the deal in an hour after the company advised that it had bypassed the committee and lined up backing from a sizable block of stockholders in advance of a required approval by a majority of unconflicted “minority” investors.

Ex-Chancellor Chandler, who did not have a role in the Dell case, said that the vice chancellor’s decision affirmed that an “MFW special committee cannot be passive but has to be engaged throughout the process” while “stockholders play a separate and distinct role” in strategies to cleanse potentially conflicted deals.

Chandler said the Dell opinion also may figure prominently in a case now before Chancellor Andre G. Bouchard over the breakup of WeWork’s $3 billion acquisition by Japan’s SoftBank Group Corp.

The case is In re: Dell Technologies Inc. Class V Stockholders Litigation, case number 2018-0816, in the Court of Chancery of the State of Delaware.

Consumer Financial Protection Bureau v. The National Collegiate Master Student Trust

On May 31, a long-stalled, 2017 settlement of claims against a $15 billion student loan management and investment enterprise got tipped into a ditch, with Delaware federal Judge Maryellen Noreika finding that attorneys for the National Collegiate Master Student Trust lacked authority to sign a $22 million consent decree with the Consumer Financial Protection Bureau.

Among other determinations, Judge Noreika concluded that National Collegiate counsel McCarter & English LLP had no clearance to sign the deal with the CFPB. Only Wilmington Trust, the “owner trustee” for the National Collegiate funds, had the authority, with the deal also needing the support of note insurer Ambac Assurance Corp.

The decision threw the case into a round of briefings on motions to dismiss filed by investors in notes collateralized by the student loans acquired by National Collegiate. Businesses that service the loans also opposed the consent agreement.

Representatives of the administrators, insurers, trustees and servicers for the 15 National Collegiate Student Loan trusts involved have argued that the owners, controlled by affiliates of Donald Uderitz’s Vantage Capital Group, accepted the consent decree in an effort to regain control of assets, litigation rights and retention agreements. Opponents say those rights and powers belong to the noteholders, indenture trustee and affiliates until the notes are paid back.

In limbo, meanwhile, are student borrowers, some of whom have argued and sued for years over claims of improper and inadequately documented efforts to collect on unsupported default claims.

Separate litigation is pending in Chancery Court on related disputes.

The case is Consumer Financial Protection Bureau v. the National Collegiate Master Student Loan Trust et al., case number 1:17-cv-01323, in the U.S. District Court for the District of Delaware.

AmerisourceBergen v. Lebanon County Employees’ Retirement Fund et al.

In April, Delaware’s Supreme Court upheld a finding that drug wholesaler AmerisourceBergen Corp. had to turn over to stockholders books and records that it had previously released to investors in a federal stockholder action despite holding back against the state parties.

The decision came in an appeal of a Chancery Court conclusion that withholding of the same documents in the state case smacked of “plaintiff shopping” — giving an advantage to a potentially weaker plaintiff while holding back the stronger or more experienced ones.

The investors’ demand for books and records in Chancery Court and the derivative suit in Delaware federal court both focused on AmerisourceBergen’s allegedly costly and deadly failures in the distribution, control and oversight of opioids.

Pileggi, who has written extensively on disputes and decisions involving the Delaware General Corporation Law’s “Section 220” provisions for investor access to books and records, said the AmerisourceBergen action was among the most important on the topic in recent years.

The decision, Pileggi said, appeared to politely signal that “there are a lot of Section 220 decisions that have strayed” from the language of the law.

The case is AmerisourceBergen v. Lebanon County Employees’ Retirement Fund et al., case number 60 of 2020, in the Supreme Court of the State of Delaware.

In re: Tesla Motors Inc. Stockholder Litigation

In February, Vice Chancellor Joseph R. Slights III released a decision that put a stockholder challenge to Elon Musk’s $2.6 billion merger of Tesla Inc. and SolarCity Corp. on track for one of the first major in-court Chancery Court trials since the COVID-19 crisis barred in-person arguments.

The vice chancellor rejected a partial summary judgment motion filed by investors and a dismissal motion sought by Musk for all but a valuation claim. Musk, who founded Tesla and co-founded SolarCity, was accused of orchestrating a deeply conflicted deal to bail out the rooftop solar company.

The suit, slimmed down since six Tesla directors agreed to an insurer-paid $60 million settlement, is now scheduled to be argued starting July 27, with one week in court and a second week of arguments via videoconference.

The case is In re: Tesla Motors Inc. Stockholder Litigation, case number 12711, in the Court of Chancery of the State of Delaware.

Forescout Technologies Inc. v. Ferrari Group Holdings LP

One week before the Tesla trial begins, Vice Chancellor Sam Glasscock III is scheduled to convene an expedited trial, to be streamed live via YouTube, in a pandemic-related merger breach case filed by cybersecurity firm Forescout Technologies Inc. on May 19.

In the suit, Forescout accused Ferrari Group Holdings LP, a deal affiliate of private equity firm Advent International, of attempting to walk away from its agreed-to $1.9 million acquisition of Forescout.

Although Forescout argued that Advent’s refusal to close was one of the latest examples of COVID-19 cold feet, and an unsupportable reason for breaching the deal, Advent said in counterclaims that Forescout’s business had fallen “off a cliff” since the merger pact was signed, creating a material adverse effect allowing Advent’s exit.

The case is Forescout Technologies Inc. v. Ferrari Group Holdings LP and Ferrari Merger Sub Inc., case number 2020-0385, in the Court of Chancery for the state of Delaware.

–Editing by Jill Coffey.

…
Continue Reading About Francis

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.

In a milestone opinion, the Delaware Supreme Court has ruled that the state’s corporation law permits Delaware chartered companies to designate the federal courts for all shareholder securities suits alleging disclosure violations in their initial and secondary public offerings in Salzberg et al. v. Sciabacucchi et al. No. 346-2019, opinion (Del. March 18, 2019).

The en banc court’s unanimous March 18 opinion reversed a Chancery Court decision that invalidated the exclusive forum selection clauses in Blue Apron Holdings Inc., Roku Inc. and Stitch Fix Inc.’s charters. 

Vice Chancellor Travis Laster’s ruling found that such bylaws wrongly barred stockholders from suing in state court over issues that were outside Delaware’s internal governance purview. Sciabacucchi v. Salzberg, 2018 WL 6719718, (Del. Ch. Dec. 19, 2018).

Herded into federal court

The widely-anticipated high court ruling effectively lets companies steer shareholder plaintiffs into federal court where charges under the federal Securities Act of 1933 must survive a procedural test of their substance.  The justices also said their decision would not interfere with federal law or the jurisdiction of other states because its effect was basically procedural.

The stakes in the defendant companies’ appeal of plaintiff Matthew Sciabacucchi’s victory in the Chancery Court were raised by the U.S. Supreme Court’s 2018 decision in Cyan v. Beaver County Employees’ Retirement Fund, in which the high court said 1933 Act securities claims could be filed in federal or state courts. Cyan, Inc. v. Beaver Cty. Emps. Ret. Fund, 138 S. Ct. 1061, 1066 (2018).

That precipitated a surge of Section 11 disclosure actions in state courts, mandatory forum selection clauses in corporate charters and Sciabacucchi’s suit for a declaratory judgment invalidating the charter provisions of the three defendant companies in which he had invested.

Based on Boilermakers?

Vice Chancellor Travis Laster’s decision in the plaintiff’s favor was based on Boilermakers v. Chevron Corp. a ruling by former Chief Justice Leo E. Strine when he was on the Chancery Court bench.  Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013)

Vice Chancellor Laster interpreted that ruling as holding that Delaware corporations could adopt a forum selection bylaw to regulate “internal affairs claims brought by stockholders qua stockholders,” but not “to regulate external relationships” such as securities law matters.

He held that Delaware General Corporation Law Section 102(b)(1) empowers companies to adopt bylaws only relating to the area of internal affairs, such as alleged violations of the duties of officers and directors, but not securities law claims.

The appeal

On appeal, the defendant companies led by William B. Chandler, of Wilson Sonsini Goodrich & Rosati — the former Delaware Chancellor — argued that Section 102(b)(1) has always been interpreted broadly to mean “for the management of the business”, even when that involves “intra-corporate” matters such as stock sales.

The defendant companies maintained that claims under Section 11 of the ’33 Act are indeed external an inappropriate for charter bylaws because they involve stockholders only in the role of purchaser or seller.

Definition too restrictive

However, the unanimous high court found the vice chancellor’s definition of internal governance to be too restrictive, noting that the U.S. Supreme Court had decided, in Matsushita Electric v. Epstein, that Delaware courts can settle claims subject to exclusive federal jurisdiction without violating federal law or policy. Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367, 377, 382 (1996).

Justice Valihura acknowledged that “intra-corporate” matters such as Section 11 disclosure claims are not at the heart of traditional corporate governance territory and might be close to the outer band of external matters in some respects.

She also noted the concern that Delaware’s endorsement of forum selection bylaws might be viewed by sister states as “an out-of-our-lane power grab,” but she said there is a strong argument that as a facial matter at least, it does not violate principles of “horizontal sovereignty” among states.

The high court reversed the declaratory judgment ruling and the $3 million fee award the plaintiff’s lawyers received for successfully invalidating the bylaws.

The following article is reprinted with permission from the Jan. 15, 2020 edition of “The Delaware Business Court Insider”, (c) 2020 ALM Media Properties, LLC. All rights reserved.

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

This is the 15th year that Francis Pileggi and various co-authors have created an annual list of important corporate and commercial decisions of the Delaware Supreme Court and the Delaware Court of Chancery. This list does not attempt to include all important decisions of those two courts that were rendered in 2019. Instead, this list highlights notable decisions that should be of widespread interest to those who work in the corporate and commercial litigation field or who follow the latest developments in this area of Delaware law. Prior annual reviews are available at this hyperlink.

This 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

Company Required to Produce Emails Among Management to Stockholders

The Delaware Supreme Court recently issued an opinion that clarifies the duty of a company to produce emails among its management in a Section 220 case. In KT4 Partners LLC v. Palantir Technologies, Inc., Del. Supr., No. 281, 2018 (Jan. 29, 2019), Delaware’s high court addressed a demand under Delaware General Corporation Law (DGCL) Section 220 by a stockholder for corporate books and records, including emails and electronically-stored information (ESI) among management, to allow the stockholder to investigate possible wrongdoing, such as the reasons behind amendments to an Investors’ Rights Agreement that severely reduced the original rights granted under that agreement. This opinion quoted from a law review article co-authored by Francis Pileggi on the intersection of DGCL Section 220 and ESI.

https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/company-required-to-produce-emails-among-management-to-stockholders/

Supreme Court Explains the Implied Covenant of Good Faith and Fair Dealing

A recent Delaware Supreme Court decision is must-reading for those who need to know the latest iteration of Delaware law on the implied covenant of good faith and fair dealing. In Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, Del. Supr. No. 536, 2018 (Jan. 17, 2019), Delaware’s High Court provided the latest articulation of Delaware law on the multi-faceted doctrine of the implied covenant of good faith and fairing dealing. In connection with affirming in part and reversing in part a 176-page trial court opinion, which was highlighted on these pages, the Supreme Court agreed with the analysis of the trial court’s correct reading of the plain meaning of the LLC agreement at issue, but disagreed with the application by the trial court of the implied covenant.

 https://www.delawarelitigation.com/2019/01/articles/delaware-supreme-court-updates/supreme-court-explains-the-implied-covenant-of-good-faith-and-fair-dealing/

Delaware Supreme Court Clarifies Ab Initio Requirement for BJR Review

The Delaware Supreme Court recently clarified the “ab initio” requirement announced in Kahn v. M&F Worldwide Corp. case as part of the set of standards that would allow for the BJR standard to apply to a challenged merger. See Olenik v. Lodzinski, No. 392, 2018 (Del. Supr., rev. April 11, 2019).  The High Court determined that the requirement was not satisfied based on the facts of the instant case because the “economic bargaining took place prior to the date” when the protections announced in the Kahn v. M&F Worldwide Corp. case needed to be in place.

Much commentary has already been written about this case, so a lengthy summary is not provided here, but I refer to prior decisions that have applied the ab initio requirement, for background purposes, as noted on these pages.

 https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-ab-initio-requirement-for-bjr-review/

Delaware Supreme Court Clarifies Appraisal Law

The Delaware Supreme Court, in a per curiam decision, recently determined that “deal price less synergies” was the appropriate determination of fair value in the appraisal action before it.  In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019), the Court reversed the Court of Chancery’s holding that “unaffected market price” was the fair value on the date of the merger. This case is the third in a recent trilogy of precedent-setting Delaware appraisal cases, preceded by DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017).  This case has been the subject of extensive commentary by scholars and practitioners.

https://www.delawarelitigation.com/2019/04/articles/delaware-supreme-court-updates/delaware-supreme-court-clarifies-appraisal-law/

Delaware Supreme Court Addresses Independence of Directors

In Marchand v. Barnhil, CA. No. 2017-0586-JRS (Del. Ch. June 18, 2019), the Delaware Supreme Court addressed the meaning of the words “independence” and “disinterestedness” in the context of adequately pleading pre-suit demand futility as a prerequisite for pursuing a derivative claim against corporate directors. The court reversed the Court of Chancery’s dismissal of the case for failure to establish demand futility. This issue is one of the most nuanced and challenging in Delaware corporate litigation as indicated by the disagreement on the outcome among the experienced jurists deciding this case.

https://www.delawarelitigation.com/2019/06/articles/delaware-supreme-court-updates/delaware-supreme-court-addresses-independence-of-directors/

Delaware Supreme Court Instructs on Standards of Deposition Conduct

A recent Delaware Supreme Court opinion provides a tutorial on the standards imposed on Delaware lawyers when a deponent, who is the lawyer’s client, engages in inappropriate conduct during a deposition. In Shorenstein Hays-Nederland Theaters LLC Appeals, Nos. 596, 2018 and 620-2018 (Del. June 20, 2019), Delaware’s High Court issued its first decision on this specific issue, as compared to the rather abundant guidance that has existed for many years regarding the consequences when lawyers themselves engage in errant conduct during a deposition.

https://www.delawarelitigation.com/2019/09/articles/delaware-supreme-court-updates/delaware-supreme-court-instructs-on-standards-of-deposition-conduct/

Confidentiality Agreement Not Always Required for Section 220 Demands

For the first time, the Delaware Supreme Court decided that in a lawsuit in which a stockholder demands corporate books and records pursuant to Section 220 of the Delaware General Corporation Law, although it is typical to condition the production of records on entering into a confidentiality agreement, that the statute does not strictly require such a condition for production. The court also explained in Tiger v. Boast Apparel, Inc., No. 23, 2019 (Del. Aug. 7, 2019), that a party need not show exigent circumstances for a court to grant something less than indefinite confidentiality, and the inspection of records pursuant to Section 220 is not subject to a presumption of confidentiality.

https://www.delawarelitigation.com/2019/08/articles/delaware-supreme-court-updates/confidentiality-agreement-not-always-required-for-section-220-demands/

COURT OF CHANCERY DECISIONS

Chancery Clarifies Director’s Right to Corporate Records

A recent Delaware Court of Chancery decision addressed the important issue of the right of directors to be given access to corporate records. In Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), Delaware’s court of equity considered a claim under Section 220(d) of the Delaware General Corporation Law (DGCL) by the founder and largest stockholder of the Papa John’s pizza chain who was forced out as the CEO but retained his position as a director.  He sought to obtain books and records in his capacity as a director to support an investigation that the other directors breached their fiduciary duties by improperly ousting him for unjustified reasons.

https://www.delawarelitigation.com/2019/01/articles/chancery-court-updates/chancery-clarifies-directors-right-to-corporate-records/

Chancery Finds Usurpation of Corporate Opportunity

Delaware case law is well-established regarding the aspect of the fiduciary duty of loyalty that prohibits a corporate director from usurping a corporate opportunity. A recent decision from the Delaware Court of Chancery applies that well-settled prohibition in a flexible manner to a set of facts that have apparently not been squarely addressed in prior precedent.  In Personal Touch Holding Corp. v. Glaubach, C.A. No. 11199-CB (Del. Ch. Feb. 25, 2019), the court awarded damages for the breach of this subset of fiduciary duty, as well as for other breaches of fiduciary duty.

https://www.delawarelitigation.com/2019/03/articles/chancery-court-updates/chancery-finds-usurpation-of-corporate-opportunity/

Chancery Applies Corporate Advancement Case Law to LLC Context

A recent Delaware Court of Chancery decision interpreted the advancement provisions of an LLC Agreement by applying case law interpreting DGCL Section 145 in the corporate context.  In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), the court reviewed the applicability of “defined phrases” that are familiar prerequisites for advancement in the corporate context pursuant to DGCL Section 145, and analyzed that same language that was used in an LLC agreement provision granting advancement.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-applies-corporate-advancement-case-law-to-llc-context/

Chancery Instructs on DGCL Merger Requirements

A recent Delaware Court of Chancery opinion began by describing the complaint as reading like a law school exam designed to test the knowledge of a student regarding the requirements in the DGCL that must be satisfied in connection with a merger, and the court commented that the company would not have done well on the exam.

In Mehta v. Mobile Posse, Inc., C.A. No. 2018-0355-KSJM (Del. Ch. May 8, 2019), the court identified the six primary issues in this case as follows:

(1) Whether DGCL Section 262 was not complied with in connection with the failure to notify stockholders of their appraisal rights within the required timeframe;

(2) Whether DGCL Section 228 was not complied with due to the failure to send prompt notice of the written stockholder consents;

(3) Whether the merger agreement, or documents it incorporates, failed to comply with DGCL Section 251 by not including the amount of cash the preferred stockholders would receive for their shares;

(4) Whether the stockholder consents did not enjoy the ratifying effect under DGCL Section 144;

(5)  Whether the director defendants breached their fiduciary duty of disclosure; and

(6) Whether the director defendants breached the fiduciary duty of loyalty because the merger was a self-dealing transaction and not entirely fair.  With one small exception, the court found that the statutory violations were sufficiently established at the early procedural stage of a motion for judgment on the pleadings.

https://www.delawarelitigation.com/2019/05/articles/chancery-court-updates/chancery-instructs-on-dgcl-merger-requirements/

Chancery Grants Advancement on Counterclaims

A recent decision of the Delaware Court of Chancery clarifies those instances where a defensive counterclaim against a former officer and director may be covered by advancement rights. In a bench ruling in Dodelson v. AC Hold Co., Inc., C.A. No. 2019-009-SG (Transcript) (Del. Ch. May 21, 2019), the court interpreted the charter provision that included within the coverage for “indemnified parties” both former directors and officers. Notably, bench rulings may be cited as authority in briefs before the Delaware Court of Chancery.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-grants-advancement-on-counterclaims/

Chancery Orders Mandatory Indemnification per DGCL Section 145(c)

The recent Delaware Court of Chancery decision in Brown v. Rite Aid Corporation, C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), clarified the perennial issue of how the word “success” is defined for purposes of mandatory indemnification under Section 145(c) of the Delaware General Corporation Law–even if all of the arguments in the underlying litigation were not successful.

https://www.delawarelitigation.com/2019/06/articles/chancery-court-updates/chancery-orders-mandatory-indemnification-per-dgcl-section-145c/

Chancery Determines Valid LLC Managers; Rejects Bump-Out Theory of Board Replacements

The Delaware Court of Chancery left no doubt in a recent ruling that the “bump-out theory” of replacing LLC managers is not recognized in Delaware. In Llamas v. Titus, C.A. No. 2018-0516-JTL (Del. Ch. June 18, 2019), the court explained that incumbent managers need to be removed before their replacements can validly “take their seats.” The court interpreted the counterpart to DGCL Section 225, which is Section 18-110(a) of the Delaware LLC Act.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/chancery-determines-valid-llc-managers-rejects-bump-out-theory-of-board-replacements/

Advancement Granted for Post-Termination Use of Confidential Information

A recent Delaware Court of Chancery opinion in Ephrat v. medCPU, Inc., C.A. No. 2018-0052-MTZ (Del. Ch. June 26, 2019), will remain a noteworthy decision for two reasons: (1) It provides and anthology of prior Delaware decisions granting advancement to former directors or officers that defend claims regarding the use of confidential information acquired in a prior corporate capacity; and (2) It adds nuance to the existing abundant case law interpreting the threshold phrase “by reason of the fact,” which is one of the statutory prerequisites that must be satisfied for advancement claims to prevail pursuant to DGCL Section 145.

https://www.delawarelitigation.com/2019/07/articles/chancery-court-updates/advancement-granted-for-post-termination-use-of-confidential-information/

Chancery Addresses Personal Jurisdiction Over Co-Conspirator

In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the court provided a noteworthy explanation of the important nuances that need to be understood when personal jurisdiction is contested, and this opinion provides an excellent analysis of the requirements for opposing personal jurisdiction based on the Delaware Long Arm Statute.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/chancery-addresses-personal-jurisdiction-over-co-conspirator/

Fully-Executed Contract Ruled Unenforceable

In Kotler v. Shipman Associates, LLC, C.A. No. 2017-0457-JRS (Del. Ch. Aug. 21, 2019), the Delaware Court of Chancery issued an opinion that should be read by all lawyers who seek to avoid the risk of a fully-executed contract being ruled unenforceable due to a court later finding, perhaps surprisingly, that the agreement did not accurately express the understanding of the parties.

https://www.delawarelitigation.com/2019/08/articles/chancery-court-updates/fully-executed-contract-ruled-unenforceable/

Chancery Explains Step-Transaction Doctrine and Defines “Affiliate”

An important concept known as the step-transaction doctrine, which treats the agreements in a series of formally separate but related transactions involving the transfer of property as a single transaction if all the steps are substantially linked, was explained in the recent Delaware Court of Chancery opinion in PWP Xerion Holdings III LLC v. Redleaf Resources, Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019) and should be consulted by anyone who needs to understand the components of this important doctrine.

https://www.delawarelitigation.com/2019/10/articles/chancery-court-updates/chancery-explains-step-transaction-doctrine-and-defines-affiliate/

Delaware Forum Selection Clause Controls Over Foreign Exclusive Jurisdiction Statute

The recent Delaware Court of Chancery decision in AlixPartners, LP v. Mori, No. 2019-0392-KSJM (Del. Ch. Nov. 26, 2019) rejected an effort to dismiss a Delaware action notwithstanding the provision in an agreement that provided for a forum in a foreign country, and the apparent law of that foreign country that also supported exclusive jurisdiction in that country.

https://www.delawarelitigation.com/2019/12/articles/chancery-court-updates/delaware-forum-selection-clause-controls-over-foreign-exclusive-jurisdiction-statute/

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.

Rallye Motors Holding, LLC cannot use Delaware’s McWanedoctrine to force its ex-CEO to move his books-and-records action to New York, where a fellow member and ex-employee of that limited liability company is litigating related claims including records inspection demands, the Chancery Court has ruled in Stanco v. Rallye Motors Holding, LLC, No. 2019-0751-SG (Del. Ch. Dec. 23, 2019).

Vice Chancellor Sam Glasscock’s Dec. 23 memorandum opinion declined to dismiss Joseph Stanco’s records inspection suit filed under Delaware LLC Act Section 18-305 – the LLC analog of Section 220 of the Delaware General Corporation Law – after rejecting two novel Rallye arguments of interest to alternate entity counsel.

  • First, the Court found that the LLC agreement did not clearly require Stanco to waive his right to file his records action in Delaware, where Rallye is chartered, because he was a managingmember as well as an officer.
  • Second, the vice chancellor said Rallye cannot use the seminal forum non conveniens decision in McWane v. McDowell-Wellman to force Stanco to combine his records action with a related suit by a third party because McWane: “should not be employed to defeat a plaintiff’s choice of forum.” McWane Cast Iron Pipe Corp. v. McDowell-Wellman Eng’g Co., 263 A.2d 2821 (Del. 1970).

Stanco says he had worked for Rallye, a holding company for five Long Island automobile dealerships, since 1980 and had acquired a 5.5 percent member ownership, a seat on Rallye’s board of members and an appointment as managing member when he was fired without cause in 2017.

Two years later, he demanded inspection of Rallye’s books and records to value his ownership interest, evaluate Rallye’s financial condition, the performance of its management, the reason for its failure to continue making distributions to shareholders and the propriety of company disclosures.

No ‘clear expression’

Two weeks after he filed his inspection complaint on Sept. 19, Rallye moved to dismiss it from Chancery Court, but the vice chancellor found that, “Generally, except as limited by contractual waiver, the members of a Delaware LLC have the right to vindicate proper books and records demands in this court” and waivers of those rights must include “the clear expression of the intent to relinquish the right.”

Vice Chancellor Glasscock ruled that Stanco “could not have intended to waive his rights to a books and records as a manager,” because in his capacity as a managing member he would have had access to the company’s books and records.

The McWane argument fails because Rallye cannot demonstrate “a high degree of hardship” should the litigation go forward in Delaware, and does not even attempt to make such a showing, he said.

Under McWane, “this court’s discretion is to be freely exercised in favor of a stay or dismissal where there is a prior action pending elsewhere, in a court capable of doing prompt and complete justice, involving the same parties and issues,” but that’s not the case here, the Court noted.

In whose interest?

The action that Rallye wants Stanco to join in the interest of efficiency is a books and records suit filed by Nicholas Toomey, a member and ex-employee of the LLC.  Toomey v. Rallye Motors Holding LLC et al., Index No. 613005/2019 (N.Y. Sup. Ct.).

According to Rallye, Toomey was Stanco’s “cohort” who was fired along with him for cause in 2017 and the two are co-plaintiffs in a related New York state court breach of contract action.  Stanco and Toomey v. Rallye Motors Holding LLC, Index No. 612155/2017 (N.Y. Sup. Ct.).

Rallye argues that the two New York suits have “a common nucleus of operative fact” and “share the same issues” for purposes of a McWane analysis, but the vice chancellor found the connection to be “insufficient to support my exercise of discretion under McWane.”

Although it might be efficient for Rallye to address both records inspection actions together, McWane“seeks to promote efficient litigation by vindicating a plaintiff’s choice of forum” and there is no overlap in the parties aside from the common defendant nor are the issues the same, he said.

“McWane is not – and should not be – that flexible,” Vice Chancellor Glasscock said in denying Rallye’s motion to dismiss.

The Delaware Court of Chancery addressed in a recent opinion the nuances of imposing personal jurisdiction (in a second ruling on the issue in as many days), in connection with someone who served as a de facto manager of an LLC.  In Metro Storage International LLC v. Harron, C.A. No. 2018-0937-JTL (Del. Ch. July 19, 2019), the court provided what can be fairly described as a definitive and comprehensive analysis, in the nature of a treatise, on the topic of the implied consent to personal jurisdiction over a person who serves as a formal, or de facto, manager of an LLC, based on § 18-109(a) of the Delaware LLC Act.  This decision is a “must read” for anyone who needs to understand the nuances of Delaware law on this topic.

In addition, the court provides a thorough discussion of the requirements, in general, for imposing personal jurisdiction over a non-resident. This should be compared with the decision issued a day earlier, by the same member of the Court of Chancery, which also discussed the requirements of imposing personal jurisdiction, in the matter styled: Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), highlighted on these pages here.

Key Takeaways:

This matter involved fraud claims against an LLC manager. The court recited many important aspects of Delaware corporate and commercial litigation, including the following important points:

  • This opinion engages in a “deep dive” that includes a review of all the prior Delaware case law that addresses the issue of implied consent to personal jurisdiction over a person who serves as a formal or de facto manager of an LLC, based on § 18-109(a) of the Delaware LLC Act. This thorough analysis is must reading for anyone who needs to understand this topic and wants to review the most complete analysis of the applicable case law in one place. See pages 8-39.
  • The court explains generally that based on the Delaware LLC Act, by default, an LLC is a member-managed entity unless the LLC Agreement provides otherwise. See page 39, citing § 18-402 of the Delaware LLC Act.

Personal Jurisdiction:

  • The basic concepts of personal jurisdiction are explained in the context of the Delaware Long-Arm Statute, 10 Del. C. § 3104(c)(1).
  • The court explains that “agency status” expands jurisdiction, and does not limit it under the plain language of the Delaware Long-Arm Statute.
  • Moreover, the court explored the concept of the common-law agency theory of jurisdiction, which provides a basis for asserting jurisdiction over a non-resident principal by attributing the jurisdictional acts of the agent to the principal. When this theory applies, it does not shield the agent from jurisdiction–nor does it substitute the principal for the agent; it instead enables the plaintiff to add the principal to the case in addition to the agent.” See pages 50-51. See generally Donald J. Wolfe, Jr. & Michael A. Pittinger, Corporate and Commercial Practice in the Delaware Court of Chancery, § 3.04[c][3] (2d ed. & Supp. 2018).
  • The court explained that an actor’s status as an agent provides an avenue to hold the principal liable in addition to the agent under principles of attribution. See Verrastro v. Bayhospitalists, LLC,—A.3d—, 2019 WL 1510458, at * 2 (Del. Apr. 8, 2019) (discussing respondeat superior).

Due Process:

  • The court explained that in connection with analyzing whether there are sufficient minimum contacts with Delaware to require a non-resident to defend itself in the courts of this State, the court considers the following relevant factors: (i) the forum state’s interest in adjudicating the dispute; (ii) the interest of the plaintiff in obtaining convenient and effective relief; and (iii) the interstate judicial system’s interest in obtaining the most efficient resolution of controversies. See page 53 (citing Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982)) (citations omitted).
  • The court in this matter also observed that because the non-resident traveled frequently around the country, and in other countries, that by comparison litigating in Delaware would be a “relatively inconsequential burden that Delaware’s interest far outweighs.” See page 55.
  • The court also considered, in addition to the above factors, that: the citizens of Delaware have an interest in using its courts to recover for the injuries they claim to have suffered. See page 55.