Delaware Transactional Law Updates

Document: R & R Capital, LLC v. Merritt, C.A. No., 3989-CC, Chandler, C. (Sept. 3, 2009)

Plaintiffs sought summary judgment on their claim that the Defendant was properly removed as manager and member of nine LLCs. Plaintiffs had provided notice to Defendant of her removal as manager for “cause” based on a finding of a Pennsylvania U.S. District Court that Defendant had engaged in fraud, one of the basis upon which to establish “cause” under the LLC agreements, in connection with a transaction involving Plaintiffs. The Court found that Defendant had been properly removed as a manager of the LLCs. The Court also held that a receiver would be appointed to wind up the LLCs.

Document: In Re Trados Inc. Shareholder Litig., C.A. No. 1512-CC, Chandler, C. (Del. Ch. July 24, 2009)

This purported class action alleging breach of fiduciary duty claims challenged a merger transaction whereby Trados Incorporated became a wholly owned subsidiary of SDL, plc and its preferred stockholders received over 80% of the consideration, executive officers received the balance and common shareholders received nothing.  Defendants moved to dismiss the action but the Court declined to dismiss the fiduciary duty claims arising out of the board’s approval of the merger since plaintiff alleged facts sufficient to demonstrate that a majority of the board was not independent or disinterested.  Four of the seven directors were designated as directors by holders of a significant number of preferred shares, and were alleged to have an ownership or employment relationship with entities that together owned 51% of Trados’ preferred stock.

Document: Stockman v. Heartland Industrial Partners, L.P. et al., C.A. No. 4227-VCS (Del. Ch. July 14, 2009)

Plaintiffs, two former officers and directors of Collins & Aikman Corporation, brought actions for advancement of legal fees and indemnification against the corporation’s majority investor pursuant to its partnership agreement.  The Court of Chancery granted motions for partial summary judgment in favor of Plaintiffs’ advancement claims and denied Defendant’s motion to dismiss the indemnification claims.  The Court found that a reasonable reading of the partnership agreement, which if ambiguous is construed against the general partner, favored Plaintiffs’ entitlement to advancement.

Document: Berger v. Pubco Corp., No. 509, 2008, Jacobs, J. (Del. July 9, 2009)

The Delaware Supreme Court reversed the Court of Chancery which had held that where notice of a Section 253 short-form merger did not disclose all material facts, the minority shareholders were entitled to a “quasi-appraisal” remedy whereby shareholders who elected appraisal must opt in to the proceeding and escrow part of their merger proceeds.  The Court held that the appropriate remedy entitled minority shareholders “to participate in a quasi-appraisal class action to recover the difference between ‘fair value’ and the merger price,” without the opt-in or escrow requirements.

Document: Amazon.com, Inc. v. Hoffman, et al., C.A. No. 2239-VCN, Noble, V.C. (Del. Ch. June 30, 2009)

Plaintiff Amazon challenged the issuance of preferred stock by defendant Basis Technology Corporation to a third party on the grounds that the defendant directors of Basis breached their fiduciary duties by “engaging in a concerted effort to avoid triggering Amazon’s anti-dilution rights”, which also allegedly constituted breach of the implied covenant of good faith and fair dealing.  The Court dismissed Amazon’s complaint (with leave to amend as to one claim), which essentially alleged that Basis’ board wrongfully issued stock at too high of a price, above the triggering price of its anti-dilution rights.  The Court held that the challenged conduct did not constitute a breach of loyalty and since the defendant corporation had a 102(b)(7) exculpatory provision, the directors were protected against duty of care claims.  The Court also dismissed the implied covenant claims.

Document: American International Group, Inc. Cons. Derivative Litig., C.A. No. 769-VCS, Strine, V.C., (Del. Ch. June 17, 2009) 

Defendants brought a motion to dismiss this derivative suit which raised the question of whether AIG could sue co-conspirators for harm AIG suffered from the alleged conspiracies.  The Court followed the established doctrine that a corporation may not recover against its third-party co-conspirators and therefore cannot shift the costs of its conduct to those parties.

Document: James Cable, LLC, v. Millennium Digital Media Systems, L.L.C., et al, C.A. No. 3637-VCL, Lamb, V.C. (Del. Ch. June 11, 2009)

The Plaintiff cable company was to be purchased by another cable company until dispute arose when valuations fell.  Plaintiff brings suit for breach of their asset purchase agreement and pursues the buyer’s controlling stockholder because the buyer itself has since filed for bankruptcy.  Though the controlling stockholder was not a party to the agreement and did not enter into a written funding agreement, Plaintiff claims it promised to provide funding for the transaction.  The Chancery Court dismissed claims for tortuous interference, promissory estoppel and breach of contract against the controlling stockholder because Plaintiff’s allegations were conclusory, unsupported by specific facts and inconsistent with the heavily negotiated and sophisticated structure of the asset purchase agreement.  The buyer’s portrayal of the controlling stockholder as its primary investor and source of answers to questions about financing, without more, does not reflect a real promise necessary for contractual obligation.  Absent a clear, written promise to fund, the responsibility to arrange financing falls on the buyer.

Document: Dubroff v. Wren Holdings, LLC, et al, C.A. No. 3940-VCN, Noble, V.C. (Del. Ch. May 22, 2009)

Former minority shareholders bring claims for breach of fiduciary against Nine Systems Corporation (NSC) and associated entity shareholders, claiming the issuance of additional stock in conjunction with a recapitalization wrongfully diluted their shares.  First, the Chancery Court dismissed the plaintiffs’ challenge to the recapitalization, holding that they lacked necessary standing.  Because NSC had been acquired by another company, the plaintiffs no longer held NSC shares and could not file a derivative claim.  Alternatively, Delaware law allows a case to proceed as a direct claim where a controlling stockholder issues itself shares to the detriment of a minority shareholder. To proceed, a plaintiff must show a legally significant connection for the purpose of working together toward a shared goal. But here, the plaintiffs’ complaint failed to raise facts sufficient to support an inference that the defendant entities arranged to act as a control group.  Second, the Chancery Court rejected motions to dismiss plaintiffs’ breach of fiduciary duty claims regarding NSC’s disclosure regarding the stockholder consent executed for the recapitalization.  As NSC did not disclose material facts regarding who benefited from the recapitalization (i.e. the defendant entities) and what benefits they received, the Court reasonably inferred that the omission was a deliberate attempt to mislead the plaintiffs about the defendant entities’ material financial interests in NSC.

Triton Construction Corp. v. Eastern Shore Electrical Services, Inc., et al, C.A. No. 3290-VCP, Parsons, V.C. (Del. Ch. May 18, 2009)

Plaintiff Corporation brings suit against a former employer and his current employer for breaches of fiduciary duty, tortuous interference and fraud in connection with the former employee’s moonlighting practices. The Chancery Court held that the employee was not a key managerial employee and, therefore, owed no fiduciary duties to the Plaintiff solely by virtue of his position.  Regardless, the employee did undertake certain duties and obligations as an agent of the Plaintiff and the Court imputed fiduciary duties under the principles of agency law. As such, an employee has a fiduciary duty to safeguard secret information acquired in the course of employment, or at least not disclose that information to a competitor. Because the employee here used Plaintiff’s confidential information for the benefit of himself and his employer, the Court held that he breached his fiduciary duty of loyalty. Additionally, the employee owed Plaintiff a duty to disclose a significant prior employment with a competitor and breached that duty by failing to inform Plaintiff accordingly.

Document: Olson v. Halvorsen, et al., C.A. No. 1884-VCL, Lamb, V.C. (Del. Ch. May 13, 2009)

Plaintiff was the founder of a successful hedge fund and claimed he was entitled to payment for his equity interest upon having his association with the fund terminated.  During trial, it was established that the parties had entered into an oral agreement providing that a departing member would only be entitled to accrued compensation and the balance of his capital account.  The Court of Chancery held that the oral agreement was never superceded by another agreement and any subsequent writings only refined the agreement.  As such, the Plaintiff was not entitled to any further payment beyond accrued compensation and his capital account.

Document:  San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., et al., C.A. No. 4446-VCL, Lamb, V.C. (Del. Ch. May 12, 2009)

An indenture trustee claimed that incumbent directors were precluded from approving as “continuing directors” persons whose election they opposed, pursuant to the terms of a trust indenture governing publicly traded notes.  The indenture provided that if at any time a majority of the board was not composed of “continuing directors,” holders of the notes could put their notes to the corporation at face value.  Both the corporation and stockholders claimed the board had the power to give its approval, thereby avoiding the put right at a time when the notes were trading at a deep discount.  The Court of Chancery held that the provisions could not be read as narrowly as urged by the indenture trustee and the incumbent directors had the power to approve any person as a continuing director so long as such approval was in accordance with the implied covenant of good faith and fair dealing.  To follow the indenture trustee’s reading, the indenture would prohibit any change in the majority of the board as a result of contested elections for the life of the notes.  As the record was underdeveloped with regard to the propriety of the board’s decision to “approve” the insurgent slate, the challenge to such decision was dismissed without prejudice.

Document: In Re NextMedia Investors, LLC, C.A. No. 4067-VCS, Strine, V.C. (Del. Ch. May 6, 2009)

Petitioners, members of respondent limited liability company, sought summary judgment on their petition for judicial dissolution of the LLC and appointment of a liquidating trustee.  Petitioners claimed their consent was required to amend the LLC agreement to extend the dissolution date of the LLC, as the agreement required consent from all members adversely affected and the extension of their investment horizon was such an adverse effect.  The Court of Chancery granted their motion for summary judgment in part and ordered dissolution because the provision at issue was unambiguous and the Petitioners’ interpretation was reasonable.  Any argument as to whether dissolution postponement was actually detrimental to Petitioners was irrelevant, as a change to the lifespan of the entity as proposed clearly altered an economically meaningful contractual term.  The Court then denied Petitioners’ request for a liquidating trustee, holding that the company’s board of managers was responsible for liquidation, as it was in the best position to dissolve the entity’s affairs, and it could not be removed from that role without cause.  Petitioners could, however, present their case for removal after full discovery and trial.

Document: JAKKS Pacific, Inc. v. THQ/JAKKS Pacific, LLC ,et al., C.A. No. 4295-VCL, Lamb, V.C. (Del. Ch. May 6, 2009)

After two joint-adventurers formed a limited liability company to exploit a video game license, the relationship soured, and one member instituted a broad books and records action against the joint venture LLC for the claimed purpose of valuing the venture and investigating wrongdoing.  The Court of Chancery denied that request, holding that the plaintiff’s stated purposes were meaningless, highly speculative or unsupported by the facts.  There was substantial uncertainty as to whether the underlying license would be renewed, making the books and records request irrelevant as there likely would be nothing left to value.  In addition, plaintiff did not have a credible basis to support his suspicion of mismanagement or wrongdoing, as he presented unreliable witnesses to justify his claims. As the plaintiff could not state a proper purpose, his request was denied.

Document: Nemec v. Shrader, et al., C.A. No. 3878-CC, Chandler, C. (Del. Ch. April 30, 2009)

The Court of Chancery dismissed breach of fiduciary claims against defendant directors in connection with a retirement contract entered into between defendant Booz Allen Hamilton Inc. (the “Company”) and the Plaintiffs.  Plaintiffs were long-tenured officers considered “founding fathers” of the Company’s modern business.  Upon retiring, Plaintiffs’ held shares of stock and a two-year put right to have the Company buy any shares, after which the Company could redeem any shares at book value.  Pursuant to the contract governing those stock grants, the Company subsequently bought back Plaintiff’s shares just before selling the Company to a private equity firm for a large premium.  As a result of the redemption, the defendant directors added almost $6M to the proceeds they collectively received through the sale transaction.  The Court dismissed Plaintiffs’ action because the directors had the bargained-for contractual right to redeem Plaintiffs’ shares and the exercise was not against reasonable business judgment.  As such, a contract right does not necessarily create a fiduciary duty.  In addition, the Court held that Booz Allen did not breach the implied covenant of good faith and fair dealing on the same general grounds.

Document:  Ivize of Milwaukee, LLC v. Compex Litig. Support, et al.; Ivize of Kansas City, LLC v. Compex Litig. Support, et al., C.A. Nos. 3158-VCL and 3406-VCL, Lamb, V.C. (Del. Ch. April 27, 2009)

Plaintiffs, the purchaser of the Defendant litigation support company, brought suit for breach of a representation in an asset purchase agreement where the Defendant allegedly did not operate only in the usual and ordinary course of business prior to the transaction’s closing date.  As employees of the Defendant undertook extensive activities to set up a competing entity before the agreement’s closing, the representation was clearly not true when made and the Defendant seller breached the asset purchase agreement.  The normal and ordinary routine of conducting business does not include destroying business assets and planning to transfer the essence of the business to a competitor.  Regardless, because the parties did not structure the transaction to secure the services of key employees or put in place noncompetition agreements, the Plaintiff purchaser was awarded only nominal damages.

Document: In Re: Arrow Investment Advisors, LLC, C.A. No. 4091-VCS, Strine, V.C. (Del. Ch. April 23, 2009)

Petitioner sought dissolution of the Respondent Arrow Investment Advisors, LLC (the “LLC”) on the grounds that it failed to fulfill the LLC’s original business plan and based on breach of fiduciary duties.  The LLC moved to dismiss the petition and the Court granted the motion as Petitioner failed to allege that the LLC was not operating in accordance with the broad purposes set forth in its LLC agreement.  The Court also would not entertain a claim for dissolution based on unproven breaches of fiduciary duty.

Document:  Stevanov v. O’Connor, C.A. No. 3820-VCP, Parsons, V.C. (Del. Ch. April 21, 2009)

After the failure of both their marriage and business venture, Plaintiff ex-wife brought suit for breaches of fiduciary duty, conversion, unjust enrichment and fraud in connection with the Defendant ex-husband’s prior management and spin-off of a new business venture.  As the Plaintiff did not assert a derivative claim, the Court had to determine whether she could sue directly.  Applying the In Re Cencom Income Partners doctrine, the Court held that Plaintiff did state a direct claim because (1) the business association consisted of only two parties in interest, (2) the business association was effectively ended, but for the winding up of affairs, and (3) the two parties opposed each other in the final dispute over liquidation of that association.  As such, the Court allowed Plaintiff’s claims to proceed because she might be able to show that she has a right to pursue directly a claim against the Defendant for misuse of assets. The Court then dismissed any claims based on conduct occurring before June 11, 2005 as being barred by laches.

Document: FLI Deep Marine LLC v. McKim, C.A. No. 4138-VCN, Noble, V.C. (Del. Ch. April 21, 2009)

Plaintiffs initially made a demand on the Board of Deep Marine Holdings, Inc. (the “Company”) rather than bring a derivative action and allege demand futility.  After the Company’s Board established a special committee to consider the demand, but before the committee acted, Plaintiffs brought this action claiming demand was excused.  The Court dismissed the complaint based on settled law that once having made a pre-suit demand, plaintiffs are precluded from arguing demand futility, and thus must first allow the special committee to consider and respond to the demand.

Documents: Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, et al., C.A. No. 3658-VCS, Strine, V.C. (Del. Ch. April 20, 2009)

After a condominium development project failed, Plaintiff brought suit against Defendant and its various controlled entities.  The LLC agreement for the venture gave Defendant considerable authority in running the entity.  The Court allowed Plaintiff’s claim for breach of the implied covenant of good faith and fair dealing to proceed because Defendant had an implied duty to perform certain contracts in good faith, which it failed to do.  Plaintiff also sufficiently pled claims for breach of fiduciary duty, even though the LLC agreement contained a provision stating that “[e]xcept for any duties imposed by this Agreement…each Member shall owe no duty of any kind.”  Because another provision contradicted this clause by requiring consistency with Delaware law as per duties and obligations, the Court could not choose between reasonable interpretations of ambiguous contract provisions and allowed the claim to proceed.

Document: Lyondell Chemical Company, et al. v. Ryan, No. 401, 2008, Berger, J. (Del. April 16, 2009)

This shareholder derivative action challenged a merger transaction where the directors negotiated the deal in less than a week, only met for seven hours to discuss the transaction, did not press the buyer for a better price and did not conduct even a limited market check.  The Court of Chancery “decided that ‘unexplained inaction’ permit[ted] a reasonable inference that the directors may have consciously disregarded their fiduciary duties.”  The Supreme Court held otherwise and reversed and remanded, noting that, although there was a triable issue as to whether the directors exercised due care, the corporate charter exculpated the directors from duty of care violations. The relevant inquiry should have been directed at the director’s duty of loyalty and, although a director could violate its duty of loyalty by intentionally disregarding that duty, the record mandated a decision on summary judgment in the directors’ favor because they did not knowingly and completely fail to undertake their responsibilities.