Delaware Transactional Law Updates

Document: Opportunity Partners L.P. v. Transtech Service Partners Inc., C.A. No. 4340-VCP, Parsons, V.C. (Del. Ch. April 14, 2009)

The Petitioner brought suit under § 211 of the Delaware General Corporation Law to compel the Respondent Transtech Service Partners to hold an annual shareholder meeting to elect directors.  The Company was formed as a “blank check vehicle,” meaning it did not own any assets when it completed its initial public offering of stock. The Company had failed to fulfill its stated special purpose, namely to merge with another operating company.  As the Petitioner had proper shareholder standing and was not pursuing a goal that offended public policy, the Court granted the Petitioner’s Section 211 request and ordered the Company to hold such annual meeting within 60 days of the ruling.

Document: Mickman v. American Intn’l Processing, L.L.C., et al., C.A. No. 3869-VCP, Parsons, V.C. (Del. Ch. April 1, 2009)

Plaintiff brought an action for inspection of the books and records of Defendant LFF, L.L.C. (the “LLC”) under Section 18-305 of the Delaware Limited Liability Company Act.  The LLC and Plaintiff cross-moved for summary judgment on the issue of whether Plaintiff was a member of the LLC and thus entitled to the inspection.  Defendant’s motion was denied and the Court reversed decision on Plaintiff’s motion, as the Court found that inspection rights may not necessarily be limited to those members listed in the LLC’s operating agreement, stating that “LLCs generally are created on a less formal basis than corporations”.  The Court held that it was appropriate to consider evidence outside of the four corners of the operating agreement concerning whether Plaintiff is a member of the LLC.

Document: Sutherland v. Sutherland, et al., and Dardanelle Timber, et al., C.A. No. 2399-VCL, Lamb, V.C. (Del. Ch. March 23, 2009)

In a case between sibling owners of a close corporation, Plaintiffs brought suit claiming the Defendants caused the corporation to enter into a variety of self-dealing and wasteful transactions. Plaintiffs had been ousted as directors of a subsidiary of the corporation when the Defendants elected themselves to the board.  The corporation’s charter contained a provision designed to sterilize director interest when approving self-dealing transactions, but the Court of Chancery held that such provisions only dealt with issues of quorum, and did nothing to sanitize a disloyal transaction. If the Court were to accept Plaintiffs’ interpretation, all interested transactions would be immunized from the entire fairness analysis.

Document:  Addy v. Piedmonte, et al., C.A. No. 3571-VCP, Parsons, V.C. (Del. Ch. March 18, 2009)

Plaintiff, a sophisticated investor, was induced by Defendants to contribute funds toward an oil and natural gas extraction project and brought suit when Defendants failed to make good on their contractual promises.  First, the Court of Chancery denied full integration of an assortment of documents underlying Plaintiff’s investment, justifying that decision by citing (1) conspicuous inconsistencies that supported the conclusion that the documents were not formally or carefully drafted, and (2) the Defendants’ failure to produce certain Note and Note Purchase Documents, contradicting the conclusion that the documents at issue expressed the final intentions of the parties.  The Court next ruled on whether a contract can exculpate a contracting party from a claim based on an intentionally false representation of fact.  Though the exculpation clause was worded to free the Defendants from responsibility for any false statements of fact represented, it did not clearly disclaim the Plaintiff’s reliance on those representations.  As Plaintiff sufficiently alleged that the Defendants knew that certain statements made were false, the Court allowed Plaintiffs’ fraud claims to proceed.  In addition, the Court denied Defendants’ motions to dismiss claims of unjust enrichment, breach of contract and promissory estoppel.

Document: AT&T Corp. v. Lillis, et al., No. 490, 2007, Berger, J. (Del. March 9, 2009)

Former officers and directors of MediaOne Corporation sought compensation from AT&T for the full value of their stock options.  AT&T had admitted many of the substantive allegations, hoping to arbitrate a claim against another party for the same relief, but withdrew its admissions after it lost the arbitration.  The Court of Chancery originally relied heavily on AT&T’s admissions in its answer and briefs in ruling against AT&T. Then, after appeal, where the Supreme Court reversed and remanded with instructions not to consider the admissions, the Court of Chancery reversed itself and ruled that the admissions should not have been considered because they did not relate to the stock option plan at issue.  On this appeal, the Supreme Court reversed the Chancery Court’s new determination, holding that the Supreme Court had based its initial reversal on a factual mistake and that the admissions were relevant to the contract at issue and supported a conclusion that the Defendant agreed with the Plaintiff’s position.  Although the admissions were no longer legally binding as admissions, withdrawal did not eliminate their probative value as evidence of a disputed material fact. The Defendant’s failure to explain its changed position, which coincided with the adverse arbitration decision, also supported the reasonable inference that the Defendant initially agreed with the Plaintiff’s position on the definition of a key contractual term.

Document:  BASF Corp. v. POSM II Properties Partnership, L.P., et al., C.A. No. 3608-VCS, Strine, V.C. (Del. Ch. March 3, 2009)

The Plaintiff corporation sought to withdraw from the Defendant limited partnership and have its limited partnership interest bought out.  Plaintiff’s right to withdraw was contractually contingent on Lyondell Chemical Company or any of its affiliates (“Lyondell”) no longer operating the partnership’s Texas petrochemical facility.  Lyondell served as the partnership’s general partner and leased the facility at issue from the partnership.  Lyondell was bought out by Basell AF S.C.A. in December 2007 and Plaintiff claimed the buy-out triggered its withdrawal rights.  The Court granted Defendants’ motion to dismiss because the plain language of the withdrawal provision did not entitle Plaintiff to withdraw simply because Lyondell experienced a change in control.  Though Lyondell now had a single owner rather than a large group of public stockholders, it still continued to operate the plant as contemplated by the parties’ contract.  The Court similarly rejected Plaintiff’s argument that Lyondell’s parent corporation, Lyondell Basell, now operated the plant instead of Lyondell itself.  Plaintiff pled no facts suggesting the parent corporation so disrespected Lyondell’s separate existence that Lyondell’s veil should be pierced.

Document: Metcap Securities LLC, et al. v. Pearl Senior Care, Inc., et al., C.A. No. 2129-VCN, Noble, V.C. (Del. Ch. Feb. 27, 2009)

The facilitators of an acquisition brought suit to recover a $20 million fee, representing 1% of the $2 billion merger.  As negotiations were nearing an end, a last-hour amendment was made to the merger agreement prohibiting brokers’ fees. The Court granted the defendants’ motion for summary judgment on the Plaintiffs’ challenge to the amendment which sought reformation of the merger agreement, holding that the parties present during the late night negotiations had authority to bind the Plaintiffs and such negotiations did not become final until after the challenged amendment.  Any conflict of interest on the part of counsel acting on behalf of Plaintiffs was understood and accepted by the Plaintiffs, who were sophisticated parties.  However, the Court allowed an unjust enrichment claim pertaining to work done after the final negotiation of the merger documents but before closing to proceed past the summary judgment phase of the litigation, because there was a possibility Defendants knew of the work being performed.

Document: Beiser v. PMC-Sierra, Inc., C.A. No. 3893-VCL, Lamb, V.C. (Del. Ch. Feb. 26, 2009)

Plaintiff brought suit under 8 Del. C. § 220 for the production of certain books and records while simultaneously serving as the lead plaintiff in a related federal action in which discovery had been stayed pursuant to the Private Securities Litigation Reform Act of 1995 (“PSLRA”). The Court held that Plaintiff did not plead a proper § 220 purpose reasonably related to a stockholder interest where the only use for the requested documents that could be inferred was to assist in the prosecution of the federal action where discovery was stayed under the PSLRA.  As the Plaintiff could have filed his § 220 action before filing his federal complaint, the Court dismissed Plaintiff’s § 220 action in order to avoid circumvention of the PSLRA.

Document:  In Re Citigroup Inc. Shareholder Derivative Litigation, C.A. No. 3338-CC, Chandler, C. (Del. Ch. Feb. 24, 2009)

Plaintiff shareholders brought suit against current and former Citigroup directors for breaches of fiduciary duty for failing to properly monitor and manage the risks Citigroup faced from its exposure to subprime assets.  Citigroup sustained large losses from its involvement with collateralized debt obligations and, specifically, residential mortgage backed securities.  Plaintiffs did not contest that Citigroup had procedures and controls in place to monitor risk, but cite general statements from public documents that reflected the worsening conditions in the financial markets as “red flags” that should have put management on notice of financial danger.  The Court, applying the business judgment rule, held that the Plaintiffs did not meet the requirements for pleading demand futility because they failed to plead particularized facts that raised a reasonable doubt that the director defendants acted in good faith.  Plaintiffs failed to specify how the board’s oversight mechanisms were inadequate or how the director defendants knew of any inadequacies.  Furthermore, the general “red flags” cited were merely conclusory and did not state a claim for relief under the Caremark doctrine.  The Court also rejected Plaintiffs’ claims for violation of the directors’ duty to disclose, but allowed a claim of corporate waste regarding executive compensation to proceed.  This decision was compared to the Court’s recent holding in American International Group, Inc. Consolidated Derivative Litigation, where it recognized allegations sufficient to support an inference that AIG executives were aware of wrongdoing and failed to exercise reasonable oversight over pervasive fraudulent and criminal conduct.  Oversight duties under Delaware law are not designed to subject directors to personal liability for failure to predict the future and to property evaluate business risk.

Document: Banet, et al. v. Fonds de Régulation et de Controle Café Cacao, et al., C.A. No. 3742-CC, Chandler, C. (Del. Ch. Feb. 18, 2009)

Plaintiffs moved for summary judgment on their request for appointment of a receiver for the New York Chocolate and Confections Company, Inc. (NYCCC).  The Court of Chancery denied the motion, holding that the Plaintiffs failed to prove that NYCCC was insolvent because NYCCC maintained a positive assets-to-liabilities ratio and was backed by an Ivory Coast government agency that practically guaranteed forthcoming financial support.  As such, appointment of a receiver was denied because NYCCC did not face an “imminent threat of great loss”.

Document: Norfolk County Retirement System v. Jos. A. Bank Clothiers, Inc., C.A. No. 3443-VCP, Parsons, V.C. (Del Ch. Feb. 12, 2009)

Plaintiff brought suit under Section 220 of the Delaware General Corporation Law to demand certain books and records of the Defendant regarding various alleged misrepresentations as to its financial affairs.  A Maryland derivative action previously brought by a different plaintiff concerning the same conduct had been dismissed (after having survived an earlier motion to dismiss), where a special litigation committee set up by the Defendant refused to proceed further after concluding the action was without merit. The Court of Chancery rejected Plaintiff’s demand for books and records because: (1) Plaintiff received a number of documents that should suffice for the purpose of evaluating a possible derivative suit and failed to articulate a reasonable need for additional documents, and (2) assuming Plaintiff pled an additional purpose for bringing suit, the fact that the Maryland derivative litigation previously survived a motion to dismiss based on the heightened pleading standards of the Private Securities Litigation Reform Act was insufficient in itself to demonstrate a credible basis for suspecting wrongdoing sufficient to warrant granting Plaintiff access to additional records and documents of the Defendant.

Document: American International Group, Inc., v. Greenberg, et al., C.A. No. 769-VCS, Strine, V.C. (Del. Ch. Feb. 10, 2009)

Stockholders of American International Group (AIG) brought a derivative suit to recover for damage done when it was revealed that intentional misconduct by top AIG managers caused the corporation’s financial statements to be materially misleading. Defendant Maurice Greenberg, former CEO of AIG, joined other defendant members of his core “inner circle” of executives in seeking dismissal of multiple breach of fiduciary duty claims based on the protections of the business judgment rule. The Chancery Court allowed the majority of claims presented to proceed, rejecting the defendants’ motions to dismiss because plaintiffs sufficiently pled facts supportive of non-exculpated breaches of fiduciary duty stemming from substantial financial fraud.  The Court inferred scienter at this stage of the proceedings because the defendant directors were each directly responsible for business units whose conduct was critical to the misconduct alleged and the magnitude of the fraud made it difficult to miss.  Plaintiffs also sufficiently pled facts supporting Defendants’ personal knowledge of the wrongdoing and awareness of internal control deficiencies.

Document:  Spellman v. Katz, C.A. No. 1838-VCN, Noble, V.C. (Del. Ch. Feb. 6, 2009)

Plaintiff and Defendant practiced medicine together in a facility constructed by KSA L.L.C., an entity in which they each held a 50% interest. Their relationship soured and Plaintiff sought dissolution of KSA pursuant to its operating agreement, which provided that dissolution shall occur upon completion of the facility’s construction. Though this condition had occurred, Defendant argued that the provision did not accurately reflect the original intention of the parties as they intended to operate KSA for a longer period so as to take advantage of tax benefits. The Court of Chancery applied the parole evidence rule to the unambiguous contractual provision and held the parties to the terms of their agreement by ordering dissolution.

Document: BAE Systems Information and Electronic Systems Integration, Inc. v. Lockheed Martin Corp. d/b/a/ Lockheed Martin STS-Orlando, C.A. No. 3099-VCN, Noble, V.C. (Del. Ch. Feb. 3, 2009)

Defendant defense contractor sold a major business unit to Plaintiff defense contractor while simultaneously executing an agreement requiring the business unit to continue to do business with its former owner (the “Agreement”). In assessing whether the Agreement was enforceable or merely an “agreement to agree,” the Court of Chancery allowed Plaintiff’s breach of contract claims to proceed because the Agreement was sufficiently definite to withstand a motion to dismiss. Defendant had performed at least 15 contracts pursuant to the Agreement, the Agreement was executed in conjunction with an associated asset purchase agreement and references to the Agreement could be found in the asset purchase agreement itself.  While the language of the Agreement lacked pricing terms and structure, the Court interpreted it as requiring the Defendant to offer Plaintiff opportunities to conduct business together as they arose, with details to be worked out on a project-by-project basis. Furthermore, language defining applicable projects might prove sufficiently definite when viewed in light of industry norms.

Document: Gantler v. Stephens, C.A. No. 132, 2008, Steele, C.J. (Del. Jan. 27, 2009)

The Delaware Supreme Court reversed the Chancery Court’s dismissal of claims based on the business judgment rule.  Plaintiff shareholders claimed breaches of fiduciary duty in connection with First Niles Financial, Inc.’s decision to reject an opportunity to sell its operations in favor of reclassifying its shares. First, in reversing dismal of Plaintiffs’ Count I, the Delaware Supreme Court found sufficient facts to overcome the business judgment rule presumption, as Plaintiffs sufficiently established the disloyalty of a majority of the First Niles directors. The Court recognized that all directors suffered from a conflict of interest for being in a position to structure the reclassification in a way that benefitted their personal interests differently from those of unaffiliated shareholders. Further, at least three directors were specifically conflicted, as CEO Stephens allegedly sabotaged the due diligence process involved with the bidding process to maintain his interest in continued employment while directors Kramer and Zuzolo had personal business dealings with First Niles that would be jeopardized if the company were sold. With the business judgment rule rebutted, the Court applied the entire fairness standard and reversed dismissal of the Plaintiffs’ claims. In addition, the Court explicitly held that officers of Delaware corporations, like directors, owe fiduciary duties of care and loyalty.  Applying this tenet, the Court found a reasonable inference that two defendants, as officers, colluded to sabotage the bidding process.  As to Count II, the Court held that the Complaint sufficiently alleged that the proxy disclosures which represented the degree of deliberation over offers received were materially misleading. As to Count III, the Court held that ratification cannot apply to a transaction where shareholder approval is statutorily required. As a vote was required to amend the certificate of incorporation to effect the reclassification, the approving vote could not also operate to ratify the challenged conduct of the interested directors. In addition, as the reclassification proxy allegedly contained a material misrepresentation, the shareholder vote could not be fully informed as a matter of law.

Document: Topspin Partners L.P. v. Rocksolid Systems Inc., C.A. 4275-VCL, Lamb, V.C. (Del. Ch. Jan. 21, 2009)

Plaintiff sought a temporary restraining order in connection with an allegedly unauthorized use of proceeds from a stock sale segregated for Plaintiff’s benefit through a right of redemption. Plaintiff sought to prevent the further dissipation of funds by Defendant. After assuming that a threat of imminent and irreparable harm existed, the Court of Chancery denied Plaintiff’s motion because: (1) an order freezing Defendant’s assets would effectively put it out of business weeks before it was to release a valuable software program it had long labored to complete, and (2) accusations of laches might be justified, as Plaintiff delayed bringing suit until ten months after its right of redemption matured and may have done so to acquire the nearly-finished software code.

Document: Alliance Data Systems Corp. v. Blackstone Capital Partners V L.P., et al., C.A. No. 3796-VCS, Strine, V.C. (Del. Ch. Jan. 15, 2009)

Plaintiff brought suit to recover damages from a failed merger with the Defendant.  The Defendant, controlled by the private equity firm Blackstone Group, L.P. (collectively, “Blackstone”), created two companies (collectively, “Aladdin”) for the purpose of acquiring the Plaintiff.  The merger terminated when the Office of the Comptroller of the Currency (OCC) denied regulatory approval when Blackstone refused to provide extra capital and liquidity as requested.  The Court of Chancery dismissed Plaintiff’s action primarily on the grounds that, while Aladdin promised to use reasonable best efforts to obtain the OCC’s approval, it made no promise to force Blackstone to do so. As Blackstone was not a party to the agreement and Aladdin was not contractually responsible for Blackstone’s refusal to negotiate with the OCC, Plaintiff was held to the contractual protections it negotiated and thus it denied the relief requested.

Document: Fisk Ventures, LLC v. Andrew Segal and Genitrix, LLC, C.A. No. 3017-CC, Chandler, C. (Del. Ch. Jan. 13, 2009)

Plaintiff joined Defendant Segal in forming Genitrix, LLC, an entity designed to commercialize biotechnology concepts through the use of a non-assignable patent rights license for the LLC’s core technology. The Court of Chancery ordered dissolution of the entity because: (1) the members’ vote was deadlocked, as board action required the approval of both classes of LLC stock, which were held by opposing parties in this action, (2) the LLC’s operating agreement did not provide a means to circumvent the deadlock, and (3) there was effectively no business to operate, as the dire financial condition of the company left it destitute.  As such, it was not reasonably practicable for the LLC to continue to operate and judicial dissolution was warranted.

Documents: Marie Raymond Revocable Trust v. MAT Five LLC, et al., C.A. No. 3843-VCL, Lamb, V.C. (Del. Ch. Dec. 19, 2008)

Plaintiffs had brought an action for breaches of fiduciary duty and violations of the Securities Exchange Act of 1933 stemming from alleged mismanagement of MAT Five LLC.  MAT Five then commenced a tender offer for its own shares, which plaintiffs challenged for inadequate disclosure.  A subsequent settlement between the parties provided MAT Five investors the option to tender and receive additional consideration, retain all MAT Five shares, elect to receive the consideration offered in the original tender offer, or opt out of the settlement.  The Court of Chancery approved the proposed settlement, finding it fair and reasonable because it significantly improved the disclosures, increased the available monetary value of the tender offer and provided an expansive range of options for the harmed investors.  The Court supported its fairness determination by noting that 80% of MAT Five investors chose to participate in the settlement and an opt out clause protected those that did not.

Document: The Bank of New York Mellon v. Realogy Corp., C.A. No. 4200-VCL, Lamb, V.C. (Del. Ch. Dec. 18, 2008)

In order to take advantage of an arbitrage opportunity, Realogy Corporation offered to refinance a class of unsecured indebtedness by exchanging existing notes for participation in a senior secured term loan.  Plaintiff, an indenture trustee of a different class of unsecured Realogy notes, challenged Realogy’s refinancing because it violated indenture terms by discriminating against that class in favor of other classes of unsecured notes.  Applying New York law, the Court of Chancery ruled in favor of the trustee and found that the proposed borrowing did not satisfy the definition of Permitted Refinancing Indebtedness in the bank credit agreement which was incorporated by reference in the subject indenture.