Delaware Transactional Law Updates

Document: General Video Corp. v. Kertesz, et al., C.A. No. 1922-VCL, Lamb, V.C. (Del. Ch. Dec. 17, 2008)

After the defendant minority owner of a corporation quit in order to start a similar venture, the remaining majority owner and insolvent entity sued to claim rights in the new venture as well as breaches of numerous agreements.  Following a three-day trial, the Court of Chancery found the plaintiffs’ claims factually and legally baseless and ruled in favor of the defendants.  First, as Delaware law does not require written notice of resignation be given to the corporation, an unequivocal statement by the defendant minority owner that he wanted out defeated any claims of breach of fiduciary duty arising from conduct occurring after such resignation. Next, the plaintiff corporation could not claim violation of the corporate opportunity doctrine because it was financially unable to exploit any such opportunities.  In addition, the Court dismissed claims of breach of fiduciary duty asserted against an attorney of the plaintiff corporation who then went into business with the defendant minority owner because there was no evidence that the attorney ever learned of anything confidential in his capacity as attorney.  Finally, due to lack of proof, the Court dismissed additional claims against the defendants.

Document: Klamka v. OneSource Technologies, Inc., C.A. No. 3639-VCN, Noble, V.C. (Del. Ch. Dec. 15, 2008)

Plaintiff moved for a default judgment for the appointment of a custodian for OneSource Technologies, an abandoned Delaware corporation.  Although OneSource’s business operations could not be resurrected, Plaintiff planned on merging it with a new entity so as to use OneSource’s trading symbol and Pink Sheet listing.  Because the Plaintiff could not show a useful purpose for the revival of OneSource and his objective could easily and properly be accomplished through new filings, the Court denied Plaintiff’s motion in order to avoid circumvention of the ordinary procedures associated with corporation formation and trading.

Document: Kahn v. Portnoy, C.A. No. 3515-CC, Chandler, C. (Del. Ch. Dec. 11, 2008)

Plaintiff brought suit against the directors of an LLC for breach of fiduciary duty where the LLC’s operating agreement explicitly imported the fiduciary duty principles of Delaware corporate law, but modified them with respect to certain transactions.  As the LLC agreement’s language inadequately defined the parameters of the contractual fiduciary duties at issue, the Court of Chancery denied the defendant directors’ motion to dismiss because the fiduciary duties were ambiguously defined and the Court could not choose between reasonable interpretations of ambiguous contractual provisions.  Plaintiff’s allegations of bad faith were sufficient to survive motion to dismiss.

Document: Aveta Inc., et al. v. Bengoa, C.A. No. 3598-VCL, Lamb, V.C. (Del. Ch. Dec. 11, 2008)

The Court of Chancery granted plaintiffs’ motion for judgment on the pleadings and ordered the parties to arbitrate all claims at issue regarding certain post-closing adjustment payments associated with a merger and stock purchase agreement between the parties.  The parties differed as to the adequacy of accounting information provided, leading plaintiffs to bring suit to compel dispute resolution by a reviewing accountant as provided in the merger agreement.  The Court found that the documentation issues in dispute fell within the merger agreement’s arbitration clauses, and that matters of procedural arbitrability, like the failure to deliver required documentation, were to be left for the arbitrator to determine.

Document: Off v. Ross, et al., C.A. No. 3468-VCP, Parsons, V.C. (Del. Ch. Nov. 26, 2008)

Plaintiff brought a class action and derivative suit against the board of trustees of a Delaware statutory trust for breach of fiduciary duty in connection with a convertible preferred stock offering that would effectively benefit two members of the board already holding a substantial amount of stock.  The parties settled, agreeing to extend the offering on the same terms to the other stockholders of the trust.  The Court of Chancery denied Plaintiff’s motion for approval of the settlement because: (1) the consideration received was not conditioned on approval of the settlement and the stockholders would have received the benefit without the settlement; (2) Plaintiff’s counsel reviewed the prospectus at issue but Plaintiff could not show that this input actually resulted in any supplemental disclosures to the stockholders; and (3) released claims pursuant to the settlement affected stockholders’ remedies in two other derivative actions.

Document: Brinkerhoff v. Texas Eastern Products Pipeline Co., LLC, et al., C.A. No. 2427-VCL, (“TEPPCO”) Lamb, V.C. (Del. Ch. Nov. 25, 2008)

Plaintiff alleged that the defendant directors breached their fiduciary duties by causing TEPPCO Partners L.P. to enter into grossly unfair transactions. The Court of Chancery held that Plaintiff’s claim against “the board of directors” provided sufficient identification of individual directors serving on TEPPCO’s board of directors at the time of the transactions at issue.  The defendant directors were adequately put on notice of the claims against them and the Plaintiff was entitled to the reasonable inference that the defendant directors participated in approving the transactions because they were part of the TEPPCO board at the time.  Accordingly, the Court rejected the defendants’ motion to dismiss for not pleading more particularized facts regarding individual director participation in the challenged transactions

Document: Cargill, Inc., et al. v. JHW Special Circumstance LLC, C.A. No. 3234-VCP, Parsons, V.C. (Del. Ch. Nov. 7, 2008)

The representative of a Delaware statutory trust (the “Trust”) brought suit against the Trust’s managing owner (the “Managing Owner”) for breach of fiduciary duty, and against the Managing Owner’s parent and grandparent (the “Cargill Defendants”) for exercising control over the Managing Owner’s actions to serve their own self interest.  The Managing Owner entered into a purchase and sale agreement with a subsidiary of Refco, Inc., which transaction resulted in the transfer of the Trust’s accounts to a Refco entity.  Refco subsequently filed for bankruptcy and the trust recovered less than half of the funds in its Refco accounts.  The Court of Chancery denied a motion to dismiss the breach of fiduciary duty claims against the Managing Owner because the pleaded facts supported a reasonable inference that the Managing Owner violated its duty of care and duty to safeguard the Trust’s assets by failing to adequately investigate the consequences of the Refco transactions.  The Court also denied the motion to dismiss the breach of fiduciary duty claims against the Cargill Defendants because: (1) under common law principles, they may owe fiduciary duties to the trust because they exercised control over the Managing Owner by virtue of ownership interest and interlocking management; (2) the facts alleged supported a reasonable inference that the Cargill Defendants used such control for their own self-interest; (3) the Delaware Statutory Trust Act does not preempt this particular field of law; and (4) the parties did not contract to modify the default duties imposed by law on fiduciaries and their corporate parents.  Lastly, the Court denied motions to dismiss claims against the Cargill Defendants for general negligence and knowing participation in the Managing Owner’s breach.

Document: Comet Systems, Inc., et al. v. MIVA, Inc., C.A. No. 2793-VCL, Lamb, V.C. (Del. Ch. Oct. 22, 2008)

In calculating an earnout as part of a merger agreement, the Court found that an employee bonus plan which paid out solely in the event of an acquisition or similar event was not the same as other bonuses to employees and thus constituted a “one time non-recurring” expense as stated in the agreement, and therefore should have been excluded from the merger agreement revenue performance calculation.  The shareholders were therefore granted summary judgment, and paid the proper amount as re-calculated under the revenue goal of the agreement. Also, the Court ruled that the defendant owed the plaintiffs interest on the original payment because they failed to pay the amount in a reasonable amount of time (i.e. 90 days), where the right to payment vested in March of 2005 and payment did not occur until June of 2006.

Document: Olson v. Halvorsen, et al., C.A. No. 1884-VCL, Lamb, V.C. (Del. Ch. Oct. 22, 2008)

The Chancery Court, in granting summary judgment to the defendant partners of a hedge fund, held that the Statute of Frauds applies to LLC operating agreements, an issue that had never before been addressed by the Court.  The Court stated that (1) an oral LLC agreement provision or multiple provisions that cannot possibly be performed within one year are unenforceable, and (2) provisions of an oral LLC agreement that could possibly be performed within one year will remain enforceable. Here, the plaintiff argued that an “earn out” provision could be performed within a year, but the Court found it unenforceable because the payments, of the LLC income over multiple years, could not be calculated within the period of one year, and there were other obligations of the LLC partners that the Court believed could not be performed within one year.

Document: HDS Investment Holding, Inc. v. The Home Depot, Inc., C.A. No. 3968-CC, Chandler, C. (Del. Ch. Oct. 17, 2008)

In addressing several motions to dismiss, the Court narrowly interpreted an arbitration provision under New York law which gave an independent auditor the authority to arbitrate issues regarding post-closing purchase price adjustments. The Court found that the disputes regarding (1) the reimbursement of bonus and retention payments, (2) payment of cash left in deposits of the purchased corporation, and (3) whether the auditor could review the revised closing statement even though it was given the allotted time in the agreement, were all beyond the scope of the arbitration provision, and therefore for the Court to decide. The Court noted that it would not try to decide what the applicable amount for the purchase would be, since that fell within the arbitration clause. Finally, under Delaware law, the Court granted the plaintiff’s motion for a preliminary injunction enjoining arbitration until the resolution of the contractual claims before the Court.

Document: Noe, et al. v. Kropf, et al., C.A. No. 4050-CC, Chandler, C. (Del. Ch. Oct. 15, 2008)

The Court granted motions to intervene and to vacate an order to expedite proceedings by a contested stockholder in an action where the plaintiffs alleged that shares of the subject corporation, AmeriStar Network, were not validly issued, and that all actions by the defendants were void as matter of law under 8 Del. C. §§ 225 and 227.  The Court reasoned that the stockholder could intervene because it had standing and a right to intervene under Chancery Court Rule 24(a), since the  stockholder would be protecting its own interest by defending the actions of the contested board, and its actions were not otherwise represented because the defendant directors failed to appear.

Document: Dow Chem. Int’l Inc. of Delaware, C.A. No. 3972-CC, Chandler, C. (Del. Ch. Oct. 14, 2008)

The Court denied an application to appoint a receiver, where the petitioner was an attorney representing a group of plaintiffs seeking to pursue tort litigation against the corporation. The Court reasoned that 8 Del. C. § 278 did not apply because (1) the action did not meet the three-year window for suits against dissolved corporations since the corporation dissolved in 1988, and (2) the discretion granted the Chancery Court to continue corporate existence beyond the three-year period is only for the purpose of resolving pending litigation or disposing of remaining assets and the corporation here had no assets. Also, the Court held that 8 Del.C. § 279 only applies to shareholders and creditors when there are remaining assets.

Document: Hexion Specialty Chemicals, Inc., et al. v. Huntsman Corp., C.A. No. 3841-VCL, Lamb, V.C. (Del. Ch. Sept. 29, 2008)

The parties, both large chemical corporations, had entered into a merger agreement by which Hexion Specialty Chemicals (“Hexion”) would acquire Huntsman Corp. (“Huntsman”) in a leveraged cash transaction. After the financial condition of Hunstman worsened, Hexion claimed that a Material Adverse Effect (“MAE”) afflicting Huntsman excused it from performance. The Court rejected this argument, holding that (a) historical changes in Huntsman’s financial condition (focusing on EBITDA and net debt) were not significant enough to materially impair Huntsman, and (b) the merger agreement explicitly disclaimed any representation or warranty by Hunstman with regard to forecasts, allocating such risk to Hexion.  In addition, the Court held that Hexion knowingly and intentionally breached a covenant in the merger agreement to use reasonable best efforts to consummate the deal’s financing when it commissioned an insolvency opinion to justify not closing on the transaction instead of approaching Huntsman management to discuss mitigation of financial problems. Lastly, the Court decided to not rule on the actual solvency of Hunstman, as the issue would not be ripe until the banks involved decided whether they would fund the transaction. The Court ordered Hexion to perform all of its covenants and obligations under the merger agreement, other than its obligation to close.

Document: Kahn v. McCarthy, et al., C.A. No. 4054-CC, Chandler, C. (Del. Ch. Sept. 24, 2008)

Plaintiff sought a temporary restraining order prohibiting Defendants from consummating the merger of PFF Bancorp (“PFF”) with FBOP Corporation, claiming the proxy statement submitted to shareholders should be amended to disclose an economic relief program recently proposed by the Secretary of the Treasury.  The Court denied the motion because Plaintiff failed to show that the disclosures were material to PFF shareholders.  The relief program, pursuant to which the federal government would purchase certain mortgage assets held by financial institutions, was substantively incomplete and had not yet been approved by Congress.

Document: In re Seneca Investments LLC, C.A. No. 3624-CC, Chandler, C. (Del. Ch. Sept. 23, 2008)

Petitioner, a former Chief Executive Officer of Seneca Investments LLC (“Seneca”), sought judicial dissolution of Seneca because the company was functioning only as a passive investment vehicle and has conducted limited business activity over the past several years.  Seneca made several counterclaims against Petitioner, alleging claims of conversion and unjust enrichment for unlawfully funneling money out of Seneca.  The court dismissed Petitioner’s claim, holding that Seneca’s corporate function as a passive instrumentality holding title to assets was both lawful and common. Accordingly, Petitioner failed to allege sufficient facts to support a claim that it was not reasonably practicable for the company to carry on business in conformity with its broadly-stated business purpose.  The strategy of holding assets while awaiting future developments represented a rational and lawful use of the corporate form, a view further supported by Seneca’s active pursuit of legal claims against the Petitioner.

Document: Weir v. JMACK, Inc., et al., C.A. No. 3263-CC, Chandler, C. (Del. Ch. Sept. 23, 2008)

Plaintiff, one of three shareholders in the corporation JMACK (“JMACK”), petitioned the Court to appoint a receiver and dissolve the solvent corporation under allegations of mismanagement and inadequate tax and regulatory compliance. The Court dismissed Plaintiff’s claim for dissolution because (a) JMACK was a solvent corporation in the midst of its most successful year, (b) Plaintiff’s claims of misconduct were not sufficiently extreme to warrant dissolution, and (c) Plaintiff failed to show that the restaurants operating under JMACK would ultimately suffer extreme and irreparable penalties due to its inability to defend itself against regulatory and tax charges.

Document: In Re Loral Space and Communications Inc. Consolidated Litigation, C.A. No. 2808-VCS, Strine, V.C. (Del. Ch. Sept. 19, 2008)

Defendant MHR Fund Management LLC (“MHR”), a controlling stockholder of Loral Space and Communications, Inc. (“Loral”), negotiated a $300 million equity investment in Loral so Loral could expand its operations.  A Special Committee was formed by Loral to negotiate the deal, members of which had material personal and business ties to MHR. In addition, Loral’s board of directors consisted of a majority of MHR-affiliated individuals.  The Court analyzed the transaction under the entire fairness standard, holding that (a) flaws in the composition of the Special Committee precluded fair dealing at arms length, and (b) the terms of the deal itself were highly favorable to MHR.  First, the passive Special Committee eschewed good process by acting quickly, blowing off an expression of interest by Goldman Sachs to invest and failing to conduct any other type of market check to seek out better terms for capital infusion. Second, the terms of the deal were unfair, as the convertible preferred stock offered as consideration had high dividend rates, low conversion rates, and gave MHR an effective “chokehold” on Loral’s future through equity control and veto rights.  As a remedy, the Court adjusted the consideration price to compensate for MHR’s access to inside information, the deal’s insulation from market pressures and Loral’s actual stock trading price.

Document: In Re Loral Space and Communications Inc. Consolidated Litigation, C.A. No. 3022-VCS, Strine, V.C. (Del. Ch. Sept. 19, 2008)

Decided alongside the Loral matter discussed below, Plaintiff noteholders of Loral Space and Communications Inc. (“Loral”) and its subsidiary, Loral Skynet Corporation (“Skynet”), brought suit against Skynet for breach of the implied covenant of good faith and fair dealing.  Plaintiffs claimed that redeeming notes issued pursuant to a redemption right was improper where MHR had sufficient control itself to ensure satisfaction of the provision requiring that not more than 2/3 of the noteholders object to redemption.  In addition, MHR agreed to support early redemption if Loral entered into a strategic transaction at its direction, leading Plaintiffs to claim that MHR received consideration that was not given to other noteholders.  The Court rejected Plaintiffs’ claim, holding the parties to their bargain because the notes did not contain any contractual restriction on payment for consent and no reasonable expectancy was upset by redemption.

Document: Amirsaleh v. Board of Trade of City of New York, Inc. and Intercontinental Exchange, Inc., C.A. No. 2822-CC, Chandler, C. (Del. Ch. Sept. 11, 2008)

Plaintiff brought suit to compel conversion of his membership interests in the defendant Board of Trade of the City of New York (“NYBOT”) into newly issued shares of stock after it merged with defendant Intercontinential Exchange, Inc. (“ICE”), as per the terms of the Defendants’ merger agreement.  The agreement gave members the choice of being cashed out or accepting stock, with those failing to elect their preference receiving the lesser-subscribed option.  Plaintiff did not receive his election form and consequently did not submit his choice until 14 days after the official deadline.  Defendants claimed they instituted a revised deadline that ended one day before Plaintiff submitted his election, thereby justifying his rejection.  Plaintiff claimed violation of the covenant of good faith and fair dealing inherent in each contract because the Defendants accepted other late elections but rejected that of the Plaintiff. After finding that Plaintiff had standing to bring suit, the Court dismissed on summary judgment his claims for literal breach but allowed his claim for breach of the implied covenant of good faith and fair dealing to proceed because Defendants failed to show uncontroverted evidence supporting its decision to reject Plaintiff’s election while accepting others in the same narrow time frame.

Document: In re Countrywide Corp. Shareholders Litigation, C.A. No. 3464-VCN, Noble, V.C. (Del. Ch. Sept. 10, 2008)

Five former shareholders objected to the proposed settlement of an action for breaches of fiduciary duty relating to Bank of America’s acquisition of Countrywide. The objectors claimed the value of the derivative litigation was not duly considered by Countrywide’s board before the merger or by Plaintiffs’ counsel in valuing the litigation for purposes of settlement. This particular dispute revolved around the scope of discovery, with the objectors seeking broad discovery rights.  The Court recognized constrained discovery rights in the objector context, requiring a showing of good cause to justify a broad grant of power. Here, the objectors were unable to make a showing of bad faith or incompetence. Accordingly, the Court granted the objectors’ motion to compel discovery to the limited extent necessary to specifically meet the reasonable needs of the objectors without unduly burdening any other party.