Delaware Transactional Law Updates

Document: Auriga Capital Corp. v. Gatz Properties, LLC, C.A. No. 4390-CS (Del. Ch. Jan. 27, 2012)

The Delaware Court of Chancery held that the manager and majority owner of a limited liability company (the “LLC”) breached his fiduciary duties by allowing the LLC’s most valuable asset to depreciate in value and then forcing the minority holders to sell their LLC interests to him for a fraction of their value. The Court also confirmed that absent a provision in the limited liability company agreement to the contrary, the managers of Delaware limited liability companies owe fiduciary duties of care and loyalty to the members of the limited liability company. In this case, the limited liability company did not alter the manager’s fiduciary duties, and the Court ordered the defendant manager and majority owner to pay the minority holders $776,515 in damages.

Document:  Shiftan et al. v. Morgan Joseph Holdings, Inc., C.A. No. 6424-CS (Del. Ch. Jan. 13, 2012)

The Delaware Court of Chancery granted summary judgment in favor of petitioners on the issue of whether a mandatory redemption provision, which provided for an automatic redemption of preferred stock six months following a merger giving rise to appraisal rights, was required to be taken into account in the Court’s determination of the “fair value” of the preferred stock.  Unlike common stock, the value of preferred stock in an appraisal proceeding is determined solely by reference to the contract rights conferred upon it in the certificate of incorporation.  Here, the preferred stock would have been redeemed for $100 per share, just six months after the merger giving rise to appraisal rights, pursuant to a specific, non-speculative, contractual right, which the Court determined was an important economic factor bearing on the value of the preferred stock as of the date of the merger.

Document: Gerber v. Enterprise Products Holdings, LLC, et al., C.A. No. 5989-VCN (Del. Ch. Jan. 6, 2012)

The Delaware Court of Chancery granted defendants’ motion to dismiss fiduciary and tort claims arising from the sale by Enterprise GP Holdings, L.P. (“EPE”) of its interest in a subsidiary to an affiliate and the subsequent merger of EPE into a wholly-owned subsidiary of such affiliate.  EPE’s partnership agreement provided that EPE’s general partner would not breach any fiduciary duty by entering into a transaction, in which the interests of the general partner and the limited partners were not aligned if the transaction was approved by a majority of the members of the Audit and Conflicts Committee of EPE (the “Special Approval”) or satisfied one of three additional methods of resolving conflicts.  The transaction at issue had received the Special Approval, and the Court found that the Special Approval provision was effective to contractually modify the general partner’s fiduciary duties.  The Court further stated: “[w]hen a contract confers discretion on one party, the implied covenant [of good faith and fair dealing] requires that the discretion be used reasonably and in good faith.” Thus, according to the Court, the general partner had a duty, under the implied covenant, to act in good faith if it took advantage of the Special Approval process.  However, the Court upheld a contractual presumption of “good faith.” Under the partnership agreement, the general partner was entitled to a presumption of good faith in making decisions if, among other things, it relied on a fairness opinion in determining to proceed with a conflict transaction.  Here, the general partner received a fairness opinion from Morgan Stanley, and the Court declined to test the presumption.  The Court noted that the implied covenant was a “gap-filler” and could not be used to infer provisions that contradicted the clear language of the contract.

Document: Steinhardt v. Occam Networks, Inc., C.A. No. 5878-VCL (Del. Ch. Jan. 6, 2012)

The Delaware Court of Chancery dismissed plaintiff as a class representative and ordered him to disgorge more than $500,000 in illicit profits gained from trading on insider information obtained in the course of the class action proceedings.  Plaintiff was a representative plaintiff in this action which challenged the merger of Occam Networks, Inc (“Occam”) with and into Calix, Inc.  (“Calix”).  Plaintiff, a stockholder of Occam, alleged that the merger price was too low and that Occam’s directors breached their fiduciary duties in approving the merger.  After litigation discovery commenced, plaintiff became privy to confidential information, which lead him to believe that Occam had been overvalued and that the merger price was unlikely to change as a result of the litigation.  Based on this information, plaintiff then began selling Calix shares short to exit his Occam position.  By selling Calix short, plaintiff could both liquidate his Occam position and take advantage of the arbitrage spread that existed between Calix and Occam stock at the time.  Consistent with prior rulings, the Court ordered plaintiff to disgorge his illicit profits.

Sagarra Inversiones, S. L., v. Cementos Portland Valderrivas, S.A., C.A. No. 6179, J. Jacobs (Del. Dec. 28, 2011)
The Delaware Supreme Court affirmed a Chancery Court decision holding that plaintiff, a stockholder of Cementos Portland Valderrivas, a Spanish corporation (“CPV”), could not assert a derivative action on behalf of a third-tier, Delaware subsidiary of CPV where plaintiff lacked standing, under Spanish law, to bring such an action.

Under Delaware law, a stockholder of a parent corporation may sue derivatively to enforce the claim of a wholly owned corporate subsidiary where the subsidiary and its parent wrongfully refuse to enforce the subsidiary’s claim directly. Spanish law does not permit so called “double” or “triple” derivative actions—in other words, a stockholder may only pursue a derivative action at the parent level. Plaintiff failed to make a demand on the board of the Spanish parent corporation as required, under Spanish law; thus, the Chancery Court dismissed plaintiff’s complaint. Plaintiff advanced three arguments in favor of the application of Delaware law to the action. First, plaintiff argued that Delaware law should be applied because it was suing to enforce a right possessed by a Delaware corporation, not a Spanish corporation. The Court rejected this argument on the basis that plaintiff’s standing to sue derivatively on behalf of a subsidiary must derive from its ownership of shares at the parent level because the parent corporation was the only corporation in which plaintiff owned stock. Second, plaintiff argued that standing was not a principle to which Delaware’s doctrine of internal affairs (which governs choice of law issues) should have been applied. The Court disagreed and found that the pre-suit demand requirement is a matter of internal affairs because it serves a core function of substantive corporation law by allocating, as between directors and stockholders, the authority to sue on behalf of the corporation. Finally, the Court rejected plaintiff’s third argument that public policy favored application of Delaware law. The Court agreed with the plaintiff that Delaware has a strong interest in policing alleged breaches of fiduciary duties, but found that Delaware courts could only fulfill that role where their power to act was first be properly invoked.

Document: Clean Harbors, Inc. v. Safety-Kleen, Inc., C.A. No. 6117-VCP (Del. Ch. Dec. 9, 2011)

The Delaware Court of Chancery declined to dismiss plaintiff’s claim that defendant Safety-Kleen, Inc. (“Safety-Kleen”) breached a contractual obligation to make a good faith determination of the fair market value of its stock in connection with the exercise of a call right set forth in an option agreement. Plaintiff Clean Harbors, Inc. (“Clean Harbors”), a competitor of Safety-Kleen, acquired shares of Safety-Kleen subject to the call right from former Safety-Kleen employees, who held Safety-Kleen options, but did not have the funds to exercise the options before they expired. Clean Harbors financed the former employees’ exercise of the options and then bought the stock from the employees for $7.50 each, a small premium. However, only several hours after Clean Harbors closed its transaction with Safety-Kleen’s former employees, Safety-Kleen notified Clean Harbor that it was exercising a call right, under the option agreement, to purchase Clean Harbor’s shares at “fair market value,” which Safety-Kleen determined was $7.50—the same price Clean Harbors paid Safety Kleen’s former employees for their stock.

Clean Harbors alleged that Safety-Kleen breached a contractual obligation to pay it the “fair market price” of the stock and an explicit obligation, under the option agreement, to make such determination in “good faith.” Specifically, Clean Harbors argued that $7.50 was a submarket price that Safety-Kleen’s former employees accepted only because they had no other means of salvaging some of the value of their options. Clean Harbors also argued that the $7.50 price reflected a discount for the stock being subject to a call right. The Court found that Clean Harbor’s allegations were sufficient to support a finding that the fair market value of the stock at issue was substantially higher than $7.50, and (2) Safety-Kleen had acted in “bad faith” in setting the call price. While Safety-Kleen argued that a contractual “bad faith” claim required Clean Harbors to establish that Safety-Kleen’s conduct constituted subjective bad faith–i.e., that its conduct was motivated by an actual intent to cause harm, the Court disagreed. Specifically, the Court found that the complaint need only allege facts related to the alleged act taken in bad faith and a plausible motivation for it. Because Clean Harbors plausibly alleged that Safety-Kleen was motivated by a desire to deprive a competitor from the benefits of its bargain (which also likely satisfied the “subjective” bad faith standard), the Court declined to dismiss its complaint.

Document: Central Laborers Pension Fund v. News Corp., C.A. No. 6287-VCN (Del. Ch. Nov. 30, 2011)

The Delaware Court of Chancery dismissed an action to inspect the books and records of defendant News Corporation (“News”), under Section 220 of the Delaware General Corporation Law (“Section 220”), on the basis that plaintiff’s purpose for making such a demand was not proper where plaintiff had already filed a derivative complaint against News. The derivative complaint alleged that News’s directors had breached their fiduciary duties in connection with a proposed acquisition of Shine Group Limited by News (the “Potential Transaction”). The 220 action sought books and records for the purpose of investigating potential breaches of fiduciary duty by the News board in connection with the Proposed Transaction. The Court found that, by filing its derivative complaint, plaintiff acknowledged—if for no other reason than to satisfy its lawyers’ ethical obligations—that it had sufficient information to support its substantive allegations in the complaint. Thus, plaintiff’s pleadings were inconsistent, and the Court ruled that Section 220 could not be used as a substitute for litigation discovery.

Document: Encite, LLC v. Soni, C.A. No. 2476-VCG (Del. Ch. Nov. 28, 2011)

The Delaware Court of Chancery denied defendant directors’ motion for summary judgment on the issue whether they conducted an entirely fair auction process for the sale of a now-defunct technology start-up, Integrated Fuel Cells Technologies, Inc. (“Integrated”), where the defendants relied largely on the defense that they had solicited and followed the advice of counsel. Integrated was a venture-backed company founded by Stephen Marsh (“Marsh”) which entered into an auction process to avoid bankruptcy. The Integrated board, which was comprised of Marsh, a Marsh designee, two designees of Echelon Ventures L.P. (“Echelon”), its largest investor, and an independent director, did not hire an investment advisor to conduct the auction, but did manage to solicit some interest, including an Echelon-backed bid and a Marsh-backed bid. Ultimately, the board approved the Echelon-backed bid, and Marsh sent an e-mail to all stockholders that the board was conflicted and had ignored superior offers. After several stockholders brought derivative claims, all members of the Integrated board resigned other than Marsh, who then abandoned the auction and entered the company into bankruptcy. A Marsh affiliate then purchased Integrated’s assets in bankruptcy and brought this action against the former Integrated directors other than Marsh.

Plaintiff alleged that defendants breached their fiduciary duties in approving the unconsummated transaction with an Echelon affiliate—essentially asking the Court to determine whether the defendants squandered an opportunity to realize the true value of the company by attempting to force through an inferior transaction in which they were interested. On this motion for summary judgment, defendants asked the Court to find that their actions passed muster under the exacting entire fairness standard of review applicable to interested transactions. The Court denied the motion on the basis that defendants had not set forth any evidence from which it could make that decision. Instead, the defendants relied on conclusionary statements that the process had been fair because their counsel told them it was a fair process. The Court noted that reasonable reliance on expert counsel is a pertinent factor in evaluating whether corporate directors have met a standard of fairness in their dealings with corporate powers; however, its existence is not outcome determinative.

Document: Winshall v. Viacom Int’l, Inc., C.A. No. 6074-CS (Del. Ch. Nov. 10, 2011)

The Delaware Court of Chancery rejected plaintiff’s argument that both the seller and the acquirer of a business possessed an affirmative duty under the implied covenant of good faith and fair dealing to take an opportunity to increase the potential earn-out payments to the seller’s stockholders under a merger agreement in which the stockholders possessed no reasonable expectancy interest.

In 2006, defendant Viacom International (“Viacom”) acquired defendant Harmonix Music Systems, Inc., a creator of music-oriented gaming systems (“Harmonix”).  Under a merger agreement entered into among Viacom, Harmonix and certain Harmonix stockholders in 2006, Harmonix’s stockholders were entitled to receive an up-front cash payment for their shares, as well as a contingent right to receive uncapped earn-out payments based on Harmonix’s financial performance in the two years following the merger, 2007 and 2008.  About one year after the merger closed, Harmonix released a new video game, which was very successful, and Harmonix renegotiated an existing contract it had with a third party for the distribution of the game.  As part of the renegotiation, Harmonix was able to obtain a wider distribution of its product and a reduction in distribution fees, in upcoming years, following the expiration of the earn-out period.

In this action, plaintiff alleged that the defendants breached the implied covenant of good faith and fair dealing by not negotiating for a reduction in distribution fees during the earn-out period.  The Court found inequitable the proposed imposition of a duty on the defendants to share with Harmonix’s stockholder the benefits of a renegotiated contract addressing distribution rights after the expiration of the earn-out period.  According to the Court, the implied covenant of good faith and fair dealing requires a party to refrain from conduct that is contrary to the fundamental expectations of the other party as implied by the explicit terms of the deal.  In this case, plaintiff sought to actually expand “its contractual counterparty’s expectancy as a matter of judicially compelled charity, not toward a 501(c)(3), but toward another sophisticated commercial actor.”  Slip. Op. at 21.  Accordingly, the Court dismissed plaintiff’s complaint.

Document: In re Southern Peru Copper Corp. Shareholders Deriv. Litig, C.A. No. 961-CS (Del. Ch. Oct. 14, 2011)

In a post-trial decision, involving the acquisition by a publicly-traded, controlled corporation, Southern Peru Copper Corporation (“Southern Peru”), of its controller’s interest in a third party at the behest of such controller, the Court of Chancery found that the controlling stockholder, Grupo Mexico, S.A.B. de C.V. (“Grupo”), and Southern Peru’s inside directors breached their fiduciary duty of loyalty because the transaction was unfair to Southern Peru’s minority stockholders. The Court awarded Southern Peru $1.263 billion in damages and ordered that the award be paid in shares of Southern Peru stock—i.e., Grupo was required to return much of the $3.1 billion in shares of Southern Peru stock that it had received for its interest in the third party, Minera Mexico, S.A. de C.V (“Minera”), a private company, from Southern Peru. Although Southern Peru had formed a special committee of unaffiliated directors to consider the transaction with Grupo, the Court found that the special committee’s mandate and process, which did not include evaluating alternatives to Grupo’s proposed transaction were flawed. After Goldman Sachs, the special committee’s financial advisor, initially valued Minera at a maximum of $1.7 billion, the Special Committee did not go back to Grupo and make a fundamentally lower counteroffer. Instead, the Special Committee and Goldman Sachs went to extraordinary efforts to “recalculate” the value of Minera and Southern Peru to justify issuing to Grupo an amount of Southern Peru stock, which the market and Grupo were valuing at $3.1 million, for the Minera interest. These efforts included valuing Southern Peru at far less than its market price even though Grupo itself was valuing Southern Peru based on its stock price. The special committee also failed to ask for an updated fairness opinion in the five-month interval between signing and a stockholder vote on the transaction in the face of strong evidence that it had considerably undervalued Southern Peru. Having found the transaction unfair, the Court awarded damages to approximate the difference between what Southern Peru would have paid for Minera in an entirely fair transaction and the price actually paid.

Document: Krieger v. Wesco Financial Corp., C.A. No. 6176-VCL (Del. Ch. Oct. 13, 2011)

The Delaware Court of Chancery held that appraisal rights were not available in a stock/cash election merger because no stockholder was required to accept cash.  In February 2011, Wesco Financial Corporation, a publicly traded corporation (“Wesco”), agreed to be acquired by Berkshire Hathaway.  The terms of the merger agreement allowed for minority stockholders to have their shares converted into: (1) $385 per share in cash, (2) an equivalent value of publicly traded shares of Berkshire Class B stock, or (3) a combination of cash and publicly traded stock.  Plaintiff, a Wesco stockholder, argued that the merger should trigger appraisal rights under Section 262 of the DGCL.  The Court held that the Wesco stock fell within DGCL Section 262(b)(1)’s “market out exception” because the Berkshire Class B shares were listed on a national securities exchange.  However, appraisal rights were not re-triggered by the “exception to the exception” in DGCL Section 262(b)(2) because, although the stockholders had the option to receive cash, they were not required to do so.

Document: In re Goldman Sachs Grp., Inc. S’holder Litig., C.A. No. 5215-VCG (Del. Ch. Oct. 12, 2011)

The Court of Chancery held that plaintiffs had failed to plead sufficient particularized facts to establish that making a demand on the board of directors of Goldman Sachs Group, Inc. (“Goldman”) to investigate Goldman compensation practices would be futile. Therefore, the Court dismissed plaintiffs’ derivative claims with prejudice.  Plaintiffs, stockholders of Goldman, alleged excessive compensation at Goldman and brought a derivative claim against Goldman directors for alleged breaches of fiduciary duties and corporate waste.  Defendants moved to dismiss the claims for failure to make a pre-suit demand.  The Court held that plaintiffs had failed to raise a reasonable doubt as to whether Goldman’s directors were disinterested and independent, and whether the board was well informed and acted in good faith.  In addition, the Court dismissed plaintiffs’ claims that any compensation payments constituted corporate waste.  Plaintiffs also brought a Caremark claim alleging that Goldman failed to monitor risky business strategies, which the Court rejected because the plaintiffs failed to demonstrate Goldman’s willful ignorance of “red flags,” as required by the Caremark decision.

Document: Gaines v. Narachi, et al., C.A. No. 6784-VCN (Del. Ch. Oct. 6, 2011)

The Court of Chancery granted the plaintiff’s motion to expedite a claim (following reargument) alleging that the defendant directors breached their fiduciary duty of disclosure by not disclosing in a proxy statement the forecasted free cash flows underlying the DCF analysis conducted by their investment advisor in connection with a merger. Plaintiff, a stockholder of AMAG Pharmaceuticals, Inc. (“AMAG”), sought to enjoin a proposed merger between AMAG and Allos Therapeutics, Inc. (“Allos”) because the proxy statement failed to disclose the forecasted free cash flows utilized by Morgan Stanley in its DCF analysis. AMAG stockholders were not receiving cash in the merger, but rather stock in Allos. The Court acknowledged that the Delaware courts have held disclosure of such information was required in cash-out mergers because stockholders are being asked to decide whether to take a sum certain in exchange for their right to those future cash flows. Here, the Court held that it was expediting the claim because: (1) there was some confusion in the record whether management may have provided such projections to Morgan Stanley, who then excised them from the proxy statement; and (2) the standard for expedition was low.

Document: In re OPENLANE, Inc. S’holders Litig., C.A. No.  6849-VCN (Del. Ch. Sept. 30, 2011)

The Court of Chancery found that plaintiffs did not have a reasonable likelihood of succeeding on the merits of their claims that a board breached its fiduciary duties by approving a merger agreement without a fiduciary out to a non-solicitation covenant, where the merger agreement was approved by the stockholders by written consent immediately following execution of the merger agreement by the defendant corporation, and the board could terminate the merger agreement if the consents were not delivered within twenty-four hours of signing.  The consents represented over 68% of the corporation’s voting power, which was held by board members and officers.  There was no voting or other agreement requiring that the board members or officers vote in favor of the merger.

This is the first decision addressing the validity of a common work-around to the Delaware Supreme Court’s decision in Omnicare, Inc. v. NCS Healthcare, Inc., No. 605, 2002 (Del. Apr. 4, 2003), which held invalid a merger agreement that did not contain a termination right in connection with a superior proposal where there existed a voting agreement locking up more than a majority of the corporation’s voting power and a board commitment to submit the merger agreement to a vote of stockholders even if the board no longer recommended the transaction.  The Supreme Court held that, under such circumstances, the board had contracted away its continuing fiduciary obligation to get the best transaction for its stockholders which ended upon the stockholder vote.  Many practitioners believed that a merger agreement without a fiduciary-out should survive scrutiny under Omnicare if approved by written consent of stockholders immediately after the signing of the merger agreement because the delivery of the written consents terminated the board’s Revlon duties.  In OPENLANE, if the consents were not immediately delivered, the target board could also terminate the merger agreement and potentially pursue another offer; thus, the board preserved its ability to pursue a superior offer if the current deal was not immediately approved.  There was also no voting agreement.

Document: Brinckerhoff v. Enbridge Energy Co., Inc., C.A. No. 5526-VCN (Del. Ch. Sep. 30, 2011)

The Delaware Court of Chancery dismissed plaintiff’s claims that defendants, the general partner (the “GP”) of a master limited partnership (the “MLP”) and the GP’s board of directors, breached their fiduciary duties in entering into a joint venture with an affiliate where the MLP’s partnership agreement (the “LPA”) expressly (1) authorized the GP to enter into affiliate transactions, and (2) eliminated the GP’s liability for damages from breach of fiduciary duties unless the actions were taken in bad faith. The LPA provided that the GP could enter into transactions with affiliates that were “fair and reasonable” and that affiliate transactions would be presumed to fair and reasonable where the GP relied on expert advice. The Court noted that the MLP, acting through the GP, engaged a special committee, which hired its own financial and legal advisors, before recommending the transaction to the GP, which entitled the GP to a presumption that the transaction was fair and reasonable. The Court also found that plaintiff had failed to allege facts suggesting that the GP or the GP’s board acted in bad faith. The Court went as far as to suggest, in dicta, that “[i]t may…be the case that if a limited partnership agreement expressly permits a corporate general partner to take certain action, that the board of that general partner cannot be found to have acted in bad faith for causing the general partner to take the expressly permitted action.” However, the Court declined to address that particular issue in light of the plaintiff’s failure to plead facts alleging that the GP’s board acted in bad faith. Finally, the court held that the claim brought by the plaintiff was derivative in nature, distinguishing its 2010 decision in the Teppco case, which permitted limited partners to enforce a partnership agreement directly when the partnership was about to be merged out of existence. In holding that the claims were derivative, the court cited to Teppco (and its prior corporate decision in Tooley) in affirming the “core Delaware public policies of promoting internal dispute resolution and ensuring that [management] ha[s] the first opportunity to address and control the claim[s].”

Document: Johnston v. Pedersen, C.A. No. 6567-VCL (Del. Ch. Sept. 23, 2011)

The Court of Chancery found that written consents representing a majority of the outstanding voting power of Xurex, Inc. (“Zurex”) were effective to remove and replace Zurex’s incumbent directors even though Zurex’s Certificate of Incorporation also required a class vote of the holders of a class of Zurex’s preferred stock where Zurex’s directors had breached their fiduciary duty of loyalty in issuing the preferred stock.  The preferred stock had been issued by Zurex to select friendly investors and management to thwart off a change in control of the board after Zurex, a financially troubled company, had a series of proxy contests that were further destabilizing the company.  While the Court stated that it believed that the defendant directors honestly believed that they were acting in the best interests of the company in issuing the preferred stock, the Court held that their actions nonetheless could not pass enhanced scrutiny.  Drawing from Mercier v. Inter-Tel (Del.) Inc., 929 A.2d 786 (Del. Ch. 2007) and Blasius Industries Inc. v. Atlas Corp., 564 A.2d 651 (Del. Ch. 1988), the Court determined that the defendants bore the burden of proving that their motivations were proper and not selfish, and that they did not preclude the stockholders from exercising their right to vote or coerce them into voting in any particular way.  Further, because the vote involved the election of directors and matters of corporate control, the directors were required to support their actions with a compelling justification.  The Court held that an intent to raise capital by the issuance of the preferred stock was not a compelling justification where the stock possessed a class vote on every issue subject to a stockholder vote.

IAC/Interactive Corp., v. Brien, C.A. No. 629, 2010 (Del. Ch. Aug. 11, 2011)
The Delaware Supreme Court affirmed the Court of Chancery’s determination that contingent fees are fees that are “incurred” for purposes of Section 145 of the Delaware General Corporation Law (“Section 145”), such that a corporation is required to indemnify a person otherwise entitled to be indemnified under Section 145 for reasonable contingent fees.  In so finding, the Court rejected the defendant corporation’s argument that premium or contingent fees are not fees that are actually “incurred” because they do not represent work done, but rather the success achieved.  The Court found that whether the amount of the fee was determined upfront or after the result was obtained was immaterial because the fee was still incurred. The Court also found that the Court of Chancery had not abused its discretion in finding reasonable the following contingent fee arrangements: (1) a 20% success fee to one firm who was defending the indemnified person in an arbitration proceeding; (2) a $100 per hour increase is the same firm’s hourly rates for all work done after the arbitration was completed; (3) a 50% premium above standard hourly rates to a second firm; and (4) a contingent $100 per hour premium above standard hourly rates to a third firm.

Document: Achaian, Inc. v. Leemon Family, LLC, et al., C.A. No. 6261-CS (Del. Ch. Aug. 9, 2011)

The Court of Chancery granted a declaratory judgment in favor of Achaian, Inc. (“Achaian”), a member of Omniglow, LLC (“Omniglow”) and ordered the dissolution of  Omniglow under 6 Del. C. § 18-802 based on a 50/50 deadlock between the members of Omniglow.  In determining that Omniglow was owned by two members each with a 50% limited liability company interest, the Court rejected the other member’s claims that a provision prohibiting the admission of new members without all members’ consent would prohibit one member from transferring its interest to another member without all members’ consent.  The Court noted that Omniglow’s LLC agreement explicitly permitted a member to transfer “all or any portion of its [i]nterest in [Omniglow] to any [p]erson at any time,” and in granting judgment in favor of Achaian, the Court opined that it “would make scant sense” to transfer only economic rights and not the entire interest in Omniglow, including voting rights, as the definition of “Interest” in the LLC agreement referred to the “entire ownership interest of the [m]ember in [Omniglow].”

Document: Paige Capital Management, LLC, et al. v. Lerner Master Fund, LLC, et al., C.A. No. 5502-CS (Del. Ch. Aug. 8, 2011)

The Court of Chancery refused to permit the management of a hedge fund (the “Paige Fund”) to use a so-called “Gate Provision” of a partnership agreement (the “Partnership Agreement”) to restrict the withdrawal by the Paige Fund’s only outside investor of its entire investment, pursuant to the terms of its revenue sharing agreement (the “Seeder Agreement”). In October 2007, an investment vehicle called the Lerner Fund agreed to invest $40 million of “seed” capital into the newly created Paige Fund. The Lerner Fund entered into the Partnership Agreement through one of the Paige Fund’s investment vehicles, as well as the Seeder Agreement, which governed the relationship between the Paige Fund and the Lerner Fund, to the exclusion of any other potential limited partners. After three years and no new investors, the Lerner Fund decided to withdraw its entire capital investment, pursuant to the terms of the Seeder Agreement. However, the Paige Fund attempted to restrict this withdrawal, based on a “Gate Provision” contained in the Partnership Agreement that permitted the general partner to limit the withdrawal of any limited partners’ investments to 20% of the total capital investments. The Paige Fund argued that the Partnership Agreement had not been “amended” by the provisions of the Seeder Agreement, while the Lerner Fund argued that no amendments were necessary since the Partnership Agreement permitted the general partner to waive the Gate Provision. The Court, using New York law contract analysis, agreed with the Lerner Fund that the Gate Provision was superseded by the Seeder Agreement and that the Seeder Agreement was tantamount to a side letter between the general partner and the Lerner Fund, and that even had it not been, the fiduciary duties of the Paige Fund’s general partner would have required it to waive the Gate Provision. After a lengthy analysis, the Court found that with respect to Section 17-1101(e) of the Delaware Revised Uniform Limited Partnership Act (DRULPA), the general partner of the Paige Fund and the managing member of the general partner had breached their fiduciary duties by favoring their own interests over those of the investor in invoking the Gate Provision.

Document: In re Ness Technologies, Inc. S’holders Litig., C.A. No. 6569-VCN (Del. Ch. Aug. 3, 2011)

The Delaware Court of Chancery confirmed that a conflict transaction negotiated by a fully functioning special committee would not be second-guessed by the Court. This decision involved a putative class action lawsuit filed by stockholders of defendant Ness Technologies (“Ness”), who sought to enjoin a proposed transaction through which Ness’s largest stockholder, defendant Citi Venture Capital International (“CVCI”), would acquire Ness in a cash transaction at $7.75 per share. The Plaintiffs challenged the transaction on both price and process grounds and also alleged that the disclosures by Ness relating to the proposed transaction were inadequate. The Court found that the plaintiffs had not articulated sufficiently colorable price or process claims to justify expedition where: (1) the transaction had been approved by a disinterested special committee following an eleven-month sales’ process involving approximately thirty bidders; and (2) the parties merger agreement contained “relatively mundane” deal protection measures (standard “no-shop” and “no talk” provisions with fiduciary-outs and a termination fee amounting to 2.72 % of the transaction price). However, consistent with recent decisions emphasizing the importance of financial advisor independence, the Court granted the plaintiffs’ motion to expedite on the limited issue whether Ness’s financial advisor was conflicted due to past, present or future dealings with CVCI.