Recent Corporate and Alternative Entity Decisions From the Delaware Courts
Posted : September 28th, 2011Chancery Court Holds Provision Prohibiting Asset Transfer Not Violated by Sale of Equity Interest in Asset.
In Roseton OL, LLC v. Dynegy Holdings, Inc., C.A. No. 6689-VCP (Del. Ch. July 29, 2011), the Court of Chancery found that plaintiffs were not likely to succeed on the merits of their claims that Dynegy Holdings, Inc. (“DHI”) would violate promises made pursuant to clauses of guaranties it had made in favor of plaintiffs’ parent company that prohibited DHI from transferring its “properties and assets substantially as an entirety.” The asset transfer that plaintiffs claimed would violate the guaranties was a proposed transfer by DHI of its entire equity interest in subsidiaries that held DHI’s most profitable power plants to new bankruptcy remote DHI subsidiaries. The Court found that the provision at issue did not likely apply, stating its opinion that the phrase “properties and assets” referred to properties and assets directly owned by DHI, not DHI’s equity ownership interests in subsidiaries. Accordingly, the Court denied the plaintiffs’ request for a temporary restraining order.
Chancery Courts Denies Motion to Expedite Conflict Transaction Negotiated by Special Committee Except on Limited Disclosure Grounds.
In a recent decision on a motion to expedite, 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.
Chancery Court Interprets LLC Agreement to Allow Transfer of Membership Interests Without Consent of All Members
In 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].”
Delaware Supreme Court Affirms Chancery Court Decision on Indemnification for Contingency Fees.
In 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.
Chancery Court Prohibits Hedge Fund Manager’s Use of Gate Provision to Restrict Withdrawal of Capital under Revenue Sharing Agreement
In 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.
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