Recent Delaware Corporate and Alternative Entity Decisions
Posted : June 15th, 2010Arkansas Teacher Retirement System, et al. v. Caiafa, No. 530, 2009, Steele, J. (Del. May 21, 2010).
This Delaware Supreme Court decision affirms the Court of Chancery’s decision approving a settlement among a majority of Countrywide stockholders, Countrywide directors, and Bank of America pertaining to Countrywide’s merger with Bank of America. The Court of Chancery denied an objection to the settlement by Countrywide stockholders Arkansas Teacher Retirement System (“TRS”), et al., who had a pending derivative suit for breach of fiduciary duties extinguished by the merger. TRS argued the Vice Chancellor erred in holding that TRS’ derivative suit claims were worthless and added no conceivable value to the merger. According to the Supreme Court, the Vice Chancellor did not abuse his discretion in denying the objection because, “Delaware corporate fiduciary law does not require directors to value or preserve piecemeal assets in a merger setting, and TRS failed to show a likelihood of prevailing on the merits of its claims.” In dicta, the Supreme Court noted that the actions of Countrywide’s board of directors may have been sufficient to meet the fraud exception to maintain a post-merger suit, which states a stockholder may maintain his post-merger suit “if the merger itself is the subject of a claim of fraud, being perpetrated merely to deprive stockholders of the standing to bring a derivative action.” Lewis v. Ward, 852 A.2d 896, 902 (Del. 2004). TRS, however, failed to present this claim in the Court of Chancery.
Brown Investment Management, L.P. v. Parkcentral Global, L.P., C.A. No. 5248-VCL, Laster, V.C. (Del. Ch. May 24, 2010).
The defendant, a defunct hedge fund (“DHF”), sought a stay pending appeal in connection with an order by the Vice Chancellor granting the plaintiff’s request for the names of fellow investors. The plaintiff, an investor and limited partner of the DHF, and its affiliates invested $16 million in DHF, which had represented to investors that it pursued strategies designed to provide returns comparable to long-term equities. DHF subsequently suffered catastrophic losses that wiped out all of its capital including the plaintiff’s investment. The Vice Chancellor denied the defendant’s request for a stay. In doing so, the Vice Chancellor held that the Gramm-Leach-Bliley Act of 1999 does not pre-empt the requirement of a Delaware limited partnership under 6 Del. C. § 17-305 to provide a list of its members. In addition, the Vice Chancellor found that there was no good faith basis to believe providing the list of the limited partners would harm DHF because it was non-operational. Further, it was noted that as a matter of public policy, “Delaware business entities have a statutory right to access a list of their fellow investors.”
Prizm Group, Inc. v. Mark E. Anderson, No. 4060-VCP, Parsons, V.C. (Del. Ch. May 10, 2010).
Plaintiff, a Delaware corporation, sought a declaratory judgment from the Court of Chancery that stock issued to one of its former directors (“FD”) was either void ab initio or voidable at the election of the corporation. Prior to amendments made in 2004, Defendant FD purported to purchase a one-third equity interest in the corporation with an unsecured promissory note. The FD, however, never paid on the note, and as a consequence the corporation’s board of directors met in 2006 and voted to cancel the FD’s shares. Prior to the 2004 amendments, Del. Const. Art. 9 § 3 and 8 Del. C. § 152 stated that an unsecured promissory note was not a valid form of consideration. Accordingly, it was not necessary to determine whether FD’s shares were void ab initio or voidable at the election of the corporation. Instead, the Court held that regardless of the distinction between void ab initio or voidable, FD failed to provide valid consideration for his shares and thus owned no shares of the corporation’s stock.
Baker v. Impact Holding, Inc., No. 4960-VCP, Parsons, V.C. (Del. Ch. May 13, 2010).
Petitioner Baker sought a declaratory judgment in the Court of Chancery under § 225 of the Delaware General Corporation Law (“DGCL”) to contest his removal from the board of directors of the Delaware corporation Impact Holding, Inc. (“Impact”). Impact moved to dismiss for improper venue, relying on a stockholders agreement (“SHA”) which contained a forum selection clause (“FSC”) requiring all actions to enforce the agreement be brought in Texas. Baker argued that Delaware’s public policy, as evidenced by 6 Del. C. §§ 17-109(d) and 18-109(d), forbid such a provision given it pertained to the internal affairs of Delaware entities. The Vice Chancellor noted, however, that the DGCL lacked a similar FSC provision, and thus there was no such overarching public policy against enforcing the provision. Baker further argued that he should not be bound by the SHA given he was not a signatory of the SHA. The Vice Chancellor rejected this notion as well, applying a three-part test in finding that: 1.) the FSC provision was valid; 2.) Baker received a direct benefit from the stockholders agreement and; 3.) his claim to a board seat was tied to the SHA. As a result, the Vice Chancellor held that Baker was bound by the FSC provision despite the fact he was a non-signatory, and consequently dismissed the action without prejudice.
West Coast Opportunity Fund, L.L.C. v. Credit Suisse Securities, L.L.C., No. 474, 2009, Jacobs, J. (Del. May 17, 2010).
West Coast Opportunity Fund, LLC (“West Coast”) appealed from a Court of Chancery interlocutory order that granted judgment on the pleadings to Credit Suisse Securities, L.L.C. (“Credit Suisse”). West Coast and other parties invested $15 million in GreenHunter Energy Inc. (“GreenHunter”). As part of that investment, GreenHunter CEO Gary C. Evans executed a lockup agreement that prohibited the sale, transfer or disposition of GreenHunter stock for one year. Evans, however, did not directly own any GreenHunter shares. Rather, Evans owned GreenHunter shares indirectly through Investment Hunter LLC (“Investment LLC”). Within the one year period, Investment LLC established a margin account with Credit Suisse and pledged 400,000 shares of GreenHunter as collateral for a $2.4 million loan. Later, Credit Suisse issued a margin call and West Coast responded by informing Credit Suisse that they intended to enforce the lockup agreement. Credit Suisse then filed suit. The court below held that Investment LLC “is not bound by the Lockup Agreement, and thus [West Coast] can not interrupt the transfer of GreenHunter shares to Credit Suisse.” On appeal, two issues were raised that were not dealt with in the Court of Chancery’s opinion: 1.) whether Credit Suisse was a bona fide pledgee for value without notice; and 2.) whether Investment LLC was Evans’ alter ego. Accordingly, the Supreme Court remanded the case to the Court of Chancery in order to resolve these two issues.
MCG Capital Corp. v. Maginn, C.A. No. 4521-CC (Del. Ch. May 5, 2010).
This case was the first time that the Court of Chancery was presented with the question of whether preferred stockholders have the same standing to due derivatively on behalf of the corporation as common stockholders. The Court held that until a series of preferred shares are given attributes that differ from other classes of stock by virtue of its designation in the corporation’s charter, all stock is created equal. It therefore follows, that unless and until a corporation expressly denies preferred stockholders the right to due derivatively, they have the same right to do so (and must meet the same standards) as holders of common stock. The Court also reiterated the previously-established rule that directors do not owe any fiduciary duties to holders of common stock warrants, and warrant holders therefore lack the standing to sue either directly or derivatively for breaches of fiduciary duty.
Sutherland v. Sutherland, C.A. No. 2399-VCN (Del. Ch. May 3, 2010).
This opinion, which is the latest installment in a series of opinions arising from a dispute among siblings in a family-run corporation, involved allegations of waste and breaches of the fiduciary duties of care and loyalty. In electing to partially grant and partially deny the defendants’ motion for summary judgment, the Court of Chancery held that 1) the decision to appoint a special litigation committee does not constitute an admission of self-dealing as a substantive matter – in other words it may be an admission of an appearance or possibility of impropriety, but not of actual impropriety – but the matter could not be decided at summary judgment; 2) a claim regarding alleged misuse of a private jet was barred by the statute of limitations, but importantly, the Court noted that it would have otherwise been dismissed on the basis of the plaintiff’s failure to rebut the presumptions of the business judgment rule; 3) in fulfilling its obligations under the duty of care, a board would generally be deemed to fulfill its obligations by considering material facts that are reasonably available and would generally not be held liable unless the conduct rises to the level of gross negligence; 4) it was not improper for the corporation to pay the costs to defend a prior lawsuit demanding access to certain books and records of the corporation as it is generally customary for the corporation to pay such expenses absent a finding of bad faith in refusing access to such books and records; 5) it is a well-settled proposition of Delaware law that the adoption of a charter provision immunizing directors for personal monetary liability for breach of the duty of care, as authorized by § 102(b)(7) of the General Corporation Law, does not constitute self dealing – even when the provision is adopted under the threat of imminent litigation; and 6) absent some reason to suspect improper and unaccounted-for payment of company funds, the Court usually will not mandate an accounting from fiduciaries.
Binks v. DSL.net, Inc., C.A. No. 2823-VCN (Del. Ch. Apr. 29, 2010).
This case explores several fundamental concepts of Delaware corporate law, including the business judgment rule and the applicability of Revlon duties in the context of a determination by an independent and well-advised board of directors to borrow funds in lieu of filing for bankruptcy. Although it did not reach the issue of whether the board had Revlon duties, the Court cited the board’s independence, good faith conduct and use of competent advisors in concluding that any such obligations were fully satisfied. After addressing the Revlon issue and concluding that the board was entitled to the presumptions of the business judgment rule, the defendants’ motion to dismiss was granted based on the Court’s finding that the board’s decision was attributable to a rational business purpose.
Ross Holding and Management Company v. Advance Realty Group LLC, C.A. No. 4113-VCN (Del. Ch. Apr. 28, 2010).
This opinion highlights the fact that Delaware’s Limited Liability Company Act and related case law do not provide much guidance with respect to the issue of what constitutes “material participation in the management of a limited liability company” for purposes of giving implied consent to jurisdiction pursuant to Section 18-109 of the LLC Act. The Court noted that the current case law indicates that activities such as forming a limited liability company, executing documents on its behalf and occasionally conferring with management and/or occasionally being involved in an single issue before the board of directors would not generally constitute material participation. On the other hand, the opposite conclusion was reached where a defendant was one of the founders of an LLC, maintained a large equity stake, and had once claimed to be its president and CEO. In this case, the Court determined that additional discovery on the jurisdictional issue would be necessary prior to rendering a decision on the defendant’s motion to dismiss.
Ashall Homes Limited v. ROK Entertainment Group, Inc., C.A. No. 4643-VCS (Del. Ch. Apr. 23, 2010).
This opinion affirms the validity of forum selection and choice of law clauses in the agreements entered into between the corporation and its stockholders which provided that disputes between the parties be litigated in the Courts of the United Kingdom and be governed by the laws of England. The agreements at issue involved a proposed three-step plan, whereby the plaintiffs would invest in a U.K. entity and then exchange their shares in the U.K. entity for shares of an Oklahoma corporation, which would then reincorporate in Delaware. Notably, the central issue of the underlying dispute related to the question of whether the shares of the Delaware corporation that the plaintiffs would be entitled to receive would be restricted or unrestricted, which is not an issue that would implicate the application of Delaware law pursuant to the internal affairs doctrine – otherwise, the Court may have reached a different conclusion with respect to the choice of law issue.
Global GT LP v. Golden Telecom, Inc., C.A. No. 3698-VCS (Del. Ch. Apr. 23, 2010).
In this appraisal action, the Court of Chancery was tasked with the fairly challenging job of valuing a Russian-based telecommunications company that was listed on NASDAQ. As with many appraisal actions, the Court engaged in its own valuation analysis after receiving what it deemed to be somewhat faulty valuations from both parties. While a detailed discussion of all of the factors involved in the Court’s use of the discounted cash flow (DCF) methodology and all of the bases for its ultimate conclusion and critiques of the analysis presented by the respective experts for each party is beyond the scope of this summary, the following findings are particularly noteworthy:
• The defendant’s argument that weight should be given to the merger price itself on the grounds that the merger reflected a market-tested price was rejected for two reason:
• The special committee that negotiated the merger did not engage in an active market check either before or after the signing of the merger agreement.
• Although a passive market check was performed, it was based on the disingenuous assumption that entities which were the two largest stockholders of both parties to the proposed merger would both sell their shares of the target corporation’s stock to another bidder if a superior proposal was received – particularly in light of the fact that one of these stockholders (which owned 26% of the target corporation) made a public announcement that it would not do so.
• The Court ultimately concluded that the plaintiffs were entitled to receive $125.49 per share (to be supplemented with an award of interest at the applicable statutory rate), which was much closer to the plaintiffs’ proposed valuation of $138.37 per share than the $88.14 per share valuation proposed by the defendants’ experts, or the $105 per share merger consideration.
• The Court relied exclusively on the DCF analysis because the experts themselves gave little weight to the comparable companies and transactions analyses and also because it was not satisfied with the experts’ level of knowledge with respect to the Russian economy and telecommunications industry.
Coughlan v. NXP B.V., No. 5110-CC (Del. Ch. Apr. 15, 2010).
In a case involving a lawsuit filed by an appointed stockholders’ representative on behalf of former stockholders, the Court of Chancery held that the stockholders’ representative had standing to pursue litigation for breach of a provision of a merger agreement which required that the surviving corporation make a contingent payment to the former stockholders. In reaching this conclusion, the Court stated that the scope of the stockholders’ representative was governed by the merger agreement and principles contract interpretation lead to the unambiguous conclusion that the stockholders’ representative had the right to pursue claims against the surviving corporation for any express obligation that the surviving corporation assumed under the merger agreement.
100 South Rockland Falls Road, P. O. Box 4175, Wilmington, DE 19807 - (302) 576 - 9600
Sitemap | Our Team | Home
Nothing in this website is intended to create an attorney-client relationship. The contents of this website and any publications included in this website should not be deemed legal advice, and you should not rely on any part of this website as legal advice related to your particular circumstances. The contents are provided for informational purposes only. If you have questions about the contents of the website, please contact us.