Recent Delaware Corporate and Alternative Entity Decisions
Posted : August 19th, 2010In Re CNX Gas Corp. S’holder Litig., C.A. No. 5377-VCL (Del. Ch. July 5, 2010)
Controlling shareholders of CNX Gas Corporation sought to certify for interlocutory appeal a decision of the Chancery Court denying a preliminary injunction by a class of minority shareholders against a unilateral two-step freeze-out merger. In the decision denying the preliminary injunction, the Court rejected the controlling shareholders’ position on the standard of review and held that the transaction would be reviewed for entire fairness under In re Cox Communications, Inc. Shareholders Litigation. The application sought interlocutory appellate review to clarify the appropriate standard of review for a unilateral two-step freeze-out by a controlling shareholder. The Chancery Court granted the application and found that review was warranted because attempts to apply Supreme Court precedent produced different conclusions regarding the appropriate standard for review, confusion regarding the inherent coercion in a two-step freeze-out merger, and conflict as to the degree to which a target board has a role in responding to a controller’s tender offer. In addition, the court determined that the issue presented a question not directly addressed by the Supreme Court, implicated fundamental issues of Delaware public policy, and determined a substantial legal issue for purposes of Rule 42(b). Update: On July 8th, the interlocutory appeal was denied by the Supreme Court of Delaware.
Morgan v. Cash, C.A. No. 5053-VCS (Del. Ch. July 16, 2010)
Morgan, a former common shareholder of Voyence, Inc., filed a claim against EMC Corporation, the acquirer of Voyence, for aiding and abetting alleged breaches of fiduciary duties by the former Voyence board. Specifically, Morgan alleged that EMC used promises of continued employment and exploited conflicts of interest between the Voyence directors and common stockholders to gain Voyence management’s support for a low cash merger price. Because none of the consideration from the sale was distributed to Voyence’s common shareholders, Morgan believed that EMC was complicit in the board’s failure to maximize stockholder value in the sale of the Voyence. The Chancery Court granted EMC’s motion to dismiss the company from the shareholder litigation. Vice Chancellor Strine determined that allegations of modest employment packages offered to two directors, standing alone, did not suggest that the Voyence board accepted a low merger price in exchange for improper personal benefits. Additionally, the fact that Voyence directors received consideration from the sale of the corporation, and common shareholders did not, was not enough to sustain a claim of collusion between EMC and the Voyence directors. Vice Chancellor Strine stressed that “[i]t is not a status crime under Delaware law to buy an entity for a price that does not result in a payment to the selling entity’s common stockholders.”
Milton Investments, LLC v. Lockwood Brothers II, LLC, C.A. No. 4909-VCP (Del. Ch. July 20, 2010)
Milton Investments and Lockwood Brothers were sole members of North Milton Development Group, LLC, and filed cross-motions for summary judgment to determine whether disputes between the Milton and Lockwood fell within the scope of the arbitration clause in North Milton’s LLC Agreement and whether the arbitrator designated in the Agreement was qualified to serve as arbitrator. Milton claimed that the arbitration clause was narrow in scope and none of the issues that Lockwood sought to arbitrate were subject to arbitration. Additionally, Milton claimed that the arbitrator identified in the Agreement was disqualified from serving based on conflicts of interest and statements made regarding the members and their dispute. While the Chancery Court determined that the arbitration clause within the LLC Agreement was narrow in scope, each of the potentially arbitrable issues identified by the parties fit within the categories of disputes in the arbitration clause. Vice Chancellor Parsons also held that the arbitrator could properly serve under the Agreement because the parties had selected him despite his known conflicts of interest. Furthermore, the statements made by the arbitrator represented “initial thoughts and observations” and did not suggest that he would be incapable of evenhandedly considering the legal arguments in dispute.
TR Investors, LLC v. Genger, C.A. No. 3994-VCS (Del. Ch. July 23, 2010)
TR Investors, LLC and other capital investors of Trans-Resources, Inc. brought an action to have the Chancery Court determine control of the Trans-Resources board pursuant to 8 Del. C. § 225. In 2004, Genger, the former founder and CEO of Trans-Resources, improperly transferred shares of Trans-Resources to trusts for his children in violation of a stockholders agreement with the capital investors. After discovering the transfer in 2008, the capital investors reached an agreement with the Genger and the trusts to buy back all of the wrongfully transferred shares, giving the capital investors a majority of the Trans-Resources stock. When the capital investors reconstituted the Trans-Resources board of directors, Genger challenged the reconstitution claiming that proper notice of the wrongful transfer was given in accordance with the stockholders agreement and that the capital investors nonetheless ratified the 2004 transfers when it acquired the shares in 2008. The Chancery Court rejected the Genger’s claims and found that the capital investors controlled the Trans-Resources board. Interpreting the stockholders agreement, the Court found that Genger had failed to comply with the notice requirement under the terms of the stockholders agreement. Furthermore, Vice Chancellor Strine found the capital investors clearly reserved their position that the 2004 transfers were void and therefore did not ratify the transfers when it acquired the shares in 2008. Accordingly, the capital investors retained the shares and control of the board.
Related Westpac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010)
JER Snowmass LLC, a funding member of two LLCs formed to pursue a land development project, filed a motion to dismiss a complaint filed by Related Westpac LLC, operating member of the project LLCs. Related Westpac claimed that JER Snowmass breached its contractual duties under the project LLCs’ operating agreements by unreasonably refusing to give consent to various major decisions and meet calls for further capital funding of the development project. The Chancery Court dismissed the complaint because the claims made by Related Westpac were inconsistent with the project LLCs’ operating agreements. While JER Snowmass could not unreasonably withhold its consent to certain decisions under the operating agreements, the “material actions” involved in the complaint were not subject to such constraints. JER Snowmass contractually bargained for the right to deny consent to material actions if it was in its own commercial self-interest. The Court refused to impose a reasonableness condition with respect to material actions that the operating member had freely given up during formation of the operating agreement. Furthermore, the Court would not imply a reasonableness requirement when it appeared in other sections of the operating agreement but not in the provision at issue. The Chancery Court also dismissed Related Westpac’s request for damages and payment of capital calls because this remedy was in conflict with the plain terms outlined in the operating agreement.
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