Updates

The Delaware Counsel Group LLP publishes legal updates regarding critical areas of Delaware Corporate and Alternative Business Entity Law on a bi-weekly basis. If you would like to sign up to receive our updates via email or post, please click here to subscribe.

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : April 21st, 2011

Pharm. Prod. Dev., Inc. v. TVM Life Sci. Ventures VI, L.P. et al, C.A. No. 5688 VCS (Del. Ch. Feb. 16, 2011).  The plaintiff, a purchaser of a biotech company, sought damages from the target’s officers and stockholders, who were jointly liable for contractual damages under the merger agreement. On a motion to dismiss for failure to state a claim, the Court allowed the breach of contract claims to proceed against the defendants, and refused to rule on whether post-acquisition expenditures were barred by the merger agreement’s indemnification clause, which excluded special damages.

 

William Penn P’ship v. Saliba, C.A. No. 111 (Del. Feb. 9, 2011).  The Delaware Supreme Court affirmed the Chancery Court’s decision that defendants, managing members of a Delaware LLC, had breached their fiduciary duties in a self-interested transaction involving the sale of an asset of the LLC, and affirmed the award of attorneys’ fees to plaintiff members of the LLC where there were no money damages based on the value of the asset sold.

 

In re Del Monte Foods Co. S’holders Litig., Cons. C.A. No. 6027-VCL (Del.  Ch. Feb. 14, 2011).  The Court preliminarily enjoined the consummation of a merger for twenty days to allow time for a topping bid before the stockholder vote.  The Court held that breach of fiduciary duty claims against directors and aiding and abetting claims against a private equity firm that was purchasing the company had a sufficient likelihood of success to where investment bankers secretly advised both the buy-side and the sell-side of the transaction.

 

King v. Verifone Holdings, Inc., C.A. No 5047 (Del. Jan. 28, 2011).  The Supreme Court of the State of Delaware reversed a Court of Chancery decision denying an 8 Del. C. § 220 information request because the stockholder had previously initiated derivative litigation, holding that a bright line rule that such an information request must be made prior to other litigation was inconsistent with prior case law and public policy.

 

KFC National Council and Advertising Cooperative, Inc. v. KFC Corp., C.A. No. 5191-VCS (Del. Ch. Jan. 31, 2011).  Franchisees and the corporate franchisor were organized as a non-stock corporation with a Committee that had a right to vote on the national advertising campaign of the brand.  The Court of Chancery granted the plaintiff franchisees’ motion for a declaratory judgment stating that franchisees had a right to amend the advertising plan proposed by the franchisor where the certificate of incorporation of the non-stock corporation did not clearly vest the franchisor with a veto over the plan.

 

Chartis Warrantyguard, Inc. v. National Electronics Warranty, LLC, C.A. No. 5764-VCP (Del. Ch. Jan. 28, 2011).  The Court preliminarily enjoined defendants from using data that was collected in a joint venture to compete against the venture until the dispute can be resolved in arbitration.

 

Air Products and Chem., Inc. v. Airgas, Inc. et al., C.A. No. 5256-CC, (Del. Ch. Feb. 15, 2011).  The Court of Chancery dismissed all claims against director defendants for keeping a poison pill in place where the board acted in good faith and with the honest belief that the price offered in an all shares, all cash offer was inadequate.  The Court, reviewing the facts under the enhanced scrutiny test set forth in Unocal v. Mesa Petroleum Co., found that the directors acted in good faith, responded to a legally cognizable threat and that the takeover defense was proportional to the threat.

---

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : February 24th, 2011

Charles R. King v. Verifone Holdings, Inc., C.A. No. 5047 (Del. Jan. 28, 2011).  Appellant is a stockholder plaintiff who first brought a derivative action in federal court in California, alleging, inter alia, breach by directors and officers of the subject corporation of their fiduciary duties to the corporation.  The stockholder did not initially pursue an action under Section 220 of the General Corporation Law of the State of Delaware to inspect the books and records of the corporation.  The Supreme Court ruled that such a stockholder plaintiff is not barred from later bringing such a books and records action, and reversed the judgment below of the Court of Chancery.

Direct Capital Corp. v. Ultrafine Technologies, Inc., et al., C.A. No. 6139-CC (Del. Ch. Jan. 21, 2011).  In a letter opinion, the Court of Chancery, in considering the legal claims of a plaintiff pursuant to a lease agreement, reaffirmed that where the claims of a plaintiff are contractual in nature, involve a “purely legal question” and “can be remedied by money damages available in the Superior Court,” the Court of Chancery does not have jurisdiction to consider plaintiff’s claims.

Reis v. Hazelett Strip-Casting Corp., et al., C.A. No. 3552-VCL (Del. Ch. Jan. 21, 2011).  The Court found defendants, a corporation and its controlling stockholders, liable to minority stockholders who were frozen out in a reverse stock split.  The Court held that defendants failed to meet their burden under the entire fairness standard, where there were no procedural protections and no one bargained on behalf of the minority stockholders in the decision to consummate the reverse split, and where the price set as compensation for the fractional shares held by the minority stockholders was less than the pro-rata value of the shares determined at trial.

---

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : February 9th, 2011

In Re John Q. Hammons Hotels, Inc. S’holders Litig., C. A. No 758-CC (Del. Ch. Jan. 14, 2011).  The Court granted summary judgment for the defendant corporation holding that under the entire fairness standard, the 2005 sale of John Q. Hammons Hotels, Inc. was “entirely fair” to minority stockholders.  The process and price were found to be fair where the special committee that approved the transaction was independent and disinterested, highly qualified, and exercised its authority to reject offers that were insufficient to the minority stockholders.  The Court rejected claims that the mere existence of a majority stockholder that could reject the transaction was enough to taint the foregoing process. 

Great-West Investors LP v. Thomas Lee Partners L.P. et al., C. A. No. 5508-VCN (Del. Ch. Jan. 14, 2011).  Plaintiff investors sought reformation of a limited partnership agreement where defendant managers were entitled to a fee that increased by a factor of “1.05 multiplied by” the prior year’s fee.  Defendants claimed that the language of the limited partnership agreement unambiguously called for an annual increase of 105% in management fees to be paid to defendant managers, notwithstanding the alleged representation of defendants’ counsel in 2007 that this language was intended to “effect a 5% increase”.  The Court granted defendants’ motion to dismiss for failure to state a claim with regard to: a claim for reformation based on ambiguity of the contract language; breach of fiduciary duty claims; and claims based on breach of the implied covenant of good faith and fair dealing.  The Court allowed the following claims to survive:  a request for declaratory relief requiring defendant to engage in faith negotiation as specified in the limited partnership agreement before the fee escalation clause became effective; breach of contract claims; reformation based upon mutual mistake; reformation based on unilateral mistake; and reformation for fraud.

---

Recent Corporate and Alternative Entity Decisions From the Delaware Courts

Posted : January 15th, 2011

Hamilton Partners, L.P. v. Englard et al., C.A. No. 4476-VCL (Del. Ch. Dec. 15, 2010).  The Chancery Court considered a motion to dismiss derivative and double-derivative claims for breach of fiduciary duty against the directors of the New York corporation and its Delaware subsidiary, as well as a claim for aiding and abetting against the principal beneficiary of the transaction at issue, for, inter alia, lack of personal jurisdiction.  The Chancery Court granted the motion with respect to the derivative claim against the New York corporation; denied the motion with respect to the Delaware corporation; and denied the motion with regard to the aiding and abetting claim.  Denying the derivative claim, the Court held that the Delaware long-arm personal jurisdiction statute “has no purchase on directors of a New York corporation,” and notes that by its statutory language, it “applies only to ‘a corporation organized under the laws of [the State of Delaware].’”  In evaluating the double derivative claim, the Court cited to Delaware precedent, which holds that a parent corporation is “an…indispensable party in a double derivative suit.”  In analyzing the aiding and abetting claim, the Court, citing Crescent/Mach I P’rs, L.P. v. Turner, 846 A.2d 963 (Del. Ch. 2000), noted that “a single transaction is sufficient to confer jurisdiction where the claim is based on that transaction,” applying the language of the Delaware long-arm statute, which provides that a person is subject to personal jurisdiction if he or she “in person or through an agent…[t]ransacts any business…in the State.”  The Court held that the defendant “purposely availed himself of the benefits of Delaware law and subjected himself to suit,” citing In re USACafes, L.P. Litig., 600 A.2d 43 (Del. Ch. 1991), in which the Court held that the defendant should have “reasonably anticipated…that his…actions might result in the forum state exercising personal jurisdiction over him in order to adjudicate disputes arising from those actions.”

Pope Investments LLC v. Benda Pharmaceutical, Inc. et al., C.A. No. 5171-VCP (Del. Ch. Dec. 15, 2010).  The Chancery Court denied the request of a stockholder to have a receiver appointed for a Delaware corporation.  The court held that even if a plaintiff is able to demonstrate that a corporation is insolvent, appointment of a receiver “is only justified if it would serve a ‘beneficial purpose’” and that the benefits of appointing a receiver “must be weighed against the likelihood of harm that might occur if an appointment causes the [corporation]’s creditors to panic and trigger an immediate liquidation.”

Golden Telecom, Inc. v. Global GT LP et al., C.A. No. 3698 (Del. Dec. 29, 2010).  In evaluating a challenge to a Chancery Court valuation proceeding under Section 262 of the General Corporation Law of the State of Delaware, the Delaware Supreme Court held that in an appraisal proceeding, the Chancery Court owes no deference to the market price agreed upon by the parties, citing the statutory language of Section 262(h) which indicates that the Chancery Court “shall take into account all relevant factors.”  The Court stressed the necessity for an independent evaluation of the merger consideration, indicating that “inflexible rules governing appraisal provide little additional benefit in determining ‘fair value’ because of the already high costs of appraisal actions..[and] [a]ppraisal is, by design, a flexible process.”  The Court also declined to “adopt a rule that binds public companies to previously prepared company specific data in appraisal proceedings,” referring both to the Court’s previous acknowledgment of the flexible nature of appraisal proceedings and the statutory language of 262(h) which “vests the court with significant discretion to consider ‘all relevant factors,’” and noting that fairness opinions are provided as third-party evidence of “fair value” at the tender offer stage, which value may differ significantly from the court’s determination at the appraisal stage.  Finally, the Court held that the Chancery Court did not abuse its discretion in its valuation determination, and that it only does so “when either its factual findings do not have record support or its valuation is clearly wrong.”

Narrowstep Inc. v. Onstream Meda Corp., C.A. No. 5114-VCP (Del. Ch. Dec, 22, 2010).  The court dismissed claims based on the covenant of good faith and fair dealing in a dispute regarding a merger agreement that required the parties to use best efforts to close the merger expeditiously and ceded control of the target to the defendant.  The court dismissed the implied covenant claims because the contract specified that the merger date would based on the satisfaction of certain conditions, and refused to invoke the covenant of good faith and fair dealing to override those terms.  Claims based on unjust enrichment, conversion of certain property and fraud in the inducement were not dismissed.

Techmer Accel Holdings, LLC v. Amer, C. A. No. 4905-VCN (Del. Ch. Dec. 29, 2010).  The court granted summary judgment to the plaintiffs, holding that 6 Del. C. § 17-804  applied to the situation where a limited partnership made a distribution to limited partners pursuant to 6 Del. C. § 17-607, but subsequently allowed the remaining assets to be depleted before dissolution.  Because the general partner of the limited partnership filed its certificate of cancellation before the effective date of the certificate of cancellation of the limited partnership, the court held that the limited partnership was canceled before the date of its general partners’ cancellation.  The court appointed a receiver under 6 Del. C. § 17-805 to wind up the affairs of the partnership.

---

Recent Corporate and Alternative Entity Decisions from the Delaware Courts

Posted : October 25th, 2010

Vila v. BVWEBTIES LLC, C.A. No. 4308-VCS (Del. Ch. Oct. 1, 2010).  The Court granted a judicial dissolution of a Delaware limited liability company under, 6 Del. C. § 18-802, where the two managers of the company were unable to agree on a business strategy with respect to operating a home-improvement themed web site.  The Court also denied several counter claims relating to breach of the limited liability company agreement and fiduciary duties, where the defendant waived such claims by his own actions and where the claims were not supported by adequate evidence.

Versata Enterprises, Inc. v. Selecta, Inc., No. 193,2010 (Del. Oct. 4, 2010).  The Supreme Court of the State of Delaware affirmed the Court of Chancery’s decision that the protection of net operating loss carry-forwards tax deductions (“NOLs”) “may be an appropriate corporate policy that merits a defensive response when they are threatened.” Versata at *31.  The Court reviewed the rights plan under enhanced scrutiny standard, but held that protection of NOLs was reasonable where IRS regulations stated that a corporate ownership change triggered a loss of the NOLs, and that the rights plan was not preclusive or coercive because it did not stifle proxy contests and was a proportionate response to the threat of the loss of the NOLs.

In re Hanover Direct, Inc. S’holders Litig., Cons. C.A. 1969-CC (Del. Ch. Sept . 24, 2010).  In a combined fiduciary duty and appraisal claims case, the Court found that the merger price was entirely fair where the petitioners’ expert witness’s testimony was “totally, completely unreliable” (In re Hanover Direct at * 3) and where there was no credible evidence that the merger approval process was tainted.

McReynolds v. Trilantic Capital Partners IV L.P., C.A. No. 5025-VCL, (Del. Ch. Sept. 23, 2010). The Court dismissed claims by investors seeking to withdraw from an investment fund, sponsored by the now bankrupt Lehman Bros. investment firm, dismissing, for failure to state a claim,  (1) doctrine of frustration claims arising from Lehman’s bankruptcy where the LP agreement contemplated the transfer of Lehman’s interest in the fund; (2) mutual mistake claims based on Lehman’s financial condition where plaintiffs assumed the risk of such uncertainty in the offering memorandum; and (3) claims arising under the Texas Securities Act, which were also held to be insufficient.

Avnet, Inc. v. H.I.G. Source, Inc., C.A. No. 5266-VCP (Del. Ch. Sept. 29, 2010).  The Court denied a motion for judgment on the pleadings with respect to whether to compel arbitration of a dispute over an adjustment to the purchase price of a corporate merger, where there was a question of substantive arbitrability as to whether dispute fell within the arbitration provision of the merger agreement.

In re Cogent, Inc. S’holder Litig.  C.A. No. 5780-VCP (Del. Ch. Oct. 5, 2010).  The Court denied the plaintiffs’ request for a preliminary injunction preventing the consummation of a merger, holding the plaintiffs’ were unlikely to succeed on the merits of either (1) fiduciary duty claims where the board engaged in a reasonable process to sell the company and was not biased in favor of the purchaser, deal protection provisions in the merger agreement and retention agreements with respect to senior employees did not effectively preclude a superior proposal, or (2) disclosure claims where the Court found that the information requested would not materially effect the total mix of information available.

---