Delaware Transactional Law Updates

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In Zayo Group, L.L.C. v. Latisys Holdings, L.L.C., C.A. No. 12874-VCS (Oct. 26, 2018), a buyer sued a target for breaches of representations and warranties contained in a stock purchase agreement. During the drafting of the terms of the stock purchase agreement, the buyer added a representation and warranty clause to the effect that no customers submitted written notices to manifest their intent “to cancel, terminate, materially modify, refuse to perform” the contracts with the target. Prior to closing, some customers delivered written notice of their intent not to renew their contracts with the target.

The buyer argued that non-renewal was “tantamount to termination and cancellation” and, as a result, the target was in breach of the representations and warranties. The Court found that the meaning of “terminate” was ambiguous and looked to extrinsic evidence. Given the drafting history showed that the buyer accepted target’s deletion of the phrase “or refuse to renew” from the form of representation and warranty proposed by the buyer. In addition, other sections of the stock purchase agreement indicated that “terminate” referred to the cancelation of a contract or agreement before the obligations were performed. Since renewal is distinct from termination, there was no breach of the representation and warranty.

BOTTOM LINE: Share this decision with your litigators to determine whether or not you should retain drafts of documents.


In Lexington Services Ltd. v. U.S. Patent No. 8019807 Delegate, L.L.C., C.A. No. 2018-0157-TMR (Oct. 26, 2018), a Maltese company owned a patent that was subject to a security interest. In accordance with its rights under the applicable security agreement, the secured party sold the patent when the Maltese company defaulted on its obligations to the secured party.

The Maltese company filed a lawsuit in the Chancery Court of Delaware alleging the patent was fraudulently transferred. Although the Security Agreement contained a forum-selection clause requiring the parties to bring any dispute “arising out of or in connection with [this agreement] or its subject matter or formation must be brought in Ireland”, the Maltese company argued the transferees could not invoke the forum-selection clause since they were not signatories to the security agreement. The Court reasoned that the security agreement contemplated the assignment of the patent and, as a result, the Court held that the transferees were closely related to the security agreement and could invoke the forum-selection clauses.

BOTTOM LINE: Consider including the following language in forum selection clauses which has been found by the court to unambiguously mandate exclusive jurisdiction in particular courts:

“Each party irrevocably agrees that…the Courts of…shall have exclusive jurisdiction over any dispute or claim arising out of or in connection with this agreement or its subject matter or formation (including non-contractual disputes or claims) and, for such purposes, irrevocably submits to the exclusive jurisdiction of such courts. Any proceedings, suit or action arising out of [or] in connection with this agreement shall therefore be brought in the Courts of ….”


In Wenske v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS (Nov. 13, 2018), following the discovery of bacterial contamination in their ice cream products, a limited partnership suspended production and distribution of its dairy products and paid a fine due to poor food safety policies and practices. The general partner of the limited partnership and its parent were sued for breach of the limited partnership agreement.

Noting that the limited partnership agreement vested the general partner with the exclusive authority to manage the limited partnership, the Court rejected an argument to the effect that the general partner formed a joint venture with the general partner and, as a result, was liable to the limited partners. A provision to the effect that “the [general partner] on [the partnership’s] behalf, may engage itself or another [p]artner to provide management or other services to [the partnership]” simply allowed the general partner to separately engage the services of another partner and did not reflect an agreement that the parent of the general partner would assist in the management of the limited partnership.

BOTTOM LINE: If you want the parent of a general partner liable to a limited partnership and its partners, include the obligation in the limited partnership agreement!


In Domain Associates, L.L.C. v. Shah, C.A. No. 12921-VCL (Aug. 13, 2018), a member was expelled from a member-managed LLC and argued that the Delaware Limited Liability Company Act (the “LLC Act”) required the LLC to pay him the fair value of his member interest.  The LLC and its members argued that, consistent with the right to modify the fair value requirement in the LLC Act, the LLC agreement specified the amount owed to a member upon a member’s retirement, resignation, death, incapacity or bankruptcy and should control the amount to be paid to the expelled member.

The Court found that neither the provision in the LLC agreement or the LLC Act fair value requirement applied to the expulsion. Given the LLC was member-managed, the Court looked to partnership law for guidance. The Court noted that each member benefited proportionately from the elimination of the expelled member’s interest. As a result, the LLC and its members were jointly and severally liable for the obligation to pay the value of the expelled member’s interest to the expelled member. The limitation of liability contained in the LLC Act did not change the analysis given it applies to obligations to third parties, not other members. The Court suggested that the members would have had a stronger argument against personal liability if the LLC Agreement had expressly provided that the LLC only was responsible to pay the value of the expelled member’s capital account.

BOTTOM LINE: Any checklist for drafting an llc agreement should include (1) the need to consider what to pay an expelled llc member and (2) whether llc member is personally responsible for obligations owed to other members.


In Carr v. New Enterprise Associates Inc., C.A. No. 2017-0381-AGB (Mar. 26, 2018), a corporation (the seller), sold a warrant with an option to purchase all of the stock of the corporation. The warrant transaction was conditioned upon the buyer purchasing another company in which the controlling stockholder of the seller was the largest investor. A minority stockholder sued the controlling stockholder of the seller and its directors alleging breach of fiduciary duty.

The seller argued that the transaction was a grant of the option to buy the seller and not a change in control or sale of the company subject to the dictates of Revlon. The Court rejected the idea that option transactions could never be subject to Revlon duties. Instead, the applicability of Revlon to an option transaction would likely depend on its “conditionality and specific features”. The Court suggested two examples to illustrate this point: (1) Revlon would apply when the option was unconditional and immediately exercisable; and in contrast, (2) Revlon might not apply if the option was contingent upon material contingencies that neither party could control.

BOTTOM LINE: Once again, substance over form matters. An unfettered right to exercise a “warrant” may subject a sale to Revlon duties.

Material Adverse Effect Clauses Require Specificity To Properly Reflect The Intent Of The Parties.

In Akorn, Inc. v Fresenius Kabi AG, C.A. No. 2018–0300–JTL, the Chancery Court permitted a buyer to terminate a merger agreement including language to the effect that disproportionate industry effects should be taken into account in determining whether there had been a material adverse effect.

After the execution of the merger agreement, (i) the target’s EBITDA decreased by 86% in the year after the execution of merger agreement, (ii) the target significantly changed its business operations, and (iii) the acquiror’s investigations found problems with seller quality control which could be in violation of applicable regulatory requirements.

Even if the seller could not represent that its representations in the merger agreement were true and correct at the time of closing, the merger would move forward except when such failure “would not be reasonably expected” to result in a material adverse effect.

The Court found there was evidence that the seller’s downturn exceeded that of its peers and was disproportionate to the unforeseen competition in the industry.

BOTTOM LINE: The Court suggested that the parties could have excluded specific matters from the definition of material adverse effect; take the time and make the effort to do so!

Court Will Ratify Actions Taken Promptly To Correct Errors.

In Almond et al. v. Glenhill Advisors LLC, C.A. No. 10477-CB, the Chancery Court denied post-trial claims challenging a series of transactions leading to the acquisition of a company. Prior to the acquisition, the certificate of incorporation was amended to implement a reverse stock split. After the reverse stock split, the acquiror had sufficient shares to move forward with a short-form merger. After the merger closed, it was discovered that the reverse split was mistakenly structured to reduce by a factor of 2500-to-1, instead of 50-to-1. The sole stockholder of the company remaining after the merger approved a DGCL Section 204 resolution to ratify the actions taken to cure the mistake. The former minority stockholders of the company argued that as a result of the mistake, the acquiror did not have enough shares to affect a short term merger. The Court disagreed and granted judicial ratification under DGCL Section 205 given the mistakes were unintended and the acquiror took prompt action to fix the mistakes after its discovery.

BOTTOM LINE: Acknowledge and cure mistakes promptly to reap the benefits of DGCL section 205.

Note The Difference Between Preliminary Discussions And Negotiations In The Context Of MFW Requirements.

In Olenik v. Lodzinski, C.A. No. 2017-0414-JRS, a controlling stockholder conducted discussions with a target for approximately nine months before making a formal offer. As a result, the plaintiffs argued that the controlling stockholder failed to meet the requirements of MFW which require the controlling stockholder to condition a transaction on the uncoerced approval by both an independent special committee and an informed majority of the minority stockholders in order to obtain the benefit of business judgement deference.

The Court disagreed with plaintiff’s proposition that the controlling stockholder failed to meet the requirements and noted the distinction between “preliminary discussions” and “negotiations”. The Court opined that “in most instances, ‘negotiations’ begin when a proposal is made by one party which, if accepted by the counter-party, would constitute an agreement between the parties regarding the contemplated transaction.” The requirement is triggered from the “outset of negotiation” and not by “extensive preliminary discussions”. The Court noted that the negotiation process did not start until the Company submitted an offer letter which was “the first real move in the negotiating bout”. The preliminary discussions did not amount to bargaining but just exploratory exchanges, and did not include discussions on the price, which was a distinguishing feature of negotiations.

BOTTOM LINE: You do not lose the benefit of the business judgement rule when you explore possibilities and do not address price.

When Common Law Fiduciary Duties Are Unambiguously Eliminated In A Limited Partnership Agreement, Recourse Against The General Partner Is Limited To Breach Of Contract Claims.

In Wenske et al. v. Blue Bell Creameries, Inc., C.A. No. 2017-0699-JRS, the limited partnership agreement required the general partner to “use its best efforts to conduct…business…in accordance with sound business practices in the [dairy industry]”.  When bacterial contamination was found in ice cream products, the partnership suspended production and distribution of its dairy products and was fined for poor food safety policies and practices. The plaintiffs sued the defendants including the general partner of the partnership for breach of the limited partnership agreement. The defendants argued that the limited partnership agreement did not incorporate government guidelines for the industry that the plaintiffs relied on in their pleadings. The Chancery Court ruled that the terms should be given their plain meaning and interpreted according to a reasonable person’s understanding. According to the Court, the wording “sound business practices” referred to government guidelines and accepted practices. In addition, the Court made it clear that given the partnership agreement unambiguously eliminated common-law fiduciary duties, the plaintiffs correctly characterized the claim as a breach of contract.

BOTTOM LINE: Consider including the following language in a partnership or LLC agreement which has been found by the court to unambiguously eliminate common law fiduciary duties: “[a]ny standard of care and duty imposed by this Agreement or under [DRULPA] or any applicable law, rule or regulation shall be modified, waived or limited, to the extent permitted by law, as required to permit [the general partner] to act under this Agreement or any other agreement contemplated by this Agreement and to make any decision under the authority prescribed in this Agreement, so long as the action is reasonably believed by [the general partner] to be in, or not inconsistent with, [the partnership’s] best interests.”

Parent Of Buyer Is Not Responsible To Seller For Obligations Unless The Agreement Includes Such Obligation.

In US Ecology, Inc. v. Allstate Power Vac, Inc., C.A. No. 2017-0437-AGB (June 18, 2018), the parent of the seller sued both the buyer and the buyer’s parent for reimbursement of “non-covered payments” after closing. The purchase agreement at issue did not include such an obligation.  In addition, the Chancery Court reasoned that even if there was a legal obligation to reimburse such expenses, the seller could recover against the target only given that the new parent company was an entity separate from the target.

BOTTOM LINE: If you want the parent to be obligated for the subsidiaries’ obligations, include it as a provision in the applicable agreement!

Two Or More Minority Stockholders Can Together Constitute A Control Group And Trigger Entire Fairness Review.

In In re Hansen Medical, Inc. Stockholder Litigation, C.A. No. 12316-VCMR, stockholders alleged that defendants, two stockholder who collectively owned more than 60% of the company, breached their fiduciary duty when they entered into exclusive stock purchase agreements with the acquiror and agreed to vote in favor of the merger in a squeeze-out merger. The Chancery Court found that the defendants functioned collectively as a control group and, as a result, it was conceivable that their actions were subject to the entire fairness standard.  Specifically, the Court noted that the defendants were parties to a voting agreement for almost 25 years and were identified by the acquiror as the key stockholders with whom they needed to negotiate.

BOTTOM LINE: Consider carefully the relationship among two or more minority stockholders before determining that no controlling shareholder issues are triggered.

If You Negotiate A Safe Harbor In A Limited Partnership Agreement, Follow Its Procedures!

In In re Energy Transfer Equity, L.P. Unitholder Litigation, C.A. No. 12197-VCG, the partnership agreement at issue included a provision relating to the use of a conflicts committee to establish the fairness and reasonableness of a conflicted transaction. When the partnership raised the safe harbor as a defense against a partner’s challenge to the conflicted transaction, it was discovered that members of the committee were directors or officers of the general partners’ affiliates and the committee was never reconstituted properly. As a result, the protections of the safe harbor provision were not available.

BOTTOM LINE: Do not establish safe harbor provisions if the procedures necessary to benefit from them cannot be met or will be ignored.

An Influential Minority Shareholder May Preclude Application Of The Corwin Presumption.

In In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VCS, the Chancery Court considered the status of one of the acquiror’s minority stockholder in an acquisition. The plaintiffs alleged that the minority stockholder was a conflicted controlling stockholder because of his 29.1% ownership in the target as well as his 22.1% ownership in the acquiror and his influence in the acquiror. The Court found that a minority stockholder, who was the co-founder of the acquiror and its visionary, had tremendous influence on the Board’s decision-making process. As a result, the minority stockholder was a controlling stockholder notwithstanding his small percentage ownership in the acquiror. In turn, since a majority of the Board was not disinterested or independent of the controlling stockholder, the protections of Corwin did not apply.

BOTTOM LINE: Once again, context matters; do not assume Corwin will apply simply because there is no stockholder that owns a majority of the outstanding shares.

Compliance With DGCL Section 144 Safe Harbor Provisions Does Not Ensure Application of Business Judgement Rule.

In Cumming v. Edens, C.A. No. 13007-VCS, the Court of Chancery found that when the majority of the Board was not disinterested or independent, the transaction was subject to the entire fairness standard of review.  This does not change simply because there has been compliance with DGCL Section 144 safe harbor provisions.

BOTTOM LINE: The contextual nature of whether or not a director is disinterested must always be considered!

Do You Need To Explain Why A Director Abstains From Voting?

In Appel v. Berkman, No. 316, 2017 , a stockholder alleged the Board breached their fiduciary duty when they failed to disclose why a director abstained from a vote to approve a tender offer. The Chancery Court dismissed the challenge and the Supreme Court reversed.  The director at issue was the founder, Chairman of the Board and former CEO. He believed that the mismanagement of the Company negatively affected its sale price. According to the Supreme Court, it “[was] no common thing’ when a Chairman and founder abstain[ed] from voting on the sale of the business he founded…” and this information should have been shared with the stockholders.

BOTTOM LINE: Do not disclose that “[t]o the company’s knowledge, the Chairman of the Board of Directors has not yet determined whether to tender . . . his shares” when the minutes of the board meeting provide otherwise.

Perhaps Drafts Of Documents Should Be Retained?

The Court in LSVC Holdings, LLC v. Vestcom Parent Holdings, Inc., C.A. No. 8424-VCMR, rejected the buyer’s interpretation of a provision in a stock purchase agreement that would have ignored seller’s rejection of such terms contained in drafts of the agreement. In addition to the importance of the parties’ drafting history, the decision illustrates the challenges presented when parties have to address in detail the general understanding of the parties as set forth in a letter of intent.

BOTTOM LINE: Think twice before you throw out drafts of agreements exchanged with the other party!

Remember: If You Want The Terms Of An Agreement To Be Enforced, Careful Drafting Is Key.

The Court in AIU Insurance Co., et.al. v. Philips Electronics North America Corp., et al., C.A. No. 9852-VCS reminds us that if a provision in an agreement has two or more meanings, it is ambiguous and the Court will decide its meaning.

At issue was the meaning of the word “audit” that was not defined in the agreement. As a result, the parties were in dispute as to the scope of information accessible in an “audit”.

BOTTOM LINE: The definition section of an agreement is key. Do not ignore the need to set out in detail what the parties should expect.

Careful: Shareholder Agreements Cannot Trump the Dictates of the Statute!

In Pierre Schroeder, et al. v. Philippe Buhannic, et al., C.A. No. 2017-0746-JTL, the Court was asked to consider the validity of a shareholder consent that removed a CEO and appointed a new CEO and Chairman of the Board.

Although there was a provision in a stockholder agreement that required shareholders to vote their shares to elect “three (3) representatives designated by the holders of the majority of the common stock, one of whom shall be the Chief Executive Officer of the Company”, the Court reminds us that if shareholders wish to limit the power of the board to manage the corporation, including the right to select the CEO, this power needs to be restricted in the certificate or bylaws of the corporation.

BOTTOM LINE: Do not assume that the provisions of a shareholder agreement will be enforceable without first considering (i) whether or not the provision is permitted under the DGCL, (ii) how the Delaware Courts have interpreted the relevant DGCL provision and (iii) what must be addressed in the Certificate or bylaws of the corporation to enable a shareholder agreement to address the issue.

You Must Keep Forum-Selection Clauses Consistent in Related Transaction Documents!

In SRL Mondani, LLC v. Mondani Spa Resort, Ltd., the Superior Court addressed competing forum-selection clauses found in multiple agreements made in connection with a loan facility. The defendants filed a motion to dismiss arguing that one agreement, which mandated Israel courts as the exclusive forum for all disputes (the “Iska Agreement”), superseded the forum-selection clauses in all other agreements related to the loan facility. The Court disagreed and determined that the forum-selection clause in the Iska Agreement was not applicable because the plaintiffs were not attempting to enforce the terms of the Iska Agreement. Instead, the claim being pursued by the plaintiff arose under the terms of a separate agreement that mandated Delaware as the exclusive forum for disputes. As a result, the Court denied the defendant’s motion to dismiss.

BOTTOM LINE: In order to avoid needless litigation, you should ensure that all forum-selection clauses in agreements related to the same transaction choose the same forum for the resolution of disputes!

When Applicable, the Corwin Presumption Is Nearly Impossible to Overcome

In Re Cyan, Inc. Stockholders Litigation provides an excellent example of the power of the Corwin Presumption when a shareholder vote is fully informed and uncoerced. There, the Court of Chancery dismissed a claim that board members of a Delaware corporation breached their fiduciary duty by approving a merger based on their own self-interest. The Court found that the merger at issue had been approved by a majority vote of fully informed, disinterested stockholders. As a result, the business judgment rule applied and, because the plaintiffs failed to plead that the merger constitutes waste under Delaware law, their claim was dismissed.

BOTTOM LINE: The approval of a merger by an informed, uncoerced majority of disinterested shareholders will result in the application of the business judgment rule and a likely dismissal of all post-closing fiduciary duty claims.