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Delaware Transactional Law Updates

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Kahn Deal Protections All But Foreclose a Successful Claim of Breach of Fiduciary Duty

In Re Books-A-Million, Inc. Stockholders Litigation, C.A. No. 11343-VCL (Del. Ch. Oct. 10, 2016)

The Court of Chancery addressed a claim for breach of fiduciary duty in connection with a going-private transaction that utilized the deal protections set forth by the Delaware Supreme Court in Kahn v. M&F Worldwide, Corp. The Court reiterated that the proper use of the Kahn protections makes it nearly impossible for minority shareholders to successfully claim breach of fiduciary duty against controlling shareholders or board members in a going-private transaction.  The plaintiff’s only options are to successfully allege that the Kahn protections were not satisfied or that the transaction at issue constituted waste under Delaware law.

BOTTOM LINE: The business judgment rule will apply, and all but foreclose successful claims of breach of fiduciary duty, when  (i) a transaction is conditioned on the approval of both an independent Special Committee of the Board and an informed majority of the minority stockholder vote; (ii) the Special Committee is empowered freely to select its own advisors and to say no definitively; (iii) the Special Committee meets its duty of care in negotiating fair price; and (iv) there is no coercion of the minority shareholders.

Shareholders have a Statutory Right to Remove Directors Without Cause

Jay Fretcher v. Cryo-Cell International, Inc., C.A. No. 11915-VCG (Del. Ch. Oct. 07, 2016)

The plaintiff-stockholder sued the defendant-corporation seeking a declaration that a provision in a corporation’s bylaws was illegal.  The provision at issue provided that directors could be removed by shareholders “for cause.”  However, pursuant to Section 141(k) of the Delaware General Corporation law, stockholders may remove directors “with or without cause.” After the plaintiff filed for summary judgment, the defendant-corporation amended its bylaws to remove the relevant language, which mooted the action.  In addressing the proper fee award in the mootness proceeding, the Court recognized that the bylaw provision at issue was not explicitly illegal, but was misleading to stockholders and could have a chilling effect on the exercise of their franchise under Section 141.

BOTTOM LINE: Shareholders have an absolute right to remove directors with or without cause.  A bylaw provision that speaks only to removal of directors “with cause,” without mentioning the removal of directors “without cause,” is misleading and potentially illegal.  A bylaw setting forth the process a shareholder may use to remove directors must be drafted to make clear that “cause” is not a requisite for such removal.

Prohibiting Dissolution Requires More Than a Standard Representation

The Huff Energy Fund, L.P. v. Gershen, C.A. No. 11116-VCS (Del. Ch. Sep. 29, 2016)

The Delaware Court of Chancery was asked to determine whether directors of a Delaware corporation (the “Corporation”) could be found to have individually breached a Shareholders Agreement (the “Agreement”) between the Corporation and its largest shareholder (the “Shareholder”) based on the directors’ signing the Agreement.  The Court ruled that it was “clear from the face of the [Agreement]” that the directors did not sign the Agreement in their individual capacity, but rather signed the Agreement on behalf of the Corporation.  As such, they were not party to the Agreement under Delaware law and could not be found to have breached its terms.  

The Court also addressed a claim that the Corporation breached the Agreement by adopting a Plan of Dissolution to dissolve the Corporation.  The plaintiffs argued that the Plan of Dissolution violated, among other provisions, a clause that stated that the Corporation “shall continue to exist and shall remain in good standing under the laws of its state of incorporation and under the laws of any state in which [it] conducts business.”  The Court disagreed, stating: the clause “appears to be nothing more than a recognition by [the Corporation] that it will remain in good standing as a Delaware corporation.  It speaks to a commitment to make necessary filings and pay required fees and expenses. It is a stretch to read more into the provision, particularly the commitment to exist ‘come what may’ that [the plaintiff] ascribes to it.”

BOTTOM LINE: If you wish a contract to be enforceable against a certain party, that party must sign the contract in its individual capacity.  The fact that the individual has signed as a representative of another is simply not sufficient.  Additionally, a standard representation that a corporation will remain in existence in good standing is not a prohibition of its dissolution or cancellation.  In order to ensure such a restriction, specific representations must be carefully drafted and included in the relevant document.

Delaware Statutory Trust Act Trumped by Contract: Transactional Practitioners Must Consult Delaware LLC and LP Law when Drafting A Trust Agreement

Grand Acquisition, LLC v. Passco Indian Springs DST, C.A. No. 12003-VCMR (Del. Ch. August 26, 2016) (Revised: September 7, 2016)

The Delaware Court of Chancery was asked to determine whether the beneficial owner (the “LLC”) of a statutory trust (the “Trust”) had the right to inspect the books and records of the trust. The answer depended upon whether the Trust Agreement of the Trust incorporated the terms of 12 Del. C. § 3819, which authorizes restriction to access under certain circumstances. The Court determined that the Trust Agreement did not incorporate the restrictions permissible under § 3819, and, as a result, access could not be restricted. In so doing, the Court relied upon judicial precedent holding that a contractual books and records right in a limited liability company or limited partnership is independent of the relevant statutory right.

BOTTOM LINE: Like Delaware LLCs and LPs, Delaware statutory trusts may create rights under their Trust Agreements separate and apart from their statutory rights. In such instances, the relevant statutory rights will be inapplicable, assuming the Delaware Statutory Trust Act permits modification.

Informed and Uncoerced Shareholder Approval of a Merger Requires Application of the Business Judgment Rule to Post-Closing Monetary Damages Suits Not Involving a Conflicted Controller

City of Miami General Employees’ and Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB (Del. Ch. August 24, 2016)

The Court of Chancery applied the business judgment rule to dismiss the plaintiff’s post-closing monetary damages claims in connection with a challenged merger that was approved by a majority of disinterested, informed, and uncoerced shareholders. The Court stated: “[P]laintiff’s claims for post-closing damages against [defendant] directors and officers are subject to the business judgment presumption under the Delaware Supreme Court’s decision in Corwin v. KKR Financial Holdings LLC because of the legal effect of the stockholder vote, and that judicial review of plaintiff’s fiduciary duty claims (and related aiding and abetting claims) thus ends there.”

The Court of Chancery analyzed and refined the same principle in a separate opinion published one day after the court’s decision in the case above. In Larkin v. Shah, former shareholders of Auspex Pharmaceuticals, Inc. filed suit for post-closing monetary damages in connection with the 2015 acquisition of Auspex (the “Merger”), which was approved by a majority of Auspex’s disinterested shareholders. The plaintiffs alleged that the directors of Auspex breached their fiduciary duties by entering into the first all-cash deal they could land without regard for other superior offers. They contended that the Corwin decision, which held that the business judgment rule applies to “a transaction not subject to the entire fairness standard, that is approved by a fully informed, uncoerced vote of the disinterested stockholders,” did not apply to any transactions which are subject to entire fairness. The Court disagreed and found that the only transactions subject to entire fairness that cannot be cleansed by proper stockholder approval are those involving a conflicted controller. The Court concluded that because the Merger did not involve a conflicted controller, the Corwin decision applied and the business judgment rule was the appropriate standard of review.

BOTTOM LINE: The business judgment standard applies to transactions subject to enhanced scrutiny if a majority of disinterested, uncoerced stockholders approve the transaction unless the challenged transaction involves a conflicted controller. This application of the rule may not be rebutted. Therefore, if a Board of Directors discloses all information related to the conflict to minority shareholders and they approve the transaction anyway, the plaintiff-shareholders seeking relief must overcome the steep burden of the business judgment rule. The only practical way the plaintiffs will be able to accomplish this is by pleading facts showing the stockholder vote was not informed, was coerced, or that a conflicted controller was in fact at issue.

But My Name is on the List! Keeping an Accurate Stock Ledger is Important

James Pogue v. Hybrid Energy, Inc., C.A. No. 11563-VCG (Del. Ch. August 5, 2016)

The Court of Chancery addressed an alleged shareholder’s claim to inspect the books and records of the defendant entity, Hybrid Energy, Inc. (“Hybrid”). The plaintiff claimed that Hybrid had issued him a stock certificate evidencing ownership of 1 million shares of Hybrid common stock. The plaintiff was also listed as a shareholder on Hybrid’s corporate stock ledger. However, at the time the plaintiff’s alleged stock certificate was issued, Hybrid’s Certificate of Incorporation authorized only 1,500 shares of common stock, all of which were already issued to someone other than the plaintiff. Nevertheless, the Court determined that the plaintiff’s name appearing on Hybrid’s share ledger was enough to create a rebuttable presumption that he was a shareholder entitled to inspect the books and records of Hybrid. The Court went on to find, however, that Hybrid had put forth enough evidence to rebut the presumption and the plaintiff was not entitled to access the books and records.

BOTTOM LINE: This case serves as a reminder that Delaware corporations must keep an accurate stock ledger and books and records in order to avoid numerous potential issues. The appearance of a name on a corporation’s stock ledger will create a presumption, only rebuttable by other evidence to the contrary, that the person so named is a shareholder of the company.

What’s in a Name? Officer Titles Matter in Corporations

Aleynikov v. The Goldman Sachs Group, Inc., C.A. No. 10636-VCL (Del. Ch. July 13, 2016) POST-TRIAL ORDER AND FINAL JUDGEMENT

The Court of Chancery analyzed a claim for advancement made by a former computer programmer (“Aleynikov”) of Goldman, Sachs & Co., a subsidiary of The Goldman Sachs Group, Inc. (“Goldman Parent”). Despite not having any managerial or supervisory responsibilities, Aleynikov held the title of “Vice President.” He argued that he was entitled to advancement pursuant to the bylaws of Goldman Parent, which provided for advancement and indemnification to the “fullest extent permitted by law” to all directors and officers of any subsidiary of Goldman Parent. The bylaws defied “officers” of Goldman Parent subsidiaries to include “in addition to any officer of such entity, any person serving in a similar capacity or as manager of such entity.”

The Court analyzed the definition of the term “officers” in the context of the Goldman Parent’s bylaws and the Delaware General Corporation Law and concluded that Aleynikov should be considered an officer. The Court noted that “Goldman Parent and its subsidiaries created ambiguity about the scope of the officer designation by handing out the title ‘Vice President’ freely to their employees.”

BOTTOM LINE: An ambiguity in the unilaterally drafted organizational documents of a parent company will be construed against the Parent company. In order to protect itself from ambiguity and unintended liability, a parent company’s organizational documents that govern subsidiaries must align clearly with the policies and governance of those subsidiaries.

The Good Faith Decision that a Closing Opinion Cannot be Delivered will Not be Met with Liability

The Williams Companies, Inc. v. Energy Transfer Equity, L.P., C.A. No. 12337-VCG & C.A. No. 12168-VCG (Del. Ch. June 24, 2016)

The Court of Chancery addressed the terms of a Merger Agreement executed in September 2015. Pursuant to the Merger Agreement, Energy Transfer Equity, L.P. (“ETE”), a Delaware limited partnership, would acquire The Williams Company, a Delaware corporation (“Williams”). Both ETE and Williams are substantial participants in the gas pipeline business.

As a condition precedent to the merger, Latham & Watkins LLP, counsel to ETC (“Latham”) was required to deliver a legal opinion to both parties to the effect that specific transactions within the merger agreement “should” be treated as a tax-free exchange under Section 721(a) of the Internal Revenue Code (the “721 Opinion”). The merger agreement required that ETC use “commercially reasonable efforts” to obtain the 721 Opinion, but failed to define the phrase “commercially reasonable efforts.”

In March 2016, after a significant decline in the energy market and the value of assets being transferred by Williams in the merger, Latham realized that it could not issue the 721 Opinion for tax-based reasons. In April 2016, Williams filed suit against ETC alleging that it had failed to use commercially reasonable efforts to obtain the 721 Opinion.

Although Latham was not named as a defendant, the Court began its analysis by ruling that Latham acted in good faith, noting that Latham devoted over 1000 attorney hours to determining whether the 721 Opinion could be delivered. Next, the Court determined that ETE’s efforts to obtain the 721 Opinion were commercially reasonable because they were “objectively reasonable” and there were no actions that ETC could have taken to make Latham issue the 721 Opinion.

BOTTOM LINE: The importance of choosing diligent and experienced counsel to issue closing opinions cannot be overstated. If the counsel requested to provide the opinion fails to exercise due diligence and determine in good faith whether it can or cannot provide the opinion post-execution of a merger agreement, the counsel’s client may be liable for failing to exercise “commercially reasonable efforts” to obtain the opinion.

Bad Faith of an Independent, Disinterested Director is Extremely Difficult to Prove

In Re Chelsea Therapeutics International Ltd. Stockholders Litigation, Consol. C.A. No. 9640-VCG (Del. Ch. May 20, 2016)

The Court of Chancery addressed a class action suit which alleged a breach of the duty of loyalty by several independent, disinterested members of the Board of Chelsea Therapeutic International, Ltd. (“Chelsea”).  The stockholders claimed the defendants acted in bad faith by knowingly selling Chelsea significantly below its standalone value, ignoring more favorable financial projections for the company, and instructing Chelsea’s financial advisors to ignore certain financial projections.

The Court of Chancery, noting that the application of bad-faith analysis was a “hazy jurisprudence,” rejected the plaintiffs’ arguments.  The Court found that the plaintiffs had failed to state a bad faith claim, which requires “an extreme set of facts to establish that disinterested directors were intentionally disregarding their duties, or that the decision under attack was so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.”  The Court reasoned that the projections ignored by the defendants were “highly speculative” and the defendants’ choice to ignore them was not “without the bounds of reason.”

What is Agreed Upon Trumps What is Objectively Fair in Alternative Entities

Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., et al C.A. No. 11603-VCG (Del. Ch. May 11, 2016)

A limited partner (the “LP”) in a Delaware limited partnership (the “Company”) filed suit against the general partner (the “GP”) of the Company for breach of the Company’s Limited Partnership Agreement (the “LP Agreement”). The LP claimed that the GP failed to ensure that a conflicted transaction between the Company and the GP’s parent company was “fair and reasonable” as was required by the LP Agreement.

The Court of Chancery rejected the LP’s claim. The Court reasoned that the conflicted transaction was cleansed by the approval of a special committee under the terms of the LP Agreement, which stated:

“Any conflict of interest and any resolution of such conflict of interest shall be conclusively deemed fair and reasonable to the Partnership if such conflict of interest or resolution is (i) approved by Special Approval (as long as the material facts known to the General Partner or any of its Affiliates regarding any proposed transaction were disclosed to the Conflicts Committee at the time it gave its approval) . . . .”

BOTTOM LINE: In the alternative entity context, you must only agree to terms by which you are willing to be bound and you should always consult counsel as to the advisability and fairness of all terms. Delaware courts will enforce the terms of an alternative entity’s constitutional documents whether or not they are objectively fair.

Potential Benefits of the Delaware Blockchain Initiative

On May 2, 2016, Governor Jack Markell declared his support for the Delaware Blockchain Initiative (the “Blockchain Initiative”) which would allow Delaware corporations to issue corporate shares using the same technology that powers the online currency Bitcoin.  By creating a single digital ledger of transactions that is shared among a network of computers, the hope is that blockchain technology will simplify the process of issuing shares of stock.

Currently, financial institutions’ databases are isolated from one another.  In order to update one database, the assistance or approval of another financial institution is often required. In contrast, each participant that uses the blockchain technology will maintain a complete copy of a single ledger. In accordance with the terms of a consensus protocol system, participants will act collectively to validate and record transactions in the single ledger.  As a result, given no intermediaries are necessary, the costs and timing associated with them are eliminated.

Bottom Line: Although a novel and potentially beneficial tool, the General Corporation Law of the State of Delaware (“DGCL”) does not permit the authorization of blockchain-based shares.  The members of the Blockchain Initiative will have to work closely with the Delaware Corporation Law Council, of which Ellisa Habbart is a member, to consider and develop amendments to the DGCL permitting the issuance of such shares.

 

Keep Corporate Language Out of Your LLC Agreement!

Document: Obeid v. Hogan, C.A. No. 11900-VCL (Del. Ch. Apr. 27, 2016)

The Court of Chancery examined the operating agreements of two Delaware limited liability companies (“LLCs”) to determine whether a third party could serve as the sole member of a special litigation committee in each LLC.

One of the two LLCs adopted a governance structure mimicking that of a corporation and using language drawn directly from the corporate domain.  It established a manager-managed governance structure that empowered a “Corporate Board” to act as the sole manager.  The “Corporate Board” was authorized to designate committees of “one or more of the Directors of the Company.”  The Court ruled that such language required the Court to apply corporate precedents, including the prohibition against non-directors acting on a special litigation committee.

The second LLC established a similar management structure. Its LLC Agreement provided that “the powers of the Company shall be exercised by or under the authority, and the business and affairs of the Company shall be managed by, one or more Managers.”  The Court determined that provisions of the LLC, taken as a whole, addressed the issue by expressly limiting the power of the managers to delegate their core governance functions.  As a result, only managers could serve on a special litigation committee.

Bottom Line: If the parties to an LLC wish to avoid the consequences of corporate precedents, do not include language typically associated with a corporation in an LLC Agreement.  In addition, the LLC Agreement should include provisions that address if and how delegation is permitted. 

“Fees on Fees” Are Not Available Until Directors and Officers Perfect Their Right to Advancement

 Wong v. USES Holding Corp., C.A. No. 11475 (Del. Ch. Apr. 5, 2016)

The Court of Chancery was asked to determine whether a former director and former officer were entitled to recover all fees they incurred to contest their former corporation’s refusal to provide advancement. This is commonly known as “fees on fees.” The bylaws of the corporation provided:

[I]f the Delaware Statute requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer . . . shall be made only upon delivery to the Corporation of an undertaking . . . by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision . . . that such indemnitee is not entitled to be indemnified . . . .

The corporation argued that plaintiffs filed suit for advancement prematurely.  The bylaws provided the corporation with 60 days to respond to a request for fees on fees and the suit was filed only 35 days after the request for indemnification was delivered. The court disagreed and interpreted the bylaw to mean that the corporation had 60 days to consider a request for advancement.  However, since the corporation had rejected the claim for advancement before the end of the 60-day period, there was no need for the plaintiffs to wait 60 days for their rights to accrue.

BOTTOM LINE: “Fees on Fees” begin to accrue on the date the director or officer complies with the undertakings required in the corporation’s bylaws and the DCGL. Care must be taken to precisely set forth the conditions that must be fulfilled by the indemnitee.

Waiving Goodbye to Fiduciary Duty Claims

Dieckman v. Regency GP LP, C.A. No. 11130 (Del. Ch. Mar. 29, 2016)

The Court of Chancery analyzed a limited partnership agreement that eliminated all fiduciary duties but included a contractual governance structure. The governance structure contained a number of safe harbors that, if satisfied, “cleansed” potentially conflicted transactions. A former unit holder of the limited partnership (the “LP”) claimed that the General Partner of the LP violated the “good faith” contractual standard set forth in the LP agreement by favoring the interests of its affiliates in a unit-for-unit merger (the “Merger”).

The LP Agreement mandated that “whenever the General Partner makes a determination or takes any action, it must do so in good faith.”  One of the safe harbors available cleansed a potentially conflicted transaction if it was “approved by the vote of a majority of the [unaffiliated] Common Units . . . .”

Although a majority of unaffiliated common units approved the Merger, the former unitholder argued the safe harbor did not apply because the unitholders were not fully informed about the transaction. The Court disagreed and determined it would be “inappropriate to reinsert the duty of disclosure or any other common law disclosure requirements into the unitholder approval safe harbor” based on the following language of the LP Agreement:

Except as expressly set forth in this Agreement, neither the General Partner nor any other Indemnitee shall have any duties or liabilities, including fiduciary duties, to the Partnership or any Limited Partner and the provisions of this Agreement, to the extent that they restrict, eliminate or otherwise modify the duties and liabilities, including fiduciary duties, of the General Partner or any other Indemnitee otherwise existing at law or in equity, are agreed by the Partners to replace such other duties and liabilities of the General Partner or such other Indemnitee.

BOTTOM LINE: A properly drafted LP Agreement can foreclose all claims of breach of fiduciary duty, including the duty of disclosure.

Do You Really Want to Indemnify Former Directors and Officers?

Marino v. Patriot Rail Company LLC, C.A. No. 11605 (Del. Ch. Feb. 29, 2016)

The Court of Chancery addressed a company’s attempt to avoid advancing expenses to a former director based on language found in the company’s Certificate of Incorporation. The company contended that the following provision required advancement be provided only to current officers and directors: “This Corporation shall indemnify and shall advance expenses on behalf of its officers and directors to the fullest extent permitted by law in existence either now or hereafter.” The Court disagreed with this argument and found that the language noted above mandated advancement to both present and former fiduciaries.

BOTTOM LINE: If you wish to avoid advancement obligations to former fiduciaries, the certificate of incorporation must include explicit language to the effect that (a) the advancement/indemnification provision can be amended retroactively or (b) directors and officers lose the right to advancement upon resignation, retirement, or removal, even if the claim at issue arose before their resignation, retirement, or removal.

Broadening the Jurisdictional Basis Over Delaware Officers and Directors: Delaware Supreme Court Overrules Thirty-Year-Old Precedent

Hazout v. Ting, No. 353, 2015 (February 26, 2016)

The Delaware Supreme Court determined that the statutory basis for finding jurisdiction over Delaware directors and officers was more expansive than it has been interpreted to be by Delaware courts for over thirty years. The governing statute at issue in this case, 10 Del. C. § 3114, provides that non-resident officers and directors of Delaware corporations are deemed to have consented to personal jurisdiction in: (1) all civil actions brought in Delaware, by or on behalf, or against a Delaware corporation, in which such director or officer “is a necessary or proper party” or (2) in any action against such director or officer for violation of a duty in such capacity. However, the Court of Chancery determined in 1980 that only subpart (2) was an applicable means of finding jurisdiction, effectively reading the language of subpart (1) out of the statute.

The Court noted that it had never had occasion to consider the precise issue before it, but found that the General Assembly clearly intended there to be two sets of categories in which directors and officers consented to jurisdiction based on the plain language of Section 3114.  The Court also addressed the argument that the “necessary and proper” category of cases was unconstitutionally broad by determining that the threat could be resolved by applying the “minimum contacts” analysis set forth in International Shoe.

Bottom Line: Non-resident directors and officers of Delaware corporations will be subject to personal jurisdiction in actions brought in Delaware where the corporation is properly before the Court and the fiduciaries are alleged to have used their corporate position to commit wrongs on behalf of the company.

​How To Foreclose Claims of Fraud Based on Statements Made Outside the Four Corners of a Contract

FdG Logistics LLC v. A&R Logistics Holdings, Inc. C.A. No. 9706-CB (February 23, 2016)

The Court of Chancery denied the Sellers’ motion to dismiss the Buyer’s claim of fraud based on statements made outside the terms of a merger agreement. The Court also granted the Sellers’ motion to dismiss Buyer’s claim that the Sellers violated the Delaware Securities Act.

1. Fraud Claims Based on Statements Made Outside the Terms of a Contract Can Only Be Foreclosed by an Affirmative Disclaimer of Reliance by the Party Alleging Fraud

Although fraud claims based on a contract can be foreclosed by an affirmative disclaimer of reliance by the party alleging fraud, the merger agreement contained no such disclaimer.

The Court cited the following example of an effective disclaimer:

[THE] REPRESENTATIONS AND WARRANTIES [FOUND WITHIN THIS AGREEMENT] CONSTITUTE THE SOLE AND EXCLUSIVE REPRESENTATIONS AND WARRANTIES . . . TO THE BUYER IN CONNECTION WITH THE TRANSACTION, AND THE BUYER UNDERSTANDS, ACKNOWLEDGES, AND AGREES THAT ALL . . . REPRESENTATIONS AND WARRANTIES OF ANY KIND OR NATURE EXPRESS OR IMPLIED (INCLUDING, BUT NOT LIMITED TO, ANY RELATING TO THE FUTURE OR HISTORICAL FINANCIAL CONDITION, RESULTS OF OPERATIONS, ASSETS OR LIABILITIES OR PROSPECTS [OF SELLER]) [NOT EXPRESSLY SET FORTH HEREIN] ARE SPECIFICALLY DISCLAIMED BY THE [SELLER] PARTIES.

If, in contrast to the above, a disclaimer fails to include (i) what the party claiming fraud is relying upon when it decides to enter into the agreement or (ii) that the party claiming fraud was not relying on any representations made outside of the agreement, it is insufficient to foreclose fraud claims based on statements or omissions made outside the terms of the contract. In this case, the following provision was held to be insufficient because it did not contain the language highlighted above:

EXCEPT AS EXPRESSLY SET FORTH IN THIS ARTICLE 5, THE [SELLER] MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AT LAW OR IN EQUITY AND ANY SUCH OTHER REPRESENTATIONS OR WARRANTIES ARE HEREBY EXPRESSLY DISCLAIMED INCLUDING ANY IMPLIED REPRESENTATION OR WARRANTY AS TO CONDITION, MERCHANTABILITY, SUITABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NOTWITHSTANDING ANYTHING TO THE CONTRARY, (A) THE [SELLER] SHALL NOT BE DEEMED TO MAKE TO BUYER ANY REPRESENTATION OR WARRANTY OTHER THAN AS EXPRESSLY MADE BY THE [SELLER] IN THIS AGREEMENT. . . .

Bottom Line: In order to foreclose claims of fraud based on statements or omissions made outside the terms of a contract, the contract must contain an affirmative disclaimer that either: (1) specifically includes what the party claiming fraud is relying upon when it decides to enter into the agreement or (2) that the party claiming fraud was not relying on any representations made outside of the agreement.

2. 6 Del. C. § 2708 Cannot Be Used to Trump Inherent Jurisdictional Limitations Found in Delaware Statutes

The Court in FdG Logistics LLC also addressed whether the Delaware Securities Act applied automatically to the merger agreement because the merger agreement included an election under 6 Del. C. § 2708. Section 2708 permits parties to agree in writing that a contract will be governed by Delaware law without regard to principles of conflict of law, as long as the contract at issue involves $100,000 or more. In contrast, the Delaware Securities Act applies only where there is a sufficient nexus between Delaware and the transaction at issue.

The plaintiffs argued that the nexus requirement of the Delaware Securities Act did not apply due to the Section 2708 Delaware choice-of-law provision in the merger agreement. The Court disagreed and found that Section 2708 cannot be used to automatically satisfy jurisdictional requirements found in Delaware statutes.

Bottom Line: A Section 2708 choice-of-law provision will not eliminate the need to comply with the jurisdictional requirements in Delaware statutes such as the Delaware Securities Act. 

Clearly Drafted Exclusive Forum Provisions That Choose the Courts of a Non-Delaware Jurisdiction Will Be Upheld Even if They Encompass Disputes Concerning the Internal Affairs of a Delaware Corporation

Bonanno v. VTB Holdings, Inc. C.A. No. 10681-VCN (February 8, 2016)

The Court of Chancery performed an extensive analysis of the application and scope of a forum selection provision found in a Stock Purchase Agreement (“SPA”) governed by New York law.

The forum selection provision provided:

Each of the parties hereto hereby irrevocably submit[s] to the jurisdiction of the courts of the State of New York and the . . . United States District Court for the Southern District of New York solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby and thereby. Each of the parties hereto irrevocably agrees that all claims in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby and thereby, or with respect to any such action or proceeding, shall be heard and determined in such a New York State or federal court, and that such jurisdiction of such courts with respect thereto shall be exclusive, except solely to the extent that all such courts shall lawfully decline to exercise such jurisdiction.

The Court determined that this forum selection provision was “clearly mandatory” under both Delaware and New York law. In addition, the Court found that the provision applied not only to the SPA but also to other agreements referred to in the SPA.

Significantly, the Court rejected the plaintiff’s argument that enforcing the forum selection clause in documents such as a right of first refusal would undermine Delaware’s interest in regulating the relationships between a corporation and its directors, officers, and shareholders.  For support, the Court relied upon DGCL Section 115, which was adopted in August 2015.  The Court determined that Section 115 precludes the use of certain types of exclusive forum selection provisions in a corporation’s certificate of incorporation or bylaws only; it does not impose the same restriction on forum selection provisions in other documents.

Bottom Line:  In transactions involving several related documents, it is important to ensure consistency among the forum selection provisions in each document.  This concern is heightened when one forum selection provision purports to apply not only to the document in which it appears, but also documents referred to therein.  Additionally, in order to guarantee that internal corporate claims of a Delaware company are not decided by courts in foreign jurisdictions, a forum selection clause should expressly choose Delaware as the exclusive forum for such actions.

​The Scope of DGCL Section 205 is Very Broad

Knoll Capital Management L.P. v. Advaxis, Inc. C.A. No. 11417-VCN (January 29, 2016)

The Court of Chancery examined the broad scope of recently amended Sections 204 and 205 of the Delaware General Corporation Law.  In Knoll Capital, the plaintiff company (“KCM”) brought suit seeking to enforce an oral agreement pursuant to which the defendant company (“Advaxis”) offered to sell 1.66 million shares of its unregistered common stock to KCM.  In dismissing Advaxis’s motion to dismiss the claim, the Court determined that the lack of a written instrument evidencing the share purchase and Advaxis’s failure to obtain board approval to issue stock was a “defective corporate act” under Section 204.  Thus, it could be ratified by the Court under Section 205.

Bottom Line: Although DGCL Sections 204 and 205 provide the Delaware courts with broad authority to ratify a corporate defective act, including invalid oral agreements to issue corporate stock, no purchaser should rely upon an oral stock-purchase agreement.

 

​​Win the Contractual Fee-Shifting Battle Even If You Lose The War

Avaya, Inc. v. Charter Communications Holding Company, LLC, C.A. No. 10568-VCN (January 29, 2016)

The Court of Chancery interpreted a fee-shifting provision found in a Master Purchase/Service Agreement (the “MPSA”).  The provision provided:

“In the event that either party commences any action or proceeding to enforce it’s [sic] rights under this Agreement, the prevailing party shall be entitled to recover its costs and reasonable attorneys’ fees.”

The Court determined that this language required payment of the prevailing party’s attorneys’ fees in each separate action brought by any prevailing party.  This included early disputes regarding proper venue to actions resulting in final resolution of the merits of the case. The Court noted that in complicated litigation such as the case before it, it made sense to wait until a decision on the merits of the case was issued before shifting attorney’s fees.  However, such a decision could not be reconciled with the plain language of the MPSA.

Bottom Line: Fee-shifting provisions that mandate legal fees be paid to the “Prevailing Party” in “any Action” taken to enforce contractual rights apply to each and every action related to the enforcement of such rights.  Parties who want to use a fee-shifting provision in business agreements, but want it to apply only upon the final resolution of the merits of the case, must include a “more encompassing reference to substantive dispute conclusion (or the final merit-based litigation outcome).”