The doctrine of waiver is fairly straightforward.  Its application, on the other hand, can prove to be not so simple.

The recent decision of Stephen W. Bomberger v. Benchmark Builders, Inc., et al., C.A. No. 11572-VCMR (Del. Ch. Aug. 19, 2016), reflects the potential difficulty in applying the doctrine to corporate acts, and more importantly, pleading such a claim.  In Bomberger, the Court ruled upon Defendants’ motion to dismiss a complaint filed by a stockholder seeking fair value of his stock post-termination, requesting among other things a declaration that the company waived its contractual right to reimburse a stockholder with the lower of the book value of his stock, and the amount originally paid for such stock.

Background

Bomberger, along with three brothers Francis, Richard, and Eugene Julian, co-founded Defendant Benchmark Builders (“Benchmark” or the “Company”) in 1988.  As the Company’s principal stockholders, the individuals subsequently entered into the Agreement of the Principal Shareholders of Benchmark Builders, Inc., dated March 2, 1994 (the “Shareholders Agreement”). Under the Shareholders Agreement, if a stockholder’s employment with Benchmark is terminated for any reason other than those specified therein, the Company has the right to repurchase such Benchmark stock at the lower of either the original purchase price or the stock’s current net book value.

In 2015, Bomberger’s employment with Benchmark was terminated. Later that month, Francis, on behalf of Benchmark’s board of directors (the “Board”) offered to repurchase Bomberger’s shares for $747 a share. Bomberger refused and asserted that his shares had a net book value of $3,925.15 per share. Benchmark responded by informing Bomberger that it was exercising its right under the Shareholders Agreement to repurchase his shares for the price he originally paid, at $100 per share.

In October 2015, Bomberger filed the instant action asserting four claims against Benchmark, Francis, Richard, William Alexander, William J. DiMondi, Dean C. Pappas, and Kang Development, LLC (collectively, “Defendants”).  Those claims include: (i) a declaration that Benchmark waived its right under the Shareholders Agreement to repurchase Bomberger’s shares for the amount he originally paid; (ii) breach of fiduciary duty claim against the Company’s board; (iii) promissory estoppel claim against Benchmark; and (iv) specific performance against Kang Development, LLC.  Defendants filed a motion to dismiss the Complaint under Court of Chancery Rule 12(b)(6).

Analysis

In Count I of the Complaint, Bomberger sought a declaration that Benchmark waived its right under the Shareholders Agreement to repurchase Bomberger’s shares for the price he originally paid.  Bomberger relied upon a prior Court decision involving substantially the same parties, Julian v. Eastern States Construction Service, Inc. (“Julian I”), 2008 WL 2673300 (Del. Ch. July 8, 2008), to support his contention that the Company’s prior interactions with Eugene Julian in a related situation resulted in a waiver of its repurchase right under the Shareholders Agreement.

In Julian I, the Court addressed a dispute between the three Julian brothers that culminated in Eugene’s termination from Benchmark in 2003. Because “by the end of 2003, [Eugene] no longer had a formal relationship with Benchmark other than as a stockholder[,] . . . Benchmark had the right to demand the reacquisition of [Eugene’s] Benchmark shares” under the Shareholders Agreement. The Court found, however, that “Benchmark knew of, and intentionally chose not to enforce, this right . . . to demand the buy-back of [Eugene’s] Benchmark shares,” until late 2005 or early 2006.

Bomberger argued that the Company’s delay in seeking to repurchase Eugene’s shares (the “2003 Waiver”) and the Board’s February 10, 2006 express waiver of the Company’s right to repurchase Eugene’s shares at his original repurchase price (the “2006 Waiver”) constitute permanent waivers of the Company’s right to repurchase Benchmark shares under the Shareholders Agreement at the lower of the original purchase price and the net book value.

The Court found that Bomberger misapplied and misconstrued Julian I.  That decision did not apply because here, the Company promptly sought to repurchase Bomberger’s shares within 3 months, whereas in Julian I, the Company delayed over two years.

The Court granted the motion to dismiss to the extent that the Company waived its right to seek repurchase of Bomberger’s shares in this instance.  However, the Court found that whether the Company intended to permanently waive that right was a separate question.  The Complaint did not include any allegations regarding whether the Board, at the time of the 2006 Waiver, intended to extend that waiver to all Benchmark stockholders, or solely to Eugene. Because, however, the Complaint adequately alleged that the 2006 Waiver constituted an express waiver, that aspect of Count I is dismissed, but without prejudice to file an amended complaint to include allegations that the Board intended to extend the waiver to all Benchmark stockholders.

In sum, this decision demonstrates that whether an entity waived its right to enforce contractual rights under a stockholder agreement is not always a straightforward consideration, and it is important to recognize that waiver as to an individual act versus a permanent and blanket waiver to enforce contractual rights are separate concepts.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Diamond State Tire, Inc. v. Diamond Tire Pro & Auto Care, LLC, C.A. No. 11550-VCS (Del. Ch. Aug. 15, 2016), the Court of Chancery considered Diamond State Tire, Inc.’s (“Diamond State”) claim that Diamond Town Tire Pros & Auto Care LLC (“Diamond Town”) violated Delaware’s Deceptive Trade Practices Act (“the Act”) by operating under a business name that creates a “likelihood of confusion” between the two businesses among vendors, customers and potential customers. Diamond State sought a permanent injunction banning Diamond Town from continuing to operate under that trade name.

Background

When it first started in business in 1989, Diamond State worked only on commercial vehicles performing vehicle repairs and selling and installing tires. Eventually it expanded its business to include retail tire sales and retail auto repairs. Over time, its focus shifted from commercial vehicles to passenger (retail) vehicles. Founded in 2015, Diamond Town sells and installs retail tires and performs automotive service on passenger vehicles of a nature similar if not identical to the work performed at Diamond State.  The two entities are located 12.3 miles away from each other.

The owners of Diamond State testified that they both had received reports from customers and vendors that the names Diamond State and Diamond Town were confusing.  In addition, a particular vendor would confuse Diamond State and Diamond Town and would deliver parts intended for one to the other.

Analysis

The Act, at 6 Del. C. § 2532(a)(2), provides that a “person engages in a deceptive trade practice when, in the course of a business …, that person … [c]auses likelihood of confusion or of misunderstanding as to the source, sponsorship, approval, or certification of goods or services.” “Likelihood of confusion exists when consumers viewing a mark would probably assume that the product or service it represents is associated with the source of a different product or service identified by a similar mark.”

The Court found that Diamond State failed to meet the elements under the Act.   When determining whether a trade name or mark creates a likelihood of confusion for purposes of the Act, Delaware courts consider “(i) the degree of similarity between the marks, (ii) the similarity of products for which the name is used, (iii) the area and manner of concurrent use, (iv) the degree of care likely to be exercised by consumers, (v) the strength of the plaintiffs’ mark, (vi) whether there has been actual confusion, and (vii) the intent of the alleged infringer to palm off his products as those of another.” (Slip op. at 8).

Here, Vice Chancellor Slights found that Diamond State could not establish factors 4 (degree of care likely to be exercised by customers), 5 (strength of the mark), 6 (actual confusion), and 7 (the intent of the alleged infringer).

In ruling against Diamond State on factor 5 (strength of the mark), the Court opined that the word “Diamond” was geographic in nature, and thus not particularly strong as recognized by the Restatement (Third) of Unfair Competition § 14 (1995).  In this regard, Diamond State has chosen “to incorporate one of Delaware’s most well-known nicknames into its business name.”  Moreover, the Court found the mark to be “weak” because it is “used in connection with a number of different products.”

Accordingly, Vice Chancellor Slights determined that Diamond State did not demonstrate a violation of Delaware’s Deceptive Trade Practices Act by Diamond Town.  As such, the Court declined to issue an order compelling Diamond Town to change its name.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In 2016, beginning with In Re Trulia Inc. Stockholder Litigation, C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016) (see blog post here), the Court of Chancery has issued a wave of decisions analyzing the granting of fees in the context of disclosures.  In Trulia, the Court of Chancery set forth the standard that disclosure-only settlements will only be approved if the supplemental disclosures address a “plainly material” misrepresentation or omission, and the releases provided to D&Os are narrowly circumscribed.

Notably, in Trulia, the Court explained that the “plainly material” standard for supplemental disclosures does not apply to a mootness fee award.  This rationale was subsequently followed in Louisiana Municipal Employees’ Retirement System v. Black, C.A. No. 9410-VCN (Del. Ch. Feb. 19, 2016) (see blog post here) (noting that Trulia does not require a ‘plainly material’ inquiry in the mootness fee award context).

The recent Court of Chancery opinion of In re Xoom Corporation Stockholder Litigation, C.A. No. 11263-VCG (Del. Ch. Aug. 4, 2016) clarified the standard for supplemental disclosures on a mootness fee application.  Vice Chancellor Glasscock ruled that a mootness fee “can be awarded if the disclosure provides some benefit to stockholders, whether or not material to the vote. In other words, a helpful disclosure may support a fee award in this context.”

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

In the recent decision of Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR (Del. Ch. Aug. 1, 2016), Vice Chancellor Montgomery-Reeves dismissed Caremark claims brought against certain directors (“Directors”) of Qualcomm, Incorporated (“Qualcomm” or “Company”).  Plaintiffs alleged that the Directors failed to take action to prevent antitrust violations from occurring, despite being aware of U.S. antitrust violations of the Company.

By way of background, it is worth noting that Caremark claims are notoriously difficult to prove.  In the decision, the Court of Chancery explained that a “Caremark claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, and bad faith on the part of the corporation’s directors is a necessary condition to liability.”

In granting the motion to dismiss Plaintiffs’ claim, the Court found that the complaint did not adequately plead facts giving rise to bad faith on the part of the board.  The Court made clear that simply alleging that the board made a “wrong” decision in response to red flags was insufficient to plead bad faith.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

When untimely claims are brought before the Delaware Court of Chancery, they are often met with challenges based upon laches or the applicable statute of limitations.  But the application of these concepts are not entirely clear and at times inconsistent.

In the recent decision of In Kraft v. WisdomTree Investments, C.A. No. 10816-CB (Del. Ch. Aug. 3, 2016), Chancellor Bouchard shed new light on the applicability of these defenses, and provided a helpful analysis which will undoubtedly serve as a “roadmap” to analyze these defenses moving forward.

In so doing, the Court distinguished between the following claims: (i) legal claims seeking legal relief, (ii) equitable claims seeking equitable relief, and (iii) matters involving legal and equitable claims, and provided the following analysis:

Legal Claims Seeking Legal Relief

If a plaintiff brings a legal claim seeking legal relief in the Court of Chancery, the statute of limitations (and its tolling doctrines) logically should apply strictly and laches should not apply. Otherwise, one may be able to circumvent the statutory time-bar that would have applied to the same claim if it had been brought in a court of law. Under the precedents of IAC and Levey, however, extraordinary circumstances may provide an exception to the strict application of statutes of limitations for purely legal matters, separate and apart from the application of tolling doctrines.

Equitable Claim Seeking Equitable Relief

If a plaintiff brings an equitable claim seeking equitable relief, the case falls under the Court’s exclusive equity jurisdiction. In this case, the doctrine of laches applies and any applicable statute of limitations would apply only by analogy, although the Court tends to afford great weight to the analogous statutory period, if one exists, and may bar a claim without further laches analysis if that period has been exceeded and the Court does not consider it inequitable to do so.

Matters Involving Legal and Equitable Claims

When an equitable claim seeks legal relief or a legal claim seeks equitable relief, the Court also will apply the statute of limitations by analogy, but with at least as much and perhaps more presumptive force given its quasi-legal status, and will bar claims outside the limitations period absent tolling or extraordinary circumstances.

This decision will undoubtedly be cited by many Chancery practitioners in future disputes where a defending party raises as a defense the timeliness of asserted claims.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

Does an individual who received a void issuance of stock from a Delaware corporation have standing to bring a books and records action under Section 220 of the Delaware General Corporation Law (“DGCL”)?

That issue was addressed in the recent decision of Pogue v. Hybrid Energy, Inc., C.A. No. 11563-VCG (Del. Ch. Aug. 5., 2016).  In Pogue, the defendant, Hybrid Energy, Inc. (“Hybrid” or the “Company”), defended the action on the grounds that Hybrid’s stock issuance to plaintiff James Pogue was void and the stock certificate a nullity.  While chastising Hybrid for taking such a position in the case and making clear the Court was not ruling on other potential causes of action that Pogue could bring, Vice Chancellor Glasscock found that Pogue lacked standing to bring a Section 220 books and records action against Hybrid.

By way of background, Pogue is a former employee of Hybrid. He alleged that the Company purported to issue him 1,000,000 shares of common stock by certificate dated December 29, 2011, at a time when all of the Company’s authorized shares—1,500 in toto—were held by another individual.  However, according to Pogue, at all material times the Company treated him as a stockholder: the void issuance was represented on the company’s ledger, Pogue was by paid dividends, and Hybrid issued to Pogue a Form 1099-DIV along with a revised stock certificate.

Pogue conceded that the stock transfer was void. However, he argued that because he is listed on the company’s stock ledger, that is the sole determinant of stock ownership under Section 220.  The Court disagreed, finding that a stockholder’s “inclusion on the stock ledger states a prima facie, but rebuttable, case that a plaintiff is a statutory stockholder of record; and that, here, the undisputed record rebuts that presumption, precluding Pogue from the relief he seeks.”  Accordingly, the Court granted Hybrid’s motion for summary judgment and dismissed the case.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

The Court of Chancery recently issued its latest decision in the contentious case captioned In re Shawe & Elting LLC.  This decision addresses Elizabeth Elting’s motion seeking the imposition of sanctions against Philip Shawe.  After conducting a hearing on the request, the Court found,

clear evidence adduced at the sanctions hearing establishes that Shawe acted in bad faith and vexatiously during the course of the litigation in three respects: (1) by intentionally seeking to destroy information on his laptop computer after the Court had entered an order requiring him to provide the laptop for forensic discovery; (2) by, at a minimum, recklessly failing to take reasonable measures to safeguard evidence on his phone, which he regularly used to exchange text messages with employees and which was another important source of discovery; and (3) by repeatedly lying under oath—in interrogatory responses, at deposition, at trial, and in a post-trial affidavit—to cover up aspects of his secret deletion of information from his laptop computer and extraction of information from the hard drive of Elting’s computer.

The Court stated that Mr. Shawe’s conduct “impeded the administration of justice” and “needlessly complicated and protracted these proceedings to Elting’s prejudice, all while wasting scarce resources of the Court.”  As a result, the motion was granted and the following sanctions imposed:

Shawe will be ordered to pay Elting the following amount: (1) 33% of her attorneys’ fees and expenses incurred in connection with the litigation of the Merits Trial (including computer expert expenses but not including other experts) from December 2, 2015 up to the resolution of the Merits Trial, i.e., the date on which the Merits Opinion was issued, plus (2) 100% of her attorneys’ fees and expenses (including computer expert expenses) incurred in connection with the litigation of the Sanctions Hearing.

The decision may be read in its entirety here.

__________________________

Leslie Spoltore is a Partner with the law firm Fox Rothschild LLP.  Leslie practices in Fox Rothschild’s Wilmington, Delaware office.  You can reach Leslie at (302) 622-4203, or lspoltore@foxrothschild.com.

 

John O’Toole writes:

In In re Appraisal of DFC Global Corp., the Court of Chancery conducted an in-depth analysis of three common valuation methodologies—discounted cash flow analysis, multiples-based comparable company analysis, and deal price.  After discussing how each methodology was and should be applied, Chancellor Bouchard ultimately determined that although “all three metrics suffer from various limitations” the fair value of the merger in question was best ascertained by weighting all three methods equally.

The Court’s opinion serves a number of useful purposes.  First, it provides a comprehensive overview of each the methodologies discussed.  Second, given the context in which the Court’s analysis was done, it offers guidance on how to best determine the fair value of a company following a deal consummated in a “tumultuous environment” where a company’s “future profitability and…viability” are at issue.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

John O’Toole writes:

In In re Volcano Corporation Stockholder Litigation, the Court of Chancery held that stockholders’ acceptance of tender offers as part of mergers accomplished under  § 251(h) of the Delaware General Corporation Law (“DGCL”) “has the same cleansing effect as a stockholder vote in favor of a transaction.” C.A. No. 10485-VCMR, 2016 WL 3583704, at *11 (Del. Ch. June 30, 2016).  Thus, as “the business judgment rule irrebuttably applies” to a transaction approved by the “fully informed vote [of] a majority of a company’s disinterested, uncoerced stockholders,” the same result obtains upon “the acceptance of a first-step tender offer by fully informed, disinterested, uncoerced stockholders representing a majority of a corporation’s outstanding shares in a two-step merger under section 251(h)….”

Copyright: bbourdages / 123RF Stock Photo
Copyright: bbourdages / 123RF Stock Photo

The Court’s decision in Volcano is particularly noteworthy for two reasons.  First, Vice Chancellor Montgomery-Reeves determined that the fully informed, disinterested, uncoerced acceptance of a tender offer done pursuant to § 251(h) is functionally identical to a fully informed, disinterested, uncoerced stockholder vote.  Second, the Court’s determination that the  acceptance of tender offers and stockholder votes are, at least in this context, the same, extends the irrebuttable application of the business judgment rule as discussed in the line of Supreme Court cases from Corwin to Attenborough, to § 251(h) tender offers and mergers.

In equating § 251(h) tender offers to stockholder votes, the Vice Chancellor determined that § 251(h) sufficiently protects stockholder interests and that the policy analysis undertaken by the Supreme Court in Corwin as to stockholder votes applies equally to § 251(h) tender offers.  The Court held that because § 251(h) requires merger agreements, which in turn activate directors’ disclosure obligations and fiduciary duties, and prohibits structural coercion, stockholder interests are no less protected than if a vote were required.  Further, where the Supreme Court in Corwin held that, in the context of a vote, “stockholders [should] have…the free and informed chance to decide on the economic merits of a transaction for themselves” and “that judges are poorly positioned to evaluate the wisdom of business decisions,” the Court here found such policy “equally applicable to a tender offer in a Section 251(h) merger.”  Vice Chancellor Montgomery-Reeves held that “a stockholder is no less exercising her ‘free and informed chance to decide on the economic merits of a transaction’ simply by virtue of accepting a tender offer rather than casting a vote.”  Thus, the Court held that because of such statutory protections and policy considerations, there is no “basis for distinguishing between a stockholder vote and a [§ 251(h)] tender offer.”

It follows then, and the Court held, that mergers approved by the acceptance of § 251(h) tender offers should be afforded the same “cleansing effect” as mergers approved by stockholder votes.  Thus, for both § 251(h) mergers and mergers approved by stockholder votes, the business judgment standard of review irrebuttably applies.  In so holding, the Court clarified and expanded upon the recent line of Chancery and Supreme Court opinions discussing the effect of fully informed, disinterested, uncoerced stockholder votes.  Vice Chancellor Montgomery-Reeves explained that “[i]n this context, if the business judgment rule is ‘irrebuttable,’ then a plaintiff only can challenge a transaction on the basis of waste….If, by contrast, the business judgment rule is ‘rebuttable,’ then a board’s violation of either the duty of care or duty of loyalty…would render the business judgment rule inapplicable.”  By expanding the irrebuttable application of the business judgment rule, the Court necessarily expanded the types and number of mergers that will now be, at least practically speaking, insulated from stockholder challenges.


John O’Toole is a summer associate, resident in the firm’s Wilmington office.

John O’Toole writes:

In Obeid v. Hogan, C.A. No. 11900-VCL, 2016 WL 3356851 (Del. Ch. June 10, 2016), the Court of Chancery was confronted with the issue of whether a non-manager/non-director could function “as the sole member of…parallel special litigation committees” created by two Delaware LLC’s.  Writing for the Court, Vice Chancellor Laster ultimately held that the LLC’s in question, Gemini Equity Partners (the “Corporate LLC”) and Gemini Real Estate Advisors (the “Manager-Managed LLC”), were not empowered to delegate power to special litigation committees not composed of directors or managers, respectively.

Both the Corporate LLC and the Manager-Managed LLC are engaged in the real estate management business, “jointly manag[ing] over $1 billion in real estate assets.”  William T. Obeid, Christopher S. La Mack, and Dante A. Massaro (the “Members”), each hold one-third membership interests in both the Corporate LLC and the Manager-Managed LLC.  The Members serve as the directors of the Corporate LLC and as the managers of the Manager-Managed LLC.

The controversy in question arose when Obeid, the Plaintiff here, was “removed [by La Mack and Massaro] as President and Operating Manager of the Manager-Managed LLC” and sued in North Carolina state court.    Obeid then sued La Mack and Massaro in New York state and federal courts, both directly and derivatively on behalf of both entities, alleging a number of subversive business dealings.

After multiple unsuccessful attempts to resolve the derivative claims brought by Obeid, La Mack and Massaro purported to designate a retired federal district court judge as the sole member of special litigations committees for both the Corporate LLC and the Manager-Managed LLC.  The judge was not a member of either LLC, nor was he a manager or director of either LLC. Obeid, quite predictably, objected.   La Mack and Massaro then voted to remove Obeid as a director of the Corporate LLC.

Obeid brought this action in January 2016, seeking a declaration that a non-manager/non-director cannot serve as the special litigation committee for either the Corporate LLC or the Manager-Managed LLC.  He also sought a declaration invalidating his removal as a director of the Corporate LLC.

The Court’s analysis began with a threshold determination that relevant corporate law applies to the Corporate LLC.  As “virtually any management structure may be implemented through [an LLC’s] governing instrument,” the Members elected to manage the Corporate LLC as if it were a corporation.  In drafting the Corporate LLC’s operating agreement, the Members created a manager-managed LLC, the manager of which is a board of directors.  The Members also included language allowing for board action by committees of directors.  As such, the Corporate LLC’s governance structure reflects the board centric governance model embodied by §§ 141 (a) and 141(c) of the Delaware General Corporation Law (“DGCL”).

After determining that the “corporate traits in the Corporate LLC Agreement call[] for applying corporate law precedents,” Vice Chancellor Laster looked to “corporate law analogies” in determining whether the Corporate LLC could “empower a special litigation committee comprising a single non‑director.”  The Court found Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) particularly relevant in discussing boards’ roles in managing derivative claims and the extent to which such management might be done by special litigation committees.  In Zapata, the Delaware Supreme Court held that directors’ power to manage derivative claims on behalf of corporations is a product of § 141(a) of the DGCL, which provides that “[t]he business and affairs of every corporation…shall be managed by…a board of directors.”  The Court then held that committees of directors created pursuant to § 141(c) of the DGCL necessarily must be comprised entirely of directors, as “[a] committee of directors is the only vessel that is capable of receiving and exercising the full authority of the board….”

Here, Vice Chancellor Laster held that “Zapata applies fully to the special litigation committee that the Corporate [LLC] purported to establish.”  Despite the Corporate LLC’s argument that § 18-407 of the Delaware LLC Act condones the delegation of power to manage derivative claims to a non-director, Vice Chancellor Laster faithfully applied the rule of Zapata to the actions of the Corporate LLC.  The Court supplemented its application of Zapata by looking to §§ 18-1001 and 18-1003 of the Delaware LLC Act, which together “indicate that only the duly authorized decision-making body of the entity, be it the members or the managers, can make the necessary decision[s]…[to] control…derivative litigation.”

Thus, the Court granted summary judgment to Obeid, holding that given the governance structure defined in the Corporate LLC’s operating agreement, a non-director cannot “function as a one-man special litigation committee on behalf of the Corporate LLC.”

The Court then turned its attention to the issue of whether a non-manager can serve as the special litigation committee of the Manager-Managed LLC.  Vice Chancellor Laster stated that “the governance structure of the Manager-Managed LLC…exhibits corporate features, albeit not so pervasively as the Corporate LLC.”  Thus “the reasoning that governed the Corporate LLC [could] apply equally to the Manager-Managed LLC.”  The Court, however, ultimately felt it unnecessary to undertake a Zapata analysis as to the Manager-Managed LLC, as certain “sections of the Manager-Managed LLC Agreement, read as a whole, evidence a distinction between matters relating to the ordinary course of business of the LLC and more significant matters that must be handled by the managers.”

Reading the Manager-Manager LLC’s operating agreement against § 18-407 of the Delaware LLC Act, which “validates…ordinary course of business delegations,” Vice Chancellor Laster determined that the operating agreement “intended to limit the ability of managers to delegate their core governance functions.”  Given such limitation, the Court held that the Manager-Managed LLC’s operating agreement “do[es] not permit an issue as serious as the exercise of authority over derivative claims to be delegated to a non-manager.”  In so holding, the Court declared that a non-manager cannot serve as a one-man special litigation committee on behalf of the Manager-Managed LLC.

The Court ended its opinion with an easily-reached finding that the Plaintiff was validly removed as a director of the Corporate LLC.  The Court determined that his removal was effected in a manner consistent with the requirements of the Delaware LLC Act, the DGCL, and the Corporate LLC’s operating agreement.

 


John O’Toole is a summer associate, resident in the firm’s Wilmington office.