Effective today, the jurisdictional capacity of the Justice of the Peace Court has been expanded in two significant ways via HB 232, which was signed into law by Governor John Carney on August 25, 2020.

Delaware Chancery Law - A Fox Rothschild BlogFirst, HB 232 raises the general jurisdictional limit of the Justice of the Peace Court from $15,000 to $25,000.  Second, the Justice of the Peace Court may now consider claims in excess of the new jurisdictional limit where the underlying matter involves a commercial tenancy and possession of the rental unit is at issue.

Importantly, practitioners will still have the option to determine whether to bifurcate the debt and summary possession issue in commercial landlord tenant cases between the Justice of the Peace Court and another court of competent jurisdiction or choose to maintain one action for both forms of relief in the Justice of the Peace Court.

The full text of HB 232, reflecting amendments to 10 Del. C. § 3901 and 25 Del. C. § 5701(B), can be found HERE.

I recently returned to the New Castle County Courthouse for the first time since the initial declaration of a Judicial Emergency by the Court back in March.  For those that are curious, here is what you can expect:

  • Upon entering the Courthouse, I was asked to confirm that I was not experiencing any symptoms of COVID-19—I was not required to have a temperature check.
  • Information desks now have Plexiglas dividers to separate the public from Court staff.
  • Elevators have restrictions on the number of occupants.
  • Masks are strictly enforced—I observed a bailiff directing an individual to cover his nose with his mask.
  • In the courtrooms there are Plexiglas dividers at counsel tables (image below) and between the court staff and Judge.

  • Hand sanitizer was found on all counsel tables and at the podium – additionally, the Court staff had a disinfectant spray for the microphone at the podium.
  • Masks remained on during argument, however I don’t know whether this was a requirement or our practice.
  • All parties in the courtroom were required to sign in and provide contact information in order to facilitate contact tracing if necessary.
  • Although the Court is now in Phase 3 of its reopening plan, which allows for up to 75% capacity, I only encountered a few people and far less than 75% capacity.

Additional statements and advisories from the Delaware Judiciary regarding COVID-19, can be found here.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.

On May 14, 2020, Delaware Chief Justice Seitz entered an Order further extending the public closure of all Delaware State courthouses and their administrative offices through June 13, 2020 (a copy of the Extension of Judicial Emergency Order can be found here).  During this time, access to State courthouses is restricted to emergency and essential hearings and operations.  Non-emergency and non-essential telephonic arguments, telephonic hearings or videoconferences shall continue to proceed at the discretion of each of the State courts.  Of particular importance to all practitioners and litigants, the Order provides the following with regard to deadlines and statutes of limitations:

  • Deadlines in court rules or state or local statutes and ordinances applicable to the judiciary that expire between March 23, 2020 and June 13, 2020 are extended through July 1, 2020;
  • Statutes of limitations and statutes of repose that would otherwise expire during the period between March 23, 2020 and June 13, 2020 are extended through July 1, 2020;
  • Deadlines, statutes of limitations, and statutes of repose that are not set to expire between March 23, 2020 and June 13, 2020 are not extended or tolled by this order; and
  • Deadlines imposed by court order continue to remain in place but may be extended, consistent with court practices, for good cause shown, including a COVID-19 related cause.

Additional statements and advisories from the Delaware Judiciary regarding COVID-19, can be found here.

The COVID-19 pandemic is shaking up M&A transactions and the Court of Chancery has seen a sudden uptick in litigation. In a recently published article, two of my Fox Rothschild colleagues – Chaney Hall and Katelyn Crawford – note that buyers with cold feet are invoking their agreement’s material adverse effect clauses (MAE) to justify terminating or postponing the deal, sparking complaints primarily filed by sellers seeking specific performance to compel a buyer to close the deal.

Read more: DE Court of Chancery Weighs Terminating M&A Deals Under Material Adverse Effect Clauses

In the highly anticipated decision of Salzberg v. Sciabacucchi, No. 346, 2019, 2020 WL 1280785 (Del. Mar. 18, 2020), the Delaware Supreme Court held that a provision in several Delaware corporations’ charters, requiring that actions arising under the Securities Act of 1933 (the “Securities Act”) be brought in federal court, was valid and enforceable.

Background/Court of Chancery Decision

Appellee, Matthew Sciabacucchi, purchased shares in three Delaware corporations in their initial public offerings or shortly thereafter.   Each of these companies adopted a federal-forum provision in their certificates of incorporation that designated the federal courts as the exclusive forum for the resolution of any claims brought under the Securities Act.  Sciabacucchi subsequently sought a declaratory judgment in the Court of Chancery that such forum-selection provisions are invalid under Delaware law.  Vice Chancellor J. Travis Laster granted summary judgment, holding that the federal-forum provisions were invalid, because, as the Vice Chancellor held, “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.”  Sciabacucchi v. Salzberg, 2018 WL 6719718, at *3 (Del. Ch. Dec. 19, 2018).

The Court of Chancery’s decision looked to Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), to decide that federal forum provisions could only be valid if they related to the internal affairs of the corporation.  Vice Chancellor Laster further reasoned “a securities claim is not an ‘internal corporate claim’ within the meaning of the amendments” to the Delaware General Corporation Law (“DGCL”) enacted in 2015, whereby Section 115 was added and Sections 102 and 109 were amended.  2018 WL 6719718, at *14.  Again relying on Boilermakers, the Vice Chancellor held that a claim under the Securities Act is “an external claim that falls outside the scope of the corporate contract.”  Id. at *18.  As such, the Court of Chancery concluded that “[a] charter-based forum-selection provision cannot govern claims [under the Securities Act] because the provision would not be addressing ‘the rights and powers of the plaintiff-stockholder as a stockholder.”  Id. at *16 (emphasis in original).

Delaware Supreme Court Analysis

On appeal, in a 53-page unanimous opinion by Justice Karen Valihura, the Delaware Supreme Court reversed the Court of Chancery’s decision, holding that such forum-selection provisions are indeed valid and survive a facial challenge.

Under the Supreme Court’s analysis, the Court held that the federal-forum provisions were valid because they fall within the plain language of 8 Del. C. § 102, which governs matters contained in a certificate of incorporation.  Under Section 102(b)(1) of the DGCL, Delaware corporations may adopt: (i) provisions that provide for the management of business and conduct of the affairs of the corporation; or (ii) provisions that create, define, limit, and regulate the powers of the corporation, directors, and stockholders so long as those provisions are not contrary to state law. Accordingly, the Court concluded that the federal-forum provisions “could easily fall” within either category, and were therefore facially valid.  Salzberg, 2020 WL 1280785 at *4.

Within the High Court’s analysis under Section 102, the Court further addressed case law, including the United States Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund, 138, S. Ct. 1061 (2018), and concluded that federal-forum provisions “classically fit the definition of a provision ‘for the management of the business and for the conduct of the affairs of the corporation.”  The Court also concluded that federal-forum provisions are not contrary to the policies or laws of Delaware, noting that such provisions are “given great respect” under Delaware law.  Salzberg, 2020 WL 1280785 at *5.  Under this analysis, the Court dissected Section 115 of the DGCL, determining that Section 115 did not alter the scope of Section 102(b)(1).

The Court’s opinion next went into a detailed analysis of the internal affairs doctrine, finding that the Court of Chancery erred by defining “internal affairs” too narrowly, and thus, erroneously narrowed the scope of Section 102(b)(1).

Lastly, the Supreme Court concluded that federal forum-provisions survive a facial challenge as a policy matter, and do not offend federal law and policy.

Key Takeaway: This groundbreaking decision permits Delaware corporations to adopt federal-forum provisions to ensure that any securities fraud claims brought under federal law are filed in federal court, so that the action would be subject to the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995.  This will likely result in a decrease in the number of claims under the Federal Securities Act being brought in state courts.  Delaware corporations that have not yet adopted federal forum provisions in their charters may consider doing so in light of this decision.

Section 18-802 of Delaware’s Limited Liability Act (“LLC Act”) provides a statutory basis for the Court of Chancery to dissolve a Delaware LLC.  The statute, which confers standing upon an LLC member of manager, states that the Court of Chancery “may decree dissolution of a limited liability company whenever it is not reasonably practicable to carry on the business in conformity with a limited liability company agreement.”  6 Del. C. § 18-802.

The question becomes, may the Court of Chancery dissolve a Delaware LLC under equitable grounds, separate and apart from the statutory basis under Section 18-802?  And if so, does a petitioner who is not a member or manager of an LLC have standing to petition the Court to equitably dissolve the LLC?

Background

This precise issue was addressed in the recent decision of SolarReserve CSP Holdings LLC v. Tonopah Solar Energy LLC, C.A. No. 2019-0791-JRS (Del. Ch., Mar. 18, 2020).  In SolarReserve, Vice Chancellor Slights dismissed a petition for the equitable dissolution of Tonopah Solar Energy LLC (“Tonopah”).  The petitioner, SolarReserve CSP Holdings LLC (“SolarReserve”), was not a member or manager of Tonopah, but held an indirect equity interest in Tonopah through several intermediary entities.

According to the opinion, Tonopah is a federally funded, nonoperational $1 billion solar energy project in Nevada.  The entity was funded by a $700 million loan from the U.S. Department of Energy (“DOE”) after Tonopah sought out additional funding sources to cover expenses.  SolarReserve was initially the sole owner of Tonopah, having invested $90 million into the company.   After obtaining funding from the DOE, Tonopah also entered into a into a co-venture relationship with Cobra Thermosolar Plants, Inc. (“Cobra”), a construction firm.

The Complaint alleged that Cobra botched the construction of the power plant, which caused the DOE to declare events of default that triggered rights to alter Tonopah’s governance structure, thereby removing SolarReserve from control over Tonopah.  As alleged in the Complaint, “the DOE’s actions, if left unchecked, will result in a forfeiture of SolarReserve’s property rights in a $1 billion project related to a solar power plant which SolarReserve started in 2008 — without an opportunity to contest that forfeiture.”  However, the Court noted that neither the DOE nor Cobra are parties to the action.

Analysis

In granting Tonopah’s motion to dismiss, Vice Chancellor Slights concluded that SolarReserve had “not pled facts that would justify, much less allow, dissolution as a matter of equity.”  The opinion states:

As noted, SolarReserve does not seek Tonopah’s statutory dissolution because it is neither member nor manager of Tonopah.  Instead, SolarReserve asks the Court to dissolve Tonopah as a matter of equity. This is a far less-traveled path to achieve the dissolution of a Delaware LLC. To be sure, this court views any form of judicial dissolution as a limited remedy that [should be] grant[ed] sparingly. Where, as here, a petitioner seeks equitable dissolution outside of the grounds enumerated in the Act, such as where a non-member/non-manager seeks dissolution, that petitioner must explain in a convincing manner why this court should invoke equitable principles to override the plain language of the Act and the relevant LLC agreement.

Slip op., at 13 (internal quotations and footnotes omitted).

Vice Chancellor Slights held that the Complaint failed to allege facts supporting the “extreme remedy” of equitable dissolution of a Delaware LLC.  In so ruling, the Court distinguished In re Carlisle Etcetera LLC, 114 A.3d 592, 597 (Del. Ch. 2015), which SolarReserve cited to in favor of equitable dissolution.  The Court noted that while the equitable dissolution of a Delaware LLC was granted in Carlisle, the facts warranted such a remedy because, among other things, the board was deadlocked and unable to remove its CEO that was hand-picked by a 50% member, who ruled the roost “free of any oversight.”  Carlisle, 114 A.3d at 594.  In Carlisle, Vice Chancellor Laster held that the petitioner had stated a claim for equitable dissolution based on the court’s “retain[ed] . . . residual authority” that prevents a Delaware LLC from being “wholly exempt” from judicial oversight. Slip op. at 16 (citing Carlisle, 114 A.3d at 606).

In determining whether to grant Tonopah’s motion to dismiss, Vice Chancellor Slights framed the question as follows: “has SolarReserve pled a set of reasonably conceivable facts ‘where it appears manifest’ that equity must intervene?” Slip op. at 17.  The Court noted that SolarReserve made a series of “calculated choices to reshape Tonopah’s complicated ownership structure in order to secure additional funding[]”, such that “SolarReserve’s ‘real relationship’ to Tonopah is that of a remote, indirect investor, not a member.” Id.  By contrast, in Carlisle, although the petitioning party had transferred its membership rights in the LLC to a wholly owned subsidiary (and thus lacked standing to seek statutory dissolution), equity “prompted the court to give effect to the parties’ ‘real relationship’ as a ‘joint venture in which they are equal participants’ with neither member intending to be a ‘passive investor.’” Id. (citing Carlisle, 114 A.3d at 606).  This was further supported by the fact that just months before the Carlisle action was filed, the parties had been operating under a draft operating agreement in which the wholly-owned subsidiary had actually been named as a member.

The Court also rejected SolarReserve’s “last-ditch” argument that because the operating agreement provided SolarReserve with certain rights similar to those of an LLC member, this reflected a right to confer member rights upon SolarReserve for all matters.   The Court noted that SolarReserve was expressly not named a member under the LLC agreement.  “Under these circumstances, SolarReserve cannot swoop in on the wings of equity as if it were a Tonopah member to impose its preferences for the Company’s future when it bargained away that status.” Slip op. at 20.

Key Takeaway

SolarReserve reconfirms the high climb that exists for the Court to equitably dissolve a Delaware limited liability company.  Simply asserting wrongdoing against other members or managers (without even naming them as parties), while not effectively asserting deadlock, will make the climb even steeper.  Litigants should carefully consider this decision along with the Carlisle opinion in assessing the viability of a claim for equitable dissolution of a Delaware LLC.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.

This morning, the Delaware Court of Chancery issued Standing Order No. 2 Concerning COVID-19 Precautionary Measures.  Pursuant to Standing Order No. 2, all Chancery hearings and trials will be conducted only telephonically for the next 30 days, absent a party requesting an in-person hearing and demonstrating imminent irreparable harm.

Standing Order No. 2 replaces the Court of Chancery’s original standing order in its entirety, which was issued last week.

A full list of the orders and related press releases can be found on the Delaware Judiciary’s website, which is also summarized in yesterday’s blog post. 

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.

In light of the outbreak of the novel coronavirus (COVID-19), the Courts of the State of Delaware have issued various standing orders to institute precautionary methods in dealing with this worldwide pandemic.   A full list of the orders and related press releases can be found on the Delaware Judiciary’s website.

A summary of the orders and press releases issued by each Delaware State Court is set forth below:

Delaware Supreme Court

  • Issued an Order dated March 13, 2020 declaring a Judicial Emergency, which will go into effect on Monday, March 16 at 8:00 a.m. ET.
  • Pursuant to the Order, the declaration gives all trial courts in Delaware the flexibility to continue trials and hearings in civil and criminal cases for 30 days.
  • The declaration will also limit the number of people gathering in public court buildings.
  • During the period of judicial emergency, all time requirements under the Speedy Trial Guidelines are tolled.
  • See Press Release, Delaware Supreme Court Chief Justice Declares Judicial Emergency, dated March 14, 2020.

Delaware Court of Chancery

  • The Court of Chancery issued a Standing Order Concerning COVID-19 Precautionary Measures.
  • The Order permits court proceedings to be held telephonically when practical and efficient.
  • Where a telephonic hearing is not feasible (i.e. a trial),  and involves the presence of a person who (i) may be infected with COVID-19, or (ii) has been in the presence of a person who may be infected within the past 14 days, the parties shall meet and confer and notify the Court of any agreement or disagreement on how to proceed.  Parties should consider the use of videoconferencing, whether an alternative person is available, and whether a continuance is appropriate.

Delaware Superior Court

  • Today, the Delaware Superior Court issued Standing Order No. 2, which, among other things, suspends all civil and criminal trials through April 15, 2020.
  • Issued Standing Order No. 1, which, like the Court of Chancery’s Standing Order, permits hearings to be held telephonically, and sets procedures for in-person hearings such as trials that would involve  the presence of an individual who may be infected with COVID-19, or has been in the presence of an individual who may be infected within the past 14 days.

The Court of Common Pleas and Justice of the Peace Courts have likewise issued similar standing orders in response to the coronavirus.  Stay tuned for further updates from the Delaware Courts in response to this worldwide pandemic.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.

In the recent decision handed down by Chancellor Bouchard in the case of In re NantHealth, Inc. Stockholder Litigation, Lead C.A. No. 2018-0302-AGB (Del. Ch. Jan. 14, 2020), the Delaware Court of Chancery granted in part and denied in part a motion to dismiss filed by the director defendants of NantHealth, Inc.

In this consolidated lawsuit, several NantHealth investors asserted that Patrick Soon-Shiong, a South African billionaire who invented the cancer fighting drug Abraxane, and two former executives and four directors, misled the public regarding a research deal with the University of Utah.

Specifically, according to the amended complaint, Soon-Shiong caused certain nonprofits controlled by him to make a donation to the University of Utah with the undisclosed understanding that the University would be required to pay substantially those funds to NantHealth to use its technology.  As NantHealth’s controlling stockholder, plaintiffs alleged that Soon-Shiong stood to benefit  to make it appear as if a prestigious academic institution had independently endorsed NantHealth’s technology and that there was greater commercial demand for its products than in reality.  Plaintiffs asserted claims of breach of fiduciary duty, corporate waste, and unjust enrichment against defendants.

Chancellor Bouchard denied defendants’ motion to dismiss the breach of fiduciary duty claim against Soon-Shiong for failure to allege demand futility, holding that a “constellation of facts” had been adequately pled creating a reasonable doubt about certain directors’ independence from Soon-Shiong such that a majority of the board could not have impartially considered a demand against Soon-Shiong.  The remaining defendants, however, were dismissed given that the amended complaint failed to allege demand futility separately as to them.

In addition, the Court of Chancery dismissed the unjust enrichment claims against all defendants.  Chancellor Bouchard found that the conduct underlying the amended complaint, such as making false and misleading disclosures, was not related to the defendants’ receipt of money from the company.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.

In one of the more lengthy decisions issued in a books and records case commenced under 8 Del. C. § 220, Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation, Vice Chancellor Laster ordered  AmerisourceBergen Corporation (“AmerisourceBergen” or the “Company”) to make available for inspection board-level documents formally evidencing the directors’ deliberations and decisions and the materials that the directors formally received and considered (the “Formal Board Materials”) relating to whether AmerisourceBergen engaged in wrongdoing in connection with the distribution of opioids.  C.A. No. 2019-0527-JTL (Del. Ch. Jan. 13, 2020)

As the 63-page opinion notes, two congressional investigations concluded that AmerisourceBergen, one of the world’s largest wholesale distributors of opioid pain medication, failed to identify and address suspicious orders of opioids, in violation of federal law requirements.  Slip op. at 1.  The opinion further notes that  the Company is subject to multiple subpoenas, government investigations, and lawsuits, and is the defendant in multi-district litigation brought by cities, counties, and attorney generals of virtually every state.  Id.

In opposing the books and records demand, AmerisourceBergen took the position that plaintiffs lacked a proper purpose, and in the alternative, the scope of the requested inspection was overly broad.  More specifically, the Company argued that plaintiffs needed to not only demonstrate an acceptable purpose, but also had to provide indications of their intended use of the materials in the demand letter itself.  Against this backdrop, AmerisourceBergen argued that plaintiff’s purpose, as set forth in the demand, should be limited to commencing a Caremark claim (which are notoriously difficult to prove).

The Court of Chancery disagreed, noting that AmerisourceBergen’s position ran contrary to Delaware Supreme Court case law, which has held that the fruits of an investigation of wrongdoing could include non-litigation purposes, including to “seek an audience with the board to discuss proposed reforms, or failing in that, [to] prepare a stockholder resolution for the next annual meeting, or [to] mount a proxy fight to elect new directors.”  Slip op. at 24 (quoting  Saito v. McKesson HBOC, Inc., 806 A.2d at 113, 117 (Del. 2002), and citing Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 121 (Del. 2006) and White v. Panic, 783 A.2d 543, 557 n.54 (Del. 2001) for their identification of other potential non-litigation purposes for books and records resulting from an investigation of corporate wrongdoing).

To summarize Vice Chancellor Laster’s disagreement with the Company’s position:

“AmerisourceBergen’s approach would require a stockholder to commit in advance to what it will do with an investigation before seeing the results of the investigation.  An investigator who proclaimed the outcome of an investigation at the outset would be viewed as biased. . . . We would not want a prosecutor to commit to bringing charges before learning whether the evidence supported them.”

Accordingly, the Court permitted inspection of the Formal Board Materials.  Further, in light of the Company’s refusal to provide discovery into what types of books and records exist, the Court authorized plaintiffs to conduct a Rule 30(b)(6) deposition to determine whether other relevant information exists.

Key Takeaway: This decision is significant because it clarifies that a plaintiff stockholder need not commit to bringing litigation in the demand letter before receiving the results of the inspection.  A defendant corporation opposing the inspection of its books and records that may support a potential Caremark claim will need to take note that raising merits-based challenges to a Caremark lawsuit it expects the plaintiff to file will not alone suffice to defend a Section 220 claim to investigate corporate misconduct.

If you would like to speak to a litigator in Fox Rothschild’s Delaware office, please reach out to Sid Liebesman (302) 622-4237 or Seth Niederman (302) 622-4238.