Directors of companies generally have broad and unfettered rights to inspect the corporate records in order to fulfill their fiduciary duties owed to the company and its stockholders.  However, that right is not without limits.  When the company can demonstrate that the director sought inspection to compete or harm the company, the Court will deny inspection rights.  That is precisely the ruling in the recent decision of Bizzari v. Suburban Waste Services Inc., C.A. No. 10709-JL (Del. Ch. Aug. 30, 2016).

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.

As discussed in prior posts, in order to prevail in a books and records inspection action, the petitioning party must demonstrate a “proper purpose” for making such demand.  Moreover, when the purpose is to investigate alleged wrongdoing by a board, a “credible basis” to infer such wrongdoing must exist.  [Click here for a post discussing a Delaware Chancery decision supporting this widely-accepted proposition, Southeastern Transportation Authority v. Abbvie, Inc., C.A. No. 10374-VCG (Del. Apr. 15, 2015).]

The recent decision by the Delaware Court of Chancery, Beatrice Corwin Living Irrevocable Trust v. Pfizer, C.A. No. 10425-JL (Del. Ch. Aug. 31, 2016, corrected Sept. 1, 2016) upheld this maxim.  There, the Court considered whether a plaintiff’s stated purpose was proper in connection with inspecting claims of wrongdoing.

The action was brought by the trustees of a trust to inspect books and records of a public company for the purpose of valuing the trust’s shares and investigating possible mismanagement. The plaintiffs asserted that the company violated accounting and disclosure laws by failing to calculate and disclose a particular deferred tax liability.

Former Master, and current Superior Court Judge, the Honorable Abigail LeGrow, found that plaintiffs have shown no credible basis to infer mismanagement or wrongdoing by the board.  The Court found that an obvious defense to the purported claim existed—the board’s reliance on an audit firm for a complicated accounting issue—and thus denied inspection.

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.

Claims for breaches of fiduciary duties and related relief are not uncommonly met with motions to dismiss if the claims accrued more than three years prior to the misconduct at issue.  Certain tolling doctrines may serve to toll the standard three-year statute of limitations under 8 Del. C. § 8106.  One such tolling doctrine is the “mutual running account” theory, codified under 10 Del. C. § 8108, which provides: “In the case of a mutual and running account between parties, the limitation specified in § 8106 [three years] of this title shall not begin to run while such account continues open and current.”

Another doctrine is one of continuing wrongs or continuing breach, which is “narrow” and “typically is applied only in unusual situations.” (Slip op. at 29) (internal citations omitted).  One example where this doctrine is applied is where “plaintiff acquires his stock after a particular transaction has begun but before it is completed.”  Desimone v. Barrows, 924 A.2d 908, 924-925 (Del. Ch. 2007).

The recent decision of Am General Holdings LLC v. The Renco Group, C.A. No. 7639-VCS (Del. Ch. Aug. 22, 2016) addressed whether claims were tolled under Section 8108, and also under the continuing wrongs doctrine.  The Court declined to apply these narrow doctrines.  The opinion further clarifies that a plaintiff who idly sleeps on his rights and fails to use monitor one’s investment cannot rely upon a tolling doctrine.

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.

Under the Delaware Statutory Trust Act, a beneficial owner of a Delaware statutory trust may seek inspection of the books and records of such trust.  Those rights are codified under 12 Del. C. § 3819.  Section 3819 provides that each beneficial owner of a statutory trust has the right, subject to reasonable standards imposed by the trustees, to inspect the following documents:

  1. A copy of the governing instrument and certificate of trust and all amendments thereto, together with copies of any written powers of attorney pursuant to which the governing instrument and any certificate and any amendments thereto have been executed;
  2. A current list of the name and last known business, residence or mailing address of each beneficial owner and trustee;
  3. Information regarding the business and financial condition of the statutory trust; and
  4. Other information regarding the affairs of the statutory trust as is just and reasonable.

The recent decision by Vice Chancellor Montgomery-Reeves in the case of Grand Acquisition LLC v. Passco Indian Springs DST, C.A. 12003-VCMR (Del. Ch. Aug. 26, 2016) constitutes the first written opinion adjudicating the right to inspect the records of a Delaware statutory trust.

It is worth noting that the Court looked to case law construing rights in the context of LLCs and LLPs.  In addition, the Court confirmed that a contractual right to inspection is only subject to the conditions in the trust statute, 12 Del. C. § 3819, if the Trust agreement language so specifies.  Otherwise, “[beneficial owners” can inspect the Trust’s books and records without complying with Section 3819’s procedural and proper purpose requirements….” (Slip op. at 18).

Given that the trust agreement at issue contained a books and records inspection clause, Section 5.3(c), and the trust agreement did not state that inspection rights were otherwise subject to Section 3819, the Court analyzed the beneficial owners’ rights to inspect books and records under the terms of the trust agreement.  The Court also clarified that the trust’s “improper purpose defense” required the trust to demonstrate proof of probable harm to the trust, which the Court ruled the trust failed to do.

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 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.