In Continental Automotive Systems, Inc. v. Nokia Corporation, the Court of Chancery confirmed that, “absent special circumstances, discovery will be stayed pending determination of a motion to dismiss the complaint where the ground for the motion offers a reasonable expectation that if the motion is granted litigation in this or another forum will be avoided.”  The Court noted that the burden is placed on the party seeking a stay to show that there are practical reasons for staying discovery, however avoidance of potentially unnecessary discovery will usually satisfy the minimal burden.

Although the Court routinely directs that discovery be held in abeyance while a motion to dismiss is pending, Plaintiff opposed the stay of discovery based upon the procedural posture of the litigation.  Continental filed its complaint in January of 2021.  Nokia then removed the action to the U.S. District Court for the district of Delaware.   Ten months after the initial complaint filing, following contested litigation in the District Court, the action was remanded back to the Court of Chancery by Opinion and Order dated November 15, 2021.  Nokia filed its Motion to Dismiss on November 29, 2021 and then the Motion to Stay Discovery on December 3, 2021.  Plaintiff argued that the stay should be denied based upon the delay caused by Nokia’s ill-fated removal bid.  The Court of Chancery held that although Continental’s frustration is understandable, “the costs and hardship to defendants if discovery were to proceed outweighs plaintiffs’ need for discovery and the risks to plaintiffs if a stay were granted.”  This holding confirms that absent special circumstances such as an expedited matter, litigants should expect that discovery will not go forward while a Rule 12 Motion to Dismiss is pending.

Seth is a commercial litigator in Fox Rothschild’s Delaware office and can be reached at Seth Niederman (302) 622-4238.

In Rummel Klepper & Kahl, LLP v. Delaware River & Bay Authority, C.A. No. 2020-0458-PAF (Del. Ch. Jan. 3, 2022), the Court of Chancery considered Defendant’s motion to dismiss and to compel arbitration.  The Plaintiff and Defendant entered into a Consulting Services Agreement (“Agreement”) that contained an arbitration clause.  Under the arbitration clause, the Defendant’s executive director was designated as the arbitrator.  The Plaintiff brought suit to enjoin the Defendant from pursuing arbitration of disputes arising under the Agreement.  The Plaintiff argued that the Defendant was not entitled to arbitration because (a) the disputes related to work performed after the expiration date of the Agreement; (b) the disputes were time-barred under a statute of repose, 10 Del. C. § 8127; and (c) the arbitration clause was unconscionable because it designated Defendant’s employee as the arbitrator.  The Defendant moved to dismiss and to compel arbitration on the basis that the challenges to arbitration were issues of procedural arbitration to be decided by the arbitrator.

The Court granted the motions to dismiss and to compel arbitration. A motion to dismiss based on a contractual arbitration clause implicates the Court’s subject matter jurisdiction, and so it is reviewed under Court of Chancery Rule 12(b)(1).  “‘[A] motion to dismiss for lack of subject matter jurisdiction will be granted if the dispute is one that, on its face, falls within the arbitration clause of the contract.”  Under Delaware law, issues of substantively arbitrability generally are decided by courts, while issues of procedural arbitrability generally are decided by the arbitrator.  Substantive arbitrability includes “a dispute over the scope of an arbitration provision” or “whether an arbitration clause is valid and enforceable.” Procedural arbitrability includes “whether prerequisites such as time limits, notice, laches, estoppel, and other conditions precedent to an obligation to arbitrate have been met, as well as allegations of waiver, delay, or a like defense to arbitrability.”

The Court determined that the applicability of a statute of repose, like 10 Del. C. § 8127, was procedural in nature and thus must be decided by the arbitrator.  Prior to this case, Delaware courts had not definitively stated whether a statute of repose was a matter of procedural or substantive arbitrability.  The Court noted that the U.S. Supreme Court views time limits as an issue presumptively for the arbitrator, citing Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002).

The Court further held that disputes concerning work completed after the expiration of the Agreement are subject to the arbitration clause.  The Court observed that the parties intended the continued work to be extensions of the original agreement.  Because the disputes brought in connection with services performed both before and after the expiration date depended upon the existence of the Agreement, they fell within the scope of the arbitration clause.

Finally, the Court rejected Plaintiff’s argument that the arbitration clause was unconscionable.  The court noted that unconscionability is used “sparingly.”  “To find unconscionability, the court must find both procedural and substantive unconscionability.”  Procedural unconscionability relates to the procedures that led to the execution of the contract, including the relative bargaining strength of the parties.  Substantive unconscionability requires a finding of terms that are so imbalanced as to shock the conscience.  The Court determined that neither procedural nor substantive unconscionability exist in this case.  Other bidders for the work subject to the Agreement did not object to the arbitration clause, which undermines the position that the provision was unconscionable.  Moreover, “The fact that the chosen arbitrator may be an employee of one of the parties is not sufficient to show unconscionability.”  Both parties were sophisticated parties who were aware of and agreed to the arbitration clause. Accordingly, the clause was not unenforceable for unconscionability.

The Court’s opinion is available here.

In a 77-page Memorandum Opinion issued by Vice Chancellor Fioravanti in Cindy Harcum v. John Lovoi et al., C.A. No. 2020-0398-PAF (Del. Ch. Jan. 3, 2022), the Delaware Court of Chancery dismissed a shareholder suit challenging a $1 billion sale of Roan Resources, Inc. (the “Company”) to a private equity-based buyer, Citizen Energy Operating, LLC (“Citizen”).

Plaintiff Cindy Harcum, individually and on behalf of a purported class of former stockholders of the Company, asserted claims against four Company directors, two officers and two investing businesses to recover damages for alleged breaches of fiduciary duties arising from a 2019 going-private merger, wherein Citizen acquired the Company in an all cash transaction through which Company stockholders received the right to payment of $1.52 per share of their Company common stock.  Specifically, through the Amended Complaint Plaintiff contended that Defendant John Lovoi, and persons and entities affiliated with Lovoi, controlled the Company, stood on both sides of the transaction, and received unique benefits not shared with the remaining stockholders of the Company.  Plaintiff further asserted that several of the Company’s Board members made material misrepresentations and omissions in the proxy statement issued to obtain stockholders’ votes for the Merger.

Vice Chancellor Fioravanti rejected Plaintiff’s allegations and dismissed all claims against Defendants.  The Memorandum Opinion held that Defendants JVL Advisors, LLC, its founding and managing director John Lovoi, Roan Holdings LLC and two Company directors (Paul B. Loyd and Michael B. Raleigh) were not conflicted controlling stockholders because Plaintiff failed to show that they stood on both sides of the transaction or obtained a unique benefit to the detriment of other stockholders.  Specifically, the Court found that Plaintiff set forth no support for her position that Paul Loyd and Michael Raleigh were controlling stockholders of the Company.  With regard to Lovoi (who Defendants conceded was a controlling stockholder of the Company) and JVL Advisors and Roan Holdings (who the Court made no determination as to whether they were controlling stockholders), the Court rejected Plaintiff’s claim for breach of fiduciary duty on the bases that: (1) Plaintiff made no allegations that Lovoi, JVL Advisors and Roan Holdings “had any financial interest in Citizen” but rather, Plaintiff’s assertion that they stood on both sides of the transaction was based upon “unsupported” theories; and (2) Plaintiff failed to demonstrate that Lovoi, JVL Advisors and Roan Holdings received any benefits not shared with other stockholders through the resolution of a pending arbitration action and repayment of a loan under the terms of the transaction.

The Court further examined Plaintiff’s arguments under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304, 312 (Del. 2015).  Under Corwin, when a transaction is approved by a fully formed, uncoerced vote of the disinterested holders, the business judgment rule applies.  After fully evaluating the disclosures made in the Proxy to the stockholders, Vice Chancellor Fioravanti rejected Plaintiff’s claims that the stockholders’ votes on the transaction were uninformed.  Accordingly, the Court held that any Revlon claims were cleansed under Corwin.

The Court also rejected Plaintiff’s claims against two of the Company’s officers in connection with the proxy statement disclosures.

The Court’s Memorandum Opinion can be read in full here.

The Delaware Supreme Court opinion in AB Stable VIII LLC v. MAPS Hotels and Resorts One, LLC, et al., No. 71, 2021, (Del. Dec. 8, 2021), considers whether a business’s response to the COVID-19 pandemic violated an “ordinary course covenant” by which the Seller promised not to deviate from running the business in the ordinary course, absent the buyer’s consent, between the date of signing and the date of closing on a sale agreement.  The Supreme Court affirmed the Court of Chancery’s decision, C.A. No. 2020-0310 (Del. Ch. Nov. 30, 2020), finding that the Seller’s post-signing COVID-19 response, while reasonable, breached its obligation to operate the business as it was ordinarily run.  The Court of Chancery’s decision in AB Stable was also significant for its interpretation of the material adverse effect (“MAE”) clause, though that issue was not presented on appeal.

The sale agreement contemplated the sale of 15 luxury hotels for a purchase price of $5.8 billion.  The parties executed the sale agreement in September 2019 and closing was to take place in April 2020.  The sale agreement contained an “Ordinary Course Covenant” whereby the Seller agreed to operate “only in the ordinary course of business consistent with past practice in all material respects,” absent the Buyer’s prior written consent, which was not to be “unreasonably withheld, conditioned or delayed”.  The sale agreement also contained a material adverse effect clause, which defined an MAE as “any event . . . that would have a material adverse effect on the business, financial condition, or results of operations of the Company and its Subsidiaries,” subject to certain exceptions, including “natural disasters and calamities.”

In February and March 2020, prior to closing, the seller took action to address the pandemic.  It closed two hotels, operated other hotels in a “closed but open” fashion, reduced staffing, and paused all non-essential capital spending.  After the Seller took these actions, it informed the Buyer of the Seller’s pandemic response and asked for the Buyer’s consent.  The Buyer asked for more information, but the Seller did not respond.

The Buyer issued formal notice of default in mid-April.  Ten days later, the Seller brought suit in the Court of Chancery to enforce the sale agreement.  The Buyer filed counterclaims, claiming that (i) the Buyer had no obligation to close because the pandemic caused the Seller to suffer an MAE and the Seller failed to comply with the Ordinary Course Covenant; (ii) the Buyer validly terminated the sale agreement; and (iii) the Buyer was entitled to the deposit and its transaction costs and fees.

Following an expedited trial, Vice Chancellor Laster found in the Buyer’s favor.  The Court concluded that the Seller breached the Ordinary Course Covenant due to its pandemic response.  The Court also determined that the pandemic fell within the “natural disasters and calamities” exception to the MAE clause, and therefore did not give rise to an MAE.  The Seller appealed, arguing that the Court of Chancery erred because (i) acting in the ordinary course of business included proportional changes in response to extraordinary circumstances, consistent with other hotels; and (ii) the parties allocated the risk of a pandemic to the Buyer through the MAE provision.

On appeal, the Delaware Supreme Court affirmed.  The Court explained that the Ordinary Course Covenant required the Seller to operate consistent with its own past practices; the covenant did not refer to what was ordinary in the industry.    The Court also noted that the covenant did not have a reasonable efforts provision.  The Court deferred to the Court of Chancery’s factual finding that the Seller’s pandemic response was “inconsistent with past practice and far from ordinary.”  The Seller could have sought the Buyer’s approval before making changes in response to the pandemic, but it did not. The Seller thus breached the Ordinary Course Covenant and excused the Buyer from closing.

The Court rejected the Seller’s argument that the Ordinary Course Covenant was inconsistent with the MAE clause’s intent to transfer the risk of the pandemic to the Buyer.  The Court explained that a breach of the Ordinary Course Covenant was not restricted to include an MAE, the “MAE standard is much higher and ‘analytically distinct’ from materiality in the Ordinary Course Covenant[,]” and “an ordinary course covenant and MAE provision serve different purposes.”

In Todd Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW, memo. op. (Del. Ch. Dec. 3, 2021), the Court of Chancery found that a stockholder lacked standing to seek inspection of books and records under 8 Del. C. § 220 because he filed suit after his shares were cancelled in a merger.  This decision represents a continuation of the approach articulated in Joe Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG, memo. op. (Del. Ch. Feb. 27, 2017).  In Monster, Vice Chancellor Glasscock found that stockholders who held stock at the time they filed suit retained standing even if the stockholder was squeezed out in a merger; however, a stockholder who brought suit post-merger lacked standing.  Houston Wire favorably relied upon Monster.

In Houston Wire, the stockholder’s shares were canceled at a defined effective time, rather than at closing as in Monster.  The effective time was defined as the time that the certificate of merger was filed with the Secretary of State. The plaintiff-stockholder’s complaint was filed three hours after the certificate of merger was filed with the Secretary of State.  The stock, however, continued to trade on Nasdaq until the end of the day. Vice Chancellor Will granted defendant’s motion to dismiss on the basis that the plaintiff-stockholder lacked standing to sue under Section 220.

In the context of a statutory appraisal judgment, the Delaware Court of Chancery recently adopted outsider reverse veil-piercing into Delaware law.   Manichaean Cap., LLC v. Exela Techs., Inc., 2021 WL 2104857 (Del. Ch. May 25, 2021).   In a case of first impression, Vice Chancellor Slights acknowledged the risk “that reverse veil-piercing may be used as a blunt instrument to harm innocent parties, and to disrupt the expectations of arms-length bargaining,” but on balance deemed these risks acceptable, concluding that “the recognition of risks creates an opportunity to manage them . . .” Id. at *11.

Plaintiffs, former stockholders of SourceHOV Holdings and dissenters in a merger with Exela, sought to enforce an unpaid statutory appraisal judgment against Exela after its merger with SourceHOV Holdings.  Id. at *1.  Plaintiffs alleged that Exela and its subsidiaries had fraudulently bypassed funds away from SourceHOV Holdings, which Exela knew would be subject to a future judgment, rendering the subsidiary insolvent and denying Plaintiffs the value of their shares.  Id. at *2.  Plaintiffs, as outside creditors, set forth to enforce the judgment upward on Exela, so that Exela was unable to “seize Plaintiff’s property without paying for it.”  Id. at *4.

The Court of Chancery’s analysis differentiated between outsider and insider veil-piercing and indicated that only the outsider version was being endorsed by the decision.  Id.  Outsider veil-piercing refers to “[a]n outside third party, frequently a creditor, urg[ing] a court to render a company liable on a judgment against its member.” Id. As a threshold issue, outsider veil-piercing applies “only in the most ‘exceptional circumstances’” and if those circumstances are present, the presence of “alter ego” factors are then considered.  Id. at *12.  These factors, none of which are dispositive, include but are not limited to “insolvency, undercapitalization, [and] commingling of corporate and personal funds.”  Id.  If “alter ego” factors are sufficiently present, the final step of the analysis is to consider “whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.”  Id.  If fraud or injustice is found, then the last step of the analysis is satisfied and piercing the veil is deemed to be appropriate. Id.

Vice Chancellor Slights’ ruling was made in a decision denying a motion to dismiss Plaintiffs’ veil-piercing claim and in doing so, endorsed outsider reverse veil-piercing as a new doctrine available under Delaware law. Id. at 17.

A motion to reargue in the Delaware Court of Chancery “may be served and filed within 5 days after the filing of the Court’s opinion or the receipt of the Court’s decision.” Court of Chancery Rule 59(f).

Last month, in one of Chancellor Andre G. Bouchard’s final acts before retirement, the Court ruled that the time to move for reconsideration of a ruling that is first given verbally begins on the date an oral ruling is rendered, not on the date an implementing order is filed or granted.   Macomb County Employees’ Retirement System v. McBride et. al. (May 4, 2021).  Specifically, Chancellor Bouchard held “[t]he motion is untimely because it was filed on March 17, 2019, more than 5 business days after the oral decision on March 9, 2019.”  Id. (emphasis added).

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.