The recent opinion of Protech Solutions, Inc. v. The Delaware Department of Health and Human ServicesC.A. No. 2017-0642-TMR (Del. Ch. Nov. 30, 2017) sets forth a helpful roadmap in terms of the Court’s determination of whether to uphold a state contract for professional services.

There, Plaintiff Protech Solutions, Inc. (“Protech”) challenged the decision of the State of Delaware Department of Health and Social Services, Division of Child Support Services to grant a contract to another bidder in response to a Request for Proposal (“RFP”) for maintenance and operations (“M&O”) services for the Delaware Child Support System.  Protech sought injunctive relief by way of a preliminary injunction motion.

Vice Chancellor Montgomery-Reeves denied the motion, finding that Protech “fail[ed] to demonstrate reasonable probability of success on the merits of any of [its] claims”, and Protech’s arguments were based upon a misunderstanding of Delaware procurement law.

In so holding, the Court relied on sections of the Delaware Procurement Code governing professional services contracts, rather than case law involving challenges to public works contracts under the Delaware Procurement Act, as requested by Protech.  The Court noted that  “the professional services negotiation subchapter establishes only general guidelines for the procurement process”, and that “agencies are granted great discretion to shape the process to meet their needs.”

As a result, given the more general guidelines established under the Act pertaining to professional services contracts, the Court found that Protech failed to meet the elements of a preliminary injunction motion.

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 a recent decision by the Delaware Court of Chancery, In re Straight Path Commc’ns Inc. Consol. S’holder Litig., Civil Action No. 2017-0486-SG (Del. Ch. Nov. 20, 20107), Vice Chancellor Glasscock stayed consideration of a pre-merger complaint brought by a stockholder, alleging claims that the controlling shareholder obtained a side deal at the expense of the corporation.  Because the deal had not yet consummated, plaintiff stockholder only sought monetary damages, while not opposing the closing of the merger.  Plaintiff asserted both direct claims for the side deal, as well as derivative claims alleging harm to the corporation.

Defendant corporation moved to dismiss the complaint, among other reasons asserting that the action was premature.  Given that the deal had not yet closed, the Court stayed consideration of the matter.  If the merger goes through, the Court held that the direct claims would then be ripe, and the derivative claims would be mooted.  If the merger fails, then the only permissible claim would be a derivative one belonging to the company arising from the side deal transaction with its controlling shareholder.

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 Wilkinson v. Schulman, C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017), the Court of Chancery denied a Section 220 books and records demand on the basis that even though the demand stated a “proper purpose”, the purpose was merely crafted by counsel for the stockholder in a lawyer manufactured litigation.

The Court found that Wilkinson’s service as a nominal plaintiff for his law firm, Levi & Korsinksy LLP (“L&K”), in this action is consistent with his past relationship with the firm. Wilkinson has served as a plaintiff for L&K in at least seven lawsuits, most of which challenged mergers.

In denying the demand, Vice Chancellor Laster found that “In this case, the trial record established that the purposes for the inspection belonged to Wilkinson’s counsel, L&K, and not to Wilkinson himself. Wilkinson simply lent his name to a lawyer-driven effort by entrepreneurial plaintiffs’ counsel.”

Further to this point, “The mere statement of a proper purpose, however, will not automatically satisfy § 220(b).”  Pershing Square, L.P. v. Ceridian Corp., 923 A.2d 810, 817 (Del. Ch. 2007).

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 Delaware law, if a shareholder requests that a company pursue litigation, the decision whether to pursue litigation on behalf of the company generally resides with the board as an exercise of its business judgment.  A stockholder lacks standing to bring suit on the company’s behalf unless the stockholder (i) has demanded that the directors pursue the corporate claim and the demand is wrongfully refused; or (ii) purports to initiate litigation on behalf of the company and alleges with particularity why pre-suit demand is excused as futile.

Under the Rales test, where a putative derivative plaintiff alleges demand futility, in order to avoid dismissal, the shareholder must point to particularized allegations in its complaint raising reasonable doubt that a majority of the board could impartially consider a demand to sue.  Rales v. Blasband, 634 A.2d 927, 934 (Del. 1993).

In the recent decision of Lenois v. Lawal, et al., C.A. No. 11963-VCMR (Del. Ch. Nov. 7, 2017), the Delaware Court of Chancery examined whether plaintiff stockholder adequately alleged demand futility.  This opinion demonstrates that merely because one officer or director may have acted in bad faith, does not excuse demand if the plaintiff is unable to plead particularized facts demonstrating that a majority of the board could not act impartially upon a stockholder demand.

In addition, this opinion illustrates that where a company’s charter contains an exculpatory provision under Section 102(b)(7) of the Delaware General Corporation Law, a plaintiff must plead facts showing that a majority of the board faces a risk of liability for claims that would not be exculpated, for example, claims for not acting in good faith or for violation of the duty of loyalty.

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 DGCL Section 220 books and records decision of The City of Cambridge Retirement System v. Universal Health Services, Inc.C.A. No. 2017-0322-SG (Del. Ch. Oct. 12, 2017), the Court of Chancery considered the propriety of a condition imposed by the defendant corporation in a confidentiality agreement that any subsequent litigation relying on corporate records produced in the action be deemed to incorporate by reference all such records produced (the “Incorporation Condition”).  Stated differently, the defendants and/or its directors wished to be able to rely on all documents produced in the books and records action to move to dismiss an anticipated derivative action.

Vice Chancellor Glasscock upheld the Incorporation Condition.  Section 220(c) of the Delaware General Corporation Law (“DGCL”) conveys on the Court discretion to “prescribe any limitations or conditions” on the inspection of corporate records by a demanding stockholder “as the Court may deem just and proper.”  8 Del. C. § 220(c).

The Court noted that “imposition of such a condition has been found appropriate in previous cases in this Court under Section 220, on the ground that it appropriately permits a defendant to respond to ‘cherry-pick[ed] documents’ that are taken ‘out of context,’ by pointing the Court to other documents already produced for assistance in determining the reasonableness of inferences drawn in any follow-on complaint.” Slip op., at 6.  The Court held that an incorporation condition “provides a remedy for the unreasonable anti-contextual use of a limited subset of the documents produced, in support of a complaint untenable when examined under the full universe of documents obtained.”  Id. at 6-7.

Plaintiff objected on the grounds that a defendant may manipulate the universe of documents by producing only a self-selected subset of documents of its choosing, without any punishment for failing to produce harmful documents.  The Court observed that the same could be said of a motion for summary judgment, in which a defendant wrongfully withholds documents in bad faith.  Vice Chancellor Glasscock posed the question: “does the risk of such potential malfeasance outweigh the benefits of allowing the court to eliminate complaints involving misleading citations to a limited subset of records?”  Id. at 8.  The answer was no.  The Incorporation Condition of the confidentiality agreement was upheld by the Court under 8 Del. C. § 220(c).

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 Mehta v. Kaazing CorporationC.A. No. 2017-0087-JRS (Del. Ch. Sept. 29, 2017), Vice Chancellor Slights examined a stockholder’s books and records request upon a Delaware corporation pursuant to 8 Del. C. § 220.  This opinion provides a useful roadmap for parties and practitioners seeking to inspect corporate books and records of a Delaware corporation.

Background

By way of brief background, plaintiff Vikram Mehta is a stockholder of Kaazing Corporation (“Kaazing”). He served as Kaazing’s CEO from October 2013 to April 2015, when he was terminated from that position by Kaazing’s board of directors.

Among other things, what led to Mehta’s books and records demand was alleged misstatements by the company concerning its financial well-being to stockholders.  For example, in February 2016, Kaazing’s CEO informed shareholders that the Company “ended 2015 with a very strong Q4.”  This communication allegedly caused shareholders to invest further into the Company.

However, on March 25, 2016, Kaazing delivered a very different message to its stockholders when it informed them of the need to engage in a $1 million bridge financing so that the Company could continue to operate.  According to Mehta, the note associated with the Series 1 bridge financing contained terms favorable to the lender to the detriment of the Company and its shareholders. Without prior notice to shareholders, the Company’s 2016 bridge financing note was thereafter amended twice to allow for investments of up to $2 million.

After certain shareholders (including Mehta) expressed concern regarding the impact of the Series 1 financing on their investment, Kaazing held a shareholder meeting in September 2016, to provide information concerning the Series 1 financing. During this meeting, Mehta and other similarly-situated shareholders again received an invitation to participate in the Series 1 financing on the condition that they sign certain documents that Mehta believed may relinquish shareholder rights under Kaazing’s Investors’ Rights Agreement. Mehta declined to participate. The Series 1 financing led to a dilutive conversion of Mehta’s 506,124 shares of Series B-1 preferred stock to 10,616 shares of common stock.

In January 2017, Mehta sent a Section 220 demand to Kaazing, in which he sought inspection of certain books and records to “(i) ascertain the value of his stock; (ii) ascertain whether there has been mismanagement, waste, or wrongdoing by the Company’s agents and representatives; (iii) determine what impact if any this mismanagement, waste, or wrongdoing, has had, or might have, on the value of Plaintiff’s shares of the Company; and (iv) communicate with other shareholders of the Company concerning the above.”  After some, but not all, of the demand documents were produced, Mehta filed a books and records action in the Delaware Court of Chancery in February 2017.

Analysis

At trial, Mehta continued to advance as his proper purposes the valuation of his membership interest in Kaazing and the investigation of mismanagement, waste or wrongdoing.

Regarding valuation of his stock, the Court noted that “It is settled in Delaware law that the valuation of one’s stock can be a proper purpose for the inspection of books and records if there is a particular need or reason for the valuation. In this case, however, Mehta has not demonstrated that valuing his membership interests justifies inspection since he has failed to identify any reason why he needs to value his membership interests at this time.”  Accordingly, the Court declined to provide any documents to Mehta related to this stated purpose.

Regarding the investigation of mismanagement, waste or wrongdoing, the Court was satisfied that Mehta “demonstrated a credible basis to suspect wrongdoing that justifies further investigation into mismanagement.” Mehta’s evidence of possible wrongdoing points to Kaazing’s stable financial status immediately prior to his termination and the Company’s rather sudden need for bridge financing after his termination, as well as the Board’s apparently contradictory statements in early 2016 regarding the Company’s financial success in 2015.

After determining the propriety of Mehta’s stated purposes, Vice Chancellor Slights then addressed whether the requested categories of documents were narrowly tailored to the stated purpose of investigating mismanagement or wrongdoing.

Key Takeaway:

This decision reinforces the notion that requesting documents for valuation purposes, while generally upheld as a “proper” purpose, will alone not suffice unless plaintiff also demonstrates what they plan to do with such documents.  Practically speaking, often times demand letters state that the stockholder seeks to value their shares in order to determine whether to sell their stock or purchase more stock in the company, or for tax or estate planning purposes.  However, idle curiosity will not suffice.

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 recent decision of LVI Group Investments LLC v. NCM Group Holdings LLC, C.A. No. 12067-VCG (Del. Ch. Sept. 7, 2017) addresses the concept of conspiracy theory of jurisdiction, under which which a non-resident may be subject to Delaware court jurisdiction if a co-conspirator commits an act in Delaware in furtherance of the conspiracy.

Specifically, according to the Delaware Supreme Court,

a conspirator who is absent from the forum state is subject to the jurisdiction of the court, assuming he is properly served under state law, if the plaintiff can make a factual showing that: (1) a conspiracy to defraud existed; (2) the defendant was a member of that conspiracy; (3) a substantial act or substantial effect in furtherance of the conspiracy occurred in the forum state; (4) the defendant knew or had reason to know of the act in the forum state or that acts outside the forum state would have an effect in the forum state; and (5) the act in, or effect on, the forum state was a direct and foreseeable result of the conduct in furtherance of the conspiracy.

Istituto Bancario Italiano SpA v. Hunter Eng’g Co., 449 A.2d 210, 225 (Del. 1982).

In LVI Group, Vice Chancellor Glasscock examined whether a non-resident CFO of a Delaware corporation was subject to jurisdiction in Delaware under the conspiracy theory of jurisdiction.  The Court found that plaintiff’s attempt to establish personal jurisdiction via a conspiracy theory fails because “[a] corporation cannot conspire with itself.”  Slip op. at 6.  Plaintiff alleges a conspiracy between defendant corporation, its executives and board members.  As this Court has explained, however, “a corporation generally cannot be deemed to have conspired with its officers and agents for purposes of establishing jurisdiction under the conspiracy theory.”  Id.

Plaintiff argued an exception to this rule in the Third Circuit decision of Johnston v. Baker, 445 F.2d 424 (3d Cir. 1971), because it pled that defendant CFO acted for “his own personal benefit because he was an LVI owner and was to become CFO of the new company with substantial compensation,” that is, defendant would become CFO of a new company with a “substantial” salary.

However, Vice Chancellor Glasscock noted that “[c]ourts interpreting the personal reasons exception of Johnston . . . have read it to mean a personal animus and/or desire for financial benefit other than one’s corporate salary.”  Slip op. at 6. Moreover, “[n]owhere in . . . Johnston is there any suggestion that the desire to protect or enhance one’s salary makes an agent sufficiently independent of the corporation to be capable of conspiring with it.”  Id. at 6-7.

Accordingly, the Court found that personal jurisdiction over the non-resident CFO cannot be premised on plaintiff’s conspiracy theory.

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 latest development in the ongoing TransPerfect dispute, the Court of Chancery denied Ms. Shawe’s application for interlocutory appeal, in the opinion of Shawe v. TransPerfect Global, Inc., C.A. No. 2017-0306-AGB (Del. Ch. Sept. 7, 2017).

By way of background, on August 13, 2015, the Court granted Elizabeth Elting’s petition to appoint a custodian (“the Custodian”) to sell TransPerfect Global, Inc. (“TPG” or the “Company”) under 8 Del. C. § 226 in order to remedy the dysfunction in the co-founders’ management of the Company and the deadlocks at the board and stockholder level.

In June 2016, Court accepted, with certain modifications, the Custodian’s recommendation for a proposed plan of sale for the Company, and issued an implementing order in July 2016 (the “Sale Order”). On February 13, 2017, the Supreme Court affirmed the post-trial decision and the Sale Order.

Ms. Shawe filed the latest action on April 20, 2017, asserting a claim under Section 211(c) of the DGCL to compel TPG to hold an annual meeting of stockholders.  Elting then filed a motion to enforce the Sale Order and for sanctions, asserting that the Section 211 action violated the Sale Order. The Court ordered the parties to engage in mediation before former Chancellor Chandler.

After mediation reached an impasse, on August 4, 2017, the Court issued a letter decision granting Elting’s motion to enforce the Sale Order, denying Elting’s motion for sanctions, and denying Ms. Shawe’s motion to expedite.  The Court found that Shawe’s Section 211 action was to remove the Custodian and end the sale process, which was inconsistent with the Sale Order, and that ordering a stockholders’ meeting “would be a futile exercise”.

Ms. Shawe applied for an interlocutory appeal of the August 4th ruling, which was opposed by Elting and the Company.

Chancellor Bouchard denied the application for interlocutory appeal.  The application is governed by Supreme Court Rule 42(b)(i), which provides that an interlocutory appeal will not be certified “unless the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.”  Del. S. Ct. Rule 42(b)(i).

The Court found that the August 4th ruling did not decide a substantial issue of material importance, but rather was the logical consequence of enforcing the Sale Order.  The Court also found that scheduling a stockholders’ meeting may jeopardize the sale process, and that no considerations of justice would be served by granting interlocutory review.  Stay tuned for further updates in the TransPerfect dispute.

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 Carl Zeiss Vision, Inc. v. REFAC Holdings, Inc., C.A. No. 11513-VCS (Del. Ch. Aug. 24, 2017), Vice Chancellor Slights denied a motion to vacate an arbitration award.  Noting that the “standard of judicial review with respect to such applications is among ‘the narrowest . . . in all of American jurisprudence'”, the Court found unconvincing defendants’ argument that the arbitration panel “eviscerate[d] the essential term” of the agreement sua sponte and then “permit[ted] the agreement to remain in effect after gutting that term.”  The Court was not inclined to permit a “do over” of the arbitration.

In declining defendants’ motion to vacate the award, the Court noted that the Federal Arbitration Act (“FAA”) “require(s) reviewing courts to give practically the highest degree of deference, short of ‘untouchable,’ recognized in the law to an arbitrator’s award. Indeed, to overturn an award, the court must be satisfied that ‘there [is] absolutely no support at all in the record justifying the arbitrator’s determinations.'”

Key Takeaway

This decision reinforces the notion that overturning an arbitration award is a “near[] vertical climb”.  Although arbitration has the benefits of confidentiality and potentially limited discovery and speed, the downfall for the losing party is the difficulty in overturning an award.

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 Delaware Supreme Court has just reached a decision that highlights the importance of taking the time to review your estate planning documents each and every year to ensure that the documents still fit, and not inadvertently allowing your testamentary plans to be changed. The decision affirmed an August 2016 Court of Chancery opinion.

Last will and testament
Copyright: stuartburf / 123RF Stock Photo

Edward J. Burke named Mildred, his wife of then 13 years, as his Power of Attorney on March 17, 1998 and on that same date, executed his Will.  Under his Will, Edward left the Virginia property that he then owned to the Trustee of the Trust established under his Will.  Edward directed the Trustee to allow his daughter to live on the Virginia property for three years and then directed the Trustee to sell the Virginia property.  The income from that sale was to go to Mildred for life and after Mildred’s death the remaining sum was to be distributed to his four children.  Edward left the residue of his estate to Mildred.

In 2012, Edward sold the Virginia property for $150,000 and deposited the net proceeds into a separate and new bank account that was in his name alone.  According to his son, Kevin, Edward had repeatedly told his children that these funds were being held for them in accordance with the 1998 Will and testimony was offered to prove that Edward had repeatedly denied Mildred’s request to gain access to this account because he wanted the funds to go to his children.  Edward became sick and had quadruple heart bypass surgery in January 2013.  Around this time, Mildred added her name as a joint owner to the account using the Durable Power of Attorney, according to Kevin without her husband’s knowledge or consent.

Edward died on October 10, 2013, leaving to survive him, Mildred (after having been married for 28 years), and his four children from his first marriage including Kevin.

Since nothing was in Edward’s name alone upon Edward’s death, Mildred did not probate Edward’s estate and due to her retitling of Edward’s account (which held the proceeds from the sale of the Virginia property) the Virginia sale proceeds passed by operation of law to Mildred.

Kevin sued his step-mother alleging that Edward had purposefully segregated the proceeds from the sale of the Virginia property with the intent to preserve the funds for his children.  Mildred alleged (and Master Ayvazian agreed) that Edward had changed his testamentary plan when he sold the Virginia property under the doctrine of ademption.  Further, the Court held, that even if Edward had not known about or approved of Mildred’s adding herself to the account, and even if the Court held that Mildred had to return the money from the account to the estate, the money would have flowed under the Will into the residuary clause, thereby ending up in Mildred’s hands anyway as she was the sole remainder beneficiary.

Master Kim E. Ayvazian relied upon In the Matter of Estate of Hobson, 456 A.2d 800 (1982):

The Court in Hobson held that:

“[U]nder Delaware law, when a testator has sold real estate during her lifetime, such disposition works an ademption of the specific devise in her Will.  Consequently, the rights of devisees do not attach by way of substitution to the proceeds of its sale or to other property subsequently acquired by the testator. Moreover, in Delaware the rule of ademption is not dependent on the apparent intention of the testator.  In fact, the application of the rule may, in many instances, defeat the intention of the testator. ” (Emphasis added.)

What did Edward actually intend?  Tough to say since Edward cannot testify.  But clearly, if Edward’s intent is not important, then it really doesn’t matter.  Even if Kevin could have proven that his father intended to or meant to leave this money to his children, this would not have been enough for the children to inherit the sales proceeds because:

  1. The Durable Personal Power of Attorney was sufficiently broad to enable Mildred to retitle the funds jointly thereby defeating Edward’s supposed intent.
  2. Edward had not changed his Will after the sale of the Virginia property and since Mildred was the residuary beneficiary, then the money from the sale would have flowed through to the residue to Mildred, not to the children.

Assuming that Edward wanted this money to go to his children, what could Edward have done to ensure that the proceeds from the sale of his Virginia property actually went to his children?

Edward had a smaller account with a daughter as joint owner but Mildred removed the daughter’s name from this account before Edward’s death so this account, too, went to Mildred.

How could Edward have ensured that the money went to his children?

Edward should have reviewed his Will after the sale of the Virginia property, and prepared a Codicil to leave the proceeds from the sale of the Virginia property to his children.

Edward should have also revised his Durable Power of Attorney to thwart Mildred’s right to add her name to this account.  As shown by this case, Durable Powers of Attorney are powerful documents – under which it is possible to completely change someone’s testamentary scheme.

Key Takeaway:

Take the time to review your estate planning documents each and every year to ensure that the documents still fit your family and do not inadvertently let your testamentary plans get changed by anyone other than you.