In the recent Delaware Supreme Court decision of Leaf Invenergy Co. v. Invenergy Renewables, LLC, No. 308, 2018 (Del. May 3, 2019), the High Court found that a nominal damages award of $1 by the Court of Chancery in a suit over a multi-billion dollar sale of a portion of  defendant/appellee Invenergy Wind LLC (“Invenergy”), a wind farm developer, should be reversed because the sale violated the consent rights of the plaintiff/appellant investor, Leaf Invenergy Co. (“Leaf”), warranting $126 million in damages.

The High Court found that Leaf had previously negotiated consent rights when investing $30 million into Invenergy, which required the investor’s permission in advance of any material sale.  Per the opinion, the relevant contract provision reflected each side’s intention to either move forward with a such a sale only with Leaf’s consent, or to require Invenergy to buy out Leaf if it did not consent to the transaction.  When the Court of Chancery determined that those rights had been breached, it should have upheld contractual provisions calling for a damages multiplier, per the Supreme Court.

Instead, Vice Chancellor Laster held that an “efficient breach” had occurred, because even though Invenergy did not seek Leaf’s consent prior to the sale, the trial court found that Leaf received more in the sale than it would have under the contract terms.  Vice Chancellor Laster thus decided on the $1 nominal damages award because he determined that Leaf was left no worse off despite the breaches, in light of the efficient breach doctrine.

When assessing damages, the High Court found that the Court of Chancery erred by limiting its focus on the harm to Leaf in the context of the results of the sale, rather than considering the full effect of Invenergy’s contractual breach in failing to seek Leaf’s consent and then failing to pay the target multiple.  The Supreme Court stated held the trial court should have taken a broader approach that “considered the combination of [all aspects of the contractual breaches] when assessing what injury Leaf suffered from Invenergy’s breach and thus what amount of damages would return Leaf to the position it would have been in had Invenergy not breached [the contract]”.  Slip op. at 28.

Accordingly, the Delaware Supreme Court found that Leaf was entitled to a payment of the contractual multiple given that it never provided its consent to the sale.  As a result, it reversed Chancery’s award of nominal damages and awarded Leaf $126 million in damages.

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 opinion issued by the Delaware Court of Chancery, Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. Apr. 30, 2019), Vice Chancellor Montgomery-Reeves granted advancement to a member of a Delaware LLC.  In the case, plaintiff Freeman Family LLC (“Plaintiff”), a member of defendant Park Avenue Landing LLC (“LLC” or “Defendant”), requested advancement under the terms of the LLC’s operating agreement.  The operating agreement provides that members shall receive advancement if they are made party to an action by reason of their status as a member.  Plaintiff, a member of the LLC, is defending a federal lawsuit in New Jersey brought by the LLC’s managing member, relating to the Plaintiff’s call right under the operating agreement.

After Defendant answered the complaint, Plaintiff filed a motion for judgment on the pleadings pursuant to Court of Chancery Rule 12(c), and Defendant followed with its own cross-motion for judgment on the pleadings.  As a preliminary note, the Court observed that “[a]dvancement cases are particularly appropriate for resolution on a paper record, as they principally involve the question of whether claims pled in a complaint against a party . . . trigger a right to advancement under the terms of a corporate instrument.” Slip op. at 7 (citing DeLucca v. KKAT Mgmt., LLC, 2006 WL 224058, at *6 (Del. Ch. Jan. 23, 2006)).

Turning to the substance of the dispute, the Court noted that the cross-motions at issue center on the interpretation of the LLC’s operating agreement.  In addition, the Court also found that corporate case law, interpreting D&O’s rights to advancement from a Delaware corporation under Section 145 of the Delaware General Corporation Law (“DGCL”), applied to the Court’s analysis.  This is because the language in the advancement provision of the LLC’s operating agreement was substantially similar to the language of 8 Del. C. § 145.

Under Section 145 of the DGCL, claims for indemnification or advancement by a director or officer of a corporation must relate to lawsuits or proceedings “by reason of the fact” that such person was or is serving in such capacity.   The Court examined Delaware case law in the corporate context addressing whether suit is brought against a party “by reason of the fact” that the party was acting in an official capacity on behalf of the company.  Vice Chancellor Montgomery-Reeves noted that under Delaware case law, the “by reason of the fact” standard is broadly interpreted, “requir[ing] a causal relationship between the official capacity and the lawsuit.” Slip op. at 18.

In this action, the Court held that the underlying action implicated Plaintiff’s performance of its official duties under the operating agreement.  Accordingly, the Court granted Plaintiff’s motion for judgment on the pleadings granting Plaintiff advancement, and denied Defendant’s cross-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.

On April 17, 2019, the Delaware Supreme Court reversed a significant appraisal decision from the Delaware Court of Chancery in Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Del. Apr. 17, 2019).  In Aruba, the Supreme Court reversed the trial court’s fair value award of $17.13 a share, directing the Court of Chancery to enter judgment at the deal price (minus synergies value) of $19.10 per share.

In so doing, the High Court found that the Court of Chancery improperly concluded that the fair value of Aruba’s stock was equal to the unaffected market price of Aruba’s shares, which was thirty percent lower than the deal price.  The Supreme Court ruled that the Vice Chancellor’s “decision to use the trading price as his sole basis for determining fair value was his alone, and in no way dictated by a rational reading of Dell”. (Slip op. at 20).

That said, the Supreme Court agreed with the Court’s conclusion that, on this record, “‘the deal price . . . operates as a ceiling for value.’” Slip op. at 25.  After excluding synergy values “or other value the buyer expects from changes it plans to make to the company’s ‘going concern’ business plan” (Slip op. at 9), the Supreme Court accepted Aruba’s calculation of its fair value at $19.10 per share, which was below the $24.67/share deal price, but higher than the trial court’s $17.13 market price valuation.

Key Takeaway: The Aruba decision reinforces the recent string of Delaware decisions, such as Dell and DFC Global, in which the Delaware Supreme Court has found that the deal price should represent strong evidence of fair value (assuming an arm’s length transaction and robust sales process), subject to reduction for synergies.  Appraisal practitioners should continue to take notice.

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 Otto Candies, LLC v. KPMG, LLP, C.A. No. 2018-0435-MTZ (Del. Ch. Apr. 25, 2019), the Delaware Court of Chancery found that Rule 15(aaa) applied to a case transferred from the Superior Court when plaintiffs, faced with a motion to dismiss for failure to state a claim under Rule 12(b)(6), declined to amend their complaint in lieu of filing an answering brief.  Court of Chancery Rule 15(aaa) provides that if a party declines to either amend their complaint or file a motion to amend in response to a motion to dismiss filed under Rules 12(b)(6) or 23.1, and the court concludes that the complaint should be dismissed under either of these rules, then “such dismissal shall be with prejudice … unless the Court, for good cause shown, shall find that dismissal with prejudice would not be just under all the circumstances.”

The significance of Otto Candies is that the action was initially filed in the Delaware Superior Court, which is not subject to Court of Chancery Rule 15(aaa).  Following briefing on the motion to dismiss, the action was transferred to the Court of Chancery under 10 Del. C. § 1902 because the Superior Court lacked subject matter jurisdiction over the action.  The Court of Chancery then issued a memorandum opinion dismissing the action for lack of personal jurisdiction and failure to state a claim.  To inform whether the dismissals should be with or without prejudice, the Court’s opinion requested supplemental briefing on the applicability of Rule 15(aaa) to fully briefed dispositive motions transferred under Section 1902.

Following supplemental briefing, and in a matter of first impression, the Court of Chancery “conclude[d] that Rule 15(aaa), or the policies that motivate it, apply when a complaint is transferred to this Court subject to a fully briefed motion seeking dismissal under Rules 12(b)(6) or 23.1. Transferring plaintiffs must either seek leave to amend or stand firm on their complaint and risk dismissal with prejudice under Rule 15(aaa).”

In other words, if a party files a complaint in the Delaware Superior Court (which does not have a Rule 15(aaa) analogue), and the case is transferred to the Court of Chancery following briefing before the Superior Court, the party’s failure to amend the complaint in lieu of filing an answering brief to a motion to dismiss may cause dismissal to be with prejudice under the Court of Chancery Rules.  Because this was a matter of first impression, however, the Court found in the interests of justice that plaintiff be permitted a “mulligan” to amend their complaint.

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 CelestialRX Investments, LLC v. Krivulka, C.A. No. 11733-VCG (Del. Ch. Mar. 27, 2019), the Delaware Court of Chancery addressed whether certain named defendants were subject to jurisdiction in Delaware under the implied consent statute of 6 Del. C. § 18-109(a).  That statute provides a statutory basis for “managers” (as defined in the LLC Act), and those who otherwise participate materially in the management of the LLC, to be subject to personal jurisdiction in Delaware, provided that due process would not be offended.

According to the Court, “Due process would not be offended if Plaintiffs can show that (1) the allegations against the defendant-manager focus centrally on his rights, duties and obligations as a manager of a Delaware LLC; (2) the resolution of the matter is inextricably bound up in Delaware law; and (3) Delaware has a strong interest in providing a forum for the resolution of the dispute relating to the manager’s ability to discharge his managerial functions.” Slip op. at 51, citing Hartsel v. Vanguard Grp., Inc., 2011 WL 2421003, at *9 (Del. Ch. June 15, 2011).

The complaint alleged that one defendant was a former manager and the other served as President and CEO of the company.  However, the Court found that these allegations were insufficient to exercise personal jurisdiction over such defendants where the complaint alleged that another defendant, named as the “manager” in the operating agreement of the LLC, exercised “absolute control an discretion” over the LLC.  As a result, the Court found that the two defendant officers did not “participate materially” in the management of the LLC under the implied consent statute of the Delaware LLC Act, and thus declined to exercise jurisdiction over such individuals under that statute.

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 Delaware Supreme Court decision of Sunline Commercial Carriers, Inc. v. CITGO Petroleum Corp., No. 185,2018 (Del. Mar. 7, 2019), at issue between the parties to two related contracts was the computation of the termination date.  The parties had contracted for defendant/appellee CITGO to ship oil using the trucking company of the plaintiff/appellant Sunline.  The Delaware Superior Court granted summary judgment in favor of CITGO, finding dispositive a provision in one of the agreements that specified a one year term.

On appeal, the High Court found that ambiguity existed because the same agreement also contemplated renewals, required notice to terminate, and contemplated a review of pricing terms prior to the one-year period.  To add to the confusion, the same contract stated that it would remain effective until a second related contract, with a later default termination date, was terminated.

Accordingly, the High Court found that the agreement “is ambiguous, and the parties are entitled to a trial where they can attempt to prove, using parol evidence, their interpretation of the contract.” Slip op. at 17 (citing GMG Capital Invs., LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 783 (Del. 2012) (“But, where reasonable minds could differ as to the contract’s meaning, a factual dispute results and the factfinder must consider admissible extrinsic evidence.”).  As such, the case was remanded for trial which permitted extrinsic evidence of the interpretation of the relevant terms of the contracts, in light of the ambiguity.

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 Hoeller v. Tempur Sealy Int’l Inc., C.A. No. 2018-0336-JRS (Del. Ch. Feb. 12, 2019), the Court of Chancery adjudicated a books and records dispute brought pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”).  In a very careful and thoughtful memorandum opinion, Vice Chancellor Slights denied plaintiff’s books and records demand, finding that a proper purpose had not been stated.

Plaintiff’s demand letter alleged that misconduct or wrongdoing occurred in light of defendant’s loss of a major client, Mattress Firm, a long-term customer relationship accounting for a substantial percentage of defendant’s sales.  On the day that the company disclosed to investors that it had issued formal termination notices for all brands supplied to Mattress Firm, the company’s stock fell significantly.

Prior to the filing of the books and records suit, the company produced a subset of documents to plaintiff under a confidentiality agreement, which according to the company demonstrated that no wrongdoing existed in connection with the termination of the contract with Mattress Firm.  Plaintiff, unsatisfied with the production, moved forward with the books and records suit before the Court of Chancery.

Plaintiff alleged three theories of wrongdoing on the part of defendant’s management: (i) “allowing or causing the Company to breach its contracts with [Mattress Firm]”; (ii) “allowing or causing the Company to ruin its relationship with its most important customer”; and (iii) “allowing or causing the Company to make false and misleading statements to the investing public related to the fact that the Company’s relationship with its key client, Mattress Firm, had soured, and was at significant risk of termination.”

Vice Chancellor Slights declined to find that a credible basis to infer wrongdoing was established that would otherwise entitle plaintiff to inspect company books and records. This in spite of the fact that “[a]s the lowest standard of proof known in our law, credible basis requires that the plaintiff demonstrate only some evidence of wrongdoing, not that wrongdoing actually occurred.” Slip op. at 20 (internal quotations omitted).

The Court noted that Plaintiff’s theory of mismanagement was that “a customer of Mattress Firm’s significance ‘doesn’t, at the drop of a hat, just leave. Something smells. There is smoke. I suspect there’s fire.'”  However, the Court found that plaintiff had not met his burden, finding it and other allegations “too thin a reed upon which to rest a ‘credible basis’ finding of wrongdoing.”  Slip op. at 3.

Key Takeaway: Although the credible basis to infer wrongdoing standard presents a very low burden in Section 220 disputes, this case nonetheless demonstrates that a plaintiff cannot meet this standard merely through conjecture or speculation.  Rather, at minimum some evidence of wrongdoing must be presented in order to support such a standard.

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 CHC Investments LLC v. Firstsun Capital Bancorp, C.A. No. 2018-0610-KSJM (Del. Ch. Jan. 24, 2019), the Court of Chancery dismissed a books and records action brought pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”), in light of a parallel pending plenary action.  The Court stated that seeking inspection under Section 220 of the DGCL to investigate pending claims is problematic for a number of reasons.

First, Vice Chancellor McCormick noted that plenary and Section 220 complaints are “inherently contradictory”, because by filing a plenary complaint, a stockholder represents that it has sufficient information to file the action.  On the other hand, to commence a books and records action to support a plenary claim, “a stockholder must represent that the information is necessary to its plenary claims.” Slip op. at 7.

Second, using “Section 220 inspections to investigate pending plenary claims undermines well-established discovery law”, as “discovery rules dictate what information relevant to its claims the stockholder may receive and when the stockholder may receive that information.”  Slip op. at 7.

However, notwithstanding the above points, “in special circumstances”, a books and records demand has been granted while a plenary action is pending. Slip op. at 8. Such special circumstances include where a plenary action has been dismissed but with leave to amend, (King v. VeriFone, 12 A.3d 1140 (Del. Jan. 28. 2011)), or when a plaintiff must comply with a statute of limitations and the “timing pressures are caused by the defendant, or, at least, not caused by the plaintiff.”  Slip op. at 9 (citing Khanna v. Covad Communications Group, Inc., C.A. No. 20481-NC, 2004 WL 187274 (Del. Ch. Jan. 23, 2004)).

Here, the Court found that plaintiff failed to demonstrate that special circumstances existed, and therefore granted defendant’s motion to dismiss the books and records complaint.

Key Takeaway: This decision reinforces the notion that a books and records action, when brought to obtain information to support a potential plenary action, should be adjudicated prior to filing the plenary action itself.  Absent special circumstances, the books and records action may be subject to dismissal.

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.

A director of a Delaware corporation is afforded broad rights under 8 Del. C. § 220(d) to inspect a corporation’s books and records.  In the recent decision of Schnatter v. Papa John’s Int’l, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), the Delaware Court of Chancery examined a books and records demand by John Schnatter, who is the largest stockholder and founder of Papa John’s pizza company.  Schnatter sought to inspect certain categories of documents and communications related to his ultimate ouster as the CEO of the corporation.

The opinion is significant in that Chancellor Bouchard ordered the production of communications pertaining to this dispute from directors’ personal email accounts and on their electronic devices, along with text messages.  In other words, e-discovery is fair game in books and records actions under the appropriate circumstances. In addition, the Court held that Schnatter’s commencement of an action for breach of fiduciary duty in his capacity as a stockholder did not serve as a basis to reject his inspection demand in his capacity as a director of the corporation.

Further, Chancellor Bouchard noted that a director should not be required to sign a confidentiality agreement as a condition to obtaining records.  That is so because directors of Delaware corporations owe fiduciary duties to maintain the confidentiality of corporate documentation.  “Delaware law has long suggested that directors need not sign confidentiality agreements to obtain documents under Section 220.”  Slip op. at 44.

By contrast, “there is a ‘presumption that the production of nonpublic corporate books and records to a stockholder making a demand pursuant to Section 220 should be conditioned upon a reasonable confidentiality order.’”  Slip op. at 44-45 (quoting Disney v. Walt Disney Co., 857 A.2d 444, 447 (Del. Ch. 2004) (emphasis added)). See also Jefferson v. Dominion Holdings, Inc., in which the Court provided guidance on confidentiality agreements entered in Section 220 actions.  C.A. No. 8663-VCN (Del. Ch. Sept. 24, 2014).  A prior post summarizing the Jefferson decision can be found here.

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 Himawan v. Cephalon, Inc., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), the Delaware Court of Chancery ruled on a motion to dismiss filed in an earnout dispute.  The Plaintiffs are representatives of former stockholders of an entity that was acquired by Cephalon, Inc. through a merger agreement that involved an initial sales price along with earnout payments.  The earnouts were payable upon the meeting of certain milestones in the approval of the antibody to treat two different conditions, in both Europe and the United States. The buyer agreed to use “commercially reasonable efforts” to develop the antibody and achieve the milestones.

Plaintiffs alleged that the buyer’s efforts, which were abandoned with respect to development of the antibody to treat one of the medical conditions upon which earnout payments depended, were not commercially reasonable.  Defendants moved to dismiss, arguing, among other things, that the complaint is defective because the merger agreement leaves discretion on how to pursue development of the antibody with the buyer.

“Commercially reasonable efforts” is defined in the Merger Agreement as “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon], with due regard to the nature of efforts and cost required for the undertaking at stake.”  The Court found that this language is clear and unambiguous, and set forth an objective standard.  Further, per the merger agreement, the former stockholders of the acquired company “shall have no right object to the manner in which business of the Surviving Corporation is conducted,” and the buyer “shall have complete discretion with respect to all decisions related to the business of the [acquired company].”

In this respect, the Court noted that the “Plaintiffs here face a difficult matter of proof.”  Slip op. at 2.  However, the Court took note of language in the merger agreement requiring “the exercise of such efforts and commitment of such resources by a company with substantially the same resources and expertise as [Cephalon]”.  Slip op. at 17.  The Court found that it was unclear what additional obligations, if any, were imposed upon Cephalon by such language.  Accordingly, the Court declined to grant the motion to Plaintiffs’ breach of contract claims, noting that “[a]t the pleadings stage, however, I must employ plaintiff-friendly inferences, consonant with which I find that the Defendants have only identified factual issues that may be resolved when a record is created.”

However, the Court dismissed Plaintiffs’ claim for breach of the implied covenant of good faith and fair dealing.  The Court found that there were no “gaps” in the merger agreement requiring the involvement of the implied covenant.  Further, the Court dismissed the tortious interference claims against certain other named defendant entities that later acquired Cephalon after the merger.  The Court found that such allegations were conclusory and therefore dismissed the same under Rule 12(b)(6).

Key Takeaway:  This case demonstrates the importance of clarifying what “commercially reasonable efforts” a buyer is required to follow under a merger agreement, as those efforts may have a significant impact on the earnout payments owed to a seller under such merger agreement.

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.