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In the recent decision of Edinburgh Holdings, Inc. v. Education Affiliates, Inc., C.A. No. 2017-0500-JRS (Del. Ch. June 6, 2018), the Delaware Court of Chancery considered whether claims for breach of contract, breach of fiduciary duty and the implied covenant of good faith and fair dealing could be brought in relation to the same conduct.

Background

In Edinburgh, the dispute arose from the sale of a proprietary education business.  The Asset Purchase Agreement (“APA”) provided for earnout payments to the seller based upon the acquired business achieving certain revenue targets following the closing.  The buyer refused to make the final annual payment, which led to the instant litigation.

Defendants moved to dismiss, asserting, among other things, that certain claims brought by plaintiff were duplicative.  Namely, defendants argued that the claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and for breach of fiduciary duty, all related to the same conduct and thus subject to dismissal.

Analysis

Vice Chancellor Slights noted that a breach of contract claim and a breach of fiduciary duty claim cannot both be asserted for the same conduct, unless “there is an independent basis for fiduciary claims arising from the same general events….” In making this determination, the Court “inquires whether the fiduciary duty claims depend on additional facts as well, are broader in scope, and involve different considerations in terms of potential remedy.”  See Slip op. at 38.  In other words:

Generally, Delaware “[c]ourts will dismiss [a] breach of fiduciary duty claim where [it] overlap[s] completely [with a breach of contract claim] and arise[s] from the same underlying conduct or nucleus of operative facts” as the breach of contract claim.

In addition, the Vice Chancellor discussed whether breach of contract and implied covenant of good faith and fair dealing claims can be asserted at the same time.  The Court took note of Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 539 (Del. 2011), which held that “[a] party may maintain a claim for breach of the implied covenant of good faith and fair dealing only if the factual allegations underlying the implied covenant claim differ from those underlying an accompanying breach of contract claim”.  Slip op. at 21, n. 84.  This is so because “[t]he implied covenant is available only where the terms to be implied are missing from the contract; ‘cannot be invoked to override the express terms of a contract.'”  Slip op. at 21 (citations omitted).

Here, the Court granted defendants’ motion to dismiss in part because it found that the above-referenced claims were improperly duplicative.  The Court determined that plaintiff’s breach of contract claims encompassed the misconduct alleged in the breach of fiduciary duty claim and the implied covenant claim, and thus dismissed the latter two claims.

Carl D. Neff is a lawyer 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 Paul Morris v. Spectra Energy Partners (DE) GP, LP et al., C.A. No. 12110-VCG (Del. Ch. May 7, 2018) provides a helpful analysis of the attorney-client privilege in Delaware and certain exceptions thereto.  In this master limited partnership dispute, plaintiff asserted that the general partner’s conflicts committee acted in bad faith by knowingly approving a transfer of assets for approximately $500 million less than they were worth.

A discovery dispute arose as to whether emails between counsel for the general partner’s conflicts committee, and the members of that committee and its financial advisor, were privileged.  The Court considered the “at issue” and the Garner exceptions to the attorney-client privilege, the latter of which was set forth in Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970).  This pithy letter opinion provides a helpful primer on the applicability of these exceptions.

Carl D. Neff is a lawyer 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 Eames v. Quantlab Group GP, LLC, C.A. No. 2017-0792-JRS  (Del. Ch. May 1, 2018), the Court considered an application under 6 Del. C. § 17-110 to determine the validity of the admission of a new general partner to Quatlab Group, LP (“Quantlab LP”), a Delaware limited partnership.

Section 17-110 of the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) provides that a partner may petition the Court of Chancery to, among other things, “determine the validity of any admission, election, appointment or removal or other withdrawal of a general partner of a limited partnership, and the right of any person to become or continue to be a general partner of a limited partnership….” 6 Del. C. § 17-110.

Per the opinion, in November 2017, a voting trustee, acting by written consent on behalf of approximately 96% of Quantlab LP’s voting limited partnership interests, purported to add Quantlab Group GP II, LLC (“Quantlab GP II”) as the general partner of Quantlab LP and then remove Quantlab Group GP, LLC (“Quantlab GP”) from its position as general partner.

The dispute arose over whether the LPA was followed in replacing Quantlab GP with Quantlab GP II. Under Quantlab LP’s limited partnership agreement (“LPA”), Quantlab LP’s general partner may be removed without cause only if at least one other general partner remains, and the addition of a new general partner requires the consent of the then-acting general partner.  Here, the admission and removal of the old and new general partner were done contemporaneously.

In response to the Section 17-110 petition, Defendant Quantlab GP moved for summary judgment that the addition of Quantlab GP II was invalid under the clear and unambiguous terms of the LPA.  Vice Chancellor Slights agreed, finding that under the LPA, it was necessary to admit a second general partner before Quantlab GP could be removed, and admitting a new general partner required Quantlab GP’s consent.  No consent was obtained, as Quantlab GP did not agree in advance to the voting trustee’s actions.  Therefore, Quantlab GP II was not properly admitted as general partner of Quantlab LP, and Quantlab GP remained the sole general partner of Quantlab LP.

Key Takeaway:

This case demonstrates the need for clear and unambiguous language of a limited partnership agreement to be followed carefully in connection with the removal or replacement of a general partner of a limited partnership.  Even though 96% of the voting limited partnership interests of Quantlab LP were in favor of replacing the general partner, and the representative of the original general partner agreed to the succession, the precise steps of the LPA were not followed, thus resulting in an invalid admission of the new general partner.

Carl D. Neff is a lawyer 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 LVI Grp. Inv., LLC v. NCM Grp. Holdings, LLC, et al., C.A. No. 12067-VCG (Del. Ch. Mar. 28, 2018), the Court of Chancery considered fraud claims in the inducement of a merger.  In ruling on a motion to dismiss filed by certain principals, the Court addressed the scope of director consent statutes, and whether certain conspiracy claims were adequately pled.

The litigation resulted from the combination of two large demolition firms—LVI Group Investments, LLC (“LVI”) and NCM Group Holdings, LLC (“NCM”)—into a single entity, NorthStar Group Holdings, LLC.  Each of the combining entities accuses the other of fraudulently misstating financial statements in the inducement of the transaction. In this opinion, Vice Chancellor Glasscock addressed claims raised in LVI’s amended complaint against third parties associated with NCM, including its president, the limited partnership funds that owned most of NCM’s outstanding units, and the persons and entities that controlled such funds.  Such third-parties moved to dismiss the complaint.

Moving defendants argued, among other things, that the Court lacked personal jurisdiction over them as they were residents of the State of Washington.  Plaintiff argued that defendant consented to jurisdiction by serving as directors or officers of Delaware corporations involved in the transaction at issue, along with participating in a conspiracy to defraud LVI.  The Court held that it had personal jurisdiction under such director defendants under the “necessary or property party” clause of Section 3114 of Title 10 of the Delaware Code.  This is so because such defendants had legal interests separate from the Delaware entities for which they consented to serve as directors or officers.

Of note, the Court rejected moving defendants’ argument that they could not plead conspiracy among a parent, subsidiary and its agents.  The Court noted that NCM was not wholly owned by the moving defendants.

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.

Recently, in the decision of Feuer v. Redstone, (Del. Ch. Apr. 19, 2018), the Delaware Court of Chancery considered a motion to dismiss brought in response to a derivative complaint against certain directors of CBS Corporation for excessive compensation paid to media titan, Sumner Redstone, at a time when plaintiff alleged he could no longer render meaningful services to the company.  The derivative plaintiff complained that his receipt of millions in salary from his “at will” employment since 2014 resulted in corporate waste and breaches of the director defendants’ fiduciary duties.

The derivative plaintiff challenged several different payments made to Mr. Redstone, including bonuses and annual salary payments received as executive chairman, and later income received as chairman emeritus.  The complaint alleged that Mr. Redstone, a nonagenarian, was suffering from diminished health and no longer could contribute to the company.

The defendants moved to dismiss pursuant to Rule 23.1 for failure to plead demand futility.  The Court applied the Rales test for determining demand futility, given that plaintiff did not challenge specific decisions by the company’s board of directors.  Plaintiff did not challenge the independence of the directors, but argued that they could not disinterestedly consider a demand because of the potential for personal liability against them, in that, as plaintiff alleged, the payments were not made in good faith, and constituted “waste”.

In denying in part defendants’ motion to dismiss, Chancellor Bouchard found that based upon the “extreme factual scenario” alleged in the complaint, i.e. that millions were paid to an individual who could not provide services to the company, plaintiff successfully plead demand futility as to at least a portion of the contested transfers.  Accordingly, the motion to dismiss was denied in part.

Carl D. Neff is a lawyer 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 a derivative lawsuit is brought on behalf of a company, the derivative plaintiff will often times attempt to argue that demand upon the board would be “futile” in order to excuse the demand requirement under Delaware Court of Chancery Rule 23.1.  The reason is that when a demand is in fact made upon the board, the propriety of the board’s refusal of the demand is governed by the “business judgment rule” — which is very unfavorable to the demanding shareholder, and generally leads to the dismissal of the claim.

In order to properly plead demand futility, a derivative plaintiff must allege with particularity that the board members are not disinterested in the subject matter of the demand.  This is almost certainly the case when the demand would ask directors to sue themselves. In order to allege demand futility, a stockholder must meet the heightened pleading standards under Delaware Court of Chancery Rule 23.1.

One way in which to assert that demand is excused is under the progeny of either Aronson or Rales, by asserting that a majority of the Board faces a substantial likelihood of liability for breaching the duty of loyalty by causing the company to violate law. This issue was addressed recently in the Delaware Court of Chancery decision of Wilkin v. Narachi, C.A. No. 12412-VCMR (Del. Ch. Feb. 28, 2018).  There, Vice Chancellor Montgomery-Reeves wrote that: “[B]ecause sophisticated and well-advised individuals do not customarily confess knowing violations of law, a plaintiff following this route effectively must plead facts and circumstances sufficient for a court to infer that the directors knowingly violated positive law.”  (Slip. op. at 27).

Wilkin addressed whether failure to follow not the law, but “best practices”, resulted in demand excusal in a derivative suit.  There, Plaintiff argued that demand should be excused because seven of the eight directors on the board knowingly and/or intentionally caused the Company to violate regulations and breach its confidentiality obligations. In rejecting Plaintiff’s demand futility argument, Vice Chancellor Montgomery-Reeves stated:

A review of Plaintiff’s allegations shows the main deficiency in the entirety of Plaintiff’s demand futility analysis. Plaintiff attempts to plead knowing and intentional violations of the law without any violation of the law. Instead, Plaintiff paints a picture of directors who, at worst, failed to follow best practices. But, a failure to follow best practices does not create a substantial likelihood of liability.

Accordingly, the Court granted Defendants’ motion to dismiss Plaintiff’s derivative complaint.

Carl D. Neff is a lawyer 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 implied covenant of good faith and fair dealing was recently addressed by Vice Chancellor Glasscock in the decision of Miller v. HCP & Co., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018).  The implied covenant applies only when one party “proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected.  (Slip op., at 22.)

In this decision, a minority member of an LLC alleged that the controller breached the implied covenant in an LLC operating agreement by selling the company for $43 million to a third party in a private sale, as opposed to conducting an open-market sale or auction to ensure maximum value for members under the operating agreement’s waterfall.  The waterfall provided the controller with the majority of the first $30 million before sale proceeds would be provided to holders of other classes of membership units. The operating agreement also gave the majority-controlled board sole discretion as to the manner of any sale to an unaffiliated third party, waived all fiduciary duties owed by the managers, and required that each member consent to such board-approved sale.

Plaintiffs argued that defendants breached the implied covenant and “pushed through a below-market sale” that “allowed them to achieve a quick exit and a 200% return on their capital investment” but left the plaintiffs and other investors “with little to nothing.”

Vice Chancellor Glasscock disagreed.  The Court held that the operating agreement was not silent as to how the company could be marketed and sold. Taking note of the parties’ waiver of fiduciary duties, the Court found that the operating agreement vested the board with sole discretion as to the type and manner of the sale process subject only to the condition that the LLC be sold to an independent third party. “[I]f the scope of the discretion is specified, there is no gap in the contract as to the scope of the discretion, and there is no reason for the court to look to the implied covenant to determine how the discretion should be exercised.”

Here, the operating agreement only required that sales be made to unaffiliated third parties. Had the plaintiffs “wanted protection from self-interested conduct by the Defendants, they could easily have drafted language requiring the Board to implement a sales process designed to achieve the highest value reasonably available for all of [the LLC’s] members.”

Key Takeaway:

This decision demonstrates the difficulty in asserting a claim for breach of the implied covenant of good faith and fair dealing, a doctrine that is “rarely invoked successfully.”  (Slip op. at 22.)  Parties to a contract in which fiduciary duties are waived should ensure that all reasonable safeguards are contained in the contract itself, rather than assuming that they will be protected through the implied covenant.

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 Reid v. Siniscalchi, C.A. No. 2874-VCS (Del. Ch. Jan. 30, 2018), the Court of Chancery analyzed the “conspiracy theory” of personal jurisdiction.

According to the Court:

Under the conspiracy theory of personal jurisdiction, the parties to a conspiracy are treated as each other’s agents with respect to acts in furtherance of the conspiracy. Thus, a substantial Delaware act by a conspirator in furtherance of the conspiracy may be attributed to nonresident co-conspirators if the co-conspirators knew or had reason to know of that act and the act “in [Delaware] was a direct and foreseeable result of the conduct in furtherance of the conspiracy.” In turn, if a conspirator’s conduct in furtherance of the conspiracy subjects him to the jurisdiction of Delaware’s courts, then the attribution of that conduct to nonresident co-conspirators will subject all of the conspirators to the jurisdiction of the Delaware courts.

Slip op., at 37 (internal citations omitted).

The case had spanned for over a decade to allow plaintiff to take jurisdictional discovery to support such theory of jurisdiction.  On a motion for summary judgment, the Court determined that the plaintiff “misled the Court by crying ‘victim’ of a Delaware based conspiracy, when, in fact, he was an architect of the very wrongdoing that he claimed provided a basis for the Court to exercise long-arm jurisdiction over [defendant].”  Slip op., at 42.  As such, Vice Chancellor Slights declined to exercise jurisdiction over such non-resident defendant, and granted summary judgment in its favor based on lack of personal jurisdiction.

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 Sarissa Capital Domestic Fund LP v. Innoviva, Inc., C.A. No. 2017-0309-JRS (Del. Ch. Dec. 8, 2017), a disputed oral settlement agreement was specifically enforced by the Delaware Court of Chancery in a proxy contest between Innoviva, Inc. and Sarissa Capital Management resulting in two dissident directors being seated on the board of directors of Innoviva. Vice Chancellor Slights held that the principals of Innoviva and Sarissa had entered into a valid, binding oral agreement that required Sarissa to cease its proxy solicitation in exchange for two seats on the Innoviva board. Given what the Court found to be “opportunistic maneuvers” by Innoviva in reneging on the agreement after it became clear that it would unexpectedly win the proxy contest, the Court awarded Sarissa specific performance of the settlement agreement.

Earlier in 2017, Sarissa launched a proxy contest to replace three of Innoviva’s seven directors at the company’s April 2017 annual meeting. Sarissa and Innoviva reached an oral agreement that in exchange for Sarissa ending its proxy campaign and related litigation, Innoviva would expand its board from seven to nine members and appoint two Sarissa nominees to the board.  The Court found that representatives of each party orally confirmed that they “had a deal” and that it would be left to other team members to “prepare the ‘paperwork . . . to get it done.’”  Notably, the deal was not contingent on execution of the paperwork, or subject to further board approval.

After Innoviva attempted to back out of the deal, upon learning that it would have sufficient votes to maintain its current representatives on the board, Sarissa commenced this action.  The lawsuit was commenced as an action under Section 225 of the Delaware General Corporation Law (“DGCL”), a statute that allows the Court of Chancery to hear and determine the validity of any election, of any director or officer of any corporation, and the right of any person to hold or continue to hold such office.  [For a prior post discussing Section 225 in detail, click here.]

In granting specific performance, Vice Chancellor Slights found that each element of an award of specific performance was satisfied with clear and convincing evidence.  The elements included: (1) a valid, enforceable settlement agreement existed, (2) the “essential elements” of that agreement were satisfied; and (3) the absence of an adequate legal remedy, because monetary damages could not compensate Sarissa for the loss of its ability to appoint representatives to the board of Innoviva.

Key Takeaway:

This decision is notable in that a oral agreements are difficult to prove, especially ones that change the composition of a board of a Delaware corporation.  Prior to executing a formal agreement, parties should take care to document the terms of a deal through writing, and make clear that a deal is contingent upon the execution of a final settlement 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.

The recent opinion of Protech Solutions, Inc. v. The Delaware Department of Health and Human Services, C.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.