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In the recent Delaware Supreme Court decision of CompoSecure LLC v. Cardux LLC, C.A. No. 177, 2018 (Del. Nov. 7, 2018), the High Court  found that a contract may be rendered void because it did not comply with the requirements set forth in an LLC agreement formed by the parties to the contract for the purposes of entering into such contract.  Although the findings of the Court of Chancery were largely affirmed, the Supreme Court remanded the action to Vice Chancellor Laster of the Court of Chancery to review a discrete but significant issue overlooked by the trial court, as discussed below.

Appellant CompoSecure, LLC, appealed an approximately $17 million judgment obtained in the Delaware Court of Chancery for past-due commissions, legal fees and expenses, pre-judgment interest, and contract damages arising out of a sales agreement with Appellee CardUX, LLC.  CompoSecure asserted on appeal that the trial court erred in holding that: (i) the Sales Agreement was not void, but rather voidable, under the LLC agreement entered among the parties, and (ii) the Sales Agreement was impliedly ratified by Appellant.  In response, CardUX argued that, notwithstanding Appellant’s arguments, the Sales Agreement should be enforced based on a provision in the LLC agreement that addresses reliance by third parties on certain company actions, or based upon the doctrine of quantum meruit.

The Supreme Court largely agreed with the Court of Chancery’s conclusions that: (i) the Related Party Provision (leaving aside the Restricted Activities Provision) rendered the Sales Agreement not void, but rather voidable, and was therefore subject to equitable defenses, (ii) the parties impliedly ratified the Sales Agreement under the law of New Jersey, and (iii) the Third Party Reliance Provision did not save the Sales Agreement from failure to comply with the Related Party or Restricted Activities Provisions.

However, the Delaware Supreme Court determined that Vice Chancellor Laster should have separately considered whether the Sales Agreement falls within the Restricted Activities Provision, and did not analyze whether the Sales Agreement was “void and of no force or effect whatsoever” in the event it did apply.  Per the Supreme Court, “[t]he answer to this question is important because, if the Restricted Activities Provision applies, the Sales Agreement would be void, as opposed to merely voidable, and, therefore, would be incapable of being ratified.” Slip op. at 4.

Of interest for practitioners, the Supreme Court noted that plaintiff/appellant CompoSecure LLC (“CompoSecure”) “only weakly raised the issue below, but, on appeal, elevates the issue to its lead argument.”  (Slip op. at 3-4.)  That said, the Supreme Court found that the argument had not been waived. Therefore, the Supreme Court affirmed in part, reversed in part and remanded for further proceedings as to this particular issue held to have been overlooked by the lower court.

This decision is significant to drafters of limited liability company agreements.  The terms of such agreement should be carefully considered before entering into a contract among the parties to such 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.

In Flood v. Synutra Int’l, Inc., No. 101, 2018, (Del. Oct. 9, 2018), the Delaware Supreme Court held that a controlling stockholder who pursues a merger with the company under its control will have the benefit of the business judgment review standard pursuant to Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), so long as the requisite protections under MFW are put in place prior to the start of negotiations between the purchaser and seller.

In MFW, the Supreme Court held that, in a landmark decision, freezeout mergers structured with various inherent protections should be reviewed under the highly deferential business judgment standard.  In order to benefit from the business judgment rule, the transaction must be conditioned, at the start, upon the following: (1) the approval of an independent, adequately-empowered special committee of the board of directors that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stockholders (the “MFW protections”).

The dispute in Synutra arose over when the MFW protections will be deemed to have been in place “ab initio.”  Appellants argued the Court of Chancery misapplied the MFW standard, claiming the business judgment rule should not apply because the initial proposal did not contain the MFW protections and therefore could not be considered to have been in place from the beginning.  The High Court majority disagreed, explaining the MFW ab initio requirement is satisfied if the controller conditions the buyout on the MFW protections at the beginning of the deal process and before economic negotiations commence.

The Supreme Court therefore concluded that the interpretation of MFW standard based on the foregoing principles was correct, citing its previous affirmance in Swomley v. Schlecht, 128 A.3d 992 (Del. 2015).

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 Trascent Management Consulting, Inc. v. Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), the Delaware Court of Chancery rescinded an operating agreement of a Delaware limited liability company.  In the 75-page opinion, Vice Chancellor Montgomery Reeves found that defendant George Bouri fraudulently induced the formation of the limited liability company and his employment agreement.  In addition, the Court found that defendant also made false statements during the litigation.

In so ruling, the Court held that Bouri lied in order to induce Trascent to hire him and to give him an equity position in the company, lied about his prior employment experience at Time Warner, and lied about his prior title, salary, and bonus structure.  Bouri had falsely claimed that he voluntarily resigned from Time Warner.  As a result of Bouri’s fraud, the Court rescinded Bouri’s employment agreement and declared the Trascent operating agreement unenforceable by Bouri.

To remedy the misconduct, the Court rescinded the employment agreement and declared the operating agreement unenforceable.  The court also awarded attorneys’ fees and costs as a penalty for defendant’s litigation misconduct, specifically awarding Trascent its attorneys’ fees and costs incurred in bringing the motion for sanctions and 40% of all fees Trascent incurred throughout the litigation.

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 CapStack Nashville 3 LLC, et al. v. MACC Venture Partners, et al., C.A. No. 2018-0552-SG (Del. Ch. Aug. 16, 2018), the Delaware Court of Chancery declined to enter a temporary restraining order (“TRO”) which would amount to a prior restraint of speech.  Plaintiffs sought a TRO to temporarily enjoin the Defendants from making allegedly defamatory statements about the Plaintiffs to the SEC, investors or other third parties.

The Court recited the well-known standard of a TRO, which requires the moving party to demonstrate: (1) a colorable claim, (2) a likelihood of imminent, irreparable harm if relief is not granted, and (3) that movant will suffer greater hardships if the TRO is not granted than the defendants would suffer if the relief were granted.

The Court found that “Plaintiffs’ request runs afoul of the ‘traditional maxim that equity will not enjoin a libel.'”  Slip op. at 9 (citing Organovo Holdings, Inc. v. Dimitrov, 162 A.3d 115 (Del. Ch. 2017)).  The Court further noted that “[w]hen an injunction against speech is entered before a full trial on the merits, “’it is almost always treated as an unconstitutional prior restraint.’” Slip op. at 10 (citing Mark A. Lemley & Eugene Volokh, Freedom of Speech and Injunctions in Intellectual Property Cases, 48 Duke L.J. 147, 171 (1998)).  Accordingly, the Court denied Plaintiffs’ motion for TRO.

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 ChyronHego Corporation v. Wight, C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), provides helpful guidance regarding the effectiveness of anti-reliance provisions in a contract.

ChyronHego clarifies that in order for the anti-reliance provision to be effective under Delaware law,

[T]he contract must contain language that, when read together, can be said to add up to a clear anti-reliance clause by which the plaintiff has contractually promised that it did not rely upon statements outside the contract’s four corners in deciding to sign the contract.

Slip op. at 12.  On the other hand, the Court clarified that Standard Integration Clauses without explicit anti-reliance representations, will not relieve a party of its extra-contractual fraudulent representations. Id.

Here, plaintiffs asserted claims of fraud arising from a corporate acquisition, alleging that defendants fraudulently misrepresented the actual condition and value of the company.  Vice Chancellor Glasscock found that the stock purchase agreement (“SPA”) at issue unambiguously barred prior extra-contractual fraud.  This was so given the unambiguous anti-reliance provision contained in the SPA, together with the SPA’s integration clause, exclusive remedies clause, a clause defining excluded liabilities, and an indemnification provision.

As such, the Court dismissed those claims in the complaint alleging extra-contractual fraud in connection with the SPA.

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 Morrison v. Berry, No. 445, 2017 (Del. July 9, 2018), the Delaware Supreme Court issued an opinion of import in connection with the Corwin doctrine.  In Morrison, the High Court reversed a dismissal by the Delaware Court of Chancery on the grounds that the disclosures at issue did not fully reflect all material facts of the transaction at issue to the company’ stockholders, thus preventing the directors from being afforded the benefit of the Corwin doctrine.

By way of background, in Corwin v. KKR Financial Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015), the Delaware Supreme Court held that in a merger transaction with a party other than a controlling shareholder, the business judgment standard of review will apply where the voluntary, fully-informed and uncoerced judgment of the majority of the disinterested shareholders to approve the transaction was obtained.  To review a prior blog post discussing this decision, click here.

In Morrison, the complaint alleged, among other things, that the sale process procedure may have been influenced by a founder’s interactions with the private equity buyer, coupled with pressure on the board to approve the transaction.   Aided by documents obtained through a pre-suit Section 220 books and records investigation, plaintiff alleged that the recommendation statement provided to stockholders omitted information that “would have helped the stockholder to reach a materially more accurate assessment of the probative value of the sale process.”  The Supreme Court found the omissions included “troubling facts regarding director behavior,” of the kind that the Corwin court reasoned would prevent ratification if omitted.  The Supreme Court stated that Corwin business judgment review will not apply to stockholder-approved transactions when “partial and elliptical” disclosures leave stockholders less than fully informed.

Key Takeaway:

The Court stated front and center on page one of the memorandum opinion that the decision should serve as a “cautionary reminder to directors and the attorneys who help them craft their disclosures” that disclosures to stockholders must reflect all material facts in order for transaction parties to benefit from the standard established by the Delaware Supreme Court in Corwin.

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 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.