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.

In the recent Delaware Supreme Court decision of CompoSecure LLC v. Cardux LLCC.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 In re PLX Technology, Inc. S’holders Litig., Consl. C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018), the Delaware Court of Chancery found that shareholders of PLX Technology Inc. (“PLX”), a semiconductor firm, failed to prove that breaches of fiduciary duty by its directors caused any damages.

The shareholders brought the suit after PLX announced the proposed sale to a competitor, Avago Technologies Wireless Manufacturing Inc. (“Avago”) at a price of $6.50 per share.  The complaint alleged that the sale process was flawed, stating that Potomac Capital Partners LP (“Potomac”), a 10% shareholder of PLX, pushed for a quick sale that undervalued the company, at a time when PLX was on the cusp of significant improvement.

The claims against two directors of PLX and Avago were previously dismissed, and a settlement was reached with the remaining director defendants before trial. The aiding and abetting claims against Potomac were the remaining claims left to be decided in the instant opinion.

In a lengthy opinion, Vice Chancellor Laster found that while PLX shareholders showed that the company’s directors breached their duty in approving a sale to a competitor in 2015, Potomac did not aid and abet those breaches of fiduciary duties even though it pushed for the deal while not providing transparent information to other investors.

Regarding damages, Vice Chancellor Laster said that the financial projections relied upon by the shareholders’ valuation expert to demonstrate the company was worth $9.82 per share were aggressive and unlikely to be realized, because they anticipated significant revenues from a product line (not yet in existence) that would require PLX to enter a new market.  In addition, PLX had a history of missing its projections.  Citing the Delaware Supreme Court Dell decision, the opinion stated that “The Delaware Supreme Court has cautioned that “[m]anagement’s history of missing its forecasts should . . . give[] the Court of Chancery pause.”  Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 27, n. 129 (Del. 2017).

In relying upon deal price, the opinion cited to recent Delaware Supreme Court rulings, including Dell and DFC Glob. Corp. v. Muirfield Value P’rs., 172 A.3d 346, 362 (Del. 2017), that give significant weight to deal price in an appraisal actions.  Because the Court found that PLX conducted an extensive marketing process both before and after the offer received from Avago that satisfied the High Court’s requirements, plaintiff stockholders were unable to demonstrate 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.

Recently, Governor John Carney nominated Morgan Zurn and Kathaleen McCormick to serve as Vice Chancellors for the Delaware Court of Chancery.  The number of jurists on the Court of Chancery was recently increased by two.  Morgan Zurn presently serves as a Master for the Court of Chancery.  Prior to joining the Court of Chancery, Master Zurn worked as a Deputy Attorney General in the Delaware Department of Justice, in the Consumer Protection Unit.  Kathaleen McCormick is a corporate litigation attorney in Delaware, with a focus on corporate, commercial and alternative entity litigation in the Court of Chancery.  The Delaware Senate plans to consider the nominations during a special session on October 3rd.

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.

Often times in appraisal litigation, the Court of Chancery must make a determination as to whether admit evidence implicating events transpiring after the signing of the merger.  This issue was addressed in the recent decision of In re Appraisal of Jarden Corporation, C.A. No. 12456-VCS (Del. Ch. Sept. 7, 2018).  There, documents relating to Jarden’s post-signing financial performance were at dispute, and the Court directed the parties to address the objections to the same in post-trial briefing.  This decision reflects that the Court will in certain instances entertain post-signing evidence into the record when adjudicating a Section 262 appraisal action.

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.