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.

The Delaware Court of Chancery recently approved a plan to sell TransPerfect Global, Inc. (“TransPerfect” or the “Company”) to co-owner Philip Shawe. In the Court’s most recent opinion issued earlier on February 15, 2018, In re TransPerfect Global, Inc., C.A. No. 9700-CB (Del. Ch. Feb. 15, 2018), Chancellor Bouchard  approved a sale agreement that permitted Shawe to acquire shares of the company owned by Elting.  Specifically, the Court accepted the recommendation of the court-appointed Custodian to approve a transaction in which one of the co-founders of TransPerfect Global, Inc. (Philip Shawe) will acquire the shares held by the other co-founder (Elizabeth Elting) to resolve the pending litigation.

From March through November 2017, the Custodian conducted an extensive sales process to follow the Court’s mandate “to sell the Company with a view toward maintaining the business as a going concern and maximizing value for the stockholders.”  After three formal rounds of bidding and an informal fourth round to elicit “final” bids, two leading bidders emerged: Shawe and H.I.G. Middle Market, LLC (“H.I.G.”), the owner of TransPerfect’s leading competitor. The Custodian believed that Shawe would offer greater consideration
than H.I.G. with fewer closing conditions, while retaining virtually all of the Company’s employees, and thus negotiated with Shawe to finalize a transaction.

Co-owner Elizabeth Elting objected to the Custodian’s recommendation that the court approve the Sale Agreement, asking the Court to reject the Sale Agreement and to direct the Custodian to negotiate a transaction with H.I.G.  The Court rejected each of Elting’s objections, while providing guidance on the discretion of a Court-appointed custodian in selling a deadlocked corporation.

By way of background, in November 2017, Chancellor Bouchard approved a modified auction of the Company, over the objections of Shawe.  For a link to a prior post discussing the November 2017 opinion, click here.   Prior to that, in September 2017, the Court denied an application for interlocutory appeal filed by Philip Shawe’s mother, who is a 1% stockholder of the Company.  The appeal request was filed in response to the Court’s denial of Ms. Shawe’s request to hold an election under Section 211 of the DGCL.  Click here for a post discussing the September 2017 opinion.

UPDATE: On May 3, 2018, the Delaware Supreme Court affirmed the February 15, 2018 opinion of Chancellor Bouchard approving the sale of TransPerfect, summarized above.

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 a long awaited and highly anticipated ruling, the Delaware Supreme Court overturned the Court of Chancery’s decision in the Dell appraisal action, Dell v. Magnetar Global Event Driven Master Fund, No. 565, 2016 (Del. Supr. Dec. 14, 2017).

By way of background, in the 2016 Court of Chancery opinion, In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016), Vice Chancellor Laster found fair value of the Dell merger to be 22% greater than the deal price, holding that deal price is not a fair value indicator in the context of a management-led buyout.  For a review of the Court of Chancery’s decision, click here.

On appeal, the High Court reversed and remanded the Chancery’s decision in an unanimous en banc decision.  Of significance, the Supreme Court found that where a company is sold in a clean M&A auction process, the Court of Chancery must give the merger price significant weight in its ruling, leaving it to the trial court to decide just how much weight that should be in this case.  Accordingly, the Supreme Court ruled that the Court of Chancery abused its discretion in placing no weight upon the transaction price when valuing the Dell shares at the time of its going-private merger in 2013, and instead relying exclusively on its own discounted cash flow analysis.

This Dell opinion is consistent with the Delaware Supreme Court’s August 2017 decision in DFC Global v. Muirfield Value Partners, No. 518, 2016 (Del. Supr. Aug. 1, 2017), whereby the High Court held that a deal price should represent strong evidence of fair value.  To review a prior post highlighting the DFC Global decision, click here.

Key Takeaway:

The Delaware Supreme Court’s decisions in DFC Global and now Dell make clear that significant weight to the deal price must be afforded when analyzing fair value of a company that is merged or consolidated in a clean, arm’s-length transaction.  Appraisal petitioners therefore will need to demonstrate flaws in the merger process to overcome the “heavy weight” afforded to the deal price.

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 Oklahoma Firefighters Pension & Retirement System v. Corbett, C.A. No. 12151-VCG (Del. Ch. Dec. 18, 2017), the Delaware Court of Chancery provided a scholarly review of Caremark claims.  In sum, the decision stands for the proposition that in order to survive a motion to dismiss, a plaintiff must plead sufficient facts demonstrating a deliberate violation of the law or a conscious indifference to wrongdoing.

It is worth noting that Caremark claims are notoriously difficult to prove.  The Court of Chancery has previously explained that a “Caremark claim is possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment, and bad faith on the part of the corporation’s directors is a necessary condition to liability.”  Melbourne Municipal Firefighters’ Pension Trust Fund v. Jacobs, C.A. No. 10872-VCMR, slip op. at 19, (Del. Ch. Aug. 1, 2016) (citing  In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).

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 opinion by the Delaware Supreme Court of Chancery in City of Birmingham Retirement and Relief System v. Good, No. 16, 2017 (Del. Supr. Dec. 15, 2017), the High Court held that stockholder plaintiffs failed to adequately plead demand futility in the connection with Caremark claims asserted against the company’s board of directors.  The majority’s en banc opinion should be read by any practitioner seeking to understand the demand futility analysis under Delaware law.

The complaint was filed as a derivative action on behalf of Duke Energy Corporation (“Company”).  In May 2015, the Company pled guilty to nine misdemeanor criminal violations of the Federal Clean Water Act and paid a fine exceeding $100 million. The plaintiffs, stockholders of Duke Energy, filed a derivative suit in the Court of Chancery against certain of Duke Energy’s directors and officers.  Plaintiffs sought to hold the directors personally liable for the damages the Company suffered from the spill.

The High Court agreed with the Court of Chancery that the stockholder plaintiffs did not sufficiently allege that the directors faced a substantial likelihood of personal liability for a Caremark violation.  Instead, the Court found that the directors at most faced the risk of an exculpated breach of the duty of care. Thus, the stockholders were required to make a demand on the board to consider the claims before filing suit.  In granting the defendant directors’ motion to dismiss, the Court noted case law explaining that Delaware courts routinely reject conclusory allegations that because illegal behavior occurred, the board must have known that internal controls were been deficient.

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 ServicesC.A. No. 2017-0642-TMR (Del. Ch. Nov. 30, 2017) sets forth a helpful roadmap in terms of the Court’s determination of whether to uphold a state contract for professional services.

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

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

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

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

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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

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

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.

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

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

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

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

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.