Delaware Docket

Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

 

Chancery Court Rules that LLC Unit Buyout Provision Operated As a Call Option

By Scott Waxman and Priya Chadha

In Kieran Walsh et al. v. White House Post Productions, LLC, et al., C.A. No. 2019-0419-KSJM (March 25, 2020), Plaintiffs Kieran Walsh and Francis Devlin brought claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and specific performance following a dispute with Defendant Carbon Visual Effects, LLC (the “Company”) regarding a buyout provision in the Company’s LLC Agreement.  On a motion to dismiss, Vice Chancellor McCormick held that the buyout provision operated as a call option, requiring Defendants to purchase Plaintiffs’ LLC units once it exercised its option by noticing its intent to purchase them.

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COURT OF CHANCERY DECIDES MOTIONS TO DISMISS, MOTION FOR SUMMARY JUDGMENT, AND MOTION FOR JUDGMENT ON THE PLEADINGS WHEN PLAINTIFF SUES STOCKHOLDERS AND DIRECTORS OF THE COMPANY HE FOUNDED

By:  David L. Forney and Rachel Cheasty Sanders

In Craig T. Bouchard v. Braidy Industries, Inc., et al., Case No. 2020-0097-KSJM (Del. Ch. Apr. 28, 2020), the Delaware Court of Chancery addressed various motions filed by both Plaintiff and Defendants, including Defendants’ motions to dismiss for lack of personal jurisdiction and failure to state a claim, Plaintiff’s motion for judgment on the pleadings regarding an individual defendant’s defense, and Plaintiff’s motion for summary judgment.  Plaintiff Craig Bouchard filed suit against Defendants claiming breach of contract regarding a voting agreement to which Bouchard and each of Defendants are a party.  The Court granted the motions to dismiss for lack of personal jurisdiction over Defendants.  Further, the Court granted Plaintiff’s motion for judgment on the pleadings regarding the defense of unclean hands asserted by Defendant Braidy Industries, Inc.  Lastly, the Court denied Plaintiff’s motion for summary judgment on his breach of contract claim, finding that the factual records needed further development. 

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Court of Chancery Defers to Board of Director’s Business Judgment in Response to Stockholder’s Dividend Demand

By: James S. Bruce and Marissa Leon

In Buckley Family Trust v. Charles Patrick McCleary, et al. (C.A. No. 2018-0903-AGB), the Delaware Court of Chancery (the “Court”) granted defendants’ motion to dismiss a stockholder’s claims to compel the company to pay a dividend and also dismissed the stockholder’s claim alleging breach of fiduciary duty of care regarding decisions made by the board of directors of the company.

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Court of Chancery Applies Entire Fairness Standard to Stock Sale Approved by Interested Board of Directors

By: Annette Becker and Marissa Leon

In Marion Coster v. UIP Companies, Inc. (C.A. No. 2018-0440-KSJM) the Delaware Court of Chancery (the “Court”) addressed a dispute over the control and ownership of a company following a sale of unissued stock to a company executive.  The Court applied the entire fairness standard to review the stock sale transaction and held it was fair in light of a valuation report obtained by the defendants in the case and entered judgment in favor of the defendants validated the stock issuance.

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Court of Chancery Analyzes LLC Valuation Reports in Connection With Breach of Fiduciary Duty

By: Scott Waxman and Zack Sager

In Zachman v. Real Time Cloud Services, LLC, the Delaware Court of Chancery analyzed competing expert reports valuing a Delaware limited liability company in connection with a breach of fiduciary duty claim.  The Court also denied motions to exclude a valuation report and for sanctions relating to discovery abuses, and denied the Delaware limited liability company’s counterclaims for conversion and tortious interference with contract.

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ATTEMPT TO SEIZE CONTROL OF A BEVERAGE COMPANY? COURT OF CHANCERY FINDS INSUFFICIENT EVIDENCE OF CIVIL CONSPIRACY

By: C. Cartwright Bibee and Claire Suni

In Todd O’Gara and Wanu Water, Inc. v. Sheldon Coleman, et al., C.A. No. 2018-0708-KSJM (Del. Ch. Feb. 14, 2020), the Delaware Court of Chancery (the “Court”) granted a motion to dismiss claims made in connection with an alleged conspiracy to seize control of a beverage company by certain former directors and current stockholders. The founder and the company itself filed the complaint asserting claims for breach of fiduciary duty, tortious interference with business relations and contract, civil conspiracy, and libel. The Court found that the complaint failed to plead facts satisfying the essential elements of each claim and, furthermore, did not establish personal jurisdiction over certain of the defendants.

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Court Holds Trustee did Not Abuse Discretion in Rejecting Competing Acquisition Proposal for Liquidated Entity’s Assets

By: Scott E. Waxman and Michael C. Payant

In Acela Investments LLC, et al. v. Raymond DiFalco and Manish Shah, C.A. No. 2018-0558-AGB, (Del. Ch. April 27, 2020), the Delaware Court of Chancery (the “Court”) granted a motion by the liquidating trustee (the “Trustee”) to sell substantially all of the assets of Inspirion Delivery Services, LLC (“IDS” or the “Company”) after determining the Trustee had not abused his discretion in declining to consider a competing eleventh-hour proposal that failed to comply with bid requirements.

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Plaintiff Entitled to Inspect Additional Documents Where Proper Purpose Demonstrated as to Mismanagement and Wrongdoing

By: Joanna Diakos Kordalis and Pouya Ahmadi

In Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020), the Delaware Court of Chancery (the “Court”) granted, in part, stockholder Paraflon Investments, Ltd.’s (“Paraflon”) request, after a trial on a paper record, for corporate books and records pursuant to Section 220 of the DGCL where proper purpose was shown with respect to the desire to investigate mismanagement and wrongdoing.

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Derivative Suit Dismissed for Failing to Plead Demand Futility

By: Rem Kinne and Zack Sager

In Shabbouei v. Potdevin, C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), the Delaware Court of Chancery dismissed a derivative suit against the board of directors (the “Board”) of lululemon athletica inc. (the “Company”) by a Company stockholder (“Plaintiff”) for failing to plead demand futility.  The Court held that Plaintiff did not plead with the requisite particularity that the Board was self-interested in a Separation Agreement with the Company’s CEO Laurent Potdevin (“Potdevin”) negotiated by the Board and that the Board’s decision to settle with, instead of firing, Potdevin for cause was outside the bounds of proper business judgment.

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Delaware Court of Chancery Interprets “Sufficient Particularity” Pleading Standard Under Rule 23.1

By Annette E. Becker and Frank J. Mazzucco

In Robert Elburn v. Robert Albanese et al. and Investors Bancorp, Inc.,C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020), defendants moved to dismiss a complaint under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state viable claims and failure to plead demand futility.  The Delaware Court of Chancery (the “Court”) interpreted the “sufficient particularity” pleading standard under Rule 23.1, noting that demand futility was pled with sufficient particularity to raise doubt that the board of directors could act impartially in response to a litigation demand.

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WINDFALL OR FAIR? BREACH OF FIDUCIARY DUTY AND UNJUST ENRICHMENT CLAIM SURVIVES MOTION TO DISMISS

By Whitney J. Smith and Mehreen Ahmed

In Gary D.  Voigt v. James S. Metcalf et. al. and NCI Building Systems, Inc., C.A. No. 2018-0828-JTL (Del Ch. Feb. 10, 2020), the court denied defendants’ motion to dismiss, finding that the transaction at issue should be reviewed under the entire fairness standard and that the plaintiff, a stockholder of NCI Building Systems, Inc. (“NCI”), successfully stated claims for breach of fiduciary duty and unjust enrichment against private equity firm Clayton, Dubilier, & Rice (“CD&R”) and most of NCI’s directors in connection with a stock-for-stock merger between NCI and Ply Gem Parent, LLC (“Ply Gem”). The headline issue for the motion to dismiss was whether the plaintiff had pled facts that made it reasonably conceivable that CD&R controlled NCI despite owning less than a majority of NCI’s outstanding shares.

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EQUITABLE RELIEF GRANTED TO STOP BOARD COUP

By David L. Forney and Annamarie C. Larson

In a Memorandum Opinion, Palisades Growth Capital II, L.P. v. Alex Bäcker and Ricardo Bäcker and QLess, Inc. (Del. Ch. C.A. No. 2019-0931-JRS) the Delaware Court of Chancery found that actions taken at a board meeting were void because the defendant acted inequitably by formulating a secret plan to deceive the other board members into attending the meeting and then seized control.  The Court stated that it will not sanction inequitable action by corporate fiduciaries simply because their act is legally authorized.  The Court found that, while the defendants’ actions were technically authorized in the Company’s Charter and Bylaws, they took affirmative action to mislead the other board members in order to take control. 

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