Delaware Docket

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

 

Chancery Court Interprets the Computer Fraud and Abuse Act

By: Scott E. Waxman and Stephanie S. Liu

In AlixPartners, LLP v. Benichou, (C.A. No. 2018-0600-KSJM (Del. Ch. May 10, 2019)), the Court of Chancery decided, as a matter of first impression, that the federal Computer Fraud and Abuse Act (“CFAA”) narrowly provides a cause of action in Delaware for unauthorized computer access or unauthorized access to information; it does not cover incidents involving misuse of information that was obtained through authorized access.

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INDEMNIFICATION PROVIDED FOR SUCCESS ON THE MERITS, EVEN IF ON A TECHNICALITY

By: C.J. Voss and Rich Minice

In Brown v. Rite Aid Corp., C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), the Delaware Court of Chancery granted the motion for partial summary judgment of plaintiff Franklin Brown (“Brown”), entitling Brown to indemnification by defendant Rite Aid Corporation (“Rite Aid”) for legal fees and expenses Brown incurred in proceedings arising out of a corporate fraud and accounting scandal in 2002. The court re-affirmed the principles that mandatory indemnification is dependent strictly on the outcome of the underlying action and that the “indemnitee need not be adjudged innocent in some ethical or moral sense,” a defendant need not pursue victory efficiently, and that indemnification is based on the reason by which a defendant is party to the action.

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court to sellers: stockholder notice rights matter

By Susan Altman and Nadia Brooks

In Mehta v. Mobile Posse, Inc., six causes of action were before the Delaware Court of Chancery in Plaintiff’s complaint alleging inadequate stockholder notice and breach of directors’ fiduciary duty of disclosure regarding the merger of Mobile Posse. The defendants, Mobile Posse and its board, asserted motions for judgments on the pleadings for all counts, arguing they were entitled to the judgments because the violations were remedied by the supplemental notice they issued. The Court denied all but one of defendants’ motions, finding numerous deficiencies in the notice process and finding that the merger was not entirely fair.

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Court of Chancery Finds that the Implied Contractual Covenant of Good Faith and Fair Dealing Requires Delaware LLC to Exercise Discretion in Good Faith

By: Scott Waxman and Zack Sager

In Coca-Cola Beverages Florida Holdings, LLC v. Goins, the Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of the implied contractual covenant of good faith and fair dealing, and, in so doing, found that the discretion afforded to a Delaware limited liability company under an agreement was required to be exercised in good faith.  In addition, the Court analyzed a motion to dismiss claims for breach of contract, unjust enrichment, quantum meruit, and fraud.

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Words Matter: Chancery Court Holds that Indemnification Provision in Equity Purchase Agreement Does Not Cover Advancement of Expenses for Officer Conduct Unauthorized by the Board

By: Annette Becker and Adrienne Wimberly

In Computer Science Corporation v. Eric Pulier, et al., C.A. No. 11011-CB (Del. Ch. June 27, 2019), the Delaware Court of Chancery denied Plaintiff Computer Sciences Corporation’s (“CSC”) motion for partial summary judgement seeking to recover a portion of funds advanced to a former officer of ServiceMesh, Inc. (an entity CSC had acquired) for legal expenses incurred in defending a separate action. The Court held that based on its interpretation of the plain language of the indemnification provision in the relevant acquisition agreement that the indemnification provision was not broad enough to encompass the advancement of legal expenses in question.

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CHANCERY COURT FINDS THAT ALLEGATIONS RELATED TO POST-SEPARATION USE OF CONFIDENTIAL INFORMATION LEARNED PRE-SEPARATION WARRANT ADVANCEMENT

By: Scott Waxman and Calvin Kennedy

In Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. June 26, 2019), the Court of Chancery found that conduct occurring after Eyal Ephrat and Sonia Ben-Yehuda (together, “Petitioners”) left their positions warrants advancement provided that such conduct was related to Petitioners’ use of confidential information learned in an official capacity with medCPU, Inc. (“medCPU” or the “Company”). However, the Court held that allegations related to Petitioners’ breach of personal contractual obligations do not warrant advancement. Lastly, the Court held that Petitioners did not release their advancement rights by releasing all claims related to their “employment” with the Company.

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CHANCERY COURT FINDS THAT LANGUAGE IN AN LLC AGREEMENT THAT STATES AN ASSIGNMENT IS “NULL AND VOID” TRUMPS THE COMMON LAW AND RENDERS EQUITABLE DEFENSES INEFFECTIVE

By: Scott Waxman and Calvin Kennedy

In Absalom Absalom Trust f/k/a Anne Deane 2013 Revocable Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR (Del. Ch. June 27, 2019), the Court of Chancery found that the transfer of membership interests in an LLC was void, rather than voidable as it ordinarily would be at common law, due to the plain language of the Company’s LLC agreement (the “LLC Agreement”). Further, the Court held that equitable defenses were unavailable to the plaintiff with regards to the transfer because the contractual language of the LLC Agreement trumped common law. Lastly, the Court found that the unambiguous contractual language controlled despite the flexibility of LLCs and the alleged purpose of the provision.

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CHANCERY COURT TRANSFERS CASE DUE TO A LACK OF JURISDICTION

By: Scott E. Waxman and Douglas A. Logan

In Helix Generation LLC v. Transcanada Facility USA, Inc., et al., C.A. No. 2018-0856-SG, the Delaware Court of Chancery transferred a case brought before it because the case could be heard more efficiently in Superior Court. The Court reaffirmed that it is Court of limited jurisdiction and even if Section 111(a) of the Delaware delegated jurisdiction to the Court, that jurisdiction is discretionary.

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SOPHISTICATED PARTY OR NOT, LLC AGREEMENT STILL GOVERNS

By: Scott Waxman and Rich Minice

In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. June 4, 2019), the Delaware Court of Chancery granted the request made by Grapetree, LLC ( “Grapetree”) to shift its fees incurred in defending this litigation to the mostly unsuccessful plaintiff, Andrew Durham (“Durham”). In shifting Grapetree’s fees under this litigation, the Court reinforced the longstanding principal that Delaware law is contractarian in nature, and that parties shall be held to their bargains regardless of their legal sophistication. The underlying litigation and the Court’s initial findings (the “Books and Records Action”) were previously summarized by this blog here.

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CHANCERY COURT IMPOSES COSTS OF RECEIVERSHIP ON STOCKHOLDER

By: Scott Waxman and Greyson Blue

In Longoria v. Somers and LC Therapeutics, Inc., C.A. No. 2018-0190-JTL (Del. Ch. May 28, 2019), the Delaware Court of Chancery examined its authority to tax the costs of receivership against the stockholder of an insolvent corporation. The Court’s decision highlights an exception to the general principle that stockholders of a properly maintained corporation are not responsible for costs incurred by the corporation and illustrates a scenario where stockholders may be held liable for a corporation’s obligations.

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Chancery Court finds Commission under Sales Agreement was not “Required” such that entry into Sales Agreement Required Additional Approvals

By Scott E. Waxman and Michael C. Payant

In CompoSecure, L.L.C. v. CardUX, LLC f/k/a Affluent Card, LLC, C.A. No. 12524-VCL (Del. Ch. June 5, 2019), the Delaware Court of Chancery (the “Court”) concluded in a Report on Remand from the Delaware Supreme Court that a Sales Agreement (“Agreement”) entered into by CompoSecure, L.L.C. (“CompoSecure”) and CardUX, LLC (“CardUX”) was not subject to the heightened approval requirements contained in the CompoSecure LLC Agreement because the Agreement did not require CompoSecure to expend more than $500,000 in any fiscal year.

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COURT OF CHANCERY HOLDS THAT MEMBER OF LIMITED LIABILITY COMPANY IS ENTITLED TO ADVANCEMENT WHILE DEFENDING A LAWSUIT IN ITS “OFFICIAL CAPACITY”

By Scott E. Waxman and Frank J. Mazzucco

In Freeman Family LLC v. Park Avenue Landing LLC, C.A. No. 2018-0683-TMR (Del. Ch. April 30, 2019), the Delaware Court of Chancery (the “Court”) held that a member of a limited liability company, in defending a lawsuit in its “official capacity” brought by the company’s managing member, was entitled to advancement of litigation expenses under the company’s operating agreement.

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