Delaware Docket

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

 

CONTRACT LANGUAGE MUST BE UNAMBIGUOUS FOR CHANCERY COURT TO GRANT DISMISSAL AS MATTER OF LAW

By: Scott E. Waxman and Douglas A. Logan

In Fortis Advisors LLC v. Stora Enso AB letter opinion 180810, Stora Enso AB (the “Defendant”) filed a motion to dismiss the claims by Fortis Advisors LLC (the “Plaintiff”), alleging the merger agreement (the “Merger Agreement”) entered into by each of the parties unambiguously did not obligate the Defendant to make further payments to the Plaintiff. The Chancery Court disagreed, finding the language of the Merger Agreement ambiguous, therefore denying the Defendant’s motion.

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Chancery Court Holds that Party Seeking Indemnification under Contract Procedure Loses Ability to Claim Excused Performance due to Material Breach

By Christopher J. Voss and Michael C. Payant

In Post Holdings, Inc., et al. v. NPE Seller Rep LLC, et al., Chancellor Andre G. Bouchard granted defendant NPE Seller Rep LLC’s (“Seller Representative”) motion for judgment on the pleadings on its counterclaim seeking payment of tax refunds and insurance proceeds allegedly owing under a stock purchase agreement (the “Agreement”). In rendering its decision, the Court concluded that once a party has made a contractual indemnification demand based on a counterparty’s alleged material breach, such party cannot rely on the same breach to excuse non-performance of its own obligations under the contract. The Court also found that unliquidated indemnification claims could not be the basis for an offset of amounts owed in the absence of contract language to the contrary.

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Stockholder’s Suit for Directors’ Fiduciary Breach Related to Acquisitions and Stock Repurchases Dismissed With Prejudice for Failure to Plead Demand Futility and to State Viable Claims, Directors Found to be Disinterested Regardless of 10-Q Filing Stating Action Without Merit

By: Remsen Kinne and Adrienne Wimberly

In Tilden v. Cunningham et. al., C.A. No. 2017-0837-JRS (Del. Ch. Oct. 26, 2018), the Delaware Court of Chancery granted the motion of directors of Delaware corporation Blucora, Inc. (“Blucora”) named as Defendants to dismiss a derivative action and dismissed Plaintiff’s complaint with prejudice, holding that the Plaintiff, a Blucora stockholder, failed to plead demand futility and failed to state viable claims under Rule 12(b)(6). This derivative action stems from three transactions Blucora entered into between 2013 and 2015: 1) an acquisition of Monoprice, Inc. (“Monoprice”), 2) the acquisition of HD Vest (“HD Vest”), and 3) several stock repurchases.

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Ex-Board Member of Homeowner’s Association Sues for Improper Removal; Awarded a Proper Removal

By Joanna A. Diakos Kordalis and Tom Sperber

In Beck v. Greim c/o Bombay Woods Maintenance Corp., the Delaware Chancery Court issued a Master’s Report making recommendations regarding a dispute between a homeowner, who had served as a director and officer of the homeowner’s association, and the homeowner’s association and its president, concerning alleged violations of Delaware General Corporation Laws and the association’s failure to enforce deed restrictions under Del. C. § 348. Andrea Beck (“Plaintiff”), one of three directors and the treasurer of Bombay Woods Maintenance Corporation (“Bombay”), which is a homeowner’s association, alleged that the other two board members, John Greim (“Greim”) (with Bombay, “Defendants”) and Jeffrey Horvat (“Horvat”) (with the Defendants, the “Adverse Parties”), improperly removed her as a director and officer of Bombay and failed to maintain common areas adjacent to her property. Based on the evidence presented at trial, the Master recommended that the Court find that Plaintiff was properly removed as treasurer, but improperly removed as a director. The Master further recommended that the Court order that Bombay remedy the improper removal by conducting a special meeting of its members to vote on Plaintiff’s removal or holding an annual election of its board of directors, or by following the Delaware Uniform Common Interest Ownership Act procedures for removal of a board member. The Master also recommended that the Court conclude that Bombay’s deed restrictions were not violated by failing to maintain aspects of Bombay’s common areas as claimed by Plaintiff.

In 2013, Plaintiff and two other homeowners were elected to the board of directors of Bombay. The other two members immediately resigned, causing the Plaintiff to appoint Greim and Horvat to the board of directors and to the positions of president and vice president/secretary, respectively. Plaintiff was appointed treasurer. During a board meeting in early, 2014, Greim and Horvat asked Plaintiff to resign from the board of directors. When Plaintiff refused to do so, Greim and Horvat voted to remove her as a director and treasurer. Later in 2014, Greim and Horvat scheduled a members meeting to have a confirmatory vote on Plaintiff’s removal. When too few members attended to form a quorum, Greim and Horvat went door to door collecting ballots. On October 20, Greim and Horvat notified Plaintiff that the members had voted to remove her as a director.

Plaintiff filed a pro se complaint against Defendants in the fall of 2014, alleging the aforementioned claims and others relating to mismanagement of Bombay’s funds and failing to enforce proper voting measures under Bombay’s bylaws. Through several letter opinions and final reports, it was held that, without counsel, Plaintiff could only pursue claims of improper removal from her positions under Section 225 of the Delaware General Corporation Law and failure to enforce deed restrictions under another provision of the Delaware Code. While the Court would look to the bylaws for several of these claims, Plaintiff contended that the bylaws were never recorded and thus were invalid. Rather than address that issue, the Master made his recommendation by analyzing the Delaware Uniform Common Interest Ownership Act (the “DUCIOA”) and Bombay’s bylaws in the alternative. While Bombay’s formation predated the enactment of DUCIOA, some provisions apply to pre-existing communities, while others control “only if the matter at issue is not expressly addressed in the community’s governing documents.”

To support Plaintiff’s claim that Greim and Horvat improperly removed her as treasurer, Plaintiff argued that the agenda on the member notice of the board meeting in question did not include the vote to remove Plaintiff from her position. She also alleged that because they were improperly elected to the board, they had no ability to remove her. In analyzing these claims, the Court looked to Bombay’s bylaws. The DUCIOA does not address the removal of officers and none of Bombay’s other organizational documents speak to the issue. The Court pointed to the provision of the bylaws granting the board the authority to choose and appoint officers and “remove any officer that it chose or appointed, ‘with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors.’” While the Court acknowledged that the bylaws require member notice of board meetings, they do not speak to whether posting a proposed agenda is required. The Court pointed out that while DUCIOA does have notice requirements for board meetings, those provisions do not apply to pre-existing communities.

In arguing that her removal from the board was invalid, Plaintiff restated her arguments for her claim of improper removal as treasurer and additionally alleged that the members did not participate in the meeting to vote on her removal. The bylaws stated that directors may be removed with or without cause by a majority vote of the members, assuming that the required 51% quorum votes in person or by proxy. The DUCIOA states that board members can be removed without a quorum only when procedures for “special meetings” are followed. These procedures include providing an opportunity for members to speak concerning the removal, a recession of the meeting, and a notification of the availability to vote within 30 days.

The Master found that the procedure used by Greim and Horvat to remove Plaintiff from the board violated both the bylaws and the DUCIOA. The quorum requirement of the bylaws was not met, therefore the members could not have properly voted on Plaintiff’s removal. While Greim and Horvat eventually got the necessary votes by going door to door and collecting ballots, the Master found that the bylaws only authorized the board to take removal actions during meetings. The Master also found that the irregularities in the voting process violated the less stringent but still particular “special meeting” procedure of the DUCIOA for a removal proceeding without a quorum. While the Master concluded that Plaintiff was improperly removed, he refused to recommend that she be reinstated after her four year absence. Instead, the Master recommended, among other things, that the Court order that Bombay conduct a special meeting of Bombay’s members to have a procedurally proper vote on Plaintiff’s removal.

The Master quickly dispatched with Plaintiff’s argument that Greim and Horvat were improperly elected to the board by pointing out that, consistent with the bylaws, Plaintiff appointed them to the board when she was the only director. The Master also found that Plaintiff had failed to present any evidence to support her claim that the Adverse Parties had failed to maintain the common areas around her property.

Andrea C. Beck v. John A. Greim in care of Bombay Woods Maintenance Corp…

Back to Basics: Delaware Court of Chancery Uses Contract Principles To Determine Dispute Involving Several Provisions of a LLC Agreement

By: Scott E. Waxman and former Associate Rashida Stevens

The Delaware Court of Chancery (“Court”) applied contract principles in interpreting a limited liability company (“LLC”) agreement to determine the impact of a written consent attempting to terminate the founder’s position as President and CEO in Matthew Godden and Tobias Bachteler (collectively, “Plaintiffs”) v. Harley V. Franco (“Franco”) C.A. No. 2018-0504-VCL (Del. Ch. August 21, 2018). The Court declined to grant fully the Plaintiffs’ motion for summary judgment because it was not clear whether or not the provisions of the LLC agreement governing the termination were satisfied.

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IN RULING ON MOTION TO DISMISS, CHANCERY COURT ALLOWS ADMISSION OF EXTRINSIC EVIDENCE TO RESOLVE AMBIGUITY IN PREFERRED STOCK CERTIFICATE OF DESIGNATIONS

By Michelle R. McCreery Repp and Stephanie A. Winkler

In Cedarview Opportunities Master Fund, L.P. v. Spanish Broadcasting System, Inc., CA No. 2017-0785-AGB (Del. Ch. Aug. 27, 2018), the Court of Chancery granted in part and denied in part the motion of Spanish Broadcasting System (“SBS” or the “Company”) to dismiss Plaintiffs’ claims, which were based on alleged breaches by the Company of its certificate of incorporation and certificate of designations for its preferred stock, under Court of Chancery Rule 12(b)(6) for failure to state a claim and Rule 12(b)(1) for lack of ripeness. In ruling on one aspect of the Company’s motion to dismiss, the Court notably held that the parties should be permitted to admit extrinsic evidence to resolve an ambiguity with respect to the terms governing preferred stock, and in doing so, expressly declined to apply two arguably conflicting principles historically used by Delaware courts in resolving such an ambiguity, the application of which would not necessitate or permit the admission of extrinsic evidence.

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Activist Stockholder Aided and Abetted a Board’s Breach of Fiduciary Duties but the Court Finds No Damages

By: Jill B. Louis and Alexander J. Chern

In In re PLX Technology, Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. October 16, 2018), the Delaware Chancery Court found that the actions of an activist stockholder in the context of a sale transaction aided and abetted the defendant board of directors in a breach of its fiduciary duty of disclosure but that there was insufficient evidence that the breach ultimately resulted in damages.

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Breaking-up Is Hard To Do: CSH Theatres, LLC v. Nederlander of San Francisco Associates

By:  Christopher J. Voss and Jeremiah W. Schwarz

CSH Theatres, LLC v. Nederlander of San Francisco Associates, CA No. 9830-VCMR (Del. Ch. July 31, 2018) concerns the dramatic break-up of a prominent theater company partnership in San Francisco involving claims and counterclaims alleging violations of contractual and fiduciary duties and charges of self-dealing and bad faith conduct.  The Delaware Court of Chancery found that no enforceable contract to renew the lease to San Francisco’s Curran Theater existed but the Court did grant the theater operator a declaratory judgment that the principals of the owner had breached their common law fiduciary duties while they were also serving as managers of the theater operator.

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Chancery Court Dismisses Derivative Suit Against Blue Bell Officers and Directors

By: Scott E. Waxman and Stephanie S. Liu

In Jack L. Marchand II v. John W. Barnhill, Jr., et al, the Delaware Chancery Court dismissed Plaintiff’s complaint under Court of Chancery Rule 23.1, finding that Plaintiff failed to plead particularized facts that an appeal for board action on the complaint would have been futile or that a majority of the company’s board lacked the independence needed to respond.

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Court of Chancery Declares LLC Agreement Unenforceable, Rescinds Employment Agreement, and Issues Sanctions Due to Member’s Fraud

By: Scott Waxman and Shane T. Devins

In Trascent Management Consulting, LLC v. George Bouri, C.A. No. 10915-VCMR (Del. Ch. Sept. 10, 2018), the Court of Chancery declared a limited liability company agreement unenforceable and rescinded a related employment agreement with the defendant, George Bouri, due to Bouri’s fraudulent and false statements that induced the plaintiff’s principal, Rakesh Kishan, to form Trascent Management Consulting, LLC (“Trascent”), and for Kishan and Trascent to enter into the LLC agreement and the employment agreement with Bouri. In addition, the Court awarded certain attorneys’ fees and costs to Trascent as sanctions for defendant’s continued fraudulent and false statements during the litigation proceedings. Read More

Chancery Court Denies Appraisal Rights Where a Stockholders’ Agreement Requires that Stockholders Refrain from Appraisal Petition

By: Annette Becker and Will Smith

In a letter opinion, Manti Holdings, LLC et al. v. Authentix Acquisition Co, Civil Action No. 2017-0887-SG (Del. Ch. October 1, 2018), the Delaware Court of Chancery denied the petitioning stockholders’ cross-motion for statutory appraisal rights under Section 262 of the DGCL, ruling that the stockholders were contractually barred from asserting such rights regarding a merger of respondent Authentix Acquisition Co. (the “Company” and “Respondent”).  The Court held that the terms of a stockholders agreement (the “SA”) imposed a duty on Manti Holdings, LLC and the other moving stockholders (“Petitioners”) to forebear from the exercise of their appraisal rights, and granted Respondent’s motion for partial summary judgment on the statutory entitlement to appraisal rights.

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Court of Chancery Judicially Validates Company’s Ratification of Defective Corporate Acts, Therefore Rejecting Bid to Unwind Merger

By Holly Hatfield and B. Ashby Hardesty, Jr.

In Charles Almond, et al. v. Glenhill Advisors LLC, et al., C.A. No. 10477-CB, Chancellor Bouchard ruled in favor of the defendants, directors of furniture company Design Within Reach Inc. (the “Company”) and Glenhill Capital Management LP (“Glenhill”), on all of the plaintiff-investors’ claims relating to the 2014 acquisition of DWR by Herman Miller, Inc. (“Herman Miller”). In doing so, Chancellor Bouchard judicially validated certain measures taken by Herman Miller to rectify an error that had diluted its ownership stake in the Company. Chancellor Bouchard also dismissed claims challenging transactions through which the Company’s board members received additional equity in the Company before the merger, holding that because these claims were derivative in nature, the plaintiffs’ standing to bring such claims were extinguished because of the merger.

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