In In re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018), the Delaware Court of Chancery denied the director defendants’ motion to dismiss the stockholder plaintiffs’ claim for breach of fiduciary duties on the basis that the stockholder vote approving the transaction was not informed and the defendants were therefore not entitled to business judgment rule deference at the pleading stage. The Court also found that the plaintiffs had adequately pled a breach of the fiduciary duty of loyalty against each of the director defendants, which would not be covered by the exculpatory clause in the company’s certificate of incorporation.Read More
By: Scott Waxman and Tom Sperber
In Decco U.S. Post-Harvest, Inc., v. MirTech, Inc., the Delaware Chancery Court issued a Memorandum Opinion dissolving a limited liability company based on evidence presented at trial. Decco U.S. Post-Harvest, Inc. (“Decco” or “Plaintiff”), whose business primarily involved the post-harvest treatment and packaging of produce, and MirTech, Inc. (“MirTech” or “Defendant”) formed the joint venture entity Essentiv LLC (the “Company”) for the purpose of commercializing products based on 1-Methylcyclopropene (“1-MCP”), a gas used to delay the ripening of fruit and other produce. In forming the Company, Defendant assured Plaintiff that Defendant owned intellectual property in 1-MCP technology. The Court found that Plaintiff proved that Defendant did not, in fact, own such intellectual property and ruled that the Company must dissolve.
1-MCP was patented in 1996. After Nazir Mir (“Mir”), of MirTech, started experimenting with 1-MCP technologies, the Defendant entered into a consulting agreement with AgroFresh Inc. (“AgroFresh”). Under that agreement, the parties agreed to joint ownership of “any and all inventions conceived or reduced to practice jointly by the [p]arties.” Subsequent agreements between Defendant and AgroFresh granted AgroFresh sole ownership over joint inventions. During this business relationship, Mir developed a technology called “RipeLock,” as well as several patents the Court refers to as the “RipeLock Patents.”
In 2014, Plaintiff and Defendant began discussions relating to a potential joint venture for the development of technology related to 1-MCP and RipeLock Patents. A letter of intent that was issued based on these discussions listed “three overarching tasks for the joint venture: (i) secure the legal rights of the listed patents; (ii) coordinate research, regulatory approvals, and other pre-commercial activity; and (iii) commercialize the developed technology.” To commercialize such technology, Defendant asserted that it would license the use of its patents to the joint venture. The Company was formed in April of 2016. The Company was a manager-managed LLC, with Plaintiff and Defendant as the only members/managers. The Company’s LLC agreement required consent of both Plaintiff and Defendant to take actions requiring manager approval. The agreement also identified the Company’s purpose as being to research, develop, manufacture, and market 1-MCP products. It did not, however, limit the Company to activities related to 1-MCP products. Per the agreement, Plaintiff had a right of first refusal over any non-1-MCP product business. Defendant was obligated to develop and license exclusively to the Company the RipeLock patents. Defendant, in the agreement, represented that it owned intellectual property rights in the relevant technology, that no other person had any “right, title or interest” in it, and that it owned the technology “free and clear of all claims, mortgages, leases, loans and encumbrances.”
The Company began selling a product utilizing 1-MCP technology called TruPick. AgroFresh quickly filed suit against Plaintiff, Defendant, and the Company alleging that TruPick amounted to an infringement of its intellectual property rights in the RipeLock Patents. The Court, ruling in favor of AgroFresh, found that the technology underlying TruPick belonged to AgroFresh. The Company stopped selling TruPick immediately. Ultimately, Mir and AgroFresh entered into a settlement agreement which called for an entry of a final judgment by consent. According to this judgment, Mir and MirTech agreed to disclose and assign to AgroFresh “all inventions, discoveries, or improvements” relating to 1-MCP. The Judgement included a finding that the RipeLock Patents belonged to AgroFresh. Shortly thereafter, Francois Girin (“Girin”), of Plaintiff, contacted defendant suggesting that the Company dissolve. Defendant refused, and Plaintiff brought this action.
Plaintiff sought an order to dissolve the Company and appoint Girin as the receiver to wind-up the Company. MirTech answered and asserted a counterclaim, but the Court granted a motion by Plaintiff to strike the counterclaim prior to trial.
In deciding this case, the Court relied on Section 18-802 of the Delaware Limited Liability Company Act (“DLLCA”). § 18-802 allows the Court to dissolve a limited liability company where it is not, or is no longer “reasonably practicable to carry on the business in conformity with a limited liability company agreement.” In considering the dissolution under § 18-802, the Court looked to the Company’s LLC agreement. The Court broke the purpose of the Company’s business, as laid out in the LLC agreement, into two categories: (1) the 1-MCP business; and (2) the Non-1-MCP business. Ultimately, the court found that the Company could not carry on business in either category.
The Court found that the LLC agreement defined 1-MCP business as business relating to 1-MCP products. The only product the Company ever developed, manufactured, or sold was TruPick. The Plaintiff pointed out that, pursuant to the judgement in the MirTech-AgroFresh litigation, the Company could no longer market TruPick. Defendant argued that the Company could still rely on Defendant’s “know-how” and “trade secrets” to conduct 1-MCP business. The Court rejected this argument, citing the previous judgment as having assigned all MirTech “know-how” relating to 1-MCP to AgroFresh. Mir admitted at trial that his proposed 1-MCP business required measuring 1-MCP, and that he could not think of a way to measure 1-MCP without relying on “know-how” that had been assigned to AgroFresh. As such, the Court found that there was no practicable way in which the Company could continue any 1-MCP business.
While the LLC agreement did contemplate the Company’s engaging in potential non-1-MCP business, the Court pointed out that any venture in that capacity was subject to a right of first refusal by Plaintiff. Seeing as how Girin testified that he no longer trusted Mir, the Court found that no new non-1-MCP venture would survive Plaintiff’s right of first refusal. Defendant argued that a non-1-MCP business already existed, and therefore survived Plaintiff’s right of first refusal, relating to “in-transit ripening” and “nano-absorbent films,” neither of which was purportedly 1-MCP technologies. The only support that Defendant provided for these assertions was testimony from Mir about conversations with low-level employees of Plaintiff regarding these technologies. Mir also conceded that nothing was ever signed or even definitively agreed to with respect to any non-1-MCP business or technology. Despite Defendant’s assertions otherwise, the Court found that there was no practicable way in which the Company could continue on by engaging in any non-1-MCP business. Consequently, Court dissolved the Company and appointed Girin as the receiver.
In a memorandum opinion, Samuel Zalmanoff v. John A. Hardy et. al, Civil Action No. 12912-VCS (Del. Ch. November 13, 2018), the Delaware Court of Chancery granted summary judgment in favor of the defendant board of directors of Equus Total Return, Inc. (“Equus”), ruling that the board of directors (the “Board” or “Defendants”) adequately fulfilled their disclosure obligations because the facts allegedly omitted from the operative proxy statement (the “Proxy”) were indisputably contained in the Form 10-K (the “10-K”), which the Board provided to stockholders in the same mailing as the Proxy.Read More
In a case arising out of the purchase by Great Hill Partners of Plimus (now known as BlueSnap, Inc.), the Delaware Court of Chancery, after a 10-day trial and extensive post-trial briefing and oral argument, recently rejected all of the fraud-based claims made by Great Hill against the two founders of Plimus, Messrs. Daniel Kleinberg and Tomer Herzog (the “founders”), who were also directors and major shareholders of Plimus at the time of the transaction. The Court’s decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906-VCG, 2018 WL 6311829 (Del. Ch. Dec. 3, 2018), is notable for its rejection of several claims Great Hill pressed for years after initiating the litigation in September 2012.Read More
In Fred L. Pasternack v. Northeastern Aviation Corp., C.A. No. 12082-VCMR (Del. Ch. Nov. 9, 2018), the Delaware Court of Chancery awarded mandatory indemnification for legal expenses and fees-on-fees to Fred Pasternack (“Pasternack”), a former pilot for Northeastern Aviation Corp. (“Northeastern”) under Northeastern’s Bylaws (the “Bylaws”) because he was determined to be an agent of Northeastern when attending a random drug test to maintain his pilot certification.Read More
In Barnes v. Sprouts Farmers Market, Inc., Jennifer Barnes, a stockholder of Sprouts Farmers Market, Inc. (“Stockholder”), sought to inspect the books and records of Sprouts Farmers Market, Inc. (the “Company”) in order to investigate potential breaches of duty, corporate mismanagement, wrongdoing, and unjust enrichment by the Company’s fiduciaries. Section 220 of the Delaware General Corporation Law permits stockholders of a Delaware corporation to inspect a company’s books and records for any proper purpose. Such purpose need only be reasonably related to the person’s interest as a stockholder, and the stockholder need only show “some evidence to suggest a credible basis from which a court can infer” the related conduct.
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.Read More
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.
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.
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.
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.
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.