Archive: June 2015

Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

By Annette Becker and Priya Chadha

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board.  During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages.  UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders.  Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”).  That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned.  Partners named David Katz, a former board member of Partners, to the UAM board.

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Strict Interpretation of Advance Notice Bylaws Guides Chancery Court in Issuing Preliminary Injunction and Partial Final Judgment Orders

By William Axtman and Ryan Drzemiecki

In the ongoing dispute of Opportunity Partners L.P. v. Hill International, Inc., Vice Chancellor J. Travis Laster granted plaintiff Opportunity’s motion for preliminary injunction with respect to an annual meeting of stockholders and defendant’s motion to enter the injunction order as partial final judgment for purposes of appellate review. In reaching its decision on the preliminary injunction, the Court relied on strict interpretation of defendant Hill’s advance notice bylaws.

Defendant’s advance notice bylaws provided that stockholders’ notice of business or nominees to be presented in an annual meeting must be furnished “not less than sixty (60) days nor more than ninety (90) days prior to the meeting,” with an exception that “in the event that less than seventy (70) days notice or prior public disclosure of the annual meeting is given or made to stockholders,” the stockholders’ notice would be considered timely if received “no later than the close of business on the tenth (10th) day” thereafter.

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Fight Between Two Chemical Giants Continues: Akzo Nobel’s Claim of IP Misappropriation against Dow Chemical Survives Motion to Dismiss

By Holly Vance and Stephanie S. Liu

In Akzo Nobel Coatings, Inc. v. The Dow Chemical Company, the Delaware Court of Chancery decided a dispute between two chemical companies that were parties to a joint development agreement. Akzo Nobel Coatings Inc. (“Akzo”) alleged, among other things, that The Dow Chemical Company, doing business as Dow Advanced Materials (“Dow”), wrongfully misappropriated intellectual property that belonged in part or in whole to Akzo and breached their joint development agreement. Dow moved to dismiss pursuant to Court of Chancery Rule 12(b)(6). The Court granted the motion in part and denied in part. Specifically, Akzo’s claims for declaratory judgment and breach of contract survived, but its alternative claims for breach of the implied covenant of good faith and fair dealing, conversion, and unjust enrichment were dismissed.

Akzo specializes in the design, manufacture, and sale of various chemical coatings, including protective coatings for food and beverage packaging and containers. Dow develops, manufactures, and sells polymeric materials, products, and technologies, including those suitable for use in coatings for food and beverage containers. In January of 2010, the parties executed a Joint Development Agreement (“JDA”) to combine the parties’ respective areas of expertise in pursuit of the development of new protective coatings for metal food and beverage packaging containers. Depending on the resulting invention, any given project under the JDA could either be wholly owned by one of the two parties or jointly owned. Dow terminated the JDA in October of 2011, and then communicated to Akzo in May of 2012 that it intended to file two patent applications relating to potential JDA inventions. In June of 2013, Akzo filed its complaint, asserting claims for: (1) a declaratory judgment regarding Akzo’s ownership rights under the JDA; (2) breach of contract and a permanent and mandatory injunction against Dow; (3) breach of the implied covenant of good faith and fair dealing; (4) conversion; and (5) unjust enrichment. The Court reviewed the complaint under the reasonable “conceivability” standard, the governing pleading standard in Delaware to survive a motion to dismiss, which asks whether there is a “possibility” of recovery.

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Delaware Chancery Court Allows Disclosure of Privileged Information to LLC Members Under Garner Fiduciary Exception

By Scott Waxman and Claire White

In De Vries v. Del Mar, L.L.C., two minority limited liability company members of Del Mar, L.L.C. (the “Company”) sought to compel disclosure of privileged information relating to the settlement of a $3.0 million loan to the Company, the transfer of the Company’s primary asset to the lender in post-settlement negotiations, and potential mismanagement and self-dealing by the managing member of the Company, Baja Management, LLC (“Baja”), and its president and sole managing member, Kenneth Jowdy (“Jowdy”). The Court held that the plaintiffs demonstrated sufficient “good cause” to compel inspection of privileged books and records of the Company related to the post-settlement events under the Garner doctrine of the Fifth Circuit Court of Appeals, adopted by the Delaware Supreme Court in Wal-Mart Stores v. Indiana Electrical Workers Pension Trust Fund IBEW, No. 614, 2013 (Del. July 23, 20

The Company was formed for the principal purpose of owning and developing a hotel, golf course and residential properties in Baja California, Mexico, and its main asset consisted of 9,238 acres of undeveloped land, valued at $68.9 million (the “Property”). Baja, the Company’s majority and managing member, owned 93% of the Company’s membership interests, and the remaining interests were held by various minority members who invested $500,000 each in exchange for a 0.5% interest in a private placement round in 2005. The Company obtained a secured loan of $3.0 million from a “hard money” lender in 2006, but failed to raise substantial investment funds for full development of the Property. Jowdy, the sole managing member of Baja, personally guaranteed the loan. In 2010, the Company defaulted on the loan, and the Company and Jowdy executed confessions of judgment for the full amount of the loan (and interest). Following settlement negotiations, and the Company’s inability to satisfy the judgments with further financing, the Company agreed to transfer the Property to the lender in lieu of the lender recording the judgments against the Company and Jowdy.

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Delaware Chancery Court Awards Attorneys’ Fees Based on Gross Amount of Settlement Award and Denies Sharing of Award by NY Counsel

By Kristy Harlan and Sophia Lee Shin

Following the settlement of In re Jefferies Group, Inc. Shareholders Litigation on March 26, 2015, the court issued this opinion on June 5, 2015 in response to plaintiffs’ Delaware counsel’s application for an award of attorneys’ fees and a motion by plaintiffs’ New York counsel for a share of that fee award. The court held that the Delaware counsel’s attorneys’ fees should be calculated on a gross basis, granting Delaware counsel an award of approximately 23.5% of the gross value of the settlement, and denied New York counsel’s motion for a share of that fee award.

On March 1, 2013, Jefferies Group, Inc. and Leucadia National Corporation consummated a stock-for-stock merger. On November 14, 2012, two days after the transaction was announced, the first of seven actions challenging the transaction was filed in New York state court. Eventually, the New York actions were stayed and the case proceeded in Delaware. The parties ultimately agreed to settle for payment of $70 million to the class, which settlement was approved by the court. The settlement contemplated that any award of attorneys’ fees would be in addition to the $70 million payment, with the defendants retaining the right to oppose the fee application.

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Delaware Court of Chancery Dismisses Shareholder Derivative Action Against Interested Directors Following Secondary Offering

By Annette Becker and Mark Hammes

In In re Molycorp, Inc. Shareholder Derivative Litigation, the Delaware Court of Chancery dismissed claims brought against director representatives of private equity investors for breach of fiduciary duties, aiding and abetting, and unjust enrichment for failure to state a claim.  The Court held that the private equity investors along with certain directors exercised their contractual rights to sell their stock in Molycorp Inc. a publicly traded corporation (“Molycorp”) in a secondary offering and the directors were under no obligation to delay such a demand registration during a time in which Molycorp was experiencing a cash shortfall.

Molycorp was engaged in the production and sale of rare earth oxides. Before Molycorp’s July 2010 IPO, three initial private equity investors (PEIs) negotiated a Registration Rights Agreement. The agreement secured the PEIs right to demand that Molycorp register their shares in a secondary offering. The results of the July 2010 IPO did not yield the funds expected, and a secondary offering of Molycorp shares in February 2011 left the company still short on cash. A potential loan from the Department of Energy fell through, and potential financing arrangements with two other companies looked increasingly unlikely. In May 2011, the PEIs exercised their demand registration rights, and the offering was held in June 2011. Due to a recent spike in the price of rare earth oxides, the PEIs (and several directors appointed by the PEIs) sold their shares in the resulting June offering at an inflated value. In September 2011, the rare earth oxide bubble burst. Subsequent efforts by Molycorp to make up for its cash shortfall by issuing convertible notes left it with inadequate funds to implement its planned production increase. As a result Molycorp missed out on potential profits from the rare earth element bubble.

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Chancery Court Affirms Former Executive’s Right to Advancement in Connection with Federal Indictment

By Lisa Stark and Lauren Garraux

In a post-trial memorandum opinion, Chancellor Andre Bouchard determined that Donald L. Blankenship, the former CEO and Chairman of Massey Energy Company (“Massey”), now known as Alpha Appalachia Holdings, Inc. (“Alpha”), was entitled to advancement of unpaid legal expenses incurred in connection with his indictment following an April 2010 mine explosion in West Virginia. According to Chancellor Bouchard, Blankenship’s right to advancement stemmed both from Massey’s October 2010 Amended and Restated Certificate of Incorporation (the “Charter”) and an Agreement and Plan of Merger between Massey and Alpha, pursuant to which Alpha acquired Massey.

Blankenship served as Massey’s CEO and Chairman until his retirement in December 2010. During his tenure at Massey, in April 2010, an explosion occurred at a West Virginia coal mine operated by a Massey subsidiary. The explosion killed 29 miners and led to both civil proceedings and a federal criminal investigation into the incident launched by the United States Attorney’s Office for the Southern District of West Virginia. For several years after the explosion, Massey and Alpha, which acquired Massey in January 2011, honored Blankenship’s right to advancement of his legal expenses and paid such expenses incurred in connection with the civil proceedings and federal criminal investigation. In November 2014, Blankenship was indicted on charges arising from the explosion. Following the indictment, Alpha stopped paying Blankenship’s legal fees.

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Delaware Court of Chancery Holds That Collateral Estoppel Bars Claims By Other Preferred Stockholders

By Annette Becker and Mark Hammes

In Brevan Howard Credit Catalyst Master Fund Limited, et al. v. Spanish Broadcasting System, Inc., the Delaware Court of Chancery considered the latest judicial iteration of rights of holders of preferred stock in Spanish Broadcasting System, Inc. (“SBS”) in which the plaintiffs sought damages as a result of SBS incurring indebtedness following the non-payment of dividends to the preferred stockholders without their consent. The Chancery Court granted defendant SBS’s motion to dismiss on the grounds that collateral estoppel and res judicata barred the plaintiffs from re-litigating issues previously decided in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc. against those in privity with the plaintiffs finding that the plaintiffs acquiesced to the non-payment of dividends.  The Court dismissed the majority of the plaintiffs’ claims.

By way of  background, in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc., a prior case involving similar claims brought by other preferred stockholders of SBS, such plaintiffs claimed that the non-payment of dividends to the preferred stockholders led to the occurrence of a voting right trigger event after which SBS incurred indebtedness in violation of the preferred stockholders’ contractual rights, the Court of Chancery granted a motion for summary judgment brought by SBS, holding that the defense of acquiescence as to the non-payment of dividends defeated those preferred stockholders’ claims. The Certificate of Designation of SBS (“Certificate”) setting forth the rights, privileges and preferences of the SBS preferred stock provided that dividends on the preferred stock were payable quarterly, and that if such dividends were not paid for four consecutive quarters, a voting rights trigger permitted the holders of 10% of the outstanding preferred stock to call a special meeting and elect additional directors. The Certificate also prohibited SBS from incurring additional debt after such a triggering event. According to the plaintiffs, a triggering event had occurred in April 2010, while additional debt was incurred in 2011 and 2012. None of the preferred stockholders called a special meeting to elect additional directors. Plaintiffs in this suit brought suit (1) seeking a declaration that a voting rights triggering event had occurred, (2) for breach of contract for incurring the debt, (3) seeking to exercise repurchase rights under the Certificate, and (4) breach of the covenant of good faith and fair dealing.

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Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties.  The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

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