Archive: August 2015

Chancery Court Confirms Delaware’s Merger Statutes Inapplicable to Options

By Lisa Stark and Eric Jay

In Kurt Fox v. CDX Holdings, Inc. (f/k/a Caris Life Sciences, Inc.), C.A. No. 8031-VCL (Del. Ch. July 28, 2015), the Delaware Court of Chancery confirmed that Delaware’s merger statutes do not effect a statutory conversion of options at the effective time of a merger. Rather, the treatment of stock options in a merger is governed by the underlying stock option plan, which must be amended in connection with a merger if the treatment of options in the merger differs from the treatment contemplated by the plan. The Court also confirmed that a standard qualification in stock option plans, requiring a corporation’s board of directors to determine the fair market value of the option for purposes of cashing out the options, could not be satisfied by informal board action or a delegation to management or a third party.

This class action arose from a 2011 spin-off/merger transaction pursuant to which Miraca Holdings, Inc. (“Miraca”) acquired CDX Holdings, Inc. (formerly known as Caris Life Sciences, Inc.) (“Caris”) for $725 million (the “Merger”). Immediately prior to the Merger, Caris spun off two of its three subsidiaries to its stockholders (the “Spin-Off”). In the Merger, each share of Caris stock was converted into the right to receive $4.46 in cash. Each option was terminated with the right to receive the difference between $5.07 per share and the exercise price of the option, minus 8% of the total option proceeds, which were held back to fund an escrow account from which Miraca could satisfy indemnification claims brought post-closing.

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Court of Chancery Discusses Statute of Limitations in Claim for Indemnification

By Scott Waxman and Stephanie S. Liu

In Francis S. Branin, Jr. v. Stein Roe Investment Counsel, LLC, et al, the Court of Chancery considered whether Plaintiff’s claim for indemnification for expenditures related to litigation that had begun in 2002, but not was resolved with finality until 2012, was time-barred. The Court concluded that the statute of limitations on Branin’s indemnification claim did not begin to run until the underlying litigation was resolved, and thus his claim was timely. The Court granted Branin’s motion to strike Defendants’ affirmative defenses and granted his motion for summary judgment on Defendants’ obligation to indemnify him. The Court also found that Branin was entitled to prejudgment simple interest at the statutory legal rate, as well as fees incurred in successfully prosecuting his indemnification claim.

After Plaintiff Francis S. Branin, Jr. (“Branin” or the “Plaintiff”) resigned from Bessemer Trust, N.A. (“Bessemer”) on July 12, 2002, he began working for Defendant Stein Roe Investment Counsel LLC (“SRIC LLC”). On November 22, 2002, Bessemer sued Branin for improperly soliciting its clients and impairing its goodwill in violation of a New York implied covenant (“New York Action”). In 2012, after a decade of litigation, Branin successfully defended against all claims. On April 17, 2013, Branin turned to the Court to enforce a purported indemnification right against SRIC LLC, Stein Roe Investment Counsel, Inc., and Atlantic Trust Group, Inc. (collectively, the “Defendants”).

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Delaware Court of Chancery Reiterates Standard for Terminating a Receivership and Finds 10% Net Recovery Contingency for a Receiver Fee Reasonable under Delaware General Corporate Law

By Scott Waxman and Anthony L Yerry

In Jagodzinski v. Silicon Valley Innovation Company, LLC, Christian Jagodzinski, a unitholder in Silicon Valley Innovation Company, LLC (“SVIC”), fueled by personal disputes with Bram Portnoy, the receiver of SVIC, brought a motion to terminate the court-appointed receivership over SVIC or, alternatively, to reduce the receiver’s pay.  Setting aside the personal disputes between Portnoy and Jagodzinski, the Delaware Court of Chancery ruled that Jagodzinski failed to make a sufficient showing to justify terminating the receivership but held that the 10% contingency portion of Portnoy’s fees are to be based off of the net, instead of the gross, recovery of the receivership.

In 2000, Jagodzinski invested $1 million in SVIC, which was an incubator for other startup technology companies.  After about four years of allegedly successful investments, SVIC stopped sending reports to the equity holders.  Jagodzinski unsuccessfully attempted to contact SVIC and investigate the state of the company’s affairs.  Eventually on February 18, 2011, Jagodzinski initiated a books and records action against SVIC in the Delaware Court of Chancery.  The then manager of SVIC refused to cooperate with the court, and the court appointed Portnoy as a limited receiver of SVIC with the specific task of collecting the books and records of the SVIC.

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Chancery Court Holds Bylaw Permitting Stockholder Removal of Officers Invalid in Continuing Fight over the Composition of the Board of Directors of Westech Capital Corp.

By Annette Becker and Porter Sesnon

In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.

Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.

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Delaware Chancery Court Dismisses Claims Involving a Related Party Transaction with a Controlling Stockholder under Court of Chancery Rules 23.1 and 12(b)(6)

By Kristy Harlan and Stephanie S. Liu

In Teamsters Union 25 Health Services & Insurance Plan v. Baiera, et al, a stockholder of Orbitz Worldwide, Inc. challenged the fairness of the terms of a five-year services agreement that Orbitz entered into with a group of entities affiliated with Travelport Limited, a controlling shareholder of Orbitz when the agreement was negotiated and signed. The plaintiff asserted four derivative claims challenging the services agreement and a separate putative class claim for breach of fiduciary duty against Orbitz’s directors for allegedly violating the rules of the New York Stock Exchange (NYSE). Defendants moved to dismiss plaintiff’s claims under Court of Chancery Rule 23.1 for failure to make a demand or to adequately plead demand is excused and under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted. The Delaware Court of Chancery concluded that demand was not excused as to any of plaintiff’s derivative claims and that it was not reasonably conceivable that the plaintiff could establish that Orbitz’s directors caused Orbitz to violate the NYSE Rules. Thus, the Court granted Defendants’ motion to dismiss the derivative claims under Rule 23.1 and the NYSE-related claim under Rule 12(b)(6).

Plaintiff Teamsters Union 25 Health Services & Insurance Plan (“Plaintiff”) has been a stockholder of Orbitz Worldwide, Inc. (“Orbitz”), an online travel company, at all relevant times with respect to its claims. Nominal Defendant. The Travelport Defendants (“Travelport”), which were majority owned by Defendant Blackstone Group LP (“Blackstone”), are group of entities affiliated with Travelport Limited, which provides transaction processing services to travel companies. The other defendants included Orbitz’s board of directors when the company entered into the New Agreement (the “Agreement Board”), Orbtiz’s board of directors when Plaintiff initiated this action (the “Demand Board”), and Orbitz’s current board of directors (“Current Board”).

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