Archive: February 2017

Chancery Court Interprets Contractual Provisions, the Elimination of Fiduciary Duties and Standard to be Applied for Self-Dealing Transactions under LLC Agreement

By Nicholas I. Froio and Rachel Cheasty Sanders

In CelestialRX Investments, LLC and Krittika Life Sciences, LLC v. Krivulka, et al., C.A. No. 11733-VCG (Del. Ch. Jan. 31, 2017), the Delaware Court of Chancery addressed two preliminary issues before it on motions for partial summary judgment filed by the various defendants.  The plaintiffs include CelestialRX Investments, LLC (“CelestialRX”), one of three members of the Delaware limited liability company Akrimax Pharmaceuticals, LLC (“Akrimax”).  The defendants include Leonard Mazur and Joseph J. Krivulka (“Krivulka”), the two other members of Akrimax, along with various entities Krivulka controls or in which he has invested.  These entities entered into a number of transactions with Akrimax, these transactions being at the heart of this dispute.  The Court first considered whether a release agreement dated July 1, 2013 (“Release Agreement”) barred CelestialRX from bringing causes of actions against the defendants which occurred prior to the release.  After applying rules of contract interpretation, the Court, in dismissing the motion for partial summary judgment, held that the plaintiff was not a “Releasing Party” as defined in the Release Agreement and thus had not released any claims existing as of July 1, 2013.  The Court next considered the extent to which the LLC Agreement of Akrimax and its July 1, 2013 amendment (“Amendment No. 7”) limited or modified fiduciary duties of the members, directors or managers of Akrimax, and what standard of care applied under the LLC Agreement in the context of conflicted transactions.

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Chancery Court Enforces LLC Agreement’s Forum Selection Clause in Fee Advancement Claim

By: Scott Waxman and Mark Hammes

In Merinoff v. Empire Merchants, C.A. No. 12920-VCS (Del. Ch. Feb. 2, 2017), the Court of Chancery held that a forum selection clause in the LLC agreement of Empire Merchants, LLC (“Empire”) precluded an action by the managers and officers of Empire to obtain advancement of legal fees from being brought in the Delaware Court of Chancery.

Plaintiff officers and managers of Empire were defendants in a separate action brought by Empire in New York alleging that they carried out a massive and long running bootlegging scheme to illegally divert wine and spirits from Maryland into New York. Plaintiffs filed a claim in the Delaware Court of Chancery asserting that Empire’s LLC Agreement entitled them to advancement of legal fees that they would incur in defending that action. Empire asserted that its LLC agreement required such claims to be brought in New York and moved to dismiss under Court of Chancery Rule 12(b)(3) for improper venue.

The Court first recited the plain language of Empire’s LLC agreement, which provided that “any suit, action, or other legal proceeding arising out of this Agreement shall be brought in the United States District Court for the Southern District of New York or in any courts of the state of New York sitting in the Borough of Manhattan….” It further included a carve-out stating that “[n]otwithstanding the foregoing, any legal proceeding arising out of this Agreement which, under [Delaware’s Limited Liability Company] Act or, to the extent made applicable to the Company pursuant to this Agreement, the DGCL, is required to be brought in the Delaware Court of Chancery may only be brought in the Delaware Court of Chancery….”

The Court then explained that the Delaware Limited Liability Company Act does not contain any provisions regarding venue for claims relating to advancement of fees, but the DGCL, in § 145, states that the Delaware Court of Chancery shall have “exclusive jurisdiction” to hear such claims with respect to corporations. Plaintiffs argued that since the Empire LLC agreement incorporated certain terms from the DGCL, the carve-out in the Empire LLC agreement applied and they were required to bring this action in Delaware.

The Court rejected plaintiff’s arguments for two reasons. First, the portions of the DGCL incorporated into Empire’s LLC agreement related only to the standards for duties owed by managers and officers to Empire, not to advancement of fees. Second, even if the DGCL were applicable to plaintiff’s advancement claims, the statutory grant of “exclusive jurisdiction” to the Delaware Court of Chancery merely allocates jurisdiction among the Delaware courts, it does not constitute a “claim against the world that no court outside of Delaware can exercise jurisdiction….” Because this action therefore could have been brought elsewhere, it did not fall into the carve-out, which only captures actions “required” to be brought in Delaware. Thus the Court granted Empire’s motion to dismiss for improper venue.

Merinoff v. Empire Merchants C.A. No. 12920-VCS (Del. Ch. Ct. February 2, 2017)

Court of Chancery Dismisses Derivative Action Against Board of Directors of UPS for Failure to Monitor

By: Michelle McCreery Repp and Joshua Haft

The Court of Chancery granted a motion to dismiss a shareholder derivative action brought against the board of directors of UPS for breach of their fiduciary duty of loyalty in which it was alleged that the board failed to monitor UPS’s compliance with laws governing the transportation and delivery of cigarettes, resulting in the government seeking approximately $180 million in a pending enforcement action against UPS. In ruling on the motion, the Court held that the plaintiffs did not adequately plead facts to support their contention that making a demand on the board of directors to take corrective action or pursue the claim would be futile, which is a prerequisite to a shareholder derivative action.

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Chancery Court Reexamines the Limits of Indemnification of Corporate Directors, Officers, and Others

By: Susan Apel and Benjamin Kendall

In Dore v. Sweports, Ltd., C.A. No. 10513-VCL (Del. Ch. January 31, 2017), plaintiffs John A. Dore, Michael J. O’Rourke, and Michael C. Moody (together, “Plaintiffs”) sought indemnification under the Delaware General Corporation Law (“DGCL”) and corporate bylaws, for expenses incurred in connection with three legal proceedings that occurred in Illinois, as well as those incurred enforcing their indemnification rights in Delaware.

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Derivative Claims of Improper Demand Refusal for Grossly Negligent Investigations and Bad Faith Must Be Adequately Pled

By: Megan Wotherspoon and Calvin Kennedy

The court found that a board of directors’ decision to refuse demand in connection with a stockholder derivative claim satisfies the business judgment rule if the board’s investigation is reasonable and the board acts in good faith.  By this opinion, the court granted the defendants’ motion to dismiss under Court of Chancery Rule 23.1 in light of plaintiff’s failure to adequately plead improper demand refusal.

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Chancery Court Clarifies the Cleansing Power of an Uncoerced and Fully Informed Disinterested Majority Stockholder Vote

By:  Annette Becker and Will Smith

In In re Merge Healthcare Inc. Stockholders Litigation, No. 11388-VCG (Del. Ch. Ct. January 30, 2017), the Delaware Court of Chancery granted the defendant directors’ motion to dismiss brought against the plaintiff stockholders, holding that the cleansing effect of an uncoerced and fully informed vote of a majority of disinterested shares shields company directors from liability for alleged fiduciary violations as to an improper merger price and process. The Court found that the business judgment rule applied on review as opposed to the entire fairness standard.

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