Archive: 2019


By: Megan A. Wotherspoon and Rachel Cheasty Sanders

In Inter-Local Pension Fund GCC/IBT v. Calgon Carbon Corp., C.A. No. 2017-0910-MTZ (Del. Ch. Jan. 25, 2019), the Delaware Court of Chancery enforced an institutional stockholder’s demand for books and records under Title 8, Section 220 of the Delaware General Corporation Law (“Section 220”). The Court found that the stockholder’s affidavit affirming the demand in substantially final form, although not in exact final form, did not violate Section 220’s “under oath” requirements where the only change between the versions was the addition of a signature and the date. The Court also found that the stockholder’s demand was not lawyer-driven under Wilkinson v. A. Schulman, Inc., C.A. No. 2017-0138-VCL (Del. Ch. Nov. 13, 2017), where the stockholder’s goals of the demand and the purposes stated in the lawyer-drafted demand were not fundamentally misaligned, even where the stockholder’s representative could not articulate all the legal nuances of such purposes in deposition testimony.

In 2016, Japanese company Kuraray Co., Ltd. (“Kuraray”) contacted Defendant Calgon Carbon Corporation, a publicly-traded Delaware corporation (“Calgon” or the “Company”), to express interest in the companies forming a partnership. Although Calgon initially informed Kuraray it was not for sale, on June 14, 2017, Kuraray delivered to Calgon an acquisition proposal with an exclusivity agreement and a promise to retain existing management. Kuraray later delivered a second proposal that increased the purchase price per share. Two months later, upon a favorable recommendation from its financial advisor and senior management, Calgon’s board of directors (the “Board”) decided to move forward with the second proposal from Kuraray, but refused to extend exclusivity.

On September 5, 2017, a group of Calgon’s independent directors prohibited senior management from discussing their post-acquisition job prospects with Kuraray until after all other material terms of the deal were settled. On September 14, the independent directors decided the deal was settled enough to allow Randall S. Dearth, Chairman of the Board and President and CEO (“Dearth”), to discuss his retention with Kuraray. The next day, Dearth met with Kuraray and gave them terms for his and other senior managers’ continued employment. The terms included no change in title or base salary, and a one-time post-closing bonus of $5.5 million for Dearth and $1.25 million for the others. Dearth reported the contents of the term sheets to the Board on September 16, after which the Board reinstated its prohibition on senior management negotiating their employment with Kuraray until the deal terms were settled. On September 19, Calgon and Kuraray agreed to the deal terms, and the next day the Board approved the merger with Dearth committed to remain as CEO. On November 28, Calgon issued the proxy statement to its stockholders.

On December 14, 2017, Calgon stockholder Inter-Local Pension Fund GCC/IBT (“Plaintiff””) retained counsel and demanded Calgon’s books and records pursuant to Section 220. Plaintiff sought to investigate potential breaches of the fiduciary duty of loyalty by Calgon directors with respect to the Kuraray transaction, as well as mismanagement and wrongdoing by officers. As evidence of wrongdoing, Plaintiff pointed to the Board’s and senior management’s substantial equity awards received as a result of the transaction. Calgon refused to comply and, the next day, Plaintiff sued to enforce the demand. Kuraray acquired Calgon on March 9, 2018, and the case proceeded to trial in July 2018.

Section 220 grants a stockholder the right to inspect the corporation’s books and records “for any proper purpose.” Investigating wrongdoing and mismanagement of directors is a proper purpose. While the stockholder bears the burden of establishing “credible bases” of director wrongdoing or mismanagement, it need only provide “some evidence” to infer there are legitimate issues that warrant further investigation.

Calgon argued (i) Plaintiff’s demand did not technically conform to Section 220’s form and manner requirements, and (ii) Plaintiff’s purposes for the demand were not its own, but were lawyer-driven and therefore prohibited by Wilkinson v. A. Schulman, Inc. Section 220 requires a stockholder to make a demand “under oath.” Stockholders often fulfill this requirement by attaching a notarized affidavit to the demand. Fund plan administrator Lawrence C. Mitchell, a nonparty, signed a notarized affidavit approving the demand “in substantially final form.” Calgon argued that Mitchell’s affidavit violated Section 220’s oath requirement because it approved a version of the demand letter that was not in its final form. The Court found that the demand did comply with Section 220, because there were no substantive differences between the version of the demand Mitchell reviewed and the final form, the only change being that the final demand was signed and dated. However, the Court did recommend that “the best practice is for the stockholder to review the final version of a demand letter, including the effective date.”

A stockholder’s demand under Section 220 can be found to lack a proper purpose “[w]hen counsel for a stockholder presses a purpose that is different from the stockholder’s actual purpose.” The Court upheld this principle in Schulman, when it refused to enforce a demand where the stockholder’s counsel initiated the demand, drafted it based on different issues than what motivated the stockholder to seek counsel in the first place, and litigated the demand largely without the stockholder’s involvement. Calgon argued Schulman applied because Plaintiff’s demand was lawyer-driven by Plaintiff’s counsel, and therefore Plaintiff lacked a proper purpose under Section 220. The Court held that Calgon failed to prove Plaintiff put forward its demand under false pretenses, a high standard. The Court noted the key issue in Schulman was the fundamental “misalignment of goals” between stockholder and counsel, which was not present in this case. Mitchell testified regarding Plaintiff’s purposes for the demand, which aligned with the purposes in the demand drafted by Plaintiff’s counsel. Calgon argued that Mitchell’s inability to articulate the details of the demand showed it was entirely conceived by Plaintiff’s counsel without Plaintiff’s involvement. However, the Court held that a stockholder’s inability to “articulate the legal nuances” of a demand is not enough to establish that the stockholder lacked a purpose. The Court expressed concern that holding otherwise would restrict Section 220 only to “sophisticated stockholders,” and recognized that stockholders are entitled to rely upon counsel to monitor its investments, raise concerns, and pursue appropriate remedies.

Additionally the Court found Plaintiff met its burden of establishing some credible bases to infer possible wrongdoing, mismanagement, and lack of director independence, to justify an investigation. Plaintiff showed Calgon refused Kuraray’s overtures until Calgon’s management and directors were offered lucrative rewards and personal benefits in the merger, casting doubt on the entire process as artificially restrictive and tainted by the decision-makers’ personal interests. Also, Plaintiff sufficiently showed that Calgon employed central projections in the merger with short time-frames; this excluded a potentially lucrative future project that would have increased Calgon’s projections substantially. Plaintiff alleged that Calgon’s directors purposefully used short projections to facilitate Kuraray’s acquisition of the company for their own personal benefit.

Further, the Court found any merit contentions put forward by Calgon would not defeat Plaintiff’s credible bases to inspect Calgon’s books and records under Section 220 because the Court does not consider the merits beyond the low “credible bases” standard. The Court explained that while Calgon’s merit arguments ultimately may be successful in subsequent plenary litigation, they do not defeat Plaintiff’s demand to inspect books and records. The Court also found the books and records were “necessary and essential” to that investigation into the credible inferences of wrongdoing and mismanagement because they “address the ‘crux of the shareholder’s purpose’” and the “information ‘is unavailable from another source.’” The Court granted nine of Plaintiff’s thirteen documents requests, and narrowed in scope several of the granted requests.


By: Scott Waxman and Rachel Cheasty Sanders

In Acela Investments LLC v. Raymond DiFalco, Case No. 2018-0558-AGB (Del. Ch. June 28, 2019), the Delaware Court of Chancery addressed an application for certification of an interlocutory appeal of the Court’s decision in the underlying case (the “Memorandum Opinion”) and a motion for stay pending appeal.

The Acela Court decision discusses Delaware Supreme Court Rule 42 (“Rule 42”), which sets forth the criteria for evaluating whether to grant a request for interlocutory appeal, and the considerations necessary to evaluate a motion for stay pending appeal. This case revolves around Inspirion Delivery Sciences, LLC, a Delaware limited liability company that develops abuse-deterrent pharmaceuticals (the “Company” or “Inspirion”), two members of the Company’s board of managers (the “Board”), and one co-founder and former Board member. The Plaintiffs include Inspirion’s Chief Executive Officer Stefan Aigner, who also serves on the Board, and entities that Aigner controls. The Defendants include the Company’s co-founders Raymond DiFalco and Manish Shah. DiFalco is also a Board member and President of the Company. Shah was a Board member and Chief Science Officer, but resigned from both of those positions. Plaintiffs filed the underlying suit against Defendants asserting breach of fiduciary duties, breach of the Company’s LLC Agreement, and declaratory relief, among other claims. DiFalco then filed counterclaims against Aigner and third party-claims against the Company seeking, among other things, judicial dissolution of the Company and the appointment of a liquidating trustee. The parties agreed to bifurcate the claims to expedite their claims regarding governance of the Company and hold their remaining claims for damages in abeyance.

The Company’s Operating Agreement (the “Agreement”) provided for a unique governance structure wherein the CEO and President must perform their duties subject to the “advice and consent” of the other. Additionally, the Agreement permitted (i) Aigner or (ii) DiFalco and Shah together to exercise veto power against any action of the Board. Moreover, the Agreement included a mechanism for an independent representative to vote in place of an interested manager in matters regarding conflicts of interest, notably because Defendants and their family members control a variety of entities with which the Company did business. This governance structure proved to be “a recipe for deadlock” which occurred amongst management regarding many issues, including deciding with whom they should partner to manufacture their existing products and develop new drugs and whether the Company should focus on research and development or the creation of an internal sales force. The Court found that, pursuant to Section 18-802 of the Delaware Limited Liability Company Act, it was not reasonably practical for the Company to carry on its business in conformity with the Agreement and ordered the judicial dissolution of the Company and the appointment of a liquidation trustee. Thus, the Court ruled in favor of the Defendants and against the Plaintiffs on all claims regarding the governance of the Company. Subsequently Plaintiffs filed their application for certification of interlocutory appeal on which this decision rules and requested a stay to prevent particular actions on the part of the liquidating trustee.

Rule 42 states that interlocutory appeals should be certified only if “the order of the trial court decides a substantial issue of material importance that merits appellate review before a final judgment.” Furthermore, Rule 42 indicates that ‘[i]nterlocutory appeals should be exceptional, not routing, because they disrupt the normal process of litigation, cause delay, and can threaten to exhaust scarce party and judicial resources.” Plaintiffs cited only one of the eight criteria offered under Rule 42, claiming “review of the interlocutory order may serve considerations of justice.” Further Plaintiffs claimed they would “suffer significant harm” if forced to wait because their appeal “would be moot as a practical matter.”

The Court disagreed. The Court stated that, although the memorandum opinion did decide a substantial issue of material importance, appellate review of the Memorandum Opinion prior to the recommendation of a transaction or plan by the liquidating trustee and the subsequent approval by the court of the transaction or plan would “create the prospect of piecemeal appeals” instead of dealing with all issues in a single action. Additionally the Court disregarded Plaintiffs’ claim of a moot appeal, reminding the parties that the liquidating trustee needs court approval before it can finish a sale process. Plaintiffs could wait for their appeal until after a sale process, but before the closing of a transaction. Thus, the claims regarding governance of the Company and their remedies should be fully adjudicated before any appeal.

According to Delaware law, a reviewing court should consider the following when faced with a motion for stay pending appeal “(1) [ ] make a preliminary assessment of likelihood of success on the merits of the appeal; (2) [ ] assess whether the petitioner will suffer irreparable injury if the stay is not granted; (3) [ ] assess whether any other interested party will suffer substantial harm if the stay is granted; and (4) determine whether the public interest will be harmed if the stay is granted.” Plaintiffs requested that the trustee be prevented from soliciting interest or providing information regarding the sale of Company; consummating a sale, or terminating employees. In applying the required elements, the Court explored the deadlock of management and the detailed factual findings of the trial court, along with the abuse of discretion standard of review, to determine that it was unlikely that Plaintiffs would be successful on appeal. Further, the Court stated that Plaintiffs’ claim of injury regarding the termination of employees and soliciting interest from potential buyers was speculative and failed to rise to the level of an “irreparable injury.” As to the remaining elements, the Court noted that there was no showing regarding harm to interested third parties and that “the public interest would be served best by denying the stay . . . in order to maximize the chances of making the Company’s abuse-deterrent technology available to the public on a larger scale.” For these reasons, the Court of Chancery denied both the application for certification of interlocutory appeal and the motion to stay pending appeal. 

Chancery Court Interprets the Computer Fraud and Abuse Act

By: Scott E. Waxman and Stephanie S. Liu

In AlixPartners, LLP v. Benichou, (C.A. No. 2018-0600-KSJM (Del. Ch. May 10, 2019)), the Court of Chancery decided, as a matter of first impression, that the federal Computer Fraud and Abuse Act (“CFAA”) narrowly provides a cause of action in Delaware for unauthorized computer access or unauthorized access to information; it does not cover incidents involving misuse of information that was obtained through authorized access.

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By: C.J. Voss and Rich Minice

In Brown v. Rite Aid Corp., C.A. No. 2017-0480-MTZ (Del. Ch. May 24, 2019), the Delaware Court of Chancery granted the motion for partial summary judgment of plaintiff Franklin Brown (“Brown”), entitling Brown to indemnification by defendant Rite Aid Corporation (“Rite Aid”) for legal fees and expenses Brown incurred in proceedings arising out of a corporate fraud and accounting scandal in 2002. The court re-affirmed the principles that mandatory indemnification is dependent strictly on the outcome of the underlying action and that the “indemnitee need not be adjudged innocent in some ethical or moral sense,” a defendant need not pursue victory efficiently, and that indemnification is based on the reason by which a defendant is party to the action.

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Court to Sellers: Stockholder Notice Rights Matter

By Scott Waxman and Nadia Brooks

In Mehta v. Mobile Posse, Inc., six causes of action were before the Delaware Court of Chancery in Plaintiff’s complaint alleging inadequate stockholder notice and breach of directors’ fiduciary duty of disclosure regarding the merger of Mobile Posse. The defendants, Mobile Posse and its board, asserted motions for judgments on the pleadings for all counts, arguing they were entitled to the judgments because the violations were remedied by the supplemental notice they issued. The Court denied all but one of defendants’ motions, finding numerous deficiencies in the notice process and finding that the merger was not entirely fair.

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Court of Chancery Finds that the Implied Contractual Covenant of Good Faith and Fair Dealing Requires Delaware LLC to Exercise Discretion in Good Faith

By: Scott Waxman and Zack Sager

In Coca-Cola Beverages Florida Holdings, LLC v. Goins, the Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of the implied contractual covenant of good faith and fair dealing, and, in so doing, found that the discretion afforded to a Delaware limited liability company under an agreement was required to be exercised in good faith.  In addition, the Court analyzed a motion to dismiss claims for breach of contract, unjust enrichment, quantum meruit, and fraud.

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Words Matter: Chancery Court Holds that Indemnification Provision in Equity Purchase Agreement Does Not Cover Advancement of Expenses for Officer Conduct Unauthorized by the Board

By: Annette Becker and Adrienne Wimberly

In Computer Science Corporation v. Eric Pulier, et al., C.A. No. 11011-CB (Del. Ch. June 27, 2019), the Delaware Court of Chancery denied Plaintiff Computer Sciences Corporation’s (“CSC”) motion for partial summary judgement seeking to recover a portion of funds advanced to a former officer of ServiceMesh, Inc. (an entity CSC had acquired) for legal expenses incurred in defending a separate action. The Court held that based on its interpretation of the plain language of the indemnification provision in the relevant acquisition agreement that the indemnification provision was not broad enough to encompass the advancement of legal expenses in question.

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By: Scott Waxman and Calvin Kennedy

In Ephrat v. medCPU, Inc., C.A. No. 2018-0852-MTZ (Del. Ch. June 26, 2019), the Court of Chancery found that conduct occurring after Eyal Ephrat and Sonia Ben-Yehuda (together, “Petitioners”) left their positions warrants advancement provided that such conduct was related to Petitioners’ use of confidential information learned in an official capacity with medCPU, Inc. (“medCPU” or the “Company”). However, the Court held that allegations related to Petitioners’ breach of personal contractual obligations do not warrant advancement. Lastly, the Court held that Petitioners did not release their advancement rights by releasing all claims related to their “employment” with the Company.

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By: Scott Waxman and Calvin Kennedy

In Absalom Absalom Trust f/k/a Anne Deane 2013 Revocable Trust v. Saint Gervais LLC, C.A. No. 2018-0452-TMR (Del. Ch. June 27, 2019), the Court of Chancery found that the transfer of membership interests in an LLC was void, rather than voidable as it ordinarily would be at common law, due to the plain language of the Company’s LLC agreement (the “LLC Agreement”). Further, the Court held that equitable defenses were unavailable to the plaintiff with regards to the transfer because the contractual language of the LLC Agreement trumped common law. Lastly, the Court found that the unambiguous contractual language controlled despite the flexibility of LLCs and the alleged purpose of the provision.

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By: Scott E. Waxman and Douglas A. Logan

In Helix Generation LLC v. Transcanada Facility USA, Inc., et al., C.A. No. 2018-0856-SG, the Delaware Court of Chancery transferred a case brought before it because the case could be heard more efficiently in Superior Court. The Court reaffirmed that it is Court of limited jurisdiction and even if Section 111(a) of the Delaware delegated jurisdiction to the Court, that jurisdiction is discretionary.

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By: Scott Waxman and Rich Minice

In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. June 4, 2019), the Delaware Court of Chancery granted the request made by Grapetree, LLC ( “Grapetree”) to shift its fees incurred in defending this litigation to the mostly unsuccessful plaintiff, Andrew Durham (“Durham”). In shifting Grapetree’s fees under this litigation, the Court reinforced the longstanding principal that Delaware law is contractarian in nature, and that parties shall be held to their bargains regardless of their legal sophistication. The underlying litigation and the Court’s initial findings (the “Books and Records Action”) were previously summarized by this blog here.

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By: Scott Waxman and Greyson Blue

In Longoria v. Somers and LC Therapeutics, Inc., C.A. No. 2018-0190-JTL (Del. Ch. May 28, 2019), the Delaware Court of Chancery examined its authority to tax the costs of receivership against the stockholder of an insolvent corporation. The Court’s decision highlights an exception to the general principle that stockholders of a properly maintained corporation are not responsible for costs incurred by the corporation and illustrates a scenario where stockholders may be held liable for a corporation’s obligations.

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