Archive: July 2019

Russian Interference and Data Privacy: Facebook Stockholders Demand Section 220 Inspection to Investigate Wrongdoing of Board and Senior Management

By: Scott Waxman and Adrienne Wimberly

In In re Facebook, Inc., C.A. No. 2018-0661-JRS (Del Ch. May 30, 2019), the Delaware Court of Chancery granted a Section 220 demand for inspection of Facebook’s books and records, (the “Demand”) for the purpose of investigating potential wrongdoing on the part of the company’s Board of Directors (the “Board”). The consolidated action comes on the heels of news that the data of over 50 million Facebook users were poached by British political consulting firm, Cambridge Analytica and used to influence the 2016 Presidential Election. In April 2018, Plaintiff, Construction and General Building Laborers’ Local No. 79 General Fund (“Local No. 79”), a Facebook stockholder since 2015, served its initial Section 220 Demand. After receiving about 1,700 pages of significantly redacted books and records, Local No. 79 filed the present action to compel production which was consolidated with two similar Section 220 demands. After holding a paper record trial in March 2019, the Court ruled in favor of the Plaintiffs with some limitations on the scope of the demand.

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MANAGERS NOT PROPERLY REMOVED FROM LLC DESPITE SOLE MEMBER’S INTENT

By: Scott Waxman and Zack Sager

In Llamas v. Titus, the Court of Chancery held that, despite the intent of an LLC’s sole member, certain managers of the LLC were not removed as such because the sole member did not expressly remove them.  In its analysis, the Court applied corporate law principles by analogy because the LLC adopted a corporate-like structure.

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COURT OF CHANCERY FINDS NO SECTION 220 ISSUE WHERE STOCKHOLDER’S AND ITS COUNSELS’ PURPOSES FOR DEMAND ALIGN

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.

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COURT OF CHANCERY DENIES APPLICATION FOR CERTIFICATION OF INTERLOCUTORY APPEAL AFTER RULING THAT JUDICIAL DISSOLUTION OF THE LIMITED LIABILITY COMPANY IS WARRANTED

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.

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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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INDEMNIFICATION PROVIDED FOR SUCCESS ON THE MERITS, EVEN IF ON A TECHNICALITY

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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CHANCERY COURT FINDS THAT ALLEGATIONS RELATED TO POST-SEPARATION USE OF CONFIDENTIAL INFORMATION LEARNED PRE-SEPARATION WARRANT ADVANCEMENT

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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CHANCERY COURT FINDS THAT LANGUAGE IN AN LLC AGREEMENT THAT STATES AN ASSIGNMENT IS “NULL AND VOID” TRUMPS THE COMMON LAW AND RENDERS EQUITABLE DEFENSES INEFFECTIVE

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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CHANCERY COURT TRANSFERS CASE DUE TO A LACK OF JURISDICTION

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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