Archive: 2019

CHANCERY COURT DENIES MOTION TO PERFECT SERVICE FOR SERVICE ON DISSOLVED LIMITED LIABILITY COMPANY

By: Scott Waxman and Greyson Blue

In Tratado de Libre Commercio, LLC v. Splitcast Technology, LLC, C.A. No. 2019-0014-JRS (Del. Ch. Mar. 6, 2019), the Delaware Court of Chancery examined the requirements for perfecting service upon a dissolved limited liability company (“LLC”). In ruling that Tratado de Libre Commercio, LLC (“Tratado”) had failed to perfect service of process on a dissolved entity, Splitcast Technology LLC (“Splitcast”), the Court highlighted its broad authority to establish service of process requirements under Court of Chancery Rule 4(d)(7) (“Rule 4(d)(7)”) in claims against defunct entities. The Court’s decision both illustrates the scope of its authority and confirms its willingness to hold that court-mandated standards for delivering service upon defunct corporations also apply in the context of defunct LLCs.

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Fiduciary Duty Claim Against Selling Company CEO Survives Motion to Dismiss with Aiding and Abetting Claim Missing the Mark

By: Annette Becker and Michael Payant

In In re Xura, Inc. Stockholder Litigation (C.A. No. 12698-VCS), the Delaware Court of Chancery (the “Court”) denied a motion to dismiss brought by defendants Phillippe Tartavull (“Tartavull”) and Siris Capital Group (“Siris”, and collectively with Tartavull, the “Defendants”) in a case filed by Obsidian Management LLC (“Obsidian” or “Plaintiff”) for breach of fiduciary duty in connection with the sale of Xura, Inc. (“Xura”) to a Siris affiliate. The Court held that Plaintiff pled a viable breach of fiduciary duty claim against Tartavull as CEO of Xura. The Court granted a motion to dismiss as to an aiding and abetting claim brought against Siris holding that Plaintiff failed to plead a viable claim.

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Know Thyself: Self-Awareness in Corporate Valuations

By: Annette Becker and Kristen Berry

In Kendall Hoyd and Silver Spur Capital Partners, LP v. Trussway Holdings, LLC (C.A. No. 2017-0260-SG), the Delaware Court of Chancery (the “Court“) addressed the perennial challenges related to corporate valuations. The central question involved the determination of a corporation’s proper price-per-share in the context of an appraisal action arising from the conversion of a corporation into an LLC by merger. The Court rejected the use of “comparable companies” and “precedent transaction” analyses, defaulting to the use of discounted cash flow (DCF) analyses in the formulation of its corporate valuation.

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CHANCERY COURT DISMISSES STOCKHOLDER CLAIM FOR BREACH OF FIDUCIARY DUTY, DESPITE BOARD’S INACCURATE DISCLOSURES

By: Holly Hatfield and Adam Heyd

In Steven H. Busch v. Edward J. Richardson et. al. and Richardson Electronics, Ltd., C.A. No. 2017-0868-AGB (Del. Ch. November 14, 2018), the Delaware Court of Chancery (the “Court”) dismissed a plaintiff’s stockholder suit against certain board members of Richardson Electronics Ltd. (the “Company”) for breach of fiduciary duty.  The Court found that the Company’s board (the “Board”) exercised valid business judgment in rejecting the plaintiff’s demand to unwind certain Company transactions, despite the Board’s failure to disclose certain related party transactions to the plaintiff and other stockholders.

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CHANCERY COURT GRANTS DEFENDANT’S MOTION ON THE PLEADINGS WHERE NAMED DEFENDANTS DID NOT OWE ANY OF THE CONTRACTUAL OR FIDUCIARY OBLIGATIONS PLAINTIFF TRIED TO ENFORCE

By: Scott Waxman and Samantha Beatty

In Ross v. Institutional Longevity Assets LLC, C.A. No. 2017-0186-TMR (Del. Ch. Feb. 26, 2019), the Chancery Court, in a motion for judgement on the pleadings, found that the plain language of a limited liability company’s operating agreement was sufficient to affirm the notion that the plaintiff had failed to establish a set of facts to support his breach of contract and breach of fiduciary duty claims. The Court found that (i) where the language of a contract is clear, the parties’ disagreement will not render a contract ambiguous; (ii) where a plaintiff has not identified gaps in the language of a contract, there can be no evidence that an implied covenant of good faith has been breached, and (iii) where a fiduciary duty claim arises out of the same conduct as a contract claim, the fiduciary claim is superfluous.

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Chancery Court Rules Inequitable Conduct May Be Considered Within the Scope of a Section 225 Review

By: Claire S. White and Will Smith

In Robert G. Brown v. Lorrence T. Kellar et. al, Civil Action No. 2018-0687-MTZ (Del. Ch. December 21, 2018), the Delaware Court of Chancery granted in part and denied in part a motion for summary judgment by the plaintiff-stockholder, Robert G. Brown (“Brown”), to determine the composition of the board of directors (the “Board”) of SPAR Group, Inc. (“SGRP”), pursuant to 8 Del. C. § 225 (the “225 Action”). Denying Brown’s motion in part, the Court held that the 225 Action should survive summary judgment and continue to trial because the defendant-directors, the incumbent Board members of SGRP (the “Director Defendants”), asserted inequitable conduct by Brown bearing on the Board’s composition. Upholding Brown’s motion in part, the Court held that certain disputed written stockholder consents were effective on delivery under 8 Del. C. § 228(e), even though the Board had not taken action to deliver prompt notice of such written consents to SGRP’s stockholders as required pursuant to Section 228(e).

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COURT OF CHANCERY FINDS NO BUYER DUTY TO MAXIMIZE CONTINGENT SALE CONSIDERATION OWED TO SELLER

By Scott E. Waxman and Thomas F. Meyer

In Glidepath Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. February 21, 2019), the Delaware Court of Chancery held that the buyer of a company did not breach transaction documents or violate the implied covenant of good faith and fair dealing in maximizing the long-term value of the company at the expense of short-term profits that would have resulted in greater contingent consideration being paid to the seller plaintiffs (the “Sellers”).

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WHEN SOMEONE SHOWS YOU WHO THEY ARE, BELIEVE THEM THE FIRST TIME, OR RISK YOUR CLAIMS BEING TIME BARRED

By Scott Waxman and Adrienne Wimberly

In Winklevoss Capital Fund, LLC et al. v. Stephen Shaw, et al., C.A. No. 2018-0398-JRS, the Delaware Court of Chancery, in a Memorandum Opinion, granted a Motion to Dismiss counterclaims against individual Plaintiffs Tyler and Cameron Winklevoss and their investment firm (altogether “Plaintiffs”) because the claims were barred by laches. In an attempt to capitalize on the publicity from their depiction in the movie The Social Network, the Winklevoss twins, Tyler and Cameron, launched an investment firm, Winklevoss Capital Fund, LLC (WCF). The twins selected Treats! LLC, founded by Stephen Shaw, to be one of their first investments. Treats! LLC owns and operates Treats! magazine, a print and digital magazine depicting nude and semi-nude photographs of models and celebrities. In August 2012, WCF invested $1,310,000 in Treats! in exchange for 1,310,000 series A preferred units under a written Purchase Agreement and Amended LLC Agreement. WCF also loaned Treats! $20,000 as evidenced by a promissory note delivered in October 2012. However, the business relationship between the parties quickly soured as the twins refused to allow Shaw to publicly announce their investment in Treats! and the twins believed Shaw was mismanaging the company.

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Chancery Court Grants Preliminary Injunction Restraining Former Director from Selling Shares Allegedly Invalidly Issued to Himself

By: Annette Becker and Michael Payant

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC (C.A. No. 2018-0489-TMR), the stockholders of Applied Energetics, Inc. (“AE” or “Plaintiff”) sued defendants George Farley (“Farley”) and his family owned-holding company AnneMarieCo., LLC (“AMC”) for issuing stock to himself and transferring such shares to AMC in a self-interested transaction.  Plaintiff sought a preliminary injunction to restrain defendants from selling AE shares during the pendency of the stockholder litigation. The Delaware Court of Chancery (the “Court”) granted the preliminary injunction holding that AE established reasonable probability of success on the merits for its claims.

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CHANCERY COURT GRANTS MOTION TO DISMISS SECTION 220 DEMAND MADE DURING A PENDING PLENARY CLAIM DUE TO LACK OF SPECIAL CIRCUMSTANCES

By: Remsen Kinne and Stephanie Winkler

In CHC Investments, LLC v. FirstSun Capital Bancorp, C.A. No. 2018-0610-KSLM (Del. Ch. January 24, 2019), the Court of Chancery (the “Court”), in a motion to dismiss, found that CHC Investments, LLC’s (“CHC” and “Plaintiff”) pending plenary claims rendered CHC’s purpose for demanding inspection corporate books and records pursuant to Section 220 of the Delaware General Corporate Law (“Section 220”) improper, and granted FirstSun Capital Bancorp’s (“FirstSun” and “Defendant”) motion to dismiss.

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Court of Chancery Invalidates Charter-Based Federal Forum Provision

By Michelle R. McCreery and Shane T. Devins

In Matthew Sciabacucchi v. Matthew B. Salzberg, et al., C.A. No. 207-0931-JTL (Del. Ch. Dec. 19, 2018), the Court of Chancery invalidated a provision in the charter documents of certain Delaware corporations that specified the federal courts as the exclusive forum for claims arising under the Securities Act of 1933 (the “1933 Act”).

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NO LOVE LOST IN BOOKS AND RECORDS REQUESTS

By: Scott Waxman and Rich Minice

In Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. January 31, 2019), the Delaware Court of Chancery granted in part and denied in part a suit to compel books and records under Section 18-305 of the Delaware Limited Liability Company Act. Durham is illustrative of the rule that books and records requests are not a proper method to conduct plenary discovery into a business entity or its management, especially if driven by animus, but must be related to a proper purpose established by the requestor in his or her demand on the business.

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