Archive: 2021

Court of Chancery Allows LLC’s Breach of Fiduciary Duty, Aiding and Abetting, and Breach of Contract Claims to Proceed, But Not Fraud

By Justin H. Roeber and Peter Ayers

In Largo Legacy Group, LLC v. Evens Charles et al., C.A. No. 2020-0105-MTZ (Del. Ch. June 30, 2021), the Delaware Court of Chancery denied a motion to dismiss brought by defendants against Plaintiff Largo Legacy Group, an investor in Largo Hotel, LLC (“Largo Hotel”), a hotel development company.  The Court found that Plaintiff successfully stated claims against the company’s principals for breach of fiduciary duty, aiding and abetting, and breach of contract arising from the defendants’ efforts to launch a parallel hotel venture on an adjacent piece of land owned by Largo Hotel.  The Court, however, concluded that Plaintiff’s claim for fraud did not survive the motion to dismiss due to failure to plead the claim with particularity.

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As the Battle over the Universata Acquisition Rages, the Chancery Court Finds that the Appropriate Standard of Review Regarding Actions of a Stockholders’ Representative is “Subjective Good Faith”

By: Gregory R. Youman and Scott G. Ofrias

As the battle over the acquisition of equity in Universata, Inc. continues, the Court of Chancery, in Houseman v. Sagerman, C.A. No. 8897-VCG (Del. Ch. July 20, 2021), resolved two general exceptions asserted by Plaintiffs to the Special Master’s Final Report (“Final Report”).  In doing so, the Court decided that an escrow fund was properly created pursuant to the Merger Agreement, and further held that the appropriate standard of review regarding actions of the Stockholders’ Representative is “subjective good faith.”  However, the ultimate resolution of all the exceptions awaits further briefing by the parties.

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stockholder bears burden of proving breach of redemption obligation; directors used best judgment to retain sufficient resources of the company

By: Michele Barnes and Jessica Liu

In Continental Investors Fund, LLC v. TradingScreen, Inc., et al, C.A. No. 10164-VCL (Del. Ch. July 23, 2021), the Delaware Court of Chancery (“Court”) denied plaintiff’s claim for breach of contract, holding that Continental Investors Fund, LLC (“Continental”) failed to carry its burden of proving that TradingScreen, Inc. (“Company”) “acted in bad faith, relied on unreliable methods or data, or reached conclusions so off the mark as to constitute constructive fraud” when calculating the redemption value of Continental’s preferred stock. Further, the Court limited the interest due calculation to the date on which funds were legally available.

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Lawyer and Witness? Not so fast. Chancery Warns Trial Counsel That His Plan To Testify Flouts Ethical Rules

By: Brian D. Koosed and Adam R.D. Paine

In In re Straight Path Communications Shareholder Litigation, C.A. No. 2017-0486-SG the Delaware Court of Chancery considered plaintiffs’ motion to compel and motion to supplement case schedule to impose an election deadline regarding defendants’ counsel’s role at trial as lead counsel and as a witness for the defense.  The Court found the motion to be premature and made no determination as to whether an ethical violation occurred.

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Chancery Court Reaffirms Application of Business Judgment Rule from M & F Worldwide While Dismissing Unsupported Complaint

By Michael Waller and Molly Mugford

In Franchi v. Firestone, et al., C.A. No. 2020-0503-KSMJ (Del. Ch. May 10, 2020), Defendants’ moved to dismiss Plaintiffs’ action challenging a going-private transaction claiming that the Special Committee set up by the Board of Directors (“Board”) to analyze the merger lacked independence and failed to exercise its duty of care, and the vote of the minority stockholders was not informed. The Chancery Court granted Defendants’ motion to dismiss, relying on the business judgment rule and finding that Plaintiffs’ claims were unsupported and insufficient to undermine “the cleansing effect of the MFW conditions.”

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Don’t Sit on Your Legal Rights, Even with Your Family – Master in Chancery Recommends Dismissal of Former Member’s Claims Against His Family LLC, Based on Laches

By: Brian D. Koosed and Julia Knitter

In Robert Boyd Fitzgerald v. Fitzgerald Home Farm, LLC, Civil Action No. 2019-0410-PWG (Del. Ch. April 16, 2021), Master in Chancery Patricia W. Griffin (“Master Griffin”) recommended the Court of Chancery (the “Court”) dismiss a complaint seeking damages and reinstatement as a member of a family limited liability company, with prejudice.  Master Griffin found that the action was barred by laches because the statute of limitations for the alleged breach had run and equitable tolling did not apply. 

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Chancery Court Dismisses Disclosure and Breach Claims in LLC Financing Litigation

By: Michael J. Ross and Ryan Reilly

In Daniel Feldman et al. v. AS Roma SPV GP, LLC, et al., C.A. No. 2020-0314-PAF (Del. Ch. July 22, 2021), the Delaware Court of Chancery (the “Court”) dismissed a suit brought by minority members (“Plaintiffs”) of AS Roma SPV GP, LLC (the “Company”) for breach of fiduciary duties by the managing member for breach of the Company’s limited liability company agreement (“LLC Agreement”) for failure to disclose material information, and breach of fiduciary duties by the investor committee in connection with pandemic-driven financing and recapitalization efforts.  In granting the Defendants’ motion to dismiss for failure to state a claim, the Court emphasized the Defendants’ limited disclosure duties and the Plaintiffs’ failure to adequately plead harm.

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FACEBOOK ESCAPES SHAREHOLDER DERIVATIVE SUIT AS COURT QUESTIONS VALIDITY OF ARONSON AND FINDS PLAINTIFF FAILED TO SUPPORT CLAIMS OF DEMAND FUTILITY

By: Michael Waller and Caitlin Velasco

In United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, et al., C.A. No. 2018-0671 (Del. Ch. Oct. 26, 2020), the Delaware Court of Chancery (the “Court”) dismissed a derivative suit brought by the stockholders (the “Plaintiffs”) of Facebook, Inc. (“Facebook”) because the Plaintiffs failed to adequately plead demand futility under Court of Chancery Rule 23.1.  The derivative suit accused members of the Facebook board of directors (the “Board”) and Facebook CEO, Mark Zuckerberg, of breaching their fiduciary duties of care and loyalty by pursing and approving a stock reclassification proposal that would have allowed Zuckerberg to retain voting control of Facebook while donating a significant portion of his common stock to charitable causes.  The Court discussed the two primary tests for determining demand futility in derivate actions – Aronson and Rales – and determined that demand futility turns on whether, at the time of filing the complaint, the majority of a board of directors is disinterested, independent, and capable of impartially evaluating a litigation demand to bring suit on behalf of a company.

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DAMAGES AND TERMINATION FEE CLAIMS REJECTED IN ANTHEM-CIGNA FAILED MERGER SUIT

By: Remsen Kinne and Adam Heyd

In In re Anthem-Cigna Merger Litigation, C.A. No. 2017-0114-JTL (Del. Ch. August 31, 2020), the Delaware Court of Chancery (“Court”) rejected claims for damages by Anthem, Inc. (“Anthem”) and by Cigna Corporation (“Cigna”) for breach of covenants under their Agreement and Plan of Merger entered into on July 23, 2015 (“Merger Agreement”).  The Court also ruled against Cigna’s claim for a reverse termination fee.

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Chancery Court Finds That Stockholders May Rely on Allegations Forming the Basis of Other Lawsuits to Demand Inspection of Books And Records Pursuant to Section 220 of the DGCL

By: David Forney and Sean Boyle

In Deborah Pettry, et al. v. Gilead Sciences, Inc., C.A. No. 2020-0132-KSJM (Del. Ch. Nov. 24, 2020), the Court of Chancery found that plaintiffs may rely on allegations forming the basis of other lawsuits to meet the credible basis standard for demands to inspect books and records under Section 220 of the DGCL. Further, the Court granted plaintiffs leave to move for attorneys’ fees and expenses as a result of Gilead Sciences, Inc.’s (“Gilead”) “overly aggressive defense” at the Section 220 phase, pointing to Gilead’s pre-litigation and litigation-related conduct as a potential basis for awarding fees.

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Produce those documents; Conflict allegations sufficient to merit inspection of books and records under Section 220 of the DGCL.

By: Joanna A. Diakos and Kara Maynard Guio

In Alexandria Venture Inv. LLC et al. v. Verseau Therapeutics, Inc., C.A. No. 2020-0593-PAF (Del. Ch. Dec. 18, 2020), the Delaware Court of Chancery (the “Court”) granted plaintiff stockholder’s motion seeking to compel inspection of certain books and records of Verseau Therapeutics pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”).  The Court ruled that the stockholders met the low threshold necessary to establish a credible basis for believing that corporate wrongdoing had occurred. While disagreements with management decisions are insufficient to meet this burden, evidence of a conflict of interest in making management decisions is sufficient.

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NOT RIGHT NOW: DELAWARE COURT OF CHANCERY DISMISSES SECTION 220(C) COMPLAINT TO COMPEL INSPECTION OF CORPORATION’S BOOKS

By: David Forney and Harsha Garikapati

In MaD Investors GRMD, LLC and MaD Investors GRPA, LLC, v. GR Companies, Inc., C.A. No. 2020-0589-MTZ (Del. Ch. October 28, 2020), the Delaware Court of Chancery (the “Court”) held on an issue of first impression that a Delaware corporation has until midnight on the fifth business day after being served with a Section 220 demand to inspect books and records (a “Demand”) to respond to that Demand. 

MaD Investors GRMD, LLC and MaD Investors GRPA, LLC (collectively, the “Plaintiffs”) are stockholders of GR Companies, Inc. (the “Company” or “Defendant”). In July 2020, Plaintiffs sent a Demand to compel inspection of the Company’s books and records. A week later, Plaintiffs filed a Verified Complaint against Defendant (the “Complaint”) with the Court, asking it to compel Defendant to open its books and records for inspection by Plaintiffs.  In early August, the Company filed a motion to dismiss (the “Motion to Dismiss”) asserting Plaintiffs failed to comply with the 8 Del. C. § 220 requirement to wait a full five business days after the Company’s receipt of the demand to file suit.

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