Author: becker

Chancery Court Holds Bylaw Permitting Stockholder Removal of Officers Invalid in Continuing Fight over the Composition of the Board of Directors of Westech Capital Corp.

By Annette Becker and Porter Sesnon

In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.

Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.

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Chancery Court Dismisses Appraisal Challenge Based on Re-Titling of Shares, But Advocates For a Different Approach

By Annette Becker and Lauren Garraux

On July 13, 2015, Vice Chancellor J. Travis Laster issued his Memorandum Opinion in In re Appraisal of Dell Inc. in which he granted Dell’s motion for summary judgment against five institutions which owned Dell common stock and sought appraisal in connection with a going-private merger of the Company which closed in October 2013.  Though Vice Chancellor Laster acknowledged that Dell’s motion “must be granted” based on existing Delaware precedent interpreting the requirement that a stockholder who wishes to pursue appraisal “continuously hold[] such shares through the effective date of the merger,” the Vice Chancellor advocated for and urged the Delaware Supreme Court to adopt the federal law approach which, if applied, would allow the petitioners’ appraisal challenge to proceed.

In February 2013, Dell agreed to a merger in which each publicly held share of Dell common stock would be converted into the right to receive $13.75 in cash, subject to the right of stockholders to seek appraisal under Section 262 of the Delaware General Corporation Law (“DGCL”).  In July 2013, prior to the vote on the merger, five institutions who owned approximately 922,975 shares of Dell common stock (the “Petitioners” or “Funds”) in street name through their custodial banks caused Cede & Co. (“Cede”), the nominee of the Depository Trust Company (“DTC”) and the entity in whose name the shares were registered, to demand appraisal rights on their behalf .

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Chancery Court Dismisses Breach of Fiduciary Duty Claims Against Company and Its Board of Directors Relating to 2014 Recapitalization, But Holds That Contract Claims May Proceed

By Annette Becker and Lauren Garraux

In a July 8, 2015 letter opinion, Vice Chancellor John W. Noble granted in part and denied in part the motion of Capella Holdings, Inc. and Capella Healthcare, Inc. (“Capella” or the “Company”) and five Capella directors (the “Director Defendants”) (collectively, “Defendants”) to dismiss breach of fiduciary duty and breach of contract claims asserted against them by James Thomas Anderson (“Anderson”), a founder and former director and officer of Capella, relating to a 2014 recapitalization of the Company.

Anderson’s counterclaims against Defendants all arise from a recapitalization of Capella which the Director Defendants approved in April 2014.  Anderson voted against the recapitalization, which decreased Anderson’s ownership percentage in the Company, as well as that of the minority shareholders, and increased the ownership percentage of affiliates of GTCR Golder Rauner II LLC (“GTCR”), which, upon Capella’s formation, made an equity investment of approximately $206 million in the Company.

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Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

By Annette Becker and Priya Chadha

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board.  During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages.  UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders.  Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”).  That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned.  Partners named David Katz, a former board member of Partners, to the UAM board.

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Delaware Court of Chancery Dismisses Shareholder Derivative Action Against Interested Directors Following Secondary Offering

By Annette Becker and Mark Hammes

In In re Molycorp, Inc. Shareholder Derivative Litigation, the Delaware Court of Chancery dismissed claims brought against director representatives of private equity investors for breach of fiduciary duties, aiding and abetting, and unjust enrichment for failure to state a claim.  The Court held that the private equity investors along with certain directors exercised their contractual rights to sell their stock in Molycorp Inc. a publicly traded corporation (“Molycorp”) in a secondary offering and the directors were under no obligation to delay such a demand registration during a time in which Molycorp was experiencing a cash shortfall.

Molycorp was engaged in the production and sale of rare earth oxides. Before Molycorp’s July 2010 IPO, three initial private equity investors (PEIs) negotiated a Registration Rights Agreement. The agreement secured the PEIs right to demand that Molycorp register their shares in a secondary offering. The results of the July 2010 IPO did not yield the funds expected, and a secondary offering of Molycorp shares in February 2011 left the company still short on cash. A potential loan from the Department of Energy fell through, and potential financing arrangements with two other companies looked increasingly unlikely. In May 2011, the PEIs exercised their demand registration rights, and the offering was held in June 2011. Due to a recent spike in the price of rare earth oxides, the PEIs (and several directors appointed by the PEIs) sold their shares in the resulting June offering at an inflated value. In September 2011, the rare earth oxide bubble burst. Subsequent efforts by Molycorp to make up for its cash shortfall by issuing convertible notes left it with inadequate funds to implement its planned production increase. As a result Molycorp missed out on potential profits from the rare earth element bubble.

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Delaware Court of Chancery Holds That Collateral Estoppel Bars Claims By Other Preferred Stockholders

By Annette Becker and Mark Hammes

In Brevan Howard Credit Catalyst Master Fund Limited, et al. v. Spanish Broadcasting System, Inc., the Delaware Court of Chancery considered the latest judicial iteration of rights of holders of preferred stock in Spanish Broadcasting System, Inc. (“SBS”) in which the plaintiffs sought damages as a result of SBS incurring indebtedness following the non-payment of dividends to the preferred stockholders without their consent. The Chancery Court granted defendant SBS’s motion to dismiss on the grounds that collateral estoppel and res judicata barred the plaintiffs from re-litigating issues previously decided in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc. against those in privity with the plaintiffs finding that the plaintiffs acquiesced to the non-payment of dividends.  The Court dismissed the majority of the plaintiffs’ claims.

By way of  background, in Lehman Brothers Holdings, Inc. v. Spanish Broadcasting System, Inc., a prior case involving similar claims brought by other preferred stockholders of SBS, such plaintiffs claimed that the non-payment of dividends to the preferred stockholders led to the occurrence of a voting right trigger event after which SBS incurred indebtedness in violation of the preferred stockholders’ contractual rights, the Court of Chancery granted a motion for summary judgment brought by SBS, holding that the defense of acquiescence as to the non-payment of dividends defeated those preferred stockholders’ claims. The Certificate of Designation of SBS (“Certificate”) setting forth the rights, privileges and preferences of the SBS preferred stock provided that dividends on the preferred stock were payable quarterly, and that if such dividends were not paid for four consecutive quarters, a voting rights trigger permitted the holders of 10% of the outstanding preferred stock to call a special meeting and elect additional directors. The Certificate also prohibited SBS from incurring additional debt after such a triggering event. According to the plaintiffs, a triggering event had occurred in April 2010, while additional debt was incurred in 2011 and 2012. None of the preferred stockholders called a special meeting to elect additional directors. Plaintiffs in this suit brought suit (1) seeking a declaration that a voting rights triggering event had occurred, (2) for breach of contract for incurring the debt, (3) seeking to exercise repurchase rights under the Certificate, and (4) breach of the covenant of good faith and fair dealing.

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It’s a Family Affair… but Not Any More, as Chancery Court Grants Motion to Dissolve General Partners Under Section 273 of the DGCL

By Annette Becker and Lauren Garraux

The Chancery Court granted a petition in accordance with Section 273 of the Delaware General Corporation Law to dissolve two Delaware corporations, the general partners of two Massachusetts limited partnerships, initially formed by the patriarchs of the Grossman and Cohen families to own three real estate properties for the benefit of their respective family members, after the families reached an impasse as to how to dispose of the assets of the business.

In 1992, the patriarchs of the Grossman and Cohen families formed two Massachusetts limited partnerships (the “Partnerships”) to own three real estate properties for the benefit of their family members (at the time of this dispute, 25 Grossmans and 6 Cohens), who are limited partners in the Partnerships.  The general partners of the Partnerships (the “General Partners”) are two Delaware corporations, each of which is a joint venture corporation with two 50% stockholders, at the time of the dispute, the petitioner, Louis Grossman (“Louis”), and the respondent, Claire Cohen (“Claire”).

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Chancery Court Denies Motion to Expedite on Speculative Disclosure Claims

By Annette Becker and Eric Jay

On January 12, 2015, Vice Chancellor Glasscock issued an opinion in Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) on a Motion to Expedite brought by Amy Parsons on behalf of similarly situated public stockholders (“Plaintiff”) as to disclosure claims concerning an imminent merger. The ruling on the disclosure claims was deferred after the Vice Chancellor denied Plaintiff’s Motion on December 31, 2014 as it related to Revlon claims raised, in order to allow Plaintiff to submit a supplemental brief clarifying why such claims would be material to stockholders.

The Motion was brought by Plaintiff against the Board of Directors of Digital River, Inc. (the “Company”) for breaches of fiduciary duties arising in connection with the Agreement and Plan of Merger entered into with Siris Capital Group, LLC, dated October 23, 2014 (the “Merger Agreement”). On November 18, 2014, Plaintiff initiated a class action to enjoin the proposed merger on the grounds that the Company was undervalued and that the Board of Directors failed to provide the stockholders with material information regarding the deal process.

Of the numerous disclosure claims raised by Plaintiff in the Motion to Expedite, Vice Chancellor Glasscock focused primarily on the claim regarding management retention, both because it was the most significant and it had not been rendered moot by the Company’s subsequent filing of a definitive proxy statement. Vice Chancellor Glasscock concluded that Plaintiff sought expedited discovery on the grounds that the disclosures were “simply not credible” without providing a factual basis for such assertion.

Because the disclosure claim was speculative, Vice Chancellor Glasscock found that the chance of receiving injunctive relief to be low and that the value of potential disclosure did not outweigh the cost of expedition. The Plaintiff’s Motion to Expedite was denied.

Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) (Glasscock, V.C.)

In re Cornerstone Therapeutics Inc. Stockholder Litigation, Consolidated C.A. No. 8922-VCG (Sept. 26, 2014) (Glasscock, V.C.)

By Annette Becker and Mark Hammes

In In Re Cornerstone Therapeutics Inc. S’holder Litig., 2014 WL 4418169 (Del. Ch. Sept. 10, 2014), Defendant directors of Cornerstone Therapeutics Inc. (“Cornerstone”) brought a motion to dismiss based on an exculpatory provision in Cornerstone’s certificate of incorporation pursuant to Section 102(b)(7) of the Delaware General Corporation Laws in the context of a controlling stockholder freeze-out merger. In the memorandum opinion, the Court denied the motion to dismiss, finding that, since entire fairness applied to the transaction at the outset, the director defendants must await a determination of entire fairness at trial before the Court could consider whether they were exculpated by the provision. The director defendants moved for interlocutory appeal under Delaware Supreme Court Rule 42 challenging the denial of the Court’s decision regarding the motion to dismiss.

This decision considers the motion for interlocutory appeal. The Court held that the defendant directors are entitled to an interlocutory appeal of the order denying the motion to dismiss. An interlocutory appeal may be certified by the Court only when the appealed decision (1) determines a substantial issue, (2) establishes a legal right, and (3) meets one or more criteria further enumerated in Rule 42, including that the decision falls under any of the criteria for certification of questions of law set forth in Rule 41. Here, the denial of the motion, if reversed, would result in dismissal of the defendant directors from the suit, so it is a substantial issue. Further, it establishes a legal right in that it necessitates the defendant directors be held as parties to the litigation. Finally, it satisfies the further “conflicting decisions” qualification set forth in Rule 41(b)(ii) because decisions of the Courts of Chancery have been conflicting as to whether, in a transaction subject to entire fairness review at the outset, in which there is a claim for “breach of duty on the part of facially disinterested directors who negotiated …. or otherwise facilitated the transaction needs to be specifically pled” and whether an exculpatory provision must be ignored at the motion to dismiss stage to await consideration of entire fairness at trial. As a result, the Court granted the defendant directors’ application for certification of interlocutory appeal.

InReCornerstorneTherapeuticsStockholder

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., C.A. No. 9587-ML (Sept. 30, 2014) (LeGrow, A., M.C.)

By Annette Becker and Caitlin Howe

This final report stems from plaintiff-shareholder Oklahoma Firefighters Pension & Retirement System’s (“Oklahoma Firefighters” or “Plaintiff”) demand under 8 Del. C. §220 for access to defendant Citigroup Inc.’s (“Citigroup” or “Defendant”) books and records in connection with alleged fraud and money laundering at two Citigroup subsidiaries. Following a paper record trial in June 2014, the court concluded in its draft report that Plaintiff had a proper purpose in seeking access to the books and records, but the court narrowed the scope of Plaintiff’s initial request.  At the present phase of the case, Citigroup objects to the conclusions reached in the draft report, arguing that the incidents at the subsidiaries do not give Plaintiff a credible basis from which to infer wrongdoing or mismanagement on the part of the Citigroup Board of Directors.  Moreover, Citigroup contends that even if Plaintiff’s purpose were proper, the scope of the documents requested is still too broad.

The demand arises from incidents at Banco Nacional de Mexico, S.A. (“Banamex”) and Banamex USA, which together account for 10% of the global profits of Citigroup.  At Banamex, a fraudulent accounts receivables finance arrangement was discovered, which caused Citigroup to adjust downward its 2013 fourth quarter and full year financials by $235 million. Investigations into the fraud indicated that Citigroup may not have had the proper internal controls in place to prevent fraud, and Moody’s subsequently downgraded Banamex’s debt and deposit ratings due to the allegations surrounding the bank. Another smaller fraud of $30 million was also uncovered at Banamex.  At Banamex USA, grand jury subpoenas were issued by the United States District Attorney for the District of Massachusetts regarding compliance with Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) regulations.  The grand jury subpoenas were issued subsequent to a number of consent orders between Citigroup and various financial regulatory agencies regarding insufficient BSA and AML controls, risk management, the flow of drug cartel-related funds, and general oversight.  In response to the BSA and AML concerns, the Citigroup Board of Directors charged the Board’s Audit Committee with responsibility for legal compliance oversight.

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Kostyszyn v. Martuscelli, et al., C.A. No. 8828-MA (July 14, 2014)

By Annette Becker and Lauren Garraux

On July 14, 2014, Master in Chancery Kim E. Ayvazian issued her draft report in Kostyszn v. Martuscelli, a dispute between the purchasers (“Plaintiffs”) and sellers (“Defendants”) of Paciugo Gelato and Café (the “Business”), an ongoing business which Plaintiffs purchased in December 2011 for a purchase price of $272,500.00.  According to Plaintiffs, their decision to purchase the Business and the purchase price were based on sales information provided to them by Defendants, as well as subsequent statements made by Defendants regarding, among other things, business earnings, on-site sales, catering sales and profits.

In August 2013, Plaintiffs commenced a lawsuit against Defendants in the Delaware Chancery Court alleging that this information and Defendants’ statements were false and misleading, and directly resulted in Plaintiffs both calculating a purchase price that was more than they otherwise would have been willing to pay for the Business and entering into a long-term lease exposing the assets of the Business to risk and the Plaintiffs to personal liability if the Business ultimately failed.  In their amended complaint (the “Amended Complaint”), Plaintiffs asserted claims against Defendants for breach of contract, breach of warranty, indemnification, equitable fraud, fraud, negligent misrepresentation, intentional misrepresentation and breach of the covenant of good faith and fair dealing, and sought indemnification and monetary damages from Defendants, as well as cancellation of the agreement to purchase the Business.  Defendants moved to dismiss the Amended Complaint on grounds that the Chancery Court lacked subject matter jurisdiction over Plaintiffs’ claims.  In her draft report, Master Ayvazian recommended that the Court dismiss Plaintiffs’ equitable claim (for equitable fraud) with prejudice, decline to apply the “clean up” doctrine to address Plaintiffs’ remaining legal claims and to allow Plaintiffs to transfer those remaining legal claims to a court of law.

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Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)

By Annette Becker and Naomi Ogan

In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.

Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.

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