Author: kennedy

An arbitrator, and not the courts, should decide the question of substantive arbitrability if “the parties’ contract provides ‘clear and unmistakable evidence’ of their intent that an arbitrator should decide the question”

By: Scott E. Waxman and Calvin D. Kennedy

In The Innovation Institute, LLC v. St. Joseph Health Source, Inc., et al., C.A. No. 2019-0156-JRS, the Court of Chancery decided to stay an action, pending the decision of an arbitrator on whether the underlying claims of the action are subject to mandatory arbitration, due to the parties agreeing to mandatory arbitration in the controlling LLC agreement. The action was brought by Innovation Institute, LLC (“Innovation”) against St. Joseph Health System, Inc. (“Health System”) and St. Joseph Health Source, Inc. (“Health Source”), a wholly owned subsidiary of Health System, seeking specific performance of Health Source’s obligation to contribute funding to Innovation in accordance with Innovation’s LLC agreement. 

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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 FINDS THAT FAILURE TO EXERCISE THE APPROPRIATE DEGREE OF DILIGENCE IN BRINGING CLAIMS CAN RESULT IN THEM BEING TIME BARRED AT THE MOTION TO DISMISS STAGE

By: David Lehman and Calvin Kennedy

In Richard Forman v. CentrifyHealth Inc. et al., C.A. No. 2018-0287-JRS (Del. Ch. April 25, 2019), the Court of Chancery found that a stockholder’s failure to exercise the “degree of diligence” which fairness requires and delay in prosecuting claims was sufficient grounds to bar by laches a variety of claims; the standard used by the Court to determine the unreasonableness of the plaintiff’s delay was the analogous statute of limitations period for the respective claim. The Court also found that the plaintiff’s claims of fraud and unjust enrichment that were not barred sufficiently alleged specific misrepresentations, justifiable reliance on those misrepresentations, and the defendants’ gains resulting from the misrepresentations.

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CHANCERY COURT NULLIFIES DISSOLUTION OF LIMITED LIABILITY COMPANIES FOR FAILURE TO SET ASIDE A RESERVE TO SATISFY KNOWN CLAIMS

By: Scott E. Waxman and Calvin D. Kennedy

In Kevin Capone and Steven Scheinman v. LDH Management Holdings LLC, et al., C.A. No. 11687-VCG (Del. Ch. April 25, 2018), the plaintiffs, Kevin Capone (“Capone”) and Steven Scheinman (“Scheinman”), and the defendants, LDH Management Holdings LLC (“Management Holdings”), LDHMH MM, LLC (together with Management Holdings, the “LLCs”), Castleton Commodities International LLC (f/k/a Louis Dreyfus Highbridge Energy LLC (“LDH”)) and certain members of the Board of Directors of LDH, each moved for summary judgment regarding the plaintiffs’ claim that the defendants violated Delaware law by cancelling the LLCs without setting aside a reserve for the plaintiffs’ breach of contract claims.  The court granted the plaintiffs’ motion for summary judgment and held that the defendants were aware of the plaintiffs’ non-frivolous claims for breach of contract against the LLCs and, therefore, the defendants acted in violation of Delaware law when they failed to create a reserve to cover the plaintiffs’ claims when the LLCs were dissolved.

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CHANCERY COURT DISMISSES STOCKHOLDERS’ BREACH OF FIDUCIARY DUTY AND AIDING AND ABETTING CLAIMS RELATING TO STOCK-FOR-STOCK MERGER

By Remsen Kinne and Calvin Kennedy

In In re MeadWestvaco Stockholders Litigation, the defendants moved to dismiss class action claims brought by stockholders of MeadWestvaco Corporation (the “Company”) for breach of fiduciary duty and aiding and abetting claims relating to the Company’s board of director’s approval of a strategic stock-for-stock merger of equals entered into between the Company and Rock-Tenn Company that closed in 2015.  The court held that the complaint did not contain factual allegations sufficient to state a claim against the directors for bad faith in connection with the approval of the merger.

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Derivative Claims of Improper Demand Refusal for Grossly Negligent Investigations and Bad Faith Must Be Adequately Pled

By: Megan Wotherspoon and Calvin Kennedy

The court found that a board of directors’ decision to refuse demand in connection with a stockholder derivative claim satisfies the business judgment rule if the board’s investigation is reasonable and the board acts in good faith.  By this opinion, the court granted the defendants’ motion to dismiss under Court of Chancery Rule 23.1 in light of plaintiff’s failure to adequately plead improper demand refusal.

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A Fiduciary’s Personal Benefit Can Preclude the Approval of A Settlement Agreement if the Personal Benefit is Not Fair and Reasonable

By: Megan Wotherspoon and Calvin Kennedy

By letter-order dated January 14, 2016, Vice Chancellor John W. Noble found that a fiduciary’s self-dealing and personal benefit may preclude the approval of a settlement agreement.  By this order, the court refused to approve the proposed settlement because of the equity buyback provision made available only to the plaintiff fiduciary.

In Smollar v. Potarazu, the plaintiff Marvin Smollar (“Smollar”) brought a derivative action on behalf of nominal defendant VitalSpring Technologies, Inc. (“VitalSpring”) against defendant Sreedhar Potarazu, VitalSpring’s Chief Executive Officer (“Potarazu”). Following litigation of the matter, a settlement agreement was agreed to between the parties and submitted to the court for approval (the “Settlement Agreement”). In addition to the relief sought on behalf of VitalSpring, the Settlement Agreement granted Smollar, but not other VitalSpring stockholders, the right to sell Smollar’s shares in VitalSpring back to VitalSpring for the same amount he had purchased it fifteen years ago (the “Buyback Provision”). Other VitalSpring stockholders accordingly objected to the Settlement Agreement and argued that Smollar engaged in a form of self-dealing while serving as a fiduciary.

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