Author:Rich Minice

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MANAGEMENT CANNOT UNILATERALLY PRECLUDE DIRECTORS FROM OBTAINING PRIVILEGED COMMUNICATIONS
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Specific Language of Operating Agreements Key in Chancery Court Dismissal of “Laundry List” of Claims Against LLC Managers
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Master in Chancery Dismissive of Fiduciary Seeking Dismissal, Applies Familiar 12(b)(6) Standard
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DELAWARE DENIES INTERLOCUTORY APPEAL OF ORDINARY ADVANCEMENT ENTITLEMENT DECISION
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Transactions Involving Controlling Stockholder as a Result of Actual or Inherent Coercion are Subject to Entire Fairness Standard of Review
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Books and Records: Court Explains a Failure to Clear the Sometimes Deceptively Challenging Credible Basis Hurdle
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Chancery Court Reaffirms Protection of Mandatory Advancement Rights
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MAINTAINING GOOD CORPORATE GOVERNANCE: ENTIRE FAIRNESS CREEPING INTO ACTIONS BENEFITING A CONTROLLING STOCKHOLDER
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Director Independence and Demand Futility: A Holistic Inquiry of the Pleading
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INDEMNIFICATION PROVIDED FOR SUCCESS ON THE MERITS, EVEN IF ON A TECHNICALITY

MANAGEMENT CANNOT UNILATERALLY PRECLUDE DIRECTORS FROM OBTAINING PRIVILEGED COMMUNICATIONS

By: Rich Minice and Annette Becker

In In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020), a special committee of the board of directors of The We Company (the “Company”) sought to obtain certain privileged communication among management of the Company and its counsel in discovery arising from breach of contract and breach of fiduciary duty case. The Court held that management of a Delaware corporation (“Management”) does not have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information, an issue of first impression in the State of Delaware.

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Specific Language of Operating Agreements Key in Chancery Court Dismissal of “Laundry List” of Claims Against LLC Managers

By: Scott Waxman and Rich Minice

In 77 Charters, Inc. v. Gould et al.., C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020), 77 Charters, Inc. (“Plaintiff”) brought suit against defendants Jonathan Gould (“Gould”), Stonemar MM Cookeville, LLC (“Stonemar MM”), Cookeville Corridor, LLC (the “Preferred Purchaser”) and Eightfold Cookeville Investor, LLC (the “New Investor” and together with Gould, Stonemar MM and the Preferred Purchaser, the “Named Defendants”) for a series of alleged “wrongful acts” in connection with the management and sale of a shopping mall (the “Property”), which also implicated Stonemar Cookeville Partners, LLC (“Cookeville Partners”) and Cookeville Retail Holdings, LLC (“Cookeville Retail”). In delivering its opinion, which centered on the nature of Delaware limited liability companies as creatures of contract, and thus, the controlling nature of the applicable operating agreements and contracts into which the parties had entered, the Delaware Court of Chancery (the “Court”) ruled that only Plaintiff’s claims which could be connected to an alleged wrongful amendment of the operating agreement of Cookeville Retail could survive Defendants’ Motion to Dismiss (the “Motion”).

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Master in Chancery Dismissive of Fiduciary Seeking Dismissal, Applies Familiar 12(b)(6) Standard

By: Rich Minice and Annette Becker

In Hill et al. v. Myers et al., C.A. No. 2018-0160 (Del. Ch. June 15, 2020), Master in Chancery Selena Molina (“Master”) issued a final report, recommending the Court of Chancery deny defendant’s (decedent’s close friend and confident, and attorney-in-fact during his final years)  motion to dismiss claims of undue influence and breach of fiduciary duty.  The Master determined that the motion to dismiss  brought by family members of the late G. Robert Dickerson, should be denied because the family members provided sufficient factual allegations to support their claims and establish standing. 

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DELAWARE DENIES INTERLOCUTORY APPEAL OF ORDINARY ADVANCEMENT ENTITLEMENT DECISION

By: Scott Waxman and Rich Minice

In Sider et al. v. Hertz Global Holdings, Inc., C.A. No. 2019-0237-KSJM; C.A. No. 2019-0240-KSJM; C.A. No. 2019-0243-0243-KSJM; CA. No. 2019-0246-KSJM (Del. Ch. June 17, 2019), the Delaware Court of Chancery re-affirmed its support for advancement consistent with corporate bylaw provisions and denied the Hertz Global Holdings, Inc. (the “Defendant”) motion seeking immediate appellate review of advancement entitlement. The Court held that Defendant’s concern that plaintiffs would be unable to repay any advanced expenses, which they could later be found not to have been entitled to, did not outweigh Delaware’s preference for advancement. Defendant’s recourse for recouping advanced expenses is via “indemnification or on appeal after issues of reasonableness have been resolved.”

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Transactions Involving Controlling Stockholder as a Result of Actual or Inherent Coercion are Subject to Entire Fairness Standard of Review

By: Annette Becker and Rich Minice

In In re Tesla Motors, Inc. Stockholder Litigation, C.A. No. 12711-VC (Del. Ch. Feb. 4, 2020), the Delaware Court of Chancery rejected the defendants’ (Elon Musk and the Tesla, Inc. (“Tesla”) board of directors (“Defendants”)) novel position that “inherent coercion” doctrine–as it relates to a controlling stockholder–evaporates when a case for breach of fiduciary duty moves beyond the pleading stage and stockholder ratification exists, and re-affirmed the Delaware principle that entire fairness is the appropriate standard of review.  The Court rejected motions for summary judgment by both parties finding that there remained issues of material fact to be determined as to whether stockholder ratification was fully informed and uncoerced, and whether a majority of the Tesla board of directors approving the merger was independent.

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Books and Records: Court Explains a Failure to Clear the Sometimes Deceptively Challenging Credible Basis Hurdle

By: David Forney and Rich Minice

In Southeastern Pennsylvania Transportation Authority and Boston Retirement System v. Facebook, Inc., C.A. No. 2019-0228-JRS (Del. Ch. Oct. 29, 2019), the Delaware Court of Chancery reaffirmed its requirement that stockholders seeking records to investigate possible wrongdoing must have some credible basis from which the court can infer waste or mismanagement occurred. Here, following trial, the court granted judgment in favor of Facebook because the Plaintiffs (defined below) failed to make a credible showing, through documents, logic, testimony or otherwise, that there are or may be legitimate issues of wrongdoing which would warrant further investigation of the matter through grant of the books and records request.

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Chancery Court Reaffirms Protection of Mandatory Advancement Rights

By: David Forney and Rich Minice

In Nielsen v. EBTH Inc., C.A. No. 2019-0164-MTZ (Del. Ch. Sep. 30, 2019), the Delaware Court of Chancery reaffirmed its standard favoring advancement of expenses to officers or directors of a company where the corporation provides mandatory advancement rights either by its certificate of incorporation (“Charter”) or separate indemnification agreements. The court granted summary judgment in favor of the plaintiffs because they (i) either used their corporate powers or such powers were necessary for the commission of the alleged misconduct in the underlying action; or (ii) the alleged misconduct in the underlying action is inextricably intertwined with the actions taken in the plaintiffs’ former capacities as officers or directors, such that the plaintiffs would necessarily be required to disprove allegations that they acted improperly as such. Advancement is appropriate when either of the two prongs for this nexus test are met.

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MAINTAINING GOOD CORPORATE GOVERNANCE: ENTIRE FAIRNESS CREEPING INTO ACTIONS BENEFITING A CONTROLLING STOCKHOLDER

By: Scott Waxman and Rich Minice

In Tornetta v. Musk, Civil Action No. 2018-0408-JRS (Del. Ch. Sep. 30, 2019), the Delaware Court of Chancery addressed the appropriate standard of review to apply when examining stockholder approval of a conflicted controller for the controller’s own executive incentive compensation package. In January 2018, Tesla, Inc.’s board of directors (the “Board”) approved a compensation package (the “Award”) for its CEO, Elon Musk. The Board then submitted the Award to Tesla’s stockholders for approval. The Award was overwhelmingly approved. Tornetta (“Plaintiff”), a Tesla stockholder, brought four direct and derivative claims against Musk and members of the Board (the “Defendants”) alleging the Award is a product of breaches of fiduciary duty, constitutes waste, and unjustly enriches Musk. The Defendants moved to dismiss all counts under Rule 12(b)(6) (the “Motion”).

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Director Independence and Demand Futility: A Holistic Inquiry of the Pleading

By: Josh Gaul and Rich Minice

In In re BGC Partners, Inc. Derivative Litigation, Civil Action No. 2018-0722-AGB (Del. Ch. Sep. 30, 2019), the Delaware Court of Chancery denied motions to dismiss for (i) failure to establish demand futility and (ii) failure to state a claim for relief (the “Motions”) filed by nominal defendant BGC Partners, Inc. (“BGC”), its affiliates CF Group Management, Inc. (“CF”) and Cantor Fitzgerald L.P. (“Cantor”), Howard Lutnick, the CEO, Chairman of the Board, and controlling stockholder of BGC (“Lutnick”), and four “independent” members of the Board of Directors of BGC (the “Special Committee Defendants” and all of which, together, are the “Defendants”). In denying the Motions in this stockholder derivative litigation, the court primarily discussed and applied recent guidance from the Delaware Supreme Court on the Aronson test for demand futility. In re BGC Partners, Inc. puts controlling stockholders on notice that their professional and personal ties to board members may undermine the purported independence of those board members.

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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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