Author: Thomas Sperber

In a Reckless Re-price, Results are not Realized

By David L. Forney and Tom Sperber

In Howland v. Kumar, C.A. no. 2018-0804-KSJM, the Delaware Chancery Court issued a Memorandum Opinion under Chancery Rule 12(b)(6) denying a motion to dismiss claims of breach of fiduciary duty and unjust enrichment on the basis that the defendants repriced stock options that they held immediately prior to making a public announcement that was sure to increase the stock price.  The Court also ruled under Chancery Rule 23.1 that the plaintiff adequately plead demand excusal. Thomas S. Howland, Jr. (“Plaintiff”), a stockholder of Anixa Biosciences, Inc. (“Anixa”), brought two derivative claims against Anixa and its directors and officers. The Anixa board of directors consisted of Chairman, President, and CEO Amit Kumar (“Kumar”), Lewis H. Titterton, Jr. (“Titterton”), Arnold M. Baskies (“Baskies”), John Monahan (“Monahan”), and David Cavalier (“Cavalier”). The officers included Kumar, John A. Roop (“Roop”), Michael J. Catelani (“Catelani”) and Anthony Campisi (“Campisi”, collectively, “Individual Defendants,” and, collectively with Anixa, “Defendants”).

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Stockholder Makes Demand on United Airlines and Encounters Turbulence

By: Joanna Diakos and Tom Sperber

In City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et. al, C.A. No. 2017-0341-KSJM, the Delaware Chancery Court issued a Memorandum Opinion granting a motion to dismiss under Chancery Rule 23.1 for failing to prove that pre-litigation demand of the Board was wrongfully refused. The City of Tamarac Firefighters’ Pension Trust Fund (“Plaintiff”), a stockholder of United Continental Holdings, Inc., the owner and operator of United Airlines (collectively, “United”), brought derivative claims against United and its board of directors (the “Board”) (collectively with United, “Defendants”) demanding either a claw-back of an allegedly excessive separation compensation award or the rescission of the separation agreement altogether. The Court found that Plaintiff failed to plead particularized facts raising a reasonable doubt that Defendants acted with due care and in good faith in rejecting Plaintiff’s demand.

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Surgery Partners, Inc. Fails to Excise Conflicts Infecting Three Interdependent Transactions

by David L. Forney and Tom Sperber

In Klein v. H.I.G. Capital, L.L.C., et. al, C.A. No. 2017-0862-AGB, the Delaware Chancery Court issued a Memorandum Opinion granting in part and denying in part a motion to dismiss under Court of Chancery Rule 23.1 for failing to make a demand and under Court of Chancery Rule 12(b)(6) for failing to state a claim of relief. Melvyn Klein (“Plaintiff”), a stockholder of Surgery Partners, Inc. (“SP”), brought direct and derivative claims against one of SP’s directors Michael Doyle (“Doyle”), SP’s controlling stockholder H.I.G. Capital, L.L.C. (“HIG”), and Bain Capital Private Equity, LP (“Bain”) (collectively, “Defendants”), alleging breaches of fiduciary duty against Defendants stemming from three interdependent transactions that were allegedly conflicted and unfair. The Court found that demand was futile because the Plaintiff sufficiently alleged that the board was interested, and found that Plaintiff stated claims for breach of fiduciary and aiding and abetting breach of fiduciary duty by HIG and Bain, respectively, because Defendants failed to show that the conflicted transactions were entirely fair.

The board of directors of SP (the “Board”) approved, and SP entered into, three transactions on May 9, 2017 (the “Transactions”). The Transactions consist of: (1) SP acquiring National Surgical Healthcare for $760 million; (2) HIG selling its shares of SP to Bain at a price of $19 per share; and (3) SP issuing to Bain 310,000 shares of a new class of stock of SP at a price of $1,000 per share. These transactions were interrelated and dependent on each other; if one fell through, the others would fail as well. The Board approved the Transactions without a special committee and with no publicly disclosed abstentions. No public stockholders voted on the transactions as HIG approved each by written consent as majority stockholder. Bain and SP used the same law firm and accounting firm to represent them during negotiations. Once the Transactions were finalized, Bain was SP’s controlling stockholder.

Plaintiff filed a complaint alleging eight claims. Of those claims, four were pled directly and four were pled derivatively. Each direct claim had a corresponding derivative claim. Counts I and V asserted claims for breach of fiduciary duty against the Board of LP (all of whom were dropped from the complaint except for Doyle) for entering into the Transactions without ensuring that the share issuance to Bain was entirely fair. Counts II and VI were claims for breach of fiduciary duty against Bain and HIG for entering into a conflicted transaction in the share issuance to Bain. Counts III and VII alleged claims of breach of fiduciary duty against HIG, in the alternative, as the sole controlling stockholder for entering into the conflicted transaction. Lastly, Counts IV and VIII asserted that Bain aided and abetted breaches of fiduciary duty by HIG and Doyle.

In deciding Defendants’ motion to dismiss, the Court first turned to whether Counts I-IV were properly brought as direct claims. The Court observed that the claims brought by Plaintiff constitute “a classic form of an ‘overpayment’ claim,” which must normally be pled derivatively. Plaintiff, however, argued that his claim resembles the claim brought in Gentile v. Rosette, where the Delaware Supreme Court recognized a situation where a corporate overpayment claim implicated both direct and derivative injury. The Court, in rejecting Plaintiff’s argument, cited several subsequent Delaware cases that limited the holding in Gentile to its facts and applied it only where the challenged transaction resulted in an improper transfer of both economic value and voting power from the minority stockholders to the controlling stockholder. The Court also observed that not only was Bain not yet the controlling stockholder before the share issuance, but that even if it was, its increase in voting power would not have been so great as to have triggered the Gentile rule. Furthermore, the Court pointed to the structure of the share issuance for the proposition that common stockholders’ shares will only be diluted if and when Bain converts its preferred shares into common stock. Ultimately, the Court found that Plaintiff’s claims could not be brought directly, and therefore dismissed Counts I-IV.

The Court next turned to the question of whether Plaintiff was excused from making demand on the Board on the basis of demand futility. In assessing Plaintiff’s futility allegation, the Court applied the test articulated in Aronson v. Lewis, under which a Plaintiff must “provide particularized factual allegations that raise a reasonable doubt that (1) the directors are disinterested and independent [or] (2) the challenged transaction was otherwise the product of a valid exercise of business judgment.” Of the Board’s seven members, Plaintiff conceded that two were disinterested, while Defendants conceded that three were interested. The Court, therefore, was tasked with determining whether either of the two remaining directors, Doyle and Brent Turner, were conflicted. The Court found that the complaint raised a reasonable doubt as to whether Doyle could make decisions regarding the Transactions independently by alleging that SP engaged him in a consulting agreement that paid him more per month than he made as SP’s CEO. On that basis, the Court found that Plaintiff had properly alleged that making demand on the board was futile.

Once the Court determined that demand was excused, it addressed the merits of Plaintiff’s remaining claims (V-VIII). First, the Court turned to Count VI, which argued in the alternative that Bain and HIG had breached fiduciary duties by acting as a “control group.” The Court dispatched Plaintiff’s argument quickly by pointing out that there was never any allegation that Bain owned any stock, let alone a controlling percentage of stock, prior to the Transactions. Ultimately, the Court dismissed Count VI for failing to state a claim.

The Court then examined Count VII, in which Plaintiff alleged that HIG breached its fiduciary duty by issuing the new shares to Bain. The Court determined that entire fairness was the proper standard of review, observing that that standard is triggered when a controlling stockholder effectuates a conflicted transaction. The Court determined that HIG was conflicted in entering into the issuance of new shares to Bain because that transaction was a condition precedent to HIG’s sale of its own shares to Bain. Entire fairness is an onerous standard for a defendant to overcome, requiring the controlling stockholder to “show, conclusively, that the challenged transaction was entirely fair based solely on the allegations of the complaint and the documents integral to it.” Because Defendants failed to show entire fairness, the Court denied Defendants’ motion to dismiss Count VII.

Count VIII alleged that Bain aided and abetted HIG’s breach of fiduciary duty. The Court found that Plaintiff’s allegations that Bain was aware of its shared legal representation with HIG, as well as the interrelated nature of the three transactions, and the lack of a stockholder vote, inferred Bain’s “knowing participation” in HIG’s breach. The Court, therefore, denied Defendants’ motion to dismiss as to Count VIII.

Lastly, due to the inclusion of an exculpatory provision in SP’s certificate of incorporation, the Court dismissed Plaintiff’s Count V for failing to allege that Doyle acted in bad faith or had personal interest in the transactions.

Patently False: The Delaware Chancery Court Dissolves Limited Liability Company Founded on False Claims of Patent Ownership

By: Scott Waxman and Tom Sperber

In Decco U.S. Post-Harvest, Inc., v. MirTech, Inc., the Delaware Chancery Court issued a Memorandum Opinion dissolving a limited liability company based on evidence presented at trial. Decco U.S. Post-Harvest, Inc. (“Decco” or “Plaintiff”), whose business primarily involved the post-harvest treatment and packaging of produce, and MirTech, Inc. (“MirTech” or “Defendant”) formed the joint venture entity Essentiv LLC (the “Company”) for the purpose of commercializing products based on 1-Methylcyclopropene (“1-MCP”), a gas used to delay the ripening of fruit and other produce. In forming the Company, Defendant assured Plaintiff that Defendant owned intellectual property in 1-MCP technology. The Court found that Plaintiff proved that Defendant did not, in fact, own such intellectual property and ruled that the Company must dissolve.

1-MCP was patented in 1996. After Nazir Mir (“Mir”), of MirTech, started experimenting with 1-MCP technologies, the Defendant entered into a consulting agreement with AgroFresh Inc. (“AgroFresh”). Under that agreement, the parties agreed to joint ownership of “any and all inventions conceived or reduced to practice jointly by the [p]arties.” Subsequent agreements between Defendant and AgroFresh granted AgroFresh sole ownership over joint inventions. During this business relationship, Mir developed a technology called “RipeLock,” as well as several patents the Court refers to as the “RipeLock Patents.”

In 2014, Plaintiff and Defendant began discussions relating to a potential joint venture for the development of technology related to 1-MCP and RipeLock Patents. A letter of intent that was issued based on these discussions listed “three overarching tasks for the joint venture: (i) secure the legal rights of the listed patents; (ii) coordinate research, regulatory approvals, and other pre-commercial activity; and (iii) commercialize the developed technology.” To commercialize such technology, Defendant asserted that it would license the use of its patents to the joint venture. The Company was formed in April of 2016. The Company was a manager-managed LLC, with Plaintiff and Defendant as the only members/managers. The Company’s LLC agreement required consent of both Plaintiff and Defendant to take actions requiring manager approval. The agreement also identified the Company’s purpose as being to research, develop, manufacture, and market 1-MCP products. It did not, however, limit the Company to activities related to 1-MCP products. Per the agreement, Plaintiff had a right of first refusal over any non-1-MCP product business. Defendant was obligated to develop and license exclusively to the Company the RipeLock patents. Defendant, in the agreement, represented that it owned intellectual property rights in the relevant technology, that no other person had any “right, title or interest” in it, and that it owned the technology “free and clear of all claims, mortgages, leases, loans and encumbrances.”

The Company began selling a product utilizing 1-MCP technology called TruPick. AgroFresh quickly filed suit against Plaintiff, Defendant, and the Company alleging that TruPick amounted to an infringement of its intellectual property rights in the RipeLock Patents. The Court, ruling in favor of AgroFresh, found that the technology underlying TruPick belonged to AgroFresh. The Company stopped selling TruPick immediately. Ultimately, Mir and AgroFresh entered into a settlement agreement which called for an entry of a final judgment by consent. According to this judgment, Mir and MirTech agreed to disclose and assign to AgroFresh “all inventions, discoveries, or improvements” relating to 1-MCP. The Judgement included a finding that the RipeLock Patents belonged to AgroFresh. Shortly thereafter, Francois Girin (“Girin”), of Plaintiff, contacted defendant suggesting that the Company dissolve. Defendant refused, and Plaintiff brought this action.

Plaintiff sought an order to dissolve the Company and appoint Girin as the receiver to wind-up the Company. MirTech answered and asserted a counterclaim, but the Court granted a motion by Plaintiff to strike the counterclaim prior to trial.

In deciding this case, the Court relied on Section 18-802 of the Delaware Limited Liability Company Act (“DLLCA”). § 18-802 allows the Court to dissolve a limited liability company where it is not, or is no longer “reasonably practicable to carry on the business in conformity with a limited liability company agreement.” In considering the dissolution under § 18-802, the Court looked to the Company’s LLC agreement. The Court broke the purpose of the Company’s business, as laid out in the LLC agreement, into two categories: (1) the 1-MCP business; and (2) the Non-1-MCP business. Ultimately, the court found that the Company could not carry on business in either category.

The Court found that the LLC agreement defined 1-MCP business as business relating to 1-MCP products. The only product the Company ever developed, manufactured, or sold was TruPick. The Plaintiff pointed out that, pursuant to the judgement in the MirTech-AgroFresh litigation, the Company could no longer market TruPick. Defendant argued that the Company could still rely on Defendant’s “know-how” and “trade secrets” to conduct 1-MCP business. The Court rejected this argument, citing the previous judgment as having assigned all MirTech “know-how” relating to 1-MCP to AgroFresh. Mir admitted at trial that his proposed 1-MCP business required measuring 1-MCP, and that he could not think of a way to measure 1-MCP without relying on “know-how” that had been assigned to AgroFresh. As such, the Court found that there was no practicable way in which the Company could continue any 1-MCP business.

While the LLC agreement did contemplate the Company’s engaging in potential non-1-MCP business, the Court pointed out that any venture in that capacity was subject to a right of first refusal by Plaintiff. Seeing as how Girin testified that he no longer trusted Mir, the Court found that no new non-1-MCP venture would survive Plaintiff’s right of first refusal. Defendant argued that a non-1-MCP business already existed, and therefore survived Plaintiff’s right of first refusal, relating to “in-transit ripening” and “nano-absorbent films,” neither of which was purportedly 1-MCP technologies. The only support that Defendant provided for these assertions was testimony from Mir about conversations with low-level employees of Plaintiff regarding these technologies. Mir also conceded that nothing was ever signed or even definitively agreed to with respect to any non-1-MCP business or technology. Despite Defendant’s assertions otherwise, the Court found that there was no practicable way in which the Company could continue on by engaging in any non-1-MCP business. Consequently, Court dissolved the Company and appointed Girin as the receiver.

Ex-Board Member of Homeowner’s Association Sues for Improper Removal; Awarded a Proper Removal

By Joanna A. Diakos Kordalis and Tom Sperber

In Beck v. Greim c/o Bombay Woods Maintenance Corp., the Delaware Chancery Court issued a Master’s Report making recommendations regarding a dispute between a homeowner, who had served as a director and officer of the homeowner’s association, and the homeowner’s association and its president, concerning alleged violations of Delaware General Corporation Laws and the association’s failure to enforce deed restrictions under Del. C. § 348. Andrea Beck (“Plaintiff”), one of three directors and the treasurer of Bombay Woods Maintenance Corporation (“Bombay”), which is a homeowner’s association, alleged that the other two board members, John Greim (“Greim”) (with Bombay, “Defendants”) and Jeffrey Horvat (“Horvat”) (with the Defendants, the “Adverse Parties”), improperly removed her as a director and officer of Bombay and failed to maintain common areas adjacent to her property. Based on the evidence presented at trial, the Master recommended that the Court find that Plaintiff was properly removed as treasurer, but improperly removed as a director. The Master further recommended that the Court order that Bombay remedy the improper removal by conducting a special meeting of its members to vote on Plaintiff’s removal or holding an annual election of its board of directors, or by following the Delaware Uniform Common Interest Ownership Act procedures for removal of a board member. The Master also recommended that the Court conclude that Bombay’s deed restrictions were not violated by failing to maintain aspects of Bombay’s common areas as claimed by Plaintiff.

In 2013, Plaintiff and two other homeowners were elected to the board of directors of Bombay. The other two members immediately resigned, causing the Plaintiff to appoint Greim and Horvat to the board of directors and to the positions of president and vice president/secretary, respectively. Plaintiff was appointed treasurer. During a board meeting in early, 2014, Greim and Horvat asked Plaintiff to resign from the board of directors. When Plaintiff refused to do so, Greim and Horvat voted to remove her as a director and treasurer. Later in 2014, Greim and Horvat scheduled a members meeting to have a confirmatory vote on Plaintiff’s removal. When too few members attended to form a quorum, Greim and Horvat went door to door collecting ballots. On October 20, Greim and Horvat notified Plaintiff that the members had voted to remove her as a director.

Plaintiff filed a pro se complaint against Defendants in the fall of 2014, alleging the aforementioned claims and others relating to mismanagement of Bombay’s funds and failing to enforce proper voting measures under Bombay’s bylaws. Through several letter opinions and final reports, it was held that, without counsel, Plaintiff could only pursue claims of improper removal from her positions under Section 225 of the Delaware General Corporation Law and failure to enforce deed restrictions under another provision of the Delaware Code. While the Court would look to the bylaws for several of these claims, Plaintiff contended that the bylaws were never recorded and thus were invalid. Rather than address that issue, the Master made his recommendation by analyzing the Delaware Uniform Common Interest Ownership Act (the “DUCIOA”) and Bombay’s bylaws in the alternative. While Bombay’s formation predated the enactment of DUCIOA, some provisions apply to pre-existing communities, while others control “only if the matter at issue is not expressly addressed in the community’s governing documents.”

To support Plaintiff’s claim that Greim and Horvat improperly removed her as treasurer, Plaintiff argued that the agenda on the member notice of the board meeting in question did not include the vote to remove Plaintiff from her position. She also alleged that because they were improperly elected to the board, they had no ability to remove her. In analyzing these claims, the Court looked to Bombay’s bylaws. The DUCIOA does not address the removal of officers and none of Bombay’s other organizational documents speak to the issue. The Court pointed to the provision of the bylaws granting the board the authority to choose and appoint officers and “remove any officer that it chose or appointed, ‘with or without cause at any time by the affirmative vote of a majority of the whole Board of Directors.’” While the Court acknowledged that the bylaws require member notice of board meetings, they do not speak to whether posting a proposed agenda is required. The Court pointed out that while DUCIOA does have notice requirements for board meetings, those provisions do not apply to pre-existing communities.

In arguing that her removal from the board was invalid, Plaintiff restated her arguments for her claim of improper removal as treasurer and additionally alleged that the members did not participate in the meeting to vote on her removal. The bylaws stated that directors may be removed with or without cause by a majority vote of the members, assuming that the required 51% quorum votes in person or by proxy. The DUCIOA states that board members can be removed without a quorum only when procedures for “special meetings” are followed. These procedures include providing an opportunity for members to speak concerning the removal, a recession of the meeting, and a notification of the availability to vote within 30 days.

The Master found that the procedure used by Greim and Horvat to remove Plaintiff from the board violated both the bylaws and the DUCIOA. The quorum requirement of the bylaws was not met, therefore the members could not have properly voted on Plaintiff’s removal. While Greim and Horvat eventually got the necessary votes by going door to door and collecting ballots, the Master found that the bylaws only authorized the board to take removal actions during meetings. The Master also found that the irregularities in the voting process violated the less stringent but still particular “special meeting” procedure of the DUCIOA for a removal proceeding without a quorum. While the Master concluded that Plaintiff was improperly removed, he refused to recommend that she be reinstated after her four year absence. Instead, the Master recommended, among other things, that the Court order that Bombay conduct a special meeting of Bombay’s members to have a procedurally proper vote on Plaintiff’s removal.

The Master quickly dispatched with Plaintiff’s argument that Greim and Horvat were improperly elected to the board by pointing out that, consistent with the bylaws, Plaintiff appointed them to the board when she was the only director. The Master also found that Plaintiff had failed to present any evidence to support her claim that the Adverse Parties had failed to maintain the common areas around her property.

Andrea C. Beck v. John A. Greim in care of Bombay Woods Maintenance Corp…

Chancery Court Finds No Breach of Duty in Failed Corporate Inversion

By Joanna Diakos and Tom Sperber

In Kyle Ellis (AbbVie, Inc.) v. Richard A. Gonzalez, et al., the Delaware Chancery Court dismissed a derivative suit for failing to make a demand and to allege particularized facts demonstrating that demand would have been futile. Kyle Ellis (“Plaintiff”) alleged breaches of fiduciary duty by the CEO of AbbVie, Inc. (“AbbVie”), Richard A. Gonzalez (“Gonzalez”), and the individual members of AbbVie’s board of directors (“Director Defendants”) in connection with a proposed but ultimately abandoned corporate inversion between pharmaceutical giants AbbVie and Shire plc (“Shire”). The Court held that because AbbVie’s certificate of incorporation contained a Section 102(b)(7) exculpatory clause, Plaintiff had to allege that a majority of the board faced a substantial likelihood of liability for breaching the duty of loyalty in order for demand to be excused. Ultimately, Plaintiff failed to do that.

At all relevant times, Plaintiff was a minority stockholder of AbbVie, a Delaware corporation headquartered in Chicago, Illinois. Shire was an Island of Jersey biopharmaceutical company with its headquarters in Dublin, Ireland.

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Court of Chancery Dismisses all Claims Brought by Minority Stockholder

By Shoshannah Katz and Tom Sperber

In Francis M. Ford (VMware Inc.) v. VMware Inc. C.A. No. 11714-VCL (Del. Ch. May 2, 2017), the Delaware Court of Chancery granted defendants’ motion to dismiss the plaintiff’s complaint in full for failing to state a claim upon which relief can be granted.  Francis M. Ford (“Plaintiff”) alleged breaches of fiduciary duty against VMware Inc. (“VMware”), EMC Corp. (“EMC”), Denali Holding Co. (“Denali”), Dell Inc. (“Dell”), Universal Acquisition Co. (“Universal”), and several directors of these companies.  Plaintiff was a minority stockholder of VMware prior to a merger between EMC, VMware’s controlling stockholder, and Denali that closed in September 2016.  The Court held that Plaintiff failed to allege that the parties to the merger breached any fiduciary duties to the VMware stockholders or that the parties otherwise bound VMware to unfair terms.  The Court also found that the restructuring of VMware prior to the merger was subject to the business judgment rule, and that Plaintiff failed to sufficiently plead that Denali’s issuance of a tracking stock reflecting the performance of VMware’s stock price was a misappropriation or a wrongful dilution.

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