waxman – Page 2 – Delaware Docket

Chancery Court Finds Majority Partner Breached Contractual and Fiduciary Obligations to the Minority

Dec 11 2014

In this Chancery Court decision, VC Laster examined damages owing to plaintiffs for claims of breach of contract and breach of fiduciary duties of care and loyalty in connection with the sale of a partnership’s assets. The plaintiffs, partners in a D.C. partnership, had proved at trial that the sale by the majority partners (U.S. Cellular) to a related party was not entirely fair to them, as minority holders.

On the breach of contract claim, VC Laster found that defendants had breached a confidentiality provision in the partnership agreement by sharing confidential information regarding the partnership with a valuation firm, for the purposes of obtaining a valuation for the sale transaction. Notwithstanding the breach, only nominal damages were awarded as plaintiffs failed to show proof of actual injury from the breach. Among other facts, the Count highlighted that the confidentiality provision in the partnership agreement could have been waived by the majority partners.

Mehta v. Smurfit-Stone Container Corp., C.A. No. 6891-VCL (October 20, 2014) (Laster, V.C.)

Oct 27 2014

By Scott Waxman and Caitlin Howe

Pro se plaintiffs, Ram and Neena Mehta (the “Mehtas”), owned common stock of defendant Smurfit-Stone Container Corporation (“Smurfit”), which, after reorganizing in a Chapter 11 bankruptcy, merged with a wholly-owned acquisition subsidiary of Rock-Tenn Company (“Rock-Tenn Sub” and “Rock-Tenn Parent”, respectively). The Mehtas challenged (i) decisions leading to Smurfit’s bankruptcy, (ii) the merger with Rock-Tenn Sub, and (iii) Rock-Tenn Sub’s failure to pay the Mehtas the merger consideration from the Rock-Tenn Sub/Smurfit merger. The defendants moved to dismiss the Mehtas’ claims for failure to state a claim, and Vice Chancellor Laster granted the defendants’ motion with respect to claims (i) and (ii); however, claim (iii) survives, with the caveat that the Mehtas are not entitled to indirect or consequential damages.

On June 21, 2010, Smurfit emerged from a Chapter 11 bankruptcy, having cancelled and re-issued 95% of its stock to its former creditors and the remainder to its shareholders, including the Mehtas who owned 1,486 shares after the reorganization. Less than six months later, Smurfit and Rock-Tenn Parent announced their plans for a merger for cash and Rock-Tenn Parent stock consideration. The Mehtas timely filed a demand for appraisal, and the merger was subsequently consummated. However, the Mehtas eventually withdrew their demand and never filed a petition for appraisal. The Mehtas did not receive any merger consideration.

In re Orchard Enterprises, Inc. Stockholder Litigation, Consolidated C.A. No. 7840-VCL

Aug 29 2014

By Scott Waxman and Porter Sesnon

On August 22, 2014, Vice Chancellor Laster approved a fee award for counsel to certain plaintiff-stockholders related to a settlement of a class action claim alleging breaches of fiduciary duties related to a freeze-out merger. The settlement amounted to $10.725 million. In the same opinion, V.C. Laster denied a fee award due to lack of standing to counsel for other stockholders in the same freeze-out merger, who separately litigated an appraisal claim, and which was relied upon by the successful class action plaintiffs.

Comerica Bank v. Global Payments Direct, Inc., C.A. No. 9707-CB (Aug. 1, 2014) (Bouchard, C.)

Aug 18 2014

By Scott Waxman and Zack Sager

This case involves the unfriendly winding up of a two-member Delaware limited liability company (the “LLC”). One of the issues raised in this case was whether “cause” existed for the Court of Chancery to intervene and wind up the LLC’s affairs and appoint a liquidating trustee under Section 18-803(a) of the Delaware Limited Liability Company Act (the “LLC Act”). One of the members of the LLC (“Global”) argued that the Court did not have cause because a deadlock did not exist among the parties entitled to wind up the LLC. Global argued that because it was the 51% owner of the LLC and had the right to make any decisions necessary to wind up the LLC, no deadlock existed.

In rejecting Global’s argument, the Court stated that nothing in the LLC Act “requires a finding of deadlock as a prerequisite to this Court assuming control of the wind up process of a Delaware LLC and/or appointing a liquidating trustee.” According to the Court, ample cause existed because Global was unwilling to wind up the LLC in an orderly and timely manner and took a confrontational approach that was contradictory to its obligation to wind up the LLC promptly so as to maximize the value of the property distributed to the members. Chancellor Bouchard noted that although the “contours of [default fiduciary duties] may be different after dissolution of an LLC during the wind up period, they continue to encompass, in my view, an obligation to distribute the assets of the company promptly consistent with maximizing their value.”

Comerica Bank v Global Payments Direct

Levey v. Brownstone Asset Mgmt., LP, et al., C.A. No. 5714-VCL (Del. Ch. Aug. 1, 2014) (Laster, V.C.)

Aug 09 2014

By Scott Waxman and Marisa DiLemme

In Levey v. Brownstone Asset Mgmt., LP, et al., the plaintiff, Gordon Levey (“Levey”), and the three individual defendants worked together as principals in a financial services boutique, Brownstone Investment Group LLC. Operating out of the same office, Levey and the three defendants also ran a hedge fund. In this action, Levey, after resigning from the financial services boutique, sought a declaration that he continued to own equity in two of the entities through which the boutique operated: (1) Brownstone Investment Partners LLC, a Delaware limited liability company, which was the passive manager of the hedge fund (the “Passive Manager”); and (2) Brownstone Asset Management LP, a Delaware limited partnership, which was the active manager of the hedge fund (the “Active Manager”). Levey sought a declaration that he continued to hold a 5% interest in the Passive Manager and the Active Manager, and if he did remain an owner of those interests, he demanded his proportionate share of all past distributions made by those entities. He also sought an order requiring the defendants to identify any undisclosed profits (from which he would presumably also seek his share).

The court first addressed the critical factual issue of whether Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006. Levey argued that he may have tried to withdraw but failed in the attempt, while the defendants argued that he could and did withdraw. The court found that an objective viewer would regard Levey as withdrawing, listing actions that support this conclusion – he turned in his keys, he cut up his corporate charge card and building identification card, and the other principals and employees of the firm gathered together and said goodbye to him. He also withdrew his personal funds that were invested in the hedge fund. Levey argued that he intended to resign as an employee and to withdraw from the financial services boutique, but not to withdraw from the Passive Manager and the Active Manager. However, based on the dislike Levey had expressed for his partners, the court did not find it credible that he wanted to maintain his relationship with his partners through the Passive Manager and the Active Manager. Therefore, the court found that Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.

In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)

Apr 29 2014

By Scott Waxman and Zack Sager

In In re Interstate General Media Holdings, LLC, the managing members of Interstate General Media Holdings, LLC, a Delaware limited liability company (the “Company”), sought judicial dissolution of the Company. Both managing members agreed that the Company was deadlocked and judicial dissolution was necessary, but they disagreed about whether the Company should be sold at a private auction or a public auction. The limited liability company agreement of the Company (the “LLC Agreement”) did not explicitly address how the Company was to be dissolved and liquidated. Nonetheless, one of the managing members argued that the Court of Chancery should look to the intent and provisions of the LLC Agreement for guidance in fashioning an appropriate remedy. The court rejected this argument holding that because the LLC Agreement did not explicitly address the procedures for dissolution and liquidation, it was essentially irrelevant in determining the issue. Further, because the managing members sought judicial dissolution, which was not proscribed by the LLC Agreement, the Company submitted itself to the discretion of the court to determine how the Company was to be dissolved and liquidated. The court ultimately ordered the dissolution of the Company and a sale of the Company via a private auction, finding that this method would maximize the value of the members’ limited liability company interests in the Company.

InReInterstate

Huatuco v. Satellite Healthcare, C.A. No. 8465 (Dec. 9, 2013) (Glasscock, V.C.)

Dec 09 2013

By Scott Waxman and Zack Sager

Huatuco v. Satellite Healthcare is about one member of a Delaware limited liability company (the “Company”) applying for judicial dissolution of the Company pursuant to Section 18-802 of the Delaware Limited Liability Company Act, which permits the Court of Chancery to dissolve a limited liability company when it is not reasonably practicable for the limited liability company to carry on its business in conformity with its limited liability company agreement. In stressing the principle of freedom of contract with respect to limited liability company agreements, the Court of Chancery dismissed the action because the limited liability company agreement of the Company (the “LLC Agreement”) did not permit a member to apply for judicial dissolution. The LLC Agreement expressly provided that, except as required by law, the members were only entitled to the rights expressed in the LLC Agreement. Because the right to judicial dissolution is not required under Delaware law (i.e., the right can be waived) and was not granted in the LLC Agreement, the Court dismissed the action.

Huatuco v Satellite Healthcare and Satellite Dialysis of Tracy LLC

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