Topic: Breach of Fiduciary Duty

Chancery Court Awards Damages for Breach of Fiduciary Duty Stemming from Director’s Refusal to Sign Self-Help Documents

By: C.J. Voss and Rich Minice

In CertiSign Holding, Inc. v. Sergio Kulikovsky, C.A. No. 12055-VCS, the Court found that Sergio Kulikovsky (“Kulikovsky”), a former director of CertiSign Holding, Inc. (“CertiSign”), had breached his fiduciary duty of loyalty to CertiSign by actively sabotaging corporate self-help efforts in a bid to advance his own personal objectives. The Court also denied Kulikovsky’s counterclaims for judicial validation of certain stock option grants and the assumption by CertiSign of a debt owed to Kulikovsky, and awarded Certisign damages in the amount of $390,455.20 for the “legal fees and expenses incurred by CertiSign in connection with its efforts to remedy its defective capitalization and board issues.”

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Chancery Court Clarifies “Constituent Corporation”

By: Stephan H. Coonrod and Stephanie S. Liu

In City of North Miami Beach General Employees’ Retirement Plan, et al. v. Dr Pepper Snapple Group, Inc., et al., (C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018)), the Court of Chancery held that the term “constituent corporation” as used in Section 262 of the Delaware General Corporation Law means only an entity that actually is being merged or combined with another entity in a merger or consolidation and does not include a parent of such entities. Thus, the Court ruled that the Dr Pepper stockholder plaintiffs are not entitled to appraisal rights because Dr Pepper is not a constituent corporation, but rather the parent of one of two corporations to be merged in connection with the proposed transaction.

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CONSENT TO JURISDICTION DOES NOT EQUAL MANDATORY FORUM SELECTION

By Scott E. Waxman and Annamarie C. Larson

In In re Bay Hills Emerging Partners I, L.P., et al (C.A. No. 2018-0234-JRS), Vice Chancellor Slights denied the defendants’ motion to dismiss claims related to their “for cause” removal as general partners, instead staying the action pending resolution of the claims filed in a Kentucky court.  Regarding the forum selection issue, the Court of Chancery held that “the inclusion of the consent language and the lack of language indicating that Kentucky is the exclusive forum—such as by the use of the term ‘any’—[the LPA] does not contain clear language indicating that jurisdiction and venue must lie exclusively in Kentucky.”

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MOTION FOR A TEMPORARY RESTRAINING ORDER OF CONTROLLING STOCKHOLDERS DENIED AS NO EXTRAORDINARY CIRCUMSTANCES FOUND

By Annette Becker and Caitlin Velasco

In CBS Corporation, et al. v. National Amusements, Inc., et al., Civil Action No. 2018-0342-AGB, the Court of Chancery denied a motion for temporary retraining order brought by CBS Corporation (“CBS”) and five independent directors of CBS (the “Plaintiffs”) to restrain controlling shareholders, Shari Redstone, her father Sumner Redstone, National Amusements, Inc. (“NAI”), NAI Entertainment Holdings LLC, and the Sumner M. Redstone National Amusements Trust (the “Defendants”) from taking certain actions that would interfere with the governance of CBS or other proposed actions of the board of directors of CBS.  The Court found that there was no precedent for the type of relief requested by Plaintiff and that no extraordinary circumstances existed to warrant the grant of such relief. Read More

Chancery Court Denies In Part Motion to Dismiss Breach of Contract and Breach of Fiduciary Duties Claims

By Shoshannah Katz and Priya Chadha

In Feldman v. Soon-Shiong, et al. (C.A No. 2017-0487-AGB), the Delaware Court of Chancery denied in part and granted in part a motion to dismiss claims involving, among other things, breach of contract and breach of the fiduciary duty of loyalty, following a defendant’s withdrawal of $47 million from a company bank account.

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Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By: Scott Waxman and Zack Sager

In MHS Capital LLC v. Goggin, the Delaware Court of Chancery granted a motion to dismiss a breach of fiduciary duty claim against the manager of a Delaware limited liability company because all of the manager’s conduct that could have formed the basis of such claim was covered by the duties of the manager delineated in the limited liability company agreement.  The Court also analyzed and dismissed claims for, among other things, fraud, breach of the implied contractual covenant of good faith and fair dealing, unjust enrichment, and misappropriation of trade secrets.

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CONTROLLING STOCKHOLDER CANNOT ADVANCE ITS OWN SELF-INTEREST AT EXPENSE OF MINORITY STOCKHOLDERS

By: C. J. Voss and Rich Minice

In Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders.  In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.

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Chancery Court Denies Motion to Dismiss Brought by Defendant Tesla Motors, Inc. After Concluding that Elon Musk is a Controlling Stockholder

By Holly Hatfield and Daisy Sexton

In In Re Tesla Motors, Inc. Stockholder Litigation, the Delaware Chancery Court denied Defendants’ motion to dismiss an action brought by plaintiffs (Tesla stockholders) against nominal Defendant Tesla Motors in connection with Tesla’s acquisition of SolarCity Corporation.  Plaintiffs alleged that Tesla’s board of directors breached their fiduciary duties by approving the acquisition of SolarCity, which benefitted SolarCity stakeholders but negatively affected Tesla stockholders.  SolarCity is a public Delaware corporation founded by Elon Musk and his cousins, Peter and Lyndon Rive.  Musk and his cousins sit on the SolarCity Board. Lyndon was SolarCity’s CEO and Peter was its CTO.

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Court of Chancery Holds That Plaintiff Failed to Meet Burden of Proof With Respect to Mistake-Based Reformation Claim

By: Scott Waxman and Tami Mack

In Richard B. Gamberg 2007 Family Trust v. United Restaurant Group, L.P., C.A. No. 10994-VCMR (Del. Ch. January 26, 2018), the Court of Chancery held that limited partner, Richard B. Gamberg 2007 Family Trust (the “Plaintiff”), failed to meet its burden of proof with respect to various claims against United Restaurant Group L.P. (the “Partnership”), Atlantic Coast Dining, Inc. (the “General Partner”), and the directors/shareholders of the General Partner (the “Shareholder Defendants”; together with the Partnership and the General Partner, the “Defendants”), which included a mistake-based reformation claim, among other breach of contract and breach of fiduciary duty claims.

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PLAINTIFFS WERE UNABLE TO ROUSE SUPPORT FOR THEIR POSITION THAT A MINORITY STOCKHOLDER WAS A CONTROLLER AND BREACHED FIDUCIARY DUTIES BECAUSE THEY DID NOT PLEAD SUFFICIENT FACTS

By: Annette Becker and Rich Minice

In In re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS, the George Leon Family Trust and Dr. Robert A Corwin (the “Plaintiffs”) sought to recover damages on behalf of Rouse Properties Inc. (“Rouse”) stockholders, for breach of fiduciary duties and aiding and abetting breaches of fiduciary duties against Brookfield Asset Management Inc. (“Brookfield”) and five Rouse directors individually arising out of a July 2016 merger between two mall real estate holding companies (the “Merger”). The court dismissed all claims finding that Brookfield was not a minority controlling stockholder of Rouse and did not wield undue influence over the board of directors of Rouse in general or during Merger discussions and that the Plaintiffs failed to well plead that the stockholder vote approving the Merger was uninformed or coerced.

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MULTI-BILLION DOLLAR INVESTMENT MANAGER AND DIRECTORS REMAIN AT RISK

By: Kevin Stichter and Samira Torshizi

In Cumming v. Edens, et al., C.A. No. 13007-VCS (Del. Ch. Feb. 20, 2018), the Court of Chancery denied a motion to dismiss a derivative suit for breach of fiduciary duties brought by a stockholder of New Senior Investment Group, Inc. (“New Senior”) against New Senior’s board of directors (the “Board”) and related parties in connection with New Senior’s $640 million acquisition of Holiday Acquisition Holdings LLC (“Holiday”). The Court made clear that compliance with Section 144 does not necessarily provide a safe harbor against claims for breach of fiduciary duty and invoke business judgment review of an interested transaction. Because the complaint alleged with specificity “that the Board acted out of self-interest or with allegiance to interest other than the stockholders,” the court applied the entire fairness standard of review and concluded that the transaction was not fair to New Senior stockholders. Read More

Board’s Failure to Adhere to Best Practices in Drug Clinical Trial Does Not Excuse Stockholder Demand as Futile

By:  Remsen Kinne and J. Tyler Moser

In Wilkin v. Narachi, et al., and Orexigen Therapeutics, Inc., Civil Action No. 12412-VCMR (Del. Ch. February 28, 2018), the Delaware Court of Chancery granted a motion to dismiss brought by defendants (“Defendants”), directors and officers of biopharmaceutical company Orexigen Therapeutics, Inc. (“Orexigen”), for failure to plead demand futility under Court of Chancery Rule 23.1.  The Court ruled that the plaintiff, a stockholder of Orexigen (“Plaintiff”), did not plead sufficient facts to show that a substantial likelihood of liability prevented the directors from exercising independent and disinterested business judgment when considering a demand to bring a lawsuit on behalf of the corporation.

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