Catagory:Breach of Fiduciary Duty

1
CHANCERY COURT GRANTS DEFENDANT’S MOTION ON THE PLEADINGS WHERE NAMED DEFENDANTS DID NOT OWE ANY OF THE CONTRACTUAL OR FIDUCIARY OBLIGATIONS PLAINTIFF TRIED TO ENFORCE
2
COURT OF CHANCERY FINDS NO BUYER DUTY TO MAXIMIZE CONTINGENT SALE CONSIDERATION OWED TO SELLER
3
WHEN SOMEONE SHOWS YOU WHO THEY ARE, BELIEVE THEM THE FIRST TIME, OR RISK YOUR CLAIMS BEING TIME BARRED
4
Chancery Court Grants Preliminary Injunction Restraining Former Director from Selling Shares Allegedly Invalidly Issued to Himself
5
YES, WE HAVE NO ESTOPPEL: CHANCERY COURT RULES DERIVATIVE, DISMISSES DILUTED STOCKHOLDERS’ EX-TEXAS MERGER-RELATED CLAIMS
6
Surgery Partners, Inc. Fails to Excise Conflicts Infecting Three Interdependent Transactions
7
Chancery Court Denies Dismissal of Breach of Fiduciary Duty Claims after Concluding that Stockholder Vote was Not Informed
8
Stockholder’s Suit for Directors’ Fiduciary Breach Related to Acquisitions and Stock Repurchases Dismissed With Prejudice for Failure to Plead Demand Futility and to State Viable Claims, Directors Found to be Disinterested Regardless of 10-Q Filing Stating Action Without Merit
9
Activist Stockholder Aided and Abetted a Board’s Breach of Fiduciary Duties but the Court Finds No Damages
10
Chancery Court Dismisses Derivative Suit Against Blue Bell Officers and Directors

CHANCERY COURT GRANTS DEFENDANT’S MOTION ON THE PLEADINGS WHERE NAMED DEFENDANTS DID NOT OWE ANY OF THE CONTRACTUAL OR FIDUCIARY OBLIGATIONS PLAINTIFF TRIED TO ENFORCE

By: Scott Waxman and Samantha Beatty

In Ross v. Institutional Longevity Assets LLC, C.A. No. 2017-0186-TMR (Del. Ch. Feb. 26, 2019), the Chancery Court, in a motion for judgement on the pleadings, found that the plain language of a limited liability company’s operating agreement was sufficient to affirm the notion that the plaintiff had failed to establish a set of facts to support his breach of contract and breach of fiduciary duty claims. The Court found that (i) where the language of a contract is clear, the parties’ disagreement will not render a contract ambiguous; (ii) where a plaintiff has not identified gaps in the language of a contract, there can be no evidence that an implied covenant of good faith has been breached, and (iii) where a fiduciary duty claim arises out of the same conduct as a contract claim, the fiduciary claim is superfluous.

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COURT OF CHANCERY FINDS NO BUYER DUTY TO MAXIMIZE CONTINGENT SALE CONSIDERATION OWED TO SELLER

By Scott E. Waxman and Thomas F. Meyer

In Glidepath Ltd. v. Beumer Corp., C.A. No. 12220-VCL (Del. Ch. February 21, 2019), the Delaware Court of Chancery held that the buyer of a company did not breach transaction documents or violate the implied covenant of good faith and fair dealing in maximizing the long-term value of the company at the expense of short-term profits that would have resulted in greater contingent consideration being paid to the seller plaintiffs (the “Sellers”).

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WHEN SOMEONE SHOWS YOU WHO THEY ARE, BELIEVE THEM THE FIRST TIME, OR RISK YOUR CLAIMS BEING TIME BARRED

By Scott Waxman and Adrienne Wimberly

In Winklevoss Capital Fund, LLC et al. v. Stephen Shaw, et al., C.A. No. 2018-0398-JRS, the Delaware Court of Chancery, in a Memorandum Opinion, granted a Motion to Dismiss counterclaims against individual Plaintiffs Tyler and Cameron Winklevoss and their investment firm (altogether “Plaintiffs”) because the claims were barred by laches. In an attempt to capitalize on the publicity from their depiction in the movie The Social Network, the Winklevoss twins, Tyler and Cameron, launched an investment firm, Winklevoss Capital Fund, LLC (WCF). The twins selected Treats! LLC, founded by Stephen Shaw, to be one of their first investments. Treats! LLC owns and operates Treats! magazine, a print and digital magazine depicting nude and semi-nude photographs of models and celebrities. In August 2012, WCF invested $1,310,000 in Treats! in exchange for 1,310,000 series A preferred units under a written Purchase Agreement and Amended LLC Agreement. WCF also loaned Treats! $20,000 as evidenced by a promissory note delivered in October 2012. However, the business relationship between the parties quickly soured as the twins refused to allow Shaw to publicly announce their investment in Treats! and the twins believed Shaw was mismanaging the company.

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Chancery Court Grants Preliminary Injunction Restraining Former Director from Selling Shares Allegedly Invalidly Issued to Himself

By: Annette Becker and Michael Payant

In Applied Energetics, Inc. v. George Farley and AnneMarieCo., LLC (C.A. No. 2018-0489-TMR), the stockholders of Applied Energetics, Inc. (“AE” or “Plaintiff”) sued defendants George Farley (“Farley”) and his family owned-holding company AnneMarieCo., LLC (“AMC”) for issuing stock to himself and transferring such shares to AMC in a self-interested transaction.  Plaintiff sought a preliminary injunction to restrain defendants from selling AE shares during the pendency of the stockholder litigation. The Delaware Court of Chancery (the “Court”) granted the preliminary injunction holding that AE established reasonable probability of success on the merits for its claims.

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YES, WE HAVE NO ESTOPPEL: CHANCERY COURT RULES DERIVATIVE, DISMISSES DILUTED STOCKHOLDERS’ EX-TEXAS MERGER-RELATED CLAIMS

 By Remsen Kinne and Adrienne Wimberly

In Sheldon v. Pinto Technology Ventures, C.A. No. 2017-0838-MTZ (Del. Ch. Jan. 25, 2019), the Delaware Court of Chancery in a Memorandum Opinion granted a motion to dismiss breach of fiduciary duty claims and other allegations brought by the founder and an early stockholder (“Plaintiffs”) of non-party IDEV Technologies, Inc., a Delaware corporation (“IDEV”). The Court found that Plaintiffs’ primary claims were derivative, rejecting Plaintiffs’ assertion that Defendants were judicially estopped by a Texas state court ruling from arguing for that characterization of the claims, and dismissed the complaint for failure to comply with Chancery Court Rule 23.1’s derivative claims demand or demand futility pleading requirements.

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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.

Chancery Court Denies Dismissal of Breach of Fiduciary Duty Claims after Concluding that Stockholder Vote was Not Informed

By: David Forney and Rachel P. Worth

In In re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018), the Delaware Court of Chancery denied the director defendants’ motion to dismiss the stockholder plaintiffs’ claim for breach of fiduciary duties on the basis that the stockholder vote approving the transaction was not informed and the defendants were therefore not entitled to business judgment rule deference at the pleading stage. The Court also found that the plaintiffs had adequately pled a breach of the fiduciary duty of loyalty against each of the director defendants, which would not be covered by the exculpatory clause in the company’s certificate of incorporation.

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Stockholder’s Suit for Directors’ Fiduciary Breach Related to Acquisitions and Stock Repurchases Dismissed With Prejudice for Failure to Plead Demand Futility and to State Viable Claims, Directors Found to be Disinterested Regardless of 10-Q Filing Stating Action Without Merit

By: Remsen Kinne and Adrienne Wimberly

In Tilden v. Cunningham et. al., C.A. No. 2017-0837-JRS (Del. Ch. Oct. 26, 2018), the Delaware Court of Chancery granted the motion of directors of Delaware corporation Blucora, Inc. (“Blucora”) named as Defendants to dismiss a derivative action and dismissed Plaintiff’s complaint with prejudice, holding that the Plaintiff, a Blucora stockholder, failed to plead demand futility and failed to state viable claims under Rule 12(b)(6). This derivative action stems from three transactions Blucora entered into between 2013 and 2015: 1) an acquisition of Monoprice, Inc. (“Monoprice”), 2) the acquisition of HD Vest (“HD Vest”), and 3) several stock repurchases.

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Activist Stockholder Aided and Abetted a Board’s Breach of Fiduciary Duties but the Court Finds No Damages

By: Jill B. Louis and Alexander J. Chern

In In re PLX Technology, Inc. Stockholders Litigation, C.A. No. 9880-VCL (Del. Ch. October 16, 2018), the Delaware Chancery Court found that the actions of an activist stockholder in the context of a sale transaction aided and abetted the defendant board of directors in a breach of its fiduciary duty of disclosure but that there was insufficient evidence that the breach ultimately resulted in damages.

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Chancery Court Dismisses Derivative Suit Against Blue Bell Officers and Directors

By: Scott E. Waxman and Stephanie S. Liu

In Jack L. Marchand II v. John W. Barnhill, Jr., et al, the Delaware Chancery Court dismissed Plaintiff’s complaint under Court of Chancery Rule 23.1, finding that Plaintiff failed to plead particularized facts that an appeal for board action on the complaint would have been futile or that a majority of the company’s board lacked the independence needed to respond.

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