Topic: Business Judgment

CHANCERY COURT DISMISSES COMPLAINT FOR FAILURE TO STATE A CLAIM, HOLDING THAT REVIEW OF SALE UNDER ENTIRE FAIRNESS IS NOT WARRANTED

By: Joanna Diakos and Adam Heyd

In Aron English and Richard Peppe v. Charles K. Narang, et al., C.A. No. 2018-0221-AGB (Del. Ch. March 20, 2019), the Delaware Court of Chancery (the “Court”) dismissed a stockholder suit against the board members of NCI, Inc., a publicly-traded company (the “Company”), for failure to state a claims for relief in connection with allegations of breach of fiduciary duty, and against H.I.G. Capital, LLC (“HIG”) for aiding and abetting such breach during a sale of the Company to HIG.  The Court held that the controlling stockholder’s alleged need for liquidity was not sufficient to compel review of the Company sale under an “entire fairness” standard, and that the vote of stockholders approving the sale was fully informed.

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Delaware Court of Chancery Dismisses Derivative Suit in Limited Partnership Context for Failing to Make Demand or Show Demand Futility

By: Scott Waxman and Zack Sager

In Inter-Marketing Group USA, Inc. v. Armstrong, the Delaware Court of Chancery dismissed a derivative suit brought on behalf of a Delaware limited partnership because the plaintiff failed to make demand or show that demand was futile.

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IN REJECTING DEFENDANTS’ MOTION FOR DISMISSAL, CHANCERY COURT FINDS THAT INDIVIDUAL FIDUCIARY MAY BE HELD LIABLE FOR TRADES THAT AN ASSOCIATED ENTITY OR FUND MAKES

By: Scott E. Waxman and Adrienne Wimberly

In the consolidated stockholder derivative litigation, In re Fitbit, Inc., CA No. 2017-0402-JRS (Del. Ch. Dec. 14, 2018), the Delaware Court of Chancery denied the Defendants’ motion to dismiss Plaintiffs’ insider trading and breach of fiduciary duty claims. The claims stem from alleged insider knowledge of members of Fitbit’s Board of Directors (the Board) and chief financial officer that Fitbit’s PurePulse™ technology was not as accurate as the company claimed. Plaintiffs alleged that members of the Board structured the company’s Initial Public Offering (IPO) and Secondary Offering (together, “the Offerings”) to benefit Fitbit insiders and voted to waive employee lock-up agreements, thereby allowing those insiders, to prematurely sell stock in the Secondary Offering. As a result of their sales, the alleged insiders sold about 6.2 million shares for over $115 million in the IPO and about 9.62 million shares for over $270 million in the Secondary Offering.

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Fiduciary Duty Claim Against Selling Company CEO Survives Motion to Dismiss with Aiding and Abetting Claim Missing the Mark

By: Annette Becker and Michael Payant

In In re Xura, Inc. Stockholder Litigation (C.A. No. 12698-VCS), the Delaware Court of Chancery (the “Court”) denied a motion to dismiss brought by defendants Phillippe Tartavull (“Tartavull”) and Siris Capital Group (“Siris”, and collectively with Tartavull, the “Defendants”) in a case filed by Obsidian Management LLC (“Obsidian” or “Plaintiff”) for breach of fiduciary duty in connection with the sale of Xura, Inc. (“Xura”) to a Siris affiliate. The Court held that Plaintiff pled a viable breach of fiduciary duty claim against Tartavull as CEO of Xura. The Court granted a motion to dismiss as to an aiding and abetting claim brought against Siris holding that Plaintiff failed to plead a viable claim.

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CHANCERY COURT DISMISSES STOCKHOLDER CLAIM FOR BREACH OF FIDUCIARY DUTY, DESPITE BOARD’S INACCURATE DISCLOSURES

By: Holly Hatfield and Adam Heyd

In Steven H. Busch v. Edward J. Richardson et. al. and Richardson Electronics, Ltd., C.A. No. 2017-0868-AGB (Del. Ch. November 14, 2018), the Delaware Court of Chancery (the “Court”) dismissed a plaintiff’s stockholder suit against certain board members of Richardson Electronics Ltd. (the “Company”) for breach of fiduciary duty.  The Court found that the Company’s board (the “Board”) exercised valid business judgment in rejecting the plaintiff’s demand to unwind certain Company transactions, despite the Board’s failure to disclose certain related party transactions to the plaintiff and other stockholders.

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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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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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Board’s Lack of Independence from Interested Director Excuses Stockholder Demand as Futile

By: Christopher B. Tillson and J. Tyler Moser

In Sciabacucchi v. Liberty Broadband Corp., et al., C.A. No. 11418-VCG (Del. Ch. July 26, 2018), the Delaware Court of Chancery denied in part a motion to dismiss brought by defendants Liberty Broadband Corporation (“Liberty”), Liberty’s largest stockholder, and the board of directors of Charter Communications, Inc. (“Charter,” and collectively “Defendants”), for failure to plead demand futility.  The Court ruled that the Plaintiff, a stockholder of Charter, pleaded sufficient facts to support a reasonable inference that the influence of Liberty’s largest stockholder would prevent the Charter board of 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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CHANCERY COURT FINDS TRANSACTION STRUCTURE CAN TRIGGER PRESUMPTIONS OF BUSINESS JUDGMENT DEFERENCE AT PLEADING STAGE

Nicholas Oleinik…v. Frank A. Lodzinski, et al., and Earthstone Energy,…

By: Carty Bibee and Samantha Beatty

In Olenik v. Lodzinski, C.A. No. 2017-0414-JRS (Del. Ch. July 20, 2018), the Court of Chancery, in a motion to dismiss, found that Earthstone Energy, Inc.’s (“Earthstone”) decision to employ the framework laid out in Kahn v. M&F Worldwide, Corp., 88 A.3d 635 (Del. 2014) (“MFW”) in structuring a transaction secured the benefit of the business judgment rule for its fiduciaries, even at the pleadings stage.  The Court found that where the Plaintiff failed to plead waste, or facts which the Court could reasonably conceive as waste, the Plaintiff’s claim that officers and the controlling stockholder breached their fiduciary duties by approving an unfair transaction as interested parties, must be dismissed.

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Court of Chancery Dismisses Derivative Suit for Failure to Demonstrate Demand Futility because Plaintiff Failed to Allege Particularized Facts

By: Charles Carter and Caitlin Velasco

In Steinberg on behalf of Hortonworks, Inc. v. Bearden, C.A. No. 2017-0286-AGB (Del. Ch. May 30, 2018), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s derivative claims for breach of fiduciary duties under Court of Chancery Rule 23.1, because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile. The Court found that the plaintiff failed to plead particularized facts sufficient to raise reasonable doubt that a majority of the directors on the Hortonworks, Inc. board could have exercised their independent and disinterested business judgment in responding to a pre-suit demand. Read More

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

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