Topic: Chancery Court Rule 12(b)(6)

Specific Language of Operating Agreements Key in Chancery Court Dismissal of “Laundry List” of Claims Against LLC Managers

By: Scott Waxman and Rich Minice

In 77 Charters, Inc. v. Gould et al.., C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020), 77 Charters, Inc. (“Plaintiff”) brought suit against defendants Jonathan Gould (“Gould”), Stonemar MM Cookeville, LLC (“Stonemar MM”), Cookeville Corridor, LLC (the “Preferred Purchaser”) and Eightfold Cookeville Investor, LLC (the “New Investor” and together with Gould, Stonemar MM and the Preferred Purchaser, the “Named Defendants”) for a series of alleged “wrongful acts” in connection with the management and sale of a shopping mall (the “Property”), which also implicated Stonemar Cookeville Partners, LLC (“Cookeville Partners”) and Cookeville Retail Holdings, LLC (“Cookeville Retail”). In delivering its opinion, which centered on the nature of Delaware limited liability companies as creatures of contract, and thus, the controlling nature of the applicable operating agreements and contracts into which the parties had entered, the Delaware Court of Chancery (the “Court”) ruled that only Plaintiff’s claims which could be connected to an alleged wrongful amendment of the operating agreement of Cookeville Retail could survive Defendants’ Motion to Dismiss (the “Motion”).

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Master in Chancery Dismissive of Fiduciary Seeking Dismissal, Applies Familiar 12(b)(6) Standard

By: Rich Minice and Annette Becker

In Hill et al. v. Myers et al., C.A. No. 2018-0160 (Del. Ch. June 15, 2020), Master in Chancery Selena Molina (“Master”) issued a final report, recommending the Court of Chancery deny defendant’s (decedent’s close friend and confident, and attorney-in-fact during his final years)  motion to dismiss claims of undue influence and breach of fiduciary duty.  The Master determined that the motion to dismiss  brought by family members of the late G. Robert Dickerson, should be denied because the family members provided sufficient factual allegations to support their claims and establish standing. 

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Chancery Court Declines to Dismiss Breach of Contract, Implied Covenant and Declaratory Judgment Claims Stemming from Termination Purportedly for Cause

By: Scott E. Waxman, Michael C. Payant, and Julia M. Knitter

In William Patrick Sheehan, et al. v. AssuredPartners, Inc., et al., C.A. No. 2019-0333-AML (Del. Ch. May 29, 2020), the Delaware Court of Chancery (the “Court”) granted in part and denied in part a motion to dismiss brought by insurance brokerage firm, AssuredPartners, Inc. (“AP Inc.”), and its private equity backers (collectively, the “Defendants”) finding that plaintiffs’ claims for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory judgment survived under the minimal pleading standard for a motion to dismiss.

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CHANCERY COURT FINDS THAT RES JUDICATA BARS PLAINTIFF’S DEMAND FOR INFORMATION RIGHTS UNDER MERGER AGREEMENT

By: Annette Becker and Caitlin Velasco

In the Memorandum Opinion, Fortis Advisors LLC v. Shire US Holdings, Inc., No. 2018-0933-JRS (Del. Ch. Feb. 13, 2020), the Court of Chancery granted Shire US Holdings, Inc.’s motion to dismiss under the doctrine of res judicata because the breach of contract claim brought by Fortis Advisors LLC arises from the same transaction that was the subject of a prior action (the “2016 Action”) between the parties, Fortis Advisors LLC v. Shire US Holdings, Inc., No. 12147-VCS (Del. Ch. Aug. 9, 2017).

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Former Derivative Plaintiff Lacks Standing to Pursue Direct Claims Against General Partner

By: Scott Waxman and Zack Sager

In Morris v. Spectra Energy Partners (DE) GP, LP, the Court of Chancery held that the plaintiff, who previously lost standing to maintain a derivative action after it ceased to be a unit holder of a limited partnership, also lacked standing to directly challenge the fairness of the transaction that extinguished its right to pursue the derivative action.

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MAINTAINING GOOD CORPORATE GOVERNANCE: ENTIRE FAIRNESS CREEPING INTO ACTIONS BENEFITING A CONTROLLING STOCKHOLDER

By: Scott Waxman and Rich Minice

In Tornetta v. Musk, Civil Action No. 2018-0408-JRS (Del. Ch. Sep. 30, 2019), the Delaware Court of Chancery addressed the appropriate standard of review to apply when examining stockholder approval of a conflicted controller for the controller’s own executive incentive compensation package. In January 2018, Tesla, Inc.’s board of directors (the “Board”) approved a compensation package (the “Award”) for its CEO, Elon Musk. The Board then submitted the Award to Tesla’s stockholders for approval. The Award was overwhelmingly approved. Tornetta (“Plaintiff”), a Tesla stockholder, brought four direct and derivative claims against Musk and members of the Board (the “Defendants”) alleging the Award is a product of breaches of fiduciary duty, constitutes waste, and unjustly enriches Musk. The Defendants moved to dismiss all counts under Rule 12(b)(6) (the “Motion”).

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COURT OF CHANCERY FIND PROVISIONS OF MERGER AGREEMENT AMBIGUOUS AND DENIES TELECOMMUNICATIONS GIANT’S MOTION TO DISMISS

By: Scott E. Waxman and Rachel Cheasty Sanders

In Charles F. Dolan v. Altice USA, Inc. et al., Case No. 2018-0651-JRS (Del. Ch. June 27, 2019), the Delaware Court of Chancery address Defendants’ 12(b)(6) motion to dismiss filed in response to the Plaintiff’s complaint containing the following six causes of action: (i) breach of contract, (ii) breach of implied covenant of good faith and fair dealing, (iii) equitable fraud, (iv) promissory estoppel, (v) negligent misrepresentation, and (vi) declaratory relief. Defendants include telecommunications and media companies Altice USA, Inc. and Altice Europe N.V. (collectively, “Altice”). Additionally, Plaintiffs named as nominal defendants Cablevision Systems Corporation (“Cablevision”) and News 12 Networks, LLC (“News12”). Plaintiffs include members of the Dolan family, the controlling shareholders of Cablevision and News12 prior to the sale of those companies to Altice. The Court denied Defendants’ motion to dismiss on the Dolan family’s claims for breach of contract, promissory estoppel, and declaratory relief and granted the motion pertaining to the claims for breach of implied covenant of good faith and fair dealing, equitable fraud, and negligent misrepresentation. (1)

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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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Chancery Court Interprets the Computer Fraud and Abuse Act

By: Scott E. Waxman and Stephanie S. Liu

In AlixPartners, LLP v. Benichou, (C.A. No. 2018-0600-KSJM (Del. Ch. May 10, 2019)), the Court of Chancery decided, as a matter of first impression, that the federal Computer Fraud and Abuse Act (“CFAA”) narrowly provides a cause of action in Delaware for unauthorized computer access or unauthorized access to information; it does not cover incidents involving misuse of information that was obtained through authorized access.

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Court of Chancery Finds that the Implied Contractual Covenant of Good Faith and Fair Dealing Requires Delaware LLC to Exercise Discretion in Good Faith

By: Scott Waxman and Zack Sager

In Coca-Cola Beverages Florida Holdings, LLC v. Goins, the Court of Chancery granted in part and denied in part a motion to dismiss a claim for breach of the implied contractual covenant of good faith and fair dealing, and, in so doing, found that the discretion afforded to a Delaware limited liability company under an agreement was required to be exercised in good faith.  In addition, the Court analyzed a motion to dismiss claims for breach of contract, unjust enrichment, quantum meruit, and fraud.

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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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CONTRACTUAL AMBIGUITIES FAVOR THE NON-MOVING PARTY AT MOTION TO DISMISS STAGE

By: Scott Waxman and Rich Minice

In Coyne v. Fusion Healthworks, LLC Civil Action No. 2018-0011-MTZ (Del. Ch. April 30, 2019), the Delaware Court of Chancery denied a motion to dismiss for failure to state a claim (the “Motion”) filed by Fusion Healthworks, LLC (the “LLC”), James Sheehan with his personal medical practice, and Andrew Lietzke, with his personal medical practice (collectively, the “Defendants”). In denying the Motion, the court reiterated the standing principal that, when presented with a contractual ambiguity, dismissal at the motion to dismiss stage is only appropriate “if the defendants’ interpretation [of the ambiguity] is the only reasonable construction as a matter of law.” Coyne highlights the critical nature of competent drafting of LLC Agreements.

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