Topic: Conflict of Interest

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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CHANCERY COURT GRANTS CERTAIN BOOKS AND RECORDS DEMANDS BY MINORITY STOCKHOLDER RELATED TO A MERGER AND VALUATION OF UNDERLYING ASSETS

By: Jessica Pearlman and Adam Heyd

In Mudrick Capital Management, L.P. v. Globalstar, Inc., C.A. No. 218-0351-TMR (Del. Ch. July 30, 2018), plaintiff Mudrick Capital Management L.P. (“Mudrick Capital”), a minority stockholder of defendant Globalstar, Inc. (the “Company”), brought a demand under Section 220 of the Delaware General Corporate Law (“Section 220”) to inspect certain communications and documents relating to the Company’s proposed merger with Thermo Acquisitions, Inc. (“Thermo”).  The Delaware Court of Chancery granted Mudrick Capital’s demand for certain emails, communications and valuation materials relating to the merger, and denied Mudrick Capital’s demand for certain internal draft materials.

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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 Denies Motion to Dismiss Claim Alleging that General Partner Breached Contractual Duty of Good Faith

By: Scott Waxman and Zack Sager

In Morris vs. Spectra Energy Partners (DE) GP, LP, the Court of Chancery of the State of Delaware found that a limited partner adequately pled that the general partner of a master limited partnership breached its contractual duty to act in good faith in connection with a conflicted transaction between the master limited partnership and the indirect parent of the general partner.  The Court also dismissed claims for breach of the implied contractual covenant of good faith and fair dealing and tortious interference with a partnership agreement.

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Delaware Court Of Chancery Ruling Provides a Cautionary Tale for Investment Fund Directors Seeking to Monetize Their Investment

Delaware Court Of Chancery Ruling Provides a Cautionary Tale for Investment Fund Directors Seeking to Monetize Their Investment

By Jill B. Louis and Ernest L. Simons

In The Frederick Hsu Living Trust v. ODN Holding Corp., et al., one of the founders of ODN Holding Corporation (the “Company”) filed suit against the controlling stockholder, the board and certain officers of the Company for cash redemptions of preferred stock allegedly made in violation of statutory and common law instead of using the Company’s cash to maximize the value of the Company for the long term benefit of all stockholders. The Delaware Court of Chancery granted defendants’ motions to dismiss claims of waste and unlawful redemption. However, the Court of Chancery denied defendants’ motions to dismiss claims of breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, and unjust enrichment finding that the allegations of the Plaintiff supported a reasonable inference that the entire fairness standard would apply and that individual defendants may have acted in bad faith.

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Court of Chancery Holds That A Credible Basis to Infer Wrongdoing by One Director is Sufficient to Satisfy Burden of Proof Under Section 220

By: Remsen Kinne and Tami Mack

In Rodgers v. Cypress Semiconductor Corporation, C.A. No. 2017-0070-AGB (Del. Ch. April 17, 2017), the Court of Chancery held that shareholder plaintiff T.J. Rodgers (“Rodgers”) had established several proper purposes for his demand to inspect certain books and records of Cypress Semiconductor Corporation (the “Company”), along with a credible basis to infer wrongdoing by at least one of the Company’s directors.  The Court granted Rodgers’ Section 220 action and directed the parties to meet and submit an order for production of all responsive documents.

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Conflict Transaction Cleansed By Master Limited Partnership’s Special Committee

By Scott E. Waxman and Annamarie C. Larson

In Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., et al, (C.A. No. 11603-VCG), Vice Chancellor Glasscock granted the defendant’s motion to dismiss claims relating to the purchase of pipeline assets from the general partner’s parent.  The Court of Chancery held that the transaction was “fair and reasonable” to the master limited partnership because it was approved by a special committee and that the general partner did not breach the implied covenant of good faith and fair dealing.  In this case, the Court of Chancery reaffirmed parties’ abilities to contract freely when forming alternative entities such as a master limited partnership and confirmed that judicial review of such contractual terms is very limited.

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Delaware Supreme Court Affirms Financial Advisor Liability for Aiding and Abetting

By Whitney Smith and Elise Gabriel

The Delaware Supreme Court affirmed RBC Capital Markets, LLC’s (“RBC”) liability for aiding and abetting a board’s fiduciary breaches based on RBC’s undisclosed conflicts of interest and its deliberately misleading the board during the company’s sales process.  The Court also upheld the Chancery Court’s finding that RBC bore 83% responsibility for the shareholders’ damages, resulting in a $75 million award against RBC, plus pre- and post-judgment interest.

In RBC Capital Markets, LLC, the Delaware Supreme Court affirmed the Chancery Court’s holding that RBC was liable for aiding and abetting breaches of fiduciary duty by the board of Rural/Metro Corporation (“Rural”) in connection with the sale of Rural to private equity firm Warburg Pincus LLC (“Warburg”).  The Rural board’s underlying breaches of fiduciary duties were its failure to be actively and reasonably informed when overseeing the sales process and to be adequately informed about Rural’s value, and also its breach of the duty of disclosure for including RBC’s flawed valuation analysis as well as false and misleading information about RBC’s conflicts of interest in the company’s proxy statement.  RBC, in turn, knowingly induced the breaches by exploiting its own conflicted interests to the detriment of Rural and by creating an “information vacuum” for the Rural board in order to push the sale forward.

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Chancery Court Holds that Company Does Not Have to Pay Damages for Refusing to Appoint Director Represented by Counsel That is Also Representing Opposing Party in Adverse Litigation

By Annette Becker and Priya Chadha

In Partners Healthcare Solutions Holdings, L.P. and GTCR Fund IX/A, L.P. v. Universal American Corp., Partners Healthcare Solutions Holdings, L.P. (“Partners”) sued Universal American Corporation (“UAM”), seeking damages and specific performance following a dispute as to Partners’ appointment of a director to UAM’s board.  During the litigation, the parties reached a settlement as to the specific performance aspect of the litigation, leaving only the issues of damages.  UAM filed a motion for summary judgment, which Vice Chancellor Glasscock granted.

In March 2012, Partners entered into a merger agreement with UAM, pursuant to which UAM purchased a Partners subsidiary, and Partners became one of UAM’s largest stockholders.  Partners was also given a seat for its designee on UAM’s board pursuant to a letter agreement (“Board Seat Agreement”).  That agreement provided that the designee must be independent under stock exchange rules, and granted Partners the right to name a replacement in the event that the initial designee resigned.  Partners named David Katz, a former board member of Partners, to the UAM board.

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Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties.  The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

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In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL (June 12, 2014)

By Eric Feldman and Porter Sesnon

In In re: El Paso Pipeline Partners L.P. Derivative Litigation, the Delaware Court of Chancery granted summary judgment in favor of the defendants on claims for breach of contract and breach of the implied contractual covenant of good faith and fair dealing in connection with a conflicted transaction.

In March 2010, El Paso Pipeline Partners, L.P., a Delaware limited partnership that operates as a publicly traded master limited partnership (the “MLP”), purchased a 51% interest in two entities that owned certain liquid natural gas (“LNG”) assets (the “Drop-down”) from its parent corporation that “sponsored” the MLP, El Paso Corporation (the “Parent”). Parent also indirectly owned the general partner of the MLP, El Paso Pipeline GP, L.L.C. (the “General Partner”), giving it control over and an economic interest in the MLP. As a result, the proposed Drop-down created a conflict of interest for the General Partner.

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Chen v. Howard-Anderson, C.A. No. 5878-VCL, decided on April 8, 2014

By Annette Becker and Jason Jones

In Chen v. Howard-Anderson, Vice Chancellor Laster considered a motion for summary judgment brought by certain officers and the Board of Directors of Occam Networks, Inc., (“Occam”), a public Delaware corporation seeking a determination by the Court that they did not breach their fiduciary duties. The plaintiffs (former stockholders of Occam) claim that the defendants breached their fiduciary duties “by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness (the “Sale Process Claim”) and (ii) issuing a proxy statement for Occam’s stockholder vote on the Merger that contained materially misleading disclosures and material omissions” (the “Disclosure Claim”).

In 2009, Calix, Inc. and Occam (competitors in the broadband market) began discussing a potential business combination. In response, the Board of Occam determined that formal discussions with Calix were not appropriate at that time and retained Jeffries & Company for advice on strategic alternatives. By June 2010, Occam proposed to acquire Keymile International GmbH (“Keymile”) for $80 million, and Calix submitted a term sheet proposing to purchase Occam for $156 million (in a mix of cash and stock). Another suitor, Adtran, presented a third option by offering a slightly higher cash offer price to acquire Occam as compared with the Calix offer. Occam had a cool reaction to Adtran. Occam prepared April and June financial projections for 2010, 2011, and 2012 which were more positive than the estimates of the two public analysts who followed Occam. The projections were not shared with Adtran, and were materially higher than Adtran’s internal projections for Occam, and later projections that Adtran would create. Occam did not provide Calix with the June financial projections. On June 23, 2010 Calix submitted a revised term sheet increasing its offer to purchase Occam to $171.1 million (to be paid in a mix of cash and stock). Adtran confirmed its interest in acquiring Occam and on June 24, 2010 proposed an all cash offer at a premium of approximately 11% over Calix’s bid. On June 24, 2010 the Board met to consider the various alternatives – the cash and stock merger with Calix, the cash sale to Adtran, or remaining independent and acquiring Keymile. It was not clear that the Board was aware that Adtran’s bid was 11% higher than Calix’s offer. The Board directed Jeffries to conduct a 24 hour “market check.”

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