Topic: Contract Interpretation

Court Refuses to Reform Contract Failing to Find a Scrivener’s Error

By: Scott E. Waxman and Douglas A. Logan

In, In re 11 West Partners, LLC, the Delaware Court of Chancery  (the “Court”) refused to reform a contract with clear language, finding the argument of a scrivener’s error unconvincing. While the Court noted that it found all of the parties’ testimony believable, the Court did not find clear and convincing evidence that a mistake was made in drafting the contract in question.

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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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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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Delaware Chancery Court Rejects Fraud-Based and Uncapped Indemnification Claims of Great Hill Partners Against the Founders of Plimus

By:  Peter N. Flocos and Joanna Diakos

In a case arising out of the purchase by Great Hill Partners of Plimus (now known as BlueSnap, Inc.), the Delaware Court of Chancery, after a 10-day trial and extensive post-trial briefing and oral argument, recently rejected all of the fraud-based claims made by Great Hill against the two founders of Plimus, Messrs. Daniel Kleinberg and Tomer Herzog (the “founders”), who were also directors and major shareholders of Plimus at the time of the transaction. The Court’s decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906-VCG, 2018 WL 6311829 (Del. Ch. Dec. 3, 2018), is notable for its rejection of several claims Great Hill pressed for years after initiating the litigation in September 2012.

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Back to Basics: Delaware Court of Chancery Uses Contract Principles To Determine Dispute Involving Several Provisions of a LLC Agreement

By: Scott E. Waxman and former Associate Rashida Stevens

The Delaware Court of Chancery (“Court”) applied contract principles in interpreting a limited liability company (“LLC”) agreement to determine the impact of a written consent attempting to terminate the founder’s position as President and CEO in Matthew Godden and Tobias Bachteler (collectively, “Plaintiffs”) v. Harley V. Franco (“Franco”) C.A. No. 2018-0504-VCL (Del. Ch. August 21, 2018). The Court declined to grant fully the Plaintiffs’ motion for summary judgment because it was not clear whether or not the provisions of the LLC agreement governing the termination were satisfied.

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IN RULING ON MOTION TO DISMISS, CHANCERY COURT ALLOWS ADMISSION OF EXTRINSIC EVIDENCE TO RESOLVE AMBIGUITY IN PREFERRED STOCK CERTIFICATE OF DESIGNATIONS

By Michelle R. McCreery Repp and Stephanie A. Winkler

In Cedarview Opportunities Master Fund, L.P. v. Spanish Broadcasting System, Inc., CA No. 2017-0785-AGB (Del. Ch. Aug. 27, 2018), the Court of Chancery granted in part and denied in part the motion of Spanish Broadcasting System (“SBS” or the “Company”) to dismiss Plaintiffs’ claims, which were based on alleged breaches by the Company of its certificate of incorporation and certificate of designations for its preferred stock, under Court of Chancery Rule 12(b)(6) for failure to state a claim and Rule 12(b)(1) for lack of ripeness. In ruling on one aspect of the Company’s motion to dismiss, the Court notably held that the parties should be permitted to admit extrinsic evidence to resolve an ambiguity with respect to the terms governing preferred stock, and in doing so, expressly declined to apply two arguably conflicting principles historically used by Delaware courts in resolving such an ambiguity, the application of which would not necessitate or permit the admission of extrinsic evidence.

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CHANCERY COURT FINDS THAT LANGUAGE OF LIMITED PARTNERSHIP AGREEMENT GOVERNS WHICH CLAIMS SURVIVE SUMMARY JUDGMENT IN MASTER LIMITED PARTNERSHIP’S RELATED PARTY TRANSACTION

By Scott Waxman and Adrienne Wimberly

In Mesirov v. Enbridge Company, Inc., et al. C.A. No. 11314-VCS (Del. Ch. Aug.29, 2018), the Delaware Chancery Court dismissed five of eight counts alleged with respect to a transaction where Enbridge Energy Company (EEP) repurchased for $1 billion a two-thirds interest in Alberta Clipper Pipelines (AC interest), despite the fact that EEP had sold that same interest years prior for $800 million and the business had steadily declined since such sale.  The dismissals were based primarily upon the language and obligations included in EEP’s limited partnership agreement.

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Delaware Chancery Court Makes Groundbreaking “Material Adverse Effect” Finding Allowing Buyer to Terminate Merger Agreement

By: Peter Flocos, Lisa Stark, Rick Giovannelli and Mark Hammes

In a landmark decision, a Delaware court has, for what is widely believed to be the first time ever, found that a material adverse effect actually occurred in an acquisition transaction, giving the buyer a right to terminate the pending transaction.  In Akorn, Inc. v. Fresenius Kabi AG,[1] the Delaware Court of Chancery (the “Court”) held, following a trial, that the buyer properly terminated the parties’ merger agreement, due to such a material adverse effect between signing and closing, under the terms of the agreement and the pertinent Delaware case law.  Unlike prior decisions rejecting buyer material adverse effect claims,[2] the Court found that a pre-closing decline in the business of the target – Akorn – was not merely a “cyclical trend” and was likely to have a post-closing, durationally-significant effect that was “material when viewed from the longer-term perspective of a reasonable acquiror.”[3]  Although groundbreaking, the Akorn decision reflects that the Delaware courts will still approach the question of whether an MAE has occurred on a case-by-case basis and does not establish a particular “bright line” test.

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DISPUTE OVER PUT RIGHT ILLUSTRATES THE POTENTIAL PITFALLS OF AMBIGUOUS CONTRACT LANGUAGE

By: David Forney and Adam Heyd

In QC Holdings, Inc. v. Allconnect, Inc., C.A. No. 2017-0715-JTL (Del. Ch. August 28, 2018), plaintiff QC Holdings, Inc. (“QC Holdings”), a former stockholder of defendant Allconnect, Inc. (the “Company”), brought a claim against the Company to enforce its right (the “Put Right”) under a Put Agreement to sell its Company shares (the “Put Shares”) to the Company in exchange for $5 million (the “Put Price”).  The Company had refused to pay the Put Price on the basis that it was contractually restricted from doing so on the date required under the Put Agreement, and therefore the Put Right was extinguished and never survived a subsequent merger of the Company when those restrictions arguably lifted. The Delaware Court of Chancery  held that the Company’s arguments would have resulted in an improper forfeiture of QC Holdings’ contractual rights to the Put Price and that the exercise of the Put Right constituted a redemption of the Put Shares prior to the merger and a continuing contractual obligation by the Company to pay the Put Price.  The Court ordered the Company to pay the Put Price to QC Holdings out of an escrow set up at the merger closing for this purpose.

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Chancery Court Enforces LLC Agreement, Further Demonstrating that LLCs are Creatures of Contract

By Scott E. Waxman and Priya Chadha

In A&J Capital, Inc. v. Law Office of Krug, C.A. No. 2018-0240-JRS (July 18, 2018), A&J Capital, Inc. (“A&J”) sought a declaratory judgment that it was improperly removed from its position as manager of LA Metropolis Condo, I LLC (the “Company”) because it was not given notice or an opportunity to be heard prior to removal.  Vice Chancellor Slights denied A&J’s motion for summary judgment, holding that A&J’s removal was proper under both the Company’s governing documents and common law.

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Court of Chancery Dismisses Fraud Claim for Alleged Extra-Contractual Misrepresentations Based on Anti-Reliance Clause

By: Claire S. White and Rachel P. Worth

In ChyronHego Corporation, et al., v. Cliff Wight and CFX Holdings, Inc., C.A. No. 2017-0548-SG (Del. Ch. July 31, 2018), the Delaware Court of Chancery granted the defendants’ motion to dismiss the plaintiffs’ claim for extra-contractual fraud on the basis that the stock purchase agreement contained an effective anti-reliance clause that precluded such claim. The Court found that the anti-reliance clause rebutted the common law fraud element of reliance on any extra-contractual representations, as described further below.  At the same time, the Court dismissed the defendants’ motion to dismiss claims for fraud and breaches of express representations and warranties under the stock purchase agreement, finding that the plaintiffs had sufficiently pleaded the elements of these claims.

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