Topic: Direct Claim

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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CHANCERY COURT GRANTS MOTION TO DISMISS SECTION 220 DEMAND MADE DURING A PENDING PLENARY CLAIM DUE TO LACK OF SPECIAL CIRCUMSTANCES

By: Remsen Kinne and Stephanie Winkler

In CHC Investments, LLC v. FirstSun Capital Bancorp, C.A. No. 2018-0610-KSLM (Del. Ch. January 24, 2019), the Court of Chancery (the “Court”), in a motion to dismiss, found that CHC Investments, LLC’s (“CHC” and “Plaintiff”) pending plenary claims rendered CHC’s purpose for demanding inspection corporate books and records pursuant to Section 220 of the Delaware General Corporate Law (“Section 220”) improper, and granted FirstSun Capital Bancorp’s (“FirstSun” and “Defendant”) motion to dismiss.

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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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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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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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CONTROLLER BREACHES FIDUCIARY DUTIES BY COERCING ONEROUS FINANCING TERMS

By: Kent Carlson and Rich Minice

In Basho Technologies, Inc. v. Georgetown Basho Investors, LLC, C.A. No. 11802-VCL (Del. Ch. July 6, 2018), the Delaware Court of Chancery reaffirmed the principle that a stockholder with actual control of a corporation violates its fiduciary duties by advancing its own interests to the detriment of the corporation.  Applying the entire fairness standard in its decision following trial, the court held that Georgetown Basho Investors, LLC (“Georgetown”), the controlling stockholder of Basho Technologies, Inc. (“Basho”), owed and breached fiduciary duties to Basho as a stockholder with actual-but not majority-control. The court ultimately awarded plaintiffs Earl Gallaher (“Gallaher”) and various investment funds under his control (the “Plaintiff(s)”) damages in the aggregate amount of $20,268,878.

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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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CONTROLLING STOCKHOLDER CANNOT ADVANCE ITS OWN SELF-INTEREST AT EXPENSE OF MINORITY STOCKHOLDERS

By: C. J. Voss and Rich Minice

In Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders.  In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.

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Court of Chancery Holds That Structurally Coercive Stockholder Vote Does Not Ratify Fiduciary Actions Related To Shares Issuance and Proxy Grant To Stockholder

By: Remsen Kinne and Tami Mack

In Sciabacucchi v. Liberty Broadband Corporation, C.A. No. 11418-VCG (Del. Ch. May 31, 2017), the Court of Chancery ruled on a motion to dismiss by defendants Liberty Broadband Corporation (“Liberty”), a stockholder of Charter Communications, Inc. (“Charter”) and officers and directors of Charter.  The Court held that facts alleged by plaintiff, a Charter stockholder, supported the inference that a vote by Charter stockholders approving a shares issuance to and voting proxy agreement with Liberty was structurally coercive.  The Court determined that since the vote was coercive, it did not ratify actions by Liberty and Charter’s directors and officers claimed by plaintiff to have breached fiduciary duties of loyalty.  As a result, the Court held, defendants were not entitled to dismissal of plaintiff’s claims solely on the basis that stockholder vote ratification operated to “cleanse” fiduciary duties breaches.

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Chancery Court Permits Limited Partners’ Claims Against General Partners to Proceed Despite Ongoing Bankruptcy of the Partnership

By: Scott Waxman and David Noll

On a motion to “’confirm the trial schedule,’” Vice Chancellor Glasscock determined that actions brought by the limited partners of a partnership based upon the general partner’s alleged fraud, self interest and breach of the partnership agreement were direct claims and therefore not subject to a stay pursuant to the partnership’s bankruptcy proceeding. Sehoy Energy LP et al. v. Haven Real Estate Group, LLC et al., C.A. No. 12387-VCG (Del. Ch. April 17, 2017), addressed a situation in which  the general partner of a limited partnership (and the person controlling the general partner) used funds of the limited partnership to make investments into the business of a personal friend  which ultimately resulted in the bankruptcy of the partnership.

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Court of Chancery Explains Demand Futility Pleading Requirements in the Context of Delaware LLCs

By: Scott Waxman and Zack Sager

In LVI Group Investments, LLC v. NCM Group Holdings, LLC, the Court of Chancery of the State of Delaware looked to Delaware corporate law for demand futility pleading requirements in dismissing a derivative claim for breach of fiduciary duties against managers of a Delaware limited liability company (an “LLC”).  In addition, the Court of Chancery analyzed the requirements for a member of an LLC sufficiently to plead a direct claim against managers of the LLC and analyzed the requirements for pleading a claim of fraud.

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Chancery Court Holds That Stockholder Vote on Merger Was Neither Fully-Informed nor Uncoerced

By: Lisa R. Stark and Taylor B. Bartholomew

In In re Saba Software, Inc. Stockholder Litigation, C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017, revised Apr. 11, 2017), the Delaware Court of Chancery held that the board of Saba Software, Inc. could not invoke the business judgment rule under the Corwin doctrine in response to a fiduciary challenge arising from Saba’s acquisition by Vector Capital Management, L.P.  According to the Court, plaintiff pled facts which supported a reasonable inference that the stockholder vote approving the acquisition was neither fully-informed nor uncoerced.  The Court also denied defendants’ motion to dismiss plaintiff’s claims that the Saba board breached its duty of loyalty and engaged in acts of bad faith by rushing the sales process, refusing to consider alternatives to the merger and granting itself substantial equity awards.

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