Topic: Direct Claim


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.

Before bringing a Section 220 claim against Defendant, Plaintiff filed a direct plenary action in the Court against Defendant and certain former directors, officers, and stockholders of Strategic Growth Bancorp, Inc. (“SG Bancorp”), which had merged into Defendant after Plaintiff became a shareholder in SG Bancorp”) in 2013. In 2014, Plaintiff invested an additional $25 million dollars in SG Bancorp securities to fund SG Bancorp’s national mortgage platform and real estate investment trust operations. Within months after the additional investment, SG Bancorp announced its intention to spin-off the mortgage unit through an exchange offer transaction in which Plaintiff declined to participate. In May 2015, SG Bancorp released financial statements, which Plaintiff alleged, contained information that was previously concealed from Plaintiff. The plenary action complaint alleged that SG Bancorp’s investment solicitation disclosures contained material misrepresentations or omissions regarding SG Bancorp’s mortgage business, asserted claims of fiduciary duty breach, fraud, and related causes of action, and sought damages, rescission, and costs and attorney’s fees.

After filing the plenary action, Plaintiff served the Defendant with a demand to inspect company books and records, pursuant to Section 220. The Plaintiff’s stated purpose was to investigate the facts behind SG Bancorp’s disclosures, corporate management in association with the mortgage unit spin-off, and alleged improprieties regarding the exchange offer transaction. The Defendant denied the demand for inspection. In response, Plaintiff commenced an action to compel inspection. The Defendant responded, and moved to dismiss.

The Court applied Court of Chancery Rule 12(b)(6) (“Rule 12(b)(6)”) to the Defendant’s motion to dismiss. Under Rule 12(b)(6) the Court will grant a motion to dismiss only if “the plaintiff could not recover under any reasonably conceivable set of circumstances susceptible of proof.” Cent. Mortg. Co. v. Morgan Stanley Mortg. Cap. Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011). 

In order to inspect corporate books and records pursuant to Section 220, a stockholder must state a proper purpose for inspection. Plaintiff admitted that it designed its inspection request to “give Plaintiff the information necessary to investigate the claims” asserted in the plenary action. The Defendant claimed that investigating claims asserted in a pending action is not a proper purpose.

In support of its Section 220 claim, Plaintiff cited two cases in which the Court held that special circumstances supported ordering enforcement of a stockholder’s Section 220 rights notwithstanding a pending plenary action. First, Plaintiff argued that Khanna v. Covad Communications Group, Inc., 2004 WL 187274 (Del. Ch. Jan. 23, 2004) should be interpreted broadly to permit a stockholder claimant such as Plaintiff to pursue its plenary claims while also seeking to investigate those claims under Section 220 where the stockholder faces statute of limitations or laches pressures. Rejecting this interpretation, the Court instead held that Khanna is limited to circumstances in which timing pressures are caused by the defendant, or at least, not by the plaintiff, and found that Plaintiff alleged no facts suggesting that Defendant was at fault for the timing of the Section 220 claim. 

Plaintiff further asserted that King v. Verifone, 12 A.3d 1140 (Del. Supr. 2011) should be interpreted broadly to permit a claimant such as Plaintiff that has filed a plenary action to pursue a Section 220 inspection where the claimant has the opportunity to amend the plenary complaint. The Court ruled that King should be construed narrowly, however, and held that Plaintiff’s right to amend the complaint, standing alone, does not create a proper purpose for a Section 220 inspection while a plenary action is pending, citing in support of this holding decisions in Central Laborers Pension Fund v. News Corporation, 2011 WL 6224538 (Del. Ch. Nov. 30, 2011) and Amalgamated Bank v. NetApp, Inc., 2012 WL 379908 (Del. Ch. Feb. 6, 2012). The Court held that these precedent cases support enforcing Section 220 rights where a court has deemed a pending plenary action complaint insufficient and permitted a stockholder to re-plead, or amend its complaint, but are not applicable to Plaintiff’s Section 220 claim since no judicial action had occurred in Plaintiff’s plenary suit.

In addition, the Court noted that Khanna and King also did not apply to Plaintiff’s Section 220 claim because Khanna and King both involved plenary actions brought as derivative claims, whereas Plaintiff’s plenary action was a direct claim. The Court indicated that derivative and representative claims may be afforded greater leniency since they seek to further the interests of all stockholders and there are greater incentives for preserving their claims. In a direct claim plenary suit such as Plaintiff’s, the Court reasoned, none of the policy considerations affording leniency are implicated.

Because the Court found that no special circumstances or policy considerations were alleged or existed as would be required to support enforcement of Plaintiff’s Section 220 claim, the Court granted FirstSun’s motion to dismiss.


 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.

Read More


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.

Read More

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.

Read More


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.

Read More

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.

Read More


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.

Read More

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.

Read More

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.

Read More

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.

Read More

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.

Read More

Chancery Court Dismisses Derivative Breach of Fiduciary Duty Claims as Improperly Pled and the Requests for Declaratory Judgment as Not Ripe

By: Annette Becker and Makda Goitom

In Chester County Employees’ Retirement Fund v. New Residential Investment Corp., No. 11058-VCMR (Del. Ch. Oct. 7, 2016), the Court of Chancery granted the motion to dismiss brought by defendants (the members of the board of directors of New Residential Corp. (“New Residential”), its manager, the manager’s owner, and its controlling stockholder: (i) for an improperly pled derivative claim (with leave to replead) brought against the defendants for breach of fiduciary duty by the plaintiff, a stockholder of New Residential, (ii) for plaintiff’s failure to sufficiently plead futility in demanding that the board of New Residential bring the derivative suit, and (iii) as to declaratory judgments sought by plaintiff with respect to the Defendants’ liability under certain documents as not being ripe (with leave to replead).

Read More

Copyright © 2019, K&L Gates LLP. All Rights Reserved.