Topic: Duty of Loyalty

Plaintiff Entitled to Inspect Additional Documents Where Proper Purpose Demonstrated as to Mismanagement and Wrongdoing

By: Joanna Diakos Kordalis and Pouya Ahmadi

In Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020), the Delaware Court of Chancery (the “Court”) granted, in part, stockholder Paraflon Investments, Ltd.’s (“Paraflon”) request, after a trial on a paper record, for corporate books and records pursuant to Section 220 of the DGCL where proper purpose was shown with respect to the desire to investigate mismanagement and wrongdoing.

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Chancery Orders Accounting for Payments to Former Director and CEO Affiliate; Rejects Most Breach of Fiduciary Duty Claims

By: Remsen Kinne and Pouya Ahmadi

In Avande, Inc. v. Shawn Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019), the Court of Chancery rejected most of the claims brought by Avande, Inc. (“Avande”) against Avande’s former director and chief executive officer (“CEO”) Shawn Evans (“Evans”) other than a claim for breach of fiduciary duty for engaging in self-interested transactions, authorizing improper expenditures and failure to maintain appropriate documentation of expenditures. The Court awarded Avande only $21,817.70 of the more than $5.3 million in damages sought to recover from Evans. The Court held that DC Risk Solutions, Inc. (“DC Risk”), an affiliate of Evans that provided Avande insurance broker services and bookkeeping services, would be liable as an aider and abettor for any damages that are assessed as a result of the accounting ordered by the Court as to payments made to DC Risk.

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Chancery Court Calls Plaintiffs’ Bet by Granting in Part and Denying in Part Partial Motion to Dismiss Breach of Fiduciary Duty Claims in Case Alleging Failure to Disclose Material Facts and Structuring a Transaction for Defendants’ Personal Financial Benefit

By Joanna Diakos and Alidad Vakili

The Delaware Court of Chancery granted in part and denied in part Plaintiff’s partial motion to dismiss, finding that the standard for breach of fiduciary duty was not met as against certain directors and officers of the Company based on allegations they failed to disclose facts relating to a tender offer, but was met as against the directors and one of the officers on allegations that they approved a tender offer where they were expected to receive a personal financial benefit.

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Books and Records: Court Explains a Failure to Clear the Sometimes Deceptively Challenging Credible Basis Hurdle

By: David Forney and Rich Minice

In Southeastern Pennsylvania Transportation Authority and Boston Retirement System v. Facebook, Inc., C.A. No. 2019-0228-JRS (Del. Ch. Oct. 29, 2019), the Delaware Court of Chancery reaffirmed its requirement that stockholders seeking records to investigate possible wrongdoing must have some credible basis from which the court can infer waste or mismanagement occurred. Here, following trial, the court granted judgment in favor of Facebook because the Plaintiffs (defined below) failed to make a credible showing, through documents, logic, testimony or otherwise, that there are or may be legitimate issues of wrongdoing which would warrant further investigation of the matter through grant of the books and records request.

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CHANCERY COURT APPLIES AND AFFIRMS DELAWARE’S CORPORATE OPPORTUNITY DOCTRINE

By Annette Becker and Frank Mazzucco

In Personal Touch Holding Corp. v. Felix Glaubach, C.A. No. 11199-CB (Del. Ch. February 25, 2019), the Delaware Court of Chancery (the “Court”) found that, by personally pursuing and closing a real estate acquisition in which his employer was also interested, a corporate officer and director had, under Delaware’s corporate opportunity doctrine, breached his fiduciary duty of loyalty. 

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Chancery Court Denies Dismissal of Breach of Fiduciary Duty Claims after Concluding that Stockholder Vote was Not Informed

By: David Forney and Rachel P. Worth

In In re Tangoe, Inc. Stockholders Litigation, C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018), the Delaware Court of Chancery denied the director defendants’ motion to dismiss the stockholder plaintiffs’ claim for breach of fiduciary duties on the basis that the stockholder vote approving the transaction was not informed and the defendants were therefore not entitled to business judgment rule deference at the pleading stage. The Court also found that the plaintiffs had adequately pled a breach of the fiduciary duty of loyalty against each of the director defendants, which would not be covered by the exculpatory clause in the company’s certificate of incorporation.

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Stockholder’s Suit for Directors’ Fiduciary Breach Related to Acquisitions and Stock Repurchases Dismissed With Prejudice for Failure to Plead Demand Futility and to State Viable Claims, Directors Found to be Disinterested Regardless of 10-Q Filing Stating Action Without Merit

By: Remsen Kinne and Adrienne Wimberly

In Tilden v. Cunningham et. al., C.A. No. 2017-0837-JRS (Del. Ch. Oct. 26, 2018), the Delaware Court of Chancery granted the motion of directors of Delaware corporation Blucora, Inc. (“Blucora”) named as Defendants to dismiss a derivative action and dismissed Plaintiff’s complaint with prejudice, holding that the Plaintiff, a Blucora stockholder, failed to plead demand futility and failed to state viable claims under Rule 12(b)(6). This derivative action stems from three transactions Blucora entered into between 2013 and 2015: 1) an acquisition of Monoprice, Inc. (“Monoprice”), 2) the acquisition of HD Vest (“HD Vest”), and 3) several stock repurchases.

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Breaking-up Is Hard To Do: CSH Theatres, LLC v. Nederlander of San Francisco Associates

By:  Christopher J. Voss and Jeremiah W. Schwarz

CSH Theatres, LLC v. Nederlander of San Francisco Associates, CA No. 9830-VCMR (Del. Ch. July 31, 2018) concerns the dramatic break-up of a prominent theater company partnership in San Francisco involving claims and counterclaims alleging violations of contractual and fiduciary duties and charges of self-dealing and bad faith conduct.  The Delaware Court of Chancery found that no enforceable contract to renew the lease to San Francisco’s Curran Theater existed but the Court did grant the theater operator a declaratory judgment that the principals of the owner had breached their common law fiduciary duties while they were also serving as managers of the theater operator.

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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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A Conflicted Controller Transaction Survives a Motion to Dismiss

By: Lisa R. Stark and Samira F. Torshizi

In In re Hansen Medical, Inc. Stockholders Litigation, C.A. No. 12316-VCMR (Del. Ch. June 18, 2018), the Delaware Court of Chancery found that plaintiffs had stated a reasonably conceivable claim that the acquisition of Hansen Medical, Inc. (“Hansen”) by Auris Surgical Robotics, Inc. (“Auris”) should be reviewed under the entire fairness standard of review because the transaction involved a controlling stockholder group which extracted benefits from the transaction not shared with the minority. The Court denied motions to dismiss filed by the alleged control group and Hansen’s directors and officers.

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Chancery Court Awards Damages for Breach of Fiduciary Duty Stemming from Director’s Refusal to Sign Self-Help Documents

By: C.J. Voss and Rich Minice

In CertiSign Holding, Inc. v. Sergio Kulikovsky, C.A. No. 12055-VCS, the Court found that Sergio Kulikovsky (“Kulikovsky”), a former director of CertiSign Holding, Inc. (“CertiSign”), had breached his fiduciary duty of loyalty to CertiSign by actively sabotaging corporate self-help efforts in a bid to advance his own personal objectives. The Court also denied Kulikovsky’s counterclaims for judicial validation of certain stock option grants and the assumption by CertiSign of a debt owed to Kulikovsky, and awarded Certisign damages in the amount of $390,455.20 for the “legal fees and expenses incurred by CertiSign in connection with its efforts to remedy its defective capitalization and board issues.”

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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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