Topic: Exculpatory Charter Provisions

Specific Language of Operating Agreements Key in Chancery Court Dismissal of “Laundry List” of Claims Against LLC Managers

By: Scott Waxman and Rich Minice

In 77 Charters, Inc. v. Gould et al.., C.A. No. 2019-0127-JRS (Del. Ch. May 18, 2020), 77 Charters, Inc. (“Plaintiff”) brought suit against defendants Jonathan Gould (“Gould”), Stonemar MM Cookeville, LLC (“Stonemar MM”), Cookeville Corridor, LLC (the “Preferred Purchaser”) and Eightfold Cookeville Investor, LLC (the “New Investor” and together with Gould, Stonemar MM and the Preferred Purchaser, the “Named Defendants”) for a series of alleged “wrongful acts” in connection with the management and sale of a shopping mall (the “Property”), which also implicated Stonemar Cookeville Partners, LLC (“Cookeville Partners”) and Cookeville Retail Holdings, LLC (“Cookeville Retail”). In delivering its opinion, which centered on the nature of Delaware limited liability companies as creatures of contract, and thus, the controlling nature of the applicable operating agreements and contracts into which the parties had entered, the Delaware Court of Chancery (the “Court”) ruled that only Plaintiff’s claims which could be connected to an alleged wrongful amendment of the operating agreement of Cookeville Retail could survive Defendants’ Motion to Dismiss (the “Motion”).

Read More

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.

Read More

Delaware Court of Chancery Dismisses Derivative Claims in Reliance on Exculpatory Language in Limited Liability Company Agreement

By Scott E. Waxman and Frank J. Mazzucco

In MKE Holdings, Ltd. and David Bergevin v. Kevin Schwartz, et al. and Verdesian Life Sciences, LLC, C.A. No. 2018-0729-SG (Del. Ch. Sept. 26, 2019), the Delaware Court of Chancery relied on exculpatory language in a Limited Liability Company  Agreement to grant a defendant’s motion to dismiss a derivative claim alleging breach of duty by the company’s managers.

Read More

IN REJECTING DEFENDANTS’ MOTION FOR DISMISSAL, CHANCERY COURT FINDS THAT INDIVIDUAL FIDUCIARY MAY BE HELD LIABLE FOR TRADES THAT AN ASSOCIATED ENTITY OR FUND MAKES

By: Scott E. Waxman and Adrienne Wimberly

In the consolidated stockholder derivative litigation, In re Fitbit, Inc., CA No. 2017-0402-JRS (Del. Ch. Dec. 14, 2018), the Delaware Court of Chancery denied the Defendants’ motion to dismiss Plaintiffs’ insider trading and breach of fiduciary duty claims. The claims stem from alleged insider knowledge of members of Fitbit’s Board of Directors (the Board) and chief financial officer that Fitbit’s PurePulse™ technology was not as accurate as the company claimed. Plaintiffs alleged that members of the Board structured the company’s Initial Public Offering (IPO) and Secondary Offering (together, “the Offerings”) to benefit Fitbit insiders and voted to waive employee lock-up agreements, thereby allowing those insiders, to prematurely sell stock in the Secondary Offering. As a result of their sales, the alleged insiders sold about 6.2 million shares for over $115 million in the IPO and about 9.62 million shares for over $270 million in the Secondary Offering.

Read More

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.

Read More

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.

Read More

CHANCERY COURT DISMISSES POST-CLOSING DISCLOSURE CLAIMS AGAINST DIRECTORS OF MILLENNIAL MEDIA, INC.

By Merrick Hatcher and Andrew Lloyd

In An Nguyen v. Michael G. Barrett, et al., C.A. No. 11511-VCG (Del. Ch. Sept. 28, 2016), Vice Chancellor Glasscock granted defendants’ motion to dismiss claims brought by a stockholder against members of the board of directors of Millennial Media, Inc., a Delaware corporation (“Millennial”), finding that plaintiff’s allegations failed to state a non-exculpated claim of breach of fiduciary duty with respect to alleged disclosure violations in connection with Millennial Media’s acquisition by AOL, Inc. (“AOL”). Read More

Chancery Court Allows Breach of Fiduciary Duty Claims to Proceed Against Board of Directors of Windstream Holdings, Inc.

By:  Eric Freedman and Makda Goitom

In Doppelt v. Windstream Holdings, Inc., No. 10629-VCN (Del. Ch. Feb. 5, 2016), the Delaware Court of Chancery denied a motion to dismiss claims brought by plaintiff stockholders against a Windstream Holdings Inc.’s board of directors for breach of fiduciary duty, finding that the plaintiffs’ allegations were reasonably conceivable and that the director liability exculpation provision in the corporation’s certificate of incorporation would not clearly preclude liability on the part of the board of directors. The Chancery Court granted defendants’ motion to dismiss as to plaintiffs’ claim for rescission and claim against the corporation for breach of fiduciary duty.

Read More

Chancery Court Holds That a Proper Purpose with a Credible Basis to Investigate is Required to Grant a Section 220 Action in Pursuit of a Future Derivative Litigation

By Meghan Wotherspoon and Calvin Kennedy

The Chancery Court held that a stockholder must show that there is a proper purpose with a credible basis in order to succeed in a Section 220 action to inspect the books and records of a corporation.

In Southeastern Pennsylvania Transportation Authority v. AbbVie Inc. and James Rizzolo v. AbbVie Inc., the plaintiffs, Southeastern Pennsylvania Transportation Authority (“SEPTA”) and James Rizzolo (“Rizzolo”), as shareholders of defendant AbbVie Inc. (“AbbVie”), made individual written demands on AbbVie for inspection of certain books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). The plaintiffs sought to obtain records to demonstrate that AbbVie’s directors breached their fiduciary duties. AbbVie rejected the demands for failure to state a proper purpose and each plaintiff then filed a Section 220 Complaint. As the actions stemmed from the same event, the Court utilized a single Memorandum Opinion to deliver its decisions.

Read More

I​​​​n re Zhongpin Inc. Stockholders Litig., C.A. No. 7393-VCN (November 26, 2014) (V.C. Noble)

By Elise Gabriel and David Bernstein

In In re Zhongpin, shareholders of Zhongpin Inc. (“Zhongpin” or the “Company”) brought a class action complaint for breach of fiduciary duty against Xianfu Zhu (“Zhu”), Zhongpin’s CEO and chairman of the board, and Zhongpin’s board of directors (the “Board”) in relation to a merger through which Zhu – who owned 17.3% of Zhongpin’s common stock – would acquire the remainder of the Company’s outstanding shares for $13.50 per share in cash. The transaction was approved by an independent committee of Zhongpin’s Board and the Merger Agreement required approval by a majority of the unrelated stockholders, although this requirement had not appeared in Zhu’s original proposal to Zhongpin’s Board.

On the defendants’ motion to dismiss, the Court held that the plaintiffs had stated a claim for breach of fiduciary duty against Zhu and the individual defendants. The Court stated that plaintiffs had adequately alleged that Zhu was a controlling stockholder even though he owned only 17.3% of Zhongpin’s stock by pointing to a statement in Zhongpin’s Form 10-K that referred to Zhu as “our controlling stockholder” and that said that as a result of the stock ownership “our controlling stockholder” was able to exercise significant influence over a variety of matters, including election of directors, the amount of dividends, if any, new securities issuances and mergers and acquisitions. The Court further held that the transaction was subject to review under the entire fairness standard rather than the business judgment rule because, even though the Merger Agreement required approval by a majority of the unrelated stockholders (and that approval was obtained), Zhu’s original proposal had not included a majority of the minority requirement at the outset. Finally, the Court was unwilling to dismiss the claims against the directors even though Zhongpin’s certificate of incorporation contained a provision under DGCL Section 102(b)(7) protecting directors against monetary liability, because, in a case subject to the entire fairness standard, a claim against directors cannot be dismissed until there is a determination as to entire fairness.

In re Zhongpin

In re Cornerstone Therapeutics Inc. Stockholder Litigation, Consolidated C.A. No. 8922-VCG (Sept. 26, 2014) (Glasscock, V.C.)

By Annette Becker and Mark Hammes

In In Re Cornerstone Therapeutics Inc. S’holder Litig., 2014 WL 4418169 (Del. Ch. Sept. 10, 2014), Defendant directors of Cornerstone Therapeutics Inc. (“Cornerstone”) brought a motion to dismiss based on an exculpatory provision in Cornerstone’s certificate of incorporation pursuant to Section 102(b)(7) of the Delaware General Corporation Laws in the context of a controlling stockholder freeze-out merger. In the memorandum opinion, the Court denied the motion to dismiss, finding that, since entire fairness applied to the transaction at the outset, the director defendants must await a determination of entire fairness at trial before the Court could consider whether they were exculpated by the provision. The director defendants moved for interlocutory appeal under Delaware Supreme Court Rule 42 challenging the denial of the Court’s decision regarding the motion to dismiss.

This decision considers the motion for interlocutory appeal. The Court held that the defendant directors are entitled to an interlocutory appeal of the order denying the motion to dismiss. An interlocutory appeal may be certified by the Court only when the appealed decision (1) determines a substantial issue, (2) establishes a legal right, and (3) meets one or more criteria further enumerated in Rule 42, including that the decision falls under any of the criteria for certification of questions of law set forth in Rule 41. Here, the denial of the motion, if reversed, would result in dismissal of the defendant directors from the suit, so it is a substantial issue. Further, it establishes a legal right in that it necessitates the defendant directors be held as parties to the litigation. Finally, it satisfies the further “conflicting decisions” qualification set forth in Rule 41(b)(ii) because decisions of the Courts of Chancery have been conflicting as to whether, in a transaction subject to entire fairness review at the outset, in which there is a claim for “breach of duty on the part of facially disinterested directors who negotiated …. or otherwise facilitated the transaction needs to be specifically pled” and whether an exculpatory provision must be ignored at the motion to dismiss stage to await consideration of entire fairness at trial. As a result, the Court granted the defendant directors’ application for certification of interlocutory appeal.

InReCornerstorneTherapeuticsStockholder

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.”

Read More

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