Topic: Fiduciary Duty

CEO’s Role in Preparation of a Proxy Statement for a Merger Exposes CEO to Duty of Care Claims

By Lisa Stark and Jonathan Shallow 

In In Re Baker Hughes Inc. Merger Litig., C.A. No. 2019-0638-AGB (Del. Ch. Oct. 27, 2020), the Delaware Court of Chancery declined to dismiss claims that the CEO of Baker Hughes Incorporated (“Baker Hughes”) breached his fiduciary duty of care by failing to include unaudited financial statements of the oil and gas segment of the General Electric Company (“GE O&G”) in a proxy statement soliciting the stockholder vote on Baker Hughes merger with GE O&G.  As a result, the Court found that (1) the stockholder vote was uninformed, and (2) enhanced scrutiny under Revlon, Inc. v. McAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986). (“Revlon”), not the business judgment review under Corwin v. KKR Financial Holdings LLC (125 A.3d 304, 306 (Del. 2015)), applied to its decision whether plaintiffs had adequately pled a predicate breach of fiduciary duty by the Baker Hughes board for purposes of an aiding and abetting claim asserted against General Electric Company (“GE”).  At the time of its decision, none of the Baker Hughes directors were named as defendants in the action except for Baker Hughes’ CEO who was named as a defendant in the action solely in his capacity as an officer of Baker Hughes.

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MANAGEMENT CANNOT UNILATERALLY PRECLUDE DIRECTORS FROM OBTAINING PRIVILEGED COMMUNICATIONS

By: Rich Minice and Annette Becker

In In re WeWork Litigation, C.A. No. 2020-0258-AGB (Del. Ch. Aug. 21, 2020), a special committee of the board of directors of The We Company (the “Company”) sought to obtain certain privileged communication among management of the Company and its counsel in discovery arising from breach of contract and breach of fiduciary duty case. The Court held that management of a Delaware corporation (“Management”) does not have the authority to unilaterally preclude a director of the corporation from obtaining the corporation’s privileged information, an issue of first impression in the State of Delaware.

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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”).

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Master in Chancery Dismissive of Fiduciary Seeking Dismissal, Applies Familiar 12(b)(6) Standard

By: Rich Minice and Annette Becker

In Hill et al. v. Myers et al., C.A. No. 2018-0160 (Del. Ch. June 15, 2020), Master in Chancery Selena Molina (“Master”) issued a final report, recommending the Court of Chancery deny defendant’s (decedent’s close friend and confident, and attorney-in-fact during his final years)  motion to dismiss claims of undue influence and breach of fiduciary duty.  The Master determined that the motion to dismiss  brought by family members of the late G. Robert Dickerson, should be denied because the family members provided sufficient factual allegations to support their claims and establish standing. 

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Court of Chancery Analyzes LLC Valuation Reports in Connection With Breach of Fiduciary Duty

By: Scott Waxman and Zack Sager

In Zachman v. Real Time Cloud Services, LLC, the Delaware Court of Chancery analyzed competing expert reports valuing a Delaware limited liability company in connection with a breach of fiduciary duty claim.  The Court also denied motions to exclude a valuation report and for sanctions relating to discovery abuses, and denied the Delaware limited liability company’s counterclaims for conversion and tortious interference with contract.

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Derivative Suit Dismissed for Failing to Plead Demand Futility

By: Rem Kinne and Zack Sager

In Shabbouei v. Potdevin, C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), the Delaware Court of Chancery dismissed a derivative suit against the board of directors (the “Board”) of lululemon athletica inc. (the “Company”) by a Company stockholder (“Plaintiff”) for failing to plead demand futility.  The Court held that Plaintiff did not plead with the requisite particularity that the Board was self-interested in a Separation Agreement with the Company’s CEO Laurent Potdevin (“Potdevin”) negotiated by the Board and that the Board’s decision to settle with, instead of firing, Potdevin for cause was outside the bounds of proper business judgment.

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EQUITABLE RELIEF GRANTED TO STOP BOARD COUP

By David L. Forney and Annamarie C. Larson

In a Memorandum Opinion, Palisades Growth Capital II, L.P. v. Alex Bäcker and Ricardo Bäcker and QLess, Inc. (Del. Ch. C.A. No. 2019-0931-JRS) the Delaware Court of Chancery found that actions taken at a board meeting were void because the defendant acted inequitably by formulating a secret plan to deceive the other board members into attending the meeting and then seized control.  The Court stated that it will not sanction inequitable action by corporate fiduciaries simply because their act is legally authorized.  The Court found that, while the defendants’ actions were technically authorized in the Company’s Charter and Bylaws, they took affirmative action to mislead the other board members in order to take control. 

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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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Court Reviews Fiduciary Disclosure Obligations in Connection with Seeking Investments

By Annette E. Becker and Samira F. Torshizi

In Clark v. Davenport, C.A. No. 2017-0839-JTL (Del. Ch. July 18, 2019), the Delaware Court of Chancery ruled on a motion to dismiss claims brought by Plaintiff Kenneth Clark (“Clark” or “Plaintiff”) against former officers, directors, and controlling stockholders of a now-defunct Basho Technologies Inc. (“Basho”) by an investor, who accused defendants of violating their fiduciary duties and committing fraud by inducing plaintiff to invest millions in what defendants knew was a failing enterprise.  The motions to dismiss were granted in part and denied in part dependent on the involvement of the particular defendant in the scheme. 

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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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Delaware Court of Chancery Grants Stockholder’s Section 220 Demand for Books and Records

By Annette E. Becker and Frank J. Mazzucco

In Michael Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), the Delaware Court of Chancery granted a plaintiff stockholder’s demand for a company’s books and records under Section 220 of the Delaware General Corporation Law in connection with a proposed merger.

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Settlement Agreement Violates Preferred Stockholder Consent Rights

By: Jill B. Louis and Pouya D. Ahmadi

In PWP Xerion Holdings III LLC v. Red Leaf Resources Inc., C.A. No. 2017-0235-JTL (Del. Ch. Oct. 23, 2019), the Delaware Court of Chancery (the “Court”) granted Xerion Holdings III LLC’s (“Xerion”) motion for partial summary judgement on a breach of contract claim, holding that the Red Leaf Resources, Inc. (“Red Leaf” or the “Company”) breached Xerion’s contractual right to consent as the holder of a majority of the shares of the Company’s Series A preferred stock.

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