Topic: Uncategorized

Chancery Court Interprets the Computer Fraud and Abuse Act

By: Scott E. Waxman and Stephanie S. Liu

In AlixPartners, LLP v. Benichou, (C.A. No. 2018-0600-KSJM (Del. Ch. May 10, 2019)), the Court of Chancery decided, as a matter of first impression, that the federal Computer Fraud and Abuse Act (“CFAA”) narrowly provides a cause of action in Delaware for unauthorized computer access or unauthorized access to information; it does not cover incidents involving misuse of information that was obtained through authorized access.

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Court to Sellers: Stockholder Notice Rights Matter

By Scott Waxman and Nadia Brooks

In Mehta v. Mobile Posse, Inc., six causes of action were before the Delaware Court of Chancery in Plaintiff’s complaint alleging inadequate stockholder notice and breach of directors’ fiduciary duty of disclosure regarding the merger of Mobile Posse. The defendants, Mobile Posse and its board, asserted motions for judgments on the pleadings for all counts, arguing they were entitled to the judgments because the violations were remedied by the supplemental notice they issued. The Court denied all but one of defendants’ motions, finding numerous deficiencies in the notice process and finding that the merger was not entirely fair.

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Court of Chancery Grants Summary Judgment For Dissolution of Limited Liability Company Where Two Minority Members Failed To Purchase The Majority Member’s Limited Liability Interest, As Required By The Operating Agreement

By: Scott Waxman and Caitlin Velasco

In Terramar Retail Centers, LLC v. Marion #2-Seaport Trust U/A/D/ June 21, 2002, Civil Action No. 12875-VCL (Del. Ch. May 22, 2019), Terramar Retail Centers, LLC (“Terramar”), the manager and 50% member of Seaport Village Operating Company, LLC, a Delaware limited liability company (the “Company”), filed an action, seeking a declaration that it may dissolve the Company and sell its assets, and that Terramar appropriately determined the allocation of the sale proceeds. The Delaware Court of Chancery held that Terramar appropriately exercised its dissolution right under the Company’s operating agreement, because the fair market value and purchase price proposed by Terramar reflected its honest opinion and Terramar did not negotiate in bad faith. The Court further held that Terramar’s waterfall determination was correct because a settlement release and the statute of limitations barred the counterclaims raised, and Terramar did not breach its contractual obligations or fiduciary duties. The Court ruled in favor of Terramar on all claims, supporting Terramar’s ability to dissolve the Company, sell its assets, and distribute the proceeds in accordance with Terramar’s allocation of the sale proceeds.

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CONTRACTUAL AMBIGUITIES FAVOR THE NON-MOVING PARTY AT MOTION TO DISMISS STAGE

By: Scott Waxman and Rich Minice

In Coyne v. Fusion Healthworks, LLC Civil Action No. 2018-0011-MTZ (Del. Ch. April 30, 2019), the Delaware Court of Chancery denied a motion to dismiss for failure to state a claim (the “Motion”) filed by Fusion Healthworks, LLC (the “LLC”), James Sheehan with his personal medical practice, and Andrew Lietzke, with his personal medical practice (collectively, the “Defendants”). In denying the Motion, the court reiterated the standing principal that, when presented with a contractual ambiguity, dismissal at the motion to dismiss stage is only appropriate “if the defendants’ interpretation [of the ambiguity] is the only reasonable construction as a matter of law.” Coyne highlights the critical nature of competent drafting of LLC Agreements.

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Court of Chancery Sides with Papa John’s Founder on Books and Records Inspection Demand

By Scott Waxman and Will Grossenbacher

John Schnatter’s falling-out with Papa John’s, the company he founded in the back of his father’s bar in Louisville, Kentucky, has been highly publicized since the dispute began in late 2017. Now, the Delaware Court of Chancery has waded into the fray.  In John Schnatter v. Papa John’s International, Inc., C.A. No. 2018-0542-AGB (Del. Ch. Jan. 15, 2019), the Court ruled in favor of Schnatter, granting his demand to inspect four categories of the Company’s books and records, subject to certain limitations and exclusions.

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Stockholder Makes Demand on United Airlines and Encounters Turbulence

By: Joanna Diakos and Tom Sperber

In City of Tamarac Firefighters’ Pension Trust Fund v. Corvi, et. al, C.A. No. 2017-0341-KSJM, the Delaware Chancery Court issued a Memorandum Opinion granting a motion to dismiss under Chancery Rule 23.1 for failing to prove that pre-litigation demand of the Board was wrongfully refused. The City of Tamarac Firefighters’ Pension Trust Fund (“Plaintiff”), a stockholder of United Continental Holdings, Inc., the owner and operator of United Airlines (collectively, “United”), brought derivative claims against United and its board of directors (the “Board”) (collectively with United, “Defendants”) demanding either a claw-back of an allegedly excessive separation compensation award or the rescission of the separation agreement altogether. The Court found that Plaintiff failed to plead particularized facts raising a reasonable doubt that Defendants acted with due care and in good faith in rejecting Plaintiff’s demand.

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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.

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CHANCERY COURT DENIES MOTION TO PERFECT SERVICE FOR SERVICE ON DISSOLVED LIMITED LIABILITY COMPANY

By: Scott Waxman and Greyson Blue

In Tratado de Libre Commercio, LLC v. Splitcast Technology, LLC, C.A. No. 2019-0014-JRS (Del. Ch. Mar. 6, 2019), the Delaware Court of Chancery examined the requirements for perfecting service upon a dissolved limited liability company (“LLC”). In ruling that Tratado de Libre Commercio, LLC (“Tratado”) had failed to perfect service of process on a dissolved entity, Splitcast Technology LLC (“Splitcast”), the Court highlighted its broad authority to establish service of process requirements under Court of Chancery Rule 4(d)(7) (“Rule 4(d)(7)”) in claims against defunct entities. The Court’s decision both illustrates the scope of its authority and confirms its willingness to hold that court-mandated standards for delivering service upon defunct corporations also apply in the context of defunct LLCs.

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CHANCERY COURT GRANTS DEFENDANT’S MOTION ON THE PLEADINGS WHERE NAMED DEFENDANTS DID NOT OWE ANY OF THE CONTRACTUAL OR FIDUCIARY OBLIGATIONS PLAINTIFF TRIED TO ENFORCE

By: Scott Waxman and Samantha Beatty

In Ross v. Institutional Longevity Assets LLC, C.A. No. 2017-0186-TMR (Del. Ch. Feb. 26, 2019), the Chancery Court, in a motion for judgement on the pleadings, found that the plain language of a limited liability company’s operating agreement was sufficient to affirm the notion that the plaintiff had failed to establish a set of facts to support his breach of contract and breach of fiduciary duty claims. The Court found that (i) where the language of a contract is clear, the parties’ disagreement will not render a contract ambiguous; (ii) where a plaintiff has not identified gaps in the language of a contract, there can be no evidence that an implied covenant of good faith has been breached, and (iii) where a fiduciary duty claim arises out of the same conduct as a contract claim, the fiduciary claim is superfluous.

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Chancery Court Rules Inequitable Conduct May Be Considered Within the Scope of a Section 225 Review

By: Claire S. White and Will Smith

In Robert G. Brown v. Lorrence T. Kellar et. al, Civil Action No. 2018-0687-MTZ (Del. Ch. December 21, 2018), the Delaware Court of Chancery granted in part and denied in part a motion for summary judgment by the plaintiff-stockholder, Robert G. Brown (“Brown”), to determine the composition of the board of directors (the “Board”) of SPAR Group, Inc. (“SGRP”), pursuant to 8 Del. C. § 225 (the “225 Action”). Denying Brown’s motion in part, the Court held that the 225 Action should survive summary judgment and continue to trial because the defendant-directors, the incumbent Board members of SGRP (the “Director Defendants”), asserted inequitable conduct by Brown bearing on the Board’s composition. Upholding Brown’s motion in part, the Court held that certain disputed written stockholder consents were effective on delivery under 8 Del. C. § 228(e), even though the Board had not taken action to deliver prompt notice of such written consents to SGRP’s stockholders as required pursuant to Section 228(e).

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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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Court of Chancery Invalidates Charter-Based Federal Forum Provision

By Michelle R. McCreery and Shane T. Devins

In Matthew Sciabacucchi v. Matthew B. Salzberg, et al., C.A. No. 207-0931-JTL (Del. Ch. Dec. 19, 2018), the Court of Chancery invalidated a provision in the charter documents of certain Delaware corporations that specified the federal courts as the exclusive forum for claims arising under the Securities Act of 1933 (the “1933 Act”).

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