Topic: Uncategorized

CHANCERY COURT DENIES MOTION TO DISMISS CLAIM FOR BREACH OF MERGER AGREEMENT EARN-OUT EFFORTS PROVISION

By: Remsen Kinne and Greyson Blue

In Himawan, et al. v. Cephalon, Inc., et al., C.A. No. 2018-0075-SG (Del. Ch. Dec. 28, 2018), the Delaware Court of Chancery in a Memorandum Opinion denied a motion to dismiss a breach of contract claim brought against defendants Cephalon, Inc. (“Cephalon”), Teva Pharmaceutical Industries Ltd. (“Teva”) and Teva’s affiliate Teva Pharmaceuticals USA, Inc. (“Teva USA”) by former shareholders of Ception, Inc. (“Ception”), a biotech company acquired by Cephalon in a merger transaction. The case concerns a dispute over the phrase “commercially reasonable efforts” as used in an earn-out provision in the merger agreement. The decision highlights pleadings requirements for supporting an initial claim for breach of an objective contractual standard.

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Patently False: The Delaware Chancery Court Dissolves Limited Liability Company Founded on False Claims of Patent Ownership

By: Scott Waxman and Tom Sperber

In Decco U.S. Post-Harvest, Inc., v. MirTech, Inc., the Delaware Chancery Court issued a Memorandum Opinion dissolving a limited liability company based on evidence presented at trial. Decco U.S. Post-Harvest, Inc. (“Decco” or “Plaintiff”), whose business primarily involved the post-harvest treatment and packaging of produce, and MirTech, Inc. (“MirTech” or “Defendant”) formed the joint venture entity Essentiv LLC (the “Company”) for the purpose of commercializing products based on 1-Methylcyclopropene (“1-MCP”), a gas used to delay the ripening of fruit and other produce. In forming the Company, Defendant assured Plaintiff that Defendant owned intellectual property in 1-MCP technology. The Court found that Plaintiff proved that Defendant did not, in fact, own such intellectual property and ruled that the Company must dissolve.

1-MCP was patented in 1996. After Nazir Mir (“Mir”), of MirTech, started experimenting with 1-MCP technologies, the Defendant entered into a consulting agreement with AgroFresh Inc. (“AgroFresh”). Under that agreement, the parties agreed to joint ownership of “any and all inventions conceived or reduced to practice jointly by the [p]arties.” Subsequent agreements between Defendant and AgroFresh granted AgroFresh sole ownership over joint inventions. During this business relationship, Mir developed a technology called “RipeLock,” as well as several patents the Court refers to as the “RipeLock Patents.”

In 2014, Plaintiff and Defendant began discussions relating to a potential joint venture for the development of technology related to 1-MCP and RipeLock Patents. A letter of intent that was issued based on these discussions listed “three overarching tasks for the joint venture: (i) secure the legal rights of the listed patents; (ii) coordinate research, regulatory approvals, and other pre-commercial activity; and (iii) commercialize the developed technology.” To commercialize such technology, Defendant asserted that it would license the use of its patents to the joint venture. The Company was formed in April of 2016. The Company was a manager-managed LLC, with Plaintiff and Defendant as the only members/managers. The Company’s LLC agreement required consent of both Plaintiff and Defendant to take actions requiring manager approval. The agreement also identified the Company’s purpose as being to research, develop, manufacture, and market 1-MCP products. It did not, however, limit the Company to activities related to 1-MCP products. Per the agreement, Plaintiff had a right of first refusal over any non-1-MCP product business. Defendant was obligated to develop and license exclusively to the Company the RipeLock patents. Defendant, in the agreement, represented that it owned intellectual property rights in the relevant technology, that no other person had any “right, title or interest” in it, and that it owned the technology “free and clear of all claims, mortgages, leases, loans and encumbrances.”

The Company began selling a product utilizing 1-MCP technology called TruPick. AgroFresh quickly filed suit against Plaintiff, Defendant, and the Company alleging that TruPick amounted to an infringement of its intellectual property rights in the RipeLock Patents. The Court, ruling in favor of AgroFresh, found that the technology underlying TruPick belonged to AgroFresh. The Company stopped selling TruPick immediately. Ultimately, Mir and AgroFresh entered into a settlement agreement which called for an entry of a final judgment by consent. According to this judgment, Mir and MirTech agreed to disclose and assign to AgroFresh “all inventions, discoveries, or improvements” relating to 1-MCP. The Judgement included a finding that the RipeLock Patents belonged to AgroFresh. Shortly thereafter, Francois Girin (“Girin”), of Plaintiff, contacted defendant suggesting that the Company dissolve. Defendant refused, and Plaintiff brought this action.

Plaintiff sought an order to dissolve the Company and appoint Girin as the receiver to wind-up the Company. MirTech answered and asserted a counterclaim, but the Court granted a motion by Plaintiff to strike the counterclaim prior to trial.

In deciding this case, the Court relied on Section 18-802 of the Delaware Limited Liability Company Act (“DLLCA”). § 18-802 allows the Court to dissolve a limited liability company where it is not, or is no longer “reasonably practicable to carry on the business in conformity with a limited liability company agreement.” In considering the dissolution under § 18-802, the Court looked to the Company’s LLC agreement. The Court broke the purpose of the Company’s business, as laid out in the LLC agreement, into two categories: (1) the 1-MCP business; and (2) the Non-1-MCP business. Ultimately, the court found that the Company could not carry on business in either category.

The Court found that the LLC agreement defined 1-MCP business as business relating to 1-MCP products. The only product the Company ever developed, manufactured, or sold was TruPick. The Plaintiff pointed out that, pursuant to the judgement in the MirTech-AgroFresh litigation, the Company could no longer market TruPick. Defendant argued that the Company could still rely on Defendant’s “know-how” and “trade secrets” to conduct 1-MCP business. The Court rejected this argument, citing the previous judgment as having assigned all MirTech “know-how” relating to 1-MCP to AgroFresh. Mir admitted at trial that his proposed 1-MCP business required measuring 1-MCP, and that he could not think of a way to measure 1-MCP without relying on “know-how” that had been assigned to AgroFresh. As such, the Court found that there was no practicable way in which the Company could continue any 1-MCP business.

While the LLC agreement did contemplate the Company’s engaging in potential non-1-MCP business, the Court pointed out that any venture in that capacity was subject to a right of first refusal by Plaintiff. Seeing as how Girin testified that he no longer trusted Mir, the Court found that no new non-1-MCP venture would survive Plaintiff’s right of first refusal. Defendant argued that a non-1-MCP business already existed, and therefore survived Plaintiff’s right of first refusal, relating to “in-transit ripening” and “nano-absorbent films,” neither of which was purportedly 1-MCP technologies. The only support that Defendant provided for these assertions was testimony from Mir about conversations with low-level employees of Plaintiff regarding these technologies. Mir also conceded that nothing was ever signed or even definitively agreed to with respect to any non-1-MCP business or technology. Despite Defendant’s assertions otherwise, the Court found that there was no practicable way in which the Company could continue on by engaging in any non-1-MCP business. Consequently, Court dissolved the Company and appointed Girin as the receiver.

No Rummaging Required: Chancery Court Rules Form 10-K Adequate to Discharge Duty of Disclosure When Provided Conspicuously and Concurrently with Stockholder Proxy

By: Joanna A. Diakos and Will Smith

In a memorandum opinion, Samuel Zalmanoff v. John A. Hardy et. al, Civil Action No. 12912-VCS (Del. Ch. November 13, 2018), the Delaware Court of Chancery granted summary judgment in favor of the defendant board of directors of Equus Total Return, Inc. (“Equus”), ruling that the board of directors (the “Board” or “Defendants”) adequately fulfilled their disclosure obligations because the facts allegedly omitted from the operative proxy statement (the “Proxy”) were indisputably contained in the Form 10-K (the “10-K”), which the Board provided to stockholders in the same mailing as the Proxy.

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Delaware Chancery Court Rejects Fraud-Based and Uncapped Indemnification Claims of Great Hill Partners Against the Founders of Plimus

By:  Peter N. Flocos and Joanna Diakos

In a case arising out of the purchase by Great Hill Partners of Plimus (now known as BlueSnap, Inc.), the Delaware Court of Chancery, after a 10-day trial and extensive post-trial briefing and oral argument, recently rejected all of the fraud-based claims made by Great Hill against the two founders of Plimus, Messrs. Daniel Kleinberg and Tomer Herzog (the “founders”), who were also directors and major shareholders of Plimus at the time of the transaction. The Court’s decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, No. 7906-VCG, 2018 WL 6311829 (Del. Ch. Dec. 3, 2018), is notable for its rejection of several claims Great Hill pressed for years after initiating the litigation in September 2012.

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MANDATORY INDEMNIFICATION PROVIDED UNDER BYLAWS TO AGENT DUE TO ACTIONS TAKEN ON COMPANY’S BEHALF

By: Annette BeckerRich Minice

In Fred L. Pasternack v. Northeastern Aviation Corp., C.A. No. 12082-VCMR (Del. Ch. Nov. 9, 2018), the Delaware Court of Chancery awarded mandatory indemnification for legal expenses and fees-on-fees to Fred Pasternack (“Pasternack”), a former pilot for Northeastern Aviation Corp. (“Northeastern”) under Northeastern’s Bylaws (the “Bylaws”) because he was determined to be an agent of Northeastern when attending a random drug test to maintain his pilot certification.

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POSSIBILITY OF WRONGDOING CONSTITUTES PROPER PURPOSE IN SECTION 220 PROCEEDING

By: James Bruce and Hillary Dawe

In Barnes v. Sprouts Farmers Market, Inc., Jennifer Barnes, a stockholder of Sprouts Farmers Market, Inc. (“Stockholder”), sought to inspect the books and records of Sprouts Farmers Market, Inc. (the “Company”) in order to investigate potential breaches of duty, corporate mismanagement, wrongdoing, and unjust enrichment by the Company’s fiduciaries. Section 220 of the Delaware General Corporation Law permits stockholders of a Delaware corporation to inspect a company’s books and records for any proper purpose. Such purpose need only be reasonably related to the person’s interest as a stockholder, and the stockholder need only show “some evidence to suggest a credible basis from which a court can infer” the related conduct.

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CONTRACT LANGUAGE MUST BE UNAMBIGUOUS FOR CHANCERY COURT TO GRANT DISMISSAL AS MATTER OF LAW

By: Scott E. Waxman and Douglas A. Logan

In Fortis Advisors LLC v. Stora Enso AB letter opinion 180810, Stora Enso AB (the “Defendant”) filed a motion to dismiss the claims by Fortis Advisors LLC (the “Plaintiff”), alleging the merger agreement (the “Merger Agreement”) entered into by each of the parties unambiguously did not obligate the Defendant to make further payments to the Plaintiff. The Chancery Court disagreed, finding the language of the Merger Agreement ambiguous, therefore denying the Defendant’s motion.

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Chancery Court Dismisses Derivative Suit Against Blue Bell Officers and Directors

By: Scott E. Waxman and Stephanie S. Liu

In Jack L. Marchand II v. John W. Barnhill, Jr., et al, the Delaware Chancery Court dismissed Plaintiff’s complaint under Court of Chancery Rule 23.1, finding that Plaintiff failed to plead particularized facts that an appeal for board action on the complaint would have been futile or that a majority of the company’s board lacked the independence needed to respond.

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Court of Chancery Compels Production of Some, but not all, Books and Records for Plaintiff’s Permitted Purposes

By Scott Waxman and Ernest Simons

In Aloha Power Company, LLC v. Regenesis Power, LLC, the Court of Chancery granted in part and denied in part plaintiff’s action to compel inspection and production of certain books and records pursuant to provisions in the defendant’s operating agreement and the Delaware Limited Liability Company Act.  The Court held that the operating agreement expressly required production of certain books and records without demand for inspection and determined whether there existed a proper purpose for inspection for the remaining demanded books and records.

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Court of Chancery Grants Motion for Judgment on the Pleadings Finding No Implied Condition as to the Accuracy of Information in Financial Reports

By: John Blair and Ernest Simons

In Greenstar IH Rep, LLC and Gary Segal v. Tutor Perini Corporation, the Court of Chancery granted the plaintiff’s motion for judgment on the pleadings and motion to dismiss counterclaims in a breach of contract suit arising out of the sale of GreenStar Services Corporation to Tutor Perini Corporation (“Tutor Perini”) in 2011 (the “Acquisition”). The merger agreement that memorialized the Acquisition (the “Merger Agreement”) provided Greenstar IH Rep, LLC (“Plaintiff”) a right to receive post-closing earn out consideration from Tutor Perini (“Earn-Out Payments”) over a five year period in the event that certain pre-tax profit milestones were reached on an annual basis.  Tutor Perini made Earn-Out Payments in the first and second years following the Acquisition, but declined Plaintiff’s demand for Earn-Out Payments in the third, fourth, and fifth years. As such, Plaintiff filed a complaint seeking damages relating to Tutor Perini’s failure to make Earn-Out Payments; Tutor Perini counterclaimed alleging fraud and a right to offset any harm caused by fraud.

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Class Action Dismissed as Demand was Not Excused as Futile; Plaintiff Failed to Allege Facts Sufficient to Establish that a Majority of the Board Faced Substantial Likelihood of Liability for Non-Exculpated Claims

By: Annette Becker and Will Smith

In Lenois, et al. v. Lawal, et al., and Erin Energy Corporation, C.A. No. 11963-VCMR (Del. Ch. November 7, 2017), plaintiff Robert Lenois (“Plaintiff”) on behalf of himself and other stockholders brought a class action for breach of fiduciary duty against controllers and the board of directors of Erin Energy Corporation (“Erin”) for approving what was claimed to be an unfair transaction. The Delaware Court of Chancery dismissed the class action suit under Court of Chancery Rule 23.1, holding that the directors were protected by an exculpatory charter, and Plaintiff failed to meet the heightened pleading standard for demand futility set by the second prong of Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Although Plaintiff pled with particularity that one director acted in bad faith, the complaint did not allege facts sufficient to establish that a majority of the board faced a substantial likelihood of liability for non-exculpated claims.

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COURT OF CHANCERY DISMISSES DERIVATIVE BREACH OF FIDUCIARY DUTY CLAIMS FOR FAILURE TO MAKE A PRE-SUIT DEMAND OR DEMONSTRATE DEMAND FUTILITY

By: Annette Becker and Caitlin Velasco

In Chester Cty. Emp. Ret. Fund v. New Residential Inv. Corp., C.A. No. 11058-VCMR (Del. Ch. Oct. 6, 2017), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s direct and derivative claims for breach of fiduciary duties under the Court of Chancery Rules 23.1 and 12(b)(6), because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile.  The Court found that although the facts alleged gave rise to a derivative claim, the plaintiff failed to make a pre-suit demand or plead particularized facts sufficient to raise a reasonable doubt that a majority of the directors on the New Residential Corp. (“New Residential”) board could have exercised their independent and disinterested business judgment in responding to a demand.

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