Delaware Docket

Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

 

Court of Chancery Dismisses Breach of Fiduciary Duty Claim as Duplicative of Breach of Contract Claim

By: Scott Waxman and Zack Sager

In MHS Capital LLC v. Goggin, the Delaware Court of Chancery granted a motion to dismiss a breach of fiduciary duty claim against the manager of a Delaware limited liability company because all of the manager’s conduct that could have formed the basis of such claim was covered by the duties of the manager delineated in the limited liability company agreement.  The Court also analyzed and dismissed claims for, among other things, fraud, breach of the implied contractual covenant of good faith and fair dealing, unjust enrichment, and misappropriation of trade secrets.

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CONTROLLING STOCKHOLDER CANNOT ADVANCE ITS OWN SELF-INTEREST AT EXPENSE OF MINORITY STOCKHOLDERS

By: C. J. Voss and Rich Minice

In Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders.  In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.

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Chancery Court Denies Motion to Dismiss Brought by Defendant Tesla Motors, Inc. After Concluding that Elon Musk is a Controlling Stockholder

By Holly Hatfield and Daisy Sexton

In In Re Tesla Motors, Inc. Stockholder Litigation, the Delaware Chancery Court denied Defendants’ motion to dismiss an action brought by plaintiffs (Tesla stockholders) against nominal Defendant Tesla Motors in connection with Tesla’s acquisition of SolarCity Corporation.  Plaintiffs alleged that Tesla’s board of directors breached their fiduciary duties by approving the acquisition of SolarCity, which benefitted SolarCity stakeholders but negatively affected Tesla stockholders.  SolarCity is a public Delaware corporation founded by Elon Musk and his cousins, Peter and Lyndon Rive.  Musk and his cousins sit on the SolarCity Board. Lyndon was SolarCity’s CEO and Peter was its CTO.

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Court of Chancery Holds That Plaintiff Failed to Meet Burden of Proof With Respect to Mistake-Based Reformation Claim

By: Scott Waxman and Tami Mack

In Richard B. Gamberg 2007 Family Trust v. United Restaurant Group, L.P., C.A. No. 10994-VCMR (Del. Ch. January 26, 2018), the Court of Chancery held that limited partner, Richard B. Gamberg 2007 Family Trust (the “Plaintiff”), failed to meet its burden of proof with respect to various claims against United Restaurant Group L.P. (the “Partnership”), Atlantic Coast Dining, Inc. (the “General Partner”), and the directors/shareholders of the General Partner (the “Shareholder Defendants”; together with the Partnership and the General Partner, the “Defendants”), which included a mistake-based reformation claim, among other breach of contract and breach of fiduciary duty claims.

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CHANCERY COURT NULLIFIES DISSOLUTION OF LIMITED LIABILITY COMPANIES FOR FAILURE TO SET ASIDE A RESERVE TO SATISFY KNOWN CLAIMS

By: Scott E. Waxman and Calvin D. Kennedy

In Kevin Capone and Steven Scheinman v. LDH Management Holdings LLC, et al., C.A. No. 11687-VCG (Del. Ch. April 25, 2018), the plaintiffs, Kevin Capone (“Capone”) and Steven Scheinman (“Scheinman”), and the defendants, LDH Management Holdings LLC (“Management Holdings”), LDHMH MM, LLC (together with Management Holdings, the “LLCs”), Castleton Commodities International LLC (f/k/a Louis Dreyfus Highbridge Energy LLC (“LDH”)) and certain members of the Board of Directors of LDH, each moved for summary judgment regarding the plaintiffs’ claim that the defendants violated Delaware law by cancelling the LLCs without setting aside a reserve for the plaintiffs’ breach of contract claims.  The court granted the plaintiffs’ motion for summary judgment and held that the defendants were aware of the plaintiffs’ non-frivolous claims for breach of contract against the LLCs and, therefore, the defendants acted in violation of Delaware law when they failed to create a reserve to cover the plaintiffs’ claims when the LLCs were dissolved.

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Chancery Court Limits Access to Books and Records Based on Stockholder’s Failure to State Purpose in Section 220 Demand

By: James S. Bruce and Taylor B. Bartholomew

In KT4 Partners LLC v. Palantir Technologies, Inc., C.A. No. 2017-0177-JRS (Del. Ch. Feb. 22, 2018), in a post-trial ruling, the Delaware Court of Chancery granted a stockholder limited rights to inspect a corporation’s books and records related to the stated purpose of investigating possible wrongdoing, but the Court denied the stockholder’s request to obtain other books and records related to the purpose of valuing its shares because its initial demand did not explicitly state a valuation purpose.

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PLAINTIFFS WERE UNABLE TO ROUSE SUPPORT FOR THEIR POSITION THAT A MINORITY STOCKHOLDER WAS A CONTROLLER AND BREACHED FIDUCIARY DUTIES BECAUSE THEY DID NOT PLEAD SUFFICIENT FACTS

By: Annette Becker and Rich Minice

In In re Rouse Properties, Inc. Fiduciary Litigation, C.A. No. 12194-VCS, the George Leon Family Trust and Dr. Robert A Corwin (the “Plaintiffs”) sought to recover damages on behalf of Rouse Properties Inc. (“Rouse”) stockholders, for breach of fiduciary duties and aiding and abetting breaches of fiduciary duties against Brookfield Asset Management Inc. (“Brookfield”) and five Rouse directors individually arising out of a July 2016 merger between two mall real estate holding companies (the “Merger”). The court dismissed all claims finding that Brookfield was not a minority controlling stockholder of Rouse and did not wield undue influence over the board of directors of Rouse in general or during Merger discussions and that the Plaintiffs failed to well plead that the stockholder vote approving the Merger was uninformed or coerced.

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Chancery Court Finds Credible Basis for Demand to Inspect Books and Records of UnitedHealth in connection with Possible Medicare Overbilling

By: David Forney and Joshua Haft

In In re UnitedHealth Group, Inc. Section 220 Litigation, Consolidated C.A. No. 2017-0681-TMR (Ch. Ct February 28, 2018) certain stockholders (“Plaintiffs”) of UnitedHealth Group, Inc. (“UnitedHealth”) sent a books and records inspection demand to UnitedHealth relying on a complaint in a type of whistleblower (qui tam) action alleging that UnitedHealth engaged in improper Medicare billing, United States ex rel. Poehling v. UnitedHealth Group, Inc. (the “Qui Tam Action”).  The Qui Tam Action was based in part on a 5-year investigation by the US Department of Justice (“DOJ”) and included depositions of 20 of UnitedHealth’s employees and production by UnitedHealth of over 600,000 documents. Plaintiffs made their demand in order to investigate mismanagement or misconduct, possible breaches of fiduciary duties and the independence and disinterestedness of the board. UnitedHealth rejected the demand and a trial was held on January 9, 2018.  UnitedHealth argued that Plaintiffs were not entitled to inspection of books and records because they lacked a credible basis to infer wrongdoing or mismanagement based on the Qui Tam Action and because the alleged activities of UnitedHealth were not illegal.  The Court found that Plaintiffs’ demand stated a proper purpose and a credible basis from which a court could infer mismanagement or wrongdoing.

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CHANCERY COURT EVALUATES OBJECTIVE FACTORS TO DETERMINE PARTNERS’ SUBJECTIVE BELIEFS

By: Scott Waxman and Hillary Dawe

Dieckman v. Regency GP LP, et al. came before the Delaware Court of Chancery as a dispute over a merger between Energy Transfer Partners, L.P. (“ETP”) and Regency Energy Partners LP (“Regency”) for an exchange ratio of 0.4066 and a cash payment of $0.32 per common unit of Regency (the “Merger”).

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MULTI-BILLION DOLLAR INVESTMENT MANAGER AND DIRECTORS REMAIN AT RISK

By: Kevin Stichter and Samira Torshizi

In Cumming v. Edens, et al., C.A. No. 13007-VCS (Del. Ch. Feb. 20, 2018), the Court of Chancery denied a motion to dismiss a derivative suit for breach of fiduciary duties brought by a stockholder of New Senior Investment Group, Inc. (“New Senior”) against New Senior’s board of directors (the “Board”) and related parties in connection with New Senior’s $640 million acquisition of Holiday Acquisition Holdings LLC (“Holiday”). The Court made clear that compliance with Section 144 does not necessarily provide a safe harbor against claims for breach of fiduciary duty and invoke business judgment review of an interested transaction. Because the complaint alleged with specificity “that the Board acted out of self-interest or with allegiance to interest other than the stockholders,” the court applied the entire fairness standard of review and concluded that the transaction was not fair to New Senior stockholders. Read More

Chancery Court Grants Summary Judgment for Dissolution of Corporation owned 50% by Two Stockholders Where Judicial Admissions Establish Prerequisites for Intervention

By: Chris Cunningham and Will Smith

In Benjamin Feldman v. YIDL Trust, C.A. No. 2017-0253-AGB (Del. Ch. November 7, 2017), plaintiff Benjamin Feldman brought a motion for summary judgment under Court of Chancery Rule 56 for dissolution of a jointly-held Delaware corporation pursuant to 8 Del. C. § 273. The Delaware Court of Chancery granted the motion, holding that YIDL Trust made voluntary and knowing concessions of fact during the judicial proceedings that conclusively established the prerequisites for a judicial order of dissolution under Section 273.

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Board’s Failure to Adhere to Best Practices in Drug Clinical Trial Does Not Excuse Stockholder Demand as Futile

By:  Remsen Kinne and J. Tyler Moser

In Wilkin v. Narachi, et al., and Orexigen Therapeutics, Inc., Civil Action No. 12412-VCMR (Del. Ch. February 28, 2018), the Delaware Court of Chancery granted a motion to dismiss brought by defendants (“Defendants”), directors and officers of biopharmaceutical company Orexigen Therapeutics, Inc. (“Orexigen”), for failure to plead demand futility under Court of Chancery Rule 23.1.  The Court ruled that the plaintiff, a stockholder of Orexigen (“Plaintiff”), did not plead sufficient facts to show that a substantial likelihood of liability prevented the directors from exercising independent and disinterested business judgment when considering a demand to bring a lawsuit on behalf of the corporation.

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