Delaware Docket

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

 

Directors Breach Fiduciary Duties in Coercive Self-Tender

By: Annette Becker and Serena Hamann

In Robert A. Davidow v. LRN Corporation, et al., C.A. No. 2019-0150-MTZ (Del. Ch. Feb. 25, 2020), the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims brought against the founder and two directors (the “Individual Defendants”) of LRN Corporation, a corporation that advises on ethics and compliance (“LRN”) because the plaintiff (on behalf of the former stockholders who tendered shares in the tender offer) (“Plaintiff”) adequately pled facts sufficient to state a claim that the Individual Defendants breached their fiduciary duties by launching a coercive self-tender at an unfair price, providing inadequate disclosure, and authorizing the self-tender notwithstanding the Individual Directors’ interestedness.

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Delaware Holds that Directors May Choose Lower Value All-Cash Deal Over Stock Deal So Long as the Decision is Made in Good Faith and Free of Conflicts

By Lisa R. Stark and Sara M. Kirkpatrick

Recently, the Delaware Court of Chancery dismissed fiduciary duty claims brought by former Essendant, Inc. (“Essendant”) stockholders after Essendant terminated its stock-for-stock merger with Genuine Parts Company (“GPC”) which was valued at $13.20 – $23.90 per share, including synergies, in favor of a lower all-cash offer of $12.80 per share, proposed by private equity fund Sycamore Partners (“Sycamore”), a minority stockholder of Essendant. Plaintiffs argued that Sycamore was a controlling stockholder of Essendant and either breached its fiduciary duties to Essendant’s stockholders or aided and abetted the Essendant directors’ breaches of fiduciary duty. Plaintiffs also argued that a majority of the Essendant directors acted disloyally or in bad faith in connection with the transaction. The Court dismissed the complaint, finding that the plaintiffs failed to adequately plead (1) non-exculpated claims against Essendant’s directors or (2) that Sycamore was a controlling stockholder or aided or abetted any breach of fiduciary duty. The Chancery Court decision, In re Essendant, Inc. Stockholder Litig., C.A. No. 2018-0789-JRS (Del. Ch. Dec. 30, 2019), was appealed to the Delaware Supreme Court on February 20, 2020.

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Chancery Court Dismisses Derivative Action Alleging Caremark Claims

By: Scott Waxman and Zane Madden

In In re Lendingclub Corp. Derivative Litigation, C.A. No. 12984-VCM (Del. Ch. October 31, 2019), the Delaware Court of Chancery (the “Court”) granted the defendants’ motion to dismiss the plaintiffs’ consolidated supplemented complaint (the “complaint”) for failure to adequately plead demand futility. After analyzing the allegations in the complaint, the Court concluded that plaintiffs’ claims failed because the facts alleged did not demonstrate at the dismissal stage that a majority of the board of directors (the “Board”) could exercise independent and disinterested judgment with regard to a litigation demand as required under In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996).

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Undisclosed Post-Merger Compensation Plan for CEO Also Serving as Lead Merger Negotiator Found Insufficient to Rebut Business Judgment Rule and Insufficient to Show Board Acted in Bad Faith

By: Scott E. Waxman and Serena M. Hamann

In the class action, In re Towers Watson & Co. Stockholders Litigation, C.A. no. 2018-0132-KSJM (Del. Ch. July 25, 2019), the Delaware Court of Chancery dismissed the complaint in its entirety under Rule 12(b)(6) because the Plaintiffs failed to plead facts sufficient to rebut the application of the business judgment rule and failed to show the Towers Board acted in bad faith.

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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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Partnership Agreement May Provide Grounds for Relief in Case Involving Drop in Unit Price Following Disclosure of General Partner’s Intent to Exercise Call Right

By: Scott E. Waxman and Serena M. Hamann

In Bandera Master Fund LP, et al. v. Board Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the Delaware Court of Chancery (the “Court”) denied the defendants’ Rule 12(b)(6) motion to dismiss breach of contract claims because the plaintiffs had established reasonably conceivable breaches of the governing partnership agreement. These breaches related to the defendants’ public statements concerning the general partner’s possible exercise of a call right leading to a sharp decrease in partnership unit prices prior to the actual exercise of the call right.

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Out of the money: breach of fiduciary duty claim survives motion to dismiss when the board approved an asset sale that left no consideration for the common unitholders

By: Scott E. Waxman and Chris Fry

In JJS, Ltd., et al., v. Steelpoint CP Holdings, LLC, et al., No. 2019-0072-KSJM (Del. Ch. 2019), the Delaware Court of Chancery (the “Court”) held that John Sarkisian, individually and on behalf of JJS, Ltd. and PPS Investors Ltd., L.P. (together, the “Plaintiffs”) successfully stated a claim for breach of fiduciary duty against a venture capital fund and its appointed board members in approving a transaction for the asset sale of Pro Performance Sports, LLC (the “Company”) where the common unitholders receive no compensation, the board members are under common ownership or employment with the venture capital fund, and one board member received an extraordinary severance package. The Court dismissed the Plaintiffs’ remaining claims, which turned on the interpretation of the voting rights provision of the limited liability company (“LLC”) agreement of the Company, finding that the operative language was not ambiguous and that a careful reading of the agreement would have given Plaintiffs notice of the voting rights mechanics. 

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Not quite instantaneous, Holmesian “Bad Men” can win by knowing the law: Plaintiffs who tried to preserve direct and derivative claims in a settlement agreement failed to realize that they had already bargained them away

By: Scott E. Waxman and Chris Fry

In Urdan v. WR Capital Partners, LLC, C.A. No. 2018-0343-JTL (Del. Ch. 2019), the Delaware Court of Chancery (the “Court”) held that Urban and Woodward (the “Plaintiffs”) lost the ability to assert their derivative and direct claims by failing to properly preserve their claims in the stock repurchase agreements and settlement agreement among the Plaintiffs, Energy Efficient Equity, Inc. (the “Company”), and the private equity group that essentially pushed the Plaintiffs out of the Company, WR Capital Partners, LLC, et al., (the “PE Firm”).  The Court dismissed the Plaintiffs’ remaining claims for fraud, as the Plaintiffs could not reasonably rely on puffery, and unjust enrichment, as this is more properly a derivative claim dismissed with the direct and derivative claims above.

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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.

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ANOTHER “WELL-PLED” CAREMARK CLAIM SURVIVES A MOTION TO DISMISS

By: Lisa R. Stark and Sara M. Kirkpatrick

In a recent decision, In Re Clovis Oncology, Inc. Derivative Litigation, C.A. No. 2017-0222-JRS, 2019 WL 4850188 (Del. Ch. Oct. 1, 2019), the Delaware Court of Chancery held that stockholders of Clovis Oncology, Inc. (“Clovis”), a developmental biopharmaceutical company, adequately pled facts that supported a pleading stage inference that the Clovis board of directors breached its fiduciary duties by failing to oversee the clinical trial of the company’s most promising drug and then allowing the company to mislead the market regarding the drug’s efficacy.

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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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