Delaware Docket

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

 

Wolst v. Monster Beverage Corporation, C.A. No. 9154-VCP (Del. Ch. October 3, 2014) (Noble, V.C.)

By David Bernstein and Meredith Laitner

On October 3, 2014, the Delaware Chancery Court issued its ruling in Wolst v. Monster Beverage Corporation, C.A. No. 9154-VCP (Del. Ch. October 3, 2014) (Noble, V.C.), rejecting the plaintiff’s request to inspect Monster Beverage Corporation’s books and records pursuant to Section 220 of the Delaware General Corporation Law.

The plaintiff’s stated purpose for her request to inspect Monster’s books was to determine whether there was a basis for her to bring a derivative suit against Monster based on insider trading that occurred seven years ago.  A class action regarding the insider trading had been settled for $16.25 million and a prior derivative suit, in which the plaintiff had been a participant, had been dismissed for failure to make a demand on the Board.  Subsequently a demand on the Board had been made and rejected.

The Court held that the possible new derivative suit that was the reason for the plaintiff’s Section 220 demand was time-barred by laches. Further, Vice Chancellor Noble refused to extend to derivative claims the general rule that a class action tolls the statute of limitations for the members of the class pursuing individual direct claims.

WolstvMonsterBeverage

Quadrant Structured Products Company v. Vertin, C.A. No. 6990-VCL (October 1, 2014) (Laster, V.C.)

By William Axtman and Dotun Obadina

In Quadrant Structured Products Company v. Vertin, creditor plaintiff Quadrant Structured Products Company, Ltd. (“Quadrant”) asserted breach of fiduciary duty claims derivatively against the Board of Directors (the “Board”) of the Athilon Capital Corp. (the “Company”) and EBF & Associates (“EBF”), the holder of all of equity and certain junior debt of the Company.  EBF also managed the operations of the Company through service and license agreements between the Company and an affiliate of EBF, Athilon Structured Investment Advisors, LLC (“ASIA”), and appointed all five directors of the Board, three of which are current employees of EBF.

Quadrant, as holder of senior notes of the Company, asserted that (a) the Company was insolvent and (b) the directors of the Board and EBF breached their fiduciary duty of loyalty and committed corporate waste by (i) continuing to unnecessarily make interest payments on the junior debt, even though such payments could be deferred for an extended period of time (past the likely date of dissolution and liquidation of the Company), (ii) paying excessive service and license fees to ASIA and EBF to operate the Company, and (iii) changing the Company’s business model to take on greater risk under a strategy where EBF would  benefit from any upside as the sole holder of the junior debt and the Company’s equity, but the Company’s more senior creditors (including Quadrant) would bear the cost of any downside.  In addition, Quadrant asserted claims under the Delaware Uniform Fraudulent Transfer Act based on the non-deferral of interest on the junior debt and the payment of excessive service and license fees to ASIA and EBF to operate the Company.

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JD Holdings, L.L.C., et. al. v. The Revocable Trust of John Q. Hammons, et. al., C.A. 7480-VCL (Laster, V.C.)

By Masha Trainor and Ryan Drzemiecki

This case involves a dispute over interpretation of a right of first refusal clause. In 2005, John Q. Hammons, a hotel entrepreneur, entered into a complex transaction (the “2005 Transaction”), structured as a triangular merger, in which Hammons’ publicly traded company, John Q. Hammons Hotels, Inc., emerged as indirect wholly-owned subsidiary of JD Holdings, LLC, which is controlled by Jonathan Eilian. As part of the 2005 Transaction, Hammons granted Eilian a right of first refusal (the “ROFR”) to purchase any interest in a hotel or other real property described therein (each a “JQH Subject Hotel”).

The plaintiffs, entities affiliated with Eilian (“Plaintiff”), originally filed suit to obtain a declaration regarding the meaning of certain provisions of the ROFR Agreement. Subsequently, Hammons died. The parties agreed that, pursuant to the ROFR Agreement, Hammons’ death triggered a 90-day period during which Eilian would negotiate exclusively with JQH Trust and Hammons’ estate (“Defendant”) to determine whether Eilian would buy the JQH Subject Hotels. However, they disagreed about the JQH Trust’s obligations following the expiration of the exclusivity period. Plaintiff argued that the ROFR clause required the JQH Trust to liquidate all of the JQH Subject Hotels for cash within a certain period after Hammons’ death even if the parties did not agree on a transaction during the exclusivity period, and the ROFR would apply to any such sale. In the answer and counterclaim to the amended complaint, Defendant rejected this interpretation of the ROFR, contending, among other things, that the ROFR failed to create any affirmative obligation to sell and, even if it did, would be void under the rule against perpetuities. The parties have cross-moved for judgment on the pleadings on this and other claims and counterclaims.

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Jefferson v. Dominion Holdings, Inc., C.A. No. 8663-VCN (September 24, 2014) (Noble, V.C.)

By Jamie Bruce and Carty Bibee

On September 24, 2014, Vice Chancellor Noble issued his opinion in Jefferson v. Dominion Holdings, Inc., a matter involving a dispute between a corporation and one of its stockholders over the scope, and attendant confidentiality concerns, in the stockholder’s inspection of the books and records of the corporation under 8 Del. C. § 220.

The Court concluded after trial that the plaintiff stockholder Jefferson (“Plaintiff Stockholder”) demonstrated that valuing his stock in defendant Dominion Holdings, Inc. (“Defendant Corporation”) was a proper purpose for his requested inspection.  In this Order, Vice Chancellor Noble addressed two issues: (1) the scope of the production of books and records and (2) the confidentiality concerns of Defendant Corporation.

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Seaport Village Ltd. v. Seaport Village Operating Company, LLC, C.A. No. 8841-VCL (Sept. 24, 2014) (Laster, V.C.)

By Nick Froio and Zack Sager

Seaport Village Operating Company, LLC (the “LLC”) sought to recover from Seaport Village Ltd. (“Limited”) attorneys’ fees and expenses that the LLC incurred in two related actions.  The limited liability company agreement of the LLC (the “LLC Agreement”) provided that if any action was brought by a party against another party relating to or arising out of the LLC Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses.  Limited’s only defense was that because the LLC did not sign the LLC Agreement, it was not a “party” to the LLC Agreement.  The Court of Chancery rejected this argument citing Section 18-101(7) of the Delaware Limited Liability Company Act, which states that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.”  The court held that since the LLC was bound to the LLC Agreement and that, as a matter of contract law principles, “only parties to a contract are bound by that contract,” the LLC was a party to the LLC Agreement and could enforce the fee-shifting provision.

SeaportVillageLtdvSeaportVillageOperating

In re Nine Systems Corp. S’Holders Litig., Consol. C.A. No. 3940-VCN (September 4, 2014) (Noble, V.C.)

By Marisa DiLemme

In re Nine Systems Corp. S’Holders Litig. involves the 2002 recapitalization of a two-year-old start-up company, Streaming Media Corporation, later known as Nine Systems Corporation (the “Corporation”).  The Corporation was going to have to liquidate unless it could carry out two acquisitions, and the purpose of the 2002 recapitalization was to fund these acquisitions. The recapitalization was approved by four of the directors of the Board of the Corporation, one the CEO of the Corporation and the other three employees of three private equity funds, two of which provided the financing needed for the acquisitions through the recapitalization, and the third of which was given a 90-day option to participate in the recapitalization but did not do so.  The fifth director, whose firm had brought in minority stockholders, was not kept informed regarding the recapitalization, which was highly dilutive to the minority stockholders, and never fully approved it.  The terms of the recapitalization were proposed by the director whose firm was the largest participant in the recapitalization based on his estimate that the Corporation was worth $4 million, without any independent valuation of the Corporation.  After the acquisitions, the Corporation became successful, and it was sold four years later for $175 million.

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Pontone v. Milso, C.A. No. 8842-VCP (August 22, 2014) (Parsons, V.C.)

By Jamie Bruce and Mark Hammes

This case involves a claim for advancement of legal fees by plaintiff Scott Pontone (“Pontone”), a director and officer of two Delaware corporations, based on indemnification and expense advancement provisions of the corporations’ bylaws. Faced with both a motion to dismiss for lack of standing and Pontone’s motion for summary judgment, the Court granted in part and denied in part the  motion to dismiss, and granted partial summary judgment in Pontone’s favor with respect to advancement of certain legal fees and expenses.  The Court also found that Pontone was entitled to advancement as to 75% of his “fees on fees” in prosecuting this action.

Pontone was the Vice President of Old Milso, a New York regional casket manufacturer, when it was acquired by The York Group, Inc. (“York”) in 2005.  After the acquisition, Pontone served as a director and Executive Vice President of Both York and the successor entity Milso Industries Corporation (“New Milso”) until 2007.  In May 2010, Pontone entered into a consulting arrangement with a competitor, Batesville Casket Company (“Batesville”).  In August 2010, York and New Milso instituted an action in a federal court in Pennsylvania (the “Underlying Action”) against Pontone and Batesville alleging that they engaged in a wrongful scheme to induce several employees and many of their most lucrative customers to switch to Batesville.  The Underlying Action is still ongoing.

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In re Orchard Enterprises, Inc. Stockholder Litigation, Consolidated C.A. No. 7840-VCL

By Scott Waxman and Porter Sesnon

On August 22, 2014, Vice Chancellor Laster approved a fee award for counsel to certain plaintiff-stockholders related to a settlement of a class action claim alleging breaches of fiduciary duties related to a freeze-out merger.  The settlement amounted to $10.725 million. In the same opinion, V.C. Laster denied a fee award due to lack of standing to counsel for other stockholders in the same freeze-out merger, who separately litigated an appraisal claim, and which was relied upon by the successful class action plaintiffs.

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In Re Astex Pharmaceuticals, Inc. Stockholders Litigation, Consolidated C.A. No. 8917-VCL

By Wilson Chu and Jason Jones

On August 25, 2014, Vice Chancellor J. Travis Laster denied a stipulated dismissal order involving the payment of a “mootness fee” as part of the settlement of a disclosure claim because it did not comply with the requirements of In re Advanced Mammography Sys., Inc. S’holders Litig., 1996 WL 633409 (Del. Ch. Oct. 30, 1996). 

Astex Pharmaceuticals, Inc. (“Astex”) and Otsuka Pharmaceutical Co, Ltd. (“Otsuka”) entered into an Agreement and Plan of Merger. Various stockholder plaintiffs filed lawsuits asserting claims against Astex, its Board of Directors, and Otsuka, and the court certified a class. One claim asserted that Astex’s stockholders lacked sufficient information to make an informed decision about tendering their shares or seeking appraisal.  In response, Astex filed a supplemental Schedule 14D-9 containing additional disclosures on October 1, 2013.  After the defendants moved for judgment on the pleadings, the named plaintiffs concluded that their remaining claims lacked merit. The parties then submitted a stipulated dismissal order, which included an agreement whereby defendants would pay a mootness fee relating to the disclosure claim. The court denied the proposed dismissal order pending further submission by the parties explaining how they complied, or proposed to comply, with Advanced Mammography.

Advanced Mammography provides that the board may exercise its business judgment to pay a mootness fee, but it is necessary to (i) notify the court and (ii) provide notice to the class and provide an opportunity for the class to be heard.  In addition, “in the context of a claim that is acknowledged to be moot and in which no consideration has been paid to the class, it is not appropriate for the court to purport to release any claims of the class.”  Id. at *1.  Notice to the class allows the class to argue that the case is not moot, but rather that the mootness fee is in fact a buyout; and enables members of the class to object to such use of corporate funds.  Id.  In this case, the stipulated dismissal order did not provide notice to the class, and as a result, Vice Chancellor Laster denied the proposal and requested that the parties submit a revised order contemplating notice to the class.

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Comerica Bank v. Global Payments Direct, Inc., C.A. No. 9707-CB (Aug. 1, 2014) (Bouchard, C.)

By Scott Waxman and Zack Sager

This case involves the unfriendly winding up of a two-member Delaware limited liability company (the “LLC”). One of the issues raised in this case was whether “cause” existed for the Court of Chancery to intervene and wind up the LLC’s affairs and appoint a liquidating trustee under Section 18-803(a) of the Delaware Limited Liability Company Act (the “LLC Act”). One of the members of the LLC (“Global”) argued that the Court did not have cause because a deadlock did not exist among the parties entitled to wind up the LLC. Global argued that because it was the 51% owner of the LLC and had the right to make any decisions necessary to wind up the LLC, no deadlock existed.

In rejecting Global’s argument, the Court stated that nothing in the LLC Act “requires a finding of deadlock as a prerequisite to this Court assuming control of the wind up process of a Delaware LLC and/or appointing a liquidating trustee.” According to the Court, ample cause existed because Global was unwilling to wind up the LLC in an orderly and timely manner and took a confrontational approach that was contradictory to its obligation to wind up the LLC promptly so as to maximize the value of the property distributed to the members. Chancellor Bouchard noted that although the “contours of [default fiduciary duties] may be different after dissolution of an LLC during the wind up period, they continue to encompass, in my view, an obligation to distribute the assets of the company promptly consistent with maximizing their value.”

Comerica Bank v Global Payments Direct

Levey v. Brownstone Asset Mgmt., LP, et al., C.A. No. 5714-VCL (Del. Ch. Aug. 1, 2014) (Laster, V.C.)

By Scott Waxman and Marisa DiLemme

In Levey v. Brownstone Asset Mgmt., LP, et al., the plaintiff, Gordon Levey (“Levey”), and the three individual defendants worked together as principals in a financial services boutique, Brownstone Investment Group LLC.  Operating out of the same office, Levey and the three defendants also ran a hedge fund.  In this action, Levey, after resigning from the financial services boutique, sought a declaration that he continued to own equity in two of the entities through which the boutique operated: (1) Brownstone Investment Partners LLC, a Delaware limited liability company, which was the passive manager of the hedge fund (the “Passive Manager”); and (2) Brownstone Asset Management LP, a Delaware limited partnership, which was the active manager of the hedge fund (the “Active Manager”). Levey sought a declaration that he continued to hold a 5% interest in the Passive Manager and the Active Manager, and if he did remain an owner of those interests, he demanded his proportionate share of all past distributions made by those entities.  He also sought an order requiring the defendants to identify any undisclosed profits (from which he would presumably also seek his share).

The court first addressed the critical factual issue of whether Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.  Levey argued that he may have tried to withdraw but failed in the attempt, while the defendants argued that he could and did withdraw.  The court found that an objective viewer would regard Levey as withdrawing, listing actions that support this conclusion – he turned in his keys, he cut up his corporate charge card and building identification card, and the other principals and employees of the firm gathered together and said goodbye to him.  He also withdrew his personal funds that were invested in the hedge fund.  Levey argued that he intended to resign as an employee and to withdraw from the financial services boutique, but not to withdraw from the Passive Manager and the Active Manager.  However, based on the dislike Levey had expressed for his partners, the court did not find it credible that he wanted to maintain his relationship with his partners through the Passive Manager and the Active Manager.  Therefore, the court found that Levey withdrew from the Passive Manager and the Active Manager on January 26, 2006.

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Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.)

By David Bernstein and Meredith Laitner

On July 31, 2014, the Delaware Chancery Court issued its decision in Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.), requiring the parties to recalculate the payment to which the plaintiff was entitled because her 22% minority interest in a Delaware corporation was squeezed out through a reverse split that reduced her holding to less than one full share.  The plaintiff in this case, a former employee of Ice Systems, Inc., brought a derivative suit in which she challenged numerous business decisions made by Ice Systems after her employment terminated and challenged  compensation and expense reimbursement payments made to the CEO, who was also the 78% stockholder and the sole director.   The plaintiff also (a) asked the Court to set aside the reverse split on the ground that it was made for the improper purpose of depriving her of the ability to bring a derivative suit, or alternatively (b) to increase the sum to which she was entitled as a result of the cancellation of her 22% interest through the reverse split.

The Court did not decide whether the plaintiff no longer had standing to sue derivatively because she was  no longer a stockholder when she commenced the suit, because the defendant acknowledged that if Ice Systems would have been entitled to recover sums if the plaintiff had been able to sue derivatively, the corporation’s right to recover those sums would increase the amount to which the plaintiff is entitled because of the cancellation of her stock interest, and therefore, the outcome of her suit would be the same whether or not she was permitted to sue derivatively.

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