Delaware Docket

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

 

Crothall, et al. v. Zimmerman, et al., Del. No. 608, 2013 (May 28, 2014)

By Eric Feldman and Naomi Ogan

In Crothall, et al. v. Zimmerman, et al., the defendants in a derivative suit sought to reverse the Delaware Court of Chancery’s decision awarding attorneys’ fees to counsel for Robert Zimmerman, the plaintiff in the underlying action. Zimmerman, a common unitholder of Adhezion Biomedical, LLC (“Adhezion”), originally brought a derivative suit against the directors and certain investors of Adhezion, claiming that (i) certain financing transactions involving the sale of Adhezion units were substantively unfair, and (ii) the units issued in those transactions were not properly authorized in accordance with Adhezion’s operating agreement. The Chancery Court’s opinion rejected Zimmerman’s claim of substantive unfairness, but agreed that Adhezion’s operating agreement had been violated because the units issued in the financing transactions had been issued without an amendment approved by a separate vote of the common unitholders.

The Chancery Court, however, awarded only nominal damages for the breach of the operating agreement, and, before a final judgment was entered, Zimmerman decided to sell his Adhezion units and abandon the lawsuit, thus rendering his claims moot.  As a result, the Chancery Court granted the defendants’ motion to dismiss Zimmerman’s claims. Nevertheless, Zimmerman’s counsel was allowed to intervene in the case, and was ultimately awarded $300,000 in attorneys’ fees, on the theory that Adhezion had realized a corporate benefit from the Chancery Court’s decision that a vote of the common unitholders was required to authorize additional units under the operating agreement.

The defendants, while unable to appeal the Chancery Court’s ruling directly due to the absence of a final judgment, asked the Delaware Supreme Court to re-consider the merits of the Chancery Court’s  finding that attorneys’ fees were warranted on the basis of a corporate benefit to Adhezion. The Supreme Court reversed the Chancery Court’s ruling, finding that Zimmerman’s counsel had not created a corporate benefit, and therefore was not entitled to the $300,000 in attorneys’ fees originally awarded by the Chancery Court. Without evaluating the Chancery Court’s substantive reading of the Adhezion operating agreement, the Supreme Court held that when a plaintiff takes action to moot his own claim, as Zimmerman did by selling his units and abandoning his claims before entry of a final judgment after trial, no corporate benefit can be created and therefore no attorneys’ fees should be awarded on that basis. The Supreme Court noted that, while attorneys’ fees have previously been awarded on the basis of mooted claims, those claims were rendered moot by the actions of the defendant, not the plaintiff. In contrast, in this case the Supreme Court refused to award fees on the basis of a claim that even the plaintiff himself had chosen not to pursue.

Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, et al., C.A. No. 8431-VCN (May 30, 2014) (Noble, V.C.)

By David Bernstein and Marisa DiLemme

The decision in Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC concerns a Stock and Asset Purchase Agreement (the “SAPA”) entered into in September 2012 by plaintiff, Eurofins Panlabs, Inc. (“Eurofins”), a Delaware corporation, and defendants, Ricerca Biosciences, LLC (“Ricerca”), a Delaware limited liability company, and Ricerca Holdings, Inc., a Delaware corporation.  Ronald Ian Lennox (“Lennox”), Chairman and CEO of Ricerca, is also a defendant in the case.

Most of the opinion focuses on Eurofins’ claims against Ricerca related to specific provisions of the SAPA, whether Ricerca breached these provisions, and whether the breaches of contract were also fraudulent.  The Court dismissed many of Eurofins’ claims against Ricerca.  All claims against Lennox, aside from those based on the relationship with AstraZeneca PLC (“AZ”), were also dismissed.

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Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Del. Ch. May 30, 2014)

By David Bernstein and Elise Gabriel

In Ravenswood Investment Co., Vice Chancellor Noble of the Delaware Chancery Court considered the novel issue of whether, under Delaware law, a corporation may condition a stockholder’s right to inspect the corporation’s books and records on an agreement not to trade in the corporation’s stock for a period of time.  Here, the defendant Winmill & Co. Incorporated (“Winmill”), a Delaware holding company, had refused to allow plaintiff stockholder Ravenswood Investment Company, L.P. (“Ravenswood”) to inspect its nonpublic financial statements absent Ravenswood’s agreement not to trade in Winmill’s stock for up to a year.  Winmill was apparently concerned that Ravenswood would use the material, non-public information to trade in Winmill’s stock, thus threatening “tipper” liability under federal securities law. 

Vice Chancellor Noble concluded that a trading restriction imposed on a stockholder’s right to inspection under Delaware General Corporation Law § 220 is contrary to Delaware law.  He found that Ravenswood had requested inspection for the proper purpose of valuing its stock, and any purported secondary purpose or ulterior motive was irrelevant.  Vice Chancellor Noble was unwilling to incorporate an “inequitable” notion into Delaware’s § 220 jurisprudence that would frustrate a stockholder’s fundamental right to value its stock.  In a footnote, he further stated that the Court did not address whether the requested financial statements should be deemed confidential, but if the parties could not agree on a confidentiality agreement, the Court would be available to address that issue.  Vice Chancellor Noble refused, however, to require Winmill to pay Ravenswood’s attorneys’ fees, finding that Ravenswood had not produced requisite evidence of Winmill’s bad faith.

Ravenswood v. Winmill

Gassis v. Corkery, C.A. No. 8868-VCG (Del. Ch. May 28, 2014)

By Joanna Diakos and Mark Hammes

In Gassis v. Corkery, Civil Action No. 8868, Bishop Macram Max Gassis challenged his removal as Chairman of the Board and as a director of the Bishop Gassis Sudan Relief Fund, Inc., a Delaware charitable nonstock corporation (the “Fund”) dedicated to helping the people of southern Sudan. The Bishop also challenged the previous removal of two directors from the Fund’s board and the elections of two directors who replaced them.

Bishop Gassis’ removal at a 2013 board meeting came after years of friction with other board members, who contended that the Bishop was difficult to work with, negatively interacted with the Fund’s beneficiaries in Sudan, spent extravagantly on travels, invested in suspicious projects, and acted as though he had a personal interest in the Fund’s assets. These board members further argued that a provision of the Fund’s bylaws providing that the Bishop “shall serve [as Chairman of the Board] until his retirement or resignation” required him to be removed from the board upon his retirement as a Catholic Bishop, which was to occur on his seventy-fifth birthday on September 21, 2013.

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Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), aff’d, C.A. No. 270, 2014 (Del. June 12, 2014)

By Jamie Bruce and Ryan Drzemiecki

In his May 21, 2014 opinion in Oracle Partners, L.P. v. Biolase, Inc., C.A. No. 9438-VCN (Del. Ch. May 21, 2014), Vice Chancellor Noble addressed the issue of what was said, and the legal effect of the statements made, during a telephonic meeting (the “Meeting”) of the board of directors of Biolase, Inc. (“Biolase”) on Friday, February 28, 2014.

Prior to the Meeting, Biolase had six directors.  On the Monday following the meeting, Biolase issued a press release stating that two of the directors — Alexander Arrow, M.D. (“Arrow”) and Samuel Low, D.D.S. (“Low”) — had resigned from the board and two new directors — Paul Clark (“Clark”) and Jeffrey Nugent (“Nugent”) — had been appointed in their place.  In a contradictory Form 8-K filing with the Securities and Exchange Commission (“SEC”) three days later, which included the press release as an exhibit, the Company disclosed only that Clark and Nugent had been appointed to the board, which had apparently increased to eight members.

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Durham v. Grapetree, LLC, C.A. No. 7325-VCG (May 16, 2014)

By Eric Feldman and Eric Taylor

This is a case dealing with the interpretation of a Limited Liability Company Agreement for a family-owned Delaware Limited Liability Company, Grapetree, LLC (“Grapetree”), set up to manage inherited resort rental properties. The plaintiff in the suit, Andrew Durham (“Andrew”) is one of five members of Grapetree, all siblings, and the only non-managing member (under the 2008 OperatingAgreement of Grapetree, which governed during the time of the actions in dispute). Andrew is a self-employed landscape architect who made several expenditures over the years to maintain and improve the managed properties and seeks reimbursement for those expenses. The 2008 OperatingAgreement contains certain limitations on authority, namely that expenditures over $2,000 are subject to the majority vote of the members and all routine operational issues are subject to the majority vote of the managing members. (It should be noted that the limitation contained an apparent error requiring a majority “3/5” vote of the managing members, despite the fact that there were only four managing members.)

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Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)

By Annette Becker and Naomi Ogan

In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.

Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.

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ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (May 8, 2014)

By David Bernstein and Elise Gabriel

In ATP Tour, Inc., the Delaware Supreme Court responded to certified questions from the United States District Court for the District of Delaware regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws.  The bylaw at issue provides that any member that asserts a claim against the corporation or another member and does not “substantially achieve, in substance and amount, the full remedy sought” will be obligated to reimburse the corporation or the member for all fees, costs and expenses, including reasonable attorneys’ fees and other litigation expenses.  The Supreme Court answered, in relevant part, that such a fee-shifting provision is authorized by the Delaware General Corporation Law (“DGCL”), and therefore is facially valid, but whether it would be enforceable depends on the circumstances under which it is adopted and under which it is invoked.  The Delaware Supreme Court stated that bylaws that otherwise may be facially valid will not be enforced if adopted or used for an inequitable purpose. 

Here, two members of ATP Tour, Inc. (“ATP”), a Delaware membership corporation operating a professional tennis tour, had unsuccessfully sued ATP for breach of fiduciary duty and antitrust violations.  ATP then moved to recover its costs and attorneys’ fees pursuant to the bylaw provision described above.  The Federal District Court, in which the suit had been brought, found the issue of enforceability of a fee-shifting bylaw to be novel and certified four questions regarding its validity and its enforceability to the Delaware Supreme Court.  After stating that the bylaw provision was facially valid, the Delaware Supreme Court found that it could not answer the questions regarding enforceability because they depended on the circumstances under which the bylaw was adopted and was being invoked, which were not before the Supreme Court.  The fourth question was whether the bylaw could be enforced against a party that became a member before the bylaw was adopted.  The Delaware Supreme Court answered this in the affirmative because the member had agreed to be bound by rules that may be adopted or amended from time to time.

Although ATP was a non-stock membership corporation, the decision was based on provisions of the DGCL that apply to all corporations, and there is no reason to think the decision would have been different if ATP had been a stock corporation.

ATP Tour, Inc. v. Deutscher Tennis Bund

Hamilton Partners, L.P. v. Highland Capital Management, et al., C.A. No. 6547-VCN (May 7, 2014) (Noble, V.C.)

By David Bernstein

Plaintiff Hamilton Partners, L.P. challenged in the Delaware Chancery Court the fairness of a merger between a Nevada corporation, American HomePatient, Inc. (“New AHP”), a successor to a Delaware corporation of the same name (“AHP”), and Highland Capital Management, L.P. (“Highland”), which before the challenged transactions owned 48% of AHP’s stock and held most of its debt. The initial question was whether the validity of the actions was governed by Nevada law or by Delaware law. The Court said that most of the transactions took place under an agreement that was signed while the corporation was a Delaware corporation and that those transactions would be governed by Delaware law. However, transactions that were not approved by the Board until after the reincorporation in Nevada would be governed by Nevada law.

The Court then addressed whether the fairness of the merger should be determined under the business judgment rule or under the entire fairness test, which would apply if Highland was a controlling stockholder. The Court said that although there were prior Delaware decisions that made it possible that Highland’s 48% ownership interest alone might not have caused it to be viewed as a controlling person when determining whether the Board’s approval of the merger should be evaluated based on the business judgment rule or on the entire fairness test, the combination of Highland’s 48% stock interest and the fact that it had used its creditor position to force the corporation to engage in the series of transactions that was being challenged made it clear that Highland was a controlling person and that the entire fairness test should apply. Therefore, noting that it is almost never possible to dismiss a complaint in an instance in which the entire fairness test applies, the Court refused to dismiss the claim against Highland.

The Plaintiff also sued Joseph Furlong, the CEO and a director of AHP, claiming that he had a personal interest in the merger (he would receive a $6.5 million payment if it took place) and therefore his actions as a director should be evaluated under the entire fairness test. The Court said that because the Board consisted of three directors, and the other two directors, whose independence was not challenged and who were not claimed to have been dominated by Furlong, approved the merger, and their approval was governed by the business judgment rule, it made no difference whether Furlong’s approval was governed by the business judgment rule or was subject to the entire fairness test. The Court also pointed out that because the merger was approved by the Board after the corporation had reincorporated in Nevada, Furlong’s liability would be governed by a Nevada statute that exculpates a director from personal liability unless the director’s act or failure to act constituted a breach of fiduciary duties and the “breach of those duties involved intentional misconduct, fraud or a knowing violation of the law”. The Court found that the Plaintiff had not claimed that Furlong had been guilty of intentional misconduct, fraud or a knowing violation of law, and therefore Furlong was entitled to the protection of the Nevada exculpation statute. Accordingly, it dismissed the claims against Furlong.

hamiltonpartnersl p v highlandcapital1

 

Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.)

By David Bernstein and Meredith Laitner

On May 2, 2014, the Delaware Chancery Court issued its decision in Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.), denying plaintiffs’ motion for a preliminary injunction which, if granted, would have delayed the Sotheby’s annual stockholder meeting until the court could determine whether the members of the Sotheby’s Board violated their fiduciary duties by adopting a “poison pill” rights plan that would be triggered if anybody acquired 10% of Sotheby’s outstanding shares, except that a Schedule 13G filer (which must be a passive investor) could acquire up to 20%.  Third Point had accumulated 9.6% of Sotheby’s stock and had nominated three candidates, including Third Point’s CEO, Daniel Loeb, for election to the Sotheby’s Board.  Third Point had asked that it be permitted to acquire up to 20% of Sotheby’s shares, but the Sotheby’s Board denied the request.  Third Point claimed in the lawsuit that this adoption of the poison pill rights plan and refusal to grant the requested waiver was an impermissible effort by the Sotheby’s Board to obtain an advantage in the proxy contest. 

Third Point had commenced the lawsuit in March 2014 after a series of acrimonious public and private communications in which Loeb had referred to what he claimed was Sotheby’s deteriorating competitive position with regard to Christie’s, accused Sotheby’s of having “a sleepy board and overpaid executive team,” said he intended to replace the CEO of Sotheby’s, and told people inside and outside of Sotheby’s that he would shortly be running Sotheby’s.  In return, Sotheby’s had publicly listed what it viewed as Loeb’s failed efforts to remake companies after it got footholds on their boards.

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2009 Caiola Family Trust, et al. v. PWA, LLC, et al., C.A. No. 8028-VCP (Apr. 30, 2014) (Parsons, V.C.)

By Nick Froio and Marisa DiLemme

In this opinion, Vice Chancellor Parsons considers the parties’ cross motions for summary judgment as to the proper interpretation of a key provision of the operating agreement (the “Operating Agreement”) of Dunes Point West Associates, LLC (the “Company”), a Delaware limited liability company, relating to the Company’s management. The plaintiffs, together, own 90% of the Company, and are the only non-managing members of the Company. The defendants are PWA, LLC (“PWA”), the Company’s managing member and the holder of a10% interest in the Company, and Ward Katz, the managing member of PWA and sole owner of the Company’s property manager, Dunes Residential Services, Inc. (“DRS”). In July 2012, plaintiffs voted to terminate DRS as property manager. Shortly thereafter, the plaintiffs voted to terminate PWA as managing member for “Cause” due to PWA having materially breached the Operating Agreement by not implementing their decision to replace DRS with a new property manager.

The plaintiffs argued that Section 8.4(a) of the Operating Agreement allows the non-managing members to mandate removal of the property manager by majority vote since one of the actions upon which the non-managing members are entitled to vote under Section 8.4(a) included the termination of the management agreement under which DRS was appointed property manager. The defendants argued that Section 8.4(a) of the Operating Agreement only gives the non-managing members a limited veto right over those Company actions. The Court found Section 8.4(a) to be unambiguous and agreed with the defendant’s interpretation of the provision as granting only a limited veto power.

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In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)

By Scott Waxman and Zack Sager

In In re Interstate General Media Holdings, LLC, the managing members of Interstate General Media Holdings, LLC, a Delaware limited liability company (the “Company”), sought judicial dissolution of the Company.  Both managing members agreed that the Company was deadlocked and judicial dissolution was necessary, but they disagreed about whether the Company should be sold at a private auction or a public auction.  The limited liability company agreement of the Company (the “LLC Agreement”) did not explicitly address how the Company was to be dissolved and liquidated.  Nonetheless, one of the managing members argued that the Court of Chancery should look to the intent and provisions of the LLC Agreement for guidance in fashioning an appropriate remedy.  The court rejected this argument holding that because the LLC Agreement did not explicitly address the procedures for dissolution and liquidation, it was essentially irrelevant in determining the issue.  Further, because the managing members sought judicial dissolution, which was not proscribed by the LLC Agreement, the Company submitted itself to the discretion of the court to determine how the Company was to be dissolved and liquidated.  The court ultimately ordered the dissolution of the Company and a sale of the Company via a private auction, finding that this method would maximize the value of the members’ limited liability company interests in the Company.

InReInterstate

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