Delaware Docket

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

 

Stating That an Inspection under DGCL Section 220 Is Not “Merely For The Curious,” The Chancery Court Reaffirms The Need for a Stockholder to Show a Proper Purpose for a Section 220 Demand and, in Doing So, Holds That a Derivative Suit That is Dismissed With Prejudice is Collateral Estoppel as to All Stockholders

By David Bernstein and Lauren Garraux

Vice Chancellor Noble denied the demand of plaintiff Fuchs Family Trust to inspect the books and records of defendant Parker Drilling Company under Section 220 of the Delaware General Corporation Law and, in doing so, held that Fuchs’s ability to institute future stockholder derivative litigation — one of the stated purposes underlying its demand — was barred by collateral estoppel based on the dismissal with prejudice of a prior stockholder derivative lawsuit — to which Fuchs was not a party — on procedural grounds.

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Chancery Court Finds Arbitration Clause in Limited Liability Company Agreement Survives Company’s Conversion into Corporation Despite Corporation’s Litigation Only Approach

By Scott Waxman and Peter C. Seel

In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the Chancery Court denied a motion to dismiss and stayed the proceedings on all counts, finding that the arbitration clause in the limited liability company agreement controlled and the case must be submitted to an arbitrator to decide the issue of substantive arbitrability.

On February 26, 2015, the Chancery Court in 3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) addressed the recurring theme of substantive arbitrability in a dispute that involved the conversion of a limited liability company into a corporation and their conflicting dispute resolution mechanisms. In 2007, defendant Christopher Griffin (the “Defendant”) formed Rubicon Media LLC (“Rubicon LLC”). In 2011, the Defendant reformed Rubicon LLC’s capital structure and, in 2013, converted Rubicon LLC into a corporation: Rubicon Inc. (“Rubicon Inc.,” and together with the Defendant, the “Defendants”). Among other things, the conversion of Rubicon LLC into Rubicon Inc. altered the rights of shareholders with respect to the dispute resolution process. The operative clause in the LLC Agreement (the “LLC Provision”) directs the parties to resolve disputes through mediation and arbitration, whereas the corresponding provision in the Certificate of Incorporation (the “Charter Provision”) designates the Delaware Court of Chancery as the exclusive forum for all disputes.

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Are Partial Written Stockholder Consents Between Annual Meetings Sufficient to Fill Board Vacancies? Chancellor Bouchard’s Ruling in Elite Horse Investments Ltd. v. T3 Motion, Inc. Suggests “Yes”

By Michelle Repp and Lauren Garraux

Ruling of Chancellor Andre Bouchard suggests that partial written stockholder consents between annual meetings may be sufficient to fill board vacancies and calls into question stockholder written consents not dated by hand.

Elite Horse Investments Ltd. (“Elite”) is a stockholder of T3 Motion, Inc. (“T3”), a Delaware corporation. T3’s bylaws provide for a seven-member Board of Directors. As of December 26, 2014, T3’s board had four vacancies, with the other three directorships occupied by T3’s CEO, William Tsumpes (“Tsumpes”), and two other individuals (collectively, the “Existing Directors”). On December 26, 2014 and January 20, 2015, Elite and other stockholders of T3 delivered to T3 two written consents relating to the composition of T3’s board, as follows: (i) on December 26, 2014, Elite and seven other stockholders holding more than 65% of the outstanding shares delivered a signed stockholder written consent dated December 17, 2014 (the “First Consent”) pursuant to which they filled the four vacancies with new directors (the “New Directors”); and (iii) on January 20, 2015, Elite and six other stockholders holding no less than 58% of the outstanding shares delivered a signed stockholder written consent dated January 15, 2015 that ratified and retook the actions reflected in the First Consent and removed Tsumpes and one of the other Existing Directors from T3’s Board (the “Second Consent”) (collectively, the “Consents”).

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Chancery Court Denies Motion to Dismiss in Case Seeking Removal of Trustees for Misconduct

By Eric Feldman and Patrick Jamieson

In response to demands by trust beneficiaries seeking removal of two trustees pursuant to Delaware law governing fiduciary relationships generally as well as a declaratory judgment that one trustee acted with gross negligence or willful misconduct, the Delaware Court of Chancery denied the trustees’ motion to dismiss, finding it was reasonably conceivable that both trustees were unfit to serve and that the one trustee could have acted with willful misconduct.

Petitioners in United Brotherhood of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) are trust beneficiaries who collectively hold a 78.61% beneficial interest in three trusts (the “Trusts”).  Their interests stem from their 2008 purchase of limited partnership interests in a Delaware limited partnership whose general partner, BSF-TDC GP, LLC (“BSF-TSC”), was controlled by Michael Baumann.  In 2012, Baumann converted the limited partnership into a publicly traded Real Estate Investment Trust (“REIT”).  The limited partnership exchanged its ownership interests in various entities for 2,904,910 REIT common shares, then valued at $18.  Following the conversion, the limited partnership held only the REIT shares and two adjoining parcels of land and consequently determined to transfer its assets into a liquidating trust (the “Master Trust”) pursuant to a Plan of Liquidation and Liquidating Trust Agreement.  BSF-TDC was named as trustee of the Master Trust and the limited partners were designated as beneficiaries.

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Chancery Court Denies Specific Performance of Retrospective Drag-Along Right Based on Prospective Terms of Contract and Declines to Decide Whether a Common Stockholder Can Contractually Waive Statutory Appraisal Rights Ex Ante

By Michelle Repp and Marisa DiLemme

Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.

In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.

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Valuing Stock in a Delisted Corporation Is a Proper Purpose for a Books and Records Request Under DGCL §220; Evaluating Risk in That Company Is Not

By David Bernstein and B. Ashby Hardesty, Jr.

A Post-Trial Master’s Report ruled that conducting a risk evaluation regarding a company was not a proper purpose for a Section 220 books and records demand, but that valuing the company was.

On February 26, 2015, Master LeGrow issued her Final Report in Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies, Inc., C.A. No. 9542-ML (Del. Ch. February 26, 2015), recommending that the Court order Advanced Battery Technologies, Inc. (“ABAT”) to produce certain books and records for inspection under Section 220 of the Delaware General Corporation Law, subject to a standard confidentiality agreement.

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DGCL §220 Books and Records Request Improper as Stockholder Demonstrates Proper Purpose but is Unable to Show Loss or Harm to Corporation

By Porter Sesnon and Kristy Harlan

A Final Master’s Report recommended that the Chancery Court deny a plaintiff’s motion for summary judgment and grant the defendant’s cross-motion for summary judgment, relating to plaintiff’s demand to inspect a Delaware corporation’s books and records to investigate possible mismanagement, waste and breaches of fiduciary duty.

In October 2012, the plaintiff, Mr. Walther, made a demand to inspect the books and records of ITT Educational Services, Inc. (“ITT”) under Section 220 of the Delaware General Corporation Law (“DGCL”).  The Section 220 request stemmed from ITT’s public disclosures and a Majority Committee Staff Report (“Committee Report”) issued by the U.S. Senate Health, Education, Labor and Pensions Committee relating to ITT’s compliance with federal Title IV student loan eligibility requirements and its student loan default rates.

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Chancery Court Finds No Fiduciary Duty for Limited Partners

By Scott Waxman and Eric Jay

Chancery Court grants motion to dismiss against former limited partners seeking damages for a freeze-out merger they claimed was a self-dealing transaction by the general partner and its affiliates.  The Court granted the motion to dismiss for lack of subject matter jurisdiction with regard to the general partner defendants based on a standard arbitration clause that referenced AAA Rules. The Court also granted the motion to dismiss for failure to state a claim with regard to the affiliated limited partner defendants because majority ownership of the merged entities, without more, did not create a fiduciary duty to the plaintiffs.

On February 10, 2015, Vice Chancellor Parsons issued a memorandum opinion in Lewis v. AimCo Properties, L.P., 2015 WL 557995, (Del. Ch. Feb. 10, 2015) granting Motions to Dismiss for each group of defendants in the case. The case was brought by several former holders of limited partnership units (“Plaintiffs”) in four Delaware limited partnerships (the “Partnerships”). Each of the Partnerships was managed by corporate entity general partners (“GP Defendants”) that were each indirectly owned by Apartment Investment and Management Company (“AimCo”).  AimCo also indirectly held a majority of the limited partnership units of each Partnership through various affiliates (together with various officers, the “LP Defendants”).

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Court of Chancery Applies New DGCL § 205 to Determine Validity of Defective Corporate Acts

By Eric Freedman and Sophia Lee Shin

In In Re Numoda Corporation Shareholders Litigation, the Court of Chancery exercised its new powers under Delaware General Corporation Law (“DGCL”) § 205, which became effective as of April 1, 2014, to resolve various disputes regarding the capital structures of two related corporations that consistently failed to follow corporate formalities.

In In Re Numoda Corporation Shareholders Litigation, C.A. No. 9163-VCN (Del. Ch. January 30, 2015) (Noble, V.C.) (the “Numoda Shareholders Litigation Decision”), the Delaware Court of Chancery addressed a dispute concerning the capital structures of two corporations, Numoda Corporation (“Numoda Corp.”) and Numoda Technologies, Inc. (“Numoda Tech.”).  The Numoda Shareholders Litigation Decision came on the heels of a decision of the Court of Chancery in a prior related action, Bons v. Schaheen, 2013 WL 6331287 (Del. Ch. Dec. 2, 2013) (the “225 Action”), in which the Court of Chancery refused to recognize several purported stock issuances due to a failure to comply with corporate formalities.  Because DGCL § 204 (Ratification of defective corporate acts and stock) and DGCL § 205 (Proceedings regarding validity of defective corporate acts and stock) became effective on April 1, 2014, after the decision in the 225 Action, the Court in the Numoda Shareholders Litigation Decision used its new statutory powers to untangle the capital structures that had been the subject of the 225 Action.

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It’s a Family Affair… but Not Any More, as Chancery Court Grants Motion to Dissolve General Partners Under Section 273 of the DGCL

By Annette Becker and Lauren Garraux

The Chancery Court granted a petition in accordance with Section 273 of the Delaware General Corporation Law to dissolve two Delaware corporations, the general partners of two Massachusetts limited partnerships, initially formed by the patriarchs of the Grossman and Cohen families to own three real estate properties for the benefit of their respective family members, after the families reached an impasse as to how to dispose of the assets of the business.

In 1992, the patriarchs of the Grossman and Cohen families formed two Massachusetts limited partnerships (the “Partnerships”) to own three real estate properties for the benefit of their family members (at the time of this dispute, 25 Grossmans and 6 Cohens), who are limited partners in the Partnerships.  The general partners of the Partnerships (the “General Partners”) are two Delaware corporations, each of which is a joint venture corporation with two 50% stockholders, at the time of the dispute, the petitioner, Louis Grossman (“Louis”), and the respondent, Claire Cohen (“Claire”).

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Chancery Court Finds No “Gap” to be Filled, No Implied Covenant Claim in Earn-Out Dispute

By Nick Froio and Lauren Garraux

Chancery Court grants defendant’s motion to dismiss alternative claims of breach of the implied covenant of good faith and fair dealing, fraudulent inducement and negligent misrepresentation in earn-out dispute, holding that merger agreement set the standard to determine whether non-payment of earn-out was improper.

Fortis Advisors LLC v. Dialog Semiconductor PLC, C.A. No. 9522-CB (January 30, 2015) involves a dispute over whether earn-out payments are owed to the former equityholders of iWatt, Inc. (“iWatt”) pursuant to an Agreement and Plan of Merger dated as of July 1, 2013 (the “Merger Agreement”) whereby Dialog Semiconductor PLC (“Dialog”) acquired iWatt. Under the Merger Agreement, Dialog was to pay earn-out payments of up to $35 million depending on the post-merger revenues of Dialog’s Power Conversion Business Group, of which iWatt became a part post-closing. In addition, the terms of the Merger Agreement required that Dialog use its “commercially reasonable best efforts” to achieve and pay the earn-out payments in full. Revenues, however, fell short of the threshold amount to trigger the earn-out payments.

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Chancery Court Holds Merger Agreement’s Forum Selection Clause Trumps Stockholders Agreement

By Jamie Bruce and Mark Hammes

Chancery Court finds that three individual stockholders, as beneficiaries of a merger agreement, were equitably estopped from challenging the valid forum selection clause contained therein despite the fact that they did not personally sign the merger agreement.

In McWane, Inc. v. Lanier, C.A. No. 9488-VCP (Del. Ch. January 30, 2015) (Parsons, V.C.), the Chancery Court denied a motion to dismiss or stay from three individual defendant stockholders who argued that the Court lacked personal jurisdiction over them in a dispute regarding whether certain representations and warranties in a merger agreement were violated.  The court determined that a forum selection clause in a stockholders agreement they had personally signed was trumped by the forum selection clause in the merger agreement that they had not personally signed.  The court determined that not only was the clause in the stockholders agreement merely permissive compared to the merger agreement’s mandatory language, but also that the stockholders agreement fundamentally related to the merger agreement, and the defendants, as beneficiaries of the merger agreement, were equitably estopped from challenging the forum selection clause in the merger agreement.

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