Delaware Docket

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

 

Court of Chancery Analyzes LLC Valuation Reports in Connection With Breach of Fiduciary Duty

By: Scott Waxman and Zack Sager

In Zachman v. Real Time Cloud Services, LLC, the Delaware Court of Chancery analyzed competing expert reports valuing a Delaware limited liability company in connection with a breach of fiduciary duty claim.  The Court also denied motions to exclude a valuation report and for sanctions relating to discovery abuses, and denied the Delaware limited liability company’s counterclaims for conversion and tortious interference with contract.

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ATTEMPT TO SEIZE CONTROL OF A BEVERAGE COMPANY? COURT OF CHANCERY FINDS INSUFFICIENT EVIDENCE OF CIVIL CONSPIRACY

By: C. Cartwright Bibee and Claire Suni

In Todd O’Gara and Wanu Water, Inc. v. Sheldon Coleman, et al., C.A. No. 2018-0708-KSJM (Del. Ch. Feb. 14, 2020), the Delaware Court of Chancery (the “Court”) granted a motion to dismiss claims made in connection with an alleged conspiracy to seize control of a beverage company by certain former directors and current stockholders. The founder and the company itself filed the complaint asserting claims for breach of fiduciary duty, tortious interference with business relations and contract, civil conspiracy, and libel. The Court found that the complaint failed to plead facts satisfying the essential elements of each claim and, furthermore, did not establish personal jurisdiction over certain of the defendants.

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Court Holds Trustee did Not Abuse Discretion in Rejecting Competing Acquisition Proposal for Liquidated Entity’s Assets

By: Scott E. Waxman and Michael C. Payant

In Acela Investments LLC, et al. v. Raymond DiFalco and Manish Shah, C.A. No. 2018-0558-AGB, (Del. Ch. April 27, 2020), the Delaware Court of Chancery (the “Court”) granted a motion by the liquidating trustee (the “Trustee”) to sell substantially all of the assets of Inspirion Delivery Services, LLC (“IDS” or the “Company”) after determining the Trustee had not abused his discretion in declining to consider a competing eleventh-hour proposal that failed to comply with bid requirements.

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Plaintiff Entitled to Inspect Additional Documents Where Proper Purpose Demonstrated as to Mismanagement and Wrongdoing

By: Joanna Diakos Kordalis and Pouya Ahmadi

In Paraflon Investments Ltd. v. Linkable Networks, Inc., C.A. No. 2017-0611-JRS (Del. Ch. April 3, 2020), the Delaware Court of Chancery (the “Court”) granted, in part, stockholder Paraflon Investments, Ltd.’s (“Paraflon”) request, after a trial on a paper record, for corporate books and records pursuant to Section 220 of the DGCL where proper purpose was shown with respect to the desire to investigate mismanagement and wrongdoing.

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Derivative Suit Dismissed for Failing to Plead Demand Futility

By: Rem Kinne and Zack Sager

In Shabbouei v. Potdevin, C.A. No. 2018-0847-JRS (Del. Ch. Apr. 2, 2020), the Delaware Court of Chancery dismissed a derivative suit against the board of directors (the “Board”) of lululemon athletica inc. (the “Company”) by a Company stockholder (“Plaintiff”) for failing to plead demand futility.  The Court held that Plaintiff did not plead with the requisite particularity that the Board was self-interested in a Separation Agreement with the Company’s CEO Laurent Potdevin (“Potdevin”) negotiated by the Board and that the Board’s decision to settle with, instead of firing, Potdevin for cause was outside the bounds of proper business judgment.

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Delaware Court of Chancery Interprets “Sufficient Particularity” Pleading Standard Under Rule 23.1

By Annette E. Becker and Frank J. Mazzucco

In Robert Elburn v. Robert Albanese et al. and Investors Bancorp, Inc.,C.A. No. 2019-0774-JRS (Del. Ch. Apr. 21, 2020), defendants moved to dismiss a complaint under Court of Chancery Rules 12(b)(6) and 23.1 for failure to state viable claims and failure to plead demand futility.  The Delaware Court of Chancery (the “Court”) interpreted the “sufficient particularity” pleading standard under Rule 23.1, noting that demand futility was pled with sufficient particularity to raise doubt that the board of directors could act impartially in response to a litigation demand.

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WINDFALL OR FAIR? BREACH OF FIDUCIARY DUTY AND UNJUST ENRICHMENT CLAIM SURVIVES MOTION TO DISMISS

By Whitney J. Smith and Mehreen Ahmed

In Gary D.  Voigt v. James S. Metcalf et. al. and NCI Building Systems, Inc., C.A. No. 2018-0828-JTL (Del Ch. Feb. 10, 2020), the court denied defendants’ motion to dismiss, finding that the transaction at issue should be reviewed under the entire fairness standard and that the plaintiff, a stockholder of NCI Building Systems, Inc. (“NCI”), successfully stated claims for breach of fiduciary duty and unjust enrichment against private equity firm Clayton, Dubilier, & Rice (“CD&R”) and most of NCI’s directors in connection with a stock-for-stock merger between NCI and Ply Gem Parent, LLC (“Ply Gem”). The headline issue for the motion to dismiss was whether the plaintiff had pled facts that made it reasonably conceivable that CD&R controlled NCI despite owning less than a majority of NCI’s outstanding shares.

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EQUITABLE RELIEF GRANTED TO STOP BOARD COUP

By David L. Forney and Annamarie C. Larson

In a Memorandum Opinion, Palisades Growth Capital II, L.P. v. Alex Bäcker and Ricardo Bäcker and QLess, Inc. (Del. Ch. C.A. No. 2019-0931-JRS) the Delaware Court of Chancery found that actions taken at a board meeting were void because the defendant acted inequitably by formulating a secret plan to deceive the other board members into attending the meeting and then seized control.  The Court stated that it will not sanction inequitable action by corporate fiduciaries simply because their act is legally authorized.  The Court found that, while the defendants’ actions were technically authorized in the Company’s Charter and Bylaws, they took affirmative action to mislead the other board members in order to take control. 

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Chancery Orders Accounting for Payments to Former Director and CEO Affiliate; Rejects Most Breach of Fiduciary Duty Claims

By: Remsen Kinne and Pouya Ahmadi

In Avande, Inc. v. Shawn Evans, C.A. No. 2018-0203-AGB (Del. Ch. Aug. 13, 2019), the Court of Chancery rejected most of the claims brought by Avande, Inc. (“Avande”) against Avande’s former director and chief executive officer (“CEO”) Shawn Evans (“Evans”) other than a claim for breach of fiduciary duty for engaging in self-interested transactions, authorizing improper expenditures and failure to maintain appropriate documentation of expenditures. The Court awarded Avande only $21,817.70 of the more than $5.3 million in damages sought to recover from Evans. The Court held that DC Risk Solutions, Inc. (“DC Risk”), an affiliate of Evans that provided Avande insurance broker services and bookkeeping services, would be liable as an aider and abettor for any damages that are assessed as a result of the accounting ordered by the Court as to payments made to DC Risk.

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COURT OF CHANCERY DISMISSES EXCESSIVE PAY CLAIMS

By: Scott Waxman and Claire Suni

In Dahle et al. v. Pope et al., C.A. No. 2019-0136-SG (Del. Ch. 2020), the Delaware Court of Chancery (the “Court”) dismissed a derivative suit by stockholders of R.R. Donnelly & Sons Company (the “Company”) under Delaware Chancery Rule 23.1 (“Rule 23.1”) alleging excessive pay of the Company’s board of directors (the “Board’).  The Court found that a letter from the stockholders (the “Letter”) to the Board constituted a pre-suit litigation demand that had been rejected by the Board, and as a result, Plaintiffs’ claim was not entitled to proceed derivatively under Delaware law. {Hard Return}

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Chancery Court Calls Plaintiffs’ Bet by Granting in Part and Denying in Part Partial Motion to Dismiss Breach of Fiduciary Duty Claims in Case Alleging Failure to Disclose Material Facts and Structuring a Transaction for Defendants’ Personal Financial Benefit

By Joanna Diakos and Alidad Vakili

The Delaware Court of Chancery granted in part and denied in part Plaintiff’s partial motion to dismiss, finding that the standard for breach of fiduciary duty was not met as against certain directors and officers of the Company based on allegations they failed to disclose facts relating to a tender offer, but was met as against the directors and one of the officers on allegations that they approved a tender offer where they were expected to receive a personal financial benefit.

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DELAWARE COURT OF CHANCERY LIMITS MEMBER’S SOLE AND EXCLUSIVE RIGHT TO CAUSE COMPANY TO UNDERTAKE A QUALIFIED IPO TO MERE RIGHT OF APPROVAL

By: Scott Waxman & Ernest Simons

In Williams Field Services Group, LLC v. Caiman Energy II, LLC, et al., C.A. No. 2019-0350-JTL (Del. Ch. Sep. 25, 2019), the Delaware Court of Chancery considered the parties’ competing requests for declaratory judgments. The dispute reduced to disagreements over the parties’ respective rights under an LLC agreement with respect to a proposed initial public offering. In this post-trial decision, the Court ruled that the defendants had the authority to implement certain steps in the proposed IPO, but not others, and ordered the parties to prepare a form of final order consistent with its rulings.

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