Delaware Docket – Page 54 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

OTK Associates, LLC v. Friedman, et. al., C.A. No. 8447-VCL

Feb 07 2014

On February 5, Vice Chancellor Laster issued an opinion regarding the Morgans Hotel Group case. OTK Associates, LLC, directly and derivatively on behalf of Morgans Hotel Group Co., alleged that the Board of Directors of Morgans had breached its fiduciary duties and violated Morgan’s operating documents in connection with a two-part recapitalization transaction with Yucaipa Companies, LLC that VC Laster had previously enjoined. The defendants argued that because the Yucaipa Transaction was not consummated and the related Board actions were blocked by a preliminary injunction, any claims based on these facts would be moot. Citing a Delaware Supreme Court decision, VC Laster said that even though the Yucaipa transactions did not take place, Morgans could have been injured by the breaches of fiduciary duty, such as by incurring uneccessary expenses, and therefore denied the motion to dismiss based on mootness.

The defendants also said the case should be dismissed because between the time the case was originally brought and the time OTK filed an amended complaint, new directors had been elected, and the plaintiff had failed to make a demand upon them as required by Delaware Rule 23.1. VC Laster said that almost all the claims in the amended complaint related to the same facts that were the subject of the original complaint, and because demand would have been futile at the time of the original complaint, there was no need to make a demand on the new Board to assert claims regarding the facts that were the subject of the original complaint, even if the amended complaint raised new theories of liability. He did dismiss a claim based on a subsequent Yucaipa repudiation of the agreements relating to the transactions, because that did not happen until after the original complaint had been filed, and demand on the Board was required with regard to a claim based on new facts.

The principal issue raised by the defendants was an assertion that there was an action pending in the New York courts and, because the transaction documents said they were governed by New York law, the Delaware courts should defer to the New York courts. VC Laster said that the Delaware courts would have honored the choice of law provision if the suit had involved the contract. However, the suit involved claimed breaches of fiduciary duty regarding the way the contract was approved, not the contract itself, and therefore, under the internal affairs doctrine, would be governed by Delaware law. Therefore, he refused to stay the Delaware proceeding. Finally, the Court refused to dismiss claims against two individual directors despite the fact that the Morgans Certificate of Incorporation contained an exculpation clause of the type permitted by Section 102(b)(7) of the General Corporation Law, because the claims raised in the complaint alleged breaches of the directors’ duties of loyalty, which cannot be protected under Section 102(b)(7).

OTK v Friedman

American Capital Acquisition Partners, LLC, et al. v. LPL Holdings, Inc., et al. No. 8490-VCG (February 3, 2014) (Glasscock, V.C.)

Feb 05 2014

By David Bernstein

In 2011, LPL Holdings, Inc. (“LPL”) acquired Concord Capital Partners, Inc. (“Concord”) from American Capital Acquisition Partners, LLC (“American Capital”) under a purchase agreement (the “Purchase Agreement”) that provided for a contingent addition to the purchase price that could be as much as $15 million based upon the 2013 gross margin of Concord (which was renamed “Concord-LPL”). Conford-LPL also entered into employment contracts with senior executives of Concord, which provided for bonuses based upon Concord-LPL’s reaching specified revenue targets in 2011, 2012 and 2013. At the time of the acquisition, LPL discussed with American Capital and Concord’s senior executives the synergies that could be achieved by using LPL’s computerized custody system to provide custody services for Concord-LPL trust accounts. In fact, the LPL computer system could not process those accounts, and LPL did not modify the system to enable it to process them. As a result, Concord-LPL did not generate gross margins sufficient to entitle American Capital to the contingent additional payments and did not generate sufficient revenues to reach the specified targets in the employment contracts. American Capital and the former Concord senior executives sued LPL, alleging that LPL had committed fraud in stating that LPL could, or would become able to, process Concord-LPL’s trust accounts, and had breached the implied covenant of good faith and fair dealing in (a) not doing what was necessary to enable the LPL computer system to be used to process those accounts and (b) diverting business away from Concord-LPL to another company to avoid having to make additional payments to American Capital under the Purchase Agreement and provide bonuses to Concord’s senior executives under the employment contracts.

Blaustein, et al. v. Lord Baltimore Capital Corp., et al., No. 272 (Del. January 21, 2014)

Jan 29 2014

By Greg Hidalgo and Claire White

In this en banc decision, the Supreme Court affirmed the grant of summary judgment by the Chancery Court in favor of the defendants, and dismissed claims by the minority shareholder of a closely-held corporation for breach of fiduciary duty and the implied covenant of good faith and fair dealing in connection with the shareholder’s repeated requests for the corporation to repurchase her stock pursuant to a Shareholder’s Agreement. The Supreme Court confirmed that the protections afforded to minority shareholders in a closely-held corporation under Delaware common law are the same as those owed to shareholders in a publicly-held corporation, and held that directors of a closely-held corporation do not owe any special fiduciary duty to a minority shareholder to repurchase stock on favorable terms, or at all. In particular, the Supreme Court rejected the minority shareholder’s argument that she was entitled to a vote of the disinterested (or “non-conflicted”) members of the Board of Directors on her repurchase proposals. Citing Nixon v. Blackwell, the Court emphasized that a minority shareholder should rely on contractual protections to provide liquidity for the investor’s shares, and noted that the relevant provision of the Shareholders’ Agreement granted the corporation discretion as to whether to engage in a repurchase transaction, and as to price. The Supreme Court also held that the Chancery Court correctly concluded that there was no implied covenant to negotiate, in good-faith, a stock purchase price, relying on the express terms of the Shareholders’ Agreement as evidence that the parties had bargained for a permissive stock repurchase provision.

Blaustein v. Lord Baltimore Capital Corp

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al., C.A. No 8602 (January 13, 2014) (Glasscock, V.C.)

Jan 15 2014

By Eric Feldman and Eric Taylor

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al. is about the members of a Delaware limited liability company, Touch of Italy Salumeria & Pasticceria, LLC (the “Company”), suing a former member of the Company seeking injunctive and monetary relief after the former member withdrew from the Company in accordance with the terms of its limited liability company agreement (the “LLC Agreement”) and opened a competing business on the same street as the Company a mere ten weeks later. Emphasizing that limited liability companies are explicitly contractual relationships, the Court of Chancery dismissed the action because the LLC Agreement permitted any member to withdraw from the Company by giving written notice of the decision to withdraw to the other members, at which time the remaining members would have 60 days to elect to purchase the withdrawing member’s interest in the Company. The LLC Agreement did not contain a covenant not to compete following withdrawal. Adding to the plaintiffs’ ire was the fact that the withdrawing member allegedly lied about his intentions after withdrawal, saying that he was planning to move to Pennsylvania and perhaps open a new business there. The remaining members of the Company said that, had they known of his true intentions, they would have objected. However, the Court of Chancery noted that the plaintiffs’ lacked the means to object in any legally effective way and interpreted the complaint as “an attempt to achieve a result–restraint on post-withdrawal competition–that the members could have but chose not to forestall by contract.” The Court of Chancery emphasized that it must enforce LLC agreements as written, in this case allowing a member of the Company to withdraw and open a competing business because the LLC Agreement contained no restriction on doing so.

Touch of Italy v. Louis Bascio

Touch of Italy Salumeria & Pasticceria, LLC, et al. v. Louis Bascio, et al., C.A. No 8602 (January 13, 2014) (Glasscock, V.C.)

Jan 15 2014

By Eric Feldman and Eric Taylor

Touch of Italy v. Louis Bascio

Huatuco v. Satellite Healthcare, C.A. No. 8465 (Dec. 9, 2013) (Glasscock, V.C.)

Dec 09 2013

By Scott Waxman and Zack Sager

Huatuco v. Satellite Healthcare is about one member of a Delaware limited liability company (the “Company”) applying for judicial dissolution of the Company pursuant to Section 18-802 of the Delaware Limited Liability Company Act, which permits the Court of Chancery to dissolve a limited liability company when it is not reasonably practicable for the limited liability company to carry on its business in conformity with its limited liability company agreement. In stressing the principle of freedom of contract with respect to limited liability company agreements, the Court of Chancery dismissed the action because the limited liability company agreement of the Company (the “LLC Agreement”) did not permit a member to apply for judicial dissolution. The LLC Agreement expressly provided that, except as required by law, the members were only entitled to the rights expressed in the LLC Agreement. Because the right to judicial dissolution is not required under Delaware law (i.e., the right can be waived) and was not granted in the LLC Agreement, the Court dismissed the action.

Huatuco v Satellite Healthcare and Satellite Dialysis of Tracy LLC