Justia Corporate Compliance Opinion SummariesArticles Posted in Delaware Supreme Court
Backer v. Palisades Growth Capital
Appellant Alex Bäcker was the co-founder and majority common stockholder of QLess, Inc. In June 2019, the Company’s board removed Alex as CEO following an internal investigation into workplace complaints. Alex eventually relented to the change and expressed support for his successor, Kevin Grauman. In the week leading up to the November 15, 2019 board meeting, the Company’s outside counsel circulated board resolutions that, among other things, would appoint Grauman to the board. Alex made a series of statements that collectively represented support for Grauman’s appointment. On the eve of the board meeting, the Company’s independent director unexpectedly resigned, giving Alex a board majority. Alex leapt into action, devising a secret counter agenda to fire Grauman and lock-in Alex’s control of the Company. Alex caught his fellow directors by surprise at the meeting, passing his counter agenda over objections and seizing control of the Company. Palisades Growth Capital II, L.P., the majority owner of the Company’s Series A preferred stock, filed a complaint in the Court of Chancery seeking to reverse Alex’s actions. Following a paper trial, the court held that, even if technically legal, the board’s actions were invalid as a matter of equity because Alex affirmatively deceived a fellow director to establish a quorum. After review of the parties briefs and the record on appeal, the Delaware Supreme Court held the Court of Chancery's finding of affirmative deception was not clearly erroneous. The Supreme Court also held that the Court of Chancery did not impose an equitable notice requirement for regular board meetings, that Appellants failed to properly raise an equitable participation defense below, and that the Court of Chancery did not exercise its equitable powers to grant relief for a de facto breach of contract claim. Accordingly, the Supreme Court affirmed the Court of Chancery’s March 26, 2020 Memorandum Opinion. View "Backer v. Palisades Growth Capital" on Justia Law
Amerisourcebergen Corp v. Lebanon County Employees’ Retirement Fund
The Court of Chancery issued a memorandum opinion in an action brought under Delaware's Corporation Law, section 220 (the "DGCL"). The opinion ordered AmerisourceBergen Corporation to produce certain books and records to Lebanon County Employees Retirement Fund and Teamsters Local 443 Health Services & Insurance Plan (“Plaintiffs”) and granting Plaintiffs leave to take a Rule 30(b)(6) deposition “to explore what types of books and records exist and who has them.” The Company claimed Plaintiffs’ inspection demand, which, among other things, was aimed at investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing, was fatally deficient because it did not disclose Plaintiffs’ ultimate objective, which was what they intended to do with the books and records in the event that they confirmed their suspicion of wrongdoing. The Company also contended the Court of Chancery erred by holding Plaintiffs were not required to establish a credible basis to suspect actionable wrongdoing. And finally, the Company argued the Court of Chancery erred as a matter of law when it allowed Plaintiffs to take a post-trial Rule 30(b)(6) deposition. After review, the Delaware Supreme Court held that when a Section 220 inspection demand stated a proper investigatory purpose, it did not need to identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing. In addition, the Court held that, although the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating stockholder was not required in all cases to establish the wrongdoing under investigation was actionable. Finally, the Court found the Court of Chancery’s allowance of the post-trial deposition was not an abuse of discretion. View "Amerisourcebergen Corp v. Lebanon County Employees' Retirement Fund" on Justia Law
Spanakos v. Page, et al.
Since 2010, appellant Mark Spanakos has tried to gain control over and revive Hawk Systems, Inc., a void Delaware corporation, by filing a series of direct and derivative actions in Florida against former Hawk Systems insiders and taking several steps outside of court to establish himself as the Company’s majority stockholder and sole director. Spanakos was successful in his direct Florida litigation, having won a Partial Final Judgment in one action and favorable Summary Judgment rulings in another. Spanakos’s derivative claims in the third Florida action, however, were stayed to allow Spanakos to clarify his standing to pursue those claims. Accordingly, in 2018 Spanakos filed suit in the Delaware Court of Chancery seeking: (1) a declaration that he controlled a majority of the voting shares of Hawk Systems and that he was the validly elected, sole director and officer of Hawk Systems; or (2) in the alternative, an order compelling the company to hold an annual election of directors under 8 Del. C. sections 223(a) and 211(c). Following a trial, briefing, and post-trial argument, the Court of Chancery denied both of Spanakos’s requests for relief, ruling that he had not carried his burden of proof to obtain any of the relief that he sought. On appeal, Spanakos argues that the Court of Chancery abused its discretion when it declined to order a stockholders’ meeting for the election of directors despite the fact that Spanakos satisfied the elements of Section 211. Having reviewed the record on appeal and the court’s opinion below, the Delaware Supreme Court found the Court of Chancery did not abuse its discretion when it declined to compel a stockholders’ meeting given the unique facts of this case. View "Spanakos v. Page, et al." on Justia Law
Murfey v. WHC Ventures, LLC
Two limited partners demanded the books and records of certain limited partnerships. Most of the documents demanded were produced, but one category of documents remains in dispute: the Schedule K-1s (“K-1s”) attached to the partnerships’ tax returns. Although the limited partners were provided with their own K-1s, the limited partners sought the K-1s of the other limited partners for the purpose of valuing their ownership stake in the partnerships and in order to investigate mismanagement and wrongdoing. The partnerships countered that the K-1s were not necessary and essential to the valuation purpose and there was no credible basis to suspect wrongdoing. The Court of Chancery, based upon its history of interpreting 6 Del. C. section 17- 305 in the same manner as 8 Del. C. section 220, held that the K-1s were subject to the requirement that documents sought be “necessary and essential” to the stated purpose, and found they failed the "necessary and essential" test. The Delaware Supreme Court disagreed, finding that the limited partners were entitled to the K-1s under the terms of the partnership agreements. The Court thus reversed the Court of Chancery and remanded for further proceedings. View "Murfey v. WHC Ventures, LLC" on Justia Law
City of Fort Myers General Employees’ Pension Fund v. Haley
Towers Watson & Co. (“Towers”) and Willis Group Holdings Public Limited Company (“Willis”) executed a merger agreement with closing conditioned on the approval of their respective stockholders. Although Towers had stronger performance and greater market capitalization, Willis stockholders were to receive the majority (50.1 percent) of the post-merger company. Upon the merger’s public announcement, several segments of the investment community criticized the transaction as a bad deal for Towers and a windfall for Willis. Towers’ stock price declined and Willis’s rose in reaction to the news. Proxy advisory firms recommended that the Towers stockholders vote against the merger, and one activist stockholder began questioning whether Towers’ management’s incentives were aligned with stockholder interests. Also, after announcing the merger, ValueAct Capital Management, L.P. (“ValueAct”), an institutional stockholder of Willis, through its Chief Investment Officer, Jeffrey Ubben, presented to John Haley, the Chief Executive Officer (“CEO”) and Chairman of Towers who was spearheading the merger negotiations, a compensation proposal with the post-merger company that would potentially provide Haley with a five-fold increase in compensation. Haley did not disclose this proposal to the Towers Board. In light of the uncertainty of stockholder approval, Haley renegotiated the transaction terms to increase the special dividend. Towers eventually obtained stockholder approval of the renegotiated merger. The transaction closed in January 2016, and the companies merged to form Willis Towers Watson Public Limited Company (“Willis Towers”). Haley became the CEO of Willis Towers and was granted an executive compensation package with a long-term equity opportunity similar to ValueAct’s proposal. At issue were stockholder suits filed in early 2018. Here, Towers stockholders alleged that Haley breached his duty of loyalty by negotiating the merger on behalf of Towers while failing to disclose to the Towers Board the compensation proposal. The Court of Chancery dismissed the claims, holding that the business judgment rule applied because “a reasonable board member would not have regarded the proposal as significant when evaluating the proposed transaction,” and further holding that plaintiffs had failed to plead a non-exculpated bad faith claim against the Towers directors. To the Delaware Supreme Court, plaintiffs argued the Court of Chancery erred in holding the executive compensation proposal was not material to the Towers Board. To this, the Supreme Court concurred, reversed the Court of Chancery, and remanded for further proceedings. View "City of Fort Myers General Employees' Pension Fund v. Haley" on Justia Law
Dohmen v. Goodman
The Ninth Circuit Court of Appeals certified a question of law to the Delaware Supreme Court arising out of an appeal from the federal district court for the Central District of California. The question asked whether in a Delaware limited partnership, does the general partner’s request to the limited partner for a one-time capital contribution constitute a request for limited partner action such that the general partner has a duty of disclosure, and if the general partner fails to disclose material information in connection with the request, could the limited partner prevail on a breach of fiduciary duty claim and recover compensatory damages without proving reliance and causation? The Delaware Court responded in the negative: "[f]undamentally, this is not a duty to disclose case - it is a breach of the duty of loyalty case for failure to tell the truth." Under the stipulated facts of this dispute, the general partner’s request to a limited partner for a one-time capital contribution does not constitute a request for limited partner action such that the general partner has a fiduciary duty of disclosure. Even if the general partner had a fiduciary duty of disclosure, if the general partner failed to disclose material information in connection with the request, the limited partner cannot recover compensatory damages without proving reliance and causation. View "Dohmen v. Goodman" on Justia Law
Salzberg, et al. v. Sciabacucchi
At issue before the Delaware Supreme Court in these cases was the validity of a provision in several Delaware corporations’ charters requiring actions arising under the federal Securities Act of 1933 (the “Securities Act” or “1933 Act”) to be filed in a federal court. Blue Apron Holdings, Inc., Roku, Inc., and Stitch Fix, Inc. were all Delaware corporations that launched initial public offerings in 2017. Before filing their registration statements with the United States Securities and Exchange Commission (the “SEC”), each company adopted a federal-forum provision. Appellee Matthew Sciabacucchi bought shares of each company in its initial public offering or a short time later. He then sought a declaratory judgment in the Court of Chancery that the FFPs were invalid under Delaware law. The Court of Chancery held that the FFPs were invalid because the “constitutive documents of a Delaware corporation cannot bind a plaintiff to a particular forum when the claim does not involve rights or relationships that were established by or under Delaware’s corporate law.” Because the Supreme Court determined such a provision could survive a facial challenge under Delaware law, judgment was reversed. View "Salzberg, et al. v. Sciabacucchi" on Justia Law
United States of America v. Sanofi Aventis U.S. LLC, et al.
The Third Circuit Court of Appeals certified a series of questions of law to the Delaware Supreme Court. The Questions arose in connection with the prosecution of a qui tam action under the False Claims Act (“FCA”), In re: Plavix Marketing, Sales Practices and Products Liability Litigation (No. II), brought against Sanofi-Aventis U.S. LLC, Sanofi-Aventis U.S. Services, Inc., Aventis, Inc., Aventis Pharmaceuticals, Inc., Bristol-Myers Squibb Company, and Bristol-Myers Squibb Pharmaceuticals Holding Partnership (together, “Defendants”). The relator bringing the action, on behalf of the United States and several states, is JKJ Partnership 2011 LLP, a Delaware limited liability partnership. The partnership consisted of three individuals who allegedly were each an “original source” of knowledge upon which the allegations against Defendants were based. The Questions arose when one of the partners was replaced by another partner, and an amended complaint was filed shortly thereafter. Upon the filing of the amended complaint, the Defendants moved to dismiss, alleging, in-part, that replacing the partner was impermissible the under the FCA’s “first-to-file” bar. The United States District Court for the District of New Jersey (the “District Court”) granted the motion on that ground. The partnership appealed to the Third Circuit, which, in turn, certified the Questions that related to the “construction or application of” a Delaware statute “which has not been, but needed to be settled by the Delaware Supreme Court. View "United States of America v. Sanofi Aventis U.S. LLC, et al." on Justia Law
McElrath v. Kalanick, et al.
In 2016, Uber Technologies, Inc. acquired Ottomotto LLC to gain more traction in the autonomous vehicle space, hiring key employees from Google's autonomous vehicle program. Though steps were taken to ensure the former Google employees did not misuse Google's confidential information, it eventually came to light Google's proprietary information had indeed been misused. Uber settled Google's misappropriation claims by issuing additional Uber stock to Google, valued at $245 million. An Uber stockholder and former Uber employee filed suit in the Delaware Court of Chancery against the directors who approved the Otto acquisition. Plaintiff claimed the directors ignored the alleged theft of Google’s intellectual property and failed to investigate pre-closing diligence that would have revealed problems with the transaction. According to plaintiff, the board should not have relied on the CEO’s representations that the transaction had the necessary protections because he and Uber had a history of misusing the intellectual property of others. Defendants responded by moving to dismiss the complaint under Court of Chancery Rule 23.1. As they asserted, the plaintiff first had to make a demand on the board of directors before pursuing litigation on the corporation’s behalf. The Court of Chancery found that a majority of the Uber board of directors could have fairly considered the demand, and dismissed the complaint. The Delaware Supreme Court found, as did the Court of Chancery, that a majority of the board was disinterested because it had no real threat of personal liability due to Uber’s exculpatory charter provision. And a majority of the board was also independent of the one interested director. Therefore, the Supreme COurt affirmed the Court of Chancery's judgment dismissing the complaint with prejudice. View "McElrath v. Kalanick, et al." on Justia Law
BlackRock Credit Allocation Income Trust, et al. v. Saba Capital Master Fund, Ltd.
The issue this case presented for the Delaware Supreme Court’s review centered on whether, under their respective bylaws, two closed-end investment funds, BlackRock Credit Allocation Income Trust (“BTZ”) and BlackRock New York Municipal Bond Trust (“BQH”, and with BTZ, the “Trusts”), properly excluded their shareholder, Saba Capital Master Fund, Ltd. (“Saba”), from presenting its slate of dissident trustee nominees for election at the respective annual meetings. The Court of Chancery held that such exclusion was improper, reasoning that the supplemental questionnaires that Saba’s nominees were asked to complete, exceeded the bylaws’ scope and, thus, the Trusts were “not permitted to rely on the five-day deadline for Saba’s compliance with that request.” It also held that laches did not bar Saba’s claims for equitable relief. On appeal, Appellants-Trusts contended the Court of Chancery erred by issuing an injunction requiring the Trusts to count the votes for Saba’s nominees at the respective annual meetings, since they claimed that Saba’s nominees were ineligible for election because of their failure to timely provide supplemental information in accordance with the clear and unambiguous bylaws. Appellants also contended the court erred in holding that Saba’s claims for equitable relief were not barred by laches. On appeal, the parties continued to dispute whether the Questionnaire was the type of “necessary” and “reasonably requested” subsequent information that falls within the meaning of Article I, Section 7(e)(ii) of the Trusts’ bylaws. The Delaware Supreme Court agreed with the Vice Chancellor that Section 7(e)(ii) was clear and unambiguous, but disagreed that Saba should have been excused from complying with the Bylaws’ clear deadline. Further, the Court affirmed the Vice Chancellor’s holding as to laches. View "BlackRock Credit Allocation Income Trust, et al. v. Saba Capital Master Fund, Ltd." on Justia Law