Personal Jurisdiction over LLC’s CLO
In re P3 Health Group Holdings LLC, C.A. No. 2021-0518, decided September 12, 2022. A suit was filed in Delaware asserting that the defendant, the general counsel and chief legal officer of a Delaware LLC, breached her fiduciary duty of loyalty in her capacity as an officer. The defendant moved to dismiss for lack of personal jurisdiction. The Delaware Chancery Court denied the motion, holding that the court had personal jurisdiction under the implied consent provision in the Delaware LLC Act, Sec. 18-109, which establishes a mechanism for serving process on a manager of an LLC. Sec. 18-109 classifies two categories of managers – formal managers, who are named in the LLC agreement, and acting managers – who participated materially in the LLC’s management. According to the court, the pleading stage record supported a reasonable inference that by acting as general counsel and CLO the defendant participated materially in the LLC’s management and was an acting manager. In addition, the exercise of personal jurisdiction over the defendant comports with minimum standards of due process. Individuals who take positions as senior officers of Delaware entities do so with the understanding that personal jurisdiction exists in Delaware courts to adjudicate disputes over compliance with their contractual or fiduciary obligations. Just as the corporate consent to jurisdiction statute reaches C-suite executives including the CLO, the LLC Act’s consent to jurisdiction reaches C-suite executives and CLOs.
5High LLC v. Feiler, CA No. 2022-0108, decided August 5, 2022. In a dispute over the membership of an LLC, the Chancery Court held that the defendant member resigned and withdrew from the LLC and that the plaintiff was therefore the sole member. The members did not have a written LLC agreement or a written agreement in which the member resigned. However his conduct indicated that he resigned and that the plaintiff accepted his resignation. Therefore there was an implied agreement that he resigned that modified the LLC Act’s default provision, which provides that members cannot resign.
Inspection of Books and Records
NVIDIA Corporation v. City of Westland Police and Fire Retirement System, No. 259, 2021, decided July 19, 2022. The Delaware Supreme Court held that in an action under Sec. 220 where the stockholder seeks to inspect books and records (1) a determination of the appropriateness of the scope of a stockholder’s requests, or any change to the stockholder’s requests, has no bearing on whether the plaintiff has satisfied Sec. 220’s form and manner requirements, (2) there is no blanket rule that requires the Court of Chancery to outright deny those demands that it finds to be overbroad, (3) Sec. 220 plaintiffs may narrow their requests during litigation if they do so in good faith and such narrowing is not prejudicial to the company, and (4) hearsay is admissible in a Sec. 220 proceeding when that hearsay is sufficiently reliable.
Stockholder Approval of Asset Transfer
Stream TV Networks, Inc. v. SeeCubic, Inc., No. 360, 2021, decided June 15, 2022. The Delaware Supreme Court reversed the Chancery Court and held that a provision of a corporation’s certificate of incorporation that required stockholder approval of certain transfers of all or substantially all of the corporation’s assets unambiguously applied to an omnibus agreement under which all of the corporation’s assets were assigned to the corporation’s secured creditors. The charter provision defined an asset transfer to include dispositions of all the corporation’s assets and the transaction contemplated by the omnibus agreement was a disposition. The court also held the Chancery Court erred in analyzing the agreement under Sec. 271 of the General Corporation Law, which requires stockholder approval for the sale, lease or exchange of the corporation’s assets. The court noted that Sec. 271 did not include approval of other dispositions and was therefore materially different from the charter provision. The court also held that there is no “board only insolvency” exception to Sec. 271’s stockholder approval requirement.
Director’s Fiduciary Duties
Coster v. UIP Industries, Inc., C.A. No. 2018-0440, decided May 2, 2022. The Delaware Chancery Court upheld a stock sale to a corporate executive that reduced the plaintiff stockholder’s percentage ownership and eliminated her ability to maintain her suit seeking to appoint a custodian to break a deadlock. The court held that there was no breach of fiduciary duty under either Schnell v. Chris-Craft Industries or Blasius Industries v. Atlas Corporation. Although motivated to block stockholder action, the board also acted in the corporation’s best interests and had a good faith basis for stock sale in that it rewarded a valued executive and the appointment of the custodian posed a risk to the corporation.
In re Lordstown Motors Corp. Shareholders Litigation, C.A. No. 2021-1066, decided March 7, 2022. The Delaware Chancery Court denied the defendants’ motion to stay a putative class action challenging a de-SPAC transaction pending the resolution of a federal securities class action. The court noted that although the federal action was first-filed and concerned the same de-SPAC business combination, the parties, claims, and remedy sought were different. And perhaps more importantly, the case raised emerging issues of Delaware law. The court noted that it had occasion to apply the doctrines of fiduciary duty in the context of SPACs only once. The court’s essential role of providing guidance in developing areas of law would be impaired if the court were to denude its jurisdiction because a federal securities action resting on similar facts was filed first.
MPM Holdings Inc. v. Federal Insurance Co., CA No. N20C-07-014, decided March 15, 2022. The Delaware Superior Court held that a corporation’s D&O insurer did not have to reimburse or advance the corporation’s attorney’s fees or costs incurred in defending stockholders’ appraisal actions. The insurance policy covers actions arising out of wrongful acts and an appraisal action does not allege a wrongful act.
Duties of SPAC Directors
In re MultiPlan Stockholders Litigation, No. 2021-0300, decided January 3, 2022. The Delaware Chancery Court denied the motion to dismiss a suit brought by the public stockholders of a SPAC against the SPAC’s directors and alleged controlling stockholder, claiming they breached their fiduciary duties by failing to disclose in the proxy that the SPAC’s target’s largest customer was planning on ceasing being its customer and competing with it instead. A majority of the stockholders approved the merger and chose not to exercise their redemption rights. The court held that the suit was direct and not derivative because the stockholders claimed that the defendants impaired the informed exercise of their redemption rights. The court also held that the entire fairness standard had to be applied because there was a conflicted controller and a majority of the board was self-interested or conflicted and that the stockholders sufficiently pled that the defendants’ disclosure violations rose to the level of overall unfairness.
Ordinary Course Covenant
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, No. 71, 2021, decided December 8, 2021. The Delaware Supreme Court affirmed the Chancery Court’s decision holding that a seller violated a covenant to conduct business “only in the ordinary course of business consistent with past practice” and that the buyer was therefore not obligated to close. The agreement involved the sale of 15 hotel properties. In response to the pandemic and without securing the buyer’s consent the seller made drastic changes to its hotel operations and the buyer eventually called off the deal, relying on the seller’s failure to comply with the sales agreement. The court held that although the seller’s actions might have been reasonable in response to the pandemic they were inconsistent with past practice and far from ordinary and required the buyer’s approval.
Director’s Right to Information
SerVaas v. Ford Smart Mobility LLC, C.A. No. 2020-0909, decided November 9, 2021. The Delaware Chancery Court denied a motion to compel a corporation to produce certain privileged documents created while the plaintiffs were directors. The plaintiffs maintained that they were entitled to the documents regardless of whether they sought them in their individual—rather than fiduciary—capacities. However, as the court noted, directors of Delaware corporations possess broad information rights but those rights spring from a board's duty to manage and oversee a company. Because the plaintiffs' request was unrelated to the principles underlying directors' information rights and in furtherance of personal money damages claims against the corporation, their motion was denied.
Reliance on Legal Opinion
Bandera Master Fund, LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372, decided November 12, 2021. The Chancery Court awarded plaintiffs, former limited partners, $690 million in damages in connection with the defendant corporation’s taking a Master Limited Partnership it controlled private. The court found that the corporation breached the partnership agreement which required a legal opinion before call rights could be exercised. The court found that the legal opinion the corporation relied on was a contrived effort to reach the desired result and did not reflect a good faith effort to discern the actual facts and apply professional judgment. In addition the conduct was not exculpated because the corporation’s actions constituted willful misconduct.
Advance Notice Bylaw
Rosenbaum v. CytoDyn Inc., No. 2021-0728, decided October 13, 2021. The Delaware Chancery Court held that the plaintiff dissident stockholder was not entitled to an injunction requiring the board to place the plaintiff’s nominees for directors on the ballot for the annual meeting where the notice of nomination was submitted one day before the deadline set forth in the advance notice bylaw and was rejected for being deficient. The board rejected the plaintiff’s attempt to fix the deficiencies after the deadline. The court noted that there was no challenge to the advance notice bylaw itself and no evidence of manipulative or inequitable conduct by the board in rejecting a deficient notice of nomination.
United Food and Commercial Workers Union and Participating Food Industry Employers Tri-State Pension Fund v. Zuckerberg, No. 404, 2020, decided September 23, 2021. The Delaware Supreme Court held that courts should ask the following three questions on a director-by-director basis when evaluating allegations of demand futility: (i) whether the director received a material personal benefit from the alleged misconduct that is the subject of the litigation demand, (ii) whether the director faces a substantial likelihood of liability on any of the claims that would be the subject of the litigation demand; and (iii) whether the director lacks independence from someone who received a material personal benefit from the alleged misconduct that would be the subject of the litigation demand or who would face a substantial likelihood of liability on any of the claims that are the subject of the litigation demand.
If the answer to any of the questions is “yes” for at least half of the members of the demand board, then demand is excused as futile. It is no longer necessary to determine whether the Aronson v. Lewis test or the Rales v. Blasband test governs a complaint’s demand-futility allegations. The court further noted that the three-part test is consistent with and enhances Aronson, Rales, and their progeny. Therefore, the court need not overrule Aronson to adopt this refined test, and cases properly construing Aronson, Rales, and their progeny remain good law.
The court also held that exculpated claims do not satisfy the second Aronson test because they do not expose directors to a substantial likelihood of liability which is what the second Aronson test focuses on.
Brookfield Assets Management, Inc. v. Rosson, No. 406, 2020, decided September 20, 2021. The Delaware Supreme Court held that equity overpayment/dilution claims, absent more, are exclusively derivative and overruled Gentile v. Rossette, 906 A.2d 91 (Del. 2006), a decision holding that an overpayment transaction may be both derivative and direct where a stockholder having a majority or effective control causes the corporation to issue excessive shares of its stock in exchange for assets of the controlling stockholder that have a lesser value; and the exchange causes an increase in the percentage of the outstanding shares owned by the controlling shareholder, and a corresponding decrease in the share percentage owned by the public (minority) shareholders.
Waiver of Appraisal Rights
Manit Holdings, LLC v. Authentix Acquisition Co., No. 354, 2020, decided September 13, 2021. The Delaware Supreme Court held that the individual right of a stockholder to seek a judicial appraisal is not among those fundamental features that cannot be waived. Accordingly, Sec. 262 of the General Corporation Law does not prohibit sophisticated and informed stockholders, who were represented by counsel and had bargaining power, from voluntarily agreeing to waive their appraisal rights in exchange for valuable consideration.
In re Coinmint, LLC, C.A. No. 2019-0983, decided August 12, 2021. The Delaware Chancery Court held that a minority (sweat equity) member of an LLC was estopped from challenging the conversion of a Delaware LLC to a Puerto Rico LLC even though the conversion was effected without compliance with the operating agreement and LLC Act. Because the operating agreement was silent on the issue, approval of the conversion was governed by the LLC Act. The LLC Act requires two steps – majority member approval or consent and approval by the managers. Here, the majority (financial) member approved but the board of managers never voted on or consented to the conversion, which was effected by the filing of a Certificate of Conversion with the Secretary of State. The court ruled that under these facts, with the majority member approving, the LLC had authority to enter into the conversion and it was therefore voidable and not void. Because it was voidable and not void challenges to the conversion were subject to equitable defenses. And in this case the challenge was barred because the minority (sweat equity) member championed the plan to convert to a Puerto Rico LLC and affirmed his consent to it until filing suit.
Malpractice Suit Based on Filing UCC-1 in Wrong State
Juno Investments LLC v. Miller, 2021 U.S. Dist. LEXIS 118776, decided June 25, 2021. The U.S. District Court, District of Delaware denied the defendant lawyers’ motion to dismiss a malpractice suit filed against them by the plaintiff. The plaintiff loaned money to a Delaware LLC of which it was the majority shareholder. The LLC engaged the defendants to provide legal services. The defendants filed a UCC-1 financing statement naming the Delaware LLC as debtor and plaintiff as creditor. However the UCC-1 was filed in North Carolina when it should have been filed in Delaware. Plaintiff claimed the defendants' failure to file the UCC-1 in the correct state rendered it an unsecured creditor in debtor’s bankruptcy, thereby causing it damage. In rejecting the motion to dismiss the court noted that (1) the defendants’ claim the plaintiff suffered no damages was mooted by the resolution of the bankruptcy proceedings, (2) the plaintiff did not lack standing to raise its negligence claim based on its not having an attorney client relationship because the plaintiff was asserting a duty as a nonclient, and (3) the plaintiff could maintain its breach of contract claim because its complaint plausibly showed privity of contract or that it was a direct third party beneficiary to the engagement contract between the debtor and defendants.
State of Delaware Department of Finance vs. AT&T Inc., No. 303, 2020, decided June 1, 2021. The Delaware Supreme Court, deciding issues of first impression in Delaware, held that it was adopting the procedures and substance followed by the federal courts in administrative subpoena enforcement proceedings. The court then affirmed the Chancery Court’s decision quashing an administrative subpoena served by the Delaware Department of Finance on a Delaware corporation to produce records relating to a financial audit to determine the corporation’s compliance with the state’s unclaimed property law. The court noted that in most cases the subpoena recipient will have a difficult time convincing the court to inquire further into an agency’s good faith once the agency, as in this case, satisfies the federal test. But under the circumstances of this case, where the court had serious questions but the Department refused to provide answers, the Court of Chancery did not err in quashing the subpoena in its entirety. The court also found that the Court of Chancery did not err when it considered the reasonableness of the subpoena in light of the statute of limitations that was in effect before the 2017 amendments to the unclaimed property law.
Reverse Veil Piercing
Manichaean Capital, LLC v. Exela Technologies, Inc., C.A. No. 2020-0601, decided May 25, 2021. The Delaware Chancery Court, in an issue of first impression, held that Delaware courts will allow for outsider reverse veil-piercing in limited circumstances and in circumscribed execution. The court stated that in reviewing a claim for reverse veil-piercing Delaware courts should consider the so-called “alter ego” factors that include insolvency, undercapitalization, commingling of funds, the absence of corporate formalities, and whether the subsidiary is simply a facade for the owner. The court should then ask whether the owner is utilizing the corporate form to perpetuate fraud or an injustice.
The court then held that this was one of those exceptional circumstances where a plaintiff had well pled a basis for reverse veil piercing. The plaintiffs were creditors of a corporation that was the single member of an LLC, which in turn was the single member of several subsidiaries, and the plaintiffs sought to hold the subsidiaries liable for a judgment held against the member. The court found it reasonably conceivable that the subsidiaries were alter egos and actively participated in a scheme to defraud or work an injustice against creditors, and that no innocent shareholders or creditors of the subsidiaries would be harmed by reverse veil-piercing.
COVID-19 and Material Adverse Effects
Snow Phipps Group, LLC v. KCake Acquisition, Inc., C.A. No. 2020-0282, decided April 30, 2021. The Delaware Chancery Court ordered the buyer to close on its acquisition of a company, thereby rejecting the buyer’s assertion that the acquisition should be terminated based on a material adverse event clause in the sales agreement. The buyer asserted that there was a material adverse change to the company’s business because of COVID-19 . However, the court found that the buyer failed to carry its burden of proving there was a reasonable expectation of a material adverse effect. The court noted that although there was a large downturn in sales at the beginning of the pandemic, sales rebounded quickly and were projected to continue recovering throughout the year. It was not projected to have a sustained drop like in the only case where the Delaware Chancery Court found a material adverse effect to be reasonably expected.
Choice of Law in D&O Policies
RSUI Indemnity Company v. Murdock, No. 154 2020, decided March 3, 2021. The Delaware Supreme Court, in what has been called a “landmark” decision concerning choice of law in the context of a directors and officers (D&O) liability insurance policy, held that Delaware law – and not California law - should be applied in a dispute over whether an excess insurer is obligated to reimburse a Delaware corporation for settlement amounts under a D&O policy where the corporation was based in California, the policy was negotiated and issued to it in California, the officers and directors lived in California, and where its only connection to Delaware was that it was incorporated there.
The court looked at various factors and found they suggested that the state of incorporation is the center of gravity of the typical D&O policy. This included that it is Delaware’s corporation law that allows a corporation to purchase a D&O policy and that Delaware law governs the duties of directors and officers of a Delaware corporation and as such the corporation must assess its need for D&O coverage with reference to Delaware law. And in balancing California’s interest – which was mainly based on physical location, against Delaware’s interest in protecting the ability of its corporate citizenry to secure D&O insurance and thereby attract the best directors and officers, the court found that Delaware had a more significant relationship to the policy and the parties.
As to the issue of whether the insurer was responsible, the court found that it was, rejecting its argument that because there was a finding of fraud it was not liable. The court noted that the policy obligated the insurer to pay for a loss arising from claims for a wrongful act, broadly defined to include a breach of duty – which could include a breach of the duty of loyalty when based on fraud. The court then held that Delaware does not have a public policy against the insurability of losses occasioned by fraud so strong as to vitiate the parties’ freedom of contract.
Noncompliance with Certificate of Incorporation
Lacey v. Mota-Velasco, C.A. No. 2019-0312, decided February 11, 2021. The Delaware Chancery Court dismissed a stockholder derivative claim against a corporation’s directors for breach of contract based on the directors failing to comply with a clause in the certificate of incorporation that required certain transactions to be approved by an independent board committee. The court stated that the complaint did not plead any facts indicating that the directors were bound to the company contractually, aside from pointing to the existence of the certificate of incorporation itself. The relationship between directors and their corporation is typically fiduciary, rather than contractual. And if any claim is created on behalf of the corporation by a failure on the part of directors to comply with the entity’s formative documents, it is a claim for breach of fiduciary duty, not breach of contract.
Production of Records
Wood v. U.S. Bank National Association, C.A. No. 2017-0034, decided February 4, 2021. The Delaware Chancery Court held that an individual member of an LLC could not invoke the privilege against self-incrimination to avoid producing documents of a collective entity that were in his possession in a representative capacity for the entity. The court also held that the collective entity doctrine applies to a single member LLC, as the member and the LLC are distinct for the purposes of the self-incrimination clause.
Standing to Challenge Merger
Morris v. Spectra Energy Partners (DE) GP, LP, No. 489, 2019, decided January 22, 2021. The Delaware Supreme Court reversed the Chancery Court’s granting the defendants’ motion to dismiss for lack of standing, the plaintiff’s direct claim challenging the fairness of a merger based on the defendants’ failure to secure value for derivative claims. The Chancery Court applied a litigation risk discount to the recovery amount the plaintiff pled in determining its materiality. This was an error because the court must accept the plaintiff’s factual allegations as true in assessing standing at the motion to dismiss stage.
Validity of Board Meeting
Backer v. Palisades Growth Capital II, L.P., No. 156, 2020, decided January 15, 2021. The Delaware Supreme Court affirmed the Chancery Court’s invalidating the actions taken at a board meeting in which the appellant seized control of the corporation. The Chancery Court did not err in finding that the appellant, the former CEO who the board had terminated, affirmatively deceived one of the directors in order to get him to attend the board meeting, thereby providing a quorum so that the appellant could put into action his agenda to be reinstated as CEO.
Inspection of Books and Records
AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60 2020, decided December 10, 2020. The Delaware Supreme Court held that when a Sec. 220 inspection demand states a proper investigatory purpose, it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing. The court also held that an investigating stockholder is not required in all cases to establish that the wrongdoing under investigation is actionable.
Effect of COVID-19 on M&A Deal
AB Stable VIII LLC v. MAPS Hotels and Resorts One LLC, CA No. 2020-0310, decided November 30, 2020. The Chancery Court held that a company that agreed – pre-COVID 19 – to buy a company that owned 15 luxury hotels was relieved of the obligation to close on the deal because the seller, among things, closed two of the hotels, severely restricted operations at all the others, and laid off thousands of employees due to the pandemic. The court ruled that the seller breached the covenant that required it to operate in the ordinary course of business consistent with past practice in all material respects. The court also found that the buyer could not terminate based on the Material Adverse Effect clause, because an MAE was defined to exclude adverse effects caused by a “calamity” and a pandemic meets the definition of calamity.
In re Solera Insurance Coverage Appeals, Nos. 413, 2019 and 418, 2019, decided October 23, 2020. The Delaware Supreme Court held that an appraisal action brought under GCL Sec. 262 was not a securities claim under a D&O policy that defined a securities claim to include a violation of any law regulating securities. The court held that the plain meaning of the term “violation” suggested an element of wrongdoing and that appraisal proceedings have a neutral purpose—to determine the value of the corporation.
Gulf LNG Energy, LLC v. ENI USA Gas Marketing LLC, No. 22, 2020, decided November 17, 2020. The Delaware Supreme Court held that the Chancery Court has jurisdiction to enjoin a collateral attack on a prior arbitration award. The parties agreed the Federal Arbitration Act governs their dispute. Under the FAA courts have the exclusive power to review and enforce arbitration awards. A party cannot escape the FAA review procedure by filing a follow-on arbitration to attack the outcome of the prior arbitration.
Forum Non Conveniens
Focus Financial Partners, LLC v Holsopple, CA No. 2020-0188, decided November 2, 2020. The Delaware Chancery Court granted the defendant’s motion to dismiss on forum non conveniens grounds in a lawsuit filed by a Delaware LLC arising out of an employee leaving and going to work for the defendant. In evaluating the Cryo-Maid factors, the court found that the fact that a California action filed by the defendant and employee was further along, the predominate role of California law in deciding the issues, and that Delaware lacked jurisdiction over the employee, all weighed against litigating in Delaware.
Definition of “Business Day”
Mad Investors GRMD, LLC v. GR Companies, Inc., CA No. 2020-0589, decided October 28, 2020. The Delaware Chancery Court, in a case of first impression, held that a “business day” for the purposes of Sec. 220(c) of the General Corporation Law expires at 12 midnight and not 5 pm. Sec. 220(c) provides that a stockholder who has demanded an inspection of books and records may not file a lawsuit to compel the inspection until the expiration of 5 five business days after the corporation does not reply to the demand (unless the corporation refuses earlier). The court based its holding in part of the fact that dictionaries indicate that a business day refers to a full calendar day and not a subset of hours and because other sections of the Delaware code define “business day” as a “day” and not limited to hours. The court also distinguished business day from the term “usual hours of busines” as found in Sec. 220(b).
Suit Against Foreign Corporation
Sylebra v. Perelman, C.A. No. 2019-0843, decided October 9, 2020. The Delaware Chancery Court dismissed claims brought by a stockholder in a corporation that was incorporated in Delaware when the stockholder invested but that had since reincorporated in Nevada, seeking to hold provisions of the Delaware bylaws invalid as the bylaws ceased to exist upon the reincorporation. The court also held that the internal affairs doctrine prevented it from declaring provisions of the Nevada corporation’s bylaws invalid under Delaware law, and dismissed the remaining claims under Nevada law because the corporation’s bylaws had an enforceable forum selection clause.
Internal Affairs Doctrine
JUUL Labs, Inc. v. Grove, CA No. 2020-0005, decided August 13, 2020. The Delaware Chancery Court held that a stockholder seeking an inspection of records of a Delaware corporation with its principal place of business in California cannot rely on Sec. 1601 of the California Corporations Code – which grants inspection rights to stockholders of corporations with their principal executive offices in California regardless of the state of incorporation. Under principles articulated by the US and Delaware Supreme Courts, Delaware law governs the internal affairs of its corporations and the scope of a stockholder’s inspection rights is a matter of internal affairs. Therefore, Delaware law applies.
Spanakos v. Pate, No. 532, 2019, decided July 31, 2020. The Delaware Supreme Court affirmed the Chancery Court’s denial of a stockholder’s request under Sec. 223 and 211 for a corporation to hold an annual meeting and elect directors, even though the stockholder met the requirements of those sections. Ordering a meeting is in the court’s discretion, and in this case, where the stockholder was involved in litigation in Florida impacting this case, the Chancery Court, by pointing the stockholder back to Florida for that court to clarify its orders, crafted what it believed was the clearest path to obtaining relief in Delaware.
Duty of Disclosure
Dohmen v. Goodman, No. 403,2019, decided June 23, 2020. The Delaware Supreme Court, answering a certified question from the 9th Circuit Court of Appeals, held that under the facts of the dispute, a general partner’s request to a limited partner for a one time capital contribution did not constitute a request for limited partner action such that the general partner had a fiduciary duty of disclosure. And even if the general partner had a fiduciary duty to disclose, the limited partner could not recover compensatory damages without proving reliance and causation.
Hughes v. Hu, 2019-0112, decided April 27, 2020. The Delaware Chancery Court held that a stockholder filing a derivative suit had established demand futility where the complaint established the board faced a substantial likelihood of liability under Caremark for failing to establish a system of internal controls over the corporation’s financial reporting. The complaint alleged, among other things, the audit committee met sporadically, failed to address known problems, and relied blindly on management instead of establishing its own system of oversight.
Validity of Stockholder Votes and Consents
Palisades Capital II, LP v. Backer, No. 2019-0931, decided March 26, 2020. The Delaware Chancery Court held that an email sent from a stockholder’s lawyer to the corporation’s counsel requesting counsel take actions to facilitate a stockholder consent to appoint a director was neither a vote nor a valid consent. The General Corporation Law requires a meeting for a vote to be valid and a request to take an action, rather than executing an action, is not a valid consent.
Forum Selection Provisions
Salzberg v. Sciabacucchi, No. 346,2019, decided March 18, 2020. The Delaware Supreme Court upheld the validity of a provision in several Delaware corporations’ certificates of incorporation requiring actions arising under the federal Securities Act of 1933 to be filed in a federal court. The court held that federal forum selection provisions fall within the broad enabling text of Sec. 102(b)(1) of the General Corporation Law and are facially valid, are not against public policy, and advance the goal of Delaware courts to achieve judicial economy and avoid duplicative efforts among courts.
Court of Chancery’s Jurisdiction
Hanna v. Baier, CA No. S12J-03-058, decided January 22, 2020. The Delaware Superior Court held that the Court of Chancery was the proper forum to hear an action to enforce a charging order where the plaintiff claimed certain payments made by the Delaware LLC to the debtor member violated the charging order and where the court had to determine if those transactions were authorized by the LLC Act. In addition, the plaintiff was seeking relief which would require the court to pierce the veil, which the Superior Court cannot do.
McElrath v. Kalanick, No. 181, 2019, decided January 13, 2020. The Delaware Supreme Court affirmed the Chancery Court’s dismissal of a derivative suit against a corporation’s board of directors for failure to make a pre-suit demand or allege demand futility. The suit arose out of the board’s approval of a risky acquisition that resulted in the corporation using another company’s proprietary information. The court found that a majority of the directors were independent and disinterested and the complaint failed to allege that the board rubberstamped the flawed transaction or acted in bad faith.