Recent Corporate and Alternative Entity Decisions from the Delaware Courts
Marie Raymond Revocable Trust v. MAT Five LLC, et al., C.A. No. 3843-VCL, Lamb, V.C. (Del. Ch. Dec. 19, 2008).
Plaintiffs had brought an action for breaches of fiduciary duty and violations of the Securities Exchange Act of 1933 stemming from alleged mismanagement of MAT Five LLC. MAT Five then commenced a tender offer for its own shares, which plaintiffs challenged for inadequate disclosure. A subsequent settlement between the parties provided MAT Five investors the option to tender and receive additional consideration, retain all MAT Five shares, elect to receive the consideration offered in the original tender offer, or opt out of the settlement. The Court of Chancery approved the proposed settlement, finding it fair and reasonable because it significantly improved the disclosures, increased the available monetary value of the tender offer and provided an expansive range of options for the harmed investors. The Court supported its fairness determination by noting that 80% of MAT Five investors chose to participate in the settlement and an opt out clause protected those that did not.
The Bank of New York Mellon v. Realogy Corp., C.A. No. 4200-VCL, Lamb, V.C. (Del. Ch. Dec. 18, 2008).
In order to take advantage of an arbitrage opportunity, Realogy Corporation offered to refinance a class of unsecured indebtedness by exchanging existing notes for participation in a senior secured term loan. Plaintiff, an indenture trustee of a different class of unsecured Realogy notes, challenged Realogy’s refinancing because it violated indenture terms by discriminating against that class in favor of other classes of unsecured notes. Applying New York law, the Court of Chancery ruled in favor of the trustee and found that the proposed borrowing did not satisfy the definition of Permitted Refinancing Indebtedness in the bank credit agreement which was incorporated by reference in the subject indenture
General Video Corp. v. Kertesz, et al., C.A. No. 1922-VCL, Lamb, V.C. (Del. Ch. Dec. 17, 2008).
After the defendant minority owner of a corporation quit in order to start a similar venture, the remaining majority owner and insolvent entity sued to claim rights in the new venture as well as breaches of numerous agreements. Following a three-day trial, the Court of Chancery found the plaintiffs’ claims factually and legally baseless and ruled in favor of the defendants. First, as Delaware law does not require written notice of resignation be given to the corporation, an unequivocal statement by the defendant minority owner that he wanted out defeated any claims of breach of fiduciary duty arising from conduct occurring after such resignation. Next, the plaintiff corporation could not claim violation of the corporate opportunity doctrine because it was financially unable to exploit any such opportunities. In addition, the Court dismissed claims of breach of fiduciary duty asserted against an attorney of the plaintiff corporation who then went into business with the defendant minority owner because there was no evidence that the attorney ever learned of anything confidential in his capacity as attorney. Finally, due to lack of proof, the Court dismissed additional claims against the defendants.
Klamka v. OneSource Technologies, Inc., C.A. No. 3639-VCN, Noble, V.C. (Del. Ch. Dec. 15, 2008).
Plaintiff moved for a default judgment for the appointment of a custodian for OneSource Technologies, an abandoned Delaware corporation. Although OneSource’s business operations could not be resurrected, Plaintiff planned on merging it with a new entity so as to use OneSource’s trading symbol and Pink Sheet listing. Because the Plaintiff could not show a useful purpose for the revival of OneSource and his objective could easily and properly be accomplished through new filings, the Court denied Plaintiff’s motion in order to avoid circumvention of the ordinary procedures associated with corporation formation and trading.
Aveta Inc., et al. v. Bengoa, C.A. No. 3598-VCL, Lamb, V.C. (Del. Ch. Dec. 11, 2008).
The Court of Chancery granted plaintiffs’ motion for judgment on the pleadings and ordered the parties to arbitrate all claims at issue regarding certain post-closing adjustment payments associated with a merger and stock purchase agreement between the parties. The parties differed as to the adequacy of accounting information provided, leading plaintiffs to bring suit to compel dispute resolution by a reviewing accountant as provided in the merger agreement. The Court found that the documentation issues in dispute fell within the merger agreement’s arbitration clauses, and that matters of procedural arbitrability, like the failure to deliver required documentation, were to be left for the arbitrator to determine.
Kahn v. Portnoy, C.A. No. 3515-CC, Chandler, C. (Del. Ch. Dec. 11, 2008).
Plaintiff brought suit against the directors of an LLC for breach of fiduciary duty where the LLC’s operating agreement explicitly imported the fiduciary duty principles of Delaware corporate law, but modified them with respect to certain transactions. As the LLC agreement’s language inadequately defined the parameters of the contractual fiduciary duties at issue, the Court of Chancery denied the defendant directors’ motion to dismiss because the fiduciary duties were ambiguously defined and the Court could not choose between reasonable interpretations of ambiguous contractual provisions. Plaintiff’s allegations of bad faith were sufficient to survive motion to dismiss.
Off v. Ross, et al., C.A. No. 3468-VCP, Parsons, V.C. (Del. Ch. Nov. 26, 2008).
Plaintiff brought a class action and derivative suit against the board of trustees of a Delaware statutory trust for breach of fiduciary duty in connection with a convertible preferred stock offering that would effectively benefit two members of the board already holding a substantial amount of stock. The parties settled, agreeing to extend the offering on the same terms to the other stockholders of the trust. The Court of Chancery denied Plaintiff’s motion for approval of the settlement because: (1) the consideration received was not conditioned on approval of the settlement and the stockholders would have received the benefit without the settlement; (2) Plaintiff’s counsel reviewed the prospectus at issue but Plaintiff could not show that this input actually resulted in any supplemental disclosures to the stockholders; and (3) released claims pursuant to the settlement affected stockholders’ remedies in two other derivative actions.
Brinkerhoff v. Texas Eastern Products Pipeline Co., LLC, et al., C.A. No. 2427-VCL, (“TEPPCO”) Lamb, V.C. (Del. Ch. Nov. 25, 2008).
Plaintiff alleged that the defendant directors breached their fiduciary duties by causing TEPPCO Partners L.P. to enter into grossly unfair transactions. The Court of Chancery held that Plaintiff’s claim against “the board of directors” provided sufficient identification of individual directors serving on TEPPCO’s board of directors at the time of the transactions at issue. The defendant directors were adequately put on notice of the claims against them and the Plaintiff was entitled to the reasonable inference that the defendant directors participated in approving the transactions because they were part of the TEPPCO board at the time. Accordingly, the Court rejected the defendants’ motion to dismiss for not pleading more particularized facts regarding individual director participation in the challenged transactions.
Cargill, Inc., et al. v. JHW Special Circumstance LLC, C.A. No. 3234-VCP, Parsons, V.C. (Del. Ch. Nov. 7, 2008).
The representative of a Delaware statutory trust (the “Trust”) brought suit against the Trust’s managing owner (the “Managing Owner”) for breach of fiduciary duty, and against the Managing Owner’s parent and grandparent (the “Cargill Defendants”) for exercising control over the Managing Owner’s actions to serve their own self interest. The Managing Owner entered into a purchase and sale agreement with a subsidiary of Refco, Inc., which transaction resulted in the transfer of the Trust’s accounts to a Refco entity. Refco subsequently filed for bankruptcy and the trust recovered less than half of the funds in its Refco accounts. The Court of Chancery denied a motion to dismiss the breach of fiduciary duty claims against the Managing Owner because the pleaded facts supported a reasonable inference that the Managing Owner violated its duty of care and duty to safeguard the Trust’s assets by failing to adequately investigate the consequences of the Refco transactions. The Court also denied the motion to dismiss the breach of fiduciary duty claims against the Cargill Defendants because: (1) under common law principles, they may owe fiduciary duties to the trust because they exercised control over the Managing Owner by virtue of ownership interest and interlocking management; (2) the facts alleged supported a reasonable inference that the Cargill Defendants used such control for their own self-interest; (3) the Delaware Statutory Trust Act does not preempt this particular field of law; and (4) the parties did not contract to modify the default duties imposed by law on fiduciaries and their corporate parents. Lastly, the Court denied motions to dismiss claims against the Cargill Defendants for general negligence and knowing participation in the Managing Owner’s breach.
Summaries prepared by The Delaware Counsel Group LLP® and submitted by Elissa Optsbaum Habbart, Esq.
If you would like to review a complete copy of the decisions or have any questions regarding this article, please contact The Delaware Counsel Group, LLP® by calling 302.576.9600. This article should not be relied upon as legal advice. Copyright © 2008 The Delaware Counsel Group, LLP.
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