Alternative Entity Decisions from the Delaware Courts
Lyondell Chemical Company, et al. v. Ryan, No. 401, 2008, Berger, J. (Del. March 25, 2009). This shareholder derivative action challenged a merger transaction where the directors negotiated the deal in less than a week, only met for seven hours to discuss the transaction, did not press the buyer for a better price and did not conduct even a limited market check. The Court of Chancery “decided that ‘unexplained inaction’ permit[ted] a reasonable inference that the directors may have consciously disregarded their fiduciary duties.” The Supreme Court held otherwise and reversed and remanded, noting that, although there was a triable issue as to whether the directors exercised due care, the corporate charter exculpated the directors from duty of care violations. The relevant inquiry should have been directed at the director’s duty of loyalty and, although a director could violate its duty of loyalty by intentionally disregarding that duty, the record mandated a decision on summary judgment in the directors’ favor because they did not knowingly and completely fail to undertake their responsibilities.
Mickman v. American Intn’l Processing, L.L.C., et al., C.A. No. 3869-VCP, Parsons, V.C. (Del. Ch. April 1, 2009). Plaintiff brought an action for inspection of the books and records of Defendant LFF, L.L.C. (the “LLC”) under Section 18-305 of the Delaware Limited Liability Company Act. The LLC and Plaintiff cross-moved for summary judgment on the issue of whether Plaintiff was a member of the LLC and thus entitled to the inspection. Defendant’s motion was denied and the Court reversed decision on Plaintiff’s motion, as the Court found that inspection rights may not necessarily be limited to those members listed in the LLC’s operating agreement, stating that “LLCs generally are created on a less formal basis than corporations”. The Court held that it was appropriate to consider evidence outside of the four corners of the operating agreement concerning whether Plaintiff is a member of the LLC.
Sutherland v. Sutherland, et al., and Dardanelle Timber, et al., C.A. No. 2399-VCL, Lamb, V.C. (Del. Ch. March 23, 2009). In a case between sibling owners of a close corporation, Plaintiffs brought suit claiming the Defendants caused the corporation to enter into a variety of self-dealing and wasteful transactions. Plaintiffs had been ousted as directors of a subsidiary of the corporation when the Defendants elected themselves to the board. The corporation’s charter contained a provision designed to sterilize director interest when approving self-dealing transactions, but the Court of Chancery held that such provisions only dealt with issues of quorum, and did nothing to sanitize a disloyal transaction. If the Court were to accept Plaintiffs’ interpretation, all interested transactions would be immunized from the entire fairness analysis.
Addy v. Piedmonte, et al., C.A. No. 3571-VCP, Parsons, V.C. (Del. Ch. March 18, 2009). Plaintiff, a sophisticated investor, was induced by Defendants to contribute funds toward an oil and natural gas extraction project and brought suit when Defendants failed to make good on their contractual promises. First, the Court of Chancery denied full integration of an assortment of documents underlying Plaintiff’s investment, justifying that decision by citing (1) conspicuous inconsistencies that supported the conclusion that the documents were not formally or carefully drafted, and (2) the Defendants’ failure to produce certain Note and Note Purchase Documents, contradicting the conclusion that the documents at issue expressed the final intentions of the parties. The Court next ruled on whether a contract can exculpate a contracting party from a claim based on an intentionally false representation of fact. Though the exculpation clause was worded to free the Defendants from responsibility for any false statements of fact represented, it did not clearly disclaim the Plaintiff’s reliance on those representations. As Plaintiff sufficiently alleged that the Defendants knew that certain statements made were false, the Court allowed Plaintiffs’ fraud claims to proceed. In addition, the Court denied Defendants’ motions to dismiss claims of unjust enrichment, breach of contract and promissory estoppel.
AT&T Corp. v. Lillis, et al., No. 490, 2007, Berger, J. (Del. March 9, 2009). Former officers and directors of MediaOne Corporation sought compensation from AT&T for the full value of their stock options. AT&T had admitted many of the substantive allegations, hoping to arbitrate a claim against another party for the same relief, but withdrew its admissions after it lost the arbitration. The Court of Chancery originally relied heavily on AT&T’s admissions in its answer and briefs in ruling against AT&T. Then, after appeal, where the Supreme Court reversed and rewarded with instructions not to consider the admissions, the Court of Chancery reversed itself and ruled that the admissions should not have been considered because they did not relate to the stock option plan at issue. On this appeal, the Supreme Court reversed the Chancery Court’s new determination, holding that the Supreme Court had based its initial reversal on a factual mistake and that the admissions were relevant to the contract at issue and supported a conclusion that the Defendant agreed with the Plaintiff’s position. Although the admissions were no longer legally binding as admissions, withdrawal did not eliminate their probative value as evidence of a disputed material fact. The Defendant’s failure to explain its changed position, which coincided with the adverse arbitration decision, also supported the reasonable inference that the Defendant initially agreed with the Plaintiff’s position on the definition of a key contractual term.
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, LLC.
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