Recent Corporate and Alternative Entity Decisions
Olson v. Halvorsen, et al., C.A. No. 1884-VCL, Lamb, V.C. (Del. Ch. May 13, 2009).
Plaintiff was the founder of a successful hedge fund and claimed he was entitled to payment for his equity interest upon having his association with the fund terminated. During trial, it was established that the parties had entered into an oral agreement providing that a departing member would only be entitled to accrued compensation and the balance of his capital account. The Court of Chancery held that the oral agreement was never superseded by another agreement and any subsequent writings only refined the agreement. As such, the Plaintiff was not entitled to any further payment beyond accrued compensation and his capital account.
San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., et al., C.A. No. 4446-VCL, Lamb, V.C. (Del. Ch. May 12, 2009).
An indenture trustee claimed that incumbent directors were precluded from approving as “continuing directors” persons whose election they opposed, pursuant to the terms of a trust indenture governing publicly traded notes. The indenture provided that if at any time a majority of the board was not composed of “continuing directors,” holders of the notes could put their notes to the corporation at face value. Both the corporation and stockholders claimed the board had the power to give its approval, thereby avoiding the put right at a time when the notes were trading at a deep discount. The Court of Chancery held that the provisions could not be read as narrowly as urged by the indenture trustee and the incumbent directors had the power to approve any person as a continuing director so long as such approval was in accordance with the implied covenant of good faith and fair dealing. To follow the indenture trustee’s reading, the indenture would prohibit any change in the majority of the board as a result of contested elections for the life of the notes. As the record was underdeveloped with regard to the propriety of the board’s decision to “approve” the insurgent slate, the challenge to such decision was dismissed without prejudice.
JAKKS Pacific, Inc. v. THQ/JAKKS Pacific, LLC ,et al., C.A. No. 4295-VCL, Lamb, V.C. (Del. Ch. May 6, 2009).
After two joint-adventurers formed a limited liability company to exploit a video game license, the relationship soured, and one member instituted a broad books and records action against the joint venture LLC for the claimed purpose of valuing the venture and investigating wrongdoing. The Court of Chancery denied that request, holding that the plaintiff’s stated purposes were meaningless, highly speculative or unsupported by the facts. There was substantial uncertainty as to whether the underlying license would be renewed, making the books and records request irrelevant as there likely would be nothing left to value. In addition, plaintiff did not have a credible basis to support his suspicion of mismanagement or wrongdoing, as he presented unreliable witnesses to justify his claims. As the plaintiff could not state a proper purpose, his request was denied.
In Re NextMedia Investors, LLC, C.A. No. 4067-VCS, Strine, V.C. (Del. Ch. May 6, 2009). Petitioners, members of respondent limited liability company, sought summary judgment on their petition for judicial dissolution of the LLC and appointment of a liquidating trustee. Petitioners claimed their consent was required to amend the LLC agreement to extend the dissolution date of the LLC, as the agreement required consent from all members adversely affected and the extension of their investment horizon was such an adverse effect. The Court of Chancery granted their motion for summary judgment in part and ordered dissolution because the provision at issue was unambiguous and the Petitioners’ interpretation was reasonable. Any argument as to whether dissolution postponement was actually detrimental to Petitioners was irrelevant, as a change to the lifespan of the entity as proposed clearly altered an economically meaningful contractual term. The Court then denied Petitioners’ request for a liquidating trustee, holding that the company’s board of managers was responsible for liquidation, as it was in the best position to dissolve the entity’s affairs, and it could not be removed from that role without cause. Petitioners could, however, present their case for removal after full discovery and trial.
Nemec v. Shrader, et al., C.A. No. 3878-CC, Chandler, C. (Del. Ch. April 30, 2009). The Court of Chancery dismissed breach of fiduciary claims against defendant directors in connection with a retirement contract entered into between defendant Booz Allen Hamilton Inc. (the “Company”) and the Plaintiffs. Plaintiffs were long-tenured officers considered “founding fathers” of the Company’s modern business. Upon retiring, Plaintiffs’ held shares of stock and a two-year put right to have the Company buy any shares, after which the Company could redeem any shares at book value. Pursuant to the contract governing those stock grants, the Company subsequently bought back Plaintiff’s shares just before selling the Company to a private equity firm for a large premium. As a result of the redemption, the defendant directors added almost $6M to the proceeds they collectively received through the sale transaction. The Court dismissed Plaintiffs’ action because the directors had the bargained-for contractual right to redeem Plaintiffs’ shares and the exercise was not against reasonable business judgment. As such, a contract right does not necessarily create a fiduciary duty. In addition, the Court held that Booz Allen did not breach the implied covenant of good faith and fair dealing on the same general grounds.
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.
Delaware Laws Governing Business Entities The essential resource for legal professionals who need quick and easy access to Delaware’s Annotated Business Statutes
