Justia Delaware Supreme Court Opinion Summaries

This case involved an appeal from a complicated transaction between a private company whose equity was wholly owned by the family of A.R. Sanchez, Jr., Sanchez Resources, LLC (the “Private Sanchez Company”), and a public company in which the Sanchez family constituted the largest stockholder bloc with some 16% of the shares and that was dependent on the Private Sanchez Company for all of its management services, Sanchez Energy Corporation (the “Sanchez Public Company”). The transaction at issue required the Sanchez Public Company to pay $78 million to: (i) help the Private Sanchez Company buy out the interests of a private equity investor; (ii) acquire an interest in certain properties with energy-producing potential from the Private Sanchez Company; (iii) facilitate the joint production of 80,000 acres of property between the Sanchez Private and Public Companies; and (iv) fund a cash payment of $14.4 million to the Private Sanchez Company. In this derivative action, the plaintiffs alleged that this transaction involved a gross overpayment by the Sanchez Public Company, which unfairly benefited the Private Sanchez Company by allowing it to use the Sanchez Public Company‟s funds to buy out their private equity partner, obtain a large cash payment for itself, and obtain a contractual right to a lucrative royalty stream that was unduly favorable to the Private Sanchez Company and thus unfairly onerous to the Sanchez Public Company. As to the latter, the plaintiffs alleged that the royalty payment was not only unfair, but was undisclosed to the Sanchez Public Company stockholders, and that it was the Sanchez family's desire to conceal the royalty obligation that led to a convoluted transaction structure. The Court of Chancery dismissed the complaint, finding that the defendants were correct in their contention that plaintiffs had not pled demand excusal under "Aronson v. Lewis," (473 A.2d 805 (1984)). "Determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal under "Aronson" can be difficult. And this case illustrates that." Because of that, the Supreme Court found that plaintiffs pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially. Therefore, the Court reversed and remanded so that plaintiffs could prosecute this derivative action. View "Delaware County Employees Retirement Fund, et al. v. Sanchez, et al." on Justia Law

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. The plaintiffs' primary argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation. The Court of Chancery held that the business judgment rule was invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. For that and other reasons, the Court of Chancery dismissed plaintiffs' complaint. In this decision, the Delaware Supreme Court found that the Chancellor was correct in finding that the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should have been dismissed. "Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests." View "Corwin, et al. v. KKR Financial Holdings LLC., et al." on Justia Law

The United States Court of Appeals for the Second Circuit certified a question of Delaware law to the Delaware Supreme Court: "If a shareholder demands that a board of directors investigate both an underlying wrongdoing and subsequent misstatements by corporate officers about that wrongdoing, what factors should a court consider in deciding whether the board acted in a grossly negligent fashion by focusing its investigation solely on the underlying wrongdoing?" The plaintiffs in this case made a demand that the board of JPMorgan Chase & Co. investigate two related issues regarding a high-profile situation, what the Second Circuit has called the "London Whale debacle." According to the Second Circuit, these issues were: (1) the failure of JPMorgan‘s risk management policies to prevent the trading that resulted in corporate losses; and (2) supposed false and misleading statements made by JPMorgan management in the wake of the emergence of the problem. According to the plaintiffs, the board investigative committee only made findings as to the former issue by arguing that what management knew when it made disclosures was the subject of several pages of the report. In the Delaware Supreme Court's view, Delaware law on the relevant topic required that the decision of an independent committee to refuse a demand should only be set aside if particularized facts were pled supporting an inference that the committee, despite being comprised solely of independent directors, breached its duty of loyalty, or breached its duty of care, in the sense of having committed gross negligence. The Court concluded that the determination of what constituted gross negligence in the circumstances by definition required a review of the relevant circumstances facing the directors charged with acting. The Court requested more information from the Second Circuit prior to answering the certified question. View "Espinoza v. Dimon, et al." on Justia Law

Defendants-appellants Hill International, Inc., David Richter, Camille Andrews, Brian Clymer, Alan Fellheimer, Irvin Richter, Steven Kramer and Gary Mazzucco sought review of Court of Chancery orders dated June 5, 2015 and June 16, 2015. In its June 5, 2015 Order, the Court of Chancery enjoined Hill from conducting any business at its June 9, 2015 Annual Meeting, other than convening the meeting for the sole purpose of adjourning it for a minimum of 21 days, in order to permit plaintiff-appellee Opportunity Partners L.P. to present certain items of business and director nominations at Hill’s 2015 Annual Meeting. On June 16, 2015, the Court of Chancery entered the Order dated June 5, 2015 as a partial final judgment pursuant to Court of Chancery Rule 54(b). This expedited appeal presented for the Supreme Court's resolution a dispute over the proper interpretation of certain provisions of Articles II and III of Hill’s Bylaws as Amended and Restated on November 12, 2007. The sections of the Bylaws at issue, specifically language in Sections 2.2 and 3.3, concerned the operative date for determining the time within which stockholders must give notice of any shareholder proposals or director nominees to be considered at Hill’s upcoming annual meeting. After review of the bylaws and the Court of Chancery's orders, the Supreme Court found reversible error and affirmed. View "Hill International, Inc., et al. v. Opportunity Partners, L.P." on Justia Law

The U.S. Court of Appeals for the Second Circuit certified a question of Delaware law arising out of an appeal from a decision issued by the U.S. District Court for the Southern District of New York. The question pertained to contract interpretation. Plaintiff-appellant NAF Holdings secured a contractual commitment of its contracting counterparty, defendant Li & Fung (Trading) Limited, to render a benefit to a third party. The counterparty breached that commitment. Could "the promisee-plaintiff bring a direct suit against the promisor for damages suffered by the plaintiff resulting from the promisor's breach, notwithstanding that (i) the third-party beneficiary of the contract is a corporation in which the plaintiff-promisee owns stock; and (ii) the plaintiff-promisee's loss derives indirectly from the loss suffered by the third-party beneficiary corporation; or must the court grant the motion of the promisor-defendant to dismiss the suit on the theory that the plaintiff may enforce the contract only through a derivative action brought in the name of the third-party beneficiary corporation?" The Delaware Supreme Court answered that under Delaware law, a party to a commercial contract who sues to enforce its contractual rights can bring a direct contract action under Delaware law. "Although the relationship of that party to the third-party beneficiary might well have relevance in determining whether the contract claim is viable as a matter of contract law, nothing in Delaware law requires the promisee-plaintiff's contract claim to be prosecuted as a derivative action. " View "NAF Holdings, LLC v. LI & Fung (Trading) Limited" on Justia Law

In the name of controlling litigation costs, a heating and air conditioning contractor, Blue Hen Mechanical, Inc. sued Christian Brothers Risk Pooling Trust as subrogee for the Little Sisters of the Poor for malicious prosecution. In January 2008, the Little Sisters of the Poor contracted with Blue Hen to maintain the heating, ventilation, and air conditioning equipment at its nonprofit residential nursing home facility. Two months later, the nursing home's air conditioner broke, requiring the unit to be replaced at a cost of $168,740. The Little Sisters of the Poor filed suit against Blue Hen, alleging that the unit's failure was due to Blue Hen's negligence in inspecting and maintaining the equipment. After briefing and oral argument, the Superior Court determined that the Little Sisters of the Poor had not produced sufficient evidence of Blue Hen's negligence, and granted Blue Hen's motion for summary judgment. Rather than seek costs in that lawsuit, Blue Hen initiated another suit against the Little Sisters of the Poor, alleging malicious prosecution and abuse of process. Blue Hen conceded that the Little Sisters of the Poor initially had good cause to sue. But it contended that during the course of that litigation, the Little Sisters of the Poor should have realized that its suit lacked probable cause, and should have dismissed its claims against Blue Hen. The Superior Court refused to enlarge the tort of malicious prosecution, which has historically been disfavored by Delaware courts, and determined that under the tort (as Delaware court have defined it), Blue Hen failed to demonstrate that the Little Sisters of the Poor acted maliciously in bringing its action and granted summary judgment to the Little Sisters of the Poor. Blue Hen appealed, and the Supreme Court affirmed: "[w]hatever the original wisdom for sanctioning the tort of malicious prosecution, we refuse to extend it to encompass claims properly brought before the court in the first instance. As important, there is no basis in the summary judgment record to support a rational jury finding that the Little Sisters of the Poor acted maliciously in the original suit, rather than in a good faith belief that Blue Hen was responsible for the serious losses that the Little Sisters of the Poor had suffered." View "Blue Hen Mechanical, Inc. v. Christian Brothers Risk Pooling Trust" on Justia Law

A dispute pending before the United States Court of Appeals for the Third Circuit turned on the interpretation of Delaware’s Equipment Dealer Contracts Statute, 6 Del. C. sec. 2720, et seq. (the “Dealer Statute”). The Third Circuit certified a question of Delaware law to the Delaware Supreme Court: "[d]oes a supplier’s repurchase obligation under section 2723(a) of the Dealer Statute extend to used inventory or is it limited to “new, unused, undamaged and complete inventory” under section 2723(b)?" The Court answered the certified question of law by concluding that a supplier’s repurchase obligation under the Dealer Statute is limited to new, unused, undamaged, and complete inventory. View "Terex Corporation, et al. v. Southern Track & Pump, Inc." on Justia Law

The Delaware Alcoholic Beverage Control (ABC) Commissioner appealed a superior court judgment dismissing his claim against the Delaware Alcoholic Beverage Control Appeals Commission for lack of standing. The Appeals Commission overturned the ABC Commissioner's decision to deny an application for a change of license classification by Lex-Pak, Inc., d/a/b Hak's Sports Bar & Restaurant. Hak's filed a motion to dismiss on grounds that the ABC Commissioner lacked standing. The superior court agreed and dismissed the case. After its review, the Supreme Court concluded that the Delaware Code did not vest the ABC Commissioner with standing to pursue an appeal of decisions by the Appeals Commission. Accordingly, the Court affirmed the superior court's judgment. View "Office of the Commissioner Delaware Alcoholic Beverage Control v. Appeals Commission Delaware Alcoholic Beverage Control" on Justia Law

These appeals both involved damages actions by stockholder plaintiffs arising out of mergers in which the controlling stockholder, who had representatives on the board of directors, acquired the remainder of the shares that it did not own in a Delaware public corporation. Both mergers were negotiated by special committees of independent directors, were ultimately approved by a majority of the minority stockholders, and were at substantial premiums to the pre-announcement market price. Nonetheless, the plaintiffs filed suit in the Court of Chancery in each case, contending that the directors had breached their fiduciary duty by approving transactions that were unfair to the minority stockholders. In both appeals, it was undisputed that the companies did not follow the process established in "Kahn v. M&F Worldwide Corporation" as a safe harbor to invoke the business judgment rule in the context of a self-interested transaction. In both cases, the defendant directors were insulated from liability for monetary damages for breaches of the fiduciary duty of care by an exculpatory charter provision adopted in accordance with 8 Del. C. 102(b)(7). Despite that provision, the plaintiffs in each case sued the controlling stockholders and their affiliated directors, and also sued the independent directors who had negotiated and approved the mergers. The issue central to both, presented for the Supreme Court's review was whether, where the plaintiff challenges an interested transaction that is presumptively subject to entire fairness review, must plead a non-exculpated claim against the disinterested, independent directors to survive a motion to dismiss by those directors. The Court answered that question in the affirmative: a plaintiff seeking only monetary damages must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct. The Court of Chancery in both of these cases denied the defendants' motions to dismiss because it read the Supreme Court's precedent to require doing so, regardless of the exculpatory provision in each company's certificate of incorporation. When the independent directors are protected by an exculpatory charter provision and the plaintiffs are unable to plead a non-exculpated claim against them, those directors are entitled to have the claims against them dismissed, in keeping with the Court's opinion in "Malpiede v. Townson" (and cases following that decision). Accordingly, the Court remanded both of these cases to allow the Court of Chancery to determine if the plaintiffs sufficiently pled non-exculpated claims against the independent directors. View "In Re Cornerstone Theraputics, Inc. Leal, et al. v. Meeks, et al." on Justia Law

The issue this case presented for the Supreme Court's review arose from a business merger. Appellant, Lazard Technology Partners, LLC, represents former stockholders of Cyveillance, Inc. (the seller). Appellee Qinetiq North America Operations, LLC paid $40 million up-front money to the company and promised to pay up to another $40 million if the company's revenues reached a certain level. When the earn-out period ended, the revenues had not reached the level required to generate an earn-out. The seller filed suit in the Court of Chancery, arguing that the buyer breached the merger agreement. The seller also argued that the buyer violated the merger agreement‟s implied covenant of good faith and fair dealing by failing to take certain actions that the seller contended would have resulted in the achievement of revenue sufficient to generate an earn-out. After review, the Court of Chancery found that the seller had not proven that any business decision of the buyer was motivated by a desire to avoid an earn-out payment. Further, the Court found that the merger agreement's express terms were supplemented by an implied covenant. But as to whether conduct not prohibited under the contract was precluded because it might result in a reduced or no earn-out payment, the Court of Chancery held that, consistent with the language of implicated section of the merger agreement, the buyer had a duty to refrain from that conduct only if it was taken with the intent to reduce or avoid an earn-out altogether. On appeal, the seller argued the Court of Chancery misinterpreted the merger agreement. Finding no misinterpretation, the Supreme Court affirmed. View "Lazard Technology Partners v. Qinetiq North America Operations LLC" on Justia Law