Justia Delaware Supreme Court Opinion Summaries

Articles Posted in Business Law
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Marion Coster and Steven Schwat – the two UIP Companies stockholders who each owned fifty percent of the company – deadlocked after attempting several times to elect directors. In response to the director election deadlock, Coster filed a petition for appointment of a custodian for UIP. The UIP board responded by issuing stock to a long-time employee representing a one-third interest in UIP. The stock issuance diluted Coster’s ownership interest, broke the deadlock, and mooted the custodian action. Coster countered by requesting that the Delaware Court of Chancery cancel the stock issuance. After trial, the Court of Chancery found that the stock sale met the most exacting standard of judicial review under Delaware law – entire fairness. On appeal, the Delaware Supreme Court concluded that the court erred by evaluating the stock sale solely under the entire fairness standard of review, reasoning that even though the stock sale price might have been entirely fair, issuing stock while a contested board election was taking place interfered with Coster’s voting rights as a half owner of UIP. Therefore, the court needed to conduct a further review to assess whether the board approved the stock issuance for inequitable reasons. If not, the court still had to decide whether the board, even if it acted in good faith, approved the stock sale to thwart Coster’s leverage to vote against the board’s director nominees and to moot the custodian action. To uphold the stock issuance under those circumstances, the board had to demonstrate a compelling justification to interfere with Coster’s voting rights. On remand, the Court of Chancery found that the UIP board had not acted for inequitable purposes and had compelling justifications for the dilutive stock issuance. Upon return, the Supreme Court agreed with the court’s assessment and "appreciate[d] its work to address the issues remanded for reconsideration." View "Coster v. UIP Companies, Inc." on Justia Law

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At issue before the Delaware Supreme Court in this case was the 2016 all-stock acquisition of SolarCity Corporation (“SolarCity”) by Tesla, Inc. (“Tesla”). Tesla’s stockholders claimed CEO Elon Musk caused Tesla to overpay for SolarCity through his alleged domination and control of the Tesla board of directors. At trial, the foundational premise of their theory of liability was that SolarCity was insolvent at the time of the Acquisition. Because the Court of Chancery assumed, without deciding, that Musk was a controlling stockholder, it applied Delaware’s most stringent "entire fairness" standard of review, and the Court of Chancery found the Acquisition to be entirely fair. In this appeal, the two sides disputed various aspects of the trial court’s legal analysis, including, primarily, the degree of importance the trial court placed on market evidence in determining whether the price Tesla paid was fair. Appellants did not challenge any of the trial court’s factual findings. Rather, they raised only a legal challenge, focused solely on the application of the entire fairness test. After careful consideration, the Delaware Supreme Court was convinced that the trial court’s decision was supported by the evidence and that the court committed no reversible error in applying the entire fairness test. View "In Re Tesla Motors, Inc. Stockholder Litigation" on Justia Law

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Tesla Inc. appealed a Delaware superior court judgment upholding a Division of Motor Vehicles’ (“DMV”) decision denying Tesla’s application for a new dealer license. The superior court agreed with the DMV Director that the Delaware Motor Vehicle Franchising Practices Act (“Franchise Act”) prohibited Tesla, as a new motor vehicle manufacturer, from selling its electric cars directly to customers in Delaware. The Delaware Supreme Court reversed, finding the Franchise Act excluded Tesla's direct sales model, where new electric cars were not sold through franchised dealers in Delaware. View "Tesla Inc. v. Delaware Division of Motor Vehicles" on Justia Law

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The Delaware Court of Chancery was asked to resolve a dispute between a company and one of its former directors over the meaning of a stock option agreement and option grant notice. Applying the plain text of the agreement, the Court of Chancery determined that the dispute was to be resolved in accordance with a board committee’s interpretation of the agreement and notice. After the board, acting through a committee, interpreted the agreement and notice in a manner favorable to the company, the Court of Chancery, without hearing further from the former director, promptly dismissed the former director’s complaint for lack of subject matter jurisdiction. The Delaware Supreme Court found the Court of Chancery properly stayed the action to permit the board’s committee to interpret the agreement and notice in the first instance. The Supreme Court disagreed, however, with the court’s decision to dismiss the former director’s complaint without any meaningful review of the committee’s interpretation. The Court of Chancery’s order of dismissal was therefore reversed, and the case remanded for a review of the committee’s conclusions. View "Terrell v. Kiromic Biopharma, Inc." on Justia Law

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William West, the founder of Access Control Related Enterprises, LLC (“ACRE”), was forced out as an officer of the company by its majority owners, LLR Equity Partners, IV, L.P. and LLR Equity Partners Parallel IV, L.P. (collectively, “LLR”). He filed a wrongful termination suit against ACRE and others in California state court. The California court stayed the case based on the forum selection provisions in the controlling agreements that designated Delaware as the exclusive forum for disputes arising out of the agreements. After a failed detour to Delaware District Court, West filed the same claims in the Delaware Superior Court. A Delaware jury eventually found against West on his breach of contract claim. West did not appeal the jury’s adverse verdict. Instead, he sought to undo his loss in Delaware by challenging the Superior Court’s procedural rulings, arguing: (1) the Superior Court no longer had jurisdiction once it issued the order transferring the case to the Court of Chancery; (2) the Superior Court improperly denied his motions for voluntary dismissal; and (3) if the Superior Court had applied forum non conveniens, it would have dismissed the Delaware case in favor of the California litigation. Finding no reversible error, the Delaware Supreme Court affirmed the Superior Court's decisions. View "West v. Access Control Related Enterprises, LLC" on Justia Law

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Plaintiff-appellant Tracey Weinberg (“Weinberg”) was the former Chief Marketing Officer of defendant-appellee Waystar, Inc.(“Waystar”). During her employment, the company granted her options to purchase stock in its co-defendant Derby TopCo, Inc.,(“Derby Inc.”), pursuant to a Derby TopCo 2019 Stock Incentive Plan (the “Plan”). Weinberg was awarded three option grants under the Plan pursuant to three option agreements executed between October 2019 and August 2020. By the time Weinberg was terminated in 2021, 107,318.96 of her options had vested. She timely exercised all of them in November 2021, and the options immediately converted to economically equivalent partnership units in co-defendant Derby TopCo Partnership LP, a Delaware limited partnership (“Derby LP”) (the “Converted Units”). Each Option Agreement contained an identical call right provision providing Appellees the right to repurchase Weinberg’s Converted Units (the “Call Right”), “during the six (6) month period following (x) the (i) [t]ermination of [Weinberg’s] employment with the Service Recipient for any reason . . . and (y) a Restrictive Covenant Breach.” This appeal turned on the meaning of the word “and” in the three option agreements. Specifically, the question presented for the Delaware Supreme Court was whether two separate events (separated by the word “and”) had to both occur in order for the company to exercise a call right, or whether the call right could be exercised if only one event has occurred. Although Weinberg had been terminated within the time frame specified by the Call Right Provision, a Restrictive Covenant Breach had not occurred. The parties disputed whether the Call Right was available in the absence of a Restrictive Covenant Breach. The Court of Chancery decided that it was, and the Delaware Supreme Court concurred, affirming the Court of Chancery. View "Weinberg v. Waystar, Inc." on Justia Law

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Stillwater Mining Company filed suit against its directors’ and officers’ liability insurers to recover the expenses it incurred defending a Delaware stockholder appraisal action. The superior court granted the insurers’ motions to dismiss after it found that Delaware law applied to the dispute and the Delaware Supreme Court’s decision in In re Solera Ins. Coverage Appeals (“Solera II”) precluded coverage for losses incurred in a stockholder appraisal action under a similar D&O policy. The primary issue on appeal was whether Delaware or Montana law applied to the claims in Stillwater’s amended complaint. Stillwater argued that the superior court should have applied Montana law because Montana had the most significant relationship to the dispute and the parties. If Montana law applied, according to Stillwater, it could recover its defense costs because Montana recognized coverage by estoppel, meaning the insurers were estopped to deny coverage when they failed to defend Stillwater in the appraisal action. Before the Delaware Supreme Court issued Solera II, the Solera I court held that D&O insureds could recover losses incurred in a stockholder appraisal action. Taking advantage of that favorable ruling, Stillwater argued in its complaint that Delaware law applied to the interpretation of the policies. Then when Solera II was issued, Stillwater reversed position and claimed that Montana law applied to the policies. Its amended complaint dropped all indemnity claims for covered losses in favor of three contractual claims for the duty to advance defense costs and a statutory claim under Montana law. In the Supreme Court's view, Stillwater’s amended claims raised the same Delaware interests that Stillwater identified in its original complaint – applying one consistent body of law to insurance policies that cover comprehensively the insured’s directors’, officers’, and corporate liability across many jurisdictions. It then held the superior court did not abuse its discretion when it denied Stillwater's motions. View "Stillwater Mining Company v. National Union Fire Insurance Company of Pittsburgh, PA" on Justia Law

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The Delaware Court of Chancery entered judgment in favor of appellee Sharon Hawkins on her request for a declaration that the irrevocable proxy which provided appellant W. Bradley Daniel (“Daniel”) with voting power over all 100 shares of N.D. Management, Inc. (“Danco GP”) (the “Irrevocable Proxy”), did not bind a subsequent owner of such Danco GP shares. The Court of Chancery also held that an addendum to the Irrevocable Proxy did not obligate the current owner of the Danco GP shares, MedApproach, L.P. (the “Partnership”), to demand that the buyer in a sale to an unaffiliated third party bind itself to the Irrevocable Proxy. Daniel appealed the Court of Chancery’s judgment that the Irrevocable Proxy did not run with the Majority Shares, arguing the court erred by: (1) rather than interpreting and applying the plain language of the Irrevocable Proxy as written, the court relied on the Restatement (Third) of Agency, which was not adopted until nearly a decade after the parties entered into the Irrevocable Proxy; (2) reading additional language into the Irrevocable Proxy in order to support its finding that the broad “catch-all” language that the parties included to prevent termination of the Irrevocable Proxy did not encompass a sale of the shares; and (3) not giving effect to all of the terms of the Irrevocable Proxy and improperly limiting the assignment clause of the Irrevocable Proxy so as not to bind assigns of the stockholder. Finding no reversible error, the Delaware Supreme Court affirmed the Court of Chancery. View "Daniel v. Hawkins" on Justia Law

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The Boardwalk Master Limited Partnership's (“MLP”) limited partnership agreement (the “Partnership Agreement”) disclaimed the general partner’s fiduciary duties, and included a conclusive presumption of good faith when relying on advice of counsel. At issue in this appeal was whether Boardwalk’s general partner properly exercised a call right to take the Boardwalk MLP private. Under the Partnership Agreement, the general partner could exercise a call right for the public units if it received an opinion of counsel acceptable to the general partner that a change in FERC regulations “has or will reasonably likely in the future have a material adverse effect on the maximum applicable rate that can be charged to customers.” The Boardwalk MLP general partner received an opinion of counsel from Baker Botts that a change in FERC policy met the call right condition. Skadden advised that: (1) it would be reasonable for the sole member, an entity in the Boardwalk MLP structure, to determine the acceptability of the opinion of counsel for the general partner; and (2) it would be reasonable for the sole member, on behalf of the general partner, to accept the Baker Botts Opinion. The sole member followed Skadden’s advice and caused the Boardwalk MLP general partner to exercise the call right and to acquire all the public units through a formula in the Partnership Agreement. The Boardwalk MLP public unitholders filed suit and claimed that the general partner improperly exercised the call right. In a post-trial opinion, the Delaware Court of Chancery concluded the general partner improperly exercised the call right because the Baker Botts Opinion had not been issued in good faith; the wrong entity in the MLP business structure determined the acceptability of the opinion; and the general partner was not exculpated from damages under the Partnership Agreement. After its review, the Delaware Supreme Court agreed with the Boardwalk entities that: (1) the sole member was the correct entity to determine the acceptability of the opinion of counsel; (2) that the sole member, as the ultimate decisionmaker who caused the general partner to exercise the call right, reasonably relied on Skadden’s opinion, and that the sole member and the general partner were therefore conclusively presumed to have acted in good faith in exercising the call right. Thus, the general partner and others were exculpated from damages under the Partnership Agreement. The Court of Chancery’s judgment was reversed and the matter remanded for further proceedings. View "Boardwalk Pipeline v. Bandera Master Fund LP" on Justia Law

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A Delaware superior court held that Plaintiffs-Appellees-Cross-Appellants, two doctors who started a laboratory testing enterprise known as Bako Diagnostics (“Bako”), breached certain restrictive covenants when they left Bako to form a new, competing laboratory enterprise. Despite fee-shifting provisions in certain of the contracts, the trial court declined to award attorneys’ fees. The Delaware Supreme Court agreed with the superior court’s determinations that the two doctors breached certain of the restrictive covenants. But because it appeared that the superior court may have misapplied the formula that both sides employed for calculating damages, the Court remanded the case for the trial court to clarify how it derived its damages award and for any needed revisions. Further, the Supreme Court disagreed that no attorneys’ fees were warranted under certain of the contracts. View "Bako Pathology LP v. Bakotic" on Justia Law