2014 – Page 3 – Delaware Docket

Lake Treasure Holdings, Ltd., et al v. Foundry Hill GP, LLC, et al and Foundry Hill Holdings, LP and CP-1 LLC, C.A. No. 6546-VCL (October 10, 2014) (Laster, V.C.)

Oct 15 2014

In Lake Treasure Holdings, Ltd., the plaintiffs, investors in a now-defunct start-up, Foundry Hill Holdings LP (the “Partnership”), sued the Partnership, one of its founders (Ulric Taylor (“Taylor”)), one of Taylor’s subsequent business partners (Christopher Klee (“Klee”)), and various other Partnership-related entities and operating subsidiaries for breach of fiduciary duty and aiding and abetting the breach of fiduciary duty, as well as under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”) and Delaware Uniform Trade Secrets Act (“DUTSA”), in connection with a series of transactions whereby all of the assets of the Partnership were ultimately transferred to entities owned and/or controlled by Taylor and Klee.

Taylor controlled the Partnership through his control of the Partnership’s general partner. As a result, the Court initially found that Taylor owed fiduciary duties, including the duty of loyalty, to the Partnership and its limited partners. In analyzing the transactions at issue, the Court further found that Taylor stood on both sides of such transactions and that therefore the entire fairness standard applied in analyzing such transactions. In applying the entire fairness test, the Court held that Taylor had breached his duty of loyalty when he granted a security interest in all of the assets of the Partnership, including its primary asset, high frequency trading software, to Klee in exchange for a $28,000 loan from Klee to the Partnership. Prior to the $28,000 loan by Klee, Taylor and Klee had previously contemplated Klee purchasing the software for $500,000 with an enterprise valuation of $3 million. 3 months following the granting of the security interest, as foreseen by Taylor and Klee at the time the loan was made, the Partnership defaulted on the loan, Klee foreclosed on the security interest, and Taylor amicably surrendered all of the assets of the Partnership, including all interest in the software, to an entity controlled by Klee. The Court determined that Taylor and Klee “acted in concert to move the Partnership’s high frequency trading software out of the Partnership and into an entity where Taylor and Klee could enjoy its benefits.” Upon finding the fiduciary duty breach by Taylor, the Court then also found that Klee had aided and abetted such breach of fiduciary duty.

Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., C.A. No. 8642-VCP (September 30, 2014) (Parsons, V.C.)

Oct 08 2014

By David Edgar and Joshua Haft

In Black Horse Capital, LP, et al. v. Xstelos Holdings, Inc., et al., the plaintiffs, including Cheval Holdings, Ltd. (“Cheval Holdings”), Black Horse Capital, LP, Black Horse Capital Master Fund Ltd. (together with Black Horse Capital, LP, “Black Horse”), and Ouray Holdings I AG, filed a breach of contract action arising out of a transaction in which the plaintiffs and defendants, Jonathan M. Couchman, Xstelos Holdings, Inc., and Xstelos Corp. (formerly known as Footstar Inc. and Footstar Corp. (“Footstar”)) jointly acquired a pharmaceuticals company, CPEX Pharmaceuticals, Inc. (“CPEX”), which is now wholly owned by defendant FCB I Holdings, Inc. (“FCB Holdings”), an entity jointly owned by Footstar and Cheval Holdings. Immediately following the closing of the acquisition, FCB Holdings was owned 80.5% by Footstar and 19.5% by Cheval Holdings.

The plaintiffs’ claims arose out of an alleged oral promise in December 2010 by the defendants to transfer to the plaintiffs certain assets of CPEX, specifically an additional 60% ownership interest in the drug product known as SER-120 and referred to as “Serenity” by the court. The transfer was to occur after the closing of the CPEX acquisition in exchange for the plaintiffs funding a disproportionately large bridge loan to FCB Holdings (the “Serenity Agreement”). On January 3, 2011, each of Black Horse and Footstar entered into separate bridge loan commitment letters with FCB Holdings and CPEX in the amounts of $10 million and $3 million, respectively. In April 2011, the bridge loans were made to FCB Holdings and the CPEX acquisition closed. In connection with the CPEX acquisition, the bridge loans, and the other related transactions, the parties entered into customary transaction documents. Although the alleged oral promise of the Serenity Agreement was made prior to the parties entering into the transaction documents, none of the transaction documents executed in connection with the loan or the merger referenced the Serenity Agreement. Furthermore, the transaction documents also contained customary integration clauses. By December 2012, the transfer of assets contemplated by the Serenity Agreement had not occurred and relations between the parties deteriorated to the point where the plaintiffs filed this action in June 2013.

In re Cornerstone Therapeutics Inc. Stockholder Litigation, Consolidated C.A. No. 8922-VCG (Sept. 26, 2014) (Glasscock, V.C.)

Oct 08 2014

By Annette Becker and Mark Hammes

In In Re Cornerstone Therapeutics Inc. S’holder Litig., 2014 WL 4418169 (Del. Ch. Sept. 10, 2014), Defendant directors of Cornerstone Therapeutics Inc. (“Cornerstone”) brought a motion to dismiss based on an exculpatory provision in Cornerstone’s certificate of incorporation pursuant to Section 102(b)(7) of the Delaware General Corporation Laws in the context of a controlling stockholder freeze-out merger. In the memorandum opinion, the Court denied the motion to dismiss, finding that, since entire fairness applied to the transaction at the outset, the director defendants must await a determination of entire fairness at trial before the Court could consider whether they were exculpated by the provision. The director defendants moved for interlocutory appeal under Delaware Supreme Court Rule 42 challenging the denial of the Court’s decision regarding the motion to dismiss.

This decision considers the motion for interlocutory appeal. The Court held that the defendant directors are entitled to an interlocutory appeal of the order denying the motion to dismiss. An interlocutory appeal may be certified by the Court only when the appealed decision (1) determines a substantial issue, (2) establishes a legal right, and (3) meets one or more criteria further enumerated in Rule 42, including that the decision falls under any of the criteria for certification of questions of law set forth in Rule 41. Here, the denial of the motion, if reversed, would result in dismissal of the defendant directors from the suit, so it is a substantial issue. Further, it establishes a legal right in that it necessitates the defendant directors be held as parties to the litigation. Finally, it satisfies the further “conflicting decisions” qualification set forth in Rule 41(b)(ii) because decisions of the Courts of Chancery have been conflicting as to whether, in a transaction subject to entire fairness review at the outset, in which there is a claim for “breach of duty on the part of facially disinterested directors who negotiated …. or otherwise facilitated the transaction needs to be specifically pled” and whether an exculpatory provision must be ignored at the motion to dismiss stage to await consideration of entire fairness at trial. As a result, the Court granted the defendant directors’ application for certification of interlocutory appeal.

InReCornerstorneTherapeuticsStockholder

Oklahoma Firefighters Pension & Retirement System v. Citigroup Inc., C.A. No. 9587-ML (Sept. 30, 2014) (LeGrow, A., M.C.)

Oct 07 2014

By Annette Becker and Caitlin Howe

This final report stems from plaintiff-shareholder Oklahoma Firefighters Pension & Retirement System’s (“Oklahoma Firefighters” or “Plaintiff”) demand under 8 Del. C. §220 for access to defendant Citigroup Inc.’s (“Citigroup” or “Defendant”) books and records in connection with alleged fraud and money laundering at two Citigroup subsidiaries. Following a paper record trial in June 2014, the court concluded in its draft report that Plaintiff had a proper purpose in seeking access to the books and records, but the court narrowed the scope of Plaintiff’s initial request. At the present phase of the case, Citigroup objects to the conclusions reached in the draft report, arguing that the incidents at the subsidiaries do not give Plaintiff a credible basis from which to infer wrongdoing or mismanagement on the part of the Citigroup Board of Directors. Moreover, Citigroup contends that even if Plaintiff’s purpose were proper, the scope of the documents requested is still too broad.

The demand arises from incidents at Banco Nacional de Mexico, S.A. (“Banamex”) and Banamex USA, which together account for 10% of the global profits of Citigroup. At Banamex, a fraudulent accounts receivables finance arrangement was discovered, which caused Citigroup to adjust downward its 2013 fourth quarter and full year financials by $235 million. Investigations into the fraud indicated that Citigroup may not have had the proper internal controls in place to prevent fraud, and Moody’s subsequently downgraded Banamex’s debt and deposit ratings due to the allegations surrounding the bank. Another smaller fraud of $30 million was also uncovered at Banamex. At Banamex USA, grand jury subpoenas were issued by the United States District Attorney for the District of Massachusetts regarding compliance with Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) regulations. The grand jury subpoenas were issued subsequent to a number of consent orders between Citigroup and various financial regulatory agencies regarding insufficient BSA and AML controls, risk management, the flow of drug cartel-related funds, and general oversight. In response to the BSA and AML concerns, the Citigroup Board of Directors charged the Board’s Audit Committee with responsibility for legal compliance oversight.

Wolst v. Monster Beverage Corporation, C.A. No. 9154-VCP (Del. Ch. October 3, 2014) (Noble, V.C.)

Oct 07 2014

By David Bernstein and Meredith Laitner

On October 3, 2014, the Delaware Chancery Court issued its ruling in Wolst v. Monster Beverage Corporation, C.A. No. 9154-VCP (Del. Ch. October 3, 2014) (Noble, V.C.), rejecting the plaintiff’s request to inspect Monster Beverage Corporation’s books and records pursuant to Section 220 of the Delaware General Corporation Law.

The plaintiff’s stated purpose for her request to inspect Monster’s books was to determine whether there was a basis for her to bring a derivative suit against Monster based on insider trading that occurred seven years ago. A class action regarding the insider trading had been settled for $16.25 million and a prior derivative suit, in which the plaintiff had been a participant, had been dismissed for failure to make a demand on the Board. Subsequently a demand on the Board had been made and rejected.

The Court held that the possible new derivative suit that was the reason for the plaintiff’s Section 220 demand was time-barred by laches. Further, Vice Chancellor Noble refused to extend to derivative claims the general rule that a class action tolls the statute of limitations for the members of the class pursuing individual direct claims.

WolstvMonsterBeverage

Quadrant Structured Products Company v. Vertin, C.A. No. 6990-VCL (October 1, 2014) (Laster, V.C.)

Oct 06 2014

By William Axtman and Dotun Obadina

In Quadrant Structured Products Company v. Vertin, creditor plaintiff Quadrant Structured Products Company, Ltd. (“Quadrant”) asserted breach of fiduciary duty claims derivatively against the Board of Directors (the “Board”) of the Athilon Capital Corp. (the “Company”) and EBF & Associates (“EBF”), the holder of all of equity and certain junior debt of the Company. EBF also managed the operations of the Company through service and license agreements between the Company and an affiliate of EBF, Athilon Structured Investment Advisors, LLC (“ASIA”), and appointed all five directors of the Board, three of which are current employees of EBF.

Quadrant, as holder of senior notes of the Company, asserted that (a) the Company was insolvent and (b) the directors of the Board and EBF breached their fiduciary duty of loyalty and committed corporate waste by (i) continuing to unnecessarily make interest payments on the junior debt, even though such payments could be deferred for an extended period of time (past the likely date of dissolution and liquidation of the Company), (ii) paying excessive service and license fees to ASIA and EBF to operate the Company, and (iii) changing the Company’s business model to take on greater risk under a strategy where EBF would benefit from any upside as the sole holder of the junior debt and the Company’s equity, but the Company’s more senior creditors (including Quadrant) would bear the cost of any downside. In addition, Quadrant asserted claims under the Delaware Uniform Fraudulent Transfer Act based on the non-deferral of interest on the junior debt and the payment of excessive service and license fees to ASIA and EBF to operate the Company.

JD Holdings, L.L.C., et. al. v. The Revocable Trust of John Q. Hammons, et. al., C.A. 7480-VCL (Laster, V.C.)

Oct 05 2014

By Masha Trainor and Ryan Drzemiecki

This case involves a dispute over interpretation of a right of first refusal clause. In 2005, John Q. Hammons, a hotel entrepreneur, entered into a complex transaction (the “2005 Transaction”), structured as a triangular merger, in which Hammons’ publicly traded company, John Q. Hammons Hotels, Inc., emerged as indirect wholly-owned subsidiary of JD Holdings, LLC, which is controlled by Jonathan Eilian. As part of the 2005 Transaction, Hammons granted Eilian a right of first refusal (the “ROFR”) to purchase any interest in a hotel or other real property described therein (each a “JQH Subject Hotel”).

The plaintiffs, entities affiliated with Eilian (“Plaintiff”), originally filed suit to obtain a declaration regarding the meaning of certain provisions of the ROFR Agreement. Subsequently, Hammons died. The parties agreed that, pursuant to the ROFR Agreement, Hammons’ death triggered a 90-day period during which Eilian would negotiate exclusively with JQH Trust and Hammons’ estate (“Defendant”) to determine whether Eilian would buy the JQH Subject Hotels. However, they disagreed about the JQH Trust’s obligations following the expiration of the exclusivity period. Plaintiff argued that the ROFR clause required the JQH Trust to liquidate all of the JQH Subject Hotels for cash within a certain period after Hammons’ death even if the parties did not agree on a transaction during the exclusivity period, and the ROFR would apply to any such sale. In the answer and counterclaim to the amended complaint, Defendant rejected this interpretation of the ROFR, contending, among other things, that the ROFR failed to create any affirmative obligation to sell and, even if it did, would be void under the rule against perpetuities. The parties have cross-moved for judgment on the pleadings on this and other claims and counterclaims.

Jefferson v. Dominion Holdings, Inc., C.A. No. 8663-VCN (September 24, 2014) (Noble, V.C.)

Sep 29 2014

By Jamie Bruce and Carty Bibee

On September 24, 2014, Vice Chancellor Noble issued his opinion in Jefferson v. Dominion Holdings, Inc., a matter involving a dispute between a corporation and one of its stockholders over the scope, and attendant confidentiality concerns, in the stockholder’s inspection of the books and records of the corporation under 8 Del. C. § 220.

The Court concluded after trial that the plaintiff stockholder Jefferson (“Plaintiff Stockholder”) demonstrated that valuing his stock in defendant Dominion Holdings, Inc. (“Defendant Corporation”) was a proper purpose for his requested inspection. In this Order, Vice Chancellor Noble addressed two issues: (1) the scope of the production of books and records and (2) the confidentiality concerns of Defendant Corporation.

Seaport Village Ltd. v. Seaport Village Operating Company, LLC, C.A. No. 8841-VCL (Sept. 24, 2014) (Laster, V.C.)

Sep 24 2014

By Nick Froio and Zack Sager

Seaport Village Operating Company, LLC (the “LLC”) sought to recover from Seaport Village Ltd. (“Limited”) attorneys’ fees and expenses that the LLC incurred in two related actions. The limited liability company agreement of the LLC (the “LLC Agreement”) provided that if any action was brought by a party against another party relating to or arising out of the LLC Agreement, the prevailing party shall be entitled to recover from the other party reasonable attorneys’ fees, costs and expenses. Limited’s only defense was that because the LLC did not sign the LLC Agreement, it was not a “party” to the LLC Agreement. The Court of Chancery rejected this argument citing Section 18-101(7) of the Delaware Limited Liability Company Act, which states that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.” The court held that since the LLC was bound to the LLC Agreement and that, as a matter of contract law principles, “only parties to a contract are bound by that contract,” the LLC was a party to the LLC Agreement and could enforce the fee-shifting provision.

SeaportVillageLtdvSeaportVillageOperating

In re Nine Systems Corp. S’Holders Litig., Consol. C.A. No. 3940-VCN (September 4, 2014) (Noble, V.C.)

Sep 23 2014

By Marisa DiLemme

In re Nine Systems Corp. S’Holders Litig. involves the 2002 recapitalization of a two-year-old start-up company, Streaming Media Corporation, later known as Nine Systems Corporation (the “Corporation”). The Corporation was going to have to liquidate unless it could carry out two acquisitions, and the purpose of the 2002 recapitalization was to fund these acquisitions. The recapitalization was approved by four of the directors of the Board of the Corporation, one the CEO of the Corporation and the other three employees of three private equity funds, two of which provided the financing needed for the acquisitions through the recapitalization, and the third of which was given a 90-day option to participate in the recapitalization but did not do so. The fifth director, whose firm had brought in minority stockholders, was not kept informed regarding the recapitalization, which was highly dilutive to the minority stockholders, and never fully approved it. The terms of the recapitalization were proposed by the director whose firm was the largest participant in the recapitalization based on his estimate that the Corporation was worth $4 million, without any independent valuation of the Corporation. After the acquisitions, the Corporation became successful, and it was sold four years later for $175 million.

Archive:2014