2015 – Page 4 – Delaware Docket

Chancery Court Holds That Merger Price That Resulted from a Strong Sale Process and Extensive Negotiations Is the Best Estimate of Fair Value in an Appraisal Proceeding

May 07 2015

Merlin Partners LP v. AutoInfo, Inc., C.A. No. 8509-VCN (Del. Ch. April 30, 2015) (Noble, V.C.) concerns an appraisal proceeding under Section 262 of the Delaware General Corporation Law in which the Chancery Court found that, where there was a strong sale and negotiation process, and there were no reliable cash flow projections from which to make a discounted cash flow analysis and there were no sales of comparably sized companies in the same business, the price received in the merger was the best indication of fair value at the time of the merger.

Petitioners were former common stockholders of Respondent, AutoInfo, Inc. (“AutoInfo”) who exercised their appraisal rights in connection with AutoInfo’s merger with Comvest Partners (“Comvest”) at a price of $1.05 per AutoInfo share. AutoInfo was struggling financially and had begun a sale process in 2011 using an investment bank, Stephens Inc. (“Stephens”), which had long experience in the applicable industry, transportation. As part of the process, Stephens asked AutoInfo’s management to prepare five year financial projections that were “optimistic” to be used to market AutoInfo. Management had never prepared similar projections before and was doubtful of the validity of the results.

Chancery Court Blocks Stockholders’ Push for Search of Non-Employee Directors’ Personal Email Accounts, But Orders Production of Certain Documents Withheld as Privileged, in Books and Records Action under DGCL Section 220

May 06 2015

By Whitney Smith and Lauren Garraux

In an April 30, 2015 Memorandum Opinion, Vice Chancellor Parsons denied in part and granted in part a motion by two lululemon athletica, inc. (“lululemon” or the “Company”) stockholders to enforce a prior court order directing the Company to produce books and records relating to an investigation of potential insider trading or Brophy claims against the Company’s founder and then-chairman of the board of directors, and potential claims for mismanagement against the other directors. In doing so, the Court held that requiring the Company to search its non-employee directors’ personal email accounts for responsive documents was unwarranted, but determined that certain documents withheld as privileged should be produced pursuant to the fiduciary exception to the attorney-client privilege.

In May and October 2013, respectively, lululemon stockholders Hallandale Beach Police Officers and Firefighters’ Personnel Retirement Fund and Laborers’ District Council Construction Industry Pension Fund (collectively, “Plaintiffs”) commenced separate actions under Delaware General Corporation Law (“DGCL”) Section 220, seeking documents relating to trades of Company stock involving Dennis Wilson, lululemon’s founder and then-chairman of its board in June of 2013. In particular, the timing of the trades — which were made within days of lululemon’s then-CEO’s announcement both to Wilson and the Company’s board that she planned to resign — raised questions, even prompting the Wall Street Journal (“WSJ”) to email the Company for confirmation of certain facts for a story regarding Wilson’s trades for an article which noted their favorable timing for Wilson.

Sound the Alarm? Not so Fast as Chancery Court Dismisses Derivative Suit Alleging Self-Interested “Pump-And-Dump” Scheme Arising Out of Alarm Company’s Repurchase of $450 Million in Stock from Hedge Fund Investor

May 05 2015

By Lauren Garraux and Phillip Kardis

In his April 28, 2015 Memorandum Opinion, Vice Chancellor Parsons dismissed a derivative suit brought by ADT Corp. stockholder Walter E. Ryan, Jr. (“Plaintiff”) against the Company’s board of directors, Corvex Management LP (“Corvex”), a hedge fund investor, and Corvex’s principal arising out of the Company’s repurchase of $450 million in stock held by Corvex, a move that led to a drop in the Company’s stock price. Citing Chancery Court Rule 23.1, Vice Chancellor Parsons dismissed the suit because Plaintiff had neither made a pre-suit demand on the Company’s board nor met his burden of proving that demand should be excused as futile under Aronson.

Plaintiff commenced this derivative action on August 1, 2014 and filed an amended complaint on October 3, 2014, asserting claims of breach of fiduciary duties of care and loyalty against ADT’s board of directors, aiding and abetting those breaches against Corvex and unjust enrichment against Corvex and Corvex principal Keith Meister (“Meister”) who, during the time period relevant to the complaint, held a seat on ADT’s board and audit committee. Plaintiff’s claims arose out of what Plaintiff characterized as a self-interested “pump-and-dump” scheme pursuant to which Meister managed to “pump up” the price of ADT’s stock and then convinced his fellow board members to repurchase most of Corvex’s ADT stock in November 2013 at $44.01 per share for an approximate total of $450 million, the alleged “dump.” Following the repurchase, ADT was left in a “far-worse-than forecasted financial condition,” with “diminished future prospects” and a slipping stock price that ultimately settled around $28 per share in the first few days of February 2014.

Chancery Court Interprets Redemption Option Provisions in LLC Agreement in Connection with Judicial Dissolution

May 05 2015

By Andrew Skouvakis and Peter C. Seel

In Hampton v. Turner, Vice Chancellor Noble denied a motion for summary judgment in a dispute about whether a limited liability company had properly exercised a redemption option under its operating agreement and tendered the correct purchase price for three members’ limited liability company interests, after such members sought judicial dissolution of the company. In denying summary judgment, Vice Chancellor Noble found that the operating agreement was unambiguous with respect to the application of the redemption option provisions and how those should be interpreted to determine a purchase price.

The Court of Chancery Orders Dissolution of a Limited Liability Company Solely on Equitable Grounds

May 05 2015

By Eric Feldman and B. Ashby Hardesty, Jr.

The Delaware Chancery Court held that the assignor of a limited liability company interest and its assignee, neither of which was a member or manager of the limited liability company, both lacked standing to petition for judicial dissolution of the limited liability company under Section 18-802 of the Delaware Limited Liability Company Act (the “LLC Act”). However, the Court went on to further hold that the assignee nonetheless had standing to seek judicial dissolution of the limited liability company in equity. Subsequent to such decision, the Court later issued an order granting the petitioners’ motion for summary judgment seeking judicial dissolution, representing the first time that a Delaware court has dissolved a limited liability company entirely on equitable grounds.

In In re Carlisle Etcetera, Well Union Capital Limited (“WU Parent”) and Tom James Company (“Tom James”) formed a two member Delaware limited liability company (the “LLC”), adopting a very basic operating agreement, with the intent to later amend and restate the operating agreement. The LLC was managed by a four member board, with each member entitled to appoint two of the board managers, and the entire board designated as the “manager” of the LLC. Additionally, a Tom James executive was appointed by the board as the CEO of the LLC. After formation, WU Parent transferred all of its limited liability company interest in the LLC to its wholly-owned subsidiary (“WU Sub”), of which Tom James was aware, and to which it did not object. The parties later began to negotiate an amended and restated operating agreement, which reflected Tom James and WU Sub as the members of the LLC.

Chancery Court Resolves Dispute over Competing Exclusive Remedy Clauses in a SPA

May 04 2015

By Lisa Stark and Andrew Lloyd

In Alliant Techsystems, Inc. v. MidOcean Bushnell Holdings, L.P., C.A. No.9813-CB (Del. Ch. Apr. 24, 2015, rev. Apr. 27, 2015), the Delaware Court of Chancery held that an exclusive remedy clause in a stock purchase agreement did not require the parties to submit their dispute over the accounting methodology used to calculate the net working capital of the seller at closing to a court for resolution under the indemnification provisions in the SPA. Rather, the Court held that an accounting firm must resolve the parties’ dispute under a separate exclusive remedy provision. The Court’s decision meant that the buyer had recourse to a larger pool of funds from which it could potentially satisfy its purchase price adjustment claim following closing.

Chancery Court Holds That a General Partner Breached a Limited Partnership Agreement for Failure to Act in the Best Interests of the Master Limited Partnership; $171 Million in Damages

Apr 23 2015

By Scott Waxman and Joshua Haft

The Chancery Court held that a general partner of a master limited partnership breached the entity’s limited partnership agreement by failing to act in the best interests of the entity and instead acting in a manner that benefited the parent of its general partner and increased distributions to the entity’s common unitholders. The Chancery Court focused on the general partner’s failure to consider lessons learned from a similar past transaction and the inadequacy of the financial advisor’s fairness opinion.

In In re: El Paso Pipeline Partners, L.P. Derivative Litigation, plaintiff challenged two transactions in which El Paso Corporation (“Parent”) sold to El Paso Pipeline Partners, L.P., a master limited partnership (“El Paso MLP”), its interest in two subsidiaries of Parent, Southern LNG Company, L.L.C. and Elba Express, L.L.C. (collectively, “Elba”). Both subsidiaries were engaged in the liquefied natural gas (“LNG”) business. Parent is the parent company of El Paso MLP’s general partner, El Paso Pipeline GP Company, L.L.C. (the “General Partner”); and thus, Parent exercised control over El Paso MLP through the General Partner. In the first transaction, in March 2010, Parent dropped-down a 51% interest in Elba to El Paso MLP for total consideration of $963 million (the “Spring Dropdown”). In the second transaction, in November 2010, Parent dropped-down to El Paso MLP the remaining 49% interest in Elba for at least $931 million and 15% of another Parent subsidiary, for total consideration of $1.412 billion (the “Fall Dropdown”).

Chancery Court Holds That a Proper Purpose with a Credible Basis to Investigate is Required to Grant a Section 220 Action in Pursuit of a Future Derivative Litigation

Apr 20 2015

By Meghan Wotherspoon and Calvin Kennedy

The Chancery Court held that a stockholder must show that there is a proper purpose with a credible basis in order to succeed in a Section 220 action to inspect the books and records of a corporation.

In Southeastern Pennsylvania Transportation Authority v. AbbVie Inc. and James Rizzolo v. AbbVie Inc., the plaintiffs, Southeastern Pennsylvania Transportation Authority (“SEPTA”) and James Rizzolo (“Rizzolo”), as shareholders of defendant AbbVie Inc. (“AbbVie”), made individual written demands on AbbVie for inspection of certain books and records pursuant to Section 220 of the Delaware General Corporation Law (“DGCL”). The plaintiffs sought to obtain records to demonstrate that AbbVie’s directors breached their fiduciary duties. AbbVie rejected the demands for failure to state a proper purpose and each plaintiff then filed a Section 220 Complaint. As the actions stemmed from the same event, the Court utilized a single Memorandum Opinion to deliver its decisions.

Chancery Court Holds that both Exclusive and Nonexclusive Forum Selection Clauses Can Supplant the McWane First Filed Doctrine

Apr 20 2015

By Scott Waxman and David Valenti

The Chancery Court held that the McWane first filed doctrine does not necessarily require a complaint to be dismissed or stayed in favor of a case pending in another state involving similar claims, parties, and facts, when the claim is based on an agreement including a bargained for, nonexclusive and irrevocable forum selection clause.

On April 15, 2015, the Chancery Court in Utilipath v. Baxter, C.A. No. 9922-VCP (Del. Ch. April 15, 2015) (Parsons, V.C.) denied a Motion to Dismiss a complaint attempting to compel enforcement of an alternative dispute resolution (“ADR”) provision in a Redemption Agreement as it pertained to a dispute over closing net working capital. Prior to August, 2013, defendants Baxter McLindon Hayes, Jr., Baxter McLindon Hayes III, and Jarrod Tyson Hayes (the “Hayes Defendants”) were the sole members of defendant Utilipath, LLC (“Old Utilipath,” and together with Hayes Defendants, the “Defendants”), a North Carolina LLC. In August 2013, the Hayes Defendants transferred all of their membership interests in Old Utilipath to defendant Utilipath Holdings, Inc. (“Holdings”), a North Carolina corporation. Subsequently Old Utilipath merged with plaintiff Utilipath, LLC, (“Utilipath”) a Delaware LLC, resulting in Holdings becoming the parent company of Utilipath.

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