2015 – Page 5 – Delaware Docket

Holders of Preferred Stock Beware: Delaware Chancery Court Holds that Preferred Stock Is Subject to the Issuer’s Need as a Going Concern, Not Just DGCL §160

Apr 08 2015

By David Bernstein and B. Ashby Hardesty, Jr.

TCV v. TradingScreen, Inc. concerns the interplay between a charter provision providing for the mandatory redemption of preferred stock, Section 160 of the Delaware General Corporation Law (the “DGCL”), and Delaware common law. The Chancery Court held that despite an adequate surplus under Section 160, common law restrictions prohibited a corporation from redeeming preferred stock as required by its charter.

In TCV, TradingScreen’s charter required that if after a specified date holders of a majority of TradingScreen’s Series D preferred stock asked for assistance in selling their preferred stock, TradingScreen would give that assistance. If no third-party buyer were found, TradingScreen would repurchase its preferred stock at its fair value as agreed upon or determined by an expert. In June 2012, the holders of a majority of the preferred stock requested assistance in selling their shares. When no suitable third-party buyer was found, an expert selected by Trading Screen and the majority owners of the preferred stock made a valuation and determined the sale price. After receiving the valuation, TradingScreen refused to repurchase more than a small portion of the preferred stock, stating that its board had determined, based on a study it had had prepared by an outside expert, that doing so would impair TradingScreen’s ability to continue as a going concern. The preferred stockholders brought suit, alleging, among other claims, that TradingScreen breached the Charter by failing to honor the charter’s redemption provision and, as a result, triggered interest payments at 13% on the unpaid amounts.

The preferred stockholders argued that because TradingScreen had a surplus that far exceeded the amount it would need to redeem the preferred stock without violating Section 160, its charter required it to repurchase the preferred stock. TradingScreen argued that under Delaware common law, funds would not be “legally available” for repurchase of preferred stock if doing so threatened the corporation’s ability to continue operating as a going concern. The Chancery Court agreed with TradingScreen. It held that even though redemption of the preferred stock would not violate Section 160, “outside the DGCL, a wide range of statutes and legal doctrines restrict a corporation’s ability to use funds.” It held that the common law restricted TradingScreen’s ability to redeem its shares when doing so would damage its ability to continue as a going concern, and that to challenge the Board’s judgment regarding the effect of redemption on TradingScreen’s ability to continue as a going concern, the preferred stockholders would have to show that the Board’s decision was made in bad faith or was so far off the mark as to constitute actual or constructive fraud. The Court rejected the argument that the charter provisions regarding the preferred stock were a contract between the corporation and the holders of the preferred stock, saying the preferred stockholders “fail to appreciate the hybrid nature of preferred stock” and that the preferred stockholders “are holders of equity, not debt.” It is likely many holders of preferred stock will be surprised to learn that their rights with regard to their preferred stock are subject to the issuers’ needs as going concerns.

TCV v. TradingScreen, Inc., C.A. No. 10164-VCN (Del. Ch. March 27, 2015) (Noble, V.C.)

Chancery Court Holds Fee-Shifting Bylaw Inapplicable to a Former Stockholder Because it Was Adopted After Stockholder’s Equity Interest Was Eliminated

Mar 20 2015

By Susan Apel and Max Kaplan

Chancellor Bouchard finds, as a matter of first impression in Delaware, that a non-reciprocal fee-shifting bylaw is inapplicable to a plaintiff stockholder because it was adopted after the plaintiff’s interest in the corporation was eliminated in a reverse stock split.

In Strougo v. Hollander, C.A. No. 9770-CB (March 16, 2015), Plaintiff – a former stockholder of First Aviation Services, Inc. (“First Aviation”) – challenged (on behalf of himself and a putative class) the fairness of a 10,000-to-1 reverse stock split that cashed out the ownership interests of Plaintiff and the putative class at the request of the Chief Executive Officer and controlling shareholder of First Aviation in order to take First Aviation private. Four days after consummation of the reverse stock split, the First Aviation Board adopted a non-reciprocal fee shifting bylaw that required any “current or prior stockholder or anyone on their behalf” who initiates or asserts a claim or counterclaim against First Aviation or any director, officer or employee and who does not obtain a judgment on the merits that substantially achieves the full remedy sought, to be jointly and severally liable for all fees, costs and expenses incurred in connection with the claim or counterclaim. There was no public announcement to the First Aviation stockholders that the board had adopted the bylaw and Plaintiff was notified of the bylaw after the lawsuit was filed.

Stating That an Inspection under DGCL Section 220 Is Not “Merely For The Curious,” The Chancery Court Reaffirms The Need for a Stockholder to Show a Proper Purpose for a Section 220 Demand and, in Doing So, Holds That a Derivative Suit That is Dismissed With Prejudice is Collateral Estoppel as to All Stockholders

Mar 11 2015

By David Bernstein and Lauren Garraux

Vice Chancellor Noble denied the demand of plaintiff Fuchs Family Trust to inspect the books and records of defendant Parker Drilling Company under Section 220 of the Delaware General Corporation Law and, in doing so, held that Fuchs’s ability to institute future stockholder derivative litigation — one of the stated purposes underlying its demand — was barred by collateral estoppel based on the dismissal with prejudice of a prior stockholder derivative lawsuit — to which Fuchs was not a party — on procedural grounds.

Chancery Court Finds Arbitration Clause in Limited Liability Company Agreement Survives Company’s Conversion into Corporation Despite Corporation’s Litigation Only Approach

Mar 09 2015

By Scott Waxman and Peter C. Seel

In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the Chancery Court denied a motion to dismiss and stayed the proceedings on all counts, finding that the arbitration clause in the limited liability company agreement controlled and the case must be submitted to an arbitrator to decide the issue of substantive arbitrability.

On February 26, 2015, the Chancery Court in 3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) addressed the recurring theme of substantive arbitrability in a dispute that involved the conversion of a limited liability company into a corporation and their conflicting dispute resolution mechanisms. In 2007, defendant Christopher Griffin (the “Defendant”) formed Rubicon Media LLC (“Rubicon LLC”). In 2011, the Defendant reformed Rubicon LLC’s capital structure and, in 2013, converted Rubicon LLC into a corporation: Rubicon Inc. (“Rubicon Inc.,” and together with the Defendant, the “Defendants”). Among other things, the conversion of Rubicon LLC into Rubicon Inc. altered the rights of shareholders with respect to the dispute resolution process. The operative clause in the LLC Agreement (the “LLC Provision”) directs the parties to resolve disputes through mediation and arbitration, whereas the corresponding provision in the Certificate of Incorporation (the “Charter Provision”) designates the Delaware Court of Chancery as the exclusive forum for all disputes.

Are Partial Written Stockholder Consents Between Annual Meetings Sufficient to Fill Board Vacancies? Chancellor Bouchard’s Ruling in Elite Horse Investments Ltd. v. T3 Motion, Inc. Suggests “Yes”

Mar 09 2015

By Michelle Repp and Lauren Garraux

Ruling of Chancellor Andre Bouchard suggests that partial written stockholder consents between annual meetings may be sufficient to fill board vacancies and calls into question stockholder written consents not dated by hand.

Elite Horse Investments Ltd. (“Elite”) is a stockholder of T3 Motion, Inc. (“T3”), a Delaware corporation. T3’s bylaws provide for a seven-member Board of Directors. As of December 26, 2014, T3’s board had four vacancies, with the other three directorships occupied by T3’s CEO, William Tsumpes (“Tsumpes”), and two other individuals (collectively, the “Existing Directors”). On December 26, 2014 and January 20, 2015, Elite and other stockholders of T3 delivered to T3 two written consents relating to the composition of T3’s board, as follows: (i) on December 26, 2014, Elite and seven other stockholders holding more than 65% of the outstanding shares delivered a signed stockholder written consent dated December 17, 2014 (the “First Consent”) pursuant to which they filled the four vacancies with new directors (the “New Directors”); and (iii) on January 20, 2015, Elite and six other stockholders holding no less than 58% of the outstanding shares delivered a signed stockholder written consent dated January 15, 2015 that ratified and retook the actions reflected in the First Consent and removed Tsumpes and one of the other Existing Directors from T3’s Board (the “Second Consent”) (collectively, the “Consents”).

Chancery Court Denies Motion to Dismiss in Case Seeking Removal of Trustees for Misconduct

Mar 09 2015

By Eric Feldman and Patrick Jamieson

In response to demands by trust beneficiaries seeking removal of two trustees pursuant to Delaware law governing fiduciary relationships generally as well as a declaratory judgment that one trustee acted with gross negligence or willful misconduct, the Delaware Court of Chancery denied the trustees’ motion to dismiss, finding it was reasonably conceivable that both trustees were unfit to serve and that the one trustee could have acted with willful misconduct.

Petitioners in United Brotherhood of Carpenters Pension Plan v. Fellner, C.A. No. 9475-VCN (Del. Ch. February 26, 2015) (Noble, V.C.) are trust beneficiaries who collectively hold a 78.61% beneficial interest in three trusts (the “Trusts”). Their interests stem from their 2008 purchase of limited partnership interests in a Delaware limited partnership whose general partner, BSF-TDC GP, LLC (“BSF-TSC”), was controlled by Michael Baumann. In 2012, Baumann converted the limited partnership into a publicly traded Real Estate Investment Trust (“REIT”). The limited partnership exchanged its ownership interests in various entities for 2,904,910 REIT common shares, then valued at $18. Following the conversion, the limited partnership held only the REIT shares and two adjoining parcels of land and consequently determined to transfer its assets into a liquidating trust (the “Master Trust”) pursuant to a Plan of Liquidation and Liquidating Trust Agreement. BSF-TDC was named as trustee of the Master Trust and the limited partners were designated as beneficiaries.

Chancery Court Denies Specific Performance of Retrospective Drag-Along Right Based on Prospective Terms of Contract and Declines to Decide Whether a Common Stockholder Can Contractually Waive Statutory Appraisal Rights Ex Ante

Mar 05 2015

By Michelle Repp and Marisa DiLemme

Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.

In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.

Valuing Stock in a Delisted Corporation Is a Proper Purpose for a Books and Records Request Under DGCL §220; Evaluating Risk in That Company Is Not

Mar 04 2015

By David Bernstein and B. Ashby Hardesty, Jr.

A Post-Trial Master’s Report ruled that conducting a risk evaluation regarding a company was not a proper purpose for a Section 220 books and records demand, but that valuing the company was.

On February 26, 2015, Master LeGrow issued her Final Report in Southpaw Credit Opportunity Master Fund LP v. Advanced Battery Technologies, Inc., C.A. No. 9542-ML (Del. Ch. February 26, 2015), recommending that the Court order Advanced Battery Technologies, Inc. (“ABAT”) to produce certain books and records for inspection under Section 220 of the Delaware General Corporation Law, subject to a standard confidentiality agreement.

DGCL §220 Books and Records Request Improper as Stockholder Demonstrates Proper Purpose but is Unable to Show Loss or Harm to Corporation

Feb 17 2015

By Porter Sesnon and Kristy Harlan

A Final Master’s Report recommended that the Chancery Court deny a plaintiff’s motion for summary judgment and grant the defendant’s cross-motion for summary judgment, relating to plaintiff’s demand to inspect a Delaware corporation’s books and records to investigate possible mismanagement, waste and breaches of fiduciary duty.

In October 2012, the plaintiff, Mr. Walther, made a demand to inspect the books and records of ITT Educational Services, Inc. (“ITT”) under Section 220 of the Delaware General Corporation Law (“DGCL”). The Section 220 request stemmed from ITT’s public disclosures and a Majority Committee Staff Report (“Committee Report”) issued by the U.S. Senate Health, Education, Labor and Pensions Committee relating to ITT’s compliance with federal Title IV student loan eligibility requirements and its student loan default rates.

Chancery Court Finds No Fiduciary Duty for Limited Partners

Feb 13 2015

By Scott Waxman and Eric Jay

Chancery Court grants motion to dismiss against former limited partners seeking damages for a freeze-out merger they claimed was a self-dealing transaction by the general partner and its affiliates. The Court granted the motion to dismiss for lack of subject matter jurisdiction with regard to the general partner defendants based on a standard arbitration clause that referenced AAA Rules. The Court also granted the motion to dismiss for failure to state a claim with regard to the affiliated limited partner defendants because majority ownership of the merged entities, without more, did not create a fiduciary duty to the plaintiffs.

On February 10, 2015, Vice Chancellor Parsons issued a memorandum opinion in Lewis v. AimCo Properties, L.P., 2015 WL 557995, (Del. Ch. Feb. 10, 2015) granting Motions to Dismiss for each group of defendants in the case. The case was brought by several former holders of limited partnership units (“Plaintiffs”) in four Delaware limited partnerships (the “Partnerships”). Each of the Partnerships was managed by corporate entity general partners (“GP Defendants”) that were each indirectly owned by Apartment Investment and Management Company (“AimCo”). AimCo also indirectly held a majority of the limited partnership units of each Partnership through various affiliates (together with various officers, the “LP Defendants”).

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