2017 – Delaware Docket

Class Action Dismissed as Demand was Not Excused as Futile; Plaintiff Failed to Allege Facts Sufficient to Establish that a Majority of the Board Faced Substantial Likelihood of Liability for Non-Exculpated Claims

Nov 22 2017

In Lenois, et al. v. Lawal, et al., and Erin Energy Corporation, C.A. No. 11963-VCMR (Del. Ch. November 7, 2017), plaintiff Robert Lenois (“Plaintiff”) on behalf of himself and other stockholders brought a class action for breach of fiduciary duty against controllers and the board of directors of Erin Energy Corporation (“Erin”) for approving what was claimed to be an unfair transaction. The Delaware Court of Chancery dismissed the class action suit under Court of Chancery Rule 23.1, holding that the directors were protected by an exculpatory charter, and Plaintiff failed to meet the heightened pleading standard for demand futility set by the second prong of Aronson v. Lewis, 473 A.2d 805 (Del. 1984). Although Plaintiff pled with particularity that one director acted in bad faith, the complaint did not allege facts sufficient to establish that a majority of the board faced a substantial likelihood of liability for non-exculpated claims.

Chancery Court Grants in Part and Denies in Part Motion to Dismiss Brought by Defendant FXCM, Inc. in Derivative Suit Alleging That FXCM Knowingly Violated Regulation 5.16

Nov 21 2017

By: Scott E. Waxman and Daisy Sexton

In Brett Kandell v. Dror Niv et al., the Delaware Chancery Court denied in part and granted in part a motion to dismiss a derivative action brought by a stockholder (“Plaintiff”) against nominal defendant FXCM, Inc. (“FXCM” or “the Company”), a foreign exchange (“FX”) broker. The claim was brought against FXCM directors (“Defendants”) for losses associated with the “Flash Crash” in the value of the euro relative to the Swiss franc, which happened when the Swiss decoupled the two currencies. As a result of these huge losses, FXCM had to obtain a loan under onerous conditions. Two main causes of action were asserted: (1) that the directors’ ability to exercise business judgment with respect to the Flash Crash was impaired, and (2) that the directors knowingly violated 17 C.F.R. § 5.16 (“Regulation 5.16”) which prohibits foreign exchange traders from representing that they will limit clients’ trading losses. Plaintiff did not make a demand on the company prior to bringing suit.

Chancery Court Dismisses Claims Against Defendants and Holds that the Transactional Structure in M&F Worldwide Applies to Conflicted One Sided Controller Transactions

Oct 19 2017

By: Annette Becker and Joshua Haft

In In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, Consolidated C.A. No. 11202-VC (Ch. Ct August 18, 2017) former stockholders of Martha Stewart Living Omnimedia, Inc. (“MSLO”) brought a consolidated class action suit against Martha Stewart (“Stewart”), the former controlling stockholder of MSLO, for breach of fiduciary duty and against Sequential Brands Group, Inc. (“Sequential”), the acquirer of MSLO by merger, for aiding and abetting that breach claiming that Stewart leveraged her position as a controller to obtain disparate consideration for herself as compared to the minority stockholders of MSLO in the acquisition of MSLO. Plaintiffs moved to dismiss, with the Court finding that the complaint failed to state a claim for breach of fiduciary duty against Stewart, and on that basis need not reach the question of whether the complaint adequately pleads the elements of aiding and abetting such a breach, and granted the plaintiffs’ motion to dismiss the complaint.

Chancery Court Partially Grants Books and Records Request

Oct 19 2017

By David Forney and Jonathan Miner

In Mehta v. Kaazing Corporation, C.A. No. 2017-0087-JRS (Del. Ch. Sept. 29, 2017), the Delaware Court of Chancery partially granted and partially denied a plaintiff shareholder’s books and records inspecting demand under Section 220(c) of the Delaware General Corporation Law (“DGCL”). Although valuation of equity is usually a proper purpose, here the shareholder did not identify any reason why his equity needed to be valued, so this purpose was deemed improper. The shareholder’s other purposes, including alleged wrongdoing and mismanagement, were deemed proper notwithstanding the shareholder’s open employment litigation action against the company, but the scope of his requests were limited only to those documents that addressed the crux of those purposes.

Chancery Court Defines De Novo Standard of Review for Appeals of Receiver’s Decisions Disallowing Claims

Oct 16 2017

By: Jessica Pearlman and Will Smith

In B.E. Capital Management Fund LP v. Fund.Com Inc., C.A. No. 12843-VCL (Del. Ch. October 4, 2017), the Delaware Court of Chancery denied an appeal from a receiver’s decision disallowing a claim for breach of contract against a company in receivership. The Court held that the appropriate standard of review for an appeal of a receiver’s decision was de novo as to both law and facts, and in particular, that the Court had discretion to consider additional evidence not presented on record to the receiver. Applying this standard, the Court upheld the receiver’s decision, but on different grounds. The Court ruled that the breach of contract claim was time-barred by the doctrine of laches, not the contract’s choice-of-law provision, as choice-of-law provisions must expressly reference statutes of limitations to apply to statutes of limitations.

COURT OF CHANCERY DISMISSES DERIVATIVE BREACH OF FIDUCIARY DUTY CLAIMS FOR FAILURE TO MAKE A PRE-SUIT DEMAND OR DEMONSTRATE DEMAND FUTILITY

Oct 13 2017

By: Annette Becker and Caitlin Velasco

In Chester Cty. Emp. Ret. Fund v. New Residential Inv. Corp., C.A. No. 11058-VCMR (Del. Ch. Oct. 6, 2017), the Delaware Court of Chancery granted the defendants’ motion to dismiss the stockholder plaintiff’s direct and derivative claims for breach of fiduciary duties under the Court of Chancery Rules 23.1 and 12(b)(6), because the plaintiff failed to make a pre-suit demand or demonstrate that doing so would be futile. The Court found that although the facts alleged gave rise to a derivative claim, the plaintiff failed to make a pre-suit demand or plead particularized facts sufficient to raise a reasonable doubt that a majority of the directors on the New Residential Corp. (“New Residential”) board could have exercised their independent and disinterested business judgment in responding to a demand.

Court of Chancery Applies Corwin Ratification to Merger Involving Private Equity Firm Favored by Company’s Founder

Oct 06 2017

By: Nicholas I. Froio and Taylor B. Bartholomew

In Morrison v. Berry, C.A. No. 12808-VCG (Del. Ch. Sept. 28, 2017), the Delaware Court of Chancery held on a motion to dismiss that plaintiff failed to plead facts from which it was reasonably conceivable that a tender of nearly eighty percent of the shares of The Fresh Market (the “Company”) was uninformed or coerced for purposes of surviving ratification under applicable caselaw in connection with the Company’s acquisition by private equity firm Apollo Management, L.P. (“Apollo”).

CHANCERY COURT DISMISSES BREACH OF FIDUCIARY CLAIMS FOLLOWING THE CLOSING OF A MERGER INVOLVING INSIDER SIDE DEALS

Oct 02 2017

By Joanna Diakos and Dean Brazier

In Alan Kahn v. Michael D. Stern, et al., C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017), the Delaware Chancery Court granted a motion to dismiss the stockholder plaintiff’s claims that the director defendants breached their fiduciary duties when they approved a merger that included side deals. The Court noted that the plaintiff had the burden of proving either that the board was not disinterested or that the board acted in bad faith with respect to the disclosures in the information statement released to stockholders. The Court concluded that the plaintiff failed to state a claim upon which relief could be granted.

Too Many Cooks in the Kitchen – Deadlocked Management Leads to LLC Dissolution

Sep 26 2017

By Scott E. Waxman and Reese Brammell

In In re GR BURGR, LLC, C.A. No. 12825-VCS (Aug. 25, 2017), the Delaware Court of Chancery exercised its power under Section 18-802 of the Delaware Limited Liability Company Act to effect the judicial dissolution of GR BURGR, LLC (“GRB”). GRB was a Delaware limited liability company formed by an entity affiliated with celebrity chef Gordon Ramsay (“GRUS”) and Rowan Siebel, each owning a 50% membership interest. This structure, along with the LLC Agreement’s lack of a tiebreaker, effectively turned any action requiring a majority vote of the managers into a unanimous vote. The relationship between the members eventually deteriorated, and the company, formed for the purpose of developing and operating burger restaurants, became locked in a stalemate regarding its future operations. GRUS petitioned for dissolution Section 18-802. The Court found that the undisputed facts entitled GRUS to such relief and, rejecting Siebel’s claims that dissolution was not equitable, granted the same.

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