Breach of Fiduciary Duty – Page 13

Chancery Court Determines Appropriate Standard of Review for Cash Flow “Tunneling” by Controlling Stockholder

Feb 13 2016

In In Re EZCorp Inc. Consulting Agreement Derivative Litigation, C.A. No. 9962-VCL (Del. Ch. January 25, 2016) (Laster, V.C.) the Delaware Court of Chancery granted in part and denied in part a 12(b)(6) motion to dismiss for failure to state a claim, but at its heart the ruling addressed the proper standard of review in a case alleging self-dealing by a controlling stockholder for “tunneling” cash flow and receiving non-ratable benefits from related-party services agreements. After a detailed and extensive analysis, the court held that the entire fairness standard of review, and not the business judgment standard of review, applied to non-merger business transactions where controlling stockholders can exact non-ratable benefits from the company, regardless of the type of transaction or method of extraction.

Chancery Court Clarifies How the Defense of Release Can Be Raised, Applies the Unocal Test to Allegedly Defensive Board Actions, and Weighs the Materiality of Proxy Statement Omissions

Feb 12 2016

By: Scott E. Waxman and David Valenti

In deciding a motion to dismiss derivative and direct shareholder claims, the Delaware Chancery Court addresses the defense of release, examines whether allegedly defensive board actions trigger the heightened Unocal test, and judges the materiality of proxy statement omissions. Although the Court made clear that the affirmative defense of release could be considered in a motion to dismiss, it held that Plaintiffs’ claims did not have the “same identical factual predicate” with previously settled federal class litigation. The Court also applied the Unocal test in analyzing whether the alleged adoption of entrenchment measures state a viable claim, and discussed the standard for pleading material omissions to a proxy statement.

In In re Ebix, Inc. Stockholder Litigation, Plaintiff shareholders brought six claims against Ebix, Inc., (“Ebix”) and its board of directors (the “Board”) arising out of several actions taken by the Board in the lead up to a later abandoned merger attempt. Claims I-III challenged several documents that related to executive compensation arrangements made by Ebix and approved by its Board. Claims IV-V challenged several of the Board’s actions as breaches of its fiduciary duties on the grounds that each constituted an improper entrenchment device by the board, including Ebix’s entry into a Director Nomination Agreement (the “DNA”) with a dissenting shareholder and its adoption of a bundle of new bylaws. In claim VI, Plaintiffs alleged the Board breached its fiduciary duties by issuing a materially misleading and incomplete 2014 Proxy Statement and sought a declaration that the 2014 Annual Shareholders’ Meeting’s actions were invalid.

A Fiduciary’s Personal Benefit Can Preclude the Approval of A Settlement Agreement if the Personal Benefit is Not Fair and Reasonable

Jan 28 2016

By: Megan Wotherspoon and Calvin Kennedy

By letter-order dated January 14, 2016, Vice Chancellor John W. Noble found that a fiduciary’s self-dealing and personal benefit may preclude the approval of a settlement agreement. By this order, the court refused to approve the proposed settlement because of the equity buyback provision made available only to the plaintiff fiduciary.

In Smollar v. Potarazu, the plaintiff Marvin Smollar (“Smollar”) brought a derivative action on behalf of nominal defendant VitalSpring Technologies, Inc. (“VitalSpring”) against defendant Sreedhar Potarazu, VitalSpring’s Chief Executive Officer (“Potarazu”). Following litigation of the matter, a settlement agreement was agreed to between the parties and submitted to the court for approval (the “Settlement Agreement”). In addition to the relief sought on behalf of VitalSpring, the Settlement Agreement granted Smollar, but not other VitalSpring stockholders, the right to sell Smollar’s shares in VitalSpring back to VitalSpring for the same amount he had purchased it fifteen years ago (the “Buyback Provision”). Other VitalSpring stockholders accordingly objected to the Settlement Agreement and argued that Smollar engaged in a form of self-dealing while serving as a fiduciary.

Delaware Supreme Court Affirms Financial Advisor Liability for Aiding and Abetting

Jan 05 2016

By Whitney Smith and Elise Gabriel

The Delaware Supreme Court affirmed RBC Capital Markets, LLC’s (“RBC”) liability for aiding and abetting a board’s fiduciary breaches based on RBC’s undisclosed conflicts of interest and its deliberately misleading the board during the company’s sales process. The Court also upheld the Chancery Court’s finding that RBC bore 83% responsibility for the shareholders’ damages, resulting in a $75 million award against RBC, plus pre- and post-judgment interest.

In RBC Capital Markets, LLC, the Delaware Supreme Court affirmed the Chancery Court’s holding that RBC was liable for aiding and abetting breaches of fiduciary duty by the board of Rural/Metro Corporation (“Rural”) in connection with the sale of Rural to private equity firm Warburg Pincus LLC (“Warburg”). The Rural board’s underlying breaches of fiduciary duties were its failure to be actively and reasonably informed when overseeing the sales process and to be adequately informed about Rural’s value, and also its breach of the duty of disclosure for including RBC’s flawed valuation analysis as well as false and misleading information about RBC’s conflicts of interest in the company’s proxy statement. RBC, in turn, knowingly induced the breaches by exploiting its own conflicted interests to the detriment of Rural and by creating an “information vacuum” for the Rural board in order to push the sale forward.

Delaware Chancery Court Denies Creditor Plaintiff’s Breach of Fiduciary Duty, Fraudulent Transfer, and Breach of Covenant Claims

Oct 30 2015

By Scott Waxman and Dotun Obadina

In Quadrant Structured Products Company v. Vertin, plaintiff creditor Quadrant Structured Products Company, Ltd. (“Quadrant”) asserted claims against defendant Athilon Capital Corporation (“Athilon” or the “Company”), challenging transactions made by Athilon in which Athilon purchased securities and notes from Merced Capital, L.P. and its affiliates (together, “Merced”), owners of 100% of the Athilon’s equity and significant amounts of Athilon’s publicly-traded junior and senior notes.[1] Quadrant contended at trial that the repurchase of Merced’s notes breached express covenants in the indenture governing the notes and also violated the implied covenant of good faith and fair dealing. Quadrant also contended that the repurchases of the notes constituted a fraudulent transfer. Finally, relying on its status as a creditor of an insolvent company, Quadrant claimed derivatively that the repurchases of the notes and securities constituted breaches of fiduciary duty by Merced and the individual defendants, who comprised Athilon’s board of directors. The court rejected all of Quadrant’s claims.

Stockholder’s Challenge to $35M Stock Issuance to Freeport-McMoran CEO Dismissed by Delaware Court of Chancery

Oct 19 2015

By Holly Hatfield and James Parks

A stockholder’s claims regarding a $35 million stock issuance to Freeport-McMoran CEO Richard Adkerson were dismissed. Governance changes within Freeport that were thought to have triggered an option in Adkerson’s employment contract that would have permitted him to quit and receive a $46 million severance package allowed the board to preempt that eventuality by issuing him $35 million in stock.

In Shaev v. Adkerson, C.A. No. 10436-VCN (Del. Ch. Oct. 5, 2015), Vice Chancellor Noble, writing for the Delaware Court of Chancery, granted defendant Freeport-McMoran’s (“Freeport” or the “Company”) motion to dismiss plaintiff Victoria Shaev’s (“Shaev” or “Plaintiff”) direct and derivative claims under Court of Chancery Rules 12(b)(6) and 23.1.

Delaware Chancery Court Asserts Personal Jurisdiction over Third Party Defendants in Connection with Contribution Sought for the Advancement of Legal Fees and Costs

Oct 16 2015

By Annette Becker and Sophia Lee Shin

In Konstantino v. AngioScore, Inc. v. Quattro Vascular PTE Ltd, et al., the Delaware Court of Chancery reviewed a motion to dismiss filed by three Singapore entity defendants seeking dismissal of a third party claim brought by AngioScore, Inc. (“AngioScore”) for lack of personal jurisdiction and by the Singapore entity defendants and a Delaware entity defendant for failure to state a claim for contribution and tortious interference with contract in connection with the manufacture and sale of a competing product. The Court of Chancery denied the third party defendants’ motion in part, holding that the Court had personal jurisdiction over the three Singapore entity defendants under the conspiracy theory of jurisdiction, and that AngioScore stated a claim for contribution from all of the third party defendants, and granted the motion in part, holding that AngioScore had not stated a claim for tortious interference with contract.

Chancery Court Holds Bylaw Permitting Stockholder Removal of Officers Invalid in Continuing Fight over the Composition of the Board of Directors of Westech Capital Corp.

Aug 14 2015

By Annette Becker and Porter Sesnon

In Gorman, IV v. Salamone, Halder and Westech Capital Corp. (“Westech”), the Delaware Chancery Court, in ruling on a motion to dismiss, issued another status quo order to temporarily fix the composition of the board of Westech while the ongoing dispute over control of Westech played out.

Plaintiff John Gorman (“Gorman”) a Westech stockholder and board member brought the Section 225 action based on two developments while a prior Section 225 temporarily designating three directors and keeping the CEO was on appeal before the Delaware Supreme Court.

Delaware Chancery Court Dismisses Claims Involving a Related Party Transaction with a Controlling Stockholder under Court of Chancery Rules 23.1 and 12(b)(6)

Aug 04 2015

By Kristy Harlan and Stephanie S. Liu

In Teamsters Union 25 Health Services & Insurance Plan v. Baiera, et al, a stockholder of Orbitz Worldwide, Inc. challenged the fairness of the terms of a five-year services agreement that Orbitz entered into with a group of entities affiliated with Travelport Limited, a controlling shareholder of Orbitz when the agreement was negotiated and signed. The plaintiff asserted four derivative claims challenging the services agreement and a separate putative class claim for breach of fiduciary duty against Orbitz’s directors for allegedly violating the rules of the New York Stock Exchange (NYSE). Defendants moved to dismiss plaintiff’s claims under Court of Chancery Rule 23.1 for failure to make a demand or to adequately plead demand is excused and under Court of Chancery Rule 12(b)(6) for failure to state a claim upon which relief may be granted. The Delaware Court of Chancery concluded that demand was not excused as to any of plaintiff’s derivative claims and that it was not reasonably conceivable that the plaintiff could establish that Orbitz’s directors caused Orbitz to violate the NYSE Rules. Thus, the Court granted Defendants’ motion to dismiss the derivative claims under Rule 23.1 and the NYSE-related claim under Rule 12(b)(6).

Plaintiff Teamsters Union 25 Health Services & Insurance Plan (“Plaintiff”) has been a stockholder of Orbitz Worldwide, Inc. (“Orbitz”), an online travel company, at all relevant times with respect to its claims. Nominal Defendant. The Travelport Defendants (“Travelport”), which were majority owned by Defendant Blackstone Group LP (“Blackstone”), are group of entities affiliated with Travelport Limited, which provides transaction processing services to travel companies. The other defendants included Orbitz’s board of directors when the company entered into the New Agreement (the “Agreement Board”), Orbtiz’s board of directors when Plaintiff initiated this action (the “Demand Board”), and Orbitz’s current board of directors (“Current Board”).

Chancery Court Dismisses Breach of Fiduciary Duty Claims Against Company and Its Board of Directors Relating to 2014 Recapitalization, But Holds That Contract Claims May Proceed

Jul 16 2015

By Annette Becker and Lauren Garraux

In a July 8, 2015 letter opinion, Vice Chancellor John W. Noble granted in part and denied in part the motion of Capella Holdings, Inc. and Capella Healthcare, Inc. (“Capella” or the “Company”) and five Capella directors (the “Director Defendants”) (collectively, “Defendants”) to dismiss breach of fiduciary duty and breach of contract claims asserted against them by James Thomas Anderson (“Anderson”), a founder and former director and officer of Capella, relating to a 2014 recapitalization of the Company.

Anderson’s counterclaims against Defendants all arise from a recapitalization of Capella which the Director Defendants approved in April 2014. Anderson voted against the recapitalization, which decreased Anderson’s ownership percentage in the Company, as well as that of the minority shareholders, and increased the ownership percentage of affiliates of GTCR Golder Rauner II LLC (“GTCR”), which, upon Capella’s formation, made an equity investment of approximately $206 million in the Company.

Catagory:Breach of Fiduciary Duty