Breach of Fiduciary Duty – Page 14

Chancery Court Dismisses Derivative Lawsuit against GM Directors Relating to Recalled Ignition Switches, Finding That Plaintiffs Failed to Show Demand Futility

Jul 10 2015

In a June 26, 2015 Memorandum Opinion, Vice Chancellor Sam Glasscock III dismissed a derivative complaint filed by stockholders of General Motors (“GM”) relating to defective ignition switches that led to the recall of approximately 13 million GM vehicles beginning in February 2014. According to Vice Chancellor Glasscock, Plaintiffs failed to adequately plead bad faith on the part of the GM directors named as defendants in the lawsuit and, therefore, failed to show demand futility under Chancery Rule 23.1.

The general facts underlying this derivative lawsuit have been widely publicized and relate to GM’s recall of approximately 13 million vehicles for issues with the vehicles’ ignition switch, which caused a vehicle’s engine and electrical system to shut off, disabling power steering and power brakes and causing the vehicle’s airbags to not deploy in the event of a crash.

Delaware Court of Chancery Dismisses Shareholder Derivative Action Against Interested Directors Following Secondary Offering

Jun 05 2015

By Annette Becker and Mark Hammes

In In re Molycorp, Inc. Shareholder Derivative Litigation, the Delaware Court of Chancery dismissed claims brought against director representatives of private equity investors for breach of fiduciary duties, aiding and abetting, and unjust enrichment for failure to state a claim. The Court held that the private equity investors along with certain directors exercised their contractual rights to sell their stock in Molycorp Inc. a publicly traded corporation (“Molycorp”) in a secondary offering and the directors were under no obligation to delay such a demand registration during a time in which Molycorp was experiencing a cash shortfall.

Molycorp was engaged in the production and sale of rare earth oxides. Before Molycorp’s July 2010 IPO, three initial private equity investors (PEIs) negotiated a Registration Rights Agreement. The agreement secured the PEIs right to demand that Molycorp register their shares in a secondary offering. The results of the July 2010 IPO did not yield the funds expected, and a secondary offering of Molycorp shares in February 2011 left the company still short on cash. A potential loan from the Department of Energy fell through, and potential financing arrangements with two other companies looked increasingly unlikely. In May 2011, the PEIs exercised their demand registration rights, and the offering was held in June 2011. Due to a recent spike in the price of rare earth oxides, the PEIs (and several directors appointed by the PEIs) sold their shares in the resulting June offering at an inflated value. In September 2011, the rare earth oxide bubble burst. Subsequent efforts by Molycorp to make up for its cash shortfall by issuing convertible notes left it with inadequate funds to implement its planned production increase. As a result Molycorp missed out on potential profits from the rare earth element bubble.

Court of Chancery Finds That Manager Breached Her Fiduciary Duty of Loyalty by Engaging in Numerous Self-Interested Transactions

Jun 03 2015

By Nick Froio and Zack Sager

In this memorandum opinion, the Delaware Court of Chancery found Sandra Manno (“Manno”), the manager of CanCan Development, LLC, a Delaware limited liability company (the “Company”), liable for breaching her fiduciary duty of loyalty to the Company by engaging in numerous self-interested transactions.

A manager of a Delaware limited liability company owes traditional fiduciary duties of care and loyalty unless the organizational documents of the limited liability company modify such duties. The Court, citing Feeley v. NHAOCG, LLC, 62 A.3d 649 (Del. Ch. 2012), implied that the organizational documents of the Company did not modify the traditional fiduciary duties.

Chancery Court Holds that Compensation Paid to Non-Employee Directors Pursuant to Shareholder-Approved Plan Must Be Reviewed Under Entire Fairness Standard

May 12 2015

By David Bernstein and Priya Chadha

In Calma v. Templeton, C.A. No. 9579-CB (Del. Ch. April 30, 2015) (Bouchard, C.), the Delaware Chancery Court held that Citrix System, Inc’s (“Citrix”) payment of compensation to non-employee directors under a shareholder-approved compensation plan must be reviewed under the entire fairness standard because the shareholders’ omnibus approval of a plan covering several different types of beneficiaries did not constitute ratification of the amount of compensation to be paid to non-employee directors.

In 2005, Citrix shareholders approved an equity compensation plan (the “Plan”) for beneficiaries such as directors, officers, employees, consultants, and advisors. The plan did not specify the amount of compensation that non-employee directors could receive, instead only providing a limit of 1 million restricted stock units (“RSUs”) for any beneficiary’s annual compensation. Based on the company’s share price at the time the suit was filed, 1 million RSUs would be worth over $55 million.

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 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 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.

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 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”).

Chancery Court Denies Motion to Expedite on Speculative Disclosure Claims

Jan 14 2015

By Annette Becker and Eric Jay

On January 12, 2015, Vice Chancellor Glasscock issued an opinion in Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) on a Motion to Expedite brought by Amy Parsons on behalf of similarly situated public stockholders (“Plaintiff”) as to disclosure claims concerning an imminent merger. The ruling on the disclosure claims was deferred after the Vice Chancellor denied Plaintiff’s Motion on December 31, 2014 as it related to Revlon claims raised, in order to allow Plaintiff to submit a supplemental brief clarifying why such claims would be material to stockholders.

The Motion was brought by Plaintiff against the Board of Directors of Digital River, Inc. (the “Company”) for breaches of fiduciary duties arising in connection with the Agreement and Plan of Merger entered into with Siris Capital Group, LLC, dated October 23, 2014 (the “Merger Agreement”). On November 18, 2014, Plaintiff initiated a class action to enjoin the proposed merger on the grounds that the Company was undervalued and that the Board of Directors failed to provide the stockholders with material information regarding the deal process.

Of the numerous disclosure claims raised by Plaintiff in the Motion to Expedite, Vice Chancellor Glasscock focused primarily on the claim regarding management retention, both because it was the most significant and it had not been rendered moot by the Company’s subsequent filing of a definitive proxy statement. Vice Chancellor Glasscock concluded that Plaintiff sought expedited discovery on the grounds that the disclosures were “simply not credible” without providing a factual basis for such assertion.

Because the disclosure claim was speculative, Vice Chancellor Glasscock found that the chance of receiving injunctive relief to be low and that the value of potential disclosure did not outweigh the cost of expedition. The Plaintiff’s Motion to Expedite was denied.

Parsons v. Digital River, Inc., et al., 2015 WL 139760 (Del. Ch. 2015) (Glasscock, V.C.)

Catagory:Breach of Fiduciary Duty