Breach of Fiduciary Duty – Page 16

Capano v. Capano, C.A. No. 8721-VCN (June 30, 2014)

Jul 12 2014

Capano, et al. v. Capano, et al. is a consolidated case involving three brothers that came before the Delaware Court of Chancery, in which Joseph and Gerry Capano each filed a complaint against Louis Capano.

Facts

Louis, Joseph and their father, Louis Sr., were equal partners in a Delaware partnership, Capano Investments. Upon Louis Sr.’s death, the partnership structure changed such that Louis and his son controlled 48.5% of the partnership, Joseph and his son controlled 48.5%, and Gerry (as the beneficiary with voting control of CI Trust) controlled 3%. In 2000, the partnership was subsequently converted into a Delaware limited liability company, Capano Investments, LLC (“CI-LLC”), with the same membership and respective ownership interests as those of the partnership

In 2000, Louis and Gerry executed two documents that purportedly granted Louis an interest in CI Trust: (1) Gerry granted Louis the “Power to Direct”, an irrevocable proxy to direct CI Trust’s trustee (at the time, Daniel McCollom) to vote its interest in CI-LLC; and (2) Gerry granted Louis the “Option” to purchase Gerry’s interest in CI Trust, but only with the consent of CI Trust’s trustee, and at a purchase price of $100,000 and the forgiveness of a $100,000 advance. Both the Power to Direct and the Option were signed by Louis and Gerry and had “(SEAL)” printed next their signatures.

In re: El Paso Pipeline Partners L.P. Derivative Litigation, C.A. No. 7141-VCL (June 12, 2014)

Jul 01 2014

By Eric Feldman and Porter Sesnon

In In re: El Paso Pipeline Partners L.P. Derivative Litigation, the Delaware Court of Chancery granted summary judgment in favor of the defendants on claims for breach of contract and breach of the implied contractual covenant of good faith and fair dealing in connection with a conflicted transaction.

In March 2010, El Paso Pipeline Partners, L.P., a Delaware limited partnership that operates as a publicly traded master limited partnership (the “MLP”), purchased a 51% interest in two entities that owned certain liquid natural gas (“LNG”) assets (the “Drop-down”) from its parent corporation that “sponsored” the MLP, El Paso Corporation (the “Parent”). Parent also indirectly owned the general partner of the MLP, El Paso Pipeline GP, L.L.C. (the “General Partner”), giving it control over and an economic interest in the MLP. As a result, the proposed Drop-down created a conflict of interest for the General Partner.

In re TriQuint Semiconductor, Inc. Stockholders Litigation, C.A. No. 9415-VCN (Del. Ch. June 13, 2014)

Jun 17 2014

By William Axtman and Joshua Haft

In In re TriQuint Semiconductor, Inc. Stockholders Litigation, plaintiff stockholders of TriQuint Semiconductor, Inc. (“TriQuint”) moved to expedite their breach of fiduciary duties claims against TriQuint’s board of directors for approving a merger of equals with RF Micro Devices, Inc. (“RFMD”) in which the shares of each company would be exchanged for 50% of the shares of a newly formed entity, Rocky Holding, Inc. (“Rocky Holding”). In this letter opinion, the Delaware Court of Chancery ruled on plaintiffs’ motion for expedited proceedings with regard to plaintiffs’ claims that the TriQuint board (i) engaged in defensive entrenchment tactics, (ii) agreed to preclusive deal protection devices, and (iii) failed to provide all material information to the stockholders in advance of the stockholder vote.

In order to show good cause for expedited proceedings under Delaware law, plaintiffs must articulate “a sufficiently colorable claim” and show “a sufficient possibility” of irreparable injury so as to justify imposing the costs of an expedited preliminary injunction proceeding on the defendants and the public.

Hamilton Partners, L.P. v. Highland Capital Management, et al., C.A. No. 6547-VCN (May 7, 2014) (Noble, V.C.)

May 09 2014

By David Bernstein

Plaintiff Hamilton Partners, L.P. challenged in the Delaware Chancery Court the fairness of a merger between a Nevada corporation, American HomePatient, Inc. (“New AHP”), a successor to a Delaware corporation of the same name (“AHP”), and Highland Capital Management, L.P. (“Highland”), which before the challenged transactions owned 48% of AHP’s stock and held most of its debt. The initial question was whether the validity of the actions was governed by Nevada law or by Delaware law. The Court said that most of the transactions took place under an agreement that was signed while the corporation was a Delaware corporation and that those transactions would be governed by Delaware law. However, transactions that were not approved by the Board until after the reincorporation in Nevada would be governed by Nevada law.

The Court then addressed whether the fairness of the merger should be determined under the business judgment rule or under the entire fairness test, which would apply if Highland was a controlling stockholder. The Court said that although there were prior Delaware decisions that made it possible that Highland’s 48% ownership interest alone might not have caused it to be viewed as a controlling person when determining whether the Board’s approval of the merger should be evaluated based on the business judgment rule or on the entire fairness test, the combination of Highland’s 48% stock interest and the fact that it had used its creditor position to force the corporation to engage in the series of transactions that was being challenged made it clear that Highland was a controlling person and that the entire fairness test should apply. Therefore, noting that it is almost never possible to dismiss a complaint in an instance in which the entire fairness test applies, the Court refused to dismiss the claim against Highland.

The Plaintiff also sued Joseph Furlong, the CEO and a director of AHP, claiming that he had a personal interest in the merger (he would receive a $6.5 million payment if it took place) and therefore his actions as a director should be evaluated under the entire fairness test. The Court said that because the Board consisted of three directors, and the other two directors, whose independence was not challenged and who were not claimed to have been dominated by Furlong, approved the merger, and their approval was governed by the business judgment rule, it made no difference whether Furlong’s approval was governed by the business judgment rule or was subject to the entire fairness test. The Court also pointed out that because the merger was approved by the Board after the corporation had reincorporated in Nevada, Furlong’s liability would be governed by a Nevada statute that exculpates a director from personal liability unless the director’s act or failure to act constituted a breach of fiduciary duties and the “breach of those duties involved intentional misconduct, fraud or a knowing violation of the law”. The Court found that the Plaintiff had not claimed that Furlong had been guilty of intentional misconduct, fraud or a knowing violation of law, and therefore Furlong was entitled to the protection of the Nevada exculpation statute. Accordingly, it dismissed the claims against Furlong.

hamiltonpartnersl p v highlandcapital1

Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.)

May 05 2014

By David Bernstein and Meredith Laitner

On May 2, 2014, the Delaware Chancery Court issued its decision in Third Point LLC v. Ruprecht, C.A. No. 9469-VCP (May 2, 2014) (Parsons, V.C.), denying plaintiffs’ motion for a preliminary injunction which, if granted, would have delayed the Sotheby’s annual stockholder meeting until the court could determine whether the members of the Sotheby’s Board violated their fiduciary duties by adopting a “poison pill” rights plan that would be triggered if anybody acquired 10% of Sotheby’s outstanding shares, except that a Schedule 13G filer (which must be a passive investor) could acquire up to 20%. Third Point had accumulated 9.6% of Sotheby’s stock and had nominated three candidates, including Third Point’s CEO, Daniel Loeb, for election to the Sotheby’s Board. Third Point had asked that it be permitted to acquire up to 20% of Sotheby’s shares, but the Sotheby’s Board denied the request. Third Point claimed in the lawsuit that this adoption of the poison pill rights plan and refusal to grant the requested waiver was an impermissible effort by the Sotheby’s Board to obtain an advantage in the proxy contest.

Third Point had commenced the lawsuit in March 2014 after a series of acrimonious public and private communications in which Loeb had referred to what he claimed was Sotheby’s deteriorating competitive position with regard to Christie’s, accused Sotheby’s of having “a sleepy board and overpaid executive team,” said he intended to replace the CEO of Sotheby’s, and told people inside and outside of Sotheby’s that he would shortly be running Sotheby’s. In return, Sotheby’s had publicly listed what it viewed as Loeb’s failed efforts to remake companies after it got footholds on their boards.

Chen v. Howard-Anderson, C.A. No. 5878-VCL, decided on April 8, 2014

Apr 10 2014

By Annette Becker and Jason Jones

In Chen v. Howard-Anderson, Vice Chancellor Laster considered a motion for summary judgment brought by certain officers and the Board of Directors of Occam Networks, Inc., (“Occam”), a public Delaware corporation seeking a determination by the Court that they did not breach their fiduciary duties. The plaintiffs (former stockholders of Occam) claim that the defendants breached their fiduciary duties “by (i) making decisions during Occam’s sale process that fell outside the range of reasonableness (the “Sale Process Claim”) and (ii) issuing a proxy statement for Occam’s stockholder vote on the Merger that contained materially misleading disclosures and material omissions” (the “Disclosure Claim”).

In 2009, Calix, Inc. and Occam (competitors in the broadband market) began discussing a potential business combination. In response, the Board of Occam determined that formal discussions with Calix were not appropriate at that time and retained Jeffries & Company for advice on strategic alternatives. By June 2010, Occam proposed to acquire Keymile International GmbH (“Keymile”) for $80 million, and Calix submitted a term sheet proposing to purchase Occam for $156 million (in a mix of cash and stock). Another suitor, Adtran, presented a third option by offering a slightly higher cash offer price to acquire Occam as compared with the Calix offer. Occam had a cool reaction to Adtran. Occam prepared April and June financial projections for 2010, 2011, and 2012 which were more positive than the estimates of the two public analysts who followed Occam. The projections were not shared with Adtran, and were materially higher than Adtran’s internal projections for Occam, and later projections that Adtran would create. Occam did not provide Calix with the June financial projections. On June 23, 2010 Calix submitted a revised term sheet increasing its offer to purchase Occam to $171.1 million (to be paid in a mix of cash and stock). Adtran confirmed its interest in acquiring Occam and on June 24, 2010 proposed an all cash offer at a premium of approximately 11% over Calix’s bid. On June 24, 2010 the Board met to consider the various alternatives – the cash and stock merger with Calix, the cash sale to Adtran, or remaining independent and acquiring Keymile. It was not clear that the Board was aware that Adtran’s bid was 11% higher than Calix’s offer. The Board directed Jeffries to conduct a 24 hour “market check.”

Kahn et. al. v. M&F Worldwide Corp. et. al., No. 334, 2013

Mar 18 2014

By Kristy Harlan and Porter Sesnon

In a much anticipated decision, on March 14, 2014 the Delaware Supreme Court sitting en banc unanimously affirmed then-Chancellor Strine’s decision in In re MFW Shareholders Litigation to dismiss a stockholder lawsuit related to the 2011 acquisition of M&F Worldwide Corp. (“MFW”) by its controlling stockholder, MacAndrews & Forbes Holdings, Inc. (“Holdings”). In upholding the dismissal, the Delaware Supreme Court confirmed that the business judgment standard of review, rather than an “entire fairness” standard of review, applies to controlling-party buyouts where the transaction is conditioned ab initio upon both: (1) the approval of an independent, adequately-empowered special committee that meets its duty of care and (2) the un-coerced, informed vote of a majority of the minority stockholders.

In May 2011, Holdings, which owned 43.4% of MFW’s common stock, began to explore the possibility of taking MFW private. In June 2011, Holdings delivered a written proposal to purchase the MFW shares not already owned by Holdings for $24 per share in cash, representing a premium to the prior day’s closing price of $16.96. Holdings’ proposal expressly stated that it would be subject to approval by a special committee of MFW’s board made up of independent directors, and included a non-waivable condition that a majority of the minority of stockholders approve the transaction.

Frank v. Elgamal, C.A. No. 6120-VCN (March 10, 2014) (Noble, V.C.)

Mar 14 2014

By Annette Becker and Claire White

In this opinion, Vice Chancellor Noble considered defendants’ motion for summary judgment in connection with various breach of fiduciary duty claims asserted by a former stockholder, Richard Frank, against the Board of Directors and two employees of American Surgical Holdings, Inc. (“ASH”), a public company, in connection with the merger of ASH with an affiliate of Great Point Partners I, L.P. (“GPP”). In connection with the motion the Chancery Court examined:

• the “entire fairness” standard of review;

• the effect of a special committee on the standard of review;

• the standard of review for Revlon claims upon a motion for summary judgment, particularly where the target’s charter includes an exculpatory clause;

• a special committee’s examination of projections underlying a fairness opinion, including where multiple sets of projections are prepared; and

• the interaction between a shareholder’s unjust enrichment and breach of fiduciary duty claims upon a motion for summary judgment.

In re Answers Corporation Shareholders Litigation, C.A. No 6170 (February 3, 2014) (Noble, V.C.)

Feb 12 2014

By Kristy Harlan and Eric Taylor

In re Answers Corporation involves an allegation that the board of a publicly-traded Delaware corporation, Answers Corporation (the “Company”), breached its fiduciary duties in negotiating and approving a sale of the Company. The plaintiffs alleged that the three conflicted directors controlled the Board, that the four remaining directors breached their duty of loyalty and acted in bad faith, and that the buyer of the Company (“AFCV”) aided and abetted the directors’ breach of fiduciary duty.

In March 2010, the Company received an unsolicited expression of interest from AFCV concerning a possible transaction. Shortly thereafter, the Board discussed the possibility of exploring strategic alternatives, including the recent expression of interest, ultimately deciding to explore potential transactions and engage a financial advisor to assist in the process. As part of this process, the Board’s financial advisor continued discussions with AFCV regarding a potential transaction, in addition to conducting a market check where it approached ten other potential buyers. Despite discussions with at least seven other possible buyers, no potential buyer other than AFCV made an offer. During this time, the Board rejected multiple requests for exclusivity from AFCV in order to preserve the Board’s opportunity to negotiate with other potential purchasers. The Board also rejected several offers from AFCV, deeming them to be inadequate, and pressured AFCV to increase the price offered until the transaction was finally approved. The Board’s financial advisor discussed with the Board the relative merits of pursuing various sales processes, advising the Board that additional bidders were unlikely to come forward, and ultimately provided a fairness opinion with respect to the final price offered by AFCV. During the final stages of negotiation with AFCV, after several quarters of declining revenues, the Company received quarterly results reflecting significant improvements in performance and record revenues. Despite the improved results, the Board was concerned about the future stability and performance of the Company, primarily due to its significant reliance on Google-directed traffic (which was entirely dependent on Google algorithms, subject to change at any time in Google’s discretion) and increasing competitive pressures, and ultimately approved the sale of the Company to AFCV.

OTK Associates, LLC v. Friedman, et. al., C.A. No. 8447-VCL

Feb 07 2014

By David Bernstein

On February 5, Vice Chancellor Laster issued an opinion regarding the Morgans Hotel Group case. OTK Associates, LLC, directly and derivatively on behalf of Morgans Hotel Group Co., alleged that the Board of Directors of Morgans had breached its fiduciary duties and violated Morgan’s operating documents in connection with a two-part recapitalization transaction with Yucaipa Companies, LLC that VC Laster had previously enjoined. The defendants argued that because the Yucaipa Transaction was not consummated and the related Board actions were blocked by a preliminary injunction, any claims based on these facts would be moot. Citing a Delaware Supreme Court decision, VC Laster said that even though the Yucaipa transactions did not take place, Morgans could have been injured by the breaches of fiduciary duty, such as by incurring uneccessary expenses, and therefore denied the motion to dismiss based on mootness.

The defendants also said the case should be dismissed because between the time the case was originally brought and the time OTK filed an amended complaint, new directors had been elected, and the plaintiff had failed to make a demand upon them as required by Delaware Rule 23.1. VC Laster said that almost all the claims in the amended complaint related to the same facts that were the subject of the original complaint, and because demand would have been futile at the time of the original complaint, there was no need to make a demand on the new Board to assert claims regarding the facts that were the subject of the original complaint, even if the amended complaint raised new theories of liability. He did dismiss a claim based on a subsequent Yucaipa repudiation of the agreements relating to the transactions, because that did not happen until after the original complaint had been filed, and demand on the Board was required with regard to a claim based on new facts.

The principal issue raised by the defendants was an assertion that there was an action pending in the New York courts and, because the transaction documents said they were governed by New York law, the Delaware courts should defer to the New York courts. VC Laster said that the Delaware courts would have honored the choice of law provision if the suit had involved the contract. However, the suit involved claimed breaches of fiduciary duty regarding the way the contract was approved, not the contract itself, and therefore, under the internal affairs doctrine, would be governed by Delaware law. Therefore, he refused to stay the Delaware proceeding. Finally, the Court refused to dismiss claims against two individual directors despite the fact that the Morgans Certificate of Incorporation contained an exculpation clause of the type permitted by Section 102(b)(7) of the General Corporation Law, because the claims raised in the complaint alleged breaches of the directors’ duties of loyalty, which cannot be protected under Section 102(b)(7).

OTK v Friedman

Catagory:Breach of Fiduciary Duty