Delaware Docket – Page 48 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

2015 Proxy Season Preview: Chancery Court Declines to Order Waiver of Advance Notice Bylaws

Dec 19 2014

Can an activist shareholder avoid compliance with advance notice bylaw provisions to run a dissident slate of directors at a fast-approaching annual meeting? The answer, which is discussed in our summary of AB Value Partners, often hinges on the actions of the board.

In AB Value Partners, LP v. Kreisler Manufacturing Corp., Vice Chancellor Parsons denied AB Value’s request for a temporary restraining order to enjoin enforcement of Kreisler’s advance notice bylaw provisions. AB Value, a hedge fund that owned approximately 11% of Kreisler’s shares, sought to run a competing slate of director’s at Kreisler’s annual meeting. The bylaws of Kreisler required that stockholders provide advance notice within a 60-90 day window prior to the anniversary date of the preceding annual meeting of any business that the stockholders wanted to address at Kreisler’s annual meeting. AB Value failed to propose its slate of directors within this required timeframe.

Valuation Materials Prepared Pre-litigation by Appraisal Petitioners Are Discoverable

Dec 12 2014

By Eric Freedman and Sophia Lee Shin

FACTS

On June 11, 2013, Dole Food Company, Inc. (“Dole”) announced that its board had received an unsolicited proposal from David Murdock, Dole’s CEO, Chairman, and controlling stockholder, to purchase all of the outstanding shares of Dole’s common stock for $12 per share. Approximately two months later, Dole and Murdock announced an agreement to take Dole private in a merger at $13.50 per share (the “Merger”). On October 31, 2013, Dole held a special meeting of the stockholders at which the stockholders approved the Merger, and the transaction closed on November 1, 2013.

Hudson Bay Master Fund Ltd. and Hudson Bay Merger Arbitrage Opportunities Master Fund Ltd. (together, “Hudson Bay”) and Ripe Holdings LLC (“Ripe”), as holders of Dole common stock, subsequently sought an appraisal for their shares. Ripe is a special-purpose investment vehicle managed by the affiliates of Fortress Investment Group (“Fortress”).

Supreme Court Partially Reverses Chancery Decision Interpreting Common Voting Agreement Provisions

Dec 12 2014

By Holly Vance and Porter Sesnon

In Salamone, Dura, and Halder v. Gorman, IV, the Supreme Court of Delaware (the “Court”) partially affirmed and partially reversed a Chancery Court decision determining the composition of the board of directors (the “Board”) of Westech Capital Corporation (“Westech”). The dispute centered on the interpretation of a Voting Agreement entered into by Westech and the purchasers of Westech’s Series A Preferred Stock in 2011.

The Voting Agreement provisions at issue were Sections 1.2(b) and 1.2(c), each of which set forth the process for designating certain individuals to serve on the Board. Section 1.2(b) provides for one director to be designated “by the majority of the holders of the Series A Preferred Stock . . . .” Section 1.2(c) provides two individuals to be designated “by the Key Holders . . . .” The dispute revolved around the removal by John J. Gorman, IV (“Gorman”), Westech’s majority stockholder, of a current director nominated pursuant to Section 1.2(c) and the election of two new directors, one pursuant to Section 1.2(b) and another pursuant to Section 1.2(c).

Chancery Court Finds Majority Partner Breached Contractual and Fiduciary Obligations to the Minority

Dec 11 2014

By Scott Waxman and Claire White

In this Chancery Court decision, VC Laster examined damages owing to plaintiffs for claims of breach of contract and breach of fiduciary duties of care and loyalty in connection with the sale of a partnership’s assets. The plaintiffs, partners in a D.C. partnership, had proved at trial that the sale by the majority partners (U.S. Cellular) to a related party was not entirely fair to them, as minority holders.

On the breach of contract claim, VC Laster found that defendants had breached a confidentiality provision in the partnership agreement by sharing confidential information regarding the partnership with a valuation firm, for the purposes of obtaining a valuation for the sale transaction. Notwithstanding the breach, only nominal damages were awarded as plaintiffs failed to show proof of actual injury from the breach. Among other facts, the Count highlighted that the confidentiality provision in the partnership agreement could have been waived by the majority partners.

In re Zhongpin Inc. Stockholders Litig., C.A. No. 7393-VCN (November 26, 2014) (V.C. Noble)

Dec 03 2014

By Elise Gabriel and David Bernstein

In In re Zhongpin, shareholders of Zhongpin Inc. (“Zhongpin” or the “Company”) brought a class action complaint for breach of fiduciary duty against Xianfu Zhu (“Zhu”), Zhongpin’s CEO and chairman of the board, and Zhongpin’s board of directors (the “Board”) in relation to a merger through which Zhu – who owned 17.3% of Zhongpin’s common stock – would acquire the remainder of the Company’s outstanding shares for $13.50 per share in cash. The transaction was approved by an independent committee of Zhongpin’s Board and the Merger Agreement required approval by a majority of the unrelated stockholders, although this requirement had not appeared in Zhu’s original proposal to Zhongpin’s Board.

On the defendants’ motion to dismiss, the Court held that the plaintiffs had stated a claim for breach of fiduciary duty against Zhu and the individual defendants. The Court stated that plaintiffs had adequately alleged that Zhu was a controlling stockholder even though he owned only 17.3% of Zhongpin’s stock by pointing to a statement in Zhongpin’s Form 10-K that referred to Zhu as “our controlling stockholder” and that said that as a result of the stock ownership “our controlling stockholder” was able to exercise significant influence over a variety of matters, including election of directors, the amount of dividends, if any, new securities issuances and mergers and acquisitions. The Court further held that the transaction was subject to review under the entire fairness standard rather than the business judgment rule because, even though the Merger Agreement required approval by a majority of the unrelated stockholders (and that approval was obtained), Zhu’s original proposal had not included a majority of the minority requirement at the outset. Finally, the Court was unwilling to dismiss the claims against the directors even though Zhongpin’s certificate of incorporation contained a provision under DGCL Section 102(b)(7) protecting directors against monetary liability, because, in a case subject to the entire fairness standard, a claim against directors cannot be dismissed until there is a determination as to entire fairness.

In re Zhongpin

In re Sanchez Energy Derivative Litig., C.A. No. 9132-VCG (November 25, 2014) (Glasscock, V.C.)

Dec 03 2014

By Priya Chadha and David Bernstein

In In re Sanchez Energy, Vice Chancellor Glasscock granted a motion to dismiss in a shareholder derivative action because the plaintiffs had failed to make a demand on the Board, holding that the plaintiffs failed to meet Rule 23.1’s particularized pleading standards for demand futility. The case centered around a transaction in which Sanchez Energy Corporation (“Sanchez Energy”), a publicly held corporation, purchased property at $2500/acre from Sanchez Resources, LLC (“Sanchez Resources”), a privately held, company, which Sanchez Resources had purchased for $184/acre. Two members of the Sanchez family—A.R. Sanchez Jr. and A.R. Sanchez III—owned a combined 21.5% of the shares of Sanchez Energy and served on its board of directors, which had three other members. Those three members comprised Sanchez Energy’s audit committee, which approved the transaction.

The court rejected the plaintiff’s claim that demand would have been futile because the three members of the Audit Committee were not independent. The Vice Chancellor said the plaintiffs had failed to show the audit committee members’ social and business relationships with the Sanchezes were such that “the non-interested director would be more willing to risk his or her reputation than risk the relationship with the interested director.” He also rejected Plaintiffs’ arguments that the Sanchezes should be treated as controlling shareholders because they failed to show that the Sanchezes controlled the board or the negotiation process for the transaction. Vice Chancellor Glasscock pointed to the fact that transaction was approved by the Audit Committee and that the Sanchezes owned at most a combined 21.5% stake in Sanchez Energy as evidence that the Sanchezes were not controlling shareholders. Lastly, VC Glasscock rejected the idea that because of the huge disparity between what Sanchez Resources paid to acquire the property and what Sanchez Energy paid to acquire the property from Sanchez Resources, the transaction was so facially unfair that it could not have been the product of valid business judgment, noting, among other things, that between Sanchez Resources’ initial purchase and its sale to Sanchez Energy, half of the property had been developed and found to contain proven oil reserves.

Thus, because the Complaint failed to specifically please facts excusing demand, the Court dismissed the Complaint.

In Re Sanchez

In Re Comverge, Inc. Shareholders Litigation

Dec 03 2014

By Sherwin Salar and Whitney Smith

In Re Comverge, Inc. Shareholders Litigation involves a stockholder challenge to a merger between Comverge, Inc. and H.I.G Capital, L.L.C. The plaintiff stockholders of Comverge contend that the Comverge board of directors (the “Board”) breached their fiduciary duties by: (1) conducting a flawed sales process and not suing HIG for an alleged breach of a non-disclosure agreement between the parties (the “NDA”); and (2) agreeing to deal protection measures that precluded the possibility of a topping bid. On November 25, 2014, Vice Chancellor Parsons granted HIG’s motion to dismiss with respect to the first claim, but denied the motion on the second claim. Furthermore, Vice Chancellor Parsons dismissed Plaintiffs’ claim that HIG aided and abetted the Board’s breaches of fiduciary duties, stating that even if there was a predicate breach of fiduciary duties by the Board, the Plaintiffs only allege conclusory facts that do not support a claim that HIG participated in those breaches.

Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., et al., C.A. No. 9405-VCP (November 26, 2014) (Parsons, V.C.)

Dec 02 2014

By Lisa Stark

In Cigna Health and Life Insurance Co. v. Audax Health Solutions, Inc., the Delaware Court of Chancery held unenforceable provisions in a merger agreement and letter of transmittal requiring, as a condition to receiving the merger consideration, the target’s stockholders to: (1) indemnify the acquirer, up to their pro rata share of the merger consideration, for the target’s breaches of its representations and warranties, and (2) release the acquirer and its affiliates from any and all claims relating to the merger.

In this case, plaintiff, Cigna Health and Life Insurance Co. (“Cigna”), a former stockholder of defendant Audax Health Solutions, Inc. (“Audax”), sought some $46 million in merger consideration arising from the acquisition of Audax by Optum Services, Inc. Defendants refused to pay Cigna the merger consideration for failure to sign a letter of transmittal (or LoT). The LoT provided that the undersigned stockholder agreed to be bound by the indemnification provisions in the merger agreement and released the acquirer for any and all claims relating to the merger. Some of the target’s representations and warranties, which were the subject of the indemnification obligations, survived indefinitely. Cigna argued that the indemnification obligations and the LoT violated the Delaware General Corporation Law (the “DGCL”) for several reasons, including that they rendered the amount of merger consideration indefinite in violation of Section 251 of the DGCL and rendered the stockholders liable for the target corporation’s debts in violation of Section 102(b)(6) of the DGCL. Cigna argued that the release contained in the LoT was unenforceable for lack of consideration. Finally, Cigna argued that the stockholder representative appointment provisions in the merger agreement were unenforceable. In this decision, the Court addressed Cigna’s motion for judgment on the pleadings.

The Court found Cigna’s claims relating to the stockholder representative appointment provisions not properly presented, but agreed with Cigna that the indemnification and release obligations were unenforceable. Specifically, the Court held that the indemnification provisions violated Section 251 of the DGCL by putting at risk all of the merger consideration for an indefinite period of time and rendering the amount of merger consideration to be received by the stockholders undeterminable. As to the release, the Court held it unenforceable for lack of consideration–the right to receive the merger consideration vested at the effective time of the merger and the stockholders could not be required to release claims absent additional consideration. The Court expressly limited its holding to cases where a stockholder was required to indemnify a party as a condition to receiving the merger consideration and all of such stockholder’s merger consideration was subject to clawback. The Court also expressly stated that it was not addressing the validity of escrow holdbacks as a purchase price adjustment even though its reasoning could be applied to invalidate such arrangements. Finally, the Court stated that its opinion did not prohibit corporations from entering into separate agreements with stockholders to indemnify the acquirer prior to the time that the stockholders’ right to receive the merger consideration vested, but that “a post-closing price adjustment cannot be foisted on non-consenting stockholders.”

CignavAudax

Smollar v. Potarazu, C.A. No. 10287-VCN (November 19, 2014) (Noble, V.C.)

Dec 01 2014

By Lauren Garraux and Lisa Stark

In Smollar v. Potarazu, the Court of Chancery denied a stockholder’s request to expedite proceedings and to appoint a temporary receiver in connection with a challenge to an alleged impeding sale of VitalSpring Technologies, Inc. (“VitalSpring”) to an unidentified third-party. Plaintiff Marvin Smollar, a VitalSpring stockholder, filed the complaint against defendant Sreedhar V. Potarazu (“Defendant”), VitalSpring’s chief executive officer and sole director, following Defendant’s announcement that VitalSpring would be sold pending approval by the Federal Trade Commission. According to Defendant, the sale — which was projected to be completed around October 19, 2014 — was ultimately delayed pending further FTC guidance.

In his complaint, Plaintiff sought to enjoin the sale until VitalSpring released audited financial statements pursuant to an agreement with its stockholders and held an annual meeting of stockholders. VitalSpring apparently had not held an annual meeting of stockholders for several years contrary to Delaware law. According to Plaintiff, Defendant’s failure to hold annual meetings, to release audited financials and general lack of corporate transparency called into question the veracity of Defendant’s claims that a buyer for VitalSpring existed.

NAMA Holdings LLC v. Related WMC LLC, et al., C.A. No. 7934-VCL (November 17, 2014) (Laster, V.C.)

Nov 24 2014

By Joshua Haft and Scott Waxman

In NAMA Holdings, LLC v. Related WMC LLC, The Related Companies, L.P., and WMC Venture, LLC, the plaintiff, NAMA Holdings, LLC (“NAMA”) filed claims against Related WMC LLC (“Related Sub”) for breach of the implied covenant of good faith and fair dealing and against The Related Companies, L.P. (“Related Parent”) and World Market Center Venture, LLC (“WMCV”) for tortious interference with contract. The case originated from a suit filed by Related Sub and WMCV seeking a declaration that they complied with certain of their contractual obligations under the WMCV operating agreement, in which the Delaware Chancery Court granted partial summary judgment in favor of Related Sub and WMCV. In this Memorandum Opinion, the Delaware Chancery Court issued its post-trial decision after a trial on NAMA’s claims for breach of the implied covenant of good faith and fair dealing by Related Sub and tortious interference with contract by Related Parent and WMCV.

The plaintiff’s claims arose out of the development of a retail shopping mall in Las Vegas, Nevada called the World Market Center (the “Center”). In order to develop the Center, Alliance Network, LLC (“Alliance Network”) was formed by Prime Associates Group, LLC, which was owned by Shawn Samson and Jack Kashani, Crescent Nevada Associates, LLC, owned by relatives of Kashani, and NAMA. NAMA contributed 70% of the capital for Alliance Network, but after a dispute over additional needed capital, the project was restructured such that WMCV was formed by Alliance Network and Related Parent, a New York City real estate firm. WMCV had two members, Network World Market Center, LLC, a wholly owned subsidiary of Alliance Network (“Network”), and Related Sub.