Delaware Docket – Page 52 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

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

Jun 17 2014

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.

Crothall, et al. v. Zimmerman, et al., Del. No. 608, 2013 (May 28, 2014)

Jun 13 2014

By Eric Feldman and Naomi Ogan

In Crothall, et al. v. Zimmerman, et al., the defendants in a derivative suit sought to reverse the Delaware Court of Chancery’s decision awarding attorneys’ fees to counsel for Robert Zimmerman, the plaintiff in the underlying action. Zimmerman, a common unitholder of Adhezion Biomedical, LLC (“Adhezion”), originally brought a derivative suit against the directors and certain investors of Adhezion, claiming that (i) certain financing transactions involving the sale of Adhezion units were substantively unfair, and (ii) the units issued in those transactions were not properly authorized in accordance with Adhezion’s operating agreement. The Chancery Court’s opinion rejected Zimmerman’s claim of substantive unfairness, but agreed that Adhezion’s operating agreement had been violated because the units issued in the financing transactions had been issued without an amendment approved by a separate vote of the common unitholders.

The Chancery Court, however, awarded only nominal damages for the breach of the operating agreement, and, before a final judgment was entered, Zimmerman decided to sell his Adhezion units and abandon the lawsuit, thus rendering his claims moot. As a result, the Chancery Court granted the defendants’ motion to dismiss Zimmerman’s claims. Nevertheless, Zimmerman’s counsel was allowed to intervene in the case, and was ultimately awarded $300,000 in attorneys’ fees, on the theory that Adhezion had realized a corporate benefit from the Chancery Court’s decision that a vote of the common unitholders was required to authorize additional units under the operating agreement.

The defendants, while unable to appeal the Chancery Court’s ruling directly due to the absence of a final judgment, asked the Delaware Supreme Court to re-consider the merits of the Chancery Court’s finding that attorneys’ fees were warranted on the basis of a corporate benefit to Adhezion. The Supreme Court reversed the Chancery Court’s ruling, finding that Zimmerman’s counsel had not created a corporate benefit, and therefore was not entitled to the $300,000 in attorneys’ fees originally awarded by the Chancery Court. Without evaluating the Chancery Court’s substantive reading of the Adhezion operating agreement, the Supreme Court held that when a plaintiff takes action to moot his own claim, as Zimmerman did by selling his units and abandoning his claims before entry of a final judgment after trial, no corporate benefit can be created and therefore no attorneys’ fees should be awarded on that basis. The Supreme Court noted that, while attorneys’ fees have previously been awarded on the basis of mooted claims, those claims were rendered moot by the actions of the defendant, not the plaintiff. In contrast, in this case the Supreme Court refused to award fees on the basis of a claim that even the plaintiff himself had chosen not to pursue.

Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC, et al., C.A. No. 8431-VCN (May 30, 2014) (Noble, V.C.)

Jun 03 2014

By David Bernstein and Marisa DiLemme

The decision in Eurofins Panlabs, Inc. v. Ricerca Biosciences, LLC concerns a Stock and Asset Purchase Agreement (the “SAPA”) entered into in September 2012 by plaintiff, Eurofins Panlabs, Inc. (“Eurofins”), a Delaware corporation, and defendants, Ricerca Biosciences, LLC (“Ricerca”), a Delaware limited liability company, and Ricerca Holdings, Inc., a Delaware corporation. Ronald Ian Lennox (“Lennox”), Chairman and CEO of Ricerca, is also a defendant in the case.

Most of the opinion focuses on Eurofins’ claims against Ricerca related to specific provisions of the SAPA, whether Ricerca breached these provisions, and whether the breaches of contract were also fraudulent. The Court dismissed many of Eurofins’ claims against Ricerca. All claims against Lennox, aside from those based on the relationship with AstraZeneca PLC (“AZ”), were also dismissed.

Ravenswood Inv. Co., L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Del. Ch. May 30, 2014)

Jun 02 2014

By David Bernstein and Elise Gabriel

In Ravenswood Investment Co., Vice Chancellor Noble of the Delaware Chancery Court considered the novel issue of whether, under Delaware law, a corporation may condition a stockholder’s right to inspect the corporation’s books and records on an agreement not to trade in the corporation’s stock for a period of time. Here, the defendant Winmill & Co. Incorporated (“Winmill”), a Delaware holding company, had refused to allow plaintiff stockholder Ravenswood Investment Company, L.P. (“Ravenswood”) to inspect its nonpublic financial statements absent Ravenswood’s agreement not to trade in Winmill’s stock for up to a year. Winmill was apparently concerned that Ravenswood would use the material, non-public information to trade in Winmill’s stock, thus threatening “tipper” liability under federal securities law.

Vice Chancellor Noble concluded that a trading restriction imposed on a stockholder’s right to inspection under Delaware General Corporation Law § 220 is contrary to Delaware law. He found that Ravenswood had requested inspection for the proper purpose of valuing its stock, and any purported secondary purpose or ulterior motive was irrelevant. Vice Chancellor Noble was unwilling to incorporate an “inequitable” notion into Delaware’s § 220 jurisprudence that would frustrate a stockholder’s fundamental right to value its stock. In a footnote, he further stated that the Court did not address whether the requested financial statements should be deemed confidential, but if the parties could not agree on a confidentiality agreement, the Court would be available to address that issue. Vice Chancellor Noble refused, however, to require Winmill to pay Ravenswood’s attorneys’ fees, finding that Ravenswood had not produced requisite evidence of Winmill’s bad faith.

Ravenswood v. Winmill

Gassis v. Corkery, C.A. No. 8868-VCG (Del. Ch. May 28, 2014)

May 29 2014

By Joanna Diakos and Mark Hammes

In Gassis v. Corkery, Civil Action No. 8868, Bishop Macram Max Gassis challenged his removal as Chairman of the Board and as a director of the Bishop Gassis Sudan Relief Fund, Inc., a Delaware charitable nonstock corporation (the “Fund”) dedicated to helping the people of southern Sudan. The Bishop also challenged the previous removal of two directors from the Fund’s board and the elections of two directors who replaced them.

Bishop Gassis’ removal at a 2013 board meeting came after years of friction with other board members, who contended that the Bishop was difficult to work with, negatively interacted with the Fund’s beneficiaries in Sudan, spent extravagantly on travels, invested in suspicious projects, and acted as though he had a personal interest in the Fund’s assets. These board members further argued that a provision of the Fund’s bylaws providing that the Bishop “shall serve [as Chairman of the Board] until his retirement or resignation” required him to be removed from the board upon his retirement as a Catholic Bishop, which was to occur on his seventy-fifth birthday on September 21, 2013.

Durham v. Grapetree, LLC, C.A. No. 7325-VCG (May 16, 2014)

May 19 2014

By Eric Feldman and Eric Taylor

This is a case dealing with the interpretation of a Limited Liability Company Agreement for a family-owned Delaware Limited Liability Company, Grapetree, LLC (“Grapetree”), set up to manage inherited resort rental properties. The plaintiff in the suit, Andrew Durham (“Andrew”) is one of five members of Grapetree, all siblings, and the only non-managing member (under the 2008 OperatingAgreement of Grapetree, which governed during the time of the actions in dispute). Andrew is a self-employed landscape architect who made several expenditures over the years to maintain and improve the managed properties and seeks reimbursement for those expenses. The 2008 OperatingAgreement contains certain limitations on authority, namely that expenditures over $2,000 are subject to the majority vote of the members and all routine operational issues are subject to the majority vote of the managing members. (It should be noted that the limitation contained an apparent error requiring a majority “3/5” vote of the managing members, despite the fact that there were only four managing members.)

Laidler v. Hesco Bastion Environmental, Inc. (May 12, 2014)

May 13 2014

By Annette Becker and Naomi Ogan

In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.

Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.

ATP Tour, Inc. v. Deutscher Tennis Bund (German Tennis Federation), No. 534, 2013 (May 8, 2014)

May 10 2014

By David Bernstein and Elise Gabriel

In ATP Tour, Inc., the Delaware Supreme Court responded to certified questions from the United States District Court for the District of Delaware regarding the validity of a fee-shifting provision in a Delaware non-stock corporation’s bylaws. The bylaw at issue provides that any member that asserts a claim against the corporation or another member and does not “substantially achieve, in substance and amount, the full remedy sought” will be obligated to reimburse the corporation or the member for all fees, costs and expenses, including reasonable attorneys’ fees and other litigation expenses. The Supreme Court answered, in relevant part, that such a fee-shifting provision is authorized by the Delaware General Corporation Law (“DGCL”), and therefore is facially valid, but whether it would be enforceable depends on the circumstances under which it is adopted and under which it is invoked. The Delaware Supreme Court stated that bylaws that otherwise may be facially valid will not be enforced if adopted or used for an inequitable purpose.

Here, two members of ATP Tour, Inc. (“ATP”), a Delaware membership corporation operating a professional tennis tour, had unsuccessfully sued ATP for breach of fiduciary duty and antitrust violations. ATP then moved to recover its costs and attorneys’ fees pursuant to the bylaw provision described above. The Federal District Court, in which the suit had been brought, found the issue of enforceability of a fee-shifting bylaw to be novel and certified four questions regarding its validity and its enforceability to the Delaware Supreme Court. After stating that the bylaw provision was facially valid, the Delaware Supreme Court found that it could not answer the questions regarding enforceability because they depended on the circumstances under which the bylaw was adopted and was being invoked, which were not before the Supreme Court. The fourth question was whether the bylaw could be enforced against a party that became a member before the bylaw was adopted. The Delaware Supreme Court answered this in the affirmative because the member had agreed to be bound by rules that may be adopted or amended from time to time.

Although ATP was a non-stock membership corporation, the decision was based on provisions of the DGCL that apply to all corporations, and there is no reason to think the decision would have been different if ATP had been a stock corporation.

ATP Tour, Inc. v. Deutscher Tennis Bund

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