Delaware Docket – Page 53 – Timely, brief summaries of cases handed down by the Delaware Court of Chancery and the Delaware Supreme Court.

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

May 05 2014

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.

2009 Caiola Family Trust, et al. v. PWA, LLC, et al., C.A. No. 8028-VCP (Apr. 30, 2014) (Parsons, V.C.)

May 05 2014

By Nick Froio and Marisa DiLemme

In this opinion, Vice Chancellor Parsons considers the parties’ cross motions for summary judgment as to the proper interpretation of a key provision of the operating agreement (the “Operating Agreement”) of Dunes Point West Associates, LLC (the “Company”), a Delaware limited liability company, relating to the Company’s management. The plaintiffs, together, own 90% of the Company, and are the only non-managing members of the Company. The defendants are PWA, LLC (“PWA”), the Company’s managing member and the holder of a10% interest in the Company, and Ward Katz, the managing member of PWA and sole owner of the Company’s property manager, Dunes Residential Services, Inc. (“DRS”). In July 2012, plaintiffs voted to terminate DRS as property manager. Shortly thereafter, the plaintiffs voted to terminate PWA as managing member for “Cause” due to PWA having materially breached the Operating Agreement by not implementing their decision to replace DRS with a new property manager.

The plaintiffs argued that Section 8.4(a) of the Operating Agreement allows the non-managing members to mandate removal of the property manager by majority vote since one of the actions upon which the non-managing members are entitled to vote under Section 8.4(a) included the termination of the management agreement under which DRS was appointed property manager. The defendants argued that Section 8.4(a) of the Operating Agreement only gives the non-managing members a limited veto right over those Company actions. The Court found Section 8.4(a) to be unambiguous and agreed with the defendant’s interpretation of the provision as granting only a limited veto power.

In re Interstate General Media Holdings, LLC, C.A. No. 9221-VCP (Apr. 25, 2014) (Parsons, V.C.)

Apr 29 2014

By Scott Waxman and Zack Sager

In In re Interstate General Media Holdings, LLC, the managing members of Interstate General Media Holdings, LLC, a Delaware limited liability company (the “Company”), sought judicial dissolution of the Company. Both managing members agreed that the Company was deadlocked and judicial dissolution was necessary, but they disagreed about whether the Company should be sold at a private auction or a public auction. The limited liability company agreement of the Company (the “LLC Agreement”) did not explicitly address how the Company was to be dissolved and liquidated. Nonetheless, one of the managing members argued that the Court of Chancery should look to the intent and provisions of the LLC Agreement for guidance in fashioning an appropriate remedy. The court rejected this argument holding that because the LLC Agreement did not explicitly address the procedures for dissolution and liquidation, it was essentially irrelevant in determining the issue. Further, because the managing members sought judicial dissolution, which was not proscribed by the LLC Agreement, the Company submitted itself to the discretion of the court to determine how the Company was to be dissolved and liquidated. The court ultimately ordered the dissolution of the Company and a sale of the Company via a private auction, finding that this method would maximize the value of the members’ limited liability company interests in the Company.

InReInterstate

In re ISN Software Corp. Appraisal Litigation, C.A. No. 8388-VCG (April 10, 2014)

Apr 16 2014

By Kristy Harlan and Eric Taylor

This is a dispute about whether attorney-client privilege applies to certain draft documents, and whether a waiver of privilege was made with respect to certain other communications, in connection with an appraisal action. The petitioners are a number of venture capital funds seeking a determination of the fair value of their shares in ISN Software Corp. (“ISN”) following a freeze-outmerger in early 2013.

The petitioners contend that ISN has improperly claimed attorney-client privilege over certain draft documents, including draft board minutes, created by management but sent to legal counsel for review. The draft minutes in question were authored by management for meetings that legal counsel did not attend. ISN claimed privilege over the draft minutes because they were forwarded to counsel for review prior to finalization and are, according to ISN, therefore per se not discoverable. Citing its decision in Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426 (Del. Ch. Mar. 20, 1986), the Court held that this was incorrect–where drafts were not prepared by a lawyer in a setting in which they were intended to remain confidential and where attorneys did not gather the information contained therein, work-product doctrine does not shield documents from production.

The petitioners also sought to compel the production of documents reflecting otherwise-privileged communications evidencing how the ISN board arrived at its merger price. The petitioners sought to rely on the “at-issue” exception to privilege–that is, that the privileged communications are required in order to arrive at the truthful resolution of an issue injected into the litigation by a party–contending that ISN placed the merger price “at issue.” However, the Court disagreed and noted that the petitioners had adequate information sources to establish whether the merger price was indicative of fair value (including depositions of ISN managers and directors, board resolutions approving the merger agreement, and a valuation opinion obtained by the ISN board).

InreISNSoftware

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.

Lehman Brothers Holdings Inc., et al. v. Spanish Broadcasting System, Inc. No. 8321-VCG (Glasscock, V.C.)

Feb 28 2014

By Wilson Chu and Mark Hammes

In this action for breach of contract, Plaintiff institutional investors held cumulative preferred stock of Spanish Broadcasting System (“SBS”), a Delaware corporation, with dividends payable quarterly if so declared by the board of directors. If the dividends were unpaid for four consecutive quarters, a voting rights trigger in the shares’ Certificate of Designation (“Certificate”) allowed the holders of the preferred stock to call a special meeting and elect two additional directors to SBS’s board. In addition, the Certificate prohibited SBS from incurring additional debt after such a triggering event.

During 2009, SBS began to fail to make dividend payments. Plaintiffs alleged a triggering event occurred no later than July 2010. Plaintiffs did not at that time assert their rights under the Certificate, nor did they when SBS incurred additional debt in publicly announced transactions during 2011 and 2012. Plaintiffs brought suit for breach of contract and breach of the covenant of good faith and fair dealing. SBS argued that no triggering event occurred until after the debt transactions, and raised defenses including laches and acquiescence.

Caspian Select Credit Master Fund Ltd. v. Key Plastics Corporation, C.A. No. 8625-VCN (Noble, V.C.)

Feb 27 2014

By Nick Froio

In this opinion, Vice Chancellor Noble considered a dispute involving a minority investor, Caspian Select Credit Master Fund Ltd. (“Caspian”), in a closely-held portfolio company, Key Plastics Corporation (“Key Plastics”), seeking to obtain certain books and records of Key Plastics pursuant to 8 Del. Code § 220. The Court found in favor of Caspian, holding that Caspian had stated proper purposes under Section 220, and that Key Plastics failed to demonstrate that those purposes were false or a pretense.

In initiating this Section 220 action, Caspian argued that the proper purposes for its books and records requests were to investigate the value of its interest and the potential waste, mismanagement, self-dealing, and other improper transactions related to a loan transaction between Key Plastics and an affiliate of Key Plastics’ controlling stockholders (the “Affiliated Loan”). Key Plastics argued that Caspian’s alleged purposes were not its primary motive and that they were a false pretense: Caspian already had the information needed to investigate any potential wrongdoing and was litigating solely to pressure the controlling stockholders to purchase its interest.

Flaa v. Montano, Civil Action No. 9146-VCG (February 24, 2014) (Glasscock, V.C.)

Feb 25 2014

By Ashley Galston

In this opinion, Vice Chancellor Glasscock considered Defendants’ motion to dismiss on ripeness grounds in a DGCL Section 225 action. In 2013, certain stockholders of CardioVascular BioTherapeutics, Inc. (the “Company”) executed written consents purporting to remove the Defendant directors, including Daniel Montano, from the Company’s board of directors. A Status Quo Order, typical in a Section 225 action, put in place an interim board, of which Daniel Montano and the other individual Defendant directors were not members. The written consent was found to be invalid, the Plaintiff appealed, and the parties agreed to maintain the interim board pending appeal. However, before the Supreme Court heard the appeal, certain stockholders initiated a second written consent action, again, seeking to remove the Defendant directors. The Plaintiff then filed this Section 225 action seeking to confirm the second written consent. The Defendants moved to dismiss the second action for “lack of ripeness and other grounds”.

Section 225 provides that “upon application of any stockholder or director, or any officer whose title to office is contested, the Court of Chancery may hear and determine the validity of any election, appointment, removal or resignation of any director or officer of any corporation, and the right of any person to hold or continue to hold such office….” 8 Del. C. § 225(a). V.C. Glasscock noted that “the statute imposes no explicit requirement that a director must hold office before this Court may determine her right to a seat.” And, further, he held that “even under a quo warranto analysis, the action is ripe…as Montano and the other Defendants remained on the de jure board.” Therefore, V.C. Glasscock found that the action was ripe. V.C. Glasscock declined to address the question raised by the Defendants of the “procedural efficacy of a written consent purporting to remove a director who is not a member of an interim board created by a status quo order.” V.C. Glasscock invited the Defendants to make that argument, along with other procedural challenges they raised in this motion, at a future evidentiary hearing related to the effectiveness of the second written consent.

Flaa v. Montano