In the recent decision of In re Forum Mobile, Inc., C.A. No. 2020-0346-JTL (Del. Ch. Feb. 3, 2022), the Delaware Court of Chancery denied a petition to appoint a custodian under 8 Del. C. § 226(a)(3) where petitioner sought to take a defunct corporation whose shares are traded over the counter to use as a blank check company through a reverse merger.

We previously discussed here on this blog custodianship proceedings under Section 226 of the Delaware General Corporation Law (“DGCL”).

Vice Chancellor Laster preliminarily noted that “Delaware decisions have enforced a public policy against permitting capital markets entrepreneurs to use sections of the DGCL to revive defunct Delaware entities with still extant listings and use them as vehicles to access the public markets.” Slip op. at 1.

The Court then analyzed the text of Section 226 itself. Petitioner sought appointment of a custodian over Forum under Del. C. § 226(a)(3), which allows the Court of Chancery to appoint a custodian when “[t]he corporation has abandoned its business and has failed within a reasonable time to take steps to dissolve, liquidate, or distribute its assets.”

Section 226(b) provides that “the authority of the custodian is to continue the business of the corporation and not to liquidate its affairs and distribute its assets, except when the court shall otherwise order and except in cases arising under paragraph (a)(3) of this section or § 352(a)(2) of this title.”

The Court held that a custodian appointed under Section 226(a)(3) does not have authority to continue the business of the corporation, under the express terms of Section 226(b). That is what the petitioner sought to do so in this action. Rather, a custodian appointed under Section 226(a)(3) may only liquidate the affairs of the abandoned corporation and distribute its assets.

Key Takeaway: The Forum Mobile decision makes clear that a petitioner may not rely upon Section 226(a)(3) of the DGCL to revive a defunct, publicly registered shell company as a blank check company.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Swift v. Houston Wire & Cable Co., C.A. No. 2021-0525-LWW (Del. Ch. Dec. 3, 2021), the Delaware Court of Chancery considered whether a plaintiff lacked standing to inspect a Delaware corporation’s books and records under 8 Del. C. § 220 when the complaint was filed just hours after a merger went effective that cancelled plaintiff’s shares.

Defendant Houston Wire & Cable Co. (“Houston”) moved to dismiss the complaint in light of the pre-suit merger that caused plaintiff to cease being a stockholder of the corporation.  In opposing the motion, Plaintiff argued that the closing of the merger, rather than the “Effective Time” set forth in the merger agreement, should dictate when plaintiff lost his standing to file the Section 220 complaint.  The timing was important, because the complaint was filed just hours after the Effective Time set forth in the merger agreement, but, as plaintiff argued, technically before the closing date.

The Court of Chancery found that, under the merger agreement, plaintiff ceased being a stockholder of the corporation upon the Effective Time.  The Court considered the time at which the Certificate of Merger was filed with the Delaware Secretary of State.  The filing date of that certificate was 12:19 p.m. Although trading occurred later in the afternoon, the Court found that such trading did not change “the reality that, under the Merger Agreement, the instruments being traded represented ‘only the right to receive the Merger Consideration payable in respect thereof.'” Slip op. at 13. Otherwise, the Court found that the shares had been cancelled.

The Court acknowledged that this may be a “harsh result”, as plaintiff called it, but the Court noted that “strict adherence to the requirements of 8 Del. C. § 220 is mandated.”  Id. As such, the Court dismissed the Section 220 books and records action.

Key Takeaway: In light of the Swift decision, it is important for any stockholder following the announcement of a merger to file a books and records complaint before the merger goes effective. Otherwise, the stockholder will be without standing to litigate the Section 220 demand.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Knott Partners L.P. v. Telepathy Labs, Inc., C.A. No. 2021-0583-SG (Del. Ch. Nov. 23, 2021), the Delaware Court of Chancery analyzed to what extent a corporation opposing a Section 220 books and records demand may rely upon its stock ledger to deny the demand.

Vice Chancellor Glasscock held that while a corporation may rely upon its stock ledger to reject an inspection demand under Section 220 when the ledger does not list plaintiff as a stockholder, it may not do so when the corporation was otherwise aware of plaintiff’s status as stockholder.

In other words, the court will not allow a corporation to “rely on [its] deficient stock ledger to achieve a dismissal, and to put the Plaintiff to the expense of a new demand and complaint.” Slip op. at 1. The Court further held that in a books and records action, “forcing litigants into the position of submitting extrinsic evidence of stockholder status would be a goad to inefficiency generally incompatible with such an action.” Id.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On August 5, 2021, the Delaware Court of Chancery issued revised Guidelines for Persons Litigating in the Court of Chancery.   According to the Court’s press release, the Guidelines “review the expectations for remote and courtroom hearings and trials and offer best practices for litigating cases in the Court of Chancery.”  These Guidelines are a “must-read” for any litigator practicing before the Court of Chancery.

The Court of Chancery previously issued original Guidelines in 2012.  While the new Guidelines retain much of the content of the original version, they also address a range of additional topics and provide various insight into the expectations of the Court.  A brief summary of various updates can be found below:

  • The revised Guidelines include a section titled “Expectations for Remote Hearings and Trials”, in light of the substantially increased use of such technology since the start of the Covid-19 pandemic.  The Guidelines list four separate technology platforms used by the Court for remote hearings and trials: (i) conference call using a standard conference bridge; (ii) conference call using CourtSolutions; (iii) video conference using Zoom; and (iv) video conference hosted by CourtScribes.  See Section B.
  • The revised Guidelines clarify that parties should contact chambers to advise whether any party requests oral argument or whether the parties agree to submit the motion for decision without argument.  See Section A(1)(b).
  • The revised Guidelines include a section related to the use of a “Discovery Facilitator”, who may be appointed “to assist the parties in navigating the discovery process”.  In contrast to a Discovery Master, a Discovery Facilitator does not have the authority to decide discovery disputes.  The Court has historically appointed a Discovery Facilitator in cases exhibiting some or all of the following: highly complex facts, extensive discovery burden, an expedited schedule, difficult privilege questions, or a pattern of discovery disputes among counsel.  See Section 7(h).
  • Settlements should be promptly reported to the Court.  See Section C(4).
  • A section discussing prolonged lack of docket activity, which provides that the Court will request updates if there has been a prolonged period of inactivity.  The Guidelines note that if there has not been any docket activity in six months, then it would be recommended to provide a status letter to the Court.  See Section C(5)(f).
  • A section discussing Rule 56 summary judgment motions, which states that parties may include in a scheduling order provisions requiring that parties seek leave before filing a motion for summary judgment.  See Section C(6)(d).
  • Clarification that the Court does not have access to Lexis.  See Section C(8)(e).  Therefore, if counsel cites to Lexis decisions, it is important to provide Lexis versions in the compendium.

In addition to the above-referenced additions, the new Guidelines include much of the content of the original Guidelines, including:

  • hearing protocols and expectations of practitioners for in-court hearings;
  • the prohibition of hand-held electronic devices of any kind in the courtroom, with the exception that a laptop may be used for hearing or trial purposes only;
  • the requirement to consult about the use of technology needs prior to a hearing;
  • recommended scheduling guidelines for expedited and non-expedited cases; and
  • the fact that the concept of mere “local counsel”, whose role is limited to administrative or ministerial matters, has no place in the Court of Chancery. Rather, Delaware counsel are required to have an active role, especially in the discovery process, including in the collection, review and production of documents, and in the assertion of privilege.

Finally, similar to the original version, the revised Guidelines provide helpful links to various sample documents, including confidentiality stipulations, briefing and case scheduling stipulations, a sample document collection outline, and a sample quick-peek stipulation, among others.  The sample documents can be found here.

The revised Guidelines are an important and necessary read for both Delaware and out-of-state counsel practicing before the Delaware Court of Chancery.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

Effective August 1, 2021, the Delaware Limited Liability Company Act (“LLC Act”), the Delaware Revised Uniform Limited Partnership Act (“LP Act”) and the Delaware Revised Uniform Partnership Act (“Partnership Act”) have been amended to require that the “necessary and essential” standard apply to books and records inspection demands made under statutory or contractual grounds, subject to the LLC or partnership agreement expanding or restricting such inspection rights.

The amendments specifically apply to Section 18-305 of the LLC Act (6 Del. C. § 18-305), Section 17-305 of the LP Act (6 Del. C. § 17-305), and Section 15-403 of the Partnership Act (Del. C. § 15-403).  The amendments were first introduced earlier this year in Delaware Senate Bill No. 114 (to amend the LLC Act), Senate Bill No. 115 (to amend the Partnership Act), and Senate Bill No. 116 (to amend the LP Act).

In light of the amendments, the scope of documentation to which a member of a Delaware LLC or partner of a Delaware limited partnership or general partnership is entitled is now more limited, consistent with 8 Del. C. § 220, the books and records inspection statute pertaining to Delaware corporations.  Under case law construing Section 220 of the Delaware General Corporation Law (DGCL), the burden is placed upon a stockholder to demonstrate that the requested books and records are “necessary and essential” to a stated purpose.

The amendments were adopted to address the Delaware Supreme Court decision of Murfey, et al. v. WHC Ventures, LLC, et al., Del. Supr., No 294, 2019 (July 13, 2020).  In Murfey, the Delaware Supreme Court found that the “necessary and essential” standard did not apply to a books and records demand made under a limited partnership’s agreement, because that condition was not expressly conditioned by the limited partnership agreement.

The author of this post represented the prevailing appellants in the Murfey appeal.  A prior post discussing the Murfey decision can be found here.

Under each of the amendments, the right to obtain or examine information may be expanded or restricted in the original LLC or partnership agreement, or in an amendment thereto signed by all members or partners of the entity or in compliance with any applicable requirements of the LLC or partnership agreement.

Key Takeaway:

Absent the LLC or partnership agreement stating otherwise, a member or partner seeking to inspect books and records of a Delaware alternative entity will now have the burden to show that the documents sought are “necessary and essential” to a stated purpose.  Accordingly, these inspection amendments should be considered by any party to a books and records dispute involving a Delaware limited liability company, limited partnership or a general partnership.

Moreover, members or partners and their counsel should consider these amendments when forming an alternative entity and entering into an LLC or partnership agreement.  If the members or partners desire to contract for full transparency into company books and records without the added burden of showing that such requested documents are “necessary and essential” to a stated purpose, they should consider negotiating for such rights at the onset and ensure that the agreement expands their inspection rights beyond the default now set by statute.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

The Delaware Court of Chancery recently dismissed a derivative lawsuit asserting a Caremark claim for failure to adequately allege demand futility under Court of Chancery Rule 23.1.  The opinion, Pettry v. Smith, et al., C.A. No. 2019-0795-JRS (Del. Ch. June 28, 2021), provides a helpful roadmap regarding the assertion of demand futility under Delaware law, and is an important read for any party or practitioner litigating a Caremark claim.

In Pettry, the plaintiff stockholder alleged that the board of FedEx Corporation (the “Company”) failed to oversee compliance with state and federal laws governing the shipment of cigarettes, despite being placed on notice by a report of misconduct in 2012.  The lawsuit sought compensation from the director defendants for a $35 million settlement of suits brought by the State of New York and New York City, along with corporate governance reforms and disgorgement of profits.

The plaintiff, Pettry, did not make a demand upon the board.  Rather, Pettry argued that demand would have been futile because each board member would face a substantial likelihood of personal liability.  Accordingly, Pettry argued demand futility, which would excuse plaintiff’s obligation to make a demand upon the board.

Defendants disagreed and moved to dismiss the Complaint under Court of Chancery Rule 23.1 for failure to plead demand futility.  Alternatively, Defendants moved to dismiss under Chancery Rule 12(b)(6) for failure to state a claim.

Vice Chancellor Slights agreed with defendants, and granted their motion to dismiss under Chancery Rule 23.1.  Specifically, the Court ruled that plaintiff failed to adequately plead that a majority of the Board faces a substantial likelihood of liability on her claims or were otherwise disabled by interest or lack of independence.

The Court wrote that, under Delaware law, a stockholder must “satisfy the threshold demand requirements of Court of Chancery Rule 23.1” before being permitted to pursue a derivative claim on behalf of a corporation.  Slip op. at 15.  “To meet the Rule 23.1 requirements, the stockholder must plead with particularity either that she made a demand on the company’s board of directors to pursue particular claims or why any such demand would be futile, thereby excusing the need to make a demand altogether.” Id.

The Court noted that a Caremark claim, which is a claim that corporate fiduciaries breached their duties by failing to monitor corporate affairs, is “possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment.”  Slip op. at 19 (quoting Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)).  The Court addressed what must be plead in order to adequately allege such a claim:

At the pleadings stage, a plaintiff must allege particularized facts that satisfy one of the necessary conditions for director oversight liability articulated in Caremark: either that (1) the directors utterly failed to implement any reporting or information system or controls; or (2) having implemented such a system or controls, [the directors] consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.

Slip op. at 19 (internal quotations and citations omitted).

Plaintiff asserted that the director defendants violated their Caremark duties under the second prong referenced above.  In granting defendants’ motion to dismiss, Vice Chancellor Slights held that the Complaint failed to sufficiently plead that the director defendants consciously disregarded “red flags”.

Specifically, the Court noted that the entire board and audit committee were apprised of the ongoing enforcement actions through settlement.  Moreover, the board formed a Demand Committee to consider a stockholder demand related to the alleged improper cigarette shipments, which found that that the Company should not bring claims against the director defendants for violation of their duty of oversight because there was no evidence of bad faith. In addition, plaintiff acknowledged that various Company personnel were reprimanded.  Finally, the Complaint acknowledged that by 2016, the Company had banned nearly all tobacco shipments, and in 2019, it introduced numerous training programs and implemented measures to increase the detection of illegal cigarette shipments.

Key Takeaway:

This opinion demonstrates the difficulty in sufficiently pleading demand futility under Court of Chancery Rule 23.1 in connection with a Caremark claim.  This is especially true if the board has been appropriately apprised of potential issues, formed an independent committee, and has taken appropriate steps to remediate any potential infractions, including reprimanding employees along with other corrective actions.  The opinion should be carefully considered by any board member faced with a Caremark claim before the Delaware Court of Chancery.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of DG BF, LLC, et al. v. Michael Ray, et al., C.A. No. 2020-0459-MTZ (Del. Ch. June 30, 2021), the Delaware Court of Chancery declined to exercise subject matter jurisdiction over a defamation claim despite the parties stipulating to have the Court hear such claim under the clean-up doctrine.

Earlier, on March 1, 2021, the Court issued a Memorandum Opinion addressing defendant’s motion to dismiss, and ordered supplemental briefing on whether the Court had subject matter jurisdiction over plaintiffs’ defamation claim, which seeks damages but not injunctive relief.  Rather than brief that question, the parties instead submitted a stipulation agreeing that the Court had subject matter jurisdiction over the claim.

While Vice Chancellor Zurn considered the pending motion’s substantive merits, Vice Chancellor Slights issued an opinion in the case of Smith v. Scott, 2021 WL 1592463, at *13–14 (Del. Ch. Apr. 23, 2021) which addressed whether the same issue, i.e. whether the Court has subject matter jurisdiction over a defamation claim.

In Smith, Vice Chancellor Slights concluded that “the Court of Chancery, in all instances, lacks subject matter jurisdiction to adjudicate the questions of whether a defendant made a false statement about the plaintiff and whether it did so with actual malice.” Id. (emphasis added).

The Court went on to state: “The ‘clean-up’ doctrine serves the important function of avoiding, when appropriate, piecemeal litigation, but the historical imperative that a jury, not a judge, should evaluate whether a defendant’s statements are defamatory shines even brighter.” Id.

Vice Chancellor Zurn adopted the rationale of Smith v. Scott, and therefore declined the parties’ request that the Court hear the defamation claim under the clean-up doctrine.  Rather, the Court dismissed the count, subject to plaintiffs’ right under 10 Del. C. § 1902 to transfer the claim to the Delaware Superior Court.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

In the recent decision of Agspring Holdco, LLC, et al. v. NGP X US Holdings, L.P., et al., C.A. No. 2019-0567-JRS (Del. Ch. June 28, 2021), the Delaware Court of Chancery issued a stay of discovery pending resolution of the parties’ cross-motions for summary judgment to confirm or vacate an arbitration ruling concerning advancement obligations.  Earlier in March 2021, an arbitration panel ruled that defendant was entitled to advancement from plaintiff.

The Court also opened the door to a stay of the entirety of the case in the event that the defendant prevailed on its cross-motion and plaintiffs failed to honor their advancement obligations.

Vice Chancellor Slights stated: “Granting a stay is appropriate where it would not prejudice the non-moving party and where it would spare the moving party unnecessary expense or burden.” Slip op. at 2 (internal quotations omitted).

The Court noted that the action was not expedited, and that a stay would not be prejudicial.  The Court held that the incurrence of further fees in the action was not warranted until the advancement issue is resolved.  Accordingly, the Court exercised its discretion and granted a stay of the case pending resolution of the cross-motions.

Of interest, the Vice Chancellor concluded by stating that, if defendant prevails on its advancement claim and plaintiffs fail to advance funds (as their CFO indicated may be the case), then “there are legitimate questions as to whether this action should be stayed until such time as Plaintiffs’ advancement obligations are fulfilled.”  Slip op. at 3 (citing Perryman v. Stimwave Techs. Inc., 2020 WL 2465720, at *4 (Del. Ch. May 13, 2020)) (“a delay in recognizing advancement rights may ultimately render those rights illusory.”).

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

On July 12, 2021, the Court of Chancery issued Standing Order No. 6.  The standing order extends the permitted use of unsworn declarations, verifications, certificates, statements, oaths, or affidavits in filings with the Court of Chancery, pursuant to 10 Del. C. § 3927, until September 30, 2021.

Citing that many law firms and businesses that litigate in the Court of Chancery continue to operate remotely to prevent the spread of COVID-19, the Court determined the continued use of unsworn declarations under 10 Del. C. § 3927 to be appropriate.  The unsworn declaration, verification, certificate, or statement must be in substantially the form approved by Section 3927.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.

The United States District Court for the District of Delaware recently issued a Jury Trial Notice on April 5, 2021, stating that jury trials will resume, subject to the discretion of each individual judge as to whether and when any particular case will proceed to trial.

Previously, on February 5th, the Chief District Court Judge issued a Standing Order RE: Criminal and Civil Jury Trial Suspension, which cancelled all jury trials for two months, in light of the continuing impact of the COVID-19 pandemic.

Citing current conditions and after consultation with the Court’s Reopening Committee, the District Court of Delaware determined that it will not extend the February 5th Standing Order.

Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware.  You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.