On December 30, 2020, the Delaware Supreme Court extended the current judicial emergency for an additional 30 days, effective January 4, 2021.  The Chief Justice of the Delaware Supreme Court issued Administrative Order No. 15 memorializing the same.

Previously, on October 5, 2020, the Delaware Courts had moved to a modified Phase 3 of the Delaware Judiciary’s four-phase reopening plan that was released in May by the Courts Reopening Committee.  The move to a modified Phase 3 allowed court facilities and staffing to increase up to 75 percent capacity and increase the number of people allowed in courtrooms to accommodate jury trials.

On November 16, 2020, citing the deterioration of COVID-19 conditions in the State, the Chief Justice had ordered the courts to postpone jury trials and transition back to Phase 2 of the Reopening Plan, as memorialized in Administrative Order No. 13.

Through Administrative Order No. 15, the Chief Justice has continued the judicial emergency for an addition thirty days, effective January 4, 2021, ordering that courts shall continue to operate under Phase 2 of the Reopening Plan, and that all Delaware Courts are authorized to continue to utilize audiovisual devices at their facilities and remotely to conduct proceedings, with the exception of jury trials.

Moreover, the suspension of requirements for sworn affidavits, verifications, oaths or affidavits filed in the Delaware Courts, as set forth under Administrative Order No. 3, remains in effect.

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 Revised Uniform Limited Partnership Act (“DRULPA”) sets forth the standard to dissolve a limited partnership formed under Delaware law.  Del. C. § 17-101, et seq.

Under Section 17-801 of the DRULPA, a Delaware limited partnership will voluntarily dissolve upon the occurrence of certain events, including: (i) at a time specified in the limited partnership agreement; (ii) upon the happening of events specified in the limited partnership agreement; or (iii) the vote of at least two-thirds of limited partners (along with the affirmative vote of all general partners), unless otherwise provided in the agreement.  6 Del. C. § 17-801(a)(1)-(3).

Alternatively, a partner of a limited partnership has standing to petition the Delaware Court of Chancery to judicially dissolve the Delaware limited partnership.   Under Section 17-802 of the DRULPA, “[o]n application by or for a partner the Court of Chancery may decree dissolution of a limited partnership whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement.” 6 Del. C. § 17-802.

Judicial dissolution of a Delaware limited partnership may be necessary when management is deadlocked, when the business is suffering irreparable harm and cannot operate, or when the business or its assets have been abandoned.

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 Supreme Court recently handed down a significant decision implicating several common defenses raised to a books and records demand made under Section 220 of the Delaware General Corporation Law.  The opinion is AmerisourceBergen Corporation v. Lebanon County Employees Retirement Fund, No. 60, 2020 (Del. Supr. Dec. 10, 2020).

The decision is an important read in that it invalidates two common defenses relied upon by corporations to oppose an inspection demand.  The decision holds that:

  • “[W]hen a Section 220 inspection demand states a proper investigatory purpose, it need not identify the particular course of action the stockholder will take if the books and records confirm the stockholder’s suspicion of wrongdoing.” Slip op. at 4.
  • “[A]lthough the actionability of wrongdoing can be a relevant factor for the Court of Chancery to consider when assessing the legitimacy of a stockholder’s stated purpose, an investigating stockholder is not required in all cases to establish that the wrongdoing under investigation is actionable.” Id.

The defendant-corporation appealed the Court of Chancery’s ruling, arguing that plaintiffs’ inspection demand, aimed at investigating possible breaches of fiduciary duty, mismanagement, and other wrongdoing, was deficient because it did not disclose their ultimate objective, i.e. “what they intended to do with the books and records in the event that they confirmed their suspicion of wrongdoing.” Slip op. at 3.  Defendant also contended that the Court of Chancery erred by holding that plaintiffs were not required to establish a credible basis to suspect actionable wrongdoing.

Addressing the matter en banc, the Delaware Supreme Court affirmed the lower court’s decision in full.  The High Court ruled that a stockholder need not know the specific “ends” of the inspection, provided that a “credible basis” to suspect possible wrongdoing has been shown.  The Court further held: “we have stated that a stockholder is not required to prove that wrongdoing occurred, only that there is possible mismanagement that would warrant further investigation.” Id. at 26 (internal quotation omitted).

Key Takeaway:

Delaware corporations opposing an otherwise proper books and records demand should carefully take the AmerisourceBergen opinion into account.  This decision makes clear that if a stockholder puts forth a “credible basis” to suspect mismanagement or wrongdoing, then a “proper purpose” has been demonstrated. A stockholder need not know exactly how it will use the fruits of the investigation, and a stockholder seeking books and records may pursue the same for non-litigation purposes.

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 opinion of Stream TV Networks, Inc. v. SeeCubic, Inc., C.A. No. 2020-0310-JTL (Del. Ch. Dec. 8, 2020) (Laster, V.C.), Vice Chancellor Laster invoked over a century-long development of Delaware corporate jurisprudence to support his ruling that the assets of a 3D television technology company can be transferred to secured creditors, notwithstanding the language of Section 271 of the Delaware General Corporation Law (“DGCL”).

The Court of Chancery granted Defendant SeeCubic Inc.’s (“SeeCubic”) motion for a preliminary injunction preventing plaintiff from interfering with with the agreement.  The Court denied Plaintiff Stream TV Networks, Inc.’s (“Stream”) competing motion for a preliminary injunction to prevent enforcement of the agreement, finding that Stream’s theories were without merit.

Under the agreement, Stream “agreed to transfer all of its assets to SeeCubic, a newly formed entity controlled by its secured creditors[.]”  Slip op. at 1.  The creditors had the right to foreclose on Stream’s assets, according to the opinion.

Vice Chancellor Laster cited both to a 19th-century treatise, and a 1915 Court of Chancer decision by Chancellor Charles M. Curtis, Butler v. New Keystone Copper Co., 93 A. 380, 382 (Del. Ch. 1915), to support his decision barring Stream and its officers from interfering with an agreement to turn over its assets to SeeCubic.

Stream argued that the agreement was “invalid because it constituted a sale of all of Stream’s assets, which required stockholder approval under Section 271 of the Delaware General Corporation Law.” Slip op. at 2-3.  Vice Chancellor Laster disagreed that the contemplated transfer of Stream’s assets to its secured creditors constituted a sale within the scope of Section 271.

The opinion walked through the history of Section 271, noting that it began as an exception to the common law rule requiring stockholder approval for the transfer of substantially all of a company’s assets when the company was faced with insolvency.

In finding that Section 271 did not apply to the transfer of Stream’s assets, the Court also conducted an analysis of the terms “sale” and “exchange,” finding that the plain meaning of these terms did not apply to the transfer of assets under the omnibus agreement at issue.  Per the Court: “principles of statutory interpretation call for examining the legislative history of the statute and its position in the broader context of the DGCL. These sources demonstrate that Section 271 does not apply to a transaction like the one contemplated by the Omnibus Agreement, in which an insolvent and failing firm transfers its assets to its secured creditors in lieu of a formal foreclosure proceeding.” Slip op. at 41.

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 a recent opinion issued by the Delaware Court of Chancery, Perryman v. Stimwave Technologies, Inc., C.A. No. 2020-0079-SG, the Vice Chancellor Glasscock ruled upon whether directors of a Delaware corporation were entitled to advancement under the corporation’s bylaws, pursuant to 8 Del. C. § 145(e).  This opinion is an important read for litigators and practitioners as it provides a helpful roadmap for those parties seeking advancement under Delaware law.

In Perryman, whether the directors were entitled to advancement centered around whether the company’s charter amendment required approval of its Series D equity holders, and if so, whether the indemnification agreements at issue were executed before the amendment to the charter went in place, as the Court found that no approval was received from Series D equity holders.

Stated differently, the Court phrased the two “deceptively simple-sounding questions” before it as follows: “(1) does Respondent Stimwave’s certificate of incorporation, post a 2018 amendment, require approval of indemnification agreements by the company’s Series D equity holders, and (2) if so, did the Petitioners, Laura Perryman, the former CEO of Respondent Stimwave, and her husband, Stimwave Director Gary Perryman, sign and execute their indemnification agreements before the amendment?” Slip op. at 2.

The Court of Chancery provided several helpful “nuggets” of practical advice pertaining to advancement claims.  In one such example, Vice Chancellor Glasscock noted:

While the contractual rights to advancement are often straightforward, these benefits have generated an inordinate amount of litigation. The reason is easy to identify; where the corporation itself is suing an indemnified individual for what it believes to be malfeasance or breach of duty to the corporation, its principals find it galling to be footing both the costs of prosecuting, and defending, the same litigation. Given the contractual rights involved, however, it is unusual in my experience for a defense to a demand for advancement to be wholly successful.

Slip op., at 1-2.

After a detailed discussion in the memorandum opinion, the Court ultimately found that Mr. Perryman’s advancement agreement was valid and enforceable, because it was executed prior to date of the charter enactment. However, the Court found that Ms. Perryman’s advancement agreement was executed after the adoption of the charter amendment, and because the charter amendment required approval from Series D equity holders, the Court held that Ms. Perryman was not entitled to indemnification.

Key Takeaway:

This decision is an important read for any director or officer seeking advancement of their claims.  Although advancement is permitted under Delaware law, it is necessary that any agreement conferring advancement rights upon a director or officer comply with any requirements set forth in the operative governing documents.

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 a brief and short letter opinion of Durham v. Grapetree, LLC, Civil Action No. 2018-0174-SG (Del. Ch. Oct. 8, 2020), Vice Chancellor Glasscock ruled upon a pro se litigant’s books and records demand after it was remanded to the Court of Chancery on appeal.  The plaintiff attached a number of books and records demands made to the defendant LLC, some timely and others untimely.  Initially, the Court granted two of Plaintiff’s demands.  Plaintiff appealed, and the case was remanded, to require that several other timely demands be considered by the Court.

The case is significant in that, on remand, the Court of Chancery revised its fee shifting award.  Fee-shifting is not automatically granted in favor of the prevailing party in a books and records demand action.  Rather, the Court applies the “American Rule”, with each side bearing their own fees and costs, absent a showing of bad faith or other litigation misconduct.  Of course, the Court also has discretion to shift fees if there is a contractual basis to do so.

Here, fee-shifting was permitted under the LLC’s operating agreement.  Initially, the Court granted fees in favor of the defendant LLC, given that plaintiff did not prevail on the majority of the demands he sought. On remand, after the Court considered each of the five demand letters submitted by plaintiff, the Court instead ruled that each side should bear their own fees.

Key Takeaway

This brief letter opinion shows the risk in asserting a books and records demand (let alone multiple demands) when the operative agreement contains a fee-shifting provision.  Even though plaintiff prevailed on some of the demands at trial, fees were initially shifted against him.  On remand, fees were not shifted to either side.  Accordingly, parties should carefully consider fee-shifting provisions when asserting an action to inspect a company’s books and records.

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.

Federal Rule of Civil Procedure 30(b)(6) now includes a confer-in-good-faith requirement.  The amendment addresses perceived deficiencies in the Rule 30(b)(6) process, including inadequately prepared witnesses and deficient notices. To address these challenges, the rule makers concluded that requiring lawyers to address such issues in advance will increase clarity and resolution.

The new amendment provides as follows:

Before or promptly after the notice or subpoena is served, the serving party and the organization must confer in good faith about the matters for examination. A subpoena must advise a nonparty organization of its duty to confer with the serving party and to designate each person who will testify.

The amendment to the rule went into effect December 1, 2020.

As the Judicial Conference of the United States’ Committee on Rules of Practice and Procedure stated in its memorandum to the U.S. Supreme Court, the amendment “codifies a best practice and practitioners across the bar support it.”

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 a short and pithy letter opinion, the Delaware Court of Chancery granted leave to a party to amend its complaint in a books and records action where plaintiff initially asserted it was a record stockholder, and then amended to state it was a beneficial stockholder.  POSCO Energy Co., Ltd. v. FuelCell Energy, Inc., Civil Action No. 2020-0713-MTZ (Del. Ch. Oct. 22, 2020).

In ruling upon the motion to amend, the Court cited Chancery Rule 15(d), which permits a party to serve a “supplemental pleading setting forth transactions or occurrences or events which have happened since the date of the pleading sought to be supplemented.”

Here, plaintiff filed an initial complaint after serving its books and records demand, asserting that it was a record holder of stock in the corporation.  Defendant asserted otherwise.  Plaintiff then determined it was instead a record holder of stock, served a subsequent demand stating as such, and sought leave to amend to assert a demand as a beneficial holder.

In granting the motion, the Court noted that leave to amend is granted liberally, and no prejudice was suffered by defendant.

Notably, Vice Chancellor Zurn also disapproved of the Rule 11 rhetoric raised by defendant in opposing the motion to amend.  The Court frowned upon defendant “invok[ing] Court of Chancery Rule 11 casually and repeatedly in this matter”, adding “in my view, it is distracting, detrimental to the famed collegiality of the Delaware bar, and counterproductive to the ‘just, speedy and inexpensive determination’ of judicial proceedings to summon Rule 11 in rhetoric.”

Accordingly, the Court granted plaintiff’s motion to amend its complaint to permit it to proceed under its supplemental demand letter.

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 a prior post, we discussed the standards required to obtain relief under Section 273 of the Delaware General Corporation Law (“DGCL”), i.e. (i) that a Delaware corporation has two 50/50 stockholders, (ii) that the company is engaged in a joint venture, and (iii) the 50/50 stockholders are unable to agree as to whether to discontinue the company.

But upon showing these elements, will the Court automatically grant dissolution of the entity?

The text of DGCL Section 273 states that the Court “may” dissolve the corporation and wind up its affairs when the requirements of the statute are met.  Case law has held that when a petitioner has satisfied each of these elements, the Court’s discretion to deny the petition is “sparingly exercised.”  In re McKinney-Ringham Corp., 1998 Del. Ch. LEXIS 34, at *16 (Del. Ch. Feb. 25, 1998).

But other remedies may be granted by the Delaware Court of Chancery.  For example, the Court has interpreted the permissive “may” language of Section 273 to give it authority to grant relief other than dissolution.

For example, in Fulk v. Washington Service Assoc., Inc., C.A. No. 17747-VCJ (Del. Ch. June 21, 2002), the Court of Chancery entered an order granting a custodian’s plan to sell the joint venture to either stockholder, instead of granting dissolution.  In that decision, the Court stated “the statute permits the Court flexibility in deciding how the joint venture should be discontinued[.]”  As demonstrated by Fulk, a sale of one stockholder’s interest to another is not uncommonly granted, especially if the corporation can be continued as a going concern.

Accordingly, the Court in a DGCL Section 273 action has broad discretion to determine the appropriate measure of relief, and may grant relief other than the dissolution of the joint venture under the 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.

In the recent decision of Searchlight CST, L.P. v. MediaMath Holdings, Inc., C.A. No. 2020-0652-SG (Del. Ch. Sept. 28, 2020), the Delaware Court of Chancery granted Defendant MediaMath Holdings, Inc.’s (“Defendant”) motion for summary judgment in connection with a contract dispute over a provision limiting the amount of indebtedness Defendant is able to incur.

According to the opinion, Plaintiff Searchlight CST, L.P. (“Plaintiff”) is an investor in the Defendant. In connection with its purchase of preferred stock, it contracted for a limit on the amount of indebtedness that Defendant is able to incur. Defendant is in the process of negotiating a new credit facility.  Plaintiff contends that the Defendant is contractually prohibited from entering the facility without its consent.

Plaintiff moved for a TRO and expedited proceedings of the action, to enjoin Defendant from consummating the transaction at issue.  In response, Defendant moved for summary judgment in its favor.

Upon review of the contract and each side’s interpretation thereof, the Court held that the contract does not require Defendant to obtain the Plaintiff’s consent before entering or borrowing under the proposed credit facility, up to $100 million.

The Court noted that while each side had differing views of the contract language at issue, the language was unambiguous (a point on which the parties agreed), and therefore the Court was able to rule on the language without considering extrinsic evidence.

As the Court noted, “[a] contract is not rendered ambiguous simply because the parties do not agree upon its proper construction. Rather, an ambiguity exists [w]hen the provisions in controversy are fairly susceptible of different interpretations or may have two or more different meanings.”  Slip op. at 18-19 (quoting GMG Capital Investments, LLC v. Athenian Venture Partners I, L.P., 36 A.3d 776, 780 (Del. 2012)).

Previously, the Court had ruled upon Defendants’ motion to seal the entirety of the upcoming TRO hearing, which the Court summarily denied in a one page ruling.  A recent blog post concerning this ruling can be found here.

Accordingly, the Court granted Defendant’s Motion for Summary Judgment, and ruled that the TRO request is moot.

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.