January 2024 – Duane Morris Delaware Business Law

The case Sunder Energy, LLC v. Jackson, C.A. No. 2023-0988-JTL relates to non-compete covenants contained in an LLC operating agreement. In November, the Court of Chancery denied a preliminary injunction enforcing the covenants. In Delaware, appeals to the Supreme Court are as-of-right, but only when a case is fully decided — a party appealing a preliminary injunction denial is almost always told to wait, unless the trial court “certifies” an immediate appeal. The Sunder Energy plaintiff asked the trial court to do just that, and late last month, Vice Chancellor Laster took the rare step of granting certification.

In his 35-page opinion explaining why he was certifying the appeal, the Vice Chancellor addressed, among other points, the plaintiff’s argument that “over the past few years, there has been a growing trend that disfavors restrictive covenant litigation in the Court of Chancery.”

That recent trend has been visible on this blog — last year, we discussed a case where the Court refused to apply Delaware law despite a contractual choice-of-law clause in a covenant when the covenant was contrary to fundamental policy of the state of employment, and another where the Court refused to ‘blue pencil’ an overly-broad covenant into a narrower, more reasonable one.

The Vice Chancellor acknowledged that the plaintiff’s “impression is not unfounded,” and agreed that the decisions of the last decade have shown greater skepticism towards non-compete covenants than the older cases, though reckoning the difference as only “a matter of degree.” While explaining that the trend against covenants was not itself a a major factor in his decision to certify immediate appeal, the Vice Chancellor agreed that the Delaware Supreme Court’s review would be important and clarifying.

The Delaware Supreme Court gives ‘great weight’ to a trial court’s certification for an immediate appeal, and is often attentive to questions the trial court specifically identifies as needing the higher court’s guidance. Sunder Energy is likely to give us the authoritative word on non-competes in Delaware. Watch this space — we will keep you informed on the Supreme Court’s decision whether to accept the immediate appeal, and of any subsequent decision.

Nearly one year ago we reported in this blog on the Court of Chancery’s decision in In re McDonald’s Corp. S’holder Litigation, 289 A.3d 343 (Del. Ch. 2023), in which the court affirmatively held that officers of Delaware corporations owe duties of oversight (often called, Caremark duties), and specifically for matters that would fall within their managerial purview. In a recent decision granting a motion to dismiss in Segway Inc. v. Hong Cai a/k/a Judy Cai, C.A. No. 2022-1110-LWW (Del. Ch. Dec. 14, 2023), Vice Chancellor Will has provided practitioners counselling corporate officers with additional guidance on how the Court of Chancery will apply the duty of oversight to officers (as opposed to directors)—particularly when reviewing the sufficiency of claims pled against such officers.

This decision makes clear that “[d]espite a proliferation of modern jurisprudence, bad faith remains a necessary predicate to any Caremark claim.” This is so no matter whether the fiduciary whose conduct is challenged is an officer or a director. While the McDonald’s decision “emphasized that—barring extreme facts—an officer’s duty of oversight would only extend to matters within the officer’s remit,” that decision did not “craft a lower standard for oversight claims brought against officers.” Because the complaint in this case did not sufficiently plead “potential wrongdoing (much less within [the officer’s] purview),” the Vice Chancellor dismissed the claims.

In closing the Memorandum Opinion, Vice Chancellor Will summarized the current state of the law as it pertains to the Caremark duties owed by officers of Delaware corporations as follows:

The Caremark doctrine is not a tool to hold fiduciaries liable for everyday business problems. Rather, it is intended to address the extraordinary case where fiduciaries’ “utter failure” to implement an effective compliance system or “conscious disregard” of the law gives rise to a corporate trauma. These tenets of our law persist regardless of whether a Caremark claim is brought against a director or an officer. Officers’ management of day-to-day matters does not make them guarantors of negative outcomes from imperfect business decisions.

* * *

At a minimum, a plaintiff pursuing an oversight claim against an officer would need to demonstrate that the officer failed to make a good faith effort to monitor central compliance risks within her remit that pose potential harm to the company or others.

To the extent officers of Delaware corporations or their advisors might have read the earlier McDonald’s decision as creating an easier path to liability for duty of oversight claims for officers as opposed to directors, this recent decision should quiet those concerns.

Month: January 2024

Chancery Acknowledges Non-Competes Treated More Skeptically in Recent Decisions

Duty of Oversight of Officers–Post-McDonald’s Action in Court of Chancery